<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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) Identification No.)
151 Farmington Avenue,
Hartford, Connecticut 06156
_______________________________ _____________________
(Address of principal (ZIP Code)
executive offices)
Registrant's telephone number, including area code: (860) 273-0123
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
___________________ _________________________
Common Capital Stock without par value New York Stock Exchange
Pacific Stock Exchange
Various Swiss Exchanges
9 1/2% Cumulative Monthly Income New York Stock Exchange
Preferred Securities, Series A
(issued by a subsidiary)
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by 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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of January 31, 1996 was
$8,553,764,659.
As of January 31, 1996, 114,869,153 shares of the registrant's
Common Capital Stock without par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1995 annual report to shareholders
(the "Annual Report"). (Parts I, II and IV)
Portions of the registrant's proxy statement to be filed on or about
March 20, 1996 (the "Proxy Statement"). (Parts III and IV)
<PAGE> 2
TABLE OF CONTENTS
Page
____
PART I
Item 1. Business.
A. Organization of Business 3
B. Financial Information about Industry Segments 4
C. Description of Business Segments
1. Aetna Health Plans 5
2. Aetna Life Insurance & Annuity 9
3. International 13
4. Large Case Pensions 14
5. Corporate 15
6. Discontinued Operations - Property-Casualty Operations 16
7. Reserves Related to Discontinued Operations 21
8. General Account Investments 25
a. Investments Related to Continuing Operations 25
b. Investments Related to Discontinued Operations 27
9. Other Matters
a. Regulation 29
b. NAIC IRIS Ratios 32
c. Ratios of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock
Dividends 33
d. Miscellaneous 33
Item 2. Properties. 34
Item 3. Legal Proceedings. 34
Item 4. Submission of Matters to a Vote of Security Holders. 34
Executive Officers of Aetna Life and Casualty Company 35
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 37
Item 6. Selected Financial Data. 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 37
Item 8. Financial Statements and Supplementary Data. 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 37
PART III
Item 10. Directors and Executive Officers of the Registrant. 38
Item 11. Executive Compensation. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management. 38
Item 13. Certain Relationships and Related Transactions. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 38
Index to Financial Statement Schedules 42
Signatures 59
<PAGE> 3
PART I
Item 1. Business.
A. Organization of Business
Aetna Life and Casualty Company was organized in 1967 as a
Connecticut insurance corporation. Aetna Life and Casualty
Company and its subsidiaries (collectively, "Aetna" or the
"company") constitute one of the nation's largest
insurance/financial services organizations based on its assets at
December 31, 1994. Based on 1994 premium rankings, the company
also is one of the nation's largest stock insurers of property-
casualty lines and one of the largest writers of health care
products, and group life, annuity and pension products. Although
the company offers insurance and financial services products in
foreign countries, 90% of its total revenue (including
Discontinued Operations - see below) in 1995 was derived from
domestic sources.
The company entered into a definitive agreement, dated November
28, 1995, to sell its property-casualty operations to The
Travelers Insurance Group Inc. for $4.0 billion in cash, subject
to various closing adjustments. The sale is subject to state
regulatory approval and other customary conditions and is expected
to be completed no later than midyear 1996. In light of the sale
agreement, the company's property-casualty operations have been
classified as Discontinued Operations. (For additional
information regarding Discontinued Operations, see MD&A - Overview
- - Sale of Property-Casualty Operations in the 1995 Annual Report.)
The agreement to sell the company's property-casualty business
reflects the company's strategic decision to focus its resources
on pursuing growth opportunities in its managed care business and
other remaining businesses. The company is considering a variety
of strategic options, and is looking for opportunities to make
managed care investments or acquisitions to further strengthen the
company's overall market position. The company also expects to
evaluate opportunities for growth of its financial services
businesses and strengthen their competitive position, and
opportunities to develop its current international operations and
enter selected new markets where suitable opportunities exist.
<PAGE> 4
The company's reportable segments are Aetna Health Plans, Aetna
Life Insurance & Annuity, International, Large Case Pensions,
Corporate and Discontinued Operations - Property-Casualty
Operations. The principal products included in such segments
(other than Corporate) are:
Aetna Health Plans:
Health
Specialty health
Group insurance
Aetna Life Insurance & Annuity:
Retirement and investment products
(including individual and group annuities)
Financial and administrative services
Life insurance (including universal life, variable universal
life, interest-sensitive whole life and term products)
International:
Life insurance and financial services
Large Case Pensions:
Group retirement and other savings products
Investment management and advisory services
Discontinued Operations - Property-Casualty Operations:
Automobile
Fidelity and surety
Fire and allied lines
General liability
Homeowners
Marine
Multiple peril
Workers' compensation
B. Financial Information about Industry Segments
Revenue, income (loss) from continuing operations before income taxes,
extraordinary item and cumulative effect adjustments, income from
Discontinued Operations, net of tax, net income (loss), and assets, by
industry segment are set forth in Note 15 to the Financial Statements,
which is incorporated herein by reference to the Annual Report.
Revenue, income (loss) from continuing operations before extraordinary
item and cumulative effect adjustments and income (loss) from
Discontinued Operations, attributable to each industry segment are
incorporated herein by reference to the Selected Financial Data in the
Annual Report.
Certain reclassifications have been made to 1994 and 1993 financial
information to conform to 1995 presentation.
<PAGE> 5
C. Description of Business Segments
1. Aetna Health Plans
Principal Products
__________________
The Aetna Health Plans ("AHP") segment consists of Health, Specialty
Health and Group Insurance businesses. The Health business provides a
full spectrum of managed care and traditional indemnity plans.
Specialty Health products include behavioral health, pharmacy and
dental plans, which provide managed care or indemnity features.
The Group Insurance business provides life insurance, disability,
including managed disability, and long-term care plans. Group life
insurance consists principally of renewable term coverage, the amounts
of which frequently are linked to individual employee wage levels.
The company also offers group universal life and whole life products.
Group disability insurance includes coverage for disabled employees'
income replacement benefits.
AHP products and services are marketed primarily to employers for the
benefit of employees and their dependents. Plans may be insured (risk
plans), whereby Aetna assumes all or a portion of health care cost and
utilization risk, or self-funded (nonrisk plans), whereby employers
assume all or a significant portion of such risks. AHP also provides
administrative and claim services and, in many cases, partial
insurance protection, for an appropriate fee or premium charge.
Continuing concern over the rising costs of health care and the need
for quality assurance have resulted in a continuation of a market
shift away from traditional forms of health benefit coverage to a
variety of managed care products. The company offers the following
Health products:
Health Maintenance Organization (HMO) plans offer the most
comprehensive form of managed care. Health care for the member is
coordinated by a personally selected primary care physician in AHP's
HMO network, with minimal out-of-pocket costs for the member and an
emphasis on preventative care. Typically, no benefits are provided if
the member chooses to seek nonemergency care without referral from the
primary care physician.
Preferred Provider Organization (PPO) plans offer the member a choice
of any health care provider, but benefits are paid at a higher level
when care is received from an AHP PPO network provider.
Point-of-Service (POS) plans blend PPO and HMO advantages. The member
selects a primary care physician from AHP's POS network to provide or
coordinate all necessary health care, including routine and
preventative services. The member may also choose to seek care from
any other provider, without referral from the primary care physician,
at a reduced level of benefits.
Traditional indemnity plans allow freedom of provider choice for
covered services with no in-network discounts available. These plans
are not considered managed care, although they may include some
medical management features, such as inpatient certification,
reasonable and customary charges and benefits for preventative
services (e.g. cancer screening).
<PAGE> 6
At year end 1995, the company operated various types of managed
care networks in approximately 241 Standard Metropolitan
Statistical Areas with aggregate enrollment of approximately 8
million members. AHP contracts with approximately 200,000
physicians and more than 2,200 hospitals in all 50 states. As
described above, managed care products differ from traditional
indemnity products primarily through the use of health care
networks (physicians, hospitals and other health care
professionals and facilities) and the implementation of medical
management procedures designed to enhance the quality and
affordability of medical services. Such procedures, including
negotiated contracts with health care providers, development and
implementation of guidelines for appropriate utilization of health
care resources and working with health care providers to review
treatment patterns in order to improve consistency and quality,
are designed to enable managed care companies and their customers
to control medical costs more effectively.
With an emphasis on promoting high quality, as well as affordable
health care, the company is seeking accreditation for its HMO
plans from the National Committee for Quality Assurance (NCQA), a
national organization established to review the quality and
medical management systems of its HMOs and other managed care
plans. Accreditation by NCQA is a nationally recognized standard.
As of the end of 1995, eight of AHP's HMOs have received
accreditation.
The company's health care network physicians and hospitals have
traditionally been independent contractors. Beginning in 1993,
the company, in an effort to further contain health care costs and
to improve quality and network access, initiated a program to
acquire or develop ownership or management interests in primary
care physician practices. At the end of 1995, the company owned
and managed 62 physician practices in eight cities. AHP expects
to continue to invest in the acquisition or development of
physician practices and in other programs which the company
believes will improve its ability to control health care costs and
enhance quality.
AHP continues to develop a wide range of products and services
tailored to provide its members with choices to meet their
individual needs and to help plan sponsors manage their benefit
plan costs effectively. The number of AHP members covered under
all managed and traditional indemnity health care plans was
approximately 12.0 million at December 31, 1995. These members
were distributed throughout all 50 states, with 3.8 million
members in the northeast region of the country, 2.4 million in the
southeast, 3.1 million in the central region and 2.7 million in
the west.
For additional information regarding products offered by AHP, see
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Aetna Health Plans in the Annual
Report.
<PAGE> 7
The following table summarizes group Health and Specialty Health, and
Group Insurance premiums for the years indicated:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Health and Specialty
Health $4,835.4 $4,423.1 $3,507.5 $3,349.8 $3,223.4
Group Insurance (1) 1,114.3 1,188.4 1,193.1 1,236.9 1,243.9
________ ________ ________ ________ ________
Total $5,949.7 $5,611.5 $4,700.6 $4,586.7 $4,467.3
________ ________ ________ ________ ________
________ ________ ________ ________ ________
<FN>
(1) The decreases in 1995 and 1994 premiums reflect the runoff of mortgage and
credit-related life and disability coverages which are no longer offered.
The decrease in 1993 premiums reflects increased refunds on retrospectively
rated policies due to favorable experience.
</TABLE>
Competition
___________
The markets in which AHP's products are sold are highly competitive.
In addition to other insurance companies, AHP competes with local and
regional HMOs and other types of medical and dental provider
organizations, various specialty service providers, integrated health
care delivery organizations and, in certain coverages, with programs
sponsored by the federal or state governments. Additionally, in
recent years, some large employers have moved to totally self-funded
and self-administered benefit plans. Competition largely is based
upon product features and prices and, in the case of managed health
care plans, upon the quality of services provided, the geographic
scope of the provider networks and the medical specialties available
in such networks. Based on 1994 membership, Aetna is the third
largest health care company in the United States and the fourth
largest underwriter of group life insurance. In addition, Aetna is
the largest commercial administrator of Medicare benefits, processing
claims for over 7,300 hospitals, skilled nursing facilities and home
health agencies, and for physicians in nine states.
Method of Distribution
______________________
Products are sold principally through salaried field
representatives and home office marketing personnel who often work
with independent consultants and brokers who assist in the
production and servicing of business.
<PAGE> 8
Reserves
________
For Group Insurance products, policy reserve liabilities are
established as premiums are received to reflect the present value
of expected future obligations net of the present value of
expected future premiums. Policy reserves for group paid-up life
insurance generally reflect long-term fixed obligations and are
computed on the basis of assumed or guaranteed yield and benefit
payments. Assumptions are based on Aetna's experience, which is
periodically reviewed against published industry data. For long
term disability products, reserves are established for (i) lives
currently in payment status (using standard industry morbidity and
interest rate assumptions), (ii) lives who have not satisfied the
waiting period (using a percentage of premiums based on Aetna's
experience) and (iii) claims that have been incurred but not
reported. For Health and Specialty Health risk products, reserves
reflect estimates of the ultimate cost of claims including (i)
claims that have been reported but not settled, and (ii) claims
that have been incurred but have not yet been reported. AHP claim
reserves are based on factors derived from past experience.
Reserves for most of these products reflect retrospective
experience rating, except for smaller group insurance cases and
HMOs, which generally are not retrospectively experience rated.
Reinsurance
___________
Aetna utilizes a variety of reinsurance agreements with
nonaffiliated insurers to share insurance risks on Health,
Specialty Health and Group Insurance businesses as directed by the
insured and to control its exposure to large losses. Generally,
these agreements are established on a case-by-case basis to
reflect the circumstances of specific group insurance risks.
<PAGE> 9
Group Life Insurance In Force and Other Statistical Data
________________________________________________________
The following table summarizes changes in group life insurance in
force before deductions for reinsurance ceded to other companies
for the years indicated:
<TABLE>
<CAPTION>
(Amounts in millions except number of policies and contracts in force)
1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
In force, end of year $274,429 $288,546 $299,996 $307,070 $305,261
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Terminations (lapses and all
other) (1) $ 14,119 $ 24,946 $ 29,855 $ 28,322 $ 20,558
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Number of policies and
contracts in force, end of
year: (2)
Group life contracts 19,175 23,268 24,440 24,496 25,737
Group conversion
policies (3) 33,358 37,513 38,431 39,567 40,370
<FN>
(1) The increases in 1993 and 1992 terminations resulted primarily from the nonrenewal
and termination of certain large contracts in each year.
(2) Due to the diversity of coverages and size of covered groups, statistics are not
provided for average size of policies in force.
(3) Reflects conversion privileges exercised by insureds under group life policies to
replace those policies with individual life policies.
</TABLE>
2. Aetna Life Insurance & Annuity
Principal Products
__________________
Aetna Life Insurance & Annuity ("ALIAC") markets and services two
principal types of products: (1) financial services and (2) life
insurance.
The financial services products include individual and group annuity
contracts which offer a variety of funding and distribution options for
personal and employer-sponsored retirement plans that qualify under IRC
Sections 401, 403, 408 and 457, and individual and group nonqualified
annuity contracts. These contracts may be immediate or deferred and are
offered primarily to individuals, pension plans, small businesses and
employer-sponsored groups in the health care, government, education
(collectively "not-for-profit" organizations) and corporate markets.
Financial services also include pension plan administrative services.
The life insurance products include universal life, variable
universal life, interest-sensitive whole life and term insurance.
These products are offered primarily to individuals, small
businesses, employer-sponsored groups and executives of Fortune
2000 companies. ALIAC's universal life product accounted for
approximately 92% of individual life sales in 1995.
Annuity products typically offer fixed (fully guaranteed and
experience rated) investment options and variable investment
options (discussed below). For fully guaranteed and experience
rated options ALIAC earns a spread representing the difference
between income on investments and interest credited to customer
reserves.
<PAGE> 10
The company's variable products (variable annuity and variable
life contracts) utilize Separate Accounts to provide
contractholders with a vehicle for investments under which the
contractholders assume the investment risks as well as the benefit
of favorable performance. Assets held under these products are
invested, as designated by the contractholder or participant under
a contract, in Separate Accounts which in turn invest in shares of
mutual funds that are managed by ALIAC, where ALIAC receives fees
for acting as investment advisor, or other selected mutual funds
that are not managed by ALIAC.
ALIAC is compensated by the Separate Accounts for bearing
mortality and expense risks pertaining to variable life and
annuity contracts. ALIAC also receives fees for serving as
investment advisor and providing administrative services, as well
as sales charges on certain products. Various investment advisory
services also are offered through a number of affiliates that are
registered investment advisors.
Product retention is a key driver of profitability for annuity
products. To encourage product retention, annuity contracts
typically impose a surrender charge on policyholder balances
withdrawn for a period of time after the contract's inception.
The period of time and level of the charge vary by product. In
addition, a new approach being incorporated into recent variable
contracts with fixed interest account investment options allows
contractholders to receive an incremental interest rate if
withdrawals from the fixed account are spread over a period of
five years. Further, more favorable credited rates may be offered
after policies have been in force for a period of time. Existing
tax penalties on annuity distributions prior to age 59-1/2 provide
an additional disincentive to premature surrenders of annuity
balances, but do not impede transfers of those balances to
products of other competitors.
Universal life products include a cash value component that is
credited with interest at competitive rates. ALIAC earns the
spread between investment income and interest credited on customer
cash values. Universal life cash values are charged for cost of
insurance coverage and for administrative expenses.
Life insurance products typically require high costs to acquire
business. Retention, an important driver of profitability, is
encouraged through product features. For example, the company's
universal and interest-sensitive whole life insurance contracts
typically impose a surrender charge on policyholder balances
withdrawn within 7 to 20 years of the contract's inception or for
variable life within 10 years. The period of time and level of
the charge vary by product. In addition, more favorable credited
rates and policy loan terms may be offered after policies have
been in force for a period of time. To further encourage
retention, life insurance agents are typically paid renewal
commissions or service fees.
Certain of the ALIAC life insurance and annuity products allow
customers to borrow against their policies. At December 31, 1995,
approximately 25% of outstanding policy loans were on individual
annuity policies and had fixed interest rates ranging from 1% to
3%. Approximately 63% of outstanding policy loans at December 31,
1995 were on individual life policies and had fixed interest rates
ranging from 5% to 9%. The remaining 12% of outstanding policy
loans had variable interest rates averaging 8% at December 31,
1995. Investment income from policy loans was $25 million for the
year ended December 31, 1995.
<PAGE> 11
At December 31, assets under management, including Separate
Accounts and assets held and managed by unaffiliated mutual funds,
were $25.9 billion in 1995, $20.0 billion in 1994, $18.8 billion
in 1993, $15.0 billion in 1992 and $13.2 billion in 1991. Under
Financial Accounting Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities (FAS 115), assets under
management at December 31, 1995, 1994 and 1993 included net
unrealized gains (losses) of approximately $800 million, $(390)
million and $750 million, respectively.
The following table summarizes premiums and deposits for the years
indicated:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Premiums $ 178.3 $ 168.3 $ 125.7 $ 111.9 $ 174.5
Deposits 3,902.8 2,966.3 2,543.0 1,937.3 1,871.0
_________ _________ _________ _________ _________
$ 4,081.1 $ 3,134.6 $ 2,668.7 $ 2,049.2 $ 2,045.5
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
</TABLE>
Competition
___________
In the financial services products markets, competition arises
from other insurance companies, banks, mutual funds and other
investment managers. Principal competitive factors are cost,
service, level of investment performance and the perceived
financial strength of the investment manager or sponsor.
The markets for life insurance products are highly competitive
among insurance companies. Competition largely is based upon
product features and prices.
Competition in financial services and life insurance markets may
affect, among other matters, both business growth and the pricing
of the company's products and services.
Method of Distribution
______________________
Financial services products generally are sold through pension
professionals, brokers, third party administrators, banks and
dedicated career agents.
Life insurance products are marketed by independent agents and
brokers and career agents.
Reserves
________
Reserves for limited payment contracts (immediate annuities with
life contingent payout) are computed on the basis of assumed
investment yield, mortality, morbidity and expenses (including a
margin for adverse deviation), which generally vary by plan, year
of issue and policy duration. Reserves for investment contracts
(deferred annuities and immediate annuities without life
contingent payouts) are equal to cumulative deposits plus credited
interest less charges thereon. Reserves for experience rated
contracts reflect cumulative deposits, less withdrawals and
charges, plus credited interest thereon, plus/less net realized
capital gains/losses (which ALIAC reflects through credited rates
on an amortized basis). These reserves also reflect unrealized
capital gains/losses related to FAS No. 115.
<PAGE> 12
Reserves for universal life and interest-sensitive whole life
products (which are all experience rated) are equal to cumulative
deposits less withdrawals and charges plus credited interest
thereon, plus/less net realized capital gains/losses (which ALIAC
reflects through credited rates on an amortized basis). These
reserves also reflect unrealized capital gains/losses related to
FAS No. 115. Reserves for all other fixed individual life
contracts are computed on the basis of assumed investment yield,
mortality, morbidity and expenses (including a margin for adverse
deviation), which generally vary by plan, year of issue and policy
duration.
The above-indicated reserves are computed amounts that, with
additions from premiums and deposits to be received, and with
interest on such reserves compounded annually at assumed rates,
are expected to be sufficient to meet the company's policy
obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
Reinsurance
___________
ALIAC retains no more than $10 million of risk per individual life
insured. Amounts in excess of the retention limit are reinsured
with unaffiliated companies.
Life Insurance In Force and Other Statistical Data
__________________________________________________
The following table summarizes changes in life insurance in force
before deductions for reinsurance ceded to other companies for the
years indicated:
<TABLE>
<CAPTION>
(Amounts in millions, except number of policies and average size of policies in force)
1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Sales and additions:
Permanent:
Nonparticipating $ 5,212 $ 3,348 $ 2,656 $ 3,107 $ 2,930
Participating 12 13 13 14 13
Term:
Nonparticipating 2,602 595 247 92 114
Participating 390 1,787 1,838 747 1,209
________ ________ ________ ________ ________
Total $ 8,216 $ 5,743 $ 4,754 $ 3,960 $ 4,266
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Terminations:
Surrenders and conversions $ 1,620 $ 1,494 $ 1,692 $ 2,004 $ 1,976
Lapses 1,874 1,973 2,151 2,372 2,752
Other 281 306 321 371 358
________ ________ ________ ________ ________
Total $ 3,775 $ 3,773 $ 4,164 $ 4,747 $ 5,086
________ ________ ________ ________ ________
________ ________ ________ ________ ________
In force, end of year:
Permanent $ 34,614 $ 31,879 $ 31,139 $ 31,270 $ 31,263
Term 12,559 10,853 9,623 8,902 9,696
________ ________ ________ ________ ________
Total $ 47,173 $ 42,732 $ 40,762 $ 40,172 $ 40,959
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Number of policies in force,
end of year:
Nonparticipating 546,007 551,381 569,322 580,846 605,233
Participating 113,045 120,967 127,319 135,440 146,308
________ ________ ________ ________ ________
Total 659,052 672,348 696,641 716,286 751,541
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Average size of policies in
force, end of year:
Nonparticipating $ 71,138 $ 61,121 $ 56,639 $ 55,281 $ 52,983
Participating 73,433 74,658 66,887 59,528 60,775
</TABLE>
<PAGE> 13
3. International
The International segment ("International"), through subsidiaries
and joint venture operations, sells primarily life insurance and
financial services products in non-U.S. markets including Canada,
Mexico, Taiwan, Chile, Malaysia, Hong Kong, New Zealand, Peru,
Argentina and Indonesia. International operations are subject to
regulation in the various jurisdictions in which they do business.
In most of the geographic areas and markets in which International
has operations, the competition is extensive. Methods of
distribution vary by country and by product, and include direct
sales, sales through agents and brokers, and sales through joint
venture-related enterprises.
On June 30, 1993, the company completed the sale of its U.K. life
and investment management operations. The company realized an
after-tax capital loss of $12 million on the sale, as well as $37
million of tax benefits from prior year operating losses of the
subsidiary not previously available for tax benefits.
The company completed the sale of its 43% interest in La Estrella
S.A. de Seguros, a Spanish insurance company, to Banco Hispano
Americano in May 1991. The company realized a net capital gain of
$33 million (after tax) on the sale.
Conducting business and investing in international markets pose
unique risks which vary from country to country. Such risks
include, but are not limited to, political developments, including
tax changes, nationalization and changes in regulatory policy,
currency restrictions, currency fluctuations, as well as the
consequences of hostilities and unrest. Management believes that
its continued focus on entering new markets where suitable
opportunities exist and development of existing operations will
help to reduce the exposure to these risks through further
diversification of its operations.
The following table sets forth International's premium revenue,
net investment income, other income and net realized capital
gains/losses and life insurance in force, before deductions for
reinsurance ceded to other companies:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Premiums $1,038.5 $ 887.1 $ 909.5 $ 814.8 $ 500.0
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Net investment income, other
income and net realized capital
gains/losses $ 421.3 $ 409.9 $ 369.8 $ 387.6 $ 390.2
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Life insurance in force, end
of year $ 59,384 $ 45,126 $ 44,186 $ 37,172 $ 30,083
________ ________ ________ ________ ________
________ ________ ________ ________ ________
</TABLE>
Premium growth in 1995 resulted primarily from increases in the
volume of business sold in the Pacific Rim and Latin American
markets.
<PAGE> 14
Premium reduction in 1994 resulted from the company's 1994 change
in its accounting for an affiliate from the consolidated basis of
accounting to the equity basis of accounting (recorded premiums
were $79 million and $136 million in 1994 and 1993, respectively)
which was substantially offset by growth in the Pacific Rim
operations.
Premium growth in 1992 included $128 million from the second
quarter consolidation of a previously unconsolidated subsidiary as
a result of an increase in the company's ownership percentage.
4. Large Case Pensions
Principal Products
__________________
The Large Case Pensions segment manages a variety of retirement
and other savings products (including pension and annuity
products), and offers investment management and advisory services
to nonpension customers. Certain of these products provide a
variety of investment guarantees, funding and benefit payment
distribution options and other services. (For additional
information regarding the products offered by Large Case Pensions,
see MD&A - Large Case Pensions in the Annual Report.)
The majority of Large Case Pensions' products that utilize
Separate Accounts provide contractholders with a vehicle for
investments under which the contractholders assume the investment
risks as well as the benefit of favorable performance. Large Case
Pensions earns a management fee on these Separate Accounts.
Various investment advisory services also are offered through a
number of wholly owned subsidiaries that are registered investment
advisors.
In January 1994, the company announced its decision to discontinue
the sale of its fully guaranteed large case pension products.
(For additional information, see MD&A - Large Case Pensions in the
Annual Report.)
At December 31, assets under management, including Separate
Accounts, were $46.4 billion in 1995, $46.3 billion in 1994, $52.8
billion in 1993, $53.4 billion in 1992 and $52.8 billion in 1991.
Under FAS 115, assets under management at December 31, 1995, 1994
and 1993 included net unrealized gains (losses) of approximately
$790 million, $(540) million and $750 million, respectively.
The following table summarizes premiums and deposits for the years
indicated:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Premiums $ 264.9 $ 234.4 $ 185.9 $ 204.2 $ 292.4
Deposits 1,623.7 1,915.6 2,791.6 2,925.1 3,531.2
_________ _________ _________ _________ _________
Total $ 1,888.6 $ 2,150.0 $ 2,977.5 $ 3,129.3 $ 3,823.6
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
</TABLE>
<PAGE> 15
Competition
___________
In the pension and annuity markets, competition arises from other
insurance companies, banks, bank trust departments, mutual funds
and other investment managers. Principal competitive factors are
cost, service, level of investment performance and the perceived
financial strength of the investment manager.
Method of Distribution
______________________
Group pension products are sold principally through salaried field
representatives and home office marketing personnel, who often
work with independent consultants and brokers who assist in the
production and servicing of business.
Reserves
________
As a result of discontinuing fully guaranteed large case pension
products, the company established a reserve that represents the
present value of anticipated net cash flow shortfalls as the
liabilities from such products are run off. Such net cash flow
shortfalls include anticipated losses from negative interest
margins (i.e., the amount by which interest credited to holders of
such contracts exceeds interest earned on investment assets
supporting the contracts), future capital losses, and operating
expenses and other costs expected to be incurred as the
liabilities are run off. For additional information on this
reserve, see Note 3 of Notes to Financial Statements in the Annual
Report.
In addition to the reserve described above, the company maintains
reserves for guaranteed investment contracts equal to the amount on
deposit for such contracts plus credited interest thereon. Reserves
for annuity contracts reflect the present value of benefits based on
actuarial assumptions established at the time of contract purchase.
Such assumptions are based on Aetna's experience, which is
periodically reviewed against published industry data. Reserves for
experience rated contracts reflect cumulative deposits, less
withdrawals and charges, plus credited interest thereon, plus/less
net realized capital gains/losses (which the company seeks to recover
through credited rates) and net unrealized capital gains/losses.
5. Corporate
The Corporate segment includes interest expense and other net
corporate expenses which are not directly related to the company's
business segments. "Other net corporate expense" includes items such
as corporate staff areas, advertising and contributions, partially
offset by net investment income.
<PAGE> 16
6. Discontinued Operations - Property-Casualty Operations
Principal Products
__________________
For additional information regarding Discontinued Operations, see
Organization of Business on page 3 and MD&A - Overview - Sale of
Property-Casualty Operations in the Annual Report.
Discontinued Operations provides most types of commercial and
personal property-casualty insurance, bonds, and insurance-related
services for businesses, government units and associations and
individuals.
Commercial and personal coverages accounted for 70% and 30%,
respectively, of Aetna's 1995 property-casualty net written premiums.
Commercial coverages are sold for risks of all sizes and include fire
and allied lines, multiple peril, marine, workers' compensation,
general liability (including product liability), commercial
automobile, certain professional liability, and fidelity and surety
bonds. In addition, Aetna offers various services to businesses that
choose to self-insure certain exposures. Aetna also reinsures
various property and liability risks, primarily through agreements
with nonaffiliated insurers, on both a treaty and facultative basis.
Personal coverages include auto and homeowners insurance.
Approximately 94% of Aetna's 1995 net property-casualty business
written was voluntary. The remainder was written by various assigned
risk plans, facilities and pools of which Aetna is a member. These
organizations are formed to meet statutory requirements relating to
the writing of certain types of property-casualty risks or to spread
particularly large loss exposures among insurers pursuant to a
prearranged allocation formula. Participation is mandatory, and
underwriting decisions are made by such facilities independent of
their membership.
For a significant portion of the commercial lines, Aetna uses
advisory or compulsory rate structures and, in some instances, forms
that were developed by agencies and bureaus in which insurance
companies are authorized to participate through state regulation.
However, in recent years, Aetna has emphasized the development of
independent coverages designed for sale to specific market segments.
<PAGE> 17
The following table sets forth the premium revenue, underwriting
results and net investment income, fees and other income and net
realized capital gains of Discontinued Operations for the years
indicated:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Statutory:
Net written premiums $ 4,081.3 $ 4,400.5 $ 4,517.0 $ 4,916.3 $ 5,810.6
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Premiums earned $ 4,111.6 $ 4,321.9 $ 4,656.2 $ 5,046.9 $ 5,973.0
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Loss ratios 102.8% 87.5% 90.1% 92.5% 83.7%
Expense ratios 33.5 35.2 34.4 32.9 30.7
_________ _________ _________ _________ _________
Combined ratios:
Before policyholder
dividends 136.3% 122.7% 124.5% 125.4% 114.4%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
After policyholder
dividends 136.7% 123.3% 125.2% 126.1% 115.4%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
After policyholder
dividends, adjusted
for discounting 136.7% 123.3% 116.4% (1) 126.1% 115.4%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
After policyholder
dividends, adjusted for
discounting and additions to
environmental and asbestos-
related claims reserves(2) 108.1% 117.1% 113.6% 117.3% 113.2%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
GAAP: (3)
Net written premiums $ 4,081.3 $ 4,431.2 $ 4,465.2 $ 4,916.3 $ 5,810.6
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Premiums earned $ 4,118.9 $ 4,390.8 $ 4,653.2 $ 5,076.3 $ 6,010.4
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Adjusted underwriting
loss (pretax)(4) $(1,434.4) $ (795.0) $ (989.8) $(1,291.6) $ (933.9)
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Net investment income,
fees and other income
and net realized
capital gains $ 1,139.3 $ 948.1 $ 1,274.7 $ 1,437.2 $ 1,323.3
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Loss ratios 102.3% 84.9% 89.6% 93.0% 83.7%
Expense ratios 32.3 32.2 32.3 32.7 30.4
_________ _________ _________ _________ _________
Combined ratios:
Before policyholder
dividends 134.6% 117.1% 121.9% 125.7% 114.1%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
After policyholder
dividends 135.1% 117.7% 122.5% 126.4% 115.0%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
After policyholder
dividends, adjusted for
discounting 135.1% 117.7% 113.6% (1) 126.4% 115.0%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
After policyholder
dividends, adjusted for
discounting and additions to
environmental and asbestos-
related claims reserves(2) 106.6% 111.5% 110.8% 117.6% 112.8%
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
<FN>
(1) Has been adjusted for the cumulative effect benefit of discounting of workers'
compensation life table indemnity reserves ($250.0 million, after tax).
(2) Excludes the effect of additions to environmental and asbestos-related claims
reserves in all years, and in 1993, has also been adjusted for the cumulative
effect benefit of discounting of workers' compensation life table indemnity reserves
($250.0 million, after tax).
(3) Generally Accepted Accounting Principles.
(4) Includes a charge of $83.6 million in 1991 related to the company's withdrawal from
the Massachusetts personal automobile insurance market pursuant to an agreement with
the Massachusetts Division of Insurance.
</TABLE>
<PAGE> 18
Discontinued Operations' underwriting profitability generally is
expressed in terms of combined ratios. When the combined ratio is
under 100%, underwriting results are considered profitable; when
the ratio is over 100%, underwriting results are considered
unprofitable. The combined ratio is the sum of (i) the percentage
of earned premiums that is paid or reserved for losses and related
loss adjustment expenses (the "loss ratio"), (ii) the percentage
of earned premiums that is paid or reserved for dividends to
policyholders, and (iii) the percentage of written premiums that
is paid or reserved for sales commissions, premium taxes,
administrative and other underwriting expenses (the "expense
ratio"). The combined ratio does not reflect net investment
income, fees and other income, net realized capital gains/losses
or federal income taxes. The statutory combined ratio does not
reflect adjustments to underwriting results in accordance with
GAAP.
Adjusted underwriting loss reflects GAAP adjustments (primarily
the establishment of a reserve for severance and facilities
charges, deferred policy acquisition costs and pre-1992 salvage
and subrogation) to underwriting results.
The following table sets forth for Discontinued Operations' major
domestic coverages for the years indicated (a) the percentage of
Discontinued Operations' statutory net written premiums (NWP) and
(b) statutory combined ratios before policyholders' dividends:
PERCENTAGE DISTRIBUTION OF STATUTORY NET WRITTEN PREMIUMS
AND COMBINED RATIOS
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
____ ____ ____ ____ ____
COMBINED COMBINED COMBINED COMBINED COMBINED
NWP RATIO NWP RATIO NWP RATIO NWP RATIO NWP RATIO
___ _____ ___ _____ ___ _____ ___ _____ ___ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Auto liability:
Bodily injury 16.9% 102.5 15.6% 111.6 17.7% 119.3 17.1% 127.7 18.3% 133.0
Property damage 5.9 104.3 5.7 95.9 6.5 70.0 6.5 81.2 7.2 101.8
Auto physical damage 8.7 87.7 8.2 99.4 9.2 91.8 9.6 94.9 11.8 90.3
Fidelity and surety 4.7 69.6 3.8 80.4 3.7 92.9 3.0 91.8 3.0 99.4
Fire and allied lines 5.4 113.7 4.7 116.5 4.3 123.7 3.2 127.0 3.2 127.0
General liability 10.6 439.5 12.4 177.9 12.4 150.5 13.2 166.8 11.0 118.7
Homeowners 7.2 112.6 9.0 136.1 9.1 124.0 7.9 132.6 8.8 112.4
Marine 3.4 91.7 3.1 97.0 3.0 94.1 2.6 90.6 2.3 105.6
Multiple peril 21.5 110.7 18.5 112.0 17.2 115.6 15.0 115.2 12.2 110.0
Workers' compensation 14.0 100.3 17.5 117.1 17.9 171.1 20.8 138.2 21.2 120.0
Other (1) 1.7 N/M* 1.5 N/M* (1.0) N/M* 1.1 N/M* 1.0 N/M*
_____ _____ _____ _____ _____
Total before
policyholders'
dividends 100.0% 136.3 100.0% 122.7 100.0% 124.5 100.0% 125.4 100.0% 114.4
_____ _____ _____ _____ _____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____ _____ _____ _____ _____
Total after
policyholders'
dividends 136.7 123.3 125.2 126.1 115.4
_____ _____ _____ _____ _____
_____ _____ _____ _____ _____
Total after
policyholders'
dividends, adjusted
for discounting 136.7 123.3 116.4 (2) 126.1 115.4
_____ _____ _____ _____ _____
_____ _____ _____ _____ _____
Total after policyholder
dividends, adjusted for
discounting and additions to
environmental and asbestos
related reserves(3) 108.1 117.1 113.6 117.3 113.2
_____ _____ _____ _____ _____
_____ _____ _____ _____ _____
<FN>
(1) Net written premiums in 1993 reflect a refund of $115 million related to a Texas Catastrophe
Insurance Association reinsurance contract.
(2) Has been adjusted for the cumulative effect benefit of discounting of workers' compensation life
table indemnity reserves ($250.0 million, after tax).
(3) Excludes the effect of additions to environmental and asbestos-related claims reserves in all years,
and in 1993, has also been adjusted for the cumulative effect benefit of discounting of workers'
compensation life table indemnity reserves ($250.0 million, after tax).
* Not meaningful.
</TABLE>
<PAGE> 19
The following table summarizes Discontinued Operations' statutory
net written premiums for the years indicated:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Auto liability:
Bodily injury $ 689.0 $ 685.9 $ 798.9 $ 841.6 $1,061.0
Property damage 239.8 251.1 295.1 322.0 420.1
Auto physical damage 355.7 359.6 414.3 472.1 686.2
Fidelity and surety 191.7 169.3 166.8 146.9 174.4
Fire and allied lines 221.1 206.0 192.6 156.4 186.2
General liability 430.9 544.2 560.6 647.4 641.7
Homeowners 295.6 394.9 412.7 389.5 509.0
Marine 138.8 137.7 134.0 125.8 135.6
Multiple peril 879.7 815.3 776.1 738.0 707.5
Workers' compensation 570.3 768.8 808.4 1,021.4 1,231.3
Other (1) 68.7 67.7 (42.5) 55.2 57.6
________ ________ ________ ________ ________
Total $4,081.3 $4,400.5 $4,517.0 $4,916.3 $5,810.6
________ ________ ________ ________ ________
________ ________ ________ ________ ________
_____________________
<FN>
(1) Net written premiums in 1993 reflect a refund of $115 million related to a
Texas Catastrophe Insurance Association reinsurance contract.
</TABLE>
The following table sets forth Aetna's percentage distributions of
Discontinued Operations' direct written premiums in various
jurisdictions for the years indicated:
GEOGRAPHIC DISTRIBUTION OF DIRECT WRITTEN PREMIUMS
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
California (1,2) 8.4% 7.8% 9.2% 9.6% 9.2%
Connecticut 6.2 5.9 5.8 6.0 6.0
Florida 5.7 5.4 4.7 4.1 4.1
Georgia 1.6 1.6 1.6 1.7 2.1
Illinois 2.5 2.8 2.8 2.7 2.7
Louisiana 1.2 1.0 1.2 2.1 2.5
Massachusetts (3) 5.1 5.4 6.2 7.5 8.3
New Jersey 5.5 5.6 5.1 4.4 3.9
New York 17.7 17.9 17.7 17.4 16.8
North Carolina 3.1 3.4 3.4 3.0 3.1
Ohio 2.3 2.2 2.0 1.7 1.7
Pennsylvania 7.4 7.5 7.6 7.3 7.0
Tennessee 1.7 2.0 2.2 2.0 1.9
Texas 6.4 5.9 4.9 4.9 6.0
Virginia 2.9 2.8 2.7 2.7 2.6
All other (4) 22.3 22.8 22.9 22.9 22.1
_____ _____ _____ _____ _____
Total 100.0% 100.0% 100.0% 100.0% 100.0%
_____ _____ _____ _____ _____
_____ _____ _____ _____ _____
_____________________
<FN>
(1) The reduction in direct written premiums in 1994 primarily reflects a
$30.7 million settlement with the California Department of Insurance
related to Proposition 103, which settlement did not have a material
effect on earnings as a result of reserves previously established.
(2) In 1993, the company withdrew from the California personal automobile
insurance market and in 1994, reduced its exposure in certain commercial
property-casualty lines.
(3) In early 1992, the company reached an agreement with the Massachusetts
Division of Insurance and the Commonwealth Automobile Reinsurers ("CAR")
under which Aetna withdrew from the Massachusetts personal automobile
insurance market. Beginning in 1992, all Massachusetts premium revenue
is ceded to CAR.
(4) All other jurisdictions, none of which accounted for more than 2% in
any year.
</TABLE>
<PAGE> 20
Competition
___________
Property-casualty insurance is highly competitive in the areas of
price, service, agent relationships and, in the case of personal
lines, method of distribution (i.e., use of independent agents,
captive agents and/or employees). There are approximately 3,300
property-casualty insurance companies in the United States. Of
those companies, approximately 900 operate in all or most states
and write the vast majority of the business, while over 2,400
offer one or more property-casualty products similar to those
marketed by Aetna. In addition, an increasing amount of
commercial risks are covered by purchaser self-insurance, risk-
purchasing groups, risk-retention groups and captive companies.
Based on 1994 written premiums, Aetna was one of the largest
underwriters of commercial and personal property-casualty
coverages in the United States.
Method of Distribution
______________________
Aetna's property-casualty coverages are sold through approximately
4,800 independent agents and brokers supervised and serviced by 22
district offices with over 70 other points of service throughout
the country.
Reserves
________
See Reserves Related to Discontinued Operations on pages 21
through 24.
Reinsurance
___________
Approximately one-third of the property-casualty reinsurance ceded
by Aetna arises in connection with its servicing relationships
with various pools (frequently involuntary pools). Aetna services
or writes a portion of the pool's individual policies, handling
all premium and loss transactions. These "service" premiums and
losses are then 100% ceded (net of an expense reimbursement) to
the pools, whose members are jointly liable to Aetna as a
servicer.
In addition to the above, Aetna utilizes a variety of reinsurance
agreements, primarily with nonaffiliated insurers, to control its
exposure to large losses. These agreements, most of which are
renegotiated annually as to coverage, limits and price, are
structured either on a treaty basis (where all risks meeting
prescribed criteria are automatically covered) or on a facultative
basis (where the circumstances of specific individual insurance
risks are reflected). The amount of risk retained by Aetna
depends on the underwriter's evaluation of the specific risk,
subject to maximum limits based on risk characteristics and the
type of coverage. The principal catastrophe reinsurance agreement
currently in force covers approximately 90% of specified property
losses between $150 million and $325 million. The company also
has in place an aggregate excess of loss arrangement with respect
to all of its property-casualty lines for accident year 1995,
providing up to approximately $250 million of additional net
protection.
For additional information on reinsurance, see MD&A - Discontinued
Operations' Reserves and Note 2 of Notes to Financial Statements
in the Annual Report.
<PAGE> 21
Aetna has internal property-casualty reinsurance arrangements
under which the risks and premiums of virtually all coverages
written by the company's Discontinued Operations' subsidiaries
(other than fidelity and surety bonds) are redistributed among
those subsidiaries on a percentage basis. The percentages are
adjusted from time to time to reflect the relative underwriting
capacities and other capital needs of participants in the
reinsurance agreement.
7. Reserves Related to Discontinued Operations
Aetna establishes liabilities designed to reflect estimates of the
ultimate cost, to the extent reasonably estimable, of claims
(including claim adjustment expenses). Certain of these
liabilities are recorded on a discounted basis (see Note 2 of
Notes to Financial Statements in the Annual Report). Estimating
the ultimate cost of claims is a complex and uncertain process
that relies on actuarial and statistical methods of analysis. The
company's reserves include: (i) claims that have been reported
but not settled ("case" reserves), and (ii) claim costs that have
been incurred but have not been reported ("IBNR" reserves). The
establishment of case reserves is dependent upon, among other
things, the extent to which coverage was provided, the extent of
injury or damage, and, in the case of a contested claim, an
estimate of the likely outcome of the adjudication process (to the
extent such outcome is estimable). IBNR reserves, established to
reflect events and occurrences that are not known to the company
but, based on actuarial and historical data (adjusted for the
effects of current social, economic and legal developments, trends
and factors), are likely to result in claims, also include
provision for development on case reserves. As claims are
reported and valued by the company, IBNR reserves are reduced by
the amount of the reported claim cost. IBNR reserves also are
adjusted as the estimates of losses for a given accident year
develop. The length of time between occurrence and settlement of
a claim varies depending on the coverage and type of claim
involved. Estimates become more difficult to make (and are,
therefore, more subject to change) as the length of time
increases. Actual claim costs are dependent upon a number of
complex factors including social and economic trends and changes
in doctrines of legal liability and damage awards.
Reserves for Discontinued Operations coverage are recomputed
periodically using a variety of actuarial and statistical
techniques for producing current estimates of actual claim costs,
claim frequency, and other economic and social factors. A
provision for inflation in the calculation of estimated future
claim costs is implicit since reliance is placed on both actual
historical data that reflect past inflation and on other factors
which are judged to be appropriate modifiers of past experience.
Adjustments to reserves are reflected in the net income of the
period in which such adjustments are made.
Aetna also establishes unearned premium reserves that are
calculated on a pro rata basis and reserves for additional
premiums or refunds on retrospectively rated policies based on
experience. This means that when a loss which will produce an
additional premium payment is incurred on a retrospectively rated
policy, the premium is recorded at the same time. Likewise when
loss experience is favorable, reserves for premium refunds are
established.
<PAGE> 22
For additional information on Discontinued Operations' reserves,
including reserves for environmental-related claims, asbestos-
related claims, and workers' compensation claims (including
discounting), see MD&A - Discontinued Operations' Reserves in the
Annual Report.
The following represents changes in aggregate reserves, net of
reinsurance, for the combined Discontinued Operations' experience:(1)
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Net unpaid claims and claim adjustment
expenses, net of discount, at
beginning of year $11,144 $11,412 $11,733
Incurred claims and claim
adjustment expenses:
Provision for insured events of
the current year 3,099 3,488 3,536
Increases in provision for insured
events of prior years 1,134 (2) 259 579 (3)
Cumulative effect of discounting - - (514)
_______ _______ _______
Total incurred claims and claim
adjustment expenses 4,233 3,747 3,601
_______ _______ _______
Payments:
Claims and claim adjustment expenses
attributable to insured events of
the current year 1,092 1,240 1,039
Claims and claim adjustment expenses
attributable to insured events of
prior years 2,540 2,775 2,883
_______ _______ _______
Total payments 3,632 4,015 3,922
_______ _______ _______
Net unpaid claims and claim
adjustment expenses, net of discount,
at end of the year 11,745 11,144 11,412
Reinsurance recoverables, end of year 4,412 4,593 4,394
Deductible amounts recoverable from
policyholders, end of year (4) 412 352 -
_______ _______ _______
Gross unpaid claims and claim
adjustment expenses, at end of year $16,569 $16,089 $15,806
_______ _______ _______
_______ _______ _______
<FN>
(1) Accident and health business is excluded.
(2) Includes increases in provision for insured events of prior years of $750 million
related to environmental reserves upon completion of the company's 1995 environmental
study in the second quarter of 1995 and $335 million related to asbestos reserves
in the fourth quarter of 1995.
(3) Includes increases in provision for insured events of prior years of $679 million,
offset by the current year effect of the change in accounting to report workers'
compensation life table indemnity claims on a discounted basis of $(100) million
related to the provision for insured events of prior years.
(4) FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts,
was adopted in 1994.
</TABLE>
<PAGE> 23
The following table reconciles, as of year end, reserves
determined in accordance with accounting principles and practices
prescribed or permitted by insurance regulatory authorities
("statutory basis reserves") to reserves determined in accordance
with generally accepted accounting principles ("GAAP basis
reserves"), for the Discontinued Operations unpaid claims and
claim adjustment expenses: (1)
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Statutory unpaid claims and
claim adjustment expenses $11,603 $11,007 $11,243
Adjustments:
Subsidiary operations (2) 142 137 169
Reinsurance recoverables (3) 4,412 4,593 4,394
Deductible amounts recoverable
from policyholders (4) 412 352 -
_______ _______ _______
GAAP unpaid claims and
claim adjustment expenses $16,569 $16,089 $15,806
_______ _______ _______
_______ _______ _______
<FN>
(1) Accident and health business is excluded.
(2) These operations are accounted for on an equity basis for statutory purposes.
(3) FAS 113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, requires reporting claim liabilities gross of
reinsurance recoverables.
(4) Information presented gross in 1995 and 1994 due to the adoption of FASB Interpretation
No. 39, Offsetting of Amounts Related to Certain Contracts, which requires reporting
claim liabilities gross of deductible amounts recoverable from policyholders.
</TABLE>
The following reserve runoff table represents Aetna's combined
Discontinued Operations' loss and loss expense experience, net of
reinsurance recoverables and deductible amounts recoverable from
policyholders. Each column shows, for the year indicated:
the reserve held at year end;
cumulative data for payments made in each subsequent year for
that reserve year;
liability reestimates made in each subsequent year for that
reserve year;
the redundancy (deficiency) represented by the difference
between the original reserve held at the end of that year and
the reestimated liability as of the end of 1995; and
the change in redundancy (deficiency) from the end of each
reserve year shown to the end of each subsequent reserve year.
The majority of increases to prior accident year reserves were for
losses and related expenses for (i) workers' compensation claims;
(ii) environmental-related liability risks; and (iii) asbestos and
other product liability risks.
The table represents historical data; it would not be appropriate
to use such data to project the company's future reserving
activity or its future performance generally.
<PAGE> 24
<TABLE>
<CAPTION>
Year Ended 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
claims and claim
adjustment expenses net
of discount (1) $6,555 $7,496 $8,699 $9,828 $10,542 $11,049 $11,391 $11,733 $11,412 $11,144 $11,745
Paid (cumulative) as of:
End of year 0 0 0 0 0 0 0 0 0 0 0
One year later 2,063 2,175 2,549 3,131 3,058 3,076 2,966 2,883 2,775 2,540
Two years later 3,367 3,721 4,544 4,945 4,982 5,127 5,107 4,883 4,633
Three years later 4,430 5,172 5,792 6,240 6,392 6,727 6,593 6,367
Four years later 5,498 6,058 6,676 7,202 7,565 7,781 7,778
Five years later 6,112 6,685 7,348 8,038 8,327 8,698
Six years later 6,565 7,189 7,986 8,575 9,050
Seven years later 6,948 7,699 8,372 9,125
Eight years later 7,369 7,997 8,851
Nine years later 7,634 8,431
Ten years later 8,032
Net liability reestimated as of,
net of discounting: (1) (2) (3)
End of year 6,555 7,496 8,699 9,828 10,542 11,049 11,391 11,733 11,412 11,144 11,745
One year later 6,772 7,739 9,013 10,004 10,628 11,100 11,860 11,798 11,671 12,278
Two years later 7,050 8,180 9,307 10,191 10,777 11,727 12,090 12,136 12,832
Three years later 7,529 8,531 9,540 10,446 11,362 12,041 12,493 13,324
Four years later 7,903 8,805 9,801 10,973 11,603 12,516 13,715
Five years later 8,149 9,076 10,312 11,196 12,176 13,775
Six years later 8,416 9,568 10,492 11,762 13,445
Seven years later 8,899 9,765 11,072 13,011
Eight years later 9,117 10,348 12,338
Nine years later 9,703 11,620
Ten years later 10,979
Redundancy (Deficiency) (4,424)(4,124)(3,639)(3,183) (2,903) (2,726) (2,324) (1,591) (1,420) (1,134) 0
Change in redundancy
(deficiency) N/A 300 485 456 280 177 402 733 171 286 1,134
Gross liability,
end of year (4,5) $15,806 $16,089 $16,569
Reinsurance recoverables 4,394 4,593 4,412
Deductible amounts
recoverable from
policyholders - 352 412
_______ _______ ______
Net liability,
end of year $11,412 $11,144 $11,745
_______ _______ _______
_______ _______ _______
Gross reestimated
liability-latest (4) $17,393 $17,166
Deductible recoverable - 352
Reestimated
recoverable-latest 4,561 4,536
_______ _______
Net reestimated
liability-latest $12,832 $12,278
_______ _______
_______ _______
Gross cumulative deficiency $(1,587)$(1,077)
_______ _______
_______ _______
<FN>
(1) The reestimated liability at December 31, 1993 includes $574 million related to development
in workers' compensation reserves in the fourth quarter of 1993. This affected the reestimated
liability by reserve year as follows: $574 million in 1992; $565 million in 1991; $534 million
in 1990; $484 million in 1989; $433 million in 1988; $396 million in 1987; $372 million in 1986;
and $346 million in 1985.
(2) The reestimated liability at December 31, 1993 includes development related to the discounting of
workers' compensation life table indemnity claims. This affected the reestimated liability by
reserve year as follows: $(634) million in 1993; $(614) million in 1992; $(577) million in 1991;
$(528) million in 1990; $(473) million in 1989; $(417) million in 1988; $(362) million in 1987;
$(317) million in 1986; and $(274) million in 1985.
(3) The reestimated liability at December 31, 1995 includes increases in provision for insured events
of prior years of $750 million related to environmental reserves upon completion of the company's
1995 environmental study in the second quarter of 1995 and $335 million related to asbestos reserves
in the fourth quarter of 1995.
(4) Information presented gross due to the adoption of FAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts in 1993. Adoption of FAS No. 113 had no
impact on the 1993 net loss.
(5) Information presented gross in 1995 and 1994 due to the adoption of FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts, which requires reporting claim liabilities
gross of deductible amounts recoverable from policyholders.
</TABLE>
<PAGE> 25
8. General Account Investments
The investment income and realized capital gains and losses from the
investment portfolios of the company's insurance subsidiaries contribute
to the results of the insurance operations described above. The
company's investment objective for both continuing operations and
Discontinued Operations is to fund policyholder and other liabilities in
a manner which enhances shareholder and contractholder value, subject to
appropriate risk constraints. It is the company's intention that this
investment objective be met by a mix of investments which reflects the
characteristics 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 asset portfolios.
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. (See Note 16 of Notes to Financial Statements in the
Annual Report for a discussion of the company's hedging activities).
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 1995, the company operated
within such investment guidelines by maintaining a mix of investments
that diversifies its assets and reflects the characteristics of the
liabilities which they support.
See MD&A - General Account Investments in the Annual Report for a
further discussion of investments.
a. Investments Related to Continuing Operations
Consistent with the nature of the contract obligations involved in
the company's continuing operations which include health care,
group life and disability, individual life, annuity and pension
operations, the majority of the general account assets
attributable to such operations have been invested in intermediate
and long-term, fixed-income obligations such as Treasury
obligations, mortgage-backed securities, corporate debt securities
and mortgage loans.
For information concerning the valuation of investments, see Notes
1, 5, and 6 of Notes to Financial Statements in the Annual Report.
<PAGE> 26
The following table sets forth the distribution of invested
assets, cash and cash equivalents and accrued investment income as
of the end of the years indicated: (1)
<TABLE>
<CAPTION>
(Millions) 1995 (2,3) 1994 (2,3) 1993 (2,3) 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Debt securities:
Bonds:
United States Government and
government agencies and
authorities $ 3,574.1 $ 4,235.4 $ 4,876.4 $ 2,340.6 $ 1,458.6
States, municipalities and
political subdivisions 489.8 537.4 429.9 468.5 247.6
Foreign (4) 4,327.6 2,769.6 3,089.9 1,395.6 2,051.4
Public utilities 2,533.3 2,107.9 2,217.3 1,795.0 2,200.6
Financial 4,875.1 4,139.7 3,845.9 2,188.6 2,481.1
Transportation/Capital goods 2,170.5 2,266.9 1,987.7 1,728.6 2,285.2
Mortgage-backed securities 5,803.3 5,499.3 8,823.2 10,117.4 8,208.3
Other loan-backed securities 1,748.6 1,331.8 49.1 - -
Food and fiber 681.4 622.8 733.5 652.5 752.0
Natural resources and services 1,165.1 755.8 897.3 600.4 739.0
All other corporate bonds 4,482.7 3,248.4 3,459.2 3,814.2 3,286.5
_________ _________ _________ _________ _________
Total bonds 31,851.5 27,515.0 30,409.4 25,101.4 23,710.3
Redeemable preferred stocks 8.8 10.4 26.7 31.8 27.4
_________ _________ _________ _________ _________
Total debt securities 31,860.3 27,525.4 30,436.1 25,133.2 23,737.7
_________ _________ _________ _________ _________
Equity securities:
Common stocks 566.9 512.7 355.7 336.8 297.4
Non-redeemable preferred stocks 92.8 101.9 105.3 110.1 162.5
_________ _________ _________ _________ _________
Total equity securities 659.7 614.6 461.0 446.9 459.9
_________ _________ _________ _________ _________
Short-term investments 607.8 344.4 543.0 1,117.3 197.7
Mortgage loans 8,327.2 10,389.9 13,000.2 15,925.8 18,399.1
Real estate (5) 1,277.3 1,283.7 1,033.8 1,255.8 1,134.4
Policy loans 629.4 533.8 490.7 463.4 434.3
Other 688.6 838.0 697.3 587.8 369.1
_________ _________ _________ _________ _________
Total investments $44,050.3 $41,529.8 $46,662.1 $44,930.2 $44,732.2
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Cash and cash equivalents $ 1,712.7 $ 2,277.2 $ 1,553.6 $ 1,899.8 $ 2,550.2
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Accrued investment income $ 618.3 $ 596.8 $ 576.2 $ 574.6 $ 615.7
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
<FN>
(1) Includes International. Excludes Separate Accounts and investments in affiliates.
(2) All debt securities are carried at fair value in 1995, and a majority are carried at fair
value in 1994 and 1993, due to the adoption of FAS No. 115 at December 31, 1993.
(3) Includes $10.3 billion, $11.9 billion and $14.7 billion of investments supporting discontinued
products in 1995, 1994 and 1993, respectively.
(4) "Foreign" includes foreign governments, foreign political subdivisions, foreign public
utilities and all other bonds of foreign issuers.
(5) Includes acquisition of real estate through foreclosures (including in-substance
foreclosures in 1995 and 1994) of mortgage loans.
</TABLE>
<PAGE> 27
The following table summarizes investment results of the company's
continuing operations: (1)
<TABLE>
<CAPTION>
(Dollar amounts in millions)
Net Earned Net Net Realized Change in Net
Investment Investment Capital Gains Unrealized Capital
Income (2) Income Rate (3) (Losses) (4) Gains and Losses (5)
__________ _______________ _____________ ____________________
<S> <C> <C> <C> <C>
For the year:
1995 $3,575.1 8.5% $ 47.2 $ 850.8
1994 3,631.4 8.4 (55.2) (975.7)
1993 3,966.6 9.0 (61.2) 374.7
1992 4,043.2 9.1 (98.9) (58.4)
1991 4,325.6 9.2 (302.4) 65.0
<FN>
(1) Includes International. Excludes Separate Accounts and investments in affiliates.
(2) Net investment income excludes net realized capital gains and losses and is after deduction of
investment expenses, but before deduction of federal income taxes.
(3) The Earned Net Investment Income Rate for any given year is equal to (a) net investment income
divided by (b) the average of (i) cash, invested assets and investment income due and accrued
less borrowed money at the beginning of the year, and (ii) cash, invested assets and investment
income due and accrued less borrowed money at the end of the year, less net investment income.
Debt securities are reflected primarily at amortized cost for purposes of this calculation.
Investments in affiliates have been eliminated for purposes of this calculation.
(4) Net realized capital gains (losses) are before federal income taxes and exclude gains and losses
allocable to experience rated pension contractholders in all years and discontinued products in 1995
and 1994. Intercompany transactions have not been eliminated.
(5) Net unrealized capital gains (losses) are before federal income taxes and exclude changes in
unrealized capital gains (losses) related to experience rated contractholders in all years and
discontinued products in 1995, 1994 and 1993.
</TABLE>
b. Investments Related to Discontinued Operations
The investment strategies for assets related to Discontinued
Operations are designed to maximize yield with appropriate
liquidity and preservation of principal, and to permit periodic
adjustment of the portfolio mix, in order to reflect changes in
underwriting results and thus maximize after-tax income. In 1995,
Discontinued Operations sold common stocks primarily due to the
company's efforts to reduce volatility in its statutory surplus,
and increase income, and in connection with the agreement to sell
the property-casualty operations.
For information concerning the valuation of investments, see Notes
1, 5, and 6 of Notes to Financial Statements in the Annual Report.
<PAGE> 28
The following table sets forth the distribution of invested
assets, cash and cash equivalents and accrued investment income as
of the end of the years indicated: (1)
<TABLE>
<CAPTION>
(Millions) 1995 (2) 1994 (2) 1993 (2) 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Debt Securities:
Bonds:
United States Government
and government agencies
and authorities $ 2,970.7 $ 3,417.5 $ 3,303.9 $ 889.1 $ 820.1
States, municipalities and
political subdivisions 974.3 1,404.4 2,086.9 2,210.0 2,953.1
Foreign (3) 1,133.3 609.2 757.2 533.0 597.8
Public utilities 764.1 520.3 705.7 663.1 454.4
Financial 1,289.1 536.1 1,280.0 708.6 942.5
Transportation/Capital goods 672.0 616.3 215.9 290.3 256.2
Mortgage-backed securities 1,211.9 1,273.6 1,453.5 3,029.5 2,561.7
Other loan-backed securities 1,204.0 317.5 - - -
Food and fiber 188.3 116.9 193.3 213.9 168.2
Natural resources and services 441.8 282.1 279.6 334.3 268.1
All other corporate bonds 724.0 421.1 740.0 670.8 375.8
_________ _________ _________ _________ _________
Total bonds 11,573.5 9,515.0 11,016.0 9,542.6 9,397.9
Redeemable preferred stocks 132.1 71.1 92.3 162.8 140.5
_________ _________ _________ _________ _________
Total debt securities 11,705.6 9,586.1 11,108.3 9,705.4 9,538.4
_________ _________ _________ _________ _________
Equity securities:
Common stocks 517.9 1,031.3 1,190.7 1,038.2 645.2
Non-redeemable preferred stocks 7.6 9.7 7.2 7.8 14.4
_________ _________ _________ _________ _________
Total equity securities 525.5 1,041.0 1,197.9 1,046.0 659.6
_________ _________ _________ _________ _________
Short-term investments 137.2 106.0 127.0 393.5 422.3
Mortgage loans 1,061.7 1,453.7 1,839.0 2,126.0 2,303.8
Real estate (4) 264.7 262.0 282.0 340.5 314.8
Other 291.8 314.7 239.5 254.9 485.7
_________ _________ _________ _________ _________
Total investments $13,986.5 $12,763.5 $14,793.7 $13,866.3 $13,724.6
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Cash and cash equivalents $ 1,153.6 $ 676.4 $ 4.2 $ 515.2 $ 390.4
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Accrued investment income $ 188.3 $ 180.4 $ 206.4 $ 192.8 $ 204.9
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
<FN>
(1) Excludes investments in affiliates.
(2) All debt securities are carried at fair value in 1995, and a majority are carried at fair value in
1994 and 1993, due to the adoption of FAS No. 115 at December 31, 1993.
(3) "Foreign" includes foreign governments, foreign political subdivisions, foreign public
utilities and all other bonds of foreign issuers.
(4) Includes acquisition of real estate through foreclosures (including in-substance
foreclosures in 1995 and 1994) of mortgage loans.
</TABLE>
<PAGE> 29
The following table summarizes investment results of the company's
Discontinued Operations: (1)
<TABLE>
<CAPTION>
(Dollar amounts in millions)
Net Earned Net Net Change in Net
Investment Investment Realized Unrealized Capital
Income (2) Income Rate (3) Capital Gains (4) Gains and Losses (4)
__________ _______________ _________________ ____________________
<S> <C> <C> <C> <C>
For the year:
1995 $ 901.7 6.4% $ 155.6 $ 1,052.9
1994 832.1 5.9 .4 (914.1)
1993 952.4 6.8 178.0 207.6
1992 1,025.8 7.4 213.8 200.6
1991 1,188.9 8.7 20.3 118.3
<FN>
(1) Excludes investments in affiliates.
(2) Net investment income excludes net realized capital gains and losses and is after
deduction of investment expenses, but before deduction of federal income taxes.
(3) The Earned Net Investment Income Rate for any given year is equal to (a) net
investment income divided by (b) the average of (i) cash, invested assets and
investment income due and accrued less borrowed money at the beginning of the
year, and (ii) cash, invested assets and investment income due and accrued less
borrowed money at the end of the year, less net investment income. Debt
securities are reflected primarily at amortized cost for purposes of this
calculation. Investments in affiliates have been eliminated for purposes of
this calculation.
(4) Net realized and unrealized capital gains (losses) are before federal income
taxes. Intercompany transactions have not been eliminated.
</TABLE>
9. Other Matters
a. Regulation
General
Aetna's insurance businesses (including Discontinued Operations)
are subject to comprehensive, detailed regulation throughout the
United States and the foreign jurisdictions in which they do
business. The laws of the various jurisdictions establish
supervisory agencies with broad authority to regulate, among other
things, the granting of licenses to transact business, premium
rates for certain coverages, trade practices, agent licensing,
policy forms, underwriting and claims practices, reserve adequacy,
insurer solvency, the maximum interest rates that can be charged
on life insurance policy loans, and the minimum rates that must be
provided for accumulation of surrender value. Many agencies also
regulate investment activities on the basis of quality,
distribution and other quantitative criteria. Aetna's operations
and accounts are subject to examination at regular intervals by
insurance regulators.
Although the federal government does not directly regulate the
business of insurance, many federal laws do affect that business.
Existing or recently proposed federal laws that may significantly
affect or would affect, if passed, the insurance business cover
such matters as pensions and other employee benefits (including
regulation of federally qualified HMOs), controls on medical care
costs, medical entitlement programs (e.g., Medicare),
environmental regulation and liability, product liability, civil
justice procedural reform, earthquake insurance, removal of
barriers preventing banks from engaging in the insurance and
mutual fund businesses, the taxation of insurance companies (see
Notes 1 and 10 of Notes to Financial Statements in the Annual
Report), and the tax treatment of insurance products.
<PAGE> 30
Material changes in applicable federal and state laws and
regulations could adversely affect the company's business
operations, although the company is unable to predict whether any
such changes will be implemented.
Health Care
In addition to regulations applicable to insurance companies
generally (described above), Aetna's managed health care products
are subject to varying levels of state insurance, HMO and/or
health department regulation. Among other things, these
regulations address health care network composition, new product
offerings, product and benefit contracts and the extent to which
insurance companies and managed care plans may provide incentives
to enrollees to use services from "preferred" health care service
providers or pay contractual and noncontractual health care
providers unequally for equivalent services. Some jurisdictions
also regulate the extent to which managed health care plans may
offer their enrollees the option of receiving health care services
from noncontracting providers. Additionally, these plans are
subject to state, and in some cases federal, regulation concerning
solvency and other operational requirements.
Legislative efforts to change the health insurance system have
received increased attention in recent years at both the state and
national levels. (For additional discussion, see MD&A - Aetna
Health Plans in the Annual Report.)
Insurance and Insurance Holding Company Laws
Several states, including Connecticut, regulate affiliated groups
of insurers such as Aetna under insurance holding company
statutes. Under such laws, intercorporate asset transfers and
dividend payments from insurance subsidiaries may require prior
notice to or approval of the insurance regulators, depending on
the size of such transfers and payments relative to the financial
position of the affiliate making the transfer. These laws also
regulate changes in control, as do Connecticut corporate laws
(which also apply to insurance corporations). See Note 8 of Notes
to Financial Statements in the Annual Report.
As a licensed Connecticut-domiciled insurer, the company is
subject to Connecticut insurance laws. These laws, among other
things, enable insurers to redeem their stock from any shareholder
who fails, in the good faith determination of the insurer's board
of directors, to (i) meet the qualifications prescribed under
Connecticut law for licensure, or (ii) to secure the regulatory
approvals required under Connecticut law for ownership of such
stock.
<PAGE> 31
Securities Laws
The Securities and Exchange Commission ("SEC") and, to a lesser
extent, the states regulate the sales and investment management
activities and operations of broker-dealer and investment advisory
subsidiaries of the company. The SEC also regulates certain of
the company's pension, annuity, life insurance and other
investment and retirement products. These products involve
Separate Accounts of Aetna Life Insurance and Annuity Company and
mutual funds registered under the Investment Company Act of 1940.
As a stock company, Aetna also is subject to extensive reporting
obligations under the Securities Exchange Act of 1934.
Discontinued Operations - Property-Casualty Operations
Over the past several years, the company's insurance businesses,
particularly personal auto and property insurance and workers'
compensation coverage, have been the target of various regulatory
and legislative initiatives that management believes have limited
the basis upon which the company conducts its activities. Such
initiatives have, among other things, sought to (1) freeze or
reduce rates that may be charged for certain insurance products,
(2) force the company to issue and renew insurance in markets
where the company cannot achieve an acceptable rate of return, and
(3) restructure residual or involuntary markets. Many
jurisdictions compel participation in, and regulate composition
of, various residual market mechanisms. Residual or involuntary
markets are established to provide coverage to insureds unable to
obtain policies in the private marketplace. As state-mandated
rates are frequently inadequate, these markets are in effect often
subsidized by the insurance industry.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed (up to
prescribed limits) for certain obligations of insolvent insurance
companies to policyholders and claimants. The after-tax charges
to earnings for guaranty fund obligations for the year ended
December 31, 1995 was $13 million (of which $5 million related to
Discontinued Operations) and for the year ended December 31, 1993
was $17 million (all of which related to Discontinued Operations).
There were no such charges in 1994. The amounts ultimately
assessed may differ from the amounts charged to earnings because
such assessments may not be made for several years and will depend
upon the final outcome of regulatory proceedings.
While the company has historically recovered more than half of
guaranty fund assessments through statutorily permitted premium
tax offsets and policy surcharges, significant increases in
assessments could jeopardize future efforts to recover such
assessments.
The company has actively supported improved insurer solvency
regulation, including measures that would facilitate earlier
identification of troubled insurers, and amendments to guaranty
fund laws that would reduce the costs of such insolvencies to
solvent insurers such as Aetna.
See MD&A - Regulatory Environment in the Annual Report for
additional discussion of regulatory matters.
<PAGE> 32
b. NAIC IRIS Ratios
The NAIC IRIS ratios cover 12 categories of financial data with
defined usual ranges for each category. The ratios are intended to
provide insurance regulators "early warnings" as to when a given
company might warrant special attention. An insurance company may
fall out of the usual range for one or more ratios and such variances
may result from specific transactions that are in themselves
immaterial or eliminated at the consolidated level. In 1994, two of
Aetna Life and Casualty Company's significant subsidiaries had more
than two IRIS ratios that were outside of the NAIC usual ranges, as
discussed below.
Aetna Life Insurance Company ("ALIC") fell outside the usual ranges
in 1994 for: (i) the Net Gain to Total Income Ratio which is
calculated by dividing the net gain from operations (including
realized capital gains and losses) by total income (including
realized capital gains and losses); (ii) the Adequacy of Investment
Income Ratio which compares investment income to credited interest;
(iii) the Total Real Estate and Total Mortgage Loans to Cash and
Invested Assets Ratio which measures the relative size of the real
estate and mortgage loan portfolios; (iv) the Change in Premium Ratio
which is calculated by dividing the current year change in total
premiums, annuity considerations and other fund deposits by total
premiums, annuity considerations and other fund deposits for the
prior year; and (v) the Change in Reserving Ratio which represents
the number of percentage points of difference between the reserving
ratio for current and prior year. The reserving ratio is equal to the
aggregate increase in reserves for individual life insurance taken as
a percentage of renewal and single premiums for individual life
insurance. The regulators were satisfied, after analysis, that ALIC
did not warrant special attention.
The Aetna Casualty & Surety Company of America ("ACSCA") fell outside
of the usual ranges in 1994 for: (i) the Two-year Overall Operating
Ratio, which is a combination of a two-year combined ratio minus a
two-year investment income ratio; (ii) the Change in Surplus which
measures the improvement or deterioration in a company's financial
condition during the year; and (iii) the Two-Year Reserve Development
to Surplus Ratio which measures the change in prior years' estimates
calculated as a percentage of policyholders' surplus two years
previous. The regulators were satisfied that ACSCA did not warrant
special attention.
Management expects that certain of the company's significant
subsidiaries will have more than two IRIS ratios outside of the NAIC
usual ranges for 1995, but expects to be able to satisfy the
regulators that further attention is not warranted.
<PAGE> 33
c. 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 years ended December 31:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.97 4.74 (a) 1.90 .54 (b)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends 4.97 4.74 (a) 1.90 .54 (b)
<FN>
(a) Aetna reported a pretax loss from continuing operations in 1993 which was
inadequate to cover fixed charges by $1.0 billion.
(b) Earnings were inadequate to cover fixed charges by $92.0 million in 1991.
</TABLE>
For purposes of computing both the ratio of earnings to fixed charges
and the ratio of earnings to combined fixed charges and preferred
stock dividends, "earnings" represent consolidated earnings from
continuing operations before income taxes, cumulative effect
adjustments and extraordinary items plus fixed charges and minority
interest. "Fixed charges" consist of interest (and the portion of
rental expense deemed representative of the interest factor) and
includes the dividends paid to preferred shareholders of a
subsidiary. (See Note 11 of Notes to Financial Statements in the
Annual Report.) For the years ended December 31, 1995, 1994, 1993,
1992 and 1991 there was no preferred stock outstanding. As a result,
the ratios of earnings to combined fixed charges and preferred stock
dividends were the same as the ratios of earnings to fixed charges.
d. Miscellaneous
Aetna had approximately 40,200 domestic employees (approximately
11,300 of whom support Discontinued Operations) at December 31,
1995.
Management believes that the company's computer facilities,
systems and related procedures are adequate to meet its business
needs. The company's data processing systems and backup and
security policies, practices and procedures are regularly
evaluated by the company's management and its internal auditors
and are modified as considered necessary.
Portions of Aetna's insurance business are seasonal in nature.
Reported claims under group health and certain property-casualty
products are generally higher in the first quarter. Sales,
particularly of individual life products, are generally lowest in
the first quarter and highest in the fourth quarter.
No customer accounted for 10% or more of Aetna's consolidated
revenues in 1995. In addition, no segment of Aetna's business is
dependent upon a single customer or a few customers, the loss of
which would have a significant effect on the segment. See Note 15
of Notes to Financial Statements regarding segment information in
the Annual Report.
<PAGE> 34
The loss of business from any one, or a few, independent brokers
or agents would not have a material adverse effect on the company
or any of its segments. In general, the company is not
contractually obligated or committed to accept a fixed portion of
business submitted by any of its property-casualty agents or
brokers. The company generally reviews all of its policy
applications, both new and renewal, for approval and acceptance.
There are cases where the company has delegated limited
underwriting authority to select agents generally for smaller
business for specific classes of risks. The risks accepted by the
company under these conditions are reviewed by company
underwriters. This authority generally can be rescinded at any
time at the discretion of the company and without prior notice to
the agents.
Item 2. Properties.
The home office of Aetna, owned by Aetna Life Insurance Company,
is a building complex located at 151 Farmington Avenue, Hartford,
Connecticut, with approximately 1.6 million square feet. The
company also owns or leases other space in the greater Hartford
area as well as various field locations throughout the country.
(Please see MD&A - Overview in the Annual Report.)
The foregoing does not include numerous investment properties held
by Aetna in its general and separate accounts.
Item 3. Legal Proceedings.
The company is continuously involved in numerous 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 environmental and
asbestos-related claims. These lawsuits and other factors make
reserving for these claims subject to significant uncertainties. See
MD&A - Discontinued Operations' Reserves in the Annual Report.
While the ultimate outcome of such litigation cannot be determined
at this time, such litigation, net of reserves established
therefore and giving effect to reinsurance probable of recovery,
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE> 35
EXECUTIVE OFFICERS OF AETNA LIFE AND CASUALTY COMPANY*
The Chairman of Aetna Life and Casualty Company is elected and all
other executive officers listed below are appointed by the Board
of Directors of the company at its Annual Meeting each year to
hold office until the next Annual Meeting of the Board or until
their successors are elected or appointed. None of these officers
have family relationships with any other executive officer or
Director.
<TABLE>
<CAPTION>
Business Experience
Name of Officer Principal Position Age * During Past Five Years
_______________ __________________ ___ ______________________
<S> <C> <C> <C>
Ronald E. Compton Chairman and President 63 (1)
Richard L. Huber Vice Chairman for
Strategy and Finance 59 (2)
Zoe Baird Senior Vice President and
General Counsel 43 (3)
Gary G. Benanav Executive Vice President,
Property/Casualty** 50 (4)
J. Roger Bolton Senior Vice President,
Corporate Communications 45 (5)
Mary Ann Champlin Senior Vice President,
Aetna Human Resources 48 (6)
Daniel P. Kearney Executive Vice President,
Investments/Financial
Services** 56 (7)
James W. McLane Executive Vice President,
Health/Group Life** 57 (8)
Vanda B. McMurtry Senior Vice President,
Federal Government Relations 46 (9)
Robert E. Broatch Senior Vice President,
Finance 47 (10)
Robert J. Price Vice President and
Corporate Controller 45 (11)
<FN>
* As of February 26, 1996.
** Executive Vice Presidents, in conjunction with certain other senior
officers, are responsible for assisting the Chairman and Vice Chairman
in setting policy and overall direction for the company.
</TABLE>
<PAGE> 36
(1)
Mr. Compton has served as Chairman since March 1, 1992. He is also
President, a position he has held since July 1988.
(2)
Mr. Huber has served in his current position since February 1995. From
September 1994 to February 1995, he served as President and Chief Operating
Officer of Grupo Wasserstein Perella. From 1990 to September 1994, he
served as Vice Chairman of Continental Bank. From 1988 to 1990, he served
as Executive Vice President and Head of Capital Markets and Foreign
Exchange Sector, Chase Manhattan Bank.
(3)
Ms. Baird has served in her current position since April 1992. From July
1990 to April 1992 she served as Vice President and General Counsel.
(4)
Mr. Benanav has served in his current position since December 1993. From
April 1992 to December 1993 he served as Group Executive responsible for
International, individual life insurance, annuities, mutual funds, and
small case pensions. From April 1990 through April 1992, he served as
Senior Vice President, International Insurance.
(5)
Mr. Bolton has served in his current position since July 1995. He was with
International Business Machines Corporation from March 1991 to June 1995,
serving as Director of Communications, IBM Software Group, from March 1994
to June 1995, and as Director of Corporate Media Relations from March 1991
to March 1994. From February 1989 to March 1991, he served as Assistant
Secretary for Public Affairs and Public Liaison, U.S. Department of
Treasury.
(6)
Mrs. Champlin has served in her current position since November 1992. From
February 1991 through November 1992 she served as Vice President, Aetna
Human Resources. From June 1989 through January 1991 she served as
Assistant Vice President, Corporate Management, Office of the Chairman.
(7)
Mr. Kearney has served in his current position since December 1993. From
February 1991 to December 1993 he served as Group Executive responsible for
investments and large case pensions. From 1990 to February 1991 he served
as the principal of Daniel P. Kearney, Inc.
(8)
Mr. McLane has served in his current position since December 1993. From
April 1992 to December 1993, he served as Group Executive responsible for
group health and life insurance including managed care operations. From
February 1991 through April 1992 he served as Chief Executive Officer,
Aetna Health Plans; from 1985 through 1991 he served as Senior Vice
President, Global Insurance Division, Citicorp.
(9)
Mr. McMurtry has served in his current position since November 1992. From
February 1989 through November 1992 he served as Staff Director and Chief
Counsel, Committee on Finance, United States Senate.
(10)
Mr. Broatch has served in his current position since December 1993. He
also served as Corporate Controller from May 1988 to July 1995 and was a
Vice President from May 1988 to December 1993.
(11)
Mr. Price was appointed to his current position on July 3, 1995, having
served as Vice President and Deputy Controller since May 1989.
<PAGE> 37
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
Aetna Life and Casualty Company's common stock is listed on the
New York and Pacific Stock Exchanges, with unlisted trading
privileges on other regional exchanges. Its symbol is AET. The
common stock also is listed on the Swiss Stock Exchanges at Basel,
Geneva and Zurich. Call and put options on the common stock are
traded on the American Stock Exchange. As of January 31, 1996,
there were 22,939 record holders of the common stock.
The dividends declared and the high and low sales prices with
respect to Aetna Life and Casualty Company's common stock for each
quarterly period for the past two years are incorporated herein by
reference from "Quarterly Data" in the Annual Report.
Information regarding restrictions on the company's present and
future ability to pay dividends is incorporated herein by
reference from Note 8 of Notes to Financial Statements in the
Annual Report.
Item 6. Selected Financial Data.
The information contained in "Selected Financial Data" in the
Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The information contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The 1995 Consolidated Financial Statements and the report of the
registrant's independent auditors and the unaudited information
set forth under the caption "Quarterly Data" is incorporated
herein by reference to the Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
<PAGE> 38
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning Executive Officers is included in Part I
pursuant to General Instruction G to Form 10-K.
Information concerning Directors and concerning compliance with
Section 16 (a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Proxy Statement.
Item 11. Executive Compensation.
The information under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The information under the caption "Security Ownership of Certain
Beneficial Owners, Directors, Nominees and Executive Officers" in
the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Certain Transactions and
Relationships" in the Proxy Statement is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements:
The Consolidated Financial Statements and the report of the
registrant's independent auditors are incorporated herein by
reference to the Annual Report.
2. Financial statement schedules:
The supporting schedules of the consolidated entity are included
in this Item 14. See Index to Financial Statement Schedules on
page 42.
<PAGE> 39
3. Exhibits: *
(3) Articles of Incorporation and By-Laws.
Certificate of Incorporation of Aetna Life and Casualty Company,
incorporated herein by reference to the company's 1992 Form 10-
K, filed on March 17, 1993 (the "1992 Form 10-K").
By-Laws of Aetna Life and Casualty Company, incorporated by
reference to the company's 1993 Form 10-K filed on March 18,
1994 (the "1993 Form 10-K").
(4) Instruments defining the rights of security holders,
including indentures.
Conformed copy of Indenture, dated as of October 15, 1977,
between Aetna Life and Casualty Company and Morgan Guaranty
Trust Company of New York, Trustee, incorporated herein by
reference to the 1992 Form 10-K.
Conformed copy of Indenture, dated as of October 15, 1986,
between Aetna Life and Casualty Company and The First National
Bank of Boston, Trustee, incorporated herein by reference to the
1992 Form 10-K.
Conformed copy of Indenture, dated as of August 1, 1993, between
Aetna Life and Casualty Company and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee,
incorporated herein by reference to the company's Registration
Statement on Form S-3 (File No. 33-50427).
Conformed copy of Rights Agreement dated as of October 27, 1989,
between Aetna Life and Casualty Company and First Chicago Trust
Company of New York, incorporated herein by reference to the
1992 Form 10-K.
Conformed copy of Summary of Rights to Purchase Preferred Stock,
incorporated herein by reference to the 1992 Form 10-K.
Conformed copy of Written Action dated as of November 15, 1994,
establishing the terms of Series A Preferred Securities of Aetna
Capital L.L.C., incorporated herein by reference to the
company's Form 8-K filed on November 22, 1994.
Conformed copy of Subordinated Indenture dated as of November 1,
1994, between the company and The First National Bank of
Chicago, as Trustee, incorporated herein by reference to the
company's Form 8-K filed on November 22, 1994.
Conformed copy of Payment and Guarantee Agreement dated November
22, 1994, of the company with respect to Aetna Capital L.L.C.,
incorporated herein by reference to the company's Form 8-K filed
on November 22, 1994.
(10) Material contracts.
Stock Purchase Agreement dated as of November 28, 1995 between
The Travelers Insurance Group Inc. and Aetna Life and Casualty
Company relating to the purchase and sale of 100% of the Common
Stock of The Aetna Casualty and Surety Company and The Standard
Fire Insurance Company.
Letter Agreement, dated January 19, 1995, between Aetna Life and
Casualty Company and Richard L. Huber. **
<PAGE> 40
Employment Agreement, dated as of October 27, 1995, between Aetna
Life and Casualty Company and Gary G. Benanav. **
Employment Agreement, dated as of January 29, 1996, between Aetna
Life and Casualty Company and Ronald E. Compton. **
Employment Agreement, dated as of December 19, 1995, between Aetna
Life and Casualty Company and Daniel P. Kearney. **
Employment Agreement, dated as of January 19, 1996, between Aetna
Life and Casualty Company and James W. McLane. **
The 1984 Stock Option Plan of Aetna Life and Casualty Company
and amendments thereto, incorporated herein by reference to the
1992 Form 10-K. **
Aetna Life and Casualty Company's Supplemental Incentive Savings
Plan, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company's Supplemental Pension Benefit
Plan, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company's 1986 Management Incentive Plan,
as amended effective February 25, 1994, incorporated herein by
reference to the 1993 Form 10-K. **
Aetna Life and Casualty Company Directors' Deferred Compensation
Plan, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company 1994 Non-Employee Director
Deferred Stock Plan, incorporated herein by reference to the
company's 1994 proxy statement, filed on March 18, 1994 (the "1994
Proxy Statement"). **
Aetna Life and Casualty Company 1994 Stock Incentive Plan,
incorporated herein by reference to the 1994 Proxy Statement. **
Letter Agreement, dated December 18, 1993, between Aetna Life and
Casualty Company and David A. Kocher, incorporated herein by
reference to the 1993 Form 10-K. **
Letter Agreement, dated September 20, 1994, between Aetna Life and
Casualty Company and Patrick W. Kenny, incorporated by reference
to the company's Form 10-Q filed on October 28, 1994. **
The Aetna Life and Casualty Company 1990 Non-Employee Director Deferred
Stock Plan, incorporated herein by reference to the 1992 Form 10-K. **
Extension Notice, dated July 17, 1995 of $500,000,000 Short-Term
Credit Agreement dated July 27, 1994 among Aetna Life and Casualty
Company, the banks listed therein, Deutsche Bank AG, as Co-
Arranger, and Morgan Guaranty Trust Company of New York,
incorporated by reference to the company's Form 10-Q filed on July
28, 1995.
$500,000,000 Medium-Term Credit Agreement dated as of July 27, 1994
among Aetna Life and Casualty Company, the banks listed on the
signature pages thereof, Morgan Guaranty Trust Company of New York,
as Managing Agent, Deutsche Bank AG, as Co-Arranger, and The Chase
Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co-
Agents, incorporated by reference to the company's Form 10-Q filed
on August 15, 1994.
<PAGE> 41
Description of certain arrangements not embodied in formal
documents, as described with respect to Directors' fees and
benefits, and under the caption "Executive Compensation," are
incorporated herein by reference to the Proxy Statement.
(11) Statement re computation of per share earnings.
Incorporated herein by reference to Note 1 of Notes to Financial
Statements in the Annual Report.
(12) Statement re computation of ratios.
Statement re: computation of ratio of earnings to fixed charges.
Statement re: computation of ratio of earnings to combined fixed
charges and preferred stock dividends.
(13) Annual Report to security holders.
Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Consolidated
Financial Statements and the report of the company's independent
auditors, and unaudited Quarterly Data from the Annual Report.
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Life and Casualty Company.
(23) Consents of experts and counsel.
Consent of Independent Auditors to Incorporation by Reference in
the Registration Statements on Form S-3 and Form S-8.
(24) Powers of attorney.
(27) Financial data schedule.
(28) Information from reports furnished to state insurance
regulatory authorities.
1995 Consolidated Schedule P of Annual Statements provided to
state regulatory authorities. ***
(b) Reports on Form 8-K
The company filed a report on Form 8-K filed on November 29, 1995,
relating to the company entering into a definitive agreement,
dated November 28, 1995, to sell its property-casualty operations
to The Travelers Insurance Group Inc.
* Exhibits other than those listed are omitted because they are
not required or are not applicable. Copies of exhibits are
available without charge by writing to the Office of the
Corporate Secretary, Aetna Life and Casualty Company,
151 Farmington Avenue, Hartford, Connecticut 06156.
** Management contract or compensatory plan or arrangement.
*** Filed under cover of Form SE.
<PAGE> 42
INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
Independent Auditors' Report Page
____
I Summary of Investments - Other than 44
Investments in Affiliates as
of December 31, 1995
II Condensed Financial Information of the 45
Registrant as of December 31, 1995 and
1994 and for the years ended December 31,
1995, 1994 and 1993
III Supplementary Insurance Information as of 51
and for the years ended December 31, 1995,
1994 and 1993
IV Reinsurance 54
V Valuation and Qualifying Accounts and Reserves 55
for the years ended December 31, 1995, 1994
and 1993
VI Supplemental Information Concerning 58
Property-Casualty Operations for the years
ended December 31, 1995, 1994 and 1993
Certain of the required information is shown in the Financial
Statements or Notes thereto in the Annual Report. Certain
information has been omitted from the schedules filed because the
information is not applicable.
Certain reclassifications have been made to 1994 and 1993
financial information to conform to 1995 presentation.
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
____________________________
The Shareholders and Board of Directors
Aetna Life and Casualty Company:
Under date of February 6, 1996, we reported on the consolidated
balance sheets of Aetna Life and Casualty Company and Subsidiaries
as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31,
1995, as contained in the 1995 annual report to shareholders.
These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for
the year 1995. In connection with our audits of the
aforementioned consolidated financial statements, we also have
audited the related financial statement schedules as listed in the
accompanying index. These financial statement schedules are the
responsibility of the company's management. Our responsibility is
to express an opinion on these financial statement schedules based
on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Notes 1 and 2 to the consolidated financial
statements, in 1993 the company changed its methods of accounting
for certain investments in debt and equity securities,
postemployment benefits, workers' compensation life table
indemnity reserves and retrospectively rated reinsurance
contracts.
By /s/ KPMG Peat Marwick LLP
_________________________
(Signature)
KPMG PEAT MARWICK LLP
Hartford, Connecticut
February 6, 1996
<PAGE> 44
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1995
<TABLE>
<CAPTION>
Amount
at which
shown in the
Type of Investment Cost Value* balance sheet
__________ __________ _____________
(Millions)
<S> <C> <C> <C>
Debt securities:
Bonds:
United States Government
and government agencies
and authorities $ 3,396.7 $ 3,574.1 $ 3,574.1
States, municipalities and
political subdivisions 445.4 489.8 489.8
Foreign (1) 4,074.7 4,327.6 4,327.6
Public utilities 2,372.6 2,533.3 2,533.3
Financial 4,685.4 4,875.1 4,875.1
Transportation/Capital goods 1,966.5 2,170.5 2,170.5
Mortgage-backed securities 5,431.1 5,803.3 5,803.3
Other loan-backed securities 1,704.5 1,748.6 1,748.6
Food and fiber 625.5 681.4 681.4
Natural resources and services 1,078.5 1,165.1 1,165.1
All other corporate bonds 4,197.4 4,482.7 4,482.7
_________ _________ _________
Total bonds 29,978.3 31,851.5 31,851.5
Redeemable preferred stocks 8.8 8.8 8.8
_________ _________ _________
Total debt securities 29,987.1 $31,860.3 31,860.3
_________ _________ _________
_________
Equity securities:
Common stocks:
Public utilities 22.6 $ 25.7 25.7
Banks, trust and insurance
companies 27.1 31.3 31.3
Industrial, miscellaneous
and all other 465.4 509.9 509.9
_________ _________ _________
Total common stocks 515.1 566.9 566.9
Non-redeemable preferred
stocks 82.8 92.8 92.8
_________ _________ _________
Total equity securities 597.9 $ 659.7 659.7
_________ _________ _________
_________
Short-term investments 607.7 607.8
Mortgage loans 8,327.2 8,327.2
Real estate 1,277.3 1,277.3
Policy loans 629.4 629.4
Other 574.1 (2) 688.6 (3)
_________ _________
Total investments $42,000.7 $44,050.3
_________ _________
_________ _________
________________________
<FN>
* See Notes 1 and 5 of Notes to Financial Statements in the company's
1995 Annual Report.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign issuers.
(2) Excludes investments in affiliates of $114.5 million.
(3) Includes investments in affiliates of $114.5 million.
</TABLE>
<PAGE> 45
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
____ ____ ____
(Millions)
<S> <C> <C> <C>
Premiums $ 1.2 $ 1.5 $ 1.3
Net investment income (expense) 1.0 (7.9) (7.9)
Net realized capital losses (.2) (7.9) (22.1)
_______ _______ ________
Total revenue 2.0 (14.3) (28.7)
Current and future benefits .4 .9 .8
Operating expenses 39.2 32.1 43.1
Severance and facilities charge - - 50.3
Interest expense 108.3 92.5 70.1
_______ _______ ________
Total benefits and expenses 147.9 125.5 164.3
_______ _______ ________
Losses before federal income taxes
(benefits) and equity in earnings
(losses) of affiliates (145.9) (139.8) (193.0)
Federal income taxes (benefits):
Current (57.2) (23.2) (53.4)
Deferred 3.1 (19.4) (45.6)
Equity in earnings (losses) of
affiliates 565.7 506.6 (508.3)
_______ _______ ________
Income (Loss) from continuing
operations before extraordinary item
and cumulative effect adjustments 473.9 409.4 (602.3)
Income (Loss) from Discontinued
Operations, net of tax (222.2) 58.1 290.3
_______ _______ ________
Income (Loss) before extraordinary item
and cumulative effect adjustments for
continuing operations 251.7 467.5 (312.0)
Extraordinary loss on debenture
redemption, net of tax - - (4.7)
Cumulative effect adjustments for
continuing operations - - (49.2)
_______ _______ ________
Net income (loss) $ 251.7 $ 467.5 $ (365.9)
_______ _______ ________
_______ _______ ________
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 46
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
1995 1994
____ ____
(Millions, except share data)
<S> <C> <C>
ASSETS
Investments:
Debt securities, available for sale
at fair value (cost of $3.9 and $3.8) $ 3.9 $ 3.8
Equity securities, at market
(cost $18.4 and $18.3) 14.9 14.8
Short-term investments 10.2 22.5
Other 8.7 10.9
Investments in affiliates:
Insurance and financial services
companies 4,830.4 3,648.5
International insurance and
financial services companies 780.2 644.6
Discontinued Operations 3,932.8 3,167.3
_________ _________
Total investments 9,581.1 7,512.4
Cash and cash equivalents 23.7 -
Premiums due and other receivables 5.6 2.5
Due from affiliates 61.3 179.3
Accrued investment income 3.2 1.6
Deferred federal income taxes 304.8 306.6
Other assets 43.2 32.8
_________ _________
Total assets $10,022.9 $ 8,035.2
_________ _________
_________ _________
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance reserve liabilities $ 45.8 $ .6
Dividends payable to shareholders 79.2 77.7
Long-term debt 958.0 1,058.2
Short-term debt 329.9 -
Other liabilities 238.7 127.2
Liability for postretirement
benefits other than pensions 609.5 624.1
Due to affiliates 356.0 513.1
Current federal income taxes 133.0 131.3
_________ _________
Total liabilities 2,750.1 2,532.2
_________ _________
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 stock (No par value; 250,000,000
shares authorized; 115,013,675 and
114,939,275 issued; and 114,727,093
and 112,657,758 outstanding) 1,448.2 1,419.2
Net unrealized capital gains (losses) 641.1 (1,071.5)
Retained earnings 5,195.6 5,259.6
Treasury stock, at cost (12.1) (104.3)
_________ _________
Total shareholders' equity 7,272.8 5,503.0
_________ _________
Total $10,022.9 $ 8,035.2
_________ _________
_________ _________
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 47
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Net
Unrealized
Three years ended December 31, 1995 Common Capital Retained Treasury
(Millions, except share data) Total Stock Gains (Losses) Earnings Stock
___________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 $ 7,238.3 $ 1,417.7 $ 259.6 $ 5,777.9 $ (216.9)
___________________________________________________________________________________________________________
Net loss (365.9) (365.9)
Net change in unrealized capital gains
and losses 388.6 388.6
Common stock issued for benefit plans
(1,930,085 shares) 86.5 86.5
Gain on issuance of treasury stock 4.3 4.3
Common stock dividends declared (308.7) (308.7)
______________________________________________________________
Balances at December 31, 1993 $ 7,043.1 $ 1,422.0 $ 648.2 (1) $ 5,103.3 $ (130.4)
___________________________________________________________________________________________________________
Net income 467.5 467.5
Net change in unrealized capital gains
and losses (1,719.7) (1,719.7)
Common stock issued for benefit plans
(457,191 shares) 26.1 26.1
Loss on issuance of treasury stock (2.8) (2.8)
Common stock dividends declared (311.2) (311.2)
______________________________________________________________
Balances at December 31, 1994 $ 5,503.0 $ 1,419.2 $(1,071.5) (1) $ 5,259.6 $ (104.3)
___________________________________________________________________________________________________________
Net income 251.7 251.7
Net change in unrealized capital gains
and losses 1,712.6 1,712.6
Common stock issued for benefit plans
(2,069,335 shares) 97.4 5.2 92.2
Gain on issuance of treasury stock 23.8 23.8
Common stock dividends declared (315.7) (315.7)
______________________________________________________________
Balances at December 31, 1995 $ 7,272.8 $ 1,448.2 $ 641.1 (1) $ 5,195.6 $ (12.1)
___________________________________________________________________________________________________________
<FN>
See Notes to Condensed Financial Statements.
(1) Excludes unrealized capital gains and losses attributable to assets supporting
discontinued products and to assets supporting experience rated contracts.
</TABLE>
<PAGE> 48
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
____ ____ ____
(Millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 251.7 $ 467.5 $(365.9)
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Cumulative effect adjustments - - 49.2
Extraordinary loss on debenture redemption - - 4.7
Loss (Income) from Discontinued Operations 222.2 (58.1) (290.3)
Decrease (Increase) in premiums due and
other receivables 116.4 (12.3) 5.0
(Increase) Decrease in accrued investment
income (1.6) (0.3) 0.3
Depreciation and amortization 0.1 0.1 -
Increase (Decrease) in federal income taxes 0.5 93.1 (58.6)
Net (decrease) increase in other assets
and other liabilities (70.3) (19.7) 38.3
Increase in insurance reserve
liabilities 45.2 0.1 0.1
Equity in (earnings) losses of affiliates (565.7) (506.6) 508.3
Net realized capital losses 0.2 7.9 22.1
Amortization of net investment discounts (0.2) (0.2) (0.2)
Other, net (36.0) (90.6) (133.2)
_______ ________ ______
Net cash used for operating activities (37.5) (119.1) (220.2)
_______ ________ ______
Cash Flows from Investing Activities:
Proceeds from sales of:
Equity securities - 1.1 -
Short-term investments 1,289.3 1,200.3 1,591.3
Cost of investments in:
Debt securities available for sale (0.1) (3.8) -
Equity securities (0.1) (21.8) (26.3)
Short-term investments (1,272.2) (1,139.6) (1,591.5)
Real estate - ( 1.0) (0.5)
Capital contributions to affiliates (303.0) - (300.0)
Dividends received from affiliates 451.7 - 302.1
Other, net (139.6) 17.2 127.8
_______ _______ _______
Net cash provided by investing activities 26.0 52.4 102.9
_______ _______ _______
Cash Flows from Financing Activities:
Issuance of long-term debt .6 .6 600.0
Issuance of subordinated debentures
to affiliates - 348.1 -
Stock issued under benefit plans 121.2 23.3 90.8
Repayment of long-term debt (100.8) - (347.2)
Net increase in short-term debt 329.9 - -
Dividends paid to shareholders (315.7) (311.2) (308.7)
_______ _______ _______
Net cash provided by financing activities 35.2 60.8 34.9
_______ _______ ________
Effect of exchange rate on cash
and cash equivalents - 0.1 -
_______ _______ _______
Net increase (decrease) in cash and
cash equivalents 23.7 (5.8) (82.4)
Cash and cash equivalents, beginning of year - 5.8 88.2
_______ _______ _______
Cash and cash equivalents, end of year $ 23.7 $ - $ 5.8
_______ _______ _______
_______ _______ _______
Supplemental disclosure of cash flow
information:
Interest paid $ 117.8 $ 90.6 $ 64.2
_______ _______ _______
_______ _______ _______
Income taxes received, net $ 70.2 $ 150.3 $ 56.7
_______ _______ _______
_______ _______ _______
________________________
<FN>
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE> 49
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto in the Annual Report. Certain reclassifications have been
made to 1994 and 1993 financial information to conform to 1995
presentation.
1. Long-Term Debt
<TABLE>
<CAPTION>
(Millions) 1995 1994
____ ____
<S> <C> <C>
Long-term debt:
Eurodollar Notes, 9 1/2% due 1995 $ - $ 100.2
Notes, 8 5/8% due 1998 99.8 99.8
Notes, 6 3/8% due 2003 198.9 198.9
Debentures, 6 3/4% due 2013 198.4 198.4
Eurodollar Notes, 7 3/4% due 2016 63.5 63.5
Debentures, 8% due 2017 199.1 199.1
Debentures, 7 1/4% due 2023 198.3 198.3
________ ________
$ 958.0 $1,058.2
________ ________
________ ________
</TABLE>
See Note 9 to the Consolidated Financial Statements in the Annual
Report for a description of the long-term debt and aggregate
maturities for 1996 to 2000 and thereafter.
2. Dividends
The amounts of cash dividends paid to Aetna Life and Casualty
Company by insurance affiliates for the years ended December 31,
1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Consolidated subsidiaries $451.7 $ - $302.1
______ ____ ______
______ ____ ______
</TABLE>
See Note 8 to the Consolidated Financial Statements in the Annual
Report for a description of dividend restrictions from the
consolidated insurance subsidiaries to the company.
3. Due to Affiliates
See Note 11 to the Consolidated Financial Statements in the Annual
Report for a description of amounts due to Aetna Capital L.L.C., a
subsidiary of the company.
<PAGE> 50
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Notes to Condensed Financial Statements (Continued)
4. Accounting Changes
See Notes 1 and 2 to the Consolidated Financial Statements in the
Annual Report for a description of accounting changes.
5. Discontinued Products
See Note 3 to the Consolidated Financial Statements in the Annual
Report for a description of discontinued products.
6. Sales of Subsidiaries
See Note 2 to the Consolidated Financial Statements in the Annual
Report for a description of the sales of subsidiaries.
7. Severance and Facilities Charge
See Note 4 to the Consolidated Financial Statements in the Annual
Report for a description of the severance and facilities charges.
8. Federal and Foreign Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual
Report for a description of federal and foreign income taxes.
<PAGE> 51
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1995
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums company revenue
_______ ___________ _________ _________ _________ ___________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna Health Plans $ 50.5 $ 2,485.2 $ 1,285.3 (1) $ 86.8 $ 634.4 $ 5,949.7
Aetna Life Insurance
& Annuity 1,320.8 3,917.4 30.2 - 10,704.4 178.3
International 581.8 2,691.9 82.8 55.3 851.7 1,038.5
Large Case Pensions - 9,278.4 1.5 - 10,708.2 264.9
Corporate - - 163.3 .3 - -
_________ _________ _________ _________ _________ _________
Total continuing
operations $ 1,953.1 $18,372.9 $ 1,563.1 $ 142.4 $22,898.7 $ 7,431.4
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Discontinued Operations $ 305.8 $ - $16,569.3 $ 1,400.3 $ 39.1 $ 4,118.9
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (2) and losses) benefits costs expenses written (3)
_______ ___________ _____________ __________ ____________ __________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna Health Plans $ 364.0 $ 1,301.7 $ 5,100.4 $ 22.2 $ 2,038.4 $ 5,016.5
Aetna Life Insurance
& Annuity 1,044.1 401.8 979.5 44.1 305.8 -
International 308.7 112.6 911.2 70.8 350.5 234.8
Large Case Pensions 1,850.6 153.4 2,036.1 - 100.1 -
Corporate 7.7 2.0 - - 292.7 -
_________ _________ _________ _________ __________ _________
Total continuing
operations $ 3,575.1 $ 1,971.5 $ 9,027.2 $ 137.1 $ 3,087.5 $ 5,251.3
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Discontinued Operations $ 901.7 $ 237.6 $ 4,232.5 $ 622.7 $ 787.3 $ 4,085.2
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
<FN>
(1) Includes minimal property-casualty business.
(2) The allocation of net investment income is based upon the investment year method
or specific identification of certain portfolios within specific segments.
(3) Excludes life insurance business pursuant to Regulation S-X.
</TABLE>
<PAGE> 52
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1994
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums company revenue
_______ ___________ _________ _________ _________ ___________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna Health Plans $ 74.2 $ 2,487.4 $ 1,204.5 (1) $ 137.5 $ 682.1 $ 5,611.5
Aetna Life Insurance
& Annuity 1,139.6 3,274.1 25.3 - 9,106.2 168.3
International 477.2 2,293.1 54.1 41.5 839.4 887.1
Large Case Pensions - 9,916.9 1.5 - 12,548.7 234.4
Corporate - - 104.0 .4 - -
_________ _________ _________ _________ __________ __________
Total continuing
operations $ 1,691.0 $17,971.5 $ 1,389.4 $ 179.4 $ 23,176.4 $ 6,901.3
_________ _________ _________ _________ __________ __________
_________ _________ _________ _________ __________ __________
Discontinued Operations $ 316.0 $ - $16,088.9 $ 1,425.5 $ 46.7 $ 4,390.8
_________ _________ _________ _________ __________ __________
_________ _________ _________ _________ __________ __________
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (2) and losses) benefits costs expenses written (3)
_______ ___________ _____________ __________ ____________ __________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna Health Plans $ 351.6 $ 1,176.0 $ 4,755.1 $ 40.5 $ 1,805.4 $ 4,669.8
Aetna Life Insurance
& Annuity 958.7 310.4 916.1 27.4 258.9 -
International 308.4 101.5 782.7 65.7 349.8 199.0
Large Case Pensions 2,017.4 103.4 2,175.9 - 98.2 -
Corporate (4.7) (5.0) 22.2 - 293.6 -
_________ _________ _________ _________ _________ _________
Total continuing
operations $ 3,631.4 $ 1,686.3 $ 8,652.0 $ 133.6 $ 2,805.9 $ 4,868.8
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Discontinued Operations $ 832.1 $ 116.0 $ 3,746.8 $ 647.2 $ 914.1 $ 4,467.1
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
<FN>
(1) Includes minimal property-casualty business.
(2) The allocation of net investment income is based upon the investment year method
or specific identification of certain portfolios within specific segments.
(3) Excludes life insurance business pursuant to Regulation S-X.
</TABLE>
<PAGE> 53
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1993
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders'
policy Future claims funds left
acquisition policy and claim Unearned with the Premium
Segment costs benefits expenses premiums company revenue
_______ ___________ _________ _________ _________ ___________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna Health Plans $ 73.5 $ 2,513.8 $ 1,228.0 (1)$ 129.7 $ 697.2 $ 4,700.6
Aetna Life Insurance
& Annuity 1,033.0 3,066.2 15.4 - 9,207.2 125.7
International 421.5 1,964.3 78.0 25.6 1,318.1 909.5
Large Case Pensions - 10,027.0 1.2 - 16,318.5 185.9
Corporate - 16.9 - - - -
_________ _________ _________ _________ _________ _________
Total continuing
operations $ 1,528.0 $17,588.2 $ 1,322.6 $ 155.3 $27,541.0 $ 5,921.7
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Discontinued Operations $ 329.6 $ - $15,789.6 $ 1,346.9 $ 51.2 $ 4,653.2
_________ _________ _________ _________ _________ _________
_________ _________ _________ _________ _________ _________
Other income
(including Amortization of
Net realized Current deferred policy Other
investment capital gains and future acquisition operating Premiums
Segment income (2) and losses) benefits costs expenses written (3)
_______ ___________ _____________ __________ ____________ __________ _________
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Aetna Health Plans $ 376.3 $ 1,029.1 $ 3,989.3 $ 29.4 $ 1,672.4 $ 3,751.9
Aetna Life Insurance
& Annuity 962.4 307.2 882.9 20.6 318.5 -
International 311.6 58.2 860.1 51.7 365.3 195.0
Large Case Pensions 2,327.7 52.4 2,428.1 - 142.1 -
Corporate (11.4) 4.5 28.8 - 295.2 -
__________ _________ _________ _________ _________ _________
Total continuing
operations $ 3,966.6 $ 1,451.4 $ 8,189.2 $ 101.7 $ 2,793.5 $ 3,946.9
__________ _________ _________ _________ _________ _________
__________ _________ _________ _________ _________ _________
Discontinued Operations $ 952.4 $ 322.3 $ 4,214.7 $ 646.2 $ 1,172.7 $ 4,464.7
__________ _________ _________ _________ _________ _________
__________ _________ _________ _________ _________ _________
<FN>
(1) Includes minimal property-casualty business.
(2) The allocation of net investment income is based upon the investment year method
or specific identification of certain portfolios within specific segments.
(3) Excludes life insurance business pursuant to Regulation S-X.
</TABLE>
<PAGE> 54
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE IV
Reinsurance*
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount__ to net___
______ _________ _________ ________ _________
<S> <C> <C> <C> <C> <C>
1995**
____
Premiums:
Life insurance $ 2,171.5 $ 72.1 $ 43.9 $ 2,143.3 2.0%
Accident and health insurance 5,286.4 48.3 9.4 5,247.5 .2
Property-casualty insurance 98.2 57.6 - 40.6 -
_________ _________ _________ _________
Total premiums $ 7,556.1 $ 178.0 $ 53.3 $ 7,431.4 .7%
_________ _________ _________ _________
_________ _________ _________ _________
1994**
____
Premiums:
Life insurance $ 2,082.9 $ 64.6 $ 37.8 $ 2,056.1 1.8%
Accident and health insurance 4,852.3 63.0 17.1 4,806.4 .4
Property-casualty insurance 98.1 60.5 1.2 38.8 3.1
_________ _________ _________ _________
Total premiums $ 7,033.3 $ 188.1 $ 56.1 $ 6,901.3 .8%
_________ _________ _________ _________
_________ _________ _________ _________
1993**
____
Premiums:
Life insurance $ 1,966.1 $ 78.0 $ 63.9 $ 1,952.0 3.3%
Accident and health insurance 3,885.2 47.5 28.0 3,865.7 .7
Property-casualty insurance 100.0 80.2 84.2 104.0 81.0
_________ _________ _________ _________
Total premiums $ 5,951.3 $ 205.7 $ 176.1 $ 5,921.7 3.0%
_________ _________ _________ _________
_________ _________ _________ _________
________________________
<FN>
* Excludes intercompany transactions.
** Net life insurance in force was $381.0 million, $376.4 million and $384.9 million at
December 31, 1995, 1994 and 1993, respectively.
</TABLE>
<PAGE> 55
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
For the year ended December 31, 1995
(Millions)
Additions
_________________________
General
Reserve Balance
allocated at
Balance to December Charged Charged Balance
at Experience 31, 1994 to cost to other at end
beginning Rated as and accounts- Deductions- of
of period products (1) adjusted expenses (2) describe (3) describe (4) period
_____________ ____________ ________ ___________ ___________ ___________ ______
<S> <C> <C> <C> <C> <C> <C> <C>
Asset valuation
reserves -
continuing
operations
Mortgage loans $ 647.5 $ 208.5 $ 856.0 $ 10.4 $ (5.0) $ (256.5) $ 604.9
Real estate 111.4 - 111.4 3.3 55.5 (39.6) 130.6
Other 6.0 - 6.0 - - (3.2) 2.8
____________ _________ __________ ___________ ___________ ___________ _______
$ 764.9 $ 208.5 $ 973.4 $ 13.7 $ 50.5 $ (299.3) $ 738.3
_____________ __________ __________ ___________ ___________ ___________ _______
_____________ __________ __________ ___________ ___________ ___________ _______
Asset valuation
reserves -
Discontinued
Operations
Mortgage loans $ 136.6 $ - $ 136.6 $ 6.4 $ - $ (77.3) $ 65.7
Real estate 34.3 - 34.3 (16.4) - (2.8) 15.1
_____________ __________ __________ ____________ ___________ ___________ _______
$ 170.9 $ - $ 170.9 $ (10.0) $ - $ (80.1) $ 80.8
_____________ __________ __________ ___________ ___________ __________ _______
_____________ __________ __________ ___________ ___________ __________ _______
________________________
<FN>
(1) The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million
related to experience rated products.
(2) Charged to net realized capital gains (losses) in the Consolidated Statements of Income.
(3) Reflects additions to reserves related to assets supporting experience rated contracts
and discontinued products for which a corresponding reduction was included in Policyholders'
Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future
losses, respectively.
(4) Reduction in reserves is primarily a result of related asset write-downs
(including foreclosures of real estate) and sales.
</TABLE>
<PAGE> 56
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
For the year ended December 31, 1994
(Millions)
Additions
_________________________
Charged
Balance at Charged to to other Balance
beginning costs and accounts- Deductions- at end of
of period expenses (1) describe (2) describe (3) period___
_________ ___________ ____________ ___________ _________
<S> <C> <C> <C> <C> <C>
Asset valuation reserves -
continuing operations
Debt securities $ 79.0 $ 3.8 $ 14.7 $ (97.5) $ -
Mortgage loans 1,122.4 47.2 197.9 (720.0) 647.5
Equity securities 3.3 - - (3.3) -
Real estate 214.4 (4.5) 24.2 (122.7) 111.4
Other 6.0 - - - 6.0
_________ _________ _________ _________ _________
$ 1,425.1 $ 46.5 $ 236.8 $ (943.5) $ 764.9
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Asset valuation reserves -
Discontinued Operations
Debt securities $ 23.8 $ (1.1) $ - $ (22.7) $ -
Mortgage loans 185.9 56.1 - (105.4) 136.6
Equity securities 7.3 - - (7.3) -
Real estate 53.3 3.3 - (22.3) 34.3
_________ _________ _________ _________ _________
$ 270.3 $ 58.3 $ - $ (157.7) $ 170.9
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
________________________
<FN>
(1) Charged to net realized capital gains (losses) in the Consolidated Statements of Income.
(2) Reflects additions to reserves related to assets supporting experience rated contracts
and discontinued products for which a corresponding reduction was included in Policyholders'
Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future
losses, respectively.
(3) Reduction in reserves is primarily a result of related asset write-downs
(including foreclosures of real estate) and sales.
</TABLE>
<PAGE> 57
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
For the year ended December 31, 1993
(Millions)
Additions
_________________________
Charged
Balance at Charged to to other Balance
beginning costs and accounts- Deductions- at end of
of period expenses (1) describe (2) describe (3) period___
_________ ___________ ____________ ___________ _________
<S> <C> <C> <C> <C> <C>
Asset valuation reserves -
continuing operations
Debt securities $ 65.6 $ 18.6 $ 12.5 $ (17.7) $ 79.0
Mortgage loans 944.8 324.1 176.5 (323.0) 1,122.4
Equity securities 2.5 .8 - - 3.3
Real estate 65.4 125.8 79.3 (56.1) 214.4
Other 6.0 - - - 6.0
_________ _________ _________ _________ _________
$ 1,084.3 $ 469.3 $ 268.3 $ (396.8) $ 1,425.1
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Asset valuation reserves -
Discontinued Operations
Debt securities $ 39.6 $ (4.1) $ - $ (11.7) $ 23.8
Mortgage loans 120.8 97.6 - (32.5) 185.9
Equity securities 10.0 - - (2.7) 7.3
Real estate 3.4 50.9 - (1.0) 53.3
_________ _________ _________ _________ _________
$ 173.8 $ 144.4 $ - $ (47.9) $ 270.3
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
________________________
<FN>
(1) Charged to net realized capital gains (losses) in the Consolidated Statements of Income.
(2) Reflects additions to reserves related to assets supporting experience rated contracts
and discontinued products for which a corresponding reduction was included in Policyholders'
Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future
losses, respectively.
(3) Reduction in reserves is primarily a result of related asset write-downs
(including foreclosures of real estate) and sales.
</TABLE>
<PAGE> 58
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE VI
Supplemental Information Concerning
Property-Casualty Operations (1)
<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
Reserves for Discount deducted
Deferred unpaid claims from reserves for
Affiliation policy and claim unpaid claims
with acquisition adjustment and claim Unearned Earned
registrant costs expenses(2) adjustment expenses(3) premiums premiums
___________ ___________ _____________ ___________________ ________ ________
<S> <C> <C> <C> <C> <C> <C>
1995 Consolidated
property-
casualty
entities $ 306 $11,745 $ 750 $ 1,400 $ 4,119
1994 Consolidated
property-
casualty
entities $ 316 $11,144 $ 644 $ 1,426 $ 4,391
1993 Consolidated
property-
casualty
entities $ 330 $11,412 $ 634 $ 1,347 $ 4,653
Claims and claim Paid
adjustment expenses claims
Affiliation Net incurred related to: Amortization of and claim
___________________
with investment Current Prior deferred policy adjustment Premiums
registrant income year(4) years(4) acquisition costs expenses written
___________ __________ _______ ______ _________________ __________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
1995 Consolidated
property-
casualty
entities $ 902 $ 3,099 $ 1,134 $ 623 $ 3,632 $ 4,085
1994 Consolidated
property-
casualty
entities $ 832 $ 3,488 $ 259 $ 647 $ 4,015 $ 4,467
1993 Consolidated
property-
casualty
entities $ 952 $ 3,536 $ 65 $ 646 $ 3,922 $ 4,465
<FN>
(1) Excludes International.
(2) Net of reinsurance, deductible amounts recoverable from policyholders in 1995 and 1994
and discounting.
(3) Reserves for workers' compensation life table indemnity claims are discounted at 5% for
voluntary business and 3.5% for involuntary business. Certain other reserves with fixed or
reasonably determinable payment patterns over periods of up to 7 years, including reserves
related to a small number of environmental and asbestos-related claims settlements, have also
been discounted. The rates used in discounting such reserves range from 4% to 7%.
(4) Net of reinsurance and discounting.
</TABLE>
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 26, 1996
AETNA LIFE AND CASUALTY COMPANY
(Registrant)
By /s/ Robert J. Price
_______________________________
(Signature)
Robert J. Price
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on February 26, 1996.
Signature Title
* Chairman, President and Director
________________________
Ronald E. Compton (Principal Executive Officer)
*
________________________
Wallace Barnes Director
*
________________________
William H. Donaldson Director
*
________________________
Barbara Hackman Franklin Director
*
________________________
Earl G. Graves Director
*
________________________
Gerald Greenwald Director
*
________________________
Ellen M. Hancock Director
*
________________________
Michael H. Jordan Director
*
________________________
Jack D. Kuehler Director
*
________________________
Frank R. O'Keefe, Jr. Director
*
________________________
Judith Rodin Director
*
________________________
Richard L. Huber Vice Chairman for
Strategy and Finance
(Principal Financial Officer)
/s/ Robert J. Price
________________________
Robert J. Price Vice President and
Corporate Controller (Controller)
* By /s/ Robert J. Price
________________________
Robert J. Price
(Attorney-in-Fact)
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
______ ______________________ ______
<S> <C> <C>
(10) Material Contracts
(10.1) Stock Purchase Agreement dated as of November 28, 1995 between Electronic
The Travelers Insurance Group Inc. and Aetna Life and Casualty
Company relating to the purchase and sale of 100% of the Common
Stock of The Aetna Casualty and Surety Company and The Standard
Fire Insurance Company.
(10.2) Letter Agreement, dated January 19, 1995, between Aetna Life Electronic
and Casualty Company and Richard L. Huber.
(10.3) Employment Agreement, dated as of October 27, 1995, between Aetna Electronic
Life and Casualty Company and Gary G. Benanav.
(10.4) Employment Agreement, dated as of January 29, 1996, between Aetna Electronic
Life and Casualty Company and Ronald E. Compton.
(10.5) Employment Agreement, dated as of December 19, 1995, between Aetna Electronic
Life and Casualty Company and Daniel P. Kearney.
(10.6) Employment Agreement, dated as of January 19, 1996, between Aetna Electronic
Life and Casualty Company and James W. McLane.
(12) Statement re computation of ratios. Electronic
Statement re: computation of ratio of earnings to fixed charges.
Statement re: computation of ratio of earnings to combined fixed
charges and preferred stock dividends.
(13) Annual Report to security holders. Electronic
Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Consolidated
Financial Statements and the report of the company's
independent auditors, and unaudited Quarterly Data from the Annual
Report.
(21) Subsidiaries of the registrant. Electronic
A listing of subsidiaries of Aetna Life and Casualty Company.
(23) Consents of experts and counsel. Electronic
Consent of Independent Auditors to Incorporation by Reference in
the Registration Statements on Form S-3 and Form S-8.
(24) Powers of Attorney. Electronic
(27) Financial Data Schedule. Electronic
(28) Information from reports furnished to state insurance regulatory Paper
authorities.
1995 Consolidated Schedule P of Annual Statements provided to
state regulatory authorities.
</TABLE>
<PAGE> 1
STOCK PURCHASE AGREEMENT
Dated as of
November 28, 1995
between
THE TRAVELERS INSURANCE GROUP INC.
and
AETNA LIFE AND CASUALTY COMPANY
relating to the purchase and sale
of 100% of the Common Stock of
THE AETNA CASUALTY AND SURETY COMPANY
and
THE STANDARD FIRE INSURANCE COMPANY
<PAGE> 2
TABLE OF CONTENTS
Page
____
ARTICLE 1
DEFINITIONS
1.1 Definitions..............................................2
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale........................................9
2.2 Closing..................................................9
2.3 September Balance Sheets................................12
2.4 Certain Contributions and Adjustments...................15
2.5 Portfolio Adjustment....................................16
2.6 Post-Closing Payments...................................18
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
3.1 Corporate Existence and Power...........................18
3.2 Corporate Authorization.................................19
3.3 Governmental Authorization..............................20
3.4 Non-Contravention.......................................20
3.5 Capitalization..........................................21
3.6 Ownership of Shares.....................................22
3.7 Subsidiaries............................................22
3.8 Financial Statements; SEC Reports.......................24
3.9 Absence of Certain Changes..............................25
3.10 No Undisclosed Material Liabilities; Investments........29
3.11 Material Contracts......................................31
3.12 Litigation..............................................34
3.13 Compliance with Laws....................................36
3.14 Properties..............................................36
3.15 Licenses and Permits; Policies; Regulatory Matters......37
3.16 ERISA Representations...................................38
3.17 Environmental Matters...................................40
3.18 Intercompany Accounts...................................44
3.19 No Representation with Respect to Reserves..............45
3.20 Intellectual Property; Software.........................45
3.21 Labor Matters...........................................47
3.22 Loans and Advances......................................47
3.23 All Assets Necessary....................................48
3.24 Certain Policies........................................48
3.25 Disclosure..............................................49
i
<PAGE> 3
Page
____
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
4.1 Corporate Existence and Power...........................49
4.2 Corporate Authorization.................................49
4.3 Governmental Authorization..............................50
4.4 Non-Contravention.......................................50
4.5 Financing...............................................51
4.6 Purchase for Investment.................................51
ARTICLE 5
COVENANTS OF SELLER
5.1 Conduct of the Companies................................52
5.2 Access to Information...................................58
5.3 Notices of Certain Events...............................59
5.4 Resignations............................................60
5.5 Covenant Not to Compete.................................60
5.6 No Solicitation.........................................61
5.7 Certain Other Transactions..............................61
5.8 Confidentiality Agreements..............................63
5.9 Other Financial Statements..............................63
5.10 1992 Audit..............................................66
5.11 Use of Computer Software................................66
5.12 Aetna Casualty Company..................................68
ARTICLE 6
COVENANTS OF BUYER
6.1 Confidentiality.........................................68
6.2 Post-Closing Access.....................................68
6.3 AmRe Agreement..........................................69
ARTICLE 7
COVENANTS OF BUYER AND SELLER
7.1 Reasonable Efforts......................................70
7.2 Certain Filings.........................................71
7.3 Public Announcements....................................71
7.4 Trademarks; Trade Names.................................72
7.5 Intercompany Accounts...................................73
7.6 Non-Solicitation of Employees...........................75
7.7 Real Estate.............................................76
7.8 Transition Agreements...................................77
7.9 Post-Closing Access.....................................77
ii
<PAGE> 4
Page
____
7.10 Supplemental Disclosure.................................78
7.11 Investment Portfolio; Real Estate Transactions..........79
7.12 Other Agreements........................................83
7.13 Certain Insurance Policies..............................85
ARTICLE 8
TAX MATTERS
8.1 Definitions.............................................86
8.2 Tax Representations.....................................88
8.3 Tax Covenants...........................................89
8.4 Termination of Existing Tax Sharing Agreements..........92
8.5 Return Filings and Payment of Tax.......................93
8.6 Cooperation on Tax Matters..............................98
8.7 Tax Benefits...........................................100
8.8 Indemnification by Seller..............................110
8.9 Indemnification by Buyer...............................113
8.10 Survival; Exclusivity..................................116
8.11 Purchase Price Adjustment..............................116
8.12 Late Payments..........................................116
8.13 No Duplicative Payments; Offsets.......................117
8.14 Rule of Construction...................................117
8.15 Notices................................................117
8.16 Allocation of Purchase Price...........................117
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
9.1 Employees..............................................118
9.2 Pension Plan...........................................118
9.3 Individual Account Plan................................122
9.4 Certain Welfare Benefit Plans..........................123
9.5 Other Employee Benefit Plans and Benefit Arrangements..124
9.6 Plans Following the Closing............................125
9.7 Indemnification........................................131
ARTICLE 10
CONDITIONS TO CLOSING
10.1 Conditions to Obligations of Buyer and Seller.........132
10.2 Conditions to Obligation of Buyer.....................133
10.3 Conditions to Obligation of Seller....................135
iii
<PAGE> 5
Page
____
ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 Survival..............................................136
11.2 Indemnification.......................................136
11.3 Procedures; Exclusivity...............................137
ARTICLE 12
TERMINATION
12.1 Grounds for Termination...............................138
12.2 Effect of Termination.................................139
ARTICLE 13
MISCELLANEOUS
13.1 Notices...............................................139
13.2 Amendments and Waivers................................140
13.3 Expenses..............................................141
13.4 Successors and Assigns................................141
13.5 Governing Law.........................................141
13.6 Jurisdiction..........................................142
13.7 Counterparts; No Third Party Beneficiaries............142
13.8 Entire Agreement......................................142
13.9 Construction..........................................143
EXHIBITS
Exhibit 5.11 Software License Agreement
Exhibit 7.4(a) License Agreement
Exhibit 7.4(b) Assignment Agreement
Exhibit 7.7 Real Estate Term Sheet
Exhibit 7.8 Transition Agreement Term Sheet
DISCLOSURE SCHEDULES
Schedule 2.3(b) Reserve Categories and Amounts
Schedule 3.3 Governmental Authorization
Schedule 3.4 Non-Contravention
Schedule 3.7 Subsidiaries
Schedule 3.9 Absence of Certain Changes
Schedule 3.9(xiii) Seller's Investment Policies
Schedule 3.10(a) No Undisclosed Material Liabilities
iv
<PAGE> 6
Page
____
Schedule 3.10(b) Company Investment Assets
Schedule 3.11 Material Contracts
Schedule 3.12 Litigation
Schedule 3.13 Compliance with Laws
Schedule 3.15 License and Permits; Policies; Regulatory
Matters
Schedule 3.16(a) Employee Plans
Schedule 3.16(c) Certain Non-Multiemployer Employee Plans
Schedule 3.16(d)(i) Benefit Arrangement
Schedule 3.17 Environmental Matters
Schedule 3.18 Intercompany Accounts
Schedule 3.20 Software Licenses
Schedule 3.21 Labor Matters
Schedule 3.22 Loans & Advances
Schedule 3.23 All Assets Necessary
Schedule 3.24 Certain Policies
Schedule 4.3 Governmental Authorization
Schedule 4.4 Non-Contravention
Schedule 5.1 Conduct of the Companies
Schedule 5.5 Covenant Not to Compete
Schedule 5.9 Balance Sheet Adjustments
Schedule 7.5(c) Certain Liabilities
Schedule 7.11(a) Equity Portfolio
Schedule 7.11(aa) Securities Not in Equity Portfolio
Schedule 7.11(b) Real Estate Transactions
Schedule 7.11(c) Shared Mortgages; Cross Collateralized
Mortgages; Shared Real Estate
Schedule 8.2 Tax Representations
Schedule 8.8(a) Cushion
Schedule 9.1 P&C Employees
Schedule 9.2(a) Reimbursement Formula
Schedule 9.3(c) Supplemental Plan
Schedule 9.4(a) Certain Welfare Benefit Plans
Schedule 9.5(c) Other Employee Benefit Plans and
Benefit Arrangements
Schedule 9.5(d) ACEShares and APEX Unit Awards
Schedule 9.6(c)(i) Severance Plans
Schedule 9.6(c)(ii) Affected Employees
Schedule 9.6(c)(iii)Certain Employment Agreements
Schedule 9.6(c)(iv) Certain Retention Bonus Payments
Schedule 9.6(d)(i) 1996 Vacation Days Calculation
Schedule 9.6(d)(ii) 1997 Vacations Days Calculation
v
<PAGE> 7
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of November 28, 1995 between
The Travelers Insurance Group Inc., a Connecticut stock
insurance corporation ("Buyer"), and Aetna Life and Casualty
Company, a Connecticut stock insurance corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is the record and beneficial owner of
all of the issued and outstanding shares of (i) common stock,
par value $25,000.00 per share (the "ACSC Common Stock"), of The
Aetna Casualty and Surety Company, a Connecticut insurance
corporation ("ACSC"), and (ii) common stock, par value $250.00
per share (the "SFIC Common Stock"), of The Standard Fire
Insurance Company, a Connecticut insurance corporation ("SFIC"
and, together with ACSC, the "Companies") ; and
WHEREAS, Seller desires to sell all of the issued and
outstanding shares of ACSC Common Stock and SFIC Common Stock
(collectively, the "Shares") to Buyer, and Buyer desires to
purchase the Shares from Seller, upon the terms and subject to
the conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
1
<PAGE> 8
ARTICLE 1
DEFINITIONS
1.1 Definitions. (a) The following terms, as used
__________
herein, have the following meanings:
"Affiliate" means, with respect to any Person, any
other Person directly or indirectly controlling, controlled by,
or under common control with such Person; provided that neither
________
of the Companies nor any of their respective Subsidiaries shall
be considered an Affiliate of Seller.
"Agreement" means this agreement, including the
Disclosure Schedules and Exhibits hereto.
"A.M. Best" means A.M. Best Company.
"Ancillary Agreements" means (i) the Transition
Agreements, (ii) the License Agreement, (iii) the Assignment
Agreement, (iv) the Software License Agreement and (v) the
agreements referred to in Section 7.7.
"Balance Sheet Date" means September 30, 1995.
"Benefit Arrangement" means any employment, severance
or similar contract, arrangement or policy, or any plan or
arrangement (whether or not written) providing for severance
benefits, insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits,
retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation rights or other forms
of incentive compensation or post-retirement insurance,
compensation or benefits that (i) is not an Employee Plan, (ii)
is entered into or maintained, as the case may be, by Seller
2
<PAGE> 9
or any of its ERISA Affiliates and (iii) covers any employee or
former employee of any of the Companies or any of their
Subsidiaries.
"Closing Date" means the date of the Closing.
"Employee Plan" means any "employee benefit plan," as
defined in Section 3(3) of ERISA, that (i) is subject to any
provision of ERISA, (ii) is maintained, administered or
contributed to by Seller or any of its ERISA Affiliates and
(iii) covers any employee or former employee of any of the
Companies or any of their Subsidiaries.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
"ERISA Affiliate" of any entity means any other entity
which, together with such entity, would be treated as a single
employer under Section 414 of the Code.
"GAAP" means U.S. generally accepted accounting
principles.
"HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Individual Account Plan" means the Aetna Life and
Casualty Company Incentive Savings Plan.
"Lien" means, with respect to any property or asset,
any mortgage, lien, pledge, charge, security interest,
encumbrance or other adverse claim of any kind in respect of
such property or asset. For the purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any property or
asset which it has acquired or holds subject to the interest of
a vendor or lessor under any conditional
3
<PAGE> 10
sale agreement, capital lease or other title retention agreement
relating to such property or asset.
"Material Adverse Effect" means, for purposes of
Section 3.9 and Article 10 only, with respect to any Person or
Persons, a material adverse effect on the financial condition,
results of operations, business, assets or liabilities of such
Person or Persons and its or their Subsidiaries, taken as whole.
"Multiemployer Plan" means each Employee Plan that is
a multiemployer plan, as defined in Section 3(37) of ERISA.
"Pension Plan" means the Retirement Plan for Employees
of the Aetna Life and Casualty Company.
"Person" means an individual, corporation,
partnership, association, trust, limited liability company or
other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"SAP" means the accounting procedures and practices
prescribed or permitted from time to time by the National
Association of Insurance Commissioners and adopted or
promulgated by the respective states of incorporation of the
Companies and employed in a consistent manner throughout the
periods involved.
"Subsidiary" means, with respect to any Person, any
entity of which securities or other ownership interests having
ordinary voting power to elect 50% or more of the board of
directors or other persons performing similar functions are at
the time directly or indirectly owned by such Person.
"Title IV Plan" means an Employee Plan, other than any
Multiemployer Plan, subject to Title IV of ERISA.
4
<PAGE> 11
"Transition Agreements" means the transition
agreements to be entered into in accordance with Section 7.8.
(b) Each of the following terms is defined in the
Section set forth opposite such term:
Term Section
____ _______
ACC 7.12
Acquisition Proposal 5.6
AC&S of Illinois 5.7
Adequate Rating 6.3
Advance Accrual Period 9.2
Aetna Casualty Company 5.12
Aetna Re U.K. Stop Loss 5.7
Affected Employees 9.6
AHP 7.12
ALOI 5.7
AL&C Business 7.12
AL&C Buyer 7.12
AmRe Agreement 6.3
Annual Statements 3.8
Assignment Agreement 7.4
Attributable Amount 8.5
Bond Portfolio 7.11
Buyer Loss 8.8
Buyer Plan 9.3
Claims Provision 3.19
Closing 2.2
Closing Date GAAP Balance Sheet 5.9
Code 8.1
Combined State Tax 8.1
Company Facilities 3.17
Company Investment Assets 3.10
Company Securities 3.5
Confidentiality Agreement 6.1
Continued Employment 9.6
Conveyance Taxes 8.3
Cross Collateralized Mortgages 7.11
Cushion 8.8
Damages 11.2
5
<PAGE> 12
Term Section
____ _______
Deemed Closing Date 5.9
Direct Rollover 9.3
Disposal Notice 8.6
Environmental Reports 3.17
Environmental Laws 3.17
Equity Adjustment 2.2
Equity Portfolio 7.11
ERI 7.11
ERI Stock 7.11
Estimated NOL Value 2.2
Estimated Portfolio Adjustment 2.2
Event 8.7
Excluded Taxes 8.8
Federal Tax 8.1
Federal Tax Detriment 8.7
Final Determination 8.1
Final NOL Value 2.2
Final Portfolio Adjustment 2.5
Fund Balance 6.3
GAAP Equity Adjustment 2.2
Hazardous Substances 3.17
Immediate Parent 6.3
Indemnified Party 11.3
Indemnifying Party 11.3
Intellectual Property 3.20
Independent Accountants 2.3
License Agreement 7.4
Maximum Annual Contribution 9.2
MBIA 7.11
MBIA Stock 7.11
Mortgaged Properties 3.17
New Plan 9.2
NOL Value 2.2
NOLs 8.1
Notifying Party 8.6
Notified Party 8.6
Obligor 6.3
P&C Employees 9.1
Permits 3.15
Permitted Capital Contribution 2.2
Points 9.2
Policyholders' Surplus 2.2
Portfolio Adjustment 2.2
Post-Closing Special Items 8.7
Post-Closing Tax Period 8.1
Post-September 30 Special Items 8.7
6
<PAGE> 13
Term Section
____ _______
Post-September 30 Tax Period 8.1
Pre-September 30 Tax Period 8.1
Prior Welfare Plan 9.4
Purchase Price 2.2
Reattributed NOLs 8.7
Regulators 3.8
REO 3.17
Replacement Welfare Plans 9.4
Retiree Benefit Program 9.6
Returns 8.2
SAP Equity Adjustment 2.2
SEC 3.8
SEC Reports 3.8
Seller Group 8.1
Seller Loss 8.9
Separate State Income Tax 8.1
Separate State Tax 8.1
September Adjusted Balance Sheets 5.9
September Adjusted GAAP Balance Sheet 5.9
September Adjusted SAP Balance Sheet 5.9
September Audited Balance Sheets 5.9
September Audited GAAP Balance Sheet 5.9
September Audited SAP Balance Sheet 5.9
September Unaudited GAAP Balance Sheet 2.3
September 30 NOL's 2.2
Severance Plans 9.6
Shared Mortgages 7.11
Shared Real Estate 7.11
Significant Agreements 3.11
Software 3.20
Software License Agreement 5.11
Special Item Federal Tax Detriment 8.7
Special Items 8.7
Stockholder's Equity 2.2
Stop Loss Business 7.12
Stop Loss Quota 7.12
Straddle Period 8.1
Subsidiary Securities 3.7
Supplemental Plan 9.3
Tax 8.1
Tax Benefit 8.1
Tax Claim 8.8
Tax Indemnified Party 8.3
Tax Indemnifying Party 8.3
7
<PAGE> 14
Term Section
____ _______
Tax Sharing Agreement 8.1
Taxing Authority 8.1
Termination Account 6.3
Transferred Employees 9.1
Transition Committee 5.1
Travelers Plan 9.2
Unaudited September Balance Sheet 3.8
Welfare Transfer Date 9.4
8
<PAGE> 15
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale. Upon the terms and subject to
_________________
the conditions of this Agreement, Seller agrees to sell to Buyer
and Buyer agrees to purchase from Seller, the Shares at the
Closing.
2.2 Closing. The closing (the "Closing") of the
_______
purchase and sale of the Shares hereunder shall take place at
the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New
York, New York as soon as possible, but in no event later than
two business days, after satisfaction of the conditions set
forth in Article 10, or at such other time or place as Buyer and
Seller may agree.
(a) At the Closing, Buyer shall deliver to Seller,
in immediately available funds by wire transfer to an
account of Seller designated in writing by Seller, by
notice to Buyer not later than two business days prior to
the Closing Date, the Purchase Price. The "Purchase
Price" shall be: (i) $4,000,000,000, (ii) plus an amount
equal to $602,740 per day for each day from and including
October 1, 1995 to but not including the Closing Date,
(iii) plus the aggregate amount of Permitted Capital
Contributions, if any, made by Seller, increased by an
amount equal to 0.015068493% of each such Permitted
Capital Contribution for each day from and including the
date such Permitted Capital Contribution is made to but
not including the Closing Date, (iv) minus the Equity
Adjustment, if any, if the Equity Adjustment has been
determined prior to the Closing Date, increased by an
amount equal to 0.015068493% of such Equity Adjustment for
each day from and including
9
<PAGE> 16
October 1, 1995 to but not including the Closing Date, (v)
minus an amount equal to the Estimated NOL Value, and (vi)
if the Estimated Portfolio Adjustment is an aggregate net
gain, plus an amount equal to such gain, or if the
Estimated Portfolio Adjustment is an aggregate net loss,
minus an amount (expressed as a positive number) equal to
such loss. If the Equity Adjustment has not been
determined prior to the Closing Date, the Equity
Adjustment, if any, shall be paid in accordance with
Section 2.3(e).
(b) At the Closing, Seller shall deliver to Buyer
certificates for the Shares, duly endorsed or accompanied
by stock powers duly endorsed in blank with all
appropriate transfer tax stamps affixed.
(c) For the purposes of this Agreement, the
following terms shall have the following meanings:
(i) "Estimated NOL Value" means Seller's good
faith
estimate of the NOL Value furnished to Buyer (it being
understood that Seller shall deliver such estimate not
less than five business days prior to the Closing Date
together with a statement setting forth the relevant
calculations in reasonable detail).
(ii) "Estimated Portfolio Adjustment" means the
Portfolio Adjustment, as estimated in good faith by Seller
and delivered to Buyer not later than five business days
prior to the Closing Date.
(iii) "Equity Adjustment" means the greater of
the
GAAP Equity Adjustment and the SAP Equity Adjustment.
(iv) "Final NOL Value" means the NOL Value
calculated as promptly as practicable after the filing of
the Seller Group tax return which includes the Tax period
beginning after December 31, 1995 and ending on the
Closing Date.
(v) "Final Portfolio Adjustment" means the
Portfolio Adjustment (i) as shown on Seller's calculation
delivered pursuant to Section 2.5(a), if no notice of
disagreement with respect thereto has been delivered
pursuant to
10
<PAGE> 17
Section 2.5(b) and the full period during which such
notice may be delivered has elapsed; or (ii) if such a
notice of disagreement has been delivered, as agreed by
Buyer and Seller pursuant to Section 2.5(c), or in the
absence of such agreement, as shown in the Independent
Accountants' calculation delivered pursuant to Section
2.5(c).
(vi) "GAAP Equity Adjustment" means the amount,
if any, by which $3,800,000,000 exceeds Stockholder's
Equity (i) as shown on Seller's calculation delivered
pursuant to Section 2.3(a), if no notice of disagreement
with respect thereto has been delivered pursuant to
Section 2.3(b) and the full period during which such
notice may be delivered has elapsed; or (ii) if such a
notice of disagreement has been delivered, as agreed by
Buyer and Seller pursuant to Section 2.3(c), or in the
absence of such agreement, as shown in the Independent
Accountants' calculation delivered pursuant to Section
2.3(c).
(vii) "NOL Value" means the value of the NOLs as
of September 30, 1995 as reflected on the September
Audited GAAP Balance Sheet without regard to the actual
NOLs (the "September 30 NOLs"), reduced by (i) any amounts
paid to any of the Companies or any Subsidiaries in
respect of such NOLs pursuant to Section 8.7(j) hereof,
and (ii) 35% of any taxable income of the Companies and
their Subsidiaries for the Post-September 30 Tax Period,
determined in accordance with Section 8.5 and without
regard to (A) the September 30 NOLs, (B) Post-September 30
Special Items or (C) any additions to reserves claimed
with respect to the Post-September 30 Tax Period which
satisfy the requirement for reserves relating to a
Permitted Capital Contribution.
(viii) "Permitted Capital Contribution" means a
cash contribution made by Seller to the capital of any of
the Companies or their Subsidiaries, (other than as
expressly contemplated by this Agreement) with the prior
written consent of Buyer.
(ix) "Portfolio Adjustment" means the aggregate net
after tax gain or aggregate net after tax loss (in either case
whether or not realized with taxes calculated on a GAAP basis)
on all securities held in the Equity Portfolio during the
period from and including October 1, 1995, through the close of
business on the business day prior to the Closing Date. Such
gains or losses shall be calculated based on the difference
between (i) the market value as of the Balance Sheet Date of
the securities in the September Audited GAAP Balance Sheet or
the cost of acquisition for securities acquired after the
Balance Sheet Date and (ii) the proceeds, net of commissions
and other direct expenses of disposition, realized in the sale
or other disposition, or, in the case of securities not sold or
disposed of, the market value of such securities as of the
close of business on the business day prior to the Closing Date
11
<PAGE> 18
(reduced in the case of shares of common stock of MBIA
Inc. by 4.5% of the market value thereof). The Portfolio
Adjustment shall be calculated using the same methodology
and pricing services for purposes of determining the
market value of securities in the Equity Portfolio at the
relevant dates.
(x) "SAP Equity Adjustment" means the amount, if
any, by which $2,700,000,000 exceeds Policyholders'
Surplus (i) as shown on Seller's calculation delivered
pursuant to Section 2.3(a), if no notice of disagreement
with respect thereto has been delivered pursuant to
Section 2.3(b) and the full period during which such
notice may be delivered has elapsed; or (ii) if such a
notice of disagreement has been delivered, as agreed by
Buyer and Seller pursuant to Section 2.3(c), or in the
absence of such agreement, as shown in the Independent
Accountants' calculation delivered pursuant to Section
2.3(c).
(xi) "Stockholder's Equity" means the total
shareholder's equity of the Companies and their
Subsidiaries as shown on the September Adjusted GAAP
Balance Sheet plus an amount equal to $300,000,000.
(xii) "Policyholders' Surplus" means the total
policyholders' surplus of the Companies and their
Subsidiaries as shown on the September Adjusted SAP
Balance Sheet plus an amount equal to $300,000,000.
2.3 September Balance Sheets. (a) As promptly as
________________________
practicable, but no later than 60 days after the date hereof,
Seller will cause to be prepared and delivered to Buyer the
September Adjusted GAAP Balance Sheet and the September Adjusted
SAP Balance Sheet and the related reports of KPMG Peat Marwick
LLP thereon, and the certificate of Seller based on such
September Adjusted Balance Sheets setting forth Seller's
calculations of the Equity Adjustment, Stockholder's Equity and
Policyholders' Surplus, all in accordance with Section 5.9.
(b) If Buyer disagrees with any item or amount
reflected on or omitted from the September Adjusted GAAP Balance
Sheet or the September Adjusted SAP Balance Sheet or with
Seller's calculations of the Equity Adjustment, Stockholder's
Equity or Policyholders' Surplus delivered pursuant to Section
2.3(a), Buyer may, within 30 days after delivery of the
documents referred to in Section 2.3(a), deliver
12
<PAGE> 19
a notice to Seller disagreeing with such calculation and setting
forth Buyer's calculation of such amount. Any such notice of
disagreement shall specify those items or amounts as to which
Buyer disagrees, and Buyer shall be deemed to have agreed with
all other items and amounts reflected on or omitted from the
September Adjusted GAAP Balance Sheet, September Adjusted SAP
Balance Sheet and the calculation of the Equity Adjustment,
Stockholder's Equity or Policyholders' Surplus delivered
pursuant to Section 2.3(a) not the subject of such disagreement.
Notwithstanding the foregoing, (i) Buyer shall not be entitled
to deliver a notice of disagreement with respect to (A) the
amounts of liabilities in respect of any major category of the
unpaid claims and claim expenses as shown on Schedule 2.3(b) if
such amounts in respect of such major category reflected on the
September Adjusted Balance Sheets are at least equal to the
corresponding amounts reflected on the September Unaudited GAAP
Balance Sheet or the September Unaudited SAP Balance Sheet, as
the case may be, or (B) the amounts accrued for vacation
liabilities reflected on the September Adjusted Balance Sheets
if such amounts are accurately determined in accordance with
Schedule 5.9, and (ii) Buyer shall not be entitled to deliver
any notice of disagreement unless Buyer's calculation of
Stockholder's Equity or Policyholders' Surplus as shown in such
notice is lower by at least $5,000,000 than the amount thereof
shown on the September Adjusted GAAP Balance Sheet or the
September Adjusted SAP Balance Sheet, respectively.
(c) If a notice of disagreement shall be delivered
pursuant to Section 2.3(b), Seller and Buyer shall, during the
30 days following such delivery, use their best efforts to reach
agreement on the disputed items or amounts in order to
13
<PAGE> 20
determine, as may be required, the Stockholder's Equity or
Policyholders' Surplus. If, during such period, Seller and
Buyer are unable to reach such agreement, they shall promptly
thereafter cause a recognized firm of independent certified
accountants of national repute mutually acceptable to Seller and
Buyer (the "Independent Accountants") promptly to review this
Agreement and the disputed items or amounts for the purpose of
calculating the Equity Adjustment, Stockholder's Equity and
Policyholders' Surplus. In making such calculation, the
Independent Accountants shall consider only those items or
amounts reflected on or omitted from the September Adjusted
Balance Sheets or Seller's calculation of Stockholder's Equity
and Policyholders' Surplus as to which Buyer has disagreed. The
Independent Accountants shall deliver to Seller and Buyer, as
promptly as practicable, a report setting forth such
calculation. Such report shall be final and binding upon Seller
and Buyer. The cost of such review and report shall be borne
(i) by Seller if the difference between the Equity Adjustment
and the Equity Adjustment as based upon Seller's calculation
delivered pursuant to Section 2.3(a) is greater than the
difference between the Equity Adjustment and the Equity
Adjustment based on Buyer's calculation delivered pursuant to
Section 2.3(b), (ii) by Buyer if the first such difference is
less than the second such difference and (iii) otherwise equally
by Seller and Buyer. In no event will the Equity Adjustment, as
finally determined pursuant to this Section 2.3(c), be less than
the amount thereof shown in Seller's calculations delivered
pursuant to Section 2.3(a) or more than the amount thereof shown
in Buyer's calculations delivered pursuant to Section 2.3(b).
14
<PAGE> 21
(d) Seller agrees that it will, and agrees to cause
its independent accountants and (prior to the Closing Date) the
Companies and their Subsidiaries to, cooperate with Buyer and
its independent accountants and assist them in the conduct of
their review of the September Adjusted Balance Sheets, including
without limitation, the making available to the extent necessary
of books, records, work papers and personnel.
(e) If the amount of the Equity Adjustment is
determined after the Closing Date, then within five business
days after such determination, Seller shall pay to Buyer the
amount of the Equity Adjustment, increased by an amount equal to
0.015068493% thereof for each day from and including October 1,
1995 to but not including the date of such payment. Any such
amount shall be deemed to be an adjustment to the Purchase
Price.
2.4 Certain Contributions and Adjustments. (a)
_____________________________________
Seller agrees that it will, on or prior to December 31, 1995,
make a cash capital contribution to the Companies of $300
million, increased by an amount equal to 0.015068493% thereof
for each day from and including October 1, 1995 to but not
including the date of such contribution.
(b) In the event that the Final NOL Value is greater
than the Estimated NOL Value, Seller shall pay to Buyer an
amount equal to such difference. In the event that the
Estimated NOL Value is greater than the Final NOL Value, Buyer
shall pay to Seller an amount equal to such difference. In
either event, such payment shall be made within five business
days from the date of the determination of the Final NOL Value,
increased by an amount equal to 0.015068493% thereof per
15
<PAGE> 22
day for each day from and including the Closing Date to but not
including the date of such payment. Any such amount shall be
deemed an adjustment to the Purchase Price.
2.5 Portfolio Adjustment. (a) As promptly as
____________________
practicable following the Closing Date, Seller shall calculate
the Portfolio Adjustment and deliver to Buyer a certificate
setting forth such calculation in reasonable detail.
(b) If Buyer disagrees with the calculation delivered
pursuant to Section 2.5(a), Buyer may, within 30 days after
delivery of such calculation, deliver a notice to Seller
disagreeing with such calculation and setting forth Buyer's
calculation of such amount. Any such notice of disagreement
shall specify those items or amounts as to which Buyer
disagrees, and Buyer shall be deemed to have agreed with all
other items and amounts contained in the calculation delivered
by Seller.
(c) If a notice of disagreement shall be delivered
pursuant to Section 2.5(b), Seller and Buyer shall, during the
30 days following such delivery, use their best efforts to reach
agreement on the disputed items or amounts in order to determine
the Portfolio Adjustment. If, during such period, Seller and
Buyer are unable to reach such agreement, they shall promptly
thereafter cause the Independent Accountants promptly to review
this Agreement and the disputed items or amounts for the purpose
of calculating the Portfolio Adjustment. In making such
calculation, the Independent Accountants shall consider only
those items or amounts in Seller's calculation as to which Buyer
has disagreed. The Independent Accountants shall deliver to
Seller and Buyer, as promptly as practicable, a report setting
forth such
16
<PAGE> 23
calculation. Such report shall be final and binding upon Seller
and Buyer. In no event shall the Portfolio Adjustment
determined pursuant to this paragraph (c) be determined to be a
greater gain or smaller loss, as the case may be, than as shown
in Seller's calculations delivered pursuant to Section 2.5(a) or
a smaller gain or greater loss, as the case may be, than as
shown in Buyer's calculations delivered pursuant to Section
2.5(b). The cost of such review and report shall be borne (i)
by Seller if the difference between the Final Portfolio
Adjustment and the Portfolio Adjustment as calculated by Seller
and set forth on the certificate delivered pursuant to Section
2.5(a) is greater than the difference between the Final
Portfolio Adjustment and the Portfolio Adjustment as calculated
by Buyer and set forth on the notice of disagreement delivered
pursuant to Section 2.5(b), (ii) by Buyer if the first such
difference is less than the second such difference and (iii)
otherwise equally by Seller and Buyer.
(d) Seller and Buyer agree that they will, and agree
to cause their respective independent accountants and the
Companies and their Subsidiaries to, cooperate and assist in the
calculation of the Portfolio Adjustment and in the conduct of
the reviews referred to in this Section, including without
limitation, the making available to the extent necessary of
books, records, work papers and personnel.
(e) If the Final Portfolio Adjustment differs from
the Estimated Portfolio Adjustment, then Seller shall pay to
Buyer or Buyer shall pay to Seller an amount equal to such
difference so that Buyer has paid the Purchase Price it would
have paid and Seller has received the Purchase Price it would
have received had the Final Portfolio Adjustment been used to
determine the Purchase Price. Such payment
17
<PAGE> 24
shall be made within five business days from the date of the
determination of the Final Portfolio Adjustment, together with
an amount equal to 0.015068493% of such difference per day for
each day from and including the Closing Date to but not
including the date of such payment. Any such amount shall be
deemed to be an adjustment of the Purchase Price.
2.6 Post-Closing Payments. All payments made to Buyer
_____________________
or Seller after the Closing Date under this Agreement shall be
paid in immediately available funds by wire transfer to an
account of the payee designated in writing by the payee, by
notice to the payor, not later than two business days prior to
the date the payment is due.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date
hereof and as of the Closing Date (but as of no other dates
unless expressly so stated) that:
3.1 Corporate Existence and Power. Seller has been
_____________________________
duly incorporated and is validly existing as an insurance
corporation in good standing under the laws of the State of
Connecticut and has all corporate powers required to carry on
its business as now conducted. Each Company (i) has been duly
incorporated and is validly existing as an insurance corporation
in good standing under the laws of the State of Connecticut,
(ii) has all corporate powers required to carry on its business
as now conducted, (iii) has all material governmental licenses,
authorizations, permits, consents and approvals required to
carry on its business as now conducted
18
<PAGE> 25
and (iv) is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where
such qualification is necessary, or is duly licensed to do
business as an insurer and is in good standing in each
jurisdiction where such licensing is necessary, as the case may
be, except for those jurisdictions where failure to be so
qualified or licensed, as the case may be, would not,
individually or in the aggregate, have a material adverse effect
on the Companies and their Subsidiaries, taken as a whole.
Seller has heretofore delivered or made available to Buyer true
and complete copies of the certificate of incorporation and
bylaws of Seller, each Company and the Subsidiaries of the
Companies as in effect on the date hereof. Neither of the
Companies nor any of their respective Subsidiaries is in
violation of any of the provisions of its certificate of
incorporation or by-laws.
3.2 Corporate Authorization. The execution, delivery
_______________________
and, subject to the receipt of the approvals referred to in
Section 3.3, performance by Seller of this Agreement and the
Ancillary Agreements to which Seller is a party are within
Seller's corporate powers and have been duly authorized by all
necessary corporate action on the part of Seller. This
Agreement constitutes, and when executed and delivered each
Ancillary Agreement to which Seller is a party will constitute,
a valid and legally binding agreement of Seller, enforceable
against Seller in accordance with its terms, subject to (i)
bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium and other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and the
rights of creditors of insurance companies generally and (ii)
general principles of equity (regardless of whether considered
in a proceeding at law or in equity).
19
<PAGE> 26
3.3 Governmental Authorization. The execution,
__________________________
delivery and performance by Seller of this Agreement and each
Ancillary Agreement to which Seller is a party require no action
by or in respect of, or filing with, any governmental body,
agency, or official on the part of Seller or any of its
Subsidiaries other than (i) compliance with any applicable
requirements of the HSR Act, (ii) approvals or filings under the
insurance laws of the jurisdictions set forth on Schedule 3.3,
(iii) filings and notices not required to be made or given until
after the Closing Date, (iv) filings, at any time, of tax
returns, tax reports and tax information statements and (v) any
such action or filing as to which the failure to make or obtain
would not, individually or in the aggregate, materially impair
the ability of the Companies and their Subsidiaries, taken as a
whole, to conduct their businesses.
3.4 Non-Contravention. Except as set forth in
_________________
Schedule 3.4, the execution, delivery and performance by Seller
of this Agreement and each Ancillary Agreement to which Seller
is a party do not and will not (i) violate the certificate of
incorporation or bylaws of Seller, any Company or any Subsidiary
of any Company, (ii) assuming compliance with the matters
referred to in Section 3.3, violate any applicable law, rule,
regulation, judgment, injunction, order or decree, (iii) require
any consent or other action by any Person under, constitute a
default under, or give rise to any right of termination,
cancellation or acceleration of any right or obligation of any
Company or any Subsidiary of any Company or to a loss of any
benefit to which any Company or any Subsidiary of any Company is
entitled under, any material agreement or other material
instrument binding upon any Company or any Subsidiary of any
Company or any material license, franchise, permit or other
similar
20
<PAGE> 27
authorization held by any Company or any Subsidiary of any
Company, (iv) result in the creation or imposition of any
material Lien on any asset of any Company or any Subsidiary of
any Company or (v) cause or constitute a "distribution date,"
"flip in event" or comparable event under any stockholder rights
plan or comparable plan of any Person the capital stock of which
is directly or indirectly beneficially owned by any Company or
any Subsidiary of any Company (provided that no representation
is made in this clause (v) as to the effect of any beneficial
ownership of such capital stock by Buyer or any of its
Affiliates).
3.5 Capitalization. (a) The authorized capital stock
______________
of ACSC consists of 1,000 shares of ACSC Common Stock. As of
the date hereof, there are outstanding 1,000 shares of ACSC
Common Stock. The authorized capital stock of SFIC consists of
20,000 shares of SFIC Common Stock. As of the date hereof,
there are outstanding 20,000 shares of SFIC Common Stock.
(b) All outstanding shares of capital stock of each
Company have been duly authorized and validly issued and are
fully paid and non-assessable and free of preemptive rights.
Except as set forth in this Section 3.5, there are no
outstanding (i) shares of capital stock or voting securities of
any Company, (ii) securities of any Company convertible into or
exchangeable for shares of capital stock or voting securities of
any Company or (iii) options or other rights to acquire from any
Company, or other obligation of any Company to issue, any
capital stock, voting securities or securities convertible into
or exchangeable for capital stock or voting securities of any
Company (the items in clauses (i), (ii) and (iii) being referred
to collectively as the "Company Securities"). There are no
outstanding obligations of
21
<PAGE> 28
any Company or any of their respective Subsidiaries to
repurchase, redeem or otherwise acquire any Company Securities.
3.6 Ownership of Shares. Seller is the record and
___________________
beneficial owner of the Shares, free and clear of any Lien and
any other limitation or restriction (including any restriction
on the right to vote, sell or otherwise dispose of the Shares
other than pursuant to generally applicable regulatory
requirements), and will transfer and deliver to Buyer at the
Closing valid title to the Shares free and clear of any Lien and
any such limitation or restriction, except Liens, limitations or
restrictions arising as a result of any action taken by Buyer or
any of its Affiliates; provided that Seller makes no
________
representation regarding the ability of any Person other than
Seller to transfer or otherwise dispose of the Shares without
registration or qualification under, or in compliance with,
applicable Federal securities or state securities or insurance
laws.
3.7 Subsidiaries. (a) Each Subsidiary of each
____________
Company has been duly incorporated or organized and is validly
existing as a corporation, partnership or association in good
standing under the laws of its jurisdiction of incorporation or
organization and has all powers and all material governmental
licenses, authoriztions, permits, consents and approvals
required to carry on its business as now conducted. Each
Subsidiary of each Company is duly qualified to do business as a
foreign corporation or organization and is in good standing in
each jurisdiction where such qualification is necessary, or is
duly licensed to do business as an insurer and is in good
standing in each jurisdiction where such licensing is necessary,
as the case may be, except for those jurisdictions where failure
to be so qualified or licensed, as
22
<PAGE> 29
the case may be, would not, individually or in the aggregate,
have a material adverse effect on the Companies and their
Subsidiaries, taken as a whole. All Subsidiaries of each
Company and their respective jurisdictions of incorporation or
organization are identified on Schedule 3.7.
(b) All outstanding shares of capital stock of each
Subsidiary of each Company have been duly authorized and validly
issued and are fully paid and non-assessable and free of
preemptive rights. As of the Closing Date, except as disclosed
in Schedule 3.7, all of the outstanding capital stock of, and
other voting securities or ownership interests in, each
Subsidiary of each Company will be owned by one of the
Companies, directly or indirectly, free and clear of any Lien
and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of
such capital stock or other voting securities or ownership
interests other than pursuant to generally applicable regulatory
requirements). Except as set forth in Schedule 3.7, there are
no outstanding (i) securities of any of the Companies or any of
their respective Subsidiaries convertible into or exchangeable
for shares of capital stock or other voting securities or
ownership interests in any Subsidiary of any Company or (ii)
options or other rights to acquire from any of the Companies or
any of their respective Subsidiaries, or other obligations of
any of the Companies or any of their respective Subsidiaries to
issue, any capital stock or other voting securities or ownership
interests in, or any securities convertible into or exchangeable
for any capital stock or other voting securities or ownership
interests in, any Subsidiary of any of the Companies (the items
in clauses (i) and (ii) being referred to collectively as the
"Subsidiary Securities"). There are no outstanding
23
<PAGE> 30
obligations of any of the Companies or any of their respective
Subsidiaries to repurchase, redeem or otherwise acquire any
outstanding Subsidiary Securities.
3.8 Financial Statements; SEC Reports. (a) The
_________________________________
audited combined balance sheet of the Companies and their
Subsidiaries as of December 31, 1993 and
December 31, 1994 and the related combined statements of income
and cash flows for each of the years ended December 31, 1993 and
December 31, 1994 and the unaudited combined balance sheet of
the Companies and their Subsidiaries as of September 30, 1995
(the "Unaudited September Balance Sheet") and the related
combined statement of income for the nine months ended September
30, 1995, respectively, previously delivered to Buyer, present
fairly, in all material respects, the combined financial
position of the Companies and their Subsidiaries as of the dates
thereof and the combined results of operations of the Companies
and their Subsidiaries for the periods then ended in conformity
with GAAP consistently applied (subject to normal year-end
adjustments in the case of the unaudited interim financial
statements).
(b) The audited balance sheets of the Companies and
their Subsidiaries as of December 31, 1994, and the related
statements of operations and statements of cash flows for the
year then ended, and their respective Annual Statements for the
fiscal year ended December 31, 1994 (the "Annual Statements")
filed with the insurance regulatory authorities in their
respective jurisdictions of domicile (collectively, the
"Regulators"), copies of which have been delivered to Buyer,
fairly present in all material respects their respective
statutory financial conditions as of such date and the results
of their respective operations for the year then ended in
24
<PAGE> 31
conformity with SAP. The other information contained in the
Annual Statements fairly presents in all material respects the
information required to be contained therein in conformity with
SAP. The balance sheets of the Companies and their Subsidiaries
in respect of any period ending after December 31, 1994, and the
related statements of operations and statements of cash flows,
which have been filed with Regulators, copies of which have been
delivered to Buyer, fairly present in all material respects
their respective statutory financial conditions as of such date
and the results of their respective operations for the period
then ended in conformity with SAP consistently applied.
(c) As of the date of the latest filing of an SEC
Report, the SEC Reports taken as a whole, including, without
limitation, any financial statements or schedules included
therein, did not contain with regard to Seller's property
casualty business segments taken as a whole any untrue statement
of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading, it being understood that for purposes of
this subparagraph (c) "material" is to be assessed in the
context of Seller and all of its Subsidiaries taken as a whole.
As used herein, "SEC Reports" means all forms, reports and
documents filed by Seller with the Securities and Exchange
Commission (the "SEC") since January 1, 1992 and prior to the
date hereof to the extent they contain any information relating
to Seller's property casualty business segments.
3.9 Absence of Certain Changes. Except as disclosed
__________________________
in Schedule 3.9, during the period from the Balance Sheet Date
to the date hereof, the business
25
<PAGE> 32
of the Companies and their Subsidiaries has been conducted in
the ordinary course consistent with past practices (including,
without limitation, with regard to underwriting, pricing,
actuarial and investment policies generally) and there has not
been:
(i) any event, occurrence, development or state
of circumstances or facts which has had or would reasonably
be expected to have a Material Adverse Effect on the
Companies, other than those resulting from changes in
general economic conditions;
(ii) any declaration, setting aside or payment
of any dividend or other distribution with respect to any
shares of capital stock of any Company, or any repurchase,
redemption or other acquisition by any Company or any
Subsidiary of any Company of any outstanding shares of
capital stock or other securities of, or other ownership
interests in, any Company or any Subsidiary of any
Company;
(iii) any incurrence, assumption or guarantee by
any Company or any Subsidiary of any Company of any
indebtedness for borrowed money other than in the ordinary
course of business and in amounts and on terms consistent
with past practices;
(iv) any transaction or commitment made, or any
contract or agreement entered into, by any Company or any
Subsidiary of any Company (including the acquisition or
disposition of any assets) or any relinquishment by any
Company or any Subsidiary of any
26
<PAGE> 33
Company of any contract or other right, other than
transactions and commitments in the ordinary course of
business consistent with past practices, or any
acquisition of assets or incurrence of liabilities by any
Company or any Subsidiary of any Company which are not
primarily related to the property and casualty insurance
business of the Companies and their Subsidiaries;
(v) any change in any method of accounting or
accounting practice or policy (including, without
limitation, any reserving method, practice or policy) by
any Company or any Subsidiary of any Company, except for
any such change as a result of a concurrent change in GAAP
or SAP;
(vi) to the extent payable directly or
indirectly by any Company or any Subsidiary of any
Company, any (A) employment, deferred compensation,
severance, retirement or other similar agreement entered
into with any director, officer or employee engaged in
Seller's property/casualty business (or any amendment to
any such existing agreement), (B) grant of any severance
or termination pay to any director, officer or employee
engaged in Seller's property/casualty business other than
in the ordinary course of business, (C) change in
compensation or other benefits payable to any director,
officer or employee engaged in Seller's property/casualty
business, other than (x) increases in base compensation in
the ordinary course of business consistent with past
practice (but in no event greater than 4 1/2% in the
27
<PAGE> 34
aggregate on a per annum basis for all such individuals as
a group), (y) with respect to directors or officers,
changes in benefits required by plans and arrangements in
effect as of the Balance Sheet Date and (z) with respect
to employees who are not directors or officers, changes in
benefits in accordance with plans or arrangements in
effect as of the Balance Sheet Date in the ordinary course
of business consistent with past practice or (D) loans or
advances to any directors, officers or employees engaged
in Seller's property/casualty business, except for
ordinary travel and business expenses in the ordinary
course of business consistent with past practice;
(vii) any damage, theft or casualty loss by any
Company or any Subsidiary of any Company in an amount
exceeding $1,000,000;
(viii) any transaction by any Company or any
Subsidiary of any Company involving Company Investment
Assets other than in the ordinary course of business
consistent with past practice;
(ix) any change in any material way by any
Company or any Subsidiary of any Company in underwriting
practices or standards;
(x)(i) any entering into of any facultative
reinsurance contract, other than in the ordinary course of
business consistent with past practice, or (ii) any
commutation of any facultative reinsurance
28
<PAGE> 35
contract, or (iii) any entering into or any commutation of
any reinsurance treaty, by any Company or any Subsidiary
of any Company;
(xi) any material insurance transaction by any
Company or any Subsidiary of any Company other than in the
ordinary course of business consistent with past practice;
(xii) any significant change by the Company or
any Subsidiary of any Company in the compensation
structure of, or benefits available to, any significant
agent or with respect to agents generally;
(xii) any investment made in Company Investment
Assets other than in accordance with Seller's investment
policies set forth in Schedule 3.9(xiii); or
(xiv) any agreement or commitment (contingent or
otherwise) by any Company or any Subsidiary of any Company
to do any of the foregoing.
3.10 No Undisclosed Material Liabilities; Investments.
________________________________________________
(a) There are no liabilities of any Company or any Subsidiary
of any Company of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise,
other than:
(i) liabilities provided for in the Unaudited
September Balance Sheet;
(ii) liabilities disclosed on Schedule 3.10(a);
29
<PAGE> 36
(iii) liabilities incurred since the Balance
Sheet Date in the ordinary course of business consistent
with past practice and in amounts and on terms consistent
with past practice; and
(iv) other undisclosed liabilities that are not
individually or in the aggregate material to the Companies
and their Subsidiaries, taken as a whole.
(b) Schedule 3.10(b) describes in reasonable
detail all Company Investment Assets as of the Balance Sheet
Date. For purposes of this Agreement, "Company Investment
Assets" means any investment assets (whether or not required by
GAAP or SAP to be reflected on a balance sheet) beneficially
owned (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) by any Company or any
Subsidiary of any Company, including, without limitation, bonds,
notes, debentures, mortgage loans, collateral loans and all other
instruments of indebtedness, stocks, partnership or joint venture
interests and all other equity interests, certificates issued by
or interests in trusts, derivatives and all other assets acquired
for investment purposes.
(c) Neither Company nor any Subsidiary of any
Company is an "acquiring person" or comparable person under the
terms of any stockholder rights plan or comparable plan of any
Person the capital stock of which is directly or indirectly
beneficially owned by any Company or any Subsidiary of any
Company, and no "distribution date," "flip in event" or
comparable event has occurred under any such plan as a
consequence of such beneficial ownership (provided that no
30
<PAGE> 37
representation is made in this paragraph (c) as to the effect of
any beneficial ownership of such capital stock by Buyer or any
of its Affiliates).
3.11 Material Contracts. (a) Except as disclosed in
__________________
Schedule 3.11, as of the date hereof, neither of the Companies
nor any of their Subsidiaries is a party to or bound by:
(i) any lease of real property where any of the
Companies or their Subsidiaries are tenants (A) providing
for annual base rentals of $1,000,000 or more, (B)
expiring after December 1, 2000 or (C) where the Seller or
any of its Affiliates holds an equity interest in such
real property;
(ii) any agreement for the purchase of
materials, supplies, goods, services, equipment or other
assets, including any license for Software, that provides
for either (A) annual payments by any Company or any
Subsidiary of any Company of $1,000,000 or more or (B)
aggregate payments by any Company or any Subsidiary of any
Company of $5,000,000 or more;
(iii) any limited partnership, joint venture or
other unincorporated business organization or similar
arrangement or agreement in which such Company or
Subsidiary serves as a general partner or otherwise has
unlimited liability, or any other material similar
agreement or arrangement;
31
<PAGE> 38
(iv) any agreement relating to the acquisition
or disposition of any business (whether by merger, sale of
stock, sale of assets or otherwise);
(v) any agreement relating to indebtedness for
borrowed money or any guarantee or similar agreement or
arrangement relating thereto, other than (A) any
guarantees issued in the ordinary course of the financial
guarantee business of the Companies and their Subsidiaries
consistent with past practice and (B) any such agreement
with, or relating to, an aggregate outstanding principal
amount or guaranteed obligation not exceeding $10,000,000;
(vi) any license, franchise or similar agreement
material to the Companies and their Subsidiaries, taken as
a whole;
(vii) any agency, dealer, sales representative,
marketing or other similar agreement material to the
Companies and their Subsidiaries, taken as a whole;
(viii) any agreement that restricts or prohibits
any Company or any Subsidiary of any Company from
competing with any Person in any line of business or from
competing in, engaging in or entering into any line of
business in any area and which would so restrict or
prohibit any Company or any Subsidiary of any Company
after the Closing Date;
(ix) any reinsurance treaty or any material
facultative reinsurance contract (in each case applicable
to insurance in force);
32
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(x) any significant agreement containing "change
in control" or similar provisions relating to change in
control of any of the Companies or their Subsidiaries;
(xi) any powers of attorney other than those
entered into in the ordinary course of business in the
surety bond business;
(xii) any "stop loss" agreements, other than
those entered into in the ordinary course of business
consistent with past practice;
(xiii) any agreements (other than insurance
policies or other similar agreements issued by any Company
or any Subsidiary of any Company in the ordinary course of
its business) material to the Companies and their
Subsidiaries taken as a whole pursuant to which any
Company or any Subsidiary of any Company is obligated to
indemnify any other person; or
(xiv) any agreement with Seller or any of its
Affiliates.
(b) Seller has hereto fore furnished or made
available to Buyer complete and correct copies of the
contracts, agreements and instruments listed on Schedule
3.11, each as amended or modified to the date hereof
(including any waivers with respect thereto) (the
"Significant Agreements"). Except as specifically
disclosed on Schedule 3.11, and except to the extent not
material to the Companies and their Subsidiaries taken as
a whole: each of the Significant Agreements is in full
force and effect and enforceable in accordance with its
terms, subject to (i) bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium and other
33
<PAGE> 40
similar laws now or hereafter in effect relating to or affecting
creditors' rights generally and the rights of creditors of
insurance companies generally and (ii) general principles of
equity (regardless of whether considered in a proceeding at law
or in equity); neither Seller, nor any of the Companies nor any
of their Subsidiaries has received any notice (written or oral)
of cancellation or termination of, or any expression or
indication of an intention or desire to cancel or terminate, any
of the Significant Agreements; no Significant Agreement is the
subject of, or, to the knowledge of Seller, has been threatened
to be made the subject of, any arbitration, suit or other legal
proceeding; with respect to any Significant Agreement which by
its terms will terminate as of a certain date unless renewed or
unless an option to extend such Significant Agreement is
exercised, neither Seller, nor any of the Companies nor any of
their Subsidiaries has received any notice (written or oral), or
otherwise has any knowledge, that any such Significant Agreement
will not be so renewed or that any such extension option will
not be exercised; and there exists no material event of default
or occurrence, condition or act on the part of any Company or
any Subsidiary of any Company or, to the knowledge of Seller on
the part of the other parties to the Significant Agreements,
which constitutes or would constitute (with notice or lapse of
time or both) a material breach of or material default under any
of the Significant Agreements.
3.12 Litigation. Except as set forth on Schedule 3.12
__________
and, in the case of clause (i) below only, except for any
action, suit, investigation or proceeding that involves a claim
under any insurance, reinsurance or indemnity policy, fidelity
bond, surety bond or similar contract or undertaking issued or
entered into by any Company
34
<PAGE> 41
or any Subsidiary of any Company, there is no action, suit,
investigation or proceeding pending against, or, to the
knowledge of Seller, any Company or any Subsidiary of any
Company, threatened against, or affecting the properties of, any
Company or any Subsidiary of either Company or any of their
respective properties before any court or arbitrator or any
governmental body, agency or official, and, to the best
knowledge of Seller and the Companies, there is no reasonable
basis for any such claim (i) in which the actual damages alleged
or sought exceeds $1,000,000 or (ii) which alleges a course of
conduct that is based on alleged facts that may give rise to a
class action lawsuit or (iii) which alleges price-fixing, and in
the case of (ii) and (iii), in Seller's judgment, there is a
reasonable basis for the assertion of such claim or (iv) which
alleges bad faith and, in the case of this clause (iv), in
Seller's judgment, there is a reasonable possibility of ultimate
liability in excess of $1,000,000 over any reserves which have
been established as of the Balance Sheet Date in respect of such
case. As of the date hereof and as of no other date, there is
no action, suit, investigation or proceeding pending against,
or, to the knowledge of Seller, threatened against, or affecting
the property of either Company or any Subsidiary of either
Company or any of their respective properties before any court
or arbitrator or any governmental body, agency or official which
challenges or seeks to prevent the transactions contemplated
hereby. Except as disclosed in Schedule 3.12, neither Company
nor any Subsidiary of any Company nor any of their respective
properties is subject to any material order, writ, judgment,
injunction, decree, determination or award which would prevent
or delay the consummation of the transactions contemplated
hereby. As used in this Section 3.12, "knowledge" of
35
<PAGE> 42
Seller, any Company or any Subsidiary of any Company means the
knowledge of the executive officers, the chief legal or
compliance officers of the Seller or the Companies or the senior
in-house counsel for property and casualty insurance matters of
the Companies and their Subsidiaries.
3.13 Compliance with Laws. Except as set forth in
____________________
Schedule 3.13, the Companies and their Subsidiaries are and have
at all times since January 1, 1993 been in compliance in all
material respects with all applicable material laws, statutes,
ordinances and regulations, whether foreign, Federal, state or
local.
3.14 Properties. The Companies and their Subsidiaries
__________
have good title to, or in the case of leased property have valid
leasehold interests in, all of their respective property and
assets (whether real or personal, tangible or intangible) except
for imperfections in title or invalidities in leasehold
interests that do not, individually or in the aggregate,
materially detract from the value reflected on the Unaudited
September Balance Sheet. None of such property or assets is
subject to any Liens, except:
(i) Liens reflected on the Unaudited September
Balance Sheet;
(ii) Liens for taxes not yet due or being
contested in good faith (and for which adequate accruals
or reserves have been established on the Unaudited
September Balance Sheet); and
(iii) Liens which do not, individually or in the
aggregate, materially detract from the value reflected on
the Unaudited
36
<PAGE> 43
September Balance Sheet or materially interfere with any
present or intended use of any material property or
assets.
3.15 Licenses and Permits; Policies; Regulatory
___________________________________________
Matters. The Companies and their Subsidiaries and, to the
_______
knowledge of Seller and the Companies and their Subsidiaries,
the significant agents of the Companies and their Subsidiaries,
hold all material licenses, franchises, permits or other similar
authorizations (the "Permits") necessary for the ownership and
conduct of the respective businesses of the Companies, their
Subsidiaries and such agents in each of the jurisdictions in
which the Companies, their Subsidiaries and such agents conduct
or operate their respective businesses in the manner now
conducted, and such Permits are in full force and effect except
where any failure to hold any Permit or any failure of any
Permit to be in full force and effect would not, individually or
in the aggregate, materially impair the ability of the Companies
and their Subsidiaries, taken as a whole, to conduct their
businesses. No material violations exist in respect of any
material Permit of the Companies and their Subsidiaries and no
proceeding or investigation is pending or, to the knowledge of
Seller, threatened, that would be reasonably likely to result in
the suspension, revocation or material limitation or restriction
of any material Permit and, to the knowledge of Seller, the
Companies and their Subsidiaries, there is no reasonable basis
for the assertion of any such violation or the institution of
any such proceeding. All insurance policies issued by each
Company and each Subsidiary of each Company, as now in force
are, to the extent required under applicable law, in a form
acceptable to applicable regulatory authorities to the knowledge
of Seller and the Companies and their Subsidiaries, or have been
filed and
37
<PAGE> 44
not objected to by such authorities within the period provided
for objection. Each Company and each Subsidiary of each Company
has filed all material reports, statements, documents,
registrations, filings or submissions required to be filed by
any Company or any Subsidiary of any Company, respectively, with
any applicable Federal, state or local regulatory authorities,
including, without limitation, state insurance regulatory
authorities. All such reports, statements, documents,
registrations, filings and submissions complied in all material
respects with applicable law in effect when filed and no
material deficiencies have been asserted by any such regulatory
authority with respect to such reports, statements, documents,
registrations, filings or submissions that have not been
satisfied. Except as set forth on Schedule 3.15, all premium
rates, rating plans and policy forms established or used by any
Company or any Subsidiary of any Company that are required to be
filed with or approved by insurance regulatory authorities have
been so filed or approved, the premiums charged conform in all
material respects to the premiums so filed or approved and
comply in all material respects with the insurance laws
applicable thereto and to the Seller's knowledge, no such
premiums are subject to any review or investigation by any
insurance regulatory authority. As used in this Section 3.15,
"knowledge" of Seller, or any Company or any Subsidiary of any
Company means the knowledge of the executive officers, the chief
legal or compliance officers of the Seller or the Companies or
the senior in-house counsel for property and casualty insurance
matters of the Companies and their Subsidiaries.
3.16 ERISA Representations. (a) Schedule 3.16(a)
_____________________
identifies each Employee Plan. Seller has furnished or made
available to Buyer copies of the
38
<PAGE> 45
Employee Plans, summary plan descriptions, and, if applicable,
related trust agreements, and all amendments thereto together
with (i) the most recent annual report
prepared in connection with any Employee Plan (Form 5500
including, if applicable, Schedule B thereto) and (ii) the most
recent actuarial valuation report prepared in connection with
any Employee Plan.
(b) There is no accumulated funding deficiency,
whether or not waived, within the meaning of Section 302 of
ERISA or Section 412 of the Code, with respect to any pension
plan of Seller or any ERISA Affiliate of Seller. Neither Seller
nor any ERISA Affiliate of Seller has incurred, or reasonably
expects to incur prior to the Closing Date (other than a
liability for premiums under Section 4007 of ERISA), any
liability under Title IV of ERISA that will not be satisfied in
full as of the Closing Date.
(c) Each Employee Plan that is intended to be
qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service
and has pending a request for a determination timely filed with
the Internal Revenue Service in respect of compliance with the
Tax Reform Act of 1986. Except as described in Schedule
3.16(c), each Employee Plan that is not a Multiemployer Plan has
been maintained in material compliance with its terms and with
the requirements prescribed by any and all applicable statutes,
orders, rules and regulations, including but not limited to
ERISA and the Code. No Employee Plan is a Multiemployer Plan or
a multiple employer plan (within the meaning of Section 413(c)
of the Code).
39
<PAGE> 46
(d) Schedule 3.16(d)(i) identifies each Benefit
Arrangement. Seller has furnished or made available to Buyer
copies or descriptions of each Benefit Arrangement. Each
Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed
by any and all applicable statutes, orders, rules and
regulations.
(e) Each Employee Plan that is a "group health plan"
(as defined in Section 4980B of the Code) has been operated in
material compliance with Section 4980B of the Code at all times.
(f) With respect to any Employee Plan that provides
disability benefits, the amounts accrued on the September
Adjusted Balance Sheets in accordance with FAS 112 are
reasonably sufficient to pay all future obligations to the
Transferred Employees who are disabled as of the Balance Sheet
Date.
3.17 Environmental Matters. (a) Other than as may be
_____________________
disclosed in the Environmental Reports or in Schedule 3.17, (i)
there are no Hazardous Substances present on the current or
former REO, the current or former Mortgaged Properties or the
current or former Company Facilities requiring material
remediation under Environmental Laws (provided that to the
extent the foregoing representation relates to Hazardous
Substances placed on former REO, former Mortgaged Properties or
former Company Facilities by any third party subsequent to the
date on which such properties were sold or otherwise transferred
by any Company or any Subsidiary of any Company, as the case may
be, to a Person other than any Company or any of its
Subsidiaries, such representation is to the knowledge of Seller)
and (ii) the
40
<PAGE> 47
Companies and their Subsidiaries are in compliance in all
material respects with all applicable Environmental Laws.
(b) To the knowledge of Seller, other than as may be
disclosed in the Environmental Reports or in Schedule 3.17,
there has been (i) no written notice issued or threatened to be
issued of a material claim against any Company or any Subsidiary
of any Company arising under Environmental Laws concerning
Hazardous Substances present on the current or former REO, the
current or former Mortgaged Properties or the current or former
Company Facilities; (ii) no written notice issued or threatened
to be issued from a governmental authority alleging a material
violation of Environmental Laws by any Company or any Subsidiary
of any Company with respect to the ownership or operation of the
REO or the Company Facilities; (iii) no written notice issued or
threatened to be issued of a material claim against any Company
or any Subsidiary of any Company alleging that it is liable
under the Environmental Laws as a result of the treatment,
storage, release, transportation, manufacture, installation,
containment or disposal of Hazardous Substances at properties
other than the current or former REO's, the current or former
Mortgaged Properties, or the current or former Company
Facilities; and (iv) no written notice issued or threatened to
be issued of a material claim under any Environmental Law
against any Company or any Subsidiary of any Company as a
successor to any other Person.
(c) Seller has made reasonable efforts to make
available to Buyer for review and copying, all environmental
reports in Seller's possession prepared for Seller, any Company
or any Subsidiary of any Company by third party environmental
41
<PAGE> 48
consultants concerning the current REO, the current Mortgaged
Properties or the current Company Facilities (the "Environmental
Reports").
(d) To the knowledge of Seller, other than as may be
disclosed in Schedule 3.17, with respect to the current or
former Mortgaged Properties, there have been no acts or
omissions of any Company or any Subsidiary of any Company, in
their capacity as lenders, prior to the Closing Date, on the
basis of which Buyer, any Company or any Subsidiary of any
Company has been found or would be found to be materially
responsible or liable parties under Environmental Laws or
relating to Hazardous Substances.
(e) No representation in this Section 3.17 is intended
to imply any representation as to any obligation or liability
that the Companies or any of their Subsidiaries have or may have
in connection with, as a result of or arising out of any
insurance or reinsurance or indemnity policy, surety bond or
similar contract or undertaking issued or entered into by any
Company or any Subsidiary of any Company in the ordinary course
of business.
(f) To the knowledge of Seller, other than as may be
disclosed in Schedule 3.17, the execution, delivery and
performance by Seller of this Agreement require no action by or
in respect of, or filing with, any governmental body, agency or
official on the part of Seller or any of its Subsidiaries
pursuant to any Environmental Law, other than any such action or
filing as to which the failure to make or obtain would not,
individually or in the aggregate, have material adverse effect
on the Companies and their Subsidiaries, taken as a whole.
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<PAGE> 49
(g) Notwithstanding anything to the contrary in this
Agreement, any and all representations, warranties, covenants
and agreements of Seller contained in this Agreement with
respect to any and all matters relating to Environmental Laws or
Hazardous Substances are contained solely and exclusively in
this Section 3.17.
(h) As used in this Section 3.17, the term "the
knowledge of Seller" means: (i) with respect to representations
concerning the current or former REO, the actual current
knowledge, without investigation, of any executive officer of
Seller, any Company or any Subsidiary of any Company or of the
regional asset manager of Seller or any Company or any
Subsidiary of any Company directly responsible for the
management of the REO's in such manager's region, (ii) with
respect to representations concerning the current or former
Mortgaged Properties, the actual current knowledge, without
investigation, of any executive officer of Seller, any Company
or any Subsidiary of any Company or of the regional investment
manager of Seller or any Company or any Subsidiary of any
Company directly responsible for the management of each loan
secured by a Mortgaged Property in such manager's region, (iii)
with respect to representations concerning the current or former
Company Facilities, the actual current knowledge, without
investigation, of any executive officer of Seller, any Company
or any Subsidiary of any Company or of the environmental
compliance officer of Seller or any Company or any Subsidiary of
any Company responsible for overall environmental compliance
matters concerning Company Facilities.
(i) "Company Facilities" means any offices, buildings
and other real property that are owned or leased by any
43
<PAGE> 50
Company or any Subsidiary of any Company and that are used in
the operation of the business of any Company or any Subsidiary
of any Company. "REO" means the real property (including land
and any buildings or other improvements thereon) owned by any
Company or any Subsidiary of any Company but not used in the
operation of the business of any Company or any Subsidiary of
any Company. "Mortgaged Properties" means the real property
(including land and any buildings or other improvements thereon)
subject to a mortgage interest or other Lien held by or in favor
of any Company or any Subsidiary of any Company (other than
mortgages and liens associated with mortgage-backed securities
or private placement bond investments made in the ordinary
course of Seller's securities transactions).
(j) "Environmental Laws" means any and all foreign,
Federal, state or local statutes, laws, regulations, ordinances,
rules or codes now in effect relating to the environment, to the
effect of the environment on human health or safety or to the
use, generation, manufacturing, treatment, disposal, storage,
discharge or release of Hazardous Substances into the
environment, including without limitation, ambient air, surface
water, groundwater or land, or the remediation thereof.
(k) "Hazardous Substances" means any toxic,
radioactive, caustic or otherwise hazardous substance, including
petroleum and its derivatives and by-products, or any substance
having any constituent elements displaying any of the foregoing
characteristics, regulated under Environmental Laws.
3.18 Intercompany Accounts. Schedule 3.18 contains a
_____________________
complete list of (A) all intercompany balances and (B) all
liabilities of the type referred to in Section 7.5(c), in each
case as of the Balance Sheet Date between Seller or any of
44
<PAGE> 51
its Affiliates, on the one hand, and any Company or any
Subsidiary of any Company, on the other hand. Except as
disclosed on Schedule 3.18, since the Balance Sheet Date, there
has not been any incurrence or accrual of liability (as a result
of allocations or otherwise) by any Company or any Subsidiary of
any Company to Seller or any of its Affiliates or other
transaction between any Company or any Subsidiary of any Company
and Seller or any of its Affiliates, except (i) in the ordinary
course of business in accordance with past practice or (ii) as
contemplated by this Agreement.
3.19 No Representation with Respect to Reserves.
__________________________________________
Notwithstanding any other Section or provision of this Article
3, except as set forth in this Section 3.19, Seller makes no
representation or warranty that the liabilities for unpaid
claims and claim expenses whether reported or incurred but not
reported of the Companies and their Subsidiaries (the "Claims
Provision") are adequate or sufficient. As of the date hereof,
Seller has provided or made available to Coopers & Lybrand
L.L.P., as consultant to Buyer, all material information in
possession of Seller and which Seller reasonably believes is
necessary in order for a reasonable evaluation of the adequacy
and sufficiency of the Claims Provision relating to asbestos
liabilities and environmental liabilities.
3.20 Intellectual Property; Software. (a) The
_______________________________
Companies and their Subsidiaries own or otherwise have rights to
use (in each case, free and clear of any material Liens or other
material limitations or restrictions) all Intellectual Property
used in their respective businesses as currently conducted, and
the consummation of the transactions contemplated hereby will
not result in the loss of any such rights (or
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<PAGE> 52
require the payment of any additional fees or royalties in order
to maintain such rights); the use of any Intellectual Property
by the Companies and their Subsidiaries does not infringe on or
otherwise violate the rights of any Person; and to Seller's
knowledge no person is challenging, infringing on or otherwise
violating any right of any Company or any Subsidiary of any
Company with respect to any Intellectual Property owned by
and/or licensed to the Companies and their Subsidiaries. For
purposes of this Agreement "Intellectual Property" shall mean
trademarks, service marks, brand names, certification marks,
trade dress, assumed names, trade names and other indications of
origin, the goodwill associated with the foregoing and
registrations in any jurisdiction of, and applications in any
jurisdiction to register, the foregoing, including any
extension, modification or renewal of any such registration or
application; inventions, discoveries and ideas, whether
patentable or not in any jurisdiction; patents, applications for
patents (including, without limitation, divisions,
continuations, continuations in part and renewal applications),
and any renewals, extensions or reissues thereof, in any
jurisdiction; nonpublic information, trade secrets and
confidential information and rights in any jurisdiction to limit
the use or disclosure thereof by any Person; writings and other
works, whether copyrightable or not in any jurisdiction;
registrations or applications for registration of copyrights in
any jurisdiction, and any renewals or extensions thereof; and
any similar intellectual property or proprietary rights, but
shall not include Software. For purposes of this Agreement,
"Software" shall mean all computer and telecommunication
software including source and object code and documentation and
any other media (including, without limitation, manuals,
journals and reference books).
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(b) Except as set forth in Schedule 3.20, the
Companies and their Subsidiaries own, or have valid and
enforceable licenses or other rights to use (in each case, free
and clear of any material Liens or other material limitations or
restrictions), all Software used in the conduct of their
respective businesses as currently conducted; the use of the
Software by the Companies and their Subsidiaries does not
infringe on or otherwise violate the rights of any person; and
to Seller's knowledge no person is challenging, infringing on or
otherwise violating any right of any Company or any Subsidiary
of any Company with respect to any Software used by the
Companies and their Subsidiaries.
3.21 Labor Matters. Neither Company nor any
_____________
Subsidiary of any Company is a party to any collective
bargaining or other labor union contract and no collective
bargaining agreement is being negotiated by any Company or any
Subsidiary of any Company. Except as set forth in Schedule
3.21, Seller has no knowledge of any material activities or
proceedings of any labor union to organize any employees of any
Company or any Subsidiary of any Company. There is no material
labor dispute, strike or work stoppage against any Company or
any Subsidiary of any Company pending or, to Sellers's
knowledge, threatened which may interfere with the respective
business activities of the Companies or any of their
Subsidiaries.
3.22 Loans and Advances. Except as set forth in
___________________
Schedule 3.22, neither of the Companies nor any of their
Subsidiaries has any contractual commitment to make any loan,
advance or capital contribution to, or investment in, any other
Person in excess of $100,000.
47
<PAGE> 54
3.23 All Assets Necessary. Except as set forth in
____________________
Schedule 3.23, the Companies and their Subsidiaries own, lease
or license all property and assets necessary to carry on their
businesses and operations as presently conducted, all such
assets and properties (other than as Buyer and Seller may
mutually agree) will be conveyed to Buyer (either indirectly by
means of the transfer of the Shares or through an Ancillary
Agreement or as contemplated by Sections 5.11, 7.11 and 7.12) at
the Closing and will as of the Closing (assuming Buyer were to
elect to obtain the services and facilities made available to
Buyer pursuant to the Ancillary Agreements and consents
contemplated by Section 5.11 were obtained) permit Buyer to
conduct such businesses and operations in the same manner as
such businesses and operations have been conducted prior to the
Closing.
3.24 Certain Policies. Subject to the qualifications
________________
set forth therein, Schedule 3.24 sets forth a brief description
of all insurance policies written by or ceded to either of the
Companies or any of their Subsidiaries with respect to any
insured currently or formerly involved in the manufacture of
tobacco products, or to the knowledge of Seller in research,
development or providing technical advice or information with
respect to the manufacture of tobacco products, including the
name of the insured, the policy period and the policy limits.
No notices have been received by Seller or the Companies or
their Subsidiaries or claims made by the insured under any of
such policies. Except as set forth in Schedule 3.24, each such
policy for each insured contains a product liability exclusion,
in the form set forth on Schedule 3.24, for each policy year.
As used in this Section 3.24, "knowledge" of Seller means the
knowledge of the executive officers, the chief legal or
compliance officers of the
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<PAGE> 55
Seller or the Companies or the senior in-house counsel for
property and casualty insurance matters of the Companies and
their Subsidiaries.
3.25 Disclosure. No representation or warranty of
__________
Seller contained in this Agreement (including the Schedules
referenced herein) contains any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary in order to make the statements made
therein, in light of circumstances under which they were made,
not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the
date hereof and as of the Closing Date (but as of no other dates
unless expressly so stated) that:
4.1 Corporate Existence and Power. Buyer has been
_____________________________
duly incorporated and is validly existing as an insurance
corporation in good standing under the laws of Connecticut and
has all corporate powers and all material governmental licenses,
authorizations, permits, consents and approvals required to
carry on its business as now conducted. Buyer has heretofore
delivered to Seller true and complete copies of its certificate
of incorporation and by-laws as in effect on the date hereof.
4.2 Corporate Authorization. The execution, delivery
_______________________
and, subject to the receipt of the approvals referred to in
Section 4.3, performance by Buyer of this Agreement and the
Ancillary Agreements to which Buyer is a party are within the
corporate powers of Buyer and have been duly authorized by all
necessary corporate action on the part of Buyer. This Agreement
constitutes, and when executed and
49
<PAGE> 56
delivered each Ancillary Agreement to which Buyer is a party
will constitute, a valid and legally binding agreement of Buyer,
enforceable against Buyer in accordance with its terms, subject
to (i) bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium and other similar laws now or hereafter
in effect relating to or affecting creditors' rights generally
and the rights of creditors of insurance companies generally and
(ii) general principles of equity (regardless of whether
considered in a proceeding at law or in equity).
4.3 Governmental Authorization. The execution,
__________________________
delivery and performance by Buyer of this Agreement and each
Ancillary Agreement to which Buyer is a party require no action
by or in respect of, or filing with, any governmental body,
agency or official on the part of Buyer or any of its
Subsidiaries other than (i) compliance with any applicable
requirements of the HSR Act, (ii) approvals or filings under the
insurance laws of the jurisdictions set forth in Schedule 4.3,
(iii) filings and notices not required to be made or given until
after the Closing Date, (iv) filings, at any time, of tax
returns, tax reports and tax information statements and (v) any
such action or filing as to which the failure to make or obtain
would not individually or in the aggregate be material.
4.4 Non-Contravention. Except as set forth in
_________________
Schedule 4.4, the execution, delivery and performance by Buyer
of this Agreement and each Ancillary Agreement to which Buyer is
a party do not and will not (i) violate the certificate of
incorporation or by-laws of Buyer, (ii) assuming compliance with
the matters referred to in Section 4.3, violate any applicable
law, rule, regulation, judgment, injunction, order or decree,
(iii) require any consent or other action by any Person under,
50
<PAGE> 57
constitute a default under, or give rise to any right of
termination, cancellation or acceleration of any right or
obligation of Buyer or any of its Subsidiaries or to a loss of
any benefit to which Buyer or any of its Subsidiaries is
entitled under, any material agreement or other instrument
binding upon Buyer or any of its Subsidiaries or any material
license, franchise, permit or other similar authorization held
by Buyer or any of its Subsidiaries or (iv) result in the
creation or imposition of any material Lien on any asset of
Buyer or any of its Subsidiaries.
4.5 Financing. Buyer has, or will have prior to the
_________
Closing, sufficient cash, available lines of credit or other
sources of immediately available funds to enable it to make
payment of the Purchase Price and any other amounts to be paid
by it hereunder.
4.6 Purchase for Investment. Buyer is purchasing the
_______________________
Shares for investment for its own account and not with a view
to, or for sale in connection with, any distribution thereof,
provided, however, that at or after the Closing Buyer may issue
or sell debt or equity securities of the Companies or their
Subsidiaries in connection with the financing of its acquisition
of the Shares. Any such issuance or sale will be effected in
compliance with all applicable securities laws. Buyer (either
alone or together with its advisors) has sufficient knowledge
and experience in financial and business matters so as to be
capable of evaluating the merits and risks of its investments in
the Shares and is capable of bearing the economic risks of such
investment.
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ARTICLE 5
COVENANTS OF SELLER
Seller agrees that:
5.1 Conduct of the Companies. Except as otherwise
________________________
expressly provided in this Agreement, during the period from the
date hereof to the Closing, Seller will cause the Companies and
their Subsidiaries to conduct their operations according to
their ordinary course of business consistent with past practice,
will cause the Companies and their Subsidiaries to use their
reasonable best efforts to preserve intact their respective
business organizations, generally to keep available the services
of their respective officers and employees and generally to
maintain existing relationships with agents, licensors,
licensees, suppliers, contractors, distributors, customers and
others having business relationships with them, and will cause
the Companies and their Subsidiaries, to the extent permitted by
applicable law, to confer with Buyer on a regular basis and
confer with Buyer on significant operational matters and
material decisions affecting the business of the Companies and
the Subsidiaries. Without limiting the generality of the
foregoing, as promptly as practicable following the date hereof,
Seller shall establish an interim transition committee (the
"Transition Committee") which shall meet on a regular basis to
review the financial and operational affairs of the Companies
and their Subsidiaries. Such review shall be conducted in
accordance with applicable law and shall not cover current or
future pricing of specific products, marketing or strategic
plans, specific breakdowns of sales by customers, or plans to
introduce new competitive products. A majority of the
Transition Committee shall consist of senior officers of the
Companies designated by
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Seller (including their respective chief executive and chief
financial officers) and one or more representatives of Seller.
The Transition Committee shall also include two individuals
designated by Buyer. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in this
Agreement or as set forth in Schedule 5.1, Seller will cause
each of the Companies and each Subsidiary of any Company not to,
without the prior written consent of Buyer:
(a) amend its certificate of incorporation or by-laws;
(b) authorize for issuance, issue, sell, deliver or
agree or commit to issue, sell or deliver (whether through the
issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise) any stock of any
class or any other securities or equity equivalents (including,
without limitation, stock appreciation rights), or amend any of
the terms of any such securities or agreements outstanding as of
the date hereof;
(c) split, combine or reclassify any shares of its
capital stock, declare, set aside or pay any dividend or other
distribution (whether in cash, stock, or property or any
combination thereof) in respect of its capital stock, or redeem,
repurchase or otherwise acquire any of its securities;
(d)(i) incur any indebtedness for borrowed money
(except for short term indebtedness incurred in the ordinary
course of business consistent with past practice pursuant to
existing lines of credit or extensions or renewals thereof) or
issue any debt securities or, except in the ordinary course of
business consistent with past practice, assume, guarantee or
endorse the obligations of any other Person; (ii) make any
loans, advances or capital contributions to, or investments in,
any other Person
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(other than (A) to wholly owned Subsidiaries of the Companies,
(B) subject to Section 7.11, investments in the ordinary course
of business consistent with past practice, (C) loans to agents
in the ordinary course of business consistent with past practice
not exceeding $500,000 aggregate principal amount to all agents
or (D) pursuant to the terms of the agreements listed in
Schedule 5.1), in excess of $100,000; (iii) pledge or otherwise
encumber shares of its capital stock; (iv) enter into or invest
in any derivative financial instruments except in the ordinary
course of business consistent with current investment and risk
management policies; or (v) except in the ordinary course of
business consistent with past practice, mortgage or pledge any
of its assets, tangible or intangible, or create or suffer to
exist any Lien thereupon;
(e) to the extent payable directly or indirectly by
any Company or any Subsidiary of any Company: enter into, adopt
or (except as may be required by law or the terms of any such
arrangement) terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, stock equivalent, stock
purchase agreement, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or
welfare of any director, officer or employee engaged in Seller's
property and casualty insurance business, amend any such
arrangement as it relates to such directors, officers or
employees or (except for increases in base compensation in the
ordinary course of business consistent with past practice, but
in no event greater than 4 1/2% in the aggregate on a per annum
basis for all such individuals as a group) increase in any
manner the compensation
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or benefits of any director, officer or employee engaged in
Seller's property and casualty insurance business or, with
respect to any director or officer engaged in Seller's property
and casualty insurance business, pay any benefit not required by
any plan or arrangement as in effect as of the date hereof or,
with respect to any employee engaged in Seller's property and
casualty insurance business who is not an officer or director,
pay any benefit other than in the ordinary course of business
consistent with past practice in accordance with plans or
arrangements in effect as of the date hereof (including, without
limitation, with respect to any such director, officer or
employee, the granting of stock options, restricted stock, stock
appreciation rights or performance units); provided that Buyer
agrees it will not unreasonably withhold its consent, if
requested by Seller, to transactions proposed under this
paragraph (e) (other than increases in base compensation);
(f) acquire, sell, lease or dispose of any assets
outside the ordinary course of business (including, without
limitation, any assets which are not primarily related to the
property and casualty insurance business conducted by the
Companies and their Subsidiaries) or any assets which in the
aggregate are material to the Companies and their Subsidiaries,
taken as a whole, or enter into any contract, agreement,
commitment or transaction with respect thereto outside the
ordinary course of business consistent with past practice;
(g) change any of the accounting principles,
practices, methods or policies (including, without limitation,
any reserving methods, practices or policies) used by it, except
as may be required as a result of a change in law, SEC
guidelines or GAAP or SAP;
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(h) change the method of determining the GAAP reserves
for any guaranty fund assessment, second injury fund assessment,
special insurance assessment or similar assessment or tax;
(i) (i) acquire (by merger, consolidation, or
acquisition of stock or assets, but excluding foreclosure) any
corporation, partnership or other business organization or
division thereof; (ii) authorize any new capital expenditure or
expenditures which, individually, is in excess of $500,000 or,
in the aggregate, are in excess of $2,500,000; (iii) settle any
litigation existing as of the Balance Sheet Date for amounts
more than $1,500,000 above held reserves existing as of the
Balance Sheet Date; (iv) settle any litigation commenced after
the Balance Sheet Date for amounts more than $1,500,000; or (v)
enter into or amend any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(j) make any Tax election or settle or compromise any
Tax liability, other than in the ordinary course of business and
as limited by Article 8 hereof or enter into any tax sharing
agreements or arrangements with any party, or amend or modify
the Tax Sharing Agreement in a manner which adversely affects
any of the Companies or their Subsidiaries;
(k) pay, discharge or satisfy any claims, liabilities
or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business consistent with
past practice or in accordance with their terms, of liabilities
reflected or reserved against in the consolidated financial
statements (or the notes thereto) of the Companies and their
Subsidiaries or incurred in the ordinary course of business
consistent with past practice;
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(l) terminate, or in any manner material thereto
modify, amend or waive compliance with, any provision of any of
the Significant Agreements;
(m) change its underwriting standards or practices in
any material way;
(n) (i) enter into any facultative reinsurance
contract other than in the ordinary course of business
consistent with past practice; (ii) commute any reinsurance
contract (provided that Buyer will not unreasonably withhold its
consent to any of the transactions specified in the foregoing
clauses (i) and (ii) and provided further that Seller may cause
ACSC to enter into an excess of loss reinsurance contract with a
term of up to one year, provided that Seller agrees to use its
best efforts to negotiate with the other party to such contract
to provide for a shorter term, such term to be as close to six
months as is reasonably practicable); or (iii) without giving
Buyer at least 10 business days' prior written notice thereof,
enter into any treaty reinsurance contract;
(o) effect any material or unusual insurance
transaction other than in the ordinary course of business
consistent with past practice;
(p) significantly change the compensation structure
of, or other benefits available to, any of its significant
agents or to its agents generally;
(q) make any investment in Company Investment Assets
other than in accordance with Seller's investment policies set
forth in Schedule 3.9(xiii);
(r) with respect to any leased facility shared by
Seller or any of its Affiliates, on the one hand, and any
Company or any Subsidiary of any Company, on the other hand, in
which the Companies and their Subsidiaries occupy less than
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50% of such facility as of the date hereof, enter into or renew
any lease or other arrangement in the name of any Company or any
Subsidiary of any Company relating to such facility;
(s) effect any transactions with Seller or any of its
Affiliates, other than pursuant to arrangements existing as of
the date hereof;
(t) except to the extent permitted by paragraphs (a)
through (r) above, enter into any agreement of the type
described in Section 3.11(a)(i), (ii), (iii), (vi), (vii),
(viii), (x), (xi), (xii) or (xiii); or
(u) take, or agree in writing or otherwise to take,
any of the actions described above in this Section 5.1.
5.2 Access to Information. From the date hereof until
_____________________
the Closing Date, subject to the terms of the Confidentiality
Agreement referred to in Section 6.1, any applicable contractual
restrictions and applicable legal privileges, and to the extent
applicable law would not thereby be violated Seller will (i)
give, and will cause the Companies and their Subsidiaries to
give, Buyer, its counsel, financial advisors, auditors and other
authorized representatives full access, upon reasonable prior
notice and during normal business hours, to the offices,
properties, books and records of the Companies and each of their
Subsidiaries and to the books and records of Seller relating to
the Companies and their Subsidiaries, (ii) furnish, and will
cause the Companies and their Subsidiaries to furnish, to Buyer,
its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other
information relating to the Companies or any of their
Subsidiaries as such Persons may reasonably request and (iii)
instruct the employees, counsel and
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financial advisors of Seller or the Companies or any of their
Subsidiaries to cooperate with Buyer in its investigation of the
Companies or any of their Subsidiaries; provided that this
Section 5.2 shall not obligate Seller to provide or make
available to Buyer any employee medical records; provided,
further, that to the extent contractual restrictions limit
Seller's ability to take any of the actions set forth in this
Section 5.2, Seller shall use its best efforts to obtain any
necessary contractual consent or accommodate any reasonable
request by Buyer with respect to such action by alternative
means and provided, further, that to the extent applicable
legal privileges or applicable laws limit Seller's ability to
take any of the actions set forth in this Section 5.2, Seller
shall use its best efforts to accommodate any reasonable request
by Buyer with respect to such action by alternative means.
5.3 Notices of Certain Events. Seller shall promptly
_________________________
notify Buyer of:
(a) any notice or other communication received by
Seller from any Person alleging that the consent of
such Person is or may be required in connection with
the transactions contemplated by this Agreement;
(b) any notice or other communication received by
Seller relating to the transactions contemplated by
this Agreement and any other significant notices or
other communications from any governmental or
regulatory agency or authority; and
(c) any actions, suits, claims, investigations or
proceedings commenced or, to Seller's knowledge
threatened against, relating to or involving or
otherwise affecting Seller, the Companies or any
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Subsidiary of any of the Companies that, if pending on
the date of this Agreement, would have been required to
have been disclosed pursuant to Section 3.12 or that
relate to the consummation of the transactions
contemplated by this Agreement.
5.4 Resignations. Seller will deliver to Buyer the
____________
resignations of all officers and directors of the Companies and
each Subsidiary of any of the Companies who will be officers,
directors or employees of Seller or any of its Affiliates after
the Closing Date from their positions with each of the Companies
and each Subsidiary of any of the Companies at or prior to the
Closing Date.
5.5 Covenant Not to Compete. For a period of five
_______________________
years after the Closing, Seller will not, and will cause its
Affiliates not to, engage, directly or indirectly, in any
business in the United States, Canada or the United Kingdom that
competes with any of the businesses of the Companies and their
Subsidiaries as conducted in such countries as of the Closing;
provided that Seller and its Affiliates shall not be prohibited
________
from engaging in any such businesses to the extent that such
business is (a) incidental to any business that does not
otherwise primarily compete with any of the businesses of the
Companies and their Subsidiaries as conducted in such countries
as of the Closing, (b) an integral part of any such business of
Seller and its Affiliates and (c) reasonably necessary to be
competitive with respect to any such business of Seller and its
Affiliates; and provided further that Seller and its Affiliates
________ _______
shall not be prohibited from conducting any of the activities
set forth in Schedule 5.5.
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5.6 No Solicitation. Seller will immediately cease
_______________
any existing discussions or negotiations with any third parties
conducted prior to the date hereof with respect to any
Acquisition Proposal (as defined below). Seller shall not,
directly or indirectly, through any officer, director, employee,
representative or agent or any of its Subsidiaries, (i) solicit,
initiate, or encourage any inquiries or proposals that
constitute, or would lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets,
sale of a substantial percentage of shares of capital stock or
similar transactions involving any of the Companies or their
Subsidiaries, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being
referred to in this Agreement as an "Acquisition Proposal"),
(ii) engage in negotiations or discussions concerning, or
provide any nonpublic information to any person or entity
relating to, any Acquisition Proposal or (iii) agree to or
approve any Acquisition Proposal. Seller shall notify Buyer
immediately (and no later than 24 hours) after receipt by Seller
of any Acquisition Proposal or any request for nonpublic
information in connection with an Acquisition Proposal or for
access to the properties, books or records of the Companies or
any of their Subsidiaries by any person or entity that informs
Seller that it is considering making, or has made, an
Acquisition Proposal. Such notice shall be made orally (and
confirmed in writing) and shall indicate the identity of the
offeror and the terms and conditions of such proposal, inquiry
or contract.
5.7 Certain Other Transactions. (a) At or prior to
__________________________
Closing, Seller will either (i) enter into a novation whereby
Seller substitutes itself or one of its Affiliates for ACSC as
assuming reinsurer under the Aggregate Excess Reinsurance
Agreement
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between ACSC and Aetna ReInsurance (U.K.) Ltd. dated May 28,
1993 (the "Aetna Re U.K. Stop Loss") and Aetna ReInsurance
(U.K.) Ltd. releases ACSC from all liability thereunder; or (ii)
otherwise indemnify Buyer to the extent that the amount paid by
ACSC under the Aetna Re U.K. Stop Loss exceeds the amount
reflected as a reserve (which Seller represents will not exceed
$35,700,000) on the September Audited GAAP Balance Sheet for
liabilities or potential liabilities under such agreement. In
the event Seller elects to substitute itself or one of its
Affiliates for ACSC as assuming reinsurer under the Aetna Re
U.K. Stop Loss, the consideration for such novation will be an
amount equal to ACSC's held reserve level relating to the Aetna
Re U.K. Stop Loss at the time of such novation. Subject to
receipt of any necessary regulatory approvals, such amount will
be paid to the assuming company by ACSC as reflected on the
September Audited Balance Sheet. In the event that Seller
elects to indemnify Buyer pursuant to clause (ii) of the first
sentence of this Section 5.7(a), to the extent that the amount
paid by ACSC under the Aetna Re U.K. Stop Loss is less than the
amount reflected as a reserve on the September Audited GAAP
Balance Sheet for liabilities or potential liabilities under
such agreement, Buyer shall pay such amount to Seller.
(b) At or prior to the Closing, Seller will (i) cause
Aetna Life Insurance Company of Illinois ("ALOI") to be
substituted for Aetna Casualty & Surety Company of Illinois
("AC&S of Illinois") as reinsurer under the original cession
from ALOI to AC&S of Illinois of Aetna Life Insurance Company's
long-term disability and credit/mortgage disability business,
and AC&S of Illinois will be released from all liabilities
thereunder and (ii) take all other actions necessary to
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ensure that, following the Closing, neither Company nor any
Subsidiary of any Company shall have any liability with respect
to any such agreements.
5.8 Confidentiality Agreements. Seller agrees that,
__________________________
without Buyer's consent, after the date hereof and until the
expiration of such agreements, it will not terminate, amend,
waive or modify any provision of any confidentiality agreement
pursuant to which information was provided to any Person (other
than Buyer) with respect to the Companies or their Subsidiaries
or their businesses and operations. Seller shall, at Buyer's
expense, take all action reasonably requested by Buyer to
enforce the terms of each such confidentiality agreement.
5.9 Other Financial Statements. (a) As promptly as
__________________________
practicable after the date hereof, but in no event later than 60
days after the date hereof, Seller will prepare or cause to be
prepared and delivered to Buyer, together with unqualified
reports of KPMG Peat Marwick LLP thereon, (i) an audited
combined balance sheet of the Companies and their Subsidiaries
as of September 30, 1995 (the "September Audited GAAP Balance
Sheet") and audited combined statements of results of operations
and cash flows of the Companies and their Subsidiaries for the
nine
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months ended September 30, 1995, in each case prepared in
accordance with GAAP applied on a basis consistent with that
used in the preparation of the audited financial statements
referred to in Section 3.8(a), and (ii) an audited combined
balance sheet of the Companies and their Subsidiaries as of
September 30, 1995 (the "September Audited SAP Balance Sheet"
and, together with the September Audited GAAP Balance Sheet, the
"September Audited Balance Sheets") and an audited combined
statement of results of operations of the Companies and their
Subsidiaries for the nine months ended September 30, 1995, in
each case prepared in accordance with SAP applied on a basis
consistent with that used in the preparation of the audited
financial statements referred to in Section 3.8(b).
(b) The September Audited Balance Sheets shall be
accompanied by a schedule reflecting the balance sheet
adjustments described in Schedule 5.9. The September Audited
GAAP Balance Sheet, as so adjusted, is referred to herein as the
"September Adjusted GAAP Balance Sheet," the September Audited
SAP Balance Sheet, as so adjusted, is referred to herein as the
"September Adjusted SAP Balance Sheet," and the September
Adjusted GAAP Balance Sheet and the September Adjusted SAP
Balance Sheet, collectively, are referred to herein as the
"September Adjusted Balance Sheets." The report of KPMG Peat
Marwick LLP referred to in Section 5.9(a) shall state that such
firm has reviewed such adjustments. All audited financial
statements delivered pursuant to this Section 5.9 will be
audited in accordance with generally accepted auditing
standards.
(c) As promptly as practicable after December 31,
1995, but in no event later than March 15, 1996, Seller will
prepare or cause to be prepared and delivered to Buyer, together
with unqualified reports of KPMG Peat Marwick LLP thereon, (i)
an audited combined balance sheet of the Companies and their
Subsidiaries as of December 31, 1995 and audited combined
statements of results of operations and cash flows of the
Companies and their Subsidiaries for the year ended December 31,
1995, in each case prepared in conformity with GAAP consistently
applied and (ii) an audited combined balance sheet of the
Companies and their Subsidiaries as of December 31, 1995 and an
audited combined statement of results of
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operations of the Companies and their Subsidiaries for the year
ended December 31, 1995, in each case prepared in conformity
with SAP consistently applied.
(d) As promptly as practicable after the Closing,
but in no event later than 60 days after the Closing, Seller
will prepare or cause to be prepared and delivered to Buyer,
together with unqualified reports of KPMG Peat Marwick LLP
thereon, (i) an audited combined balance sheet of the Companies
and their Subsidiaries as of the Closing Date, if the Closing
Date is the last day of a calendar month, or if the Closing Date
is not the last day of a calendar month, as of the last day in
the calendar month immediately preceding the calendar month in
which the Closing occurs (such date, the "Deemed Closing Date")
(the "Closing Date GAAP Balance Sheet") and audited combined
statements of results of operations and cash flows of the
Companies and their Subsidiaries for the period beginning on the
January 1st next preceding the Deemed Closing Date and ending on
the Deemed Closing Date, in each case prepared in conformity
with GAAP consistently applied and (ii) an audited combined
balance sheet of the Companies and their Subsidiaries as of the
Deemed Closing Date and an audited combined statement of results
of operations of the Companies and their Subsidiaries for the
period beginning on the January 1st next preceding the Deemed
Closing Date and ending on the Deemed Closing Date, in each case
prepared in conformity with SAP consistently applied. In
addition, from and after the date hereof until the Closing Date,
Seller will prepare or cause to be prepared and, to the extent
permitted by applicable law, delivered to the members of the
Transition Committee the same periodic unaudited financial
information relating to the Companies and their Subsidiaries
which is provided to the senior management
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of Seller and the Companies. Buyer shall bear 100% of the cost
of the audit of the financial statements as of and for the
period ending on the Deemed Closing Date referred to in this
Section, and Seller shall bear 100% of the cost of the audit of
all other financial statements and information referred to in
this Section.
(e) As promptly as practicable after December 31,
1995, but in no event later than March 15, 1996, Seller will
deliver to Buyer copies of the Companies' and their
Subsidiaries' respective annual statements for the fiscal year
ended December 31, 1995, in the forms filed with the Regulators
in their respective jurisdictions of domicile.
5.10 1992 Audit. Seller shall cause to be prepared
__________
and delivered to Buyer, as promptly as practicable, but in no
event later than December 31, 1995, audited combined statements
of results of operations and cash flows of the Companies and
their Subsidiaries for the year ended December 31, 1992,
prepared in accordance with GAAP consistently applied, together
with the unqualified reports of KPMG Peat Marwick LLP thereon.
Buyer shall bear 100% of the cost of the audit of the financial
statements referred to in this Section.
5.11 Use of Computer Software. (a) Prior to the
________________________
execution hereof, Seller and the Companies have entered into the
Software License Agreement annexed hereto as Exhibit 5.11 (the
"Software License Agreement").
(b) With respect to all Software not owned by Seller
but which is presently used in the operation of the business of
any of the Companies or their Subsidiaries as that business is
conducted as of the date hereof, Seller shall use its best
efforts, prior to Closing, to transfer or procure from the
necessary third parties
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an enforceable license with terms and conditions of like tenor
to those that are currently enforced against Seller. Seller and
Buyer shall share all costs and expenses in excess of ongoing
royalty obligations incurred in connection with the transfer or
license to the Companies and their Subsidiaries of all such
Software, including, but not limited to, payment of any transfer
or license fees or similar costs, in accordance with the last
sentence of this paragraph (b). In the event that Seller is
unable to effect the transfer or license to the Companies and
their Subsidiaries of any such Software, Seller shall continue
following the Closing to use its best efforts to effect such
transfer or license in accordance with this Section 5.11, and
shall in the interim make arrangements for the provision of
replacement Software to the Companies and their Subsidiaries as
of the Closing, which replacement software shall be reasonably
acceptable to Buyer, the cost of which arrangements shall be
shared by Seller and Buyer as provided in the following
sentence. Seller shall pay 80%, and Buyer shall pay 20%, of the
first $10 million of any costs and expenses referred to in this
paragraph (b), and Seller and Buyer shall share equally in any
such costs and expenses in excess of $10 million.
(c) From the date hereof and prior to the Closing,
Seller agrees that to the extent it develops, acquires or
licenses any Software that is used in the operation of the
business of the Companies and their Subsidiaries, any such
Software owned exclusively by Seller shall be licensed to the
Companies and their Subsidiaries prior to the Closing on the
same terms and conditions as set forth in the Software License
Agreement, and any such Software not owned exclusively by Seller
shall be licensed directly by one or more of the Companies and
the Subsidiaries.
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(d) To the extent that Seller or the Companies or
the Subsidiaries of the Companies negotiate or renegotiate
licenses, leases, extensions of leases, purchases or sales of
Software referred to in paragraphs (b) and (c) above, Seller
shall notify Buyer of such discussions and Buyer and Seller will
jointly participate in such negotiations or renegotiations as
long as Seller has ongoing obligations under this Section 5.11.
Section 5.12 Aetna Casualty Company. Seller will
______________________
use its best efforts to change, as soon as practicable after the
Closing Date consistent with any required regulatory approvals,
the corporate name of "Aetna Casualty Company" to a name which
may include the word "Aetna" but shall not include the word
"Casualty" or "Surety."
ARTICLE 6
COVENANTS OF BUYER
Buyer agrees that:
6.1 Confidentiality. All information provided to
_______________
Buyer or any of the Persons referred to in Section 5.2 will be
treated as if provided under the Confidentiality Agreement,
dated October 2, 1995, between Seller and Buyer (the
"Confidentiality Agreement").
6.2 Post-Closing Access. Buyer will cause the
___________________
Companies and each of their Subsidiaries, on and after the
Closing Date, to afford promptly to Seller and its agents
reasonable access, upon reasonable prior notice and during
normal business hours, to their offices, properties, books,
records, employees and auditors to the
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extent reasonably necessary to permit Seller to determine any
matter relating to its ownership of the Companies prior to the
Closing Date.
6.3 AmRe Agreement. If, at any time after the Closing
______________
Date and for so long as the AmRe Agreement is in effect, the
rating of ACSC or such other Person which is the primary obligor
(the "Obligor") under the Aggregate Excess of Loss Reinsurance
Agreement between ACSC and American Re-Insurance Company dated
September 30, 1992 (the "AmRe Agreement") as determined by A.M.
Best falls below "A-" or its equivalent (or, if A.M. Best shall
cease to publish ratings of insurance companies, an equivalent
claims paying rating by a nationally recognized rating agency)
(an "Adequate Rating"), Buyer shall promptly inform Seller of
such fact and, at Buyer's option, shall (i) cause the Obligor to
establish and fund a trust (satisfying the requirements of
Regulation 113 of the New York Insurance Department or any
successor provision thereto) with cash or cash equivalents in an
amount equal to the Termination Account from time to time as
provided in Article XIII of the AmRe Agreement (the "Termination
Account") with the assets of such trust to be held and used
solely for the purpose of satisfying the obligations of the
Obligor under the AmRe Agreement, (ii) cause the parent company
of the Obligor which is the immediate parent company of the
property and casualty insurance operations of Buyer (the
"Immediate Parent") to unconditionally guarantee the obligations
of the Obligor under the AmRe Agreement (provided that if any
such Immediate Parent ceases to be such, Buyer shall again have
the obligation to elect one of the alternatives in clause (i),
(ii) (with respect to the then Immediate Parent), or (iii) of
this sentence, subject to the last sentence of this Section 6.3)
or (iii) obtain
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an unconditional letter of credit in favor of Seller in an
amount not less than the Termination Account issued by a bank
organized under the laws of the United States with combined
capital and surplus of at least $3,000,000,000 and having a
long-term deposit rating of "A+" or "A-1" or better from
Standard & Poor's Corporation or Moody's Investor Services,
Inc., respectively, which letter of credit would be drawn on
solely for the purpose of satisfying the obligations of the
Obligor under the AmRe Agreement. Buyer's obligation under the
first sentence of this Section 6.3 shall terminate, and any
existing trust, guarantee or letter of credit will be terminated
at the election of the Obligor, at such time as the Obligor
regains an Adequate Rating; provided that Buyer's obligation
________
under this Section 6.3 shall again be reinstated at any time
such obligation is required in accordance with the first
sentence of this Section 6.3.
ARTICLE 7
COVENANTS OF BUYER AND SELLER
Buyer and Seller agree that:
7 .1 Reasonable Efforts. Subject to the terms and
__________________
conditions of this Agreement, Buyer and Seller will use their
reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things reasonably necessary
or desirable under applicable laws and regulations to consummate
the transactions contemplated by this Agreement. Buyer and
Seller will promptly, and in any event within 30 days of the
date hereof, prepare and file all applications, notices,
consents and other documents necessary or advisable to obtain
the regulatory approvals
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specified in Schedule 4.3 and Schedule 3.3, respectively,
promptly file all supplements or amendments thereto and use
reasonable efforts to obtain the regulatory approvals specified
in Schedule 4.3 and Schedule 3.3 as promptly as practicable.
Buyer and Seller will provide each other and their counsel the
opportunity to review in advance and comment on all such
filings. Buyer and Seller will keep each other informed of the
status of matters relating to obtaining the regulatory approvals
specified in Schedule 4.3 and Schedule 3.3. Seller and Buyer
agree, and Seller, prior to the Closing, and Buyer, after the
Closing, agree to cause the Companies and each Subsidiary of any
of the Companies to execute and deliver such other documents,
certificates, agreements and other writings and to take such
other actions as may be necessary or desirable in order to
consummate or implement expeditiously the transactions
contemplated by this Agreement.
7.2 Certain Filings. Seller and Buyer shall cooperate
_______________
with one another (i) in determining whether any action by or in
respect of, or filing with, any governmental body, agency,
official or authority is required, or any actions, consents,
approvals or waivers are required to be obtained from parties to
any contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (ii) in taking
such reasonable actions or making any such filings, furnishing
information required in connection therewith and reasonably
seeking to obtain in timely fashion any such actions, consents,
approvals or waivers.
7.3 Public Announcements. The parties agree to
____________________
consult with each other before issuing any press release or
making any public statement with respect to this Agreement or
the transactions contemplated hereby and, except as may be
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required by applicable law or any listing agreement with any
national securities exchange, will not issue any such press
release or make any such public statement prior to such
consultation.
7.4 Trademarks; Trade Names. (a) Prior to the
_______________________
execution hereof, the Companies and Seller have entered into the
license agreement attached hereto as Exhibit 7.4(a) (the
"License Agreement"). Prior to the execution hereof, the
Companies and Seller have also entered into the assignment
agreement attached hereto as Exhibit 7.4(b) (the "Assignment
Agreement").
(b) After the Closing, Buyer will not, and will not
permit the Companies or any of their Subsidiaries to, use any of
Seller's other logos, marks or names not specifically licensed
or assigned by the License Agreement or the Assignment Agreement
giving effect to any updates to the schedules thereto as
provided therein.
(c) On or before the expiration of the term of the
License Agreement, Buyer will cause each of the Companies and
their Subsidiaries, to the extent necessary, to file with the
applicable governmental body, agency or official amendments to
the Companies' or such Subsidiaries' articles or certificate of
incorporation to delete from its name the word "Aetna" and any
marks and names derived therefrom and shall do or cause to be
done all other acts, including the payment of any fees required
in connection therewith, to cause each such amendment to become
effective.
(d) Seller agrees to cooperate with Buyer in
connection with all regulatory matters relating to the License
Agreement and the Assignment Agreement.
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(e) After the Closing, Buyer will cause the
Companies and their Subsidiaries to use the marks and names
licensed to them pursuant to the License Agreement only in
connection with one or more of Buyer's existing names or marks.
(f) Notwithstanding any provision in this Agreement
or the License Agreement to the contrary, following the Closing,
the Companies and their Subsidiaries may continue to use signs,
labels, containers, stationery, forms (including policy forms)
and other printed material or matter which are included as of
the Closing in the assets or inventory of any Company or any
Subsidiary of any Company; provided that Buyer shall (i) use its
________
reasonable efforts to deplete the supply of such materials
(excluding signs) containing or bearing the trademarks, trade
names and service marks listed on Schedule B to the License
Agreement as soon as practicable in the ordinary course of
business, but in no event later than six months after the
Closing Date and (ii) as promptly as practicable following the
Closing, remove any such signs which contain or bear any of the
trademarks, trade names and service marks listed on Schedule B
to the License Agreement.
7.5 Intercompany Accounts. (a) All intercompany
_____________________
accounts (other than those under or relating to reinsurance
contracts and arrangements to the extent not then due and
payable) between Seller or any of its Affiliates, on the one
hand, and any Company or any Subsidiary of any Company, on the
other hand, as of the Closing shall be settled (irrespective of
the terms of payment of such intercompany accounts) in the
manner provided in this Section 7.5. At least five business
days prior to the Closing, Seller shall prepare and deliver to
Buyer a statement setting out in reasonable detail the
calculation of all such intercompany account balances
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based upon the latest available financial information as of such
date and, to the extent requested by Buyer, provide Buyer with
supporting documentation to verify the underlying intercompany
charges and transactions. All such intercompany account
balances shall be paid in full in cash prior to the Closing.
Except as contemplated by Section 5.7 and Section 7.12, all
intercompany reinsurance agreements shall remain in effect and
shall be performed and settled in accordance with their
respective terms.
(b) As promptly as practicable, but no later than 60
days after the Closing Date, Seller will cause to be prepared
and delivered to Buyer a statement setting out in reasonable
detail the calculation of such intercompany account balances as
of the Closing Date (giving effect to any settlement under
subsection (a) and any other payments in respect thereof).
Buyer and Seller shall cooperate in the preparation of any such
calculation including the provision of supporting documentation
to verify the underlying intercompany charges, transaction and
payments. If Buyer disagrees with Seller's calculation of such
intercompany balances, Buyer may, within 30 days after delivery
of such statement, deliver a notice to Seller disagreeing with
such calculation and setting forth Buyer's calculation of such
amount. If Buyer and Seller are unable to resolve such
disagreement within 30 days thereafter, such disagreement shall
be resolved by the Independent Accountants. The net amount of
any such intercompany balance shall be paid in cash promptly
thereafter, together with interest thereon from and including
the Closing Date to but excluding the date of payment at a rate
per annum equal to the three-month London Interbank Offered Rate
(as published in The Wall Street Journal on the Closing Date)
plus 40 basis
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points. Such interest shall be payable at the same time as the
payable to which it relates and shall be calculated on the basis
of a year of 365 days and the actual number of days elapsed.
(c) Liabilities of the Companies and their
Subsidiaries reflecting allocations of certain expenses of
Seller and its Affiliates set forth on Schedule 7.5(c) shall be
settled in the manner contemplated by Section 7.5(a) and (b)
with respect to intercompany accounts.
7.6 Non-Solicitation of Employees. (a) For a period
_____________________________
commencing on the date hereof through the second anniversary of
the Closing Date, (i) neither Seller nor any of its Affiliates
shall affirmatively seek to hire any officer or key employee of
the Companies or any Subsidiary whose annual base salary as of
the date hereof equals or exceeds $75,000 in any capacity
whatsoever without the express written consent of Buyer, and
(ii) none of Buyer or any of its Affiliates shall affirmatively
seek to hire any officer or key employee of Seller whose annual
base salary as of the date hereof equals or exceeds $75,000 and
with whom Buyer had significant contact in connection with the
transactions contemplated hereby in any capacity whatsoever
without the express written consent of Seller.
(b) For a period commencing on the date hereof
through the second anniversary of the termination of this
Agreement pursuant to Section 12.1, none of Buyer or any of its
Affiliates shall (x) affirmatively seek to hire in any capacity
whatsoever any officer or key employee of the Companies whose
annual base salary as of the date hereof equals or exceeds
$75,000 and with whom Buyer had significant contact in
connection with the transactions contemplated hereby or (y)
while any such
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officer or key employee is employed by Seller or any of its
Affiliates in a position having greater or substantially the
same level of compensation and responsibility as the position
with the Companies held by such officer or key employee on the
date hereof, hire any such officer or key employee in any
capacity whatsoever without, in either case (x) or (y), the
express written consent of Seller.
(c) Seller recognizes that the provisions of clause
(a)(i) of this Section 7.6 are reasonable and necessary for
Buyer's protection and Buyer recognizes that the provisions of
clause (a)(ii) and paragraph (b) of this Section 7.6 are
reasonable and necessary for Seller's protection, and Seller and
Buyer acknowledge that any breach of Section 7.6(a) or (b) will
cause irreparable injury to Seller or Buyer, as the case may be,
which injury will not be reasonably measurable or compensable by
money damages. Accordingly, each of the parties hereto agrees
that it shall be entitled without posting any bond to an
injunction or injunctions to prevent breaches of the provisions
of paragraphs (a) and (b) of this Section 7.6 and to enforce
specifically the terms and provisions hereof in any action
instituted in any court of the United States or any state
thereof having subject matter jurisdiction in addition to any
other remedy to which such party may be entitled at law or
equity.
(d) If any provision of this Section 7.6 is held
unenforceable because of the scope or duration of its
applicability, the court making such determinations shall have
the power to modify such scope or duration and such provisions
shall then be applicable in such modified form.
7.7 Real Estate. Seller and the Companies shall enter
___________
into a sublease, effective as of the Closing Date, providing for
the sublease by one or both of the
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Companies of Seller's "CityPlace" facility and the lease by one
or both of the Companies of Seller's Windsor facility, which
sublease and lease shall have the principal terms set forth on
Exhibit 7.7.
7.8 Transition Agreements. At the Closing, Seller,
_____________________
Buyer and, as applicable, the Companies and their Subsidiaries
will enter into transition agreements having the principal terms
set forth in Exhibit 7.8.
7.9 Post-Closing Access. From and after the Closing
___________________
Date, Seller shall retain the originals of all records of the
Companies and their Subsidiaries concerning Taxes for which
Seller is responsible hereunder. To the extent permitted by
applicable law, Seller shall at Closing provide to Buyer copies
(or at its election originals) of all of the personnel, payroll,
accounting and tax records (other than consolidated tax returns,
consolidated accounting records and consolidated financial
statements of Seller) of the Companies and their Subsidiaries
that heretofore have been maintained by Seller. Seller shall
cause all other books and records of the Companies and their
Subsidiaries, whether currently maintained by the Seller, any
Company or any Subsidiary of any Company, or a third party, to
be available on the premises of the applicable Company or
Subsidiary on the Closing Date. To the extent permitted by
applicable law, Seller will, on and after the Closing Date,
afford promptly to Buyer and its agents reasonable access, upon
reasonable prior notice and during normal business hours, to its
offices, properties, books, records, employees and auditors to
the extent reasonably necessary to permit Buyer to determine any
matter relating to the business of the Companies prior to the
Closing Date. Buyer may, at its own expense, make such copies
of and excerpts from such books and
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records as it may deem necessary for the preparation of tax or
regulatory reports or other purposes permitted hereby. Seller
shall maintain all such books and records for the period
required by law. Seller will hold, and will use its best
efforts to cause its officers, directors, employees,
accountants, counsel, consultants, advisors and agents to hold,
in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all
confidential documents and information concerning the Companies
or any Subsidiary of the Companies provided to it by Buyer
pursuant to Section 6.2.
7.10 Supplemental Disclosure. Each of Seller and
_______________________
Buyer shall have the continuing obligation promptly to advise
the other with respect to (i) any material matter hereafter
arising and (ii) any material matter hereafter discovered which,
in the case of a matter being disclosed pursuant to clause (i)
hereof if existing at the date hereof or, in the case of a
matter being disclosed pursuant to clause (ii) hereof, if known
at the date hereof would have been required to be set forth or
described in the respective Schedules provided by them;
provided, however, that for the purpose of the rights and
________ _______
obligations of the parties hereunder, any such supplemental or
amended disclosure by any party shall not be deemed to have been
disclosed as of the date hereof, to constitute part of, or an
amendment or supplement to, such Party's Schedules or cure any
breach or inaccuracy of a representation or warranty unless so
agreed to in writing by the other party. If prior to the
Closing Seller or Buyer becomes aware of a breach or inaccuracy
of a representation or warranty made by it herein, such party
shall use its best efforts to cure such breach or inaccuracy as
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promptly as practicable; provided, however, that no such cure
________ _______
will relieve such party of any liability for such breach or
inaccuracy.
7.11 Investment Portfolio; Real Estate Transactions.
______________________________________________
(a) From the date of this Agreement until the Closing Date,
Buyer and Seller agree that (i) the investment portfolio of the
Companies and their Subsidiaries consisting of bonds, notes,
debentures and all other instruments of indebtedness, excluding
mortgage loans, but including mortgage-backed securities ("Bond
Portfolio"), shall be invested and managed at the direction of
Buyer; provided that such investment and management shall be
consistent with the existing investment guidelines of the
Companies and their Subsidiaries set forth in Schedule
3.9(xiii), except that investments in U.S. Treasuries/Agencies
may be increased to a level up to 40% of invested assets,
provided that with respect to the additional 20% allowance being
________
provided herein, the duration of such additional 20% shall not
exceed an average of 5.0 years and provided further that no tax
________ _______
exempt securities shall be purchased other than to replace tax
exempt securities that are sold or redeemed or mature; and (ii)
the equity investment portfolio of the Companies and their
Subsidiaries consisting of the securities listed on Schedule
7.11(a) ("Equity Portfolio") shall be managed at the direction
of Seller. Transactions involving real estate investments,
mortgage loans and other Company Investment Assets not including
the Bond Portfolio or the Equity Portfolio shall be managed at
the direction of Seller, in consultation with Buyer. Subject to
the foregoing, Seller shall effect the actual execution of
transactions for all Company Investment Assets. To the extent
that investment holdings at September 30, 1995 are at levels
outside the existing investment guidelines of the Companies and
their
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Subsidiaries, no action is required pursuant to this Agreement
to change the levels of such holdings.
(b) Seller agrees that at the Closing the aggregate
market value of the securities held in the Equity Portfolio
shall not exceed $400 million, reduced by (i) the market value
at the Closing of all shares of common stock, par value $1.00
per share ("MBIA Stock"), of MBIA, Inc. ("MBIA") held in the
Equity Portfolio and (ii) 95.5% of the gross proceeds from the
sale at or prior to the Closing of any shares of MBIA Stock to
Seller or other Person(s). Prior to the Closing, Seller shall
use its reasonable efforts to liquidate for cash, at least 50%
of the shares of MBIA Stock held in the Equity Portfolio at the
date hereof; provided that Seller need not seek to liquidate
shares of MBIA Stock to the extent Seller provides Buyer with
reasonable evidence of Seller's inability to obtain a price for
such shares at least equal to the market value thereof at the
Balance Sheet Date. Absent such evidence, Seller shall not
permit to remain in the Equity Portfolio, and shall retain at or
prior to the Closing, such shares of MBIA Stock, and in
consideration for any such shares so retained, shall deliver to
the Companies at the time of such retention, cash in an amount
equal to 95.5% of the market value of such shares at such time.
Notwithstanding any other provision of this Agreement to the
contrary, Seller shall not permit to remain in the Equity
Portfolio as of the Closing a number of shares of MBIA Stock or
shares of common stock, par value $0.10 per share ("ERI Stock"),
of Executive Risk Inc. ("ERI") that would result in Buyer being
(x) an "Acquiring Person" under the Rights Agreement, dated as
of December 31, 1993, between ERI and Mellon Bank, N.A., or the
Rights Agreement, dated as of December 12, 1991,
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between MBIA and Mellon Bank, N.A. or (y) subject, with respect
to ERI, to the restrictions on "business combinations" with an
"interested stockholder" under Section 203 of the Delaware
General Corporation Law. Notwithstanding any other provision of
this Agreement to the contrary, this Agreement shall not
constitute an agreement, arrangement or understanding to acquire
or dispose of any, and Seller shall therefore retain all, shares
of MBIA Stock and ERI Stock, other than in either case any
shares up to an amount that may remain in the Equity Portfolio
by operation of the immediately preceding sentence. In
consideration for any such shares so retained, Seller shall
deliver to the Companies at the time of such retention cash in
an amount equal to the market value (or, in the case of MBIA
Stock, 95.5% thereof) of such shares at such time. Prior to the
Closing, Buyer shall notify Seller of any shares of MBIA Stock
or ERI Stock beneficially owned by Buyer, and Seller shall have
no liability to Buyer for any losses incurred by Buyer due to
any inaccuracy in such notification. Seller agrees that no
shares of MBIA Stock shall be sold or retained for consideration
other than cash.
(c) At or prior to the Closing, Seller shall
purchase or cause another Person to purchase for cash securities
of American Re-Insurance Company held in the Equity Portfolio so
that at Closing the aggregate market value of such securities
held in the Equity Portfolio is not more than $20 million.
Seller further agrees that the securities listed on Schedule
7.11(aa) shall not at the Closing be held in the Equity
Portfolio.
(d) At the Closing, if requested by Buyer, Seller
shall transfer to the Companies readily marketable securities
(to be reasonably agreed upon by Seller and
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Buyer) with a market value at the Closing of up to one-seventh
(but in no event more than $20 million in the aggregate) of the
aggregate market value of the Equity Portfolio at such time, and
in exchange therefor Buyer shall transfer to Seller securities
held in the Equity Portfolio of equal market value at such time.
(e) For purposes of this Section, securities to be
valued at the Closing shall be valued at the market value at the
close of business on the business day prior to the Closing Date
(determined in accordance with Seller's pricing policies
consistent with past practices), except that the value of any
shares of MBIA Stock as so determined shall be reduced by
4 1/2%.
(f) From the Balance Sheet Date to the date hereof
Seller has not acquired any securities for the Equity Portfolio.
From the date hereof until the Closing Date Seller shall
transfer to the Bond Portfolio all cash proceeds received in
respect of sales of securities in the Equity Portfolio
immediately following receipt of such proceeds.
(g) Schedule 7.11(b) lists (a) all mortgages with
respect to which both a Company or Subsidiary of a Company and
Seller or an Affiliate is a party (the "Shared Mortgages"), (b)
each mortgage held by either Company or any of their
Subsidiaries which is cross defaulted or cross collateralized
with a mortgage held by Seller or an Affiliate of Seller (the
"Cross Collateralized Mortgages") and (c) each real property in
which or with respect to which both a Company or Subsidiary of a
Company and Seller or an Affiliate has an ownership interest
(the "Shared Real Estate"). Prior to the Closing, and subject
to the receipt of all necessary consents and approvals (which
Seller shall use its best efforts to obtain in a timely manner),
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Seller shall exchange or cause to be exchanged for the
Companies' and their Subsidiaries' interest in the Shared
Mortgages and the Shared Real Estate, Seller's and its
Affiliates' interest in the mortgages and properties set forth
on Schedule 7.11(c); provided that if Seller does not effect the
exchange of any such interest of any of the Companies or their
Subsidiaries in any such Shared Mortgage or Shared Real Estate
prior to the Closing (by reason of the failure to obtain any
necessary consent or otherwise), then Seller shall use
reasonable good faith efforts (including, but not limited to,
committing to and effectuating the sale of its portion of any
such shared investment on the same terms and conditions as the
applicable Company or Subsidiary thereof may agree to sell its
portion of such investment) to ensure that following the Closing
the applicable Company or Subsidiary thereof will be permitted
to sell its interest in such investment without any material
limitations on such sale.
(h) With respect to each Cross Collateralized
Mortgage, prior to Closing, Seller shall either (i) exchange or
cause to be exchanged for the interest of the Companies or their
Subsidiaries in the Cross Collateralized Mortgage, Seller's or
its Affiliate's interest in mortgages reasonably acceptable to
Buyer or (ii) cause the cross collateral or cross default
provisions of the Cross Collateralized Mortgage to be deleted or
released.
7.12 Other Agreements. (a) Effective at the Closing,
________________
Buyer shall cause one of the Companies or one of their
Subsidiaries (the "AL&C Buyer") to assume on a 100% quota share
basis all of Seller's previously existing, in-force, new and
renewal direct written property and casualty insurance business
carried on directly by Seller in the states of Connecticut and
Pennsylvania (the "AL&C
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Business") in exchange for the payment to Buyer of an amount
equal to the sum of the reserves for unearned premium, loss
adjustment expense and incurred loss and other outstanding
liabilities directly related to the AL&C Business as of the
Closing Date. For each such insured, Buyer shall cause the AL&C
Buyer to make offers of renewal to all persons insured under the
AL&C Business at the next succeeding renewal date that occurs
after the Closing. Seller agrees to provide the AL&C Buyer such
underwriting information as may be reasonably required to
effectuate the foregoing transactions. Buyer agrees to
indemnify Seller for any losses sustained or expenses incurred
by Seller as a result of the failure of Buyer or the AL&C Buyer
to perform their obligations under this Section 7.12(a) or under
the AL&C Business assumed.
(b) ACSC has written and continues to write stop
loss insurance business ("Stop Loss Business") in connection
with group health business conducted by Seller's Aetna Health
Plans Strategic Business Unit ("AHP"). All liabilities related
to the Stop Loss Business are reinsured to Aetna Casualty
Company ("ACC") on a 100% quota share basis pursuant to the Stop
Loss Reinsurance Agreement dated March 25, 1991, by and between
ACSC and ACC (the "Stop Loss Quota Share"). Buyer agrees that
Seller shall retain the Stop Loss Business. Seller shall cause
ACC, or another Affiliate, to make offers of renewal to all
Persons insured under the Stop Loss Business at the next
succeeding renewal date for each such insured that occurs after
Closing. Buyer agrees to provide Seller or its designated
Affiliate such underwriting information as may be reasonably
necessary to effectuate the foregoing transactions.
Notwithstanding anything in this Section 7.12(b) to the
contrary, until
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such time as all of the Stop Loss Business is being written in
ACC or another Affiliate of Seller (but in no event for longer
than three months following the Closing), Buyer agrees to
continue to make ACSC available to Seller as an underwriter of
Stop Loss Business in the State of Missouri, and to reinsure all
such liabilities to ACC pursuant to the terms of the Stop Loss
Quota Share. Seller agrees to indemnify Buyer for any losses
sustained or expenses incurred by Buyer as a result of the
failure of Seller or its Affiliates to perform their obligations
under this Section 7.12(b) or under the Stop Loss Business. For
so long as the Stop Loss Quota Share remains in effect, Seller
agrees to cause one of its Affiliates to administer all of the
Stop Loss Business.
7.13 Certain Insurance Policies. To the extent that,
__________________________
after the Closing, any Company or any Subsidiary of any Company
experiences any loss arising out of any event occurring prior to
the Closing, which loss is covered by any insurance policy
maintained by Seller or any of its Affiliates for the benefit of
any Company or any Subsidiary of any Company, Seller will use
its best efforts to assist the Companies and their Subsidiaries
in pursuing a claim under such policy and shall remit to the
Companies or their Subsidiaries any proceeds received by Seller
or its Affiliates pursuant to such policy (it being understood
that Seller has no obligation to provide or pay for insurance
coverage for any of the Companies or their Subsidiaries after
the Closing).
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ARTICLE 8
TAX MATTERS
8.1 Definitions. The following terms, as used herein,
___________
have the following meanings:
"Code" means the Internal Revenue Code of 1986, as
amended.
"Combined State Tax" means, with respect to each state
or local taxing jurisdiction, any income, franchise or similar
tax payable to such state or local taxing jurisdiction in which
a member of the Seller Group files Returns (as hereinafter
defined) with the Companies and their Subsidiaries (or any
member thereof), on a consolidated, combined or unitary basis
for purposes of such income or franchise tax.
"Federal Tax" means any Tax imposed under the Code.
"Final Determination" shall mean (i) with respect to
Federal Taxes, a "determination" as defined in Section 1313(a)
of the Code or the execution of an Internal Revenue Service Form
870AD and, (ii) with respect to Taxes other than Federal Taxes,
any final determination of liability in respect of a Tax that,
under applicable law, is not subject to further appeal, review
or modification through proceedings or otherwise (including the
expiration of a statute of limitations or a period for the
filing of claims for refunds, amended returns or appeals from
adverse determinations).
"NOLs" mean all net operating losses and net capital
losses of the Companies and their Subsidiaries.
"Post-Closing Tax Period" means any Tax period
beginning after the Closing Date and the portion of any Straddle
Period beginning after the Closing Date pursuant to Section
8.5(i).
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"Post-September 30 Tax Period" means (i) the portion of
calendar year 1995 beginning after September 30, 1995, (ii) any
Tax period beginning after December 31, 1995 and ending on or
prior to the Closing Date, and (iii) the portion of any Straddle
Period ending on and including the Closing Date pursuant to
Section 8.5(i).
"Pre-September 30 Tax Period" means any Tax period
ending on or before September 30, 1995 and the portion of
calendar year 1995 ending on and including September 30, 1995.
"Seller Group" means, (i) with respect to Federal
Taxes, the affiliated group of corporations (as defined in
Section 1504(a) of the Code with due regard to Section 1504(c)
of the Code) of which Seller is a member and, (ii) with respect
to state or local income or franchise Taxes, the consolidated,
combined, unitary or similar group of which Seller or any of its
Affiliates is a member.
"Separate State Tax" means with respect to each state,
local or foreign taxing jurisdiction, any tax (other than
Combined State Tax) payable by the Companies and their
Subsidiaries to such state, local or foreign taxing
jurisdiction.
"Separate State Income Tax" means with respect to each
state, local or foreign taxing jurisdiction, any income,
franchise or similar tax (other than Combined State Tax) payable
by the Companies and their Subsidiaries to such state, local or
foreign taxing jurisdiction.
"Straddle Period" means any Tax period beginning before
and ending after the Closing Date.
"Tax" or "Taxes" means all taxes, charges, fees, levies
or other assessments, including, without limitation, any net
income tax or franchise tax based
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on net income, any alternative or add-on minimum taxes, any
gross income, gross receipts, premium, sales, use, ad valorem,
value added, transfer, profits, license, social security,
medicare, payroll, employment, excise, severance, stamp,
occupation, property, environmental or windfall profit tax,
custom duty or other tax, governmental fee or other like
assessment, together with any interest, penalty, addition to tax
or additional amount imposed by any governmental authority
(domestic or foreign) responsible for the imposition of any
such tax (a "Taxing Authority").
"Tax Benefit" means any deduction, credit,
amortization, exclusion from income, loss or other tax
attribute.
"Tax Sharing Agreement" means the Tax Sharing
Agreement, entered into by Seller and its Subsidiaries,
applicable to the taxable year ending December 31, 1994 and all
other periods specified therein, and the procedures and
practices employed pursuant thereto or reflected therein
including, without limitation, all procedures and practices with
respect to alternative minimum taxes.
8.2 Tax Representations. Seller represents and
___________________
warrants to Buyer as of the date hereof that, except as set
forth on Schedule 8.2:
(i) all Tax returns, statements, reports, forms and
other documentation (collectively, "Returns") required to be
filed with any Taxing Authority by or with respect to the
Companies or any of their Subsidiaries on or before the Closing
Date with respect to any Pre-September 30 Tax Period have been
filed or will be timely filed on or before the Closing Date in
accordance with all applicable laws, and all such Returns are
true, correct and complete in all material respects;
(ii) the Companies and their Subsidiaries have
timely paid all Taxes shown to be due on such Returns;
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(iii) the Companies and their Subsidiaries have made
adequate provision on the September Adjusted GAAP Balance Sheet
for all Taxes payable by the Companies and their Subsidiaries
for any Pre-September 30 Tax Period for which no Return has yet
been filed or for which Returns have been filed but payment of
the Tax shown to be due thereon is not yet due;
(iv) there is no action, suit, proceeding,
investigation, assessment, adjustment, audit or claim now
proposed or pending against or with respect to the Companies or
their Subsidiaries in respect of any Tax;
(v) there are no outstanding waivers or other
agreements extending any statutory periods of limitation for the
assessment of Taxes of the Companies and their Subsidiaries;
(vi) on or prior to the date hereof, Seller has
provided Buyer with copies of all record retention agreements
currently in effect between the Seller Group and any Taxing
Authority, and no such record retention agreements have been
entered into or modified since September 30, 1995; and
(vii) the Tax Sharing Agreement is the only
agreement which governs the liability for Taxes between Seller
and the Companies and their Subsidiaries.
8.3 Tax Covenants. (a) Except as otherwise required
_____________
by law, Buyer covenants that it will not cause or permit the
Companies, any of their Subsidiaries or any Affiliate of Buyer
(i) to take any action on the Closing Date, other than in the
ordinary course of business or except as agreed in writing
between the parties (including, but not limited to, the
distribution of any dividend or the effectuation of any
redemption) that could give rise to any Tax liability or loss of
the Seller Group under this Agreement, (ii) to make any election
or deemed election
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under Section 338 of the Code with respect to the purchase of
the Shares pursuant to this Agreement or (iii) to amend any
Return or file a claim for refund that results in any increased
Tax liability or reduction of any Tax Benefit of the Seller
Group or any Seller Affiliate.
(b) Except as otherwise required by law or set forth
in section (c) below, Seller covenants and agrees that no member
of the Seller Group shall amend any Return, file any claim for
refund, change any method of tax accounting, or make or change
any Tax election with respect to (i) any Tax period that results
in any increased Tax liability or reduction of Tax Benefits of
Buyer, the Companies or any of their Subsidiaries, or any of
their Affiliates in respect of any Post-September 30 Tax Period
or any Post-Closing Tax Period and (ii) any Post-September 30
Tax Period. Furthermore, Seller covenants and agrees that it
shall not make any change to its election under Treasury
Regulation section 1.1502-20(g) as described in Section 8.7
hereof.
(c) Prior to the Closing, Seller will reverse any
deductions taken pursuant to Section 847 of the Code. Such
reversal shall have no effect on the current or deferred tax
balances on the September Adjusted GAAP Balance Sheet and shall
not result in any Tax expense (state or Federal) for the
Companies and their Subsidiaries for any Post-September 30 Tax
Period or any Post-Closing Tax Period.
(d) Each party agrees that, as between the Seller on
the one hand and the Buyer on the other hand, the other is to
have no liability for any Tax or reduction of Tax Benefits
resulting from any action referred to in Sections 8.3(a), (b)
and (c), and each party shall indemnify and hold harmless
(hereafter, the "Tax Indemnified Party") the other party and its
Affiliates (hereafter, the "Tax Indemni-
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fied Party") against any such Tax or reduction in Tax Benefits.
Each Tax Indemnified Party shall give prompt notice to the Tax
Indemnifying Party of the assertion of any claim, or the
commencement of any action or proceeding, in respect of which
indemnity may be sought under this Section 8.3(d). Failure to
give the Tax Indemnifying Party such notice shall not relieve
such party of its indemnification obligation pursuant to
Sections 8.3(a), (b) and (c) unless and to the extent that the
Tax Indemnifying Party and its Affiliates are materially
prejudiced as a result thereof. The Tax Indemnifying Party
shall be entitled to participate in, and to the extent the
matter reasonably can be handled separately from other items not
within the scope of this Agreement, shall be entitled to control
the defense of any such claim, action or proceeding at its own
expense and neither party shall settle any such claim, action or
proceeding without the other party's prior written consent,
which shall not be unreasonably withheld.
(e) Buyer shall promptly pay or cause to be paid to
Seller all refunds of Taxes (including any interest thereon)
received by Buyer or any of its Affiliates which are
attributable to Taxes paid by or on behalf of Seller, the
Companies or any of their Subsidiaries with respect to any Pre-
September 30 Tax Period to the extent that such refund and any
interest thereon were not reflected on the September Adjusted
GAAP Balance Sheet.
(f) Seller shall promptly pay or cause to be paid to
Buyer all refunds of Taxes (including any interest thereon)
received by any member of the Seller Group which are
attributable to Taxes paid by or on behalf of the Companies or
any of their Subsidiaries to the extent that such refund and any
interest thereon were reflected on the September Adjusted GAAP
Balance Sheet.
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(g) All transfer, documentary, sales, use, stamp,
registration and other such Taxes incurred in connection with
this Agreement other than Taxes incurred in connection with the
Transition Agreements (including, without limitation, any New
York State real property transfer and transfer gains Taxes, New
York City real property transfer Tax and any similar Taxes
imposed in other states or subdivisions) (collectively,
"Conveyance Taxes") shall be paid by Seller. Seller will, at
its own expense, file all necessary Returns with respect to all
such Conveyance Taxes, and, to the extent required by applicable
law, Buyer will, and will cause its Affiliates to, join in the
execution of any such Returns. Buyer shall, within ten days of
a written request therefor (including a statement calculating in
reasonable detail Buyer's payment obligation pursuant to this
Section 8.3(g)), reimburse Seller for 50% of all such Conveyance
Taxes and Seller's out-of-pocket expenses incurred in connection
with the filing of such Returns.
(h) Buyer and Seller shall jointly determine the
provision for discounted P&C losses of the Companies and their
Subsidiaries under Sections 832(b)(5) and 846 of the Code for
the taxable period ending on the Closing Date. If the parties
are unable to agree on the provision for discounted P&C losses,
such dispute shall be resolved by independent accountants or an
actuarial consultant acceptable to both parties whose fees and
expenses shall be borne equally by Buyer and Seller.
8.4 Termination of Existing Tax Sharing Agreements.
______________________________________________
On the date hereof or as soon as practicable thereafter, the Tax
Sharing Agreement between the Companies and their Subsidiaries
and any member of the Seller Group shall be terminated as of
September 30, 1995. After such date, neither the Companies and
their
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Subsidiaries, Seller nor any of its Affiliates shall have any
further rights or liabilities thereunder. This Agreement shall
be the sole Tax sharing agreement relating to the Companies and
their Subsidiaries for all Tax periods ending on or prior to the
Closing Date.
8.5 Return Filings and Payment of Tax. (a) Seller
_________________________________
shall prepare and file or cause the relevant Company or
Subsidiary to prepare and file on a timely basis and consistent
with past practices all Returns with respect to the Companies
and their Subsidiaries for (i) all Pre-September 30 Tax Periods
(excluding calendar year 1995), (ii) calendar year 1995 and
(iii) all Post-September 30 Tax Periods (excluding calendar year
1995 and any Straddle Period).
(b) Buyer shall prepare or cause to be prepared and
file or cause to be filed on a timely basis all other Returns
with respect to the Companies and their Subsidiaries. Buyer
shall pay or cause to be paid to the appropriate Taxing
Authority the Taxes shown to be due on all Returns required to
be filed by it pursuant to this Section 8.5(b).
(c) In connection with Returns described in
subsection (i) of Section 8.5(a), (x) Seller shall pay or cause
the relevant Company or Subsidiary to pay, to the extent such
Tax liability is reflected as a current liability on the
September Adjusted GAAP Balance Sheet (as adjusted for any
payments made by the Companies and their Subsidiaries with
respect to such Returns after September 30, 1995 and prior to
the payment date in question), the appropriate Taxing Authority
the amount of Taxes shown to be due on such Returns, and (y) to
the extent the amount, if any, reflected as a current liability
on the September Adjusted GAAP Balance Sheet with respect
thereto exceeds the actual amount of such liability, the
Companies and their
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Subsidiaries shall pay such excess to Seller simultaneously with
the payment of Taxes to such Taxing Authority.
(d) In connection with Returns for calendar year
1995, (x) with respect to the Pre-September 30 Tax Period of
such year, Seller shall pay to the relevant Taxing Authority or
Seller (or, if such payment is due after the Closing Date,
Buyer) shall cause the relevant Company or Subsidiary to pay, to
the extent such Tax liability is reflected as a current
liability on the September Adjusted GAAP Balance Sheet (as
adjusted for any payments made by the Companies and their
Subsidiaries with respect to such Returns after September 30,
1995 and prior to the payment date in question), Seller or the
appropriate Taxing Authority such Company's or Subsidiary's
Attributable Amount (as defined in Section 8.5(i)) with respect
to such Returns, (y) with respect to the Post-September 30 Tax
Period of such year, Seller (or, if such payment is due after
the Closing Date, Buyer) shall cause the relevant Company or
Subsidiary to pay Seller or the appropriate Taxing Authority
such Company's or Subsidiary's Attributable Amount with respect
to such Returns, and (z) to the extent the amount reflected as a
current liability on the September Adjusted GAAP Balance Sheet
with respect to the Pre-September 30 Tax Period of such year
exceeds the Attributable Amount with respect to such period,
Seller or Buyer, as the case may be, shall cause the Companies
and their Subsidiaries to pay such excess to Seller
simultaneously with the payment of Taxes to such Taxing
Authority. For purposes of this subsection (d), any payments
required to be made by the Companies and their Subsidiaries
shall be made one business day prior to the due date of the
relevant Return (giving effect to any applicable extensions
thereto).
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(e) In connection with Returns described in
subsection (iii) of Section 8.5(a), Seller (or, if the payment
with respect to such Return is due after the Closing Date,
Buyer) shall cause the relevant Company or Subsidiary to pay
Seller or the appropriate Taxing Authority such Company's or
Subsidiary's Attributable Amount with respect to such Returns
one business day prior to the due date for such Return (giving
effect to any applicable extensions thereto).
(f) With respect to any Straddle Period, Seller or
Buyer, as the case may be, shall cause the Companies and their
Subsidiaries to pay, when due, Seller or the appropriate Taxing
Authority the Attributable Amount, if any, with respect thereto.
(g) Seller shall (i) provide Buyer with a copy of
the income and franchise Tax Returns described in Section 8.5(a)
hereof which have not been filed as of the date hereof at least
fifteen days prior to filing such Returns, and (ii) make
available for Buyer's review the premium Tax Returns described
in Section 8.5(a) hereof which have not been filed as of the
date hereof as soon as reasonably practicable, but in no event
more than 60 days after filing such Returns, in both cases,
accompanied by a statement calculating in reasonable detail the
Attributable Amount, if any, pursuant to Sections 8.5(c), (d),
(e) and (f). To the extent that the total amount of Tax
payments made by the Companies and their Subsidiaries with
respect to such Returns pursuant to Sections 8.5(c), (d), (e)
and (f) (other than payments made by the Companies and their
Subsidiaries pursuant to Section 8.5(c)(y) or Section 8.5(d)(z))
exceeds the aggregate amount of the liability shown on such
statements or, in the case of Section 8.5(c) and the Pre-
September 30 Tax Period of calendar year 1995, if less, the
amount reflected on the September Adjusted GAAP
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Balance Sheet, Seller shall pay the Companies and their
Subsidiaries within 30 days the amount of such excess.
(h) If Buyer disputes a liability of the Companies
and their Subsidiaries as determined by Seller under Section
8.5(g), Buyer may, within 30 days after delivery of the
statement referred to in Section 8.5(g), deliver a notice to
Seller disagreeing with such calculation and setting forth
Buyer's calculation of such amount. Any notice of disagreement
shall specify those items and amounts as to which Buyer
disagrees, and, solely for purposes of this Section 8.5, Buyer
shall be deemed to have agreed with all other items and amounts
contained in the statement not the subject of such disagreement,
except for such items and amounts which may be affected by any
disputed items and amounts. If a notice of disagreement shall
be delivered pursuant to this Section 8.5(h), Seller and Buyer
shall, during the 30 days following such delivery, use their
best efforts to reach agreement on the disputed items or
amounts. If the parties are unable to agree on the allocation
of Tax payments between Seller, on the one hand, and the
Companies and their Subsidiaries, on the other hand, under
Sections 8.5(c), (d), (e) and (f) during such period, such
dispute shall be resolved by the Independent Accountants whose
fees and expenses shall be borne by the Companies and their
Subsidiaries unless the resolution of such dispute as determined
by such accountants results in an adjustment that reduces the
obligation of the Companies and their Subsidiaries with respect
to the disputed item or amount by more than 10% of such amount
as determined by Seller pursuant to Section 8.5(g), in which
case Seller shall bear the cost of such fees and expenses, and
the party owing Taxes shall pay to the other party the amount
determined by such accountants within three business days of
such determination.
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(i) For purposes of this Article 8, the Taxes
attributable to the Companies and their Subsidiaries (the
"Attributable Amount") shall be (i) with respect to each Federal
Tax and Combined State Tax Return prepared pursuant to Section
8.5(a), an amount equal to the Tax liability that the Companies
and their Subsidiaries would pay on their taxable income if they
were not filing combined, consolidated or unitary returns with
any other member of the Seller Group (excluding the Companies
and their Subsidiaries), and (ii) for each Separate State Tax
Return, the Tax liability of the Company and its Subsidiaries.
For purposes of this Section 8.5(i), the Attributable Amount for
the Pre-September 30 Tax Period and the Post-September 30 Tax
Period of calendar year 1995 shall be allocated on an "interim
closing of the books method" as of 11:59 p.m. on September 30
and the Closing Date, respectively; provided, however, that
________ _______
exemptions, allowances, deductions or other Taxes determined on
a basis other than income, premium or sales that are calculated
on an annual basis and annual property taxes shall be prorated
by allocating the amount of such exemptions, allowances or
deductions in the case of calendar year 1995, to Seller, by
multiplying such amount by 273/365; provided, further, that the
________ _______
same amount of taxable income or loss of the Companies and their
Subsidiaries for the Pre-September 30 Tax Period of calendar
year 1995 used for determining the value of the NOLs reflected
on the September Adjusted GAAP Balance Sheet shall be assumed to
be the actual taxable income or loss of the Companies and their
Subsidiaries for such period; provided, further, that for
________ _______
purposes of determining the taxable income or loss of the
Companies and their Subsidiaries for any Post-September 30 Tax
Period, the September 30 NOLs shall be assumed to be the actual
NOLs as of September 30, 1995.
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(j) For purposes of Section 8.5 and Section 8.8, the
reserves accrued on the September Adjusted GAAP Balance Sheet
with respect to any guaranty fund assessment, second injury fund
assessment, special insurance assessment or similar assessment
or tax shall be deemed to be the legal liability of the
Companies and their Subsidiaries on September 30, 1995. No
payments under Section 8.5 shall be made between Buyer or the
Companies and their Subsidiaries and Seller with respect to any
guaranty fund assessment, second injury fund assessment, special
insurance assessment or similar assessment or tax.
8.6 Cooperation on Tax Matters. (a) Buyer shall, and
__________________________
shall cause its Affiliates, the Companies and the Subsidiaries
to, and Seller shall, and shall cause the members of the Seller
Group to, provide any requesting party with such reasonable
assistance (including the execution and delivery of such powers
of attorney as are reasonably necessary to carry out the intent
of this section) and information (including access to books and
records) as may reasonably be requested by such party in
connection with (i) the preparation of any Return, (ii) the
conduct of any proceeding relating to liability for or refunds
or adjustments with respect to Taxes, and (iii) any other matter
that is a subject of this Article 8. Such cooperation and
assistance shall be provided to the requesting party promptly
upon its request.
(b) Buyer and its Affiliates, on the one hand, and
Seller and the Seller Group, on the other hand, shall retain or
cause to be retained all Returns, schedules, workpapers, and all
material records or other documents relating thereto, until the
expiration of the statute of limitations (including any waivers
or extensions thereof) of the taxable years to which such
Returns and other documents relate. Prior to transferring,
discarding or destroying any material records or documents
relating
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to any Pre-September 30 Tax Period or Post-September 30 Tax
Period, Buyer and its Affiliates, on the one hand, and Seller
and the Seller Group, on the other, shall provide the other
party with reasonable notice and, if such party so requests, the
opportunity to take possession of such records and documents
solely at its cost and expense. Furthermore, each party agrees
to abide by or cause the abidance with all record retention
agreements entered into with any Taxing Authority to the extent
that compliance therewith was possible as of September 30, 1995.
Seller and its Affiliates shall not without the prior written
consent of Buyer enter into or modify any record retention
agreement with any Taxing Authority which relates to the
Companies or any of their Subsidiaries. In order to keep all
parties informed as to the expiration of the statute of
limitations for any period, at least thirty days prior to the
end of each calendar year, each Party (the "Notifying Party")
shall provide the other (the "Notified Party") with a schedule
setting forth in reasonable detail which Pre-September 30 Tax
Periods or Post-September 30 Tax Periods remain open with
respect to the assessment of income taxes of the Companies and
their Subsidiaries as of the date of such notice and a good
faith estimate of when such Tax periods are expected to be
closed by the expiration of the applicable statutory period of
limitations or otherwise. To the extent that the Notified Party
does not receive the notice described in the preceding sentence
with respect to any Pre-September 30 Tax Period or Post-
September 30 Tax Period of the Companies or any of its
Subsidiaries, such Notified Party shall retain such books and
records relating to such Pre-September 30 Tax Periods and Post-
September 30 Tax Periods until the expiration of the applicable
statutory period of limitations (without giving effect to any
extensions or waivers) and, subject to any record retention
agreements with any Taxing Authority then in force, shall
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notify the Notifying Party by registered mail and facsimile of
its intention to destroy or dispose of such books and records
(the "Disposal Notice"). To the extent that the Notified Party
does not receive a response from the Notifying Party within
thirty days of sending the Disposal Notice that the applicable
statutory period of limitations for the years in question remain
open or that the Notifying Party intends to take possession of
such books and records within sixty days of receipt of such
Disposal Notice at its sole cost and expense, the Notified Party
shall be entitled to destroy or dispose of any such books and
records after the expiration of such statutory period of
limitations (without giving effect to any extensions or
waivers).
(c) Seller shall furnish to Buyer, simultaneously
with the delivery of the September Adjusted GAAP Balance Sheet
pursuant to Section 2.3(a), a schedule of the deferred and
current Tax assets (including any NOLs) and deferred and current
Tax liabilities of the Companies and their Subsidiaries to the
extent such items are reflected on the September Adjusted GAAP
Balance Sheet. Such schedule shall include a listing of
temporary differences (including NOLs), the amount of deferred
tax assets (including NOLs) or deferred tax liabilities
associated with each temporary difference and the estimated
reversal period (by amount and year) of each temporary
difference. The schedule shall also include a detail of current
tax assets and liabilities by type of tax (premium, property,
state income, etc.).
8.7 Tax Benefits. (a) Seller shall elect to
____________
reattribute to itself, in accordance with Treasury regulation
1.1502-20(g), an amount of NOLs equal to the September 30 NOLs
(v) reduced by (i) the portion of such NOLs for which the Seller
has made payment pursuant to Section 8.7(j) hereof, and (ii) the
portion of such NOLs used by the Companies and their
Subsidiaries to reduce their taxable income
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for a Post-September 30 Tax Period and (w) increased by the
amount, if any, of NOLs attributable to Post-September 30
Special Items, as described in the last sentence of Section
8.7(e) hereof. Seller shall also reattribute any remaining
amount of NOLs, based on the 1996 Seller Group consolidated
Federal Tax Return, not otherwise fairly attributable to NOLs
described in Section 8.7(k)(ii). For purposes of this Section
8.7(a), "taxable income" of the Companies and their Subsidiaries
shall be determined without regard to (x) the September 30 NOLs,
(y) the Post-September 30 Special Items (as defined in Section
8.7(e) hereof) and (z) any additions to reserves claimed with
respect to the Post-September 30 Tax Period which satisfy the
requirement for reserves relating to a Permitted Capital
Contribution, calculated as if such entities were not filing a
consolidated return with any other member of the Seller Group.
At least five days prior to the Closing Date, Seller shall
provide Buyer with a schedule setting forth Seller's good faith
estimate of the amount of NOLs which will not be reattributed to
Seller and the years in which such NOLs expire.
(b) On or prior to the date on which Seller files
its consolidated Federal Tax Return for the Tax period which
includes the Closing Date, Seller shall provide Buyer with a
schedule of the actual NOLs that were reattributed to Seller on
such Return pursuant to Treasury regulation section 1.1502-20(g)
(the "Reattributed NOLs"). Buyer agrees to cause each of the
Companies and their Subsidiaries with respect to which NOLs are
reattributed under this Section 8.7 to execute such statements
or other documents as may be required to comply with the
provisions of the Code and the regulations.
(c) If there is a Final Determination that (i)
reduces the amount of the Reattributed NOLs or (ii) relates to a
Return for, or with respect to, a Pre-September
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30 Tax Period of any member of the Seller Group which, in either
case, entitles (x) the Companies or any of their Subsidiaries to
claim Tax Benefits in their Post-September 30 Tax Period Returns
solely as a result of such Final Determination or (y) Buyer and
its Affiliates to claim Tax Benefits in their Post-Closing Tax
Period Returns solely as a result of such Final Determination,
to the extent permitted by law, the relevant party shall claim
such Tax Benefits in its earliest available Post-September 30
Tax Period Returns or Post-Closing Tax Period Returns, as the
case may be. With respect to each such Post-September 30 Tax
Period or Post-Closing Tax Period in which a Federal Tax Savings
(as defined below) is realized, the relevant party shall pay to
Seller the Federal Tax Savings within 90 days of filing the
applicable Federal Tax Return for such period. The Federal Tax
Savings for the Post-September 30 Tax Period or the Post-Closing
Tax Period in question shall be an amount equal to the excess,
if any, of (i) the amount of Federal Taxes which would have been
payable by the Companies and their Subsidiaries or Buyer and its
Affiliates, as the case may be, for such Tax period had such Tax
Benefit not been claimed in their Federal Tax Return for such
period over (ii) the amount of Federal Taxes actually payable by
the Companies and their Subsidiaries or Buyer and its
Affiliates, as the case may be, with respect to such period.
If, subsequent to the payment to Seller of any such amount,
there shall be a reduction in the amount of the Federal Tax
Savings as a result of the utilization by Buyer, the Companies
or any of their Subsidiaries or Affiliates of any other Tax
Benefits that arise in a Post-September 30 Tax Period or Post-
Closing Tax Period, Seller shall repay to Buyer, within 90 days
of such event (an "Event"), any amount which would not have been
payable to Seller pursuant to this Section 8.7(c) had the
Federal Tax Savings originally been determined in light
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of the Event. The principles of the foregoing provisions shall
continue to apply with respect to any utilization of a Federal
Tax Savings subsequent to an Event, as well as to any Event
subsequent thereto.
(d) If there is a Final Determination that relates
to a Return for, or with respect to, a Pre-September 30 Tax
Period of any member of the Seller Group which results in an
increase in the liability for Federal Taxes of (x) the Companies
or any of their Subsidiaries for any Post-September 30 Tax
Period solely as a result of such Final Determination or (y)
Buyer and its Affiliates for any Post-Closing Tax Period solely
as a result of such Final Determination, Seller shall pay the
relevant party the Federal Tax Detriment (as defined below)
within 90 days of such party's filing of the applicable Federal
Tax Return for the Post-September 30 Tax Period or Post-Closing
Tax Period in which such party incurs the Federal Tax Detriment.
The Federal Tax Detriment for the Post-September 30 Tax Period
or the Post-Closing Tax Period in question shall be the excess,
if any, of (i) the aggregate amount of Federal Taxes payable by
the Companies and their Subsidiaries or Buyer and its
Affiliates, as the case may be, with respect to such period
after giving effect to any adjustments required to be reported
on their Federal Tax Return for such period by reason of such
Final Determination over (ii) the aggregate amount of Federal
Taxes that would have been payable by the Companies and their
Subsidiaries or Buyer and its Affiliates, as the case may be,
for such period had such adjustments not been reported in their
Federal Tax Return for such period. If the Companies or any of
their Subsidiaries or Buyer and its Affiliates realize any
reduction in a Federal Tax Detriment for which they have
received a payment pursuant to this subsection (d), other than
by reason of an Event, Buyer shall pay Seller the amount of any
such reduction. The principles
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of this Section 8.7(d) shall continue to apply upon the
recurrence of a Federal Tax Detriment subject to reversal
pursuant to the preceding sentence, as well as any subsequent
reduction of such reversal.
(e) To the extent that the Companies and their
Subsidiaries realize a Federal Tax Savings on their Federal Tax
Returns for a Post-September 30 Tax Period as a result of the
use in any such Return of any Tax Benefit attributable to (i)
deductions arising in respect of Transferred Employee stock
options which are exercised for Seller common stock after
September 30, 1995 and on or prior to the Closing Date, (ii)
alternative minimum tax credits available by reason of
alternative minimum tax paid by the Seller Group, and (iii)
other deductions relating to Benefit Arrangements, the costs of
which are borne by the Seller Group (excluding the Companies and
their Subsidiaries) (hereafter (i), (ii) and (iii) are referred
to as "Post-September 30 Special Items"), Seller or Buyer, as
the case may be, shall cause the Companies and their
Subsidiaries to pay Seller the amount of such Federal Tax
Savings within 90 days of filing the applicable Federal Tax
Return for the Post-September 30 Tax Period in which the
relevant party realizes such Federal Tax Savings; provided,
________
however, that such Federal Tax Savings shall be payable to
_______
Seller only to the extent that the value of any such Post-
September 30 Special Item is not reflected on the September
Adjusted GAAP Balance Sheet; provided, further, that the amount
________ _______
of Federal Tax Savings to be paid to Seller shall be reduced by
any costs or expenses (including Taxes) incurred by the
Companies and their Subsidiaries solely as a result of claiming
the Tax Benefits relating to such Post-September 30 Special
Items. If, subsequent to the payment to Seller of such Federal
Tax Savings, there shall be a reduction in the amount of such
Federal Tax Savings as a result of the
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utilization by the Companies and their Subsidiaries of any other
Tax Benefits that arise in (i) a Post-September 30 Tax Period or
(ii) a Post-Closing Tax Period due to a Final Determination,
Seller shall repay to the Companies and their Subsidiaries
within 90 days of such Event, any amount which would not have
been payable to Seller pursuant to this Section 8.7(e) had such
Federal Tax Savings originally been determined in light of the
Event. The principles of the last sentence of Section 8.7(c)
hereof shall apply here mutatis mutandis. Solely for purposes
_______ ________
of determining whether the Companies and their Subsidiaries
realize such Federal Tax Savings, the taxable income of the
Companies and their Subsidiaries for such Post-September 30 Tax
Period (determined in accordance with the principles of Section
8.5(i) and without regard to any Post-September 30 Special Item)
and then the taxable income of the members of the Seller Group
(excluding the Companies and their Subsidiaries) shall be offset
by the NOLs and any Tax Benefit attributable to a Post-September
30 Special Item in the following order; first, by the September
30 NOLs; second, by any NOLs generated by the Companies and
their Subsidiaries in any Post-September 30 Tax Period; and
third, by any Tax Benefit relating to a Post-September 30
Special Item. To the extent that a Post-September 30 Special
Item generates a Tax Benefit that is not utilized by the
Companies and their Subsidiaries in a Post-September 30 Tax
Period, such amount will be included in the amount of NOLs to be
reattributed to Seller as described in Section 8.7(a) hereof.
(f)(A) To the extent that Buyer and its Affiliates
realize a Federal Tax Savings on their Federal Tax Returns for a
Post-Closing Tax Period, as a result of the use in any such
Return of any Tax Benefit attributable to (i) deductions arising
in respect of Transferred Employee stock options which are
exercised for
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Seller common stock after the Closing Date, (ii) alternative
minimum tax credits available by reason of alternative minimum
tax paid by the Seller Group, and (iii) other deductions
relating to retiree life and health and the 1996 payout on the
Aetna employee incentive program, subject to the receipt of a
private letter ruling from the Internal Revenue Service which
concludes that such deductions are allowable to the Companies
and their Subsidiaries without any inclusion in the income of
Buyer or any of its Affiliates in a Post-Closing Tax Period
((hereafter (i), (ii) and (iii) are referred to as "Post-Closing
Special Items," and together with the Post-September 30 Special
Items, the "Special Items"), Buyer shall pay Seller such Federal
Tax Savings within 90 days of filing the applicable Federal Tax
Return for the Post-Closing Tax Period in which Buyer and its
Affiliates realize such Federal Tax Savings; provided, however,
________ _______
that such Federal Tax Savings shall be payable to Seller only to
the extent that the value of such Post-Closing Special Item is
not reflected on the September Adjusted GAAP Balance Sheet;
provided, further, that the amount of Federal Tax Savings to be
________ _______
paid to Seller shall be reduced by any costs or expenses
(including Taxes) incurred by Buyer and its Affiliates solely as
a result of claiming the Tax Benefits relating to the Post-
Closing Special Items which resulted in the Federal Tax Savings.
If, subsequent to the payment to Seller of such Federal Tax
Savings, there shall be a reduction in the amount of such
Federal Tax Savings as a result of the utilization by Buyer and
its Affiliates of any other Tax Benefits that arise in a Post-
Closing Tax Period, Seller shall repay to Buyer within 90 days
of such Event, any amount which would not have been payable to
Seller pursuant to this Section 8.7(f) had such Federal Tax
Savings originally been determined in light of the Event. The
principles of the foregoing
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provisions shall continue to apply with respect to any
utilization of a Federal Tax Savings subsequent to an Event, as
well as to any Event subsequent thereto.
(B) If the private letter ruling described in
Section 8.7(f)(A)(iii) above is not obtained, Buyer and its
Affiliates may, in their sole discretion, claim the deductions
referred to in such subsection (iii). In any case, if Buyer and
its Affiliates claim such deductions, such deductions shall be
treated as if they were Post-Closing Special Items for purposes
of Sections 8.7(f)(A), (g), (h) and (i).
(g) To the extent that, with respect to a Post-
Closing Tax Period, Buyer and its Affiliates, incur a Special
Item Federal Tax Detriment (as defined below) as a result of any
adjustment (including, but not limited to, any adjustment
resulting from an audit by any Taxing Authority, filing an
amended Return or the use by the Companies or their Subsidiaries
or Buyer and its Affiliates of a carryforward or carryback) to
the taxable income of the relevant party in any Post-Closing Tax
Period Return caused by the use of any Tax Benefit attributable
to a Special Item, Seller shall pay the relevant party, and
indemnify the relevant party against, the Special Item Federal
Tax Detriment within 15 days of the incurrence of such
detriment. The Special Item Federal Tax Detriment for the Post-
Closing Tax Period in question shall be the excess, if any, of
(i) the aggregate amount of Federal Taxes payable by the
Companies and their Subsidiaries or Buyer and its Affiliates, as
the case may be, with respect to such period after giving effect
to any adjustments required to be made by reason of claiming
such Tax Benefit over (ii) the aggregate amount of Federal Taxes
that would have been payable by the Companies and their
Subsidiaries or Buyer and its Affiliates, as the case may be,
for such period had such adjustments not been made.
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(h) With respect to subsections (e), (f) and (g) of
this Section 8.7, (i) any conflicts arising between such
subsections and any other provision of this Article 8 shall be
resolved by applying first the provisions of subsections (e),
(f) and (g) of Section 8.7 and then, to the extent such other
provision is not in conflict, such other provision of this
Article 8, and (ii) in determining whether a Tax Benefit
relating to a Special Item is utilized by the Companies and
their Subsidiaries or Buyer and its Affiliates, as the case may
be, (including, but not limited to, as a result of any audit by
any Taxing Authority, filing an amended Return or as a result of
the use by the Companies and their Subsidiaries or Buyer and its
Affiliates, as the case may be, of any carryforward or
carryback), any Tax Benefit relating to a Special Item shall be
presumed to be used by the Companies and their Subsidiaries or
Buyer and its Affiliates, as the case may be, only after all
other available Tax Benefits have been utilized by the Companies
and their Subsidiaries or Buyer and its Affiliates, as the case
may be, to reduce their taxable income.
(i) To the extent permitted by law, as determined by
Buyer in good faith, Buyer agrees to claim or cause the
Companies or their Subsidiaries to claim in a proper and timely
fashion in the earliest Post-Closing Tax Period all or any Tax
Benefits attributable to the Special Items. Buyer shall
promptly notify Seller of any proposed disallowance of any such
Tax Benefit and shall give Seller such information with respect
thereto as Seller may reasonably request. Seller may, at its
own expense, assist Buyer in the defense of any Tax Claim with
respect to any Tax Benefit described in Sections 8.7(e) and (f);
provided, however, that such assistance shall be limited solely
________ _______
to communications with Buyer and its Affiliates. Neither
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Buyer nor any of its Affiliates shall settle, compromise or
otherwise dispose of any such Tax Claim without providing prior
written notice to Seller.
(j) Notwithstanding anything contained in this
Agreement, to the extent that any NOLs or other Tax Benefits
that are reflected on the September Adjusted GAAP Balance Sheet
or were generated by the Companies and the Subsidiaries in any
Post-September 30 Tax Period (determined without regard to the
Post-September 30 Special Items) are absorbed or otherwise
utilized by the Seller Group (other than the Companies and their
Subsidiaries) to offset its taxable income in any Tax period
ending on or prior to December 31 of the calendar year that
includes the Closing Date, Seller shall pay to the party or
parties which generated such NOLs or Tax Benefits, within 15
days of the end of the quarter in which such reduction or
elimination occurred, an amount equal to 35% of such NOLs or Tax
Benefits (other than credits) or the amount of any such credit,
as the case may be.
(k) Notwithstanding anything in this Section 8.7 to
the contrary, it is the intent of the parties that the Buyer
receive a value relating to the NOLs equal to the amount of the
NOL deferred tax asset (i) stated on the September Adjusted GAAP
Balance Sheet, and (ii) generated by the Companies and their
Subsidiaries in any Post-September 30 Tax Period (including the
portion of calendar year 1995 beginning after September 30) or
Post-Closing Tax Period, in each case computed pursuant to the
principles established in Section 8.5(i) and excluding any
Special Items. The parties agree to take all actions necessary
(including, without limitation, adjusting the amount of NOLs to
be reattributed pursuant to Section 8.7(a) hereof and/or
intercompany settlements) in order to ensure that Buyer and its
Affiliates
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receive only the value (but no less than such value)
attributable to the NOLs which it is entitled pursuant to the
preceding sentence.
8.8 Indemnification by Seller. (a) Seller hereby
_________________________
indemnifies Buyer and its Affiliates against and agrees to hold
them harmless from any (i) Tax of the Companies and their
Subsidiaries for any Pre-September 30 Tax Period, (ii) liability
of the Companies and their Subsidiaries for any Tax of the
Seller Group under Treasury regulation section 1.1502-6 or any
similar provision of state or local law as a result of the
Companies or any of their Subsidiaries being a member of the
Seller Group, (iii) penalties, interest or other costs and
expenses with respect to Taxes for a Post-September 30 Tax
Period attributable to the failure of any member of the Seller
Group to prepare or timely file any Returns or pay any Taxes
shown to be due on such Returns of the Companies and their
Subsidiaries in a manner consistent with past practice, and (iv)
liabilities, costs, expenses (including, without limitation,
reasonable expenses of investigation and reasonable attorneys'
fees and expenses), arising out of or incident to the
imposition, assessment or assertion of any Tax (including those
incurred in the contest in good faith in appropriate proceedings
relating to the imposition, assessment or assertion of any Tax)
described in clause (i) through (iv) of this paragraph (the sum
of (i) through (iv) being referred to as a "Buyer Loss");
provided, however, that Seller shall not indemnify Buyer and its
________ _______
Affiliates for (i) any Taxes that are measured on a
retrospective base (e.g., superfund taxes) that includes any
Pre-September 30 Tax Period and that are imposed with respect to
any Post-September 30 Tax Period (including, without limitation,
only that portion of calendar year 1995 beginning after
September 30) or Post-Closing Tax Period of the Companies and
their Subsidiaries by reason of any change in law
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enacted after September 30, 1995, (ii) any Taxes reflected on
the September Adjusted GAAP Balance Sheet, (iii) any Loss
attributable to or resulting from any action described in
Section 8.3(a) hereof, or (iv) any guaranty fund assessment,
second injury fund assessment, special insurance assessment or
similar assessment or tax that was not actually assessed on or
prior to September 30, 1995 or for which there is not a
specified legal liability in existence on September 30, 1995
("Excluded Taxes"); provided, further, that such Excluded Taxes
________ _______
shall not include assessments made on or prior to September 30,
1995 (including any correction in the amount of any assessments
made after such date to take account of a computational error,
such as using the wrong base or wrong rate or a mathematical
error, in light of the facts and law at the time such
computation was made) or assessments for which there is a legal
liability in existence on such date; provided, further, that
________ _______
Seller shall have no obligation to make any payment to Buyer
pursuant to this Section 8.8 until the amount of all claims
arising pursuant hereto in the aggregate which are treated as
adjustments to the Purchase Price (minus the actual reduction in
the liability for Taxes of Buyer and its Affiliates as a result
of realizing any Tax Benefit attributable thereto) exceeds the
cushion for Taxes, if any, with respect to the Companies and
their Subsidiaries reflected on the September Adjusted GAAP
Balance Sheet (the "Cushion"), as adjusted for any payments made
by Buyer or the Companies and any of their Subsidiaries to
Seller pursuant to subsection (z) of Section 8.5(d) or otherwise
pursuant to this Article 8 after September 30, 1995 and prior to
Buyer's request for payment pursuant to this Section 8.8(a). On
or prior to the date hereof, Seller shall provide Buyer with a
schedule setting forth a good faith estimate of the Cushion,
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which shall be adjusted (and promptly provided to Buyer) to
reflect assets and liabilities on the September Adjusted GAAP
Balance Sheet.
(b) Any payment required of Seller pursuant to
Section 8.8(a) shall be made not later than 30 days after
receipt by Seller of written notice from Buyer stating that a
Buyer Loss has been paid by Buyer or any of its Affiliates and
the amount thereof and of the indemnity payment requested.
Failure to give Seller such written notice shall not relieve
Seller of its indemnification obligation pursuant to Section
8.8(a) unless and to the extent that Seller is materially
prejudiced as a result thereof.
(c) Each party shall notify the other, within ten
days of receipt thereof, of any claim for Taxes made in writing
to such party or its Affiliates by a Taxing Authority (a "Tax
Claim") which, if successful, could affect the other party's
liability for Taxes. Seller may discharge, at any time, its
indemnification obligation under this Section 8.8 by paying to
Buyer the amount of the applicable Buyer Loss, calculated on the
date of such payment; provided, however, that if the amount of
________ _______
such Buyer Loss, at the time of a Final Determination with
respect thereto, exceeds the amount paid by Seller to Buyer
pursuant to the preceding clause, Seller shall pay such excess
to Buyer within ten days of such Final Determination. Seller
may, at its own expense, participate in and, upon notice to
Buyer, assume the defense of any Tax Claim for which Seller has
agreed to indemnify Buyer pursuant to Section 8.8(a). If Seller
assumes such defense, Buyer shall have the right (but not the
duty) to participate in the defense thereof and to employ
counsel, at its own expense, separate from the counsel employed
by Seller; provided, however, that to the extent such action
________ _______
reasonably could be expected adversely to affect any Tax
liability of Buyer and
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its Affiliates for any Post-September 30 Tax Period or Post-
Closing Tax Period Seller shall not settle, compromise, or
otherwise dispose of any such Tax Claim without Buyer's prior
written consent, which shall not be unreasonably withheld.
Buyer shall indemnify Seller from and against any (i) increase
in the amount of Buyer Loss and (ii) increase in the liability
for Taxes of the Seller Group incurred by reason of Buyer
unreasonably withholding its consent to the matters described in
this Section 8.8(c).
(d) Seller shall not be liable under Section 8.8(a)
for (i) any Tax the payment of which by Buyer was made without
Seller's prior written consent, which shall not be unreasonably
withheld, or (ii) any settlements relating to a Tax of the
Companies or any of their Subsidiaries for a Pre-September 30
Tax Period effected without the consent of Seller, which shall
not be unreasonably withheld, or resulting from any Tax Claim in
which Seller was not permitted an opportunity to participate,
but only to the extent (in the case of both clause (i) and (ii)
herein) that Buyer's failure to obtain Seller's consent or
provide Seller with such an opportunity to participate
materially prejudiced Seller. Seller shall indemnify Buyer from
and against any Buyer Loss incurred by Buyer or any of its
Affiliates by reason of Seller unreasonably withholding its
consent to the matters described in clause (i) or (ii) of this
Section 8.8(d).
8.9 Indemnification by Buyer. (a) After the Closing
________________________
Date, Buyer shall indemnify the Seller Group against and agrees
to hold it harmless from any (i) Tax of the Companies and their
Subsidiaries for any Post-September 30 Tax Period, (ii) any Tax
with respect to a Return described in Section 8.5(b) and (iii)
liabilities, costs, expenses (including, without limitation,
reasonable expenses of investigation and reasonable attorneys'
fees and expenses), arising out of or incident to the
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imposition, assessment or assertion of any Tax (including those
incurred in the contest in good faith in appropriate proceedings
relating to the imposition, assessment or assertion of any Tax)
described in clause (i) of this paragraph (the sum of (i), (ii)
and (iii) being referred to as a "Seller Loss"); provided,
________
however, that Buyer shall not indemnify the Seller Group against
_______
any (x) liability described in subsections (ii) or (iii) of
Section 8.8(a), and (y) liability for Taxes and other costs and
expenses attributable to claiming the Post-September 30 Special
Items described in Section 8.7(e).
(b) Any payment required of Buyer pursuant to
Section 8.9(a) shall be made not later than 30 days after
receipt by Buyer of written notice from Seller stating that a
Seller Loss has been paid by any member of the Seller Group and
the amount thereof and of the indemnity payment requested.
Failure to give Buyer such written notice shall not relieve
Buyer of its indemnification obligation pursuant to Section
8.9(a) unless and to the extent that Buyer is materially
prejudiced as a result thereof.
(c) Each party shall notify the other, within ten
days of receipt thereof, of any Tax Claim which, if successful,
could affect the other party's liability for Taxes. Buyer may
discharge, at any time, its indemnification obligation under
this Section 8.9 by paying to Seller the amount of the
applicable Seller Loss, calculated on the date of such payment;
provided, however, that if the amount of such Seller Loss, at
________ _______
the time of a Final Determination with respect thereto, exceeds
the amount paid by Buyer to Seller pursuant to the preceding
clause, Buyer shall pay such excess to Seller with interest
within ten days of such Final Determination. Buyer may, at its
own expense, participate in and, upon notice to Seller, assume
the
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defense (other than with respect to the Seller Group
consolidated Federal Tax Returns or Combined State Tax Returns)
of any Tax Claim for which Buyer has agreed to indemnify Seller
pursuant to this Section 8.9. If Buyer assumes such defense
(including, for this purpose, as provided in the penultimate
sentence of this Section 8.9(c)), Seller shall have the right
(but not the duty) to participate in the defense thereof and to
employ counsel, at its own expense, separate from the counsel
employed by Buyer; provided, however, that to the extent such
________ _______
action reasonably could be expected to adversely affect any Tax
liability of the Seller Group for any Post-September 30 Tax
Period or any Post-Closing Tax Period Buyer shall not settle,
compromise, or otherwise dispose of any such Tax Claim without
Seller's prior written consent, which shall not be unreasonably
withheld. With respect to a Tax Claim relating to a Seller
Group consolidated Federal Tax Return or a Combined State Tax
Return, (i) to the extent possible, Buyer shall have the right
to litigate (at its own expense) such Tax Claim upon resolution
of the Tax audit with the Taxing Authority for which such Tax
Claim relates in a court determined by Seller, and (ii) Seller
shall use good faith in defending and maintaining Buyer's
position with respect to such Tax Claim and shall not
discriminate against such claim due to its indemnified nature.
Seller shall indemnify Buyer from and against any (i) increase
in the amount of Seller Loss and (ii) increase in the liability
for Taxes of Buyer and its Affiliates incurred by reason of
Seller unreasonably withholding its consent to the matters
described in this Section 8.9(c).
(d) Buyer shall not be liable under Section 8.9(a)
for (i) any Tax the payment of which by Seller was made without
Buyer's prior written consent, which shall not be unreasonably
withheld, or (ii) any settlements relating to a Tax of the
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Companies or any of their Subsidiaries for a Post-September 30
Tax Period or Post-Closing Tax Period effected without the
consent of Buyer, which shall not be unreasonably withheld, or
resulting from any Tax Claim in which Buyer was not permitted an
opportunity to participate, but only to the extent (in the case
of both clause (i) and (ii) herein) that Seller's failure to
obtain Buyer's consent or provide Buyer with such an opportunity
to participate caused Buyer to incur a loss. Buyer shall
indemnify Seller from and against any Seller Loss incurred by
any member of the Seller Group by reason of Buyer unreasonably
withholding its consent to the matters described in clause (i)
or (ii) of this Section 8.9(d).
8.10 Survival; Exclusivity. Notwithstanding anything
_____________________
in this Agreement to the contrary, (i) this Article 8 shall
govern the procedure for all indemnification claims relating to
Taxes and (ii) the provisions of this Article 8 shall survive
for the full period of all statutes of limitations (giving
effect to any waiver, mitigation or extension thereof) for the
assessment of Taxes for the Tax period in question, and any
claim to be brought under this Article 8 must be brought prior
to the expiration of such period.
8.11 Purchase Price Adjustment. Any amount paid to or
_________________________
by Seller under this Article 8 will be treated as an adjustment
to the Purchase Price unless a Final Determination causes any
such amount to not constitute an adjustment to the Purchase
Price for Federal Tax purposes.
8.12 Late Payments. Any payment required to be made
_____________
by Buyer or Seller pursuant to this Article 8 that is not made
when due shall bear interest from and including the due date of
payment to but excluding the date of payment at a rate
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per annum equal to the three-month London Interbank Offered Rate
(as published in the Wall Street Journal on such due date) plus
40 basis points.
8.13 No Duplicative Payments; Offsets. The provisions
________________________________
of this Article 8 shall be interpreted in a manner such that no
payment shall be made by any party with respect to the same item
more than once. To the extent that any item causes parties to
make reciprocal payments in any Tax period, such parties shall
be entitled to offset such payments and the party which is
obligated to make the greater payment shall pay only the
difference between the amount of its original obligation and the
amount it would have received had the reciprocal payments been
made.
8.14 Rule of Construction. For purposes of this
____________________
Article 8, the term "Buyer and its Affiliates" shall include the
Companies and their Subsidiaries for all Post-Closing Tax
Periods.
8.15 Notices. All notices required to be provided to
_______
any party under this Article 8 shall be sent by both registered
mail and facsimile to, in the case of Buyer, the Vice-President
of Taxes (with a copy to Chief Counsel) or, in the case of
Seller, the Corporate Controller at the addresses provided in
Section 13.1 hereof.
8.16 Allocation of Purchase Price. Prior to the
____________________________
Closing Date, Buyer and Seller shall negotiate in good faith to
agree on an allocation of the Purchase Price to the Shares of
the Companies.
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ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
9.1 Employees. Effective December 31, 1995, Seller
_________
shall cause all employees of Seller or any of its Subsidiaries
who perform substantially all of their services in Seller's
property and casualty business units ("P&C Employees") to become
employees of one of the Companies or one of their Subsidiaries
(as directed by Buyer). Schedule 9.1 sets forth the complete
description of the P&C Employees and the employers of such P&C
Employees as of the date hereof. With respect to each P&C
Employee who, as of the Closing Date, is employed by any Company
or any Subsidiary of any Company (including any P&C Employee
absent as of such date from active service for any reason,
including but not limited to disability or leave of absence but
excluding any terminated P&C Employees receiving severance)
("Transferred Employees"), Buyer shall cause each Transferred
Employee's employer to continue to employ such Transferred
Employee at the same rate of base salary per annum as is in
effect on the day prior to the Closing Date, provided, however,
________ _______
that nothing herein is intended to, or shall require, such
employer to employ any such employee on a basis other than as an
employee at will; and, provided, further, that the individuals
listed on Schedule 9.6(c)(ii) (Affected Employees) shall not be
Transferred Employees except as provided in Section 9.6(c)(ii).
Seller agrees that, as of the date hereof, employees expected
to become Transferred Employees consist of 11,350 active
employees and 275 employees absent from active service (of whom
250 are on disability and 25 are on a leave of absence).
9.2 Pension Plan. (a) Transferred Employees shall
____________
cease to participate in the Pension Plan as of the Closing Date.
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Effective as of the day immediately prior to the Closing Date,
each Transferred Employee shall be granted service for all
purposes (including benefit accrual) under the Pension Plan for
the period commencing on the Closing Date and ending on December
31, 1997 (the "Advance Accrual Period"). Buyer shall cause the
Companies to reimburse Seller for the grant of service for the
Advance Accrual Period within 30 days following the Closing Date
(but in no event earlier than 15 days after receipt of relevant
information from Seller). Such reimbursement shall be made in
accordance with the formula set forth in Schedule 9.2(a) but in
no event will such amount exceed the after-tax equivalent of the
present value (based upon an 8% discount factor) of $15 million
per year (pre-tax) for two years. Seller shall provide Buyer
with all documentation reasonably requested by Buyer to
substantiate the amount of such charge.
(b) After the Closing Date, Seller and its
Affiliates shall retain all liabilities and obligations in
respect of benefits accrued by Transferred Employees under the
Pension Plan. Accrued benefits of Transferred Employees under
the Pension Plan shall be fully vested as of the Closing Date.
Benefit accruals in respect of Transferred Employees under the
Pension Plan shall cease as of the Closing Date and Transferred
Employees participating therein shall be considered terminated
vested participants in such Pension Plan. No Pension Plan
assets shall be transferred to Buyer or any of its Affiliates or
to the Companies or their Subsidiaries or to any plan of Buyer
or its Affiliates or of the Companies or their Subsidiaries.
(c) Effective as of January 1, 1998, the Transferred
Employees who are then eligible to participate in the Travelers
Group Pension Plan ("Travelers Plan") shall become participants
in the Travelers Plan and in a defined contribution profit
sharing plan to be established by Buyer for the benefit of the
Transferred Employees
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("New Plan"). Under the Travelers Plan, each Transferred
Employee shall be granted credit for service, to the extent
recognized by the Pension Plan, for the purpose of eligibility
and vesting (but not benefit accrual). The New Plan shall be
designed to supplement the benefits under the Travelers Plan.
The amount available to satisfy obligations under the New Plan
shall be initially $4,000,000 per year, reduced each year after
1996 to reflect Transferred Employees who have terminated
employment with the Companies and their Subsidiaries, whether
voluntarily, involuntarily, by retirement or otherwise (such
amount in effect from time to time, the "Maximum Annual
Contribution"). Buyer will in good faith, calculate the Maximum
Annual Contribution for each year. Buyer and Seller shall bear
the Maximum Annual Contribution in the proportions set forth
below to meet the obligations to employees under the New Plan.
In respect of its obligations, at the Closing, Seller shall pay
to Buyer $10,000,000 in cash, which shall be treated as an
adjustment to the Purchase Price ("Initial Contribution"). The
Initial Contribution shall be credited interest at the rate of
6.0% per annum simple interest on the unused balance. From time
to time such amount shall be debited by 32.5%, until such time
as the Initial Contribution (and all interest credited thereto)
is exhausted, of all amounts paid to Transferred Employees under
the New Plan as and when such amounts are paid, up to an
aggregate amount of 32.5%, until such time as the Initial
Contribution (and all interest credited thereto) is exhausted,
of the Maximum Annual Contribution. The remaining obligations
to Transferred Employees, up to 67.5%, until such time as the
Initial Contribution (and all interest credited thereto) is
exhausted, of the Maximum Annual Contribution shall be funded by
Buyer. As promptly as practicable after the close of each year
of the New Plan, Buyer will
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provide Seller an accounting in reasonable detail of the
remaining Initial Contribution and the aggregate interest
credited thereon. As soon as practicable after December 31,
2002, Buyer and Seller will negotiate in good faith to settle
and liquidate Seller's remaining obligations under the New Plan.
If they are unable to agree on such a settlement, Buyer shall
continue to apply any remaining Initial Contribution (and
interest credited thereto) to Seller's obligations as set forth
above. If such funds are exhausted during the term of the New
Plan, Buyer shall so notify Seller, and Seller shall promptly
deposit with Buyer an additional amount (the "Subsequent
Contribution") reasonably estimated to fund any remaining
liabilities of Seller under the New Plan. The Subsequent
Contribution shall be credited with interest and otherwise
treated as the Initial Contribution described above is treated,
except that the Subsequent Contribution shall be debited at the
rate of 50% of amounts contributed in lieu of 32.5%, up to an
amount equal to 50% of the Maximum Annual Contribution, and
Buyer shall fund the remaining obligations to Transferred
Employees up to 50% of the Maximum Annual Contribution. At the
time when no additional obligations are due under the New Plan,
Buyer will repay to Seller an amount equal to any remaining
unused Initial Contribution or Subsequent Contribution and the
amount of interest credited thereon. If at any time the funds
held by Buyer are not sufficient to satisfy Seller's obligations
hereunder, Buyer shall assess Seller for its obligations under
the New Plan, up to an aggregate of 50% of the Maximum Annual
Contribution, and Seller shall promptly pay to Buyer the amount
of each such assessment. As of the Closing, each Transferred
Employee will be assigned points, based upon the participant's
age, length of service and compensation level, by such
reasonable method of allocation as Seller determines and Buyer
shall
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not unreasonably withhold its consent thereto. The number of
points held by each employee shall be fixed until such time as
such employee's employment is terminated for any reason, at
which time they will be forfeited. For each calendar year of
the New Plan, an amount equal to the Maximum Annual Contribution
shall be allocated to Transferred Employees entitled to
participate in the New Plan in accordance with each such
participant's Points.
9.3 Individual Account Plan. (a) Seller shall retain
_______________________
all liabilities and obligations in respect to benefits accrued
by Transferred Employees under the Individual Account Plan. On
the Closing Date, Seller shall take such action as may be
necessary, if any, to permit each Transferred Employee to
exercise such Transferred Employee's rights under the Individual
Account Plan to effect an immediate distribution of such
Transferred Employee's vested account balances under the
Individual Account Plan or to effect a tax-free rollover of the
taxable portion of the account balances into an eligible
retirement plan (within the meaning of Section 401(a)(31) of the
Code, a "Direct Rollover") maintained by Buyer or an Affiliate
of Buyer (the "Buyer Plan") or to an individual retirement
account. Seller and Buyer shall work together in order to
facilitate any such distribution or rollover and to effect a
Direct Rollover for those participants who elect to roll over
their account balances directly into Buyer Plan; provided,
________
however, that nothing contained herein shall obligate Buyer Plan
_______
to accept a Direct Rollover in a form other than cash. No
contributions to the Individual Account Plan in respect of
Transferred Employees shall be made after the Closing Date and
Transferred Employees shall be considered terminated as of the
Closing Date. To the extent reasonably practicable, Seller and
Buyer shall work together to develop a process whereby
Transferred Employees who
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have loans outstanding under the Individual Account Plan will be
permitted to continue to make periodic (at least monthly)
repayments on such loans through a reduction of salary paid by
Buyer (it being understood that such loans are to be retained by
the Individual Account Plan). Except as required by law, no
communication shall be sent to the Transferred Employees
relating to the treatment or status of their loans outstanding
under the Individual Account Plan without the consent of both
Buyer and Seller.
(b) On the Closing Date, or as soon as practicable
thereafter, Buyer shall establish or designate Buyer Plan in
order to accommodate the Direct Rollovers described above and
shall take all action necessary, if any, to qualify Buyer Plan
under the applicable provisions of the Code and shall make any
and all filings and submissions to the appropriate governmental
authorities required to be made by it in connection with any
Direct Rollover. Under Buyer Plan, each Transferred Employee
will be given credit for service, to the extent recognized by
the Individual Account Plan, for the purpose of eligibility and
vesting.
(c) From the Closing Date and until December 31,
1996, under the Buyer Plan and Buyer's supplemental plan, each
Transferred Employee shall be entitled to (i) make salary
deferral contributions (which contributions shall be fully
vested as of the time they are made) and (ii) receive employer
matching contributions (which contributions shall be fully
vested as of the time they are made) in accordance with the
terms of the Individual Account Plan and the Supplemental
Incentive Savings Plan identified on Schedule 9.3(c) (the
"Supplemental Plan") relating to salary deferral and employer
matching contributions.
9.4 Certain Welfare Benefit Plans. As of the Closing
_____________________________
Date, the Transferred Employees shall cease to participate in
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the welfare benefit plans listed in Schedule 9.4(a) ("Prior
Welfare Plans") and shall commence to participate (without any
break in service for purpose of any eligibility, pre-existing
condition, deductible or co-payment provisions) in welfare
benefit plans of Buyer or the Companies ("Replacement Welfare
Plans"), which Replacement Welfare Plans shall provide for
identical benefits at identical cost to the employee and on
substantially identical terms and conditions as those provided
by Prior Welfare Plans immediately prior to the Closing Date.
Such Replacement Welfare Plans may not be amended or terminated,
except as may be required by law or to preserve intended tax
results, before December 31, 1996. Notwithstanding the above,
nothing herein shall prohibit, or be construed to prohibit,
Buyer or the Companies from terminating or amending the
Replacement Welfare Plans at any time after December 31, 1996
("Welfare Transfer Date"). Unless Buyer otherwise elects by no
later than 60 days prior to the Closing Date, from the Closing
Date until the Welfare Transfer Date Seller shall administer the
Replacement Welfare Plans on behalf of Buyer under terms
substantially similar to those applicable to welfare benefit
plans then maintained by Seller; provided, however, that the
________ _______
Companies or Buyer may terminate such administration at any
time. After the Closing Date, Buyer shall be responsible for
any claims by Transferred Employees for medical benefits
relating to claims incurred but not reported prior to the
Closing Date, but only to the extent the liability relating to
any such claim is fully reflected on the September Adjusted GAAP
Balance Sheet.
9.5 Other Employee Benefit Plans and Benefit
_________________________________________
Arrangements.
____________
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(a) Except to the extent otherwise provided in this
Agreement, Seller shall retain all obligations and liabilities
under the Employee Plans and Benefit Arrangements in respect of
any employee or former employee or any independent contractor or
former independent contractor or other participant (in each case
including any beneficiary or dependent thereof) who is not a
Transferred Employee.
(b) Except to the extent otherwise provided in this
Article 9, with respect to Transferred Employees, Seller shall
retain all obligations and liabilities relating to or arising
under the Employee Plans or Benefit Arrangements which (i) are
attributable to service performed, or benefits accrued or
payable, on or prior to the Closing Date or (ii) arise out of
actions, events or omissions that occurred (or, in the case of
omissions, failed to occur) prior to the Closing Date.
(c) As of the Closing Date, Buyer shall cause the
Company to assume all the assets, if any, and liabilities of the
plans listed on Schedule 9.5(c) that are included on the
September Adjusted GAAP Balance Sheet estimated as of the
Closing Date. Each such plan constitutes a plan under Section
401(a)(1) of ERISA.
(d) Unless otherwise notified in writing by Seller on
or prior to the Closing Date, Buyer shall cause the applicable
Company to assume all obligations in respect of any Transferred
Employee for the final performance payment, if any, in
connection with the first cycle of ACE Shares and APEX Unit
Awards described in Schedule 9.5(d); provided that if Buyer or
________
either Company is obligated to make any payments hereunder,
Seller shall promptly pay Buyer for any such payments in excess
of the accrual for such obligation included on the September
Adjusted GAAP Balance Sheet prior to Buyer or a Company making
such payments. To the extent the accrual for such obligation as
of the Closing Date exceeds the aggregate of such payments made
by Buyer and the Companies, Buyer shall promptly reimburse
Seller in the amount of such excess accrual. Communications
with Transferred Employees and any other administrative
activities required to be performed in connection with such
Shares and Awards shall be handled by Seller.
9.6 Plans Following the Closing. (a) With respect to
___________________________
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the Transferred Employees who would have been eligible for
benefits under Seller's Retiree Medical and Life Program
("Retiree Benefit Program") had they remained employed by Seller
or an Affiliate of Seller until December 31, 1997, each such
Transferred Employee shall continue to participate in the
Retiree Benefit Program at the sole cost of Seller or its
Affiliates and shall be credited for service with any Company or
any Subsidiary of any Company on and after the Closing Date
until December 31, 1997 for all purposes thereunder provided
such Transferred Employee is a participant in Seller's
Medical/Dental Plan or Seller's Life Insurance Plan on the day
prior to the Closing Date.
(b) Except to the extent otherwise provided in
Section 9.2, Buyer will cause the Companies to give Transferred
Employees full credit for such Transferred Employees' service
with Seller or any Subsidiary of Seller to the same extent
recognized by Seller for purposes of eligibility, vesting and
benefit accrual under any employee benefit plans or arrangements
maintained by Buyer or any Subsidiary of Buyer in which such
Transferred Employees are entitled to participate.
(c)(i) Buyer shall cause the Companies to pay
severance and other job elimination benefits to the Transferred
Employees (other than those who are parties to the Employment
Agreements and letter
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agreements entered into upon hiring identified on Schedule
9.6(c)(iii) for so long as those Agreements and letter
agreements are in effect and to the extent such Agreements and
letter agreements enhance severance) whose employment is
terminated after the Closing Date and prior to December 31, 1997
to the extent required by Seller's severance plans and programs
identified on Schedule 9.6(c)(i) ("Severance Plans"); provided,
________
however, that, consistent with the interpretation of the
_______
Severance Plans by the plan administrator, no reduction or
change in benefits (excluding reductions in base salary) shall
constitute failure to offer (i) an "equivalent or alternate
position" or (ii) "job with comparable compensation" under the
Severance Plans; and, provided, further, that if any period of
________ _______
severance provided under the Severance Plans constitutes service
for purpose of eligibility, vesting or benefit accrual under any
pension plan, then any such service shall be reduced by any
Advance Accrual Period remaining from the date of termination of
employment. In no case will Buyer or any Company pay severance
under the Severance Plans to any Transferred Employee unless
such Transferred Employee's employment is terminated after the
Closing Date and prior to December 31, 1997. Seller covenants
that in no case will Buyer or any Company pay severance under
the Severance Plans to any Transferred Employee solely by reason
of the consummation of the transactions contemplated by this
Agreement. Severance will be paid to a Transferred Employee who
is a party to an Employment Agreement or letter agreements
identified on Schedule 9.6(c)(iii) to the extent provided in
such employee's Employment Agreement or letter agreements.
(ii) Buyer shall cause one or more of the Companies
and their Subsidiaries to reimburse Seller for 50% of any
severance payments under the Severance Plans made by Seller to
individuals identified on Schedule 9.6(c)(ii) ("Affected
Employees"); provided, however, that if Buyer, any of its
________ _______
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Subsidiaries (including, after the Closing Date, the Companies
and their Subsidiaries) or any of its Affiliates offers to any
of the Affected Employees as of the Closing Date (but prior to
the termination of such Affected Employee's employment by
Seller; provided, however, that prior to the Closing Date no
________ _______
Affected Employee may be terminated by Seller or the Companies
without prior consent of Buyer) continued employment with Buyer,
any of its Subsidiaries (including, after the Closing, the
Companies and their Subsidiaries) or any of its Affiliates with
a base salary substantially equal to the base salary such
Affected Employee received immediately prior to the Closing Date
(such employment, "Continued Employment"), the amount of
reimbursement owed hereunder shall be tax-effected and shall
equal (A) the amount of reimbursement that would have been owed
in absence of such offers of employment, multiplied by (B) one
minus a fraction the numerator of which is the number of
Affected Employees offered Continued Employment and the
denominator of which is one-half of the total number of Affected
Employees; provided, further, that in no case may the amount of
________ _______
reimbursement owed hereunder be less than zero. Any Affected
Employee who accepts Continued Employment shall be treated as a
Transferred Employee for all purposes under this Agreement.
(iii) Buyer shall cause the Employment Agreements
and letter agreements identified on Schedule 9.6(c)(iii) to be
assumed by a Company or a Subsidiary of a Company, which shall
become a successor with respect thereto. Seller shall
indemnify and hold harmless Buyer and its Affiliates (including,
after the Closing, the Companies and their Subsidiaries) with
respect to (i) any liabilities or obligations under the
Employment Agreements to make payments to any Transferred
Employees with respect to any tax liability under Section 4999
of the Code on
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<PAGE> 135
"excess parachute payments" as defined in Section 280G of the
Code and (ii) for any loss of a tax benefit resulting from the
treatment of any payment under the Employment Agreement as an
excess parachute payment.
(iv) Seller shall indemnify and hold harmless Buyer
and its Affiliates (including, after the Closing, the Companies
and their Subsidiaries) with respect to any liabilities or
obligations to make retention bonus payments to the Transferred
Employees listed on Schedule 9.6(c)(iv) except to the extent any
such liabilities relating to retention bonus payments are
reflected on the September Adjusted GAAP Balance Sheet.
(d) To the extent any vacation days earned by any
Transferred Employee during the period from July 1, 1995 through
December 31, 1995 are not projected to be used as of the Closing
Date, Seller will accrue the liability for such vacation days as
of the September Adjusted GAAP Balance Sheet. Buyer shall be
responsible for any vacation days earned after December 31,
1995, which shall be calculated in accordance with Schedule
9.6(d)(i) hereto (less any vacation days taken by such
Transferred Employee in 1996 prior to the Closing Date);
provided, however, that such vacation entitlement shall be
________ _______
calculated on the same calendar year basis as under current
Buyer plan. Vacation days earned during the period commencing
on July 1, 1995 and ending on December 31, 1995 that are used by
the Closing Date shall be credited to Seller's obligation as
accrued on September Adjusted GAAP Balance Sheet. Any vacation
days earned since July 1, 1995 that are used after December 31,
1995 and before the Closing Date will reduce Buyer's obligation
after the Closing Date. Any vacation days or required payments
related thereto earned prior to July 1, 1995 (i) will not affect
Buyer's obligation after the
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Closing Date, (ii) will be used prior to any days earned after
July 1, 1995, and (iii) shall in no event become responsibility
of Buyer. After December 31, 1996 each Transferred Employee
shall be entitled to the number of vacation days calculated in
accordance with Buyer's current plan as modified by Schedule
9.6(d)(ii). Seller covenants that, notwithstanding the above,
no Transferred Employee may take a number of vacation days
during the 1996 calendar year in excess of the number of
vacation days earned by such Transferred Employee during the
1996 calendar year and the July 1 - December 31 period during
1995, all determined as of the Closing Date.
(e) Nothing in this Article 9 shall be construed to
impair in any way the application of Buyer's Arbitration Policy
with respect to Transferred Employees.
(f) Prior to the Closing Date, no communications
shall be made by either party to any Transferred Employee
relating to any of the provisions of this Article 9 without the
approval of the other party, which approval shall not be
unreasonably delayed or withheld. Seller shall provide Buyer
with copies of any other communications directed at Transferred
Employees generally which relate to an employee benefit plan in
which Transferred Employees participate. Buyer and Seller agree
to cooperate in connection with employee benefit plans and
arrangements covering Transferred Employees.
(g) Buyer agrees that it will cooperate fully with
Seller's investigation of, response to, and defense of, any
claims made by Seller's employees or former employees, or their
legal representatives, with respect to employment-related
matters or decisions, including employee benefit plan
determinations, made or alleged to have been made by Seller or
its directors, officers, employees, or agents. Such
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cooperation shall include, but not be limited to, making Buyer's
officers, employees and agents reasonably available (upon
reasonable notice but at no cost (other than reasonable out of
pocket expenses) to Seller) to Seller or Seller's
representatives for interviews and the giving of testimony in
legal proceedings, making available to Seller any documents in
Buyer's care, custody or control which are, or may be, relevant
to such claims, unless prohibited by law and designating an
attorney employed by Buyer to manage the cooperation
contemplated by this paragraph and seek to ensure compliance by
Buyer's employees.
9.7 Indemnification. (a) Seller hereby agrees to
_______________
indemnify Buyer and its Affiliates (including, after the
Closing, the Companies and their Subsidiaries) against and
agrees to hold them harmless from any and all Damages incurred
or suffered as a result of any failure by Seller to satisfy and
discharge its obligations under this Article 9. Buyer hereby
agrees to indemnify Seller and its Affiliates against and agrees
to hold Seller and its Affiliates harmless from any and all
Damages incurred or suffered as a result of any failure by Buyer
to satisfy and discharge its obligations under this Article 9.
(b) Seller hereby agrees to indemnify Buyer and its
Affiliates (including, after the Closing, the Companies and
their Subsidiaries) against, and agrees to hold them harmless
from any and all Damages incurred or suffered as a result of any
claim by any present or former employee of Seller or any of its
Subsidiaries who performed or performs services in Seller's
property and casualty business units, including, without
limitation, the Transferred Employees which arises under
federal, state or local statute (including, without limitation,
Title VII of the Civil Rights Act of 1964, the Civil Rights Act
of 1991, the Age Discrimination in
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Employment Act of 1990, the Equal Pay Act, the Americans with
Disabilities Act of 1990, the Employee Retirement Income
Security Act of 1974 and all other statutes regulating the terms
and conditions of employment), regulation or ordinance, under
the common law or in equity (including any claims for wrongful
discharge or otherwise), or under any policy, agreement,
understanding or promise, written or oral, formal or informal,
between the Company and the Transferred Employee, which arose
out of actions, events or omissions that occurred (or, in the
case of omissions, failed to occur) prior to the Closing Date.
(c) The indemnification provided for in this Section
9.7 shall be subject to the provisions of Section 11.3(a).
ARTICLE 10
CONDITIONS TO CLOSING
10.1 Conditions to Obligations of Buyer and Seller.
_____________________________________________
The obligations of Buyer and Seller to consummate the Closing
are subject to the satisfaction of the following conditions:
(i) Any applicable waiting period under the
HSR Act relating to the transactions contemplated hereby
shall have expired or been terminated.
(ii) All other regulatory consents, approvals
or clearances necessary for the consummation of the
Closing shall have been obtained, and no provision of any
applicable law or regulation shall prohibit the
consummation of the Closing.
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(iii) All material consents, approvals or
waivers of all non-governmental Persons necessary for the
consummation of the Closing shall have been obtained.
(iv) There shall not be in effect any
temporary restraining order, preliminary injunction or
permanent injunction or other order issued by any court of
competent jurisdiction preventing the consummation of the
transactions contemplated hereby; provided that the party
invoking this condition shall have used its reasonable
best efforts to have such order or injunction vacated.
(v) The Ancillary Agreements, other than the
agreement referenced in Section 10.2(ii), shall have been
executed and delivered by the parties thereto.
10.2 Conditions to Obligation of Buyer. The
_________________________________
obligation of Buyer to consummate the Closing is subject to the
satisfaction of the following further conditions:
(i)(A) Seller shall have performed in all
material respects all of its obligations hereunder
required to be performed by it on or prior to the Closing
Date, (B) the representations and warranties of Seller
contained in this Agreement shall be true at and as of the
Closing Date, as if made at and as of such date (without
giving effect to any materiality qualifications or
materiality exceptions contained therein); provided that
this condition (B) shall be deemed satisfied if any
inaccuracies in any such representations and warranties at
and as of the Closing Date (without giving effect to any
materiality qualifications or materiality exceptions
contained therein) would
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not, individually or in the aggregate, have or reasonably be
expected to have a Material Adverse Effect on the Companies, and
(C) Buyer shall have received a certificate signed by the Chief
Financial Officer of Seller to the effect that the foregoing
conditions have been satisfied.
(ii) Seller shall have executed a reinsurance
contract, in form and substance satisfactory to Buyer,
relating to certain matters previously discussed by the
parties.
(iii) Buyer shall have received all documents
it may reasonably request relating to the existence of
Seller, the Companies and their Subsidiaries and the
authority of Seller for this Agreement, all in form and
substance reasonably satisfactory to Buyer.
(iv) Except as disclosed in Schedule 3.9,
since the Balance Sheet Date, there shall not have been
any event, occurrence, development or state of
circumstances or facts which has had or would reasonably
be expected to have a Material Adverse Effect on the
Companies, other than those resulting from changes in
general economic conditions.
(v) No governmental or regulatory authority shall
have commenced any proceeding seeking a temporary restraining
order, preliminary or permanent injunction or other order
preventing the consummation of the transactions contemplated
hereby, other than any such proceeding which, in the reasonable
judgment of Buyer, would not be reasonably likely, assuming such
consummation occurs, to have a material adverse effect on the
Companies and their Subsidiaries, taken as a whole; provided
that Buyer shall
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have used its reasonable best efforts to have such
proceeding dismissed or terminated.
10.3 Conditions to Obligation of Seller. The
__________________________________
obligation of Seller to consummate the Closing is subject
to the satisfaction of the following further conditions:
(i)(A) Buyer shall have performed in all
material respects all of its obligations hereunder
required to be performed by it at or prior to the Closing
Date, (B) the representations and warranties of Buyer
contained in this Agreement shall be true at and as of the
Closing Date, as if made at and
as of such date (without giving effect to any materiality
qualifications or materiality exceptions contained
therein); provided that this condition (B) shall be deemed
satisfied if any inaccuracies in any such representations
and warranties at and as of the Closing Date (without
giving effect to any materiality qualifications or
materiality exceptions contained therein) would not,
individually or in the aggregate, have or reasonably be
expected to have a Material Adverse Effect on Buyer, and
(C) Seller shall have received a certificate signed by the
Chief Financial Officer of Buyer to the effect that the
foregoing conditions have been satisfied.
(ii) Seller shall have received all documents
it may reasonably request relating to the existence of
Buyer and the authority of Buyer for this Agreement, all
in form and substance reasonably satisfactory to Seller.
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ARTICLE 11
SURVIVAL; INDEMNIFICATION
11.1 The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement
shall not survive the Closing; provided that (i) the covenants
________
and agreements which, by their terms, are to have effect or be
performed after the Closing shall survive in accordance with
their terms; (ii) the representations and warranties contained
in Sections 3.2, 3.4(v), 3.5, 3.6, 3.7, 3.10(c), 4.2 and 4.6
shall survive for two years after the Closing, (iii) the
covenants, agreements, representations and warranties contained
in Article 8 shall survive to the extent provided in Article 8
and (iv) the covenants and agreements contained in Article 9
shall survive indefinitely. No covenant, agreement,
representation or warranty contained in this Agreement shall
survive after the time at which it would otherwise terminate
pursuant to the preceding sentence unless notice of the
inaccuracy or breach thereof shall have been given to the party
against whom indemnity for such breach or inaccuracy may be
sought prior to such time, in which case such covenant,
agreement, representation or warranty shall survive until such
claim for indemnity is finally resolved.
11.2 Indemnification. (a) Effective at the Closing,
_______________
Seller hereby indemnifies Buyer and, effective at the Closing,
without duplication, the Companies and their Subsidiaries
against and agrees to hold them harmless from any and all
damage, loss, liability and expense (including, without
limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any action, suit
or proceeding) ("Damages") incurred or suffered by Buyer, any
Company or any Subsidiary of any Company arising out of the
breach of any representation or
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warranty which survives the Closing for such period as provided
in Section 11.1 or the breach of any covenant or agreement made
or to be performed by Seller pursuant to this Agreement which
covenant or agreement survives the Closing for such period as
provided in Section 11.1 (other than pursuant to Articles 8 and
9).
(b) Effective at the Closing, Buyer hereby
indemnifies Seller against and agrees to hold it harmless from
any and all Damages incurred or suffered by Seller arising out
of the breach of any representation or warranty which survives
the Closing for such period as provided in Section 11.1 or the
breach of any covenant or agreement made or to be performed by
Buyer pursuant to this Agreement which covenant or agreement
survives the Closing for such period as provided in Section 11.1
(other than pursuant to Articles 8 and 9).
(c) Any amount of Damages paid by Seller or Buyer
under this Section 11.2 will be treated as an adjustment to the
Purchase Price unless and to the extent that a Final
Determination causes any such amount not to constitute an
adjustment to the Purchase Price for Federal Tax purposes.
11.3 Procedures; Exclusivity. (a) The party seeking
_______________________
indemnification under Section 11.2 (the "Indemnified Party")
agrees to give prompt notice to the party against whom indemnity
is sought (the "Indemnifying Party") of the assertion of any
claim, or the commencement of any suit, action or proceeding in
respect of which indemnity may be sought under such Section,
provided, however, that the failure to give any such notice
________ _______
shall not prejudice the right of such party to receive
indemnification hereunder unless the Indemnifying Party is
actually prejudiced by such failure. The Indemnifying Party may,
and at the request of the Indemnified Party shall, participate
in or control the defense of any such suit, action or
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proceeding at its own expense. If the Indemnifying Party
assumes such defense, the Indemnified Party shall have the right
(but not the duty) to participate in the defense thereof and to
employ counsel, at its own expense, separate from counsel
employed by the Indemnifying Party. Whether or not Indemnifying
Party chooses to defend or prosecute any claim, all of the
parties hereto shall cooperate in the defense or prosecution
thereof. The Indemnifying Party shall not be liable under
Section 11.2 for any settlement effected without its consent of
any claim, litigation or proceeding in respect of which
indemnity may be sought hereunder, which consent shall not be
unreasonably withheld or delayed.
(b) After the Closing, Article 8, and Sections 9.7
and 11.2 will provide the exclusive remedy for any
misrepresentation, breach of warranty, covenant or other
agreement (other than those contained in Sections 2.3, 2.4, 2.5,
5.5, 5.7, 5.8, 5.9(d), 6.2, 6.3, 7.4, 7.5, 7.6, 7.9, 7.12 and
9.6) or other claim arising out of this Agreement or the
transactions contemplated hereby.
ARTICLE 12
TERMINATION
12.1 Grounds for Termination. This Agreement may be
_______________________
terminated at any time prior to the Closing:
(i) by mutual written agreement of Seller and Buyer;
or
(ii) by either Seller or Buyer if the Closing shall
not have been consummated on or before September 30, 1996.
The party desiring to terminate this Agreement shall
give notice of such termination to the other party.
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12.2 Effect of Termination. If this Agreement is
_____________________
terminated as permitted by Section 12.1, termination shall be
without liability of either party (or any stockholder, director,
officer, employee, agent, consultant or representative of such
party) to the other party to this Agreement, except as provided
in Section 13.3 and except that no such termination shall
relieve Buyer of its obligations under Section 6.1; and provided
________
that if such termination shall result from the willful failure
of either party to fulfill a condition to the performance of the
obligations of the other party or to perform a covenant of this
Agreement or from a willful breach by either party to this
Agreement, such party shall be fully liable for any and all
Damages incurred or suffered by the other party as a result of
such failure or breach. The provisions of Section 7.6, this
Section 12.2, Section 13.3 and Section 13.5 shall survive any
termination hereof pursuant to Section 12.1.
ARTICLE 13
MISCELLANEOUS
13.1 Notices. All notices, requests and other
_______
communications to any party hereunder shall be in writing
(including facsimile transmission) and shall be given:
if to Buyer, to:
The Travelers Insurance Group Inc.
One Tower Square
Hartford, Connecticut 06183
Attention: Chief Financial Officer
Fax: (203) 954-1161
139
<PAGE> 146
with copies to:
Travelers Group Inc.
388 Greenwich Street
New York, NY 10013
Attention: General Counsel
Fax: (212) 816-8969
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attention: Kenneth J. Bialkin, Esq.
Fax: (212) 735-2000
if to Seller, to:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Chief Financial Officer
Fax: (203) 273-2428
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Richard J. Sandler, Esq.
Fax: (212) 450-4800
or at such other address to the attention of such other person
as Buyer or Seller may designate by written notice to the other
party hereto. All such notices, requests and other
communications shall be deemed received on the date of receipt
by the recipient thereof if received prior to 5 p.m. in the
place of receipt and such day is a business day in the place of
receipt. Otherwise, any such notice, request or communication
shall be deemed not to have been received until the next
succeeding business day in the place of receipt.
13.2 Amendments and Waivers. (a) Any provision of
______________________
this Agreement may be amended or waived if, but only if, such
amendment or waiver is in writing
140
<PAGE> 147
and is signed, in the case of an amendment, by each party to
this Agreement, or in the case of a waiver, by the party against
whom the waiver is to be effective.
(b) No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. Other than as provided
herein, the rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided
by law.
13.3 Expenses. Except as otherwise expressly provided
________
herein, all costs and expenses incurred in connection with this
Agreement, including all brokers', finders', investment advisory
or similar fees, shall be paid by the party incurring or
responsible for incurring such cost or expense.
13.4 Successors and Assigns. The provisions of this
______________________
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns;
provided that no party may assign, delegate or otherwise
________
transfer any of its rights or obligations under this Agreement
without the consent of each other party hereto. Notwithstanding
the foregoing, Buyer may assign any of its rights and
obligations under this Agreement to a wholly owned Subsidiary
without Seller's consent; provided that no such assignment shall
relieve Buyer of any of its obligations under this Agreement.
13.5 Governing Law. This Agreement shall be governed
_____________
by and construed in accordance with the law of the State of New
York, without regard to the conflict of laws rules of such
state.
141
<PAGE> 148
13.6 Jurisdiction. Except as otherwise expressly
____________
provided in this Agreement, any suit, action or proceeding
seeking to enforce any provision of, or based on any matter
arising out of or in connection with, this Agreement or the
transactions contemplated hereby shall be brought only in the
United States District Court for the Southern District of New
York or any New York State court sitting in New York City, and
each of the parties hereby consents to the jurisdiction of such
courts (and of the appropriate appellate courts therefrom) in
any such suit, action or proceeding and irrevocably waives, to
the fullest extent permitted by law, any objection which it may
now or hereafter have to the laying of the venue of any such
suit, action or proceeding in any such court or that any such
suit, action or proceeding which is brought in any such court
has been brought in an inconvenient forum. Process in any such
suit, action or proceeding may be served on any party anywhere
in the world, whether within or without the jurisdiction of any
such court. Without limiting the foregoing, each party agrees
that service of process on such party as provided in this
Section 13.6 shall be deemed effective service of process on
such party.
13.7 Counterparts; No Third Party Beneficiaries. This
__________________________________________
Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. No
provision of this Agreement is intended to confer upon any
Person other than the parties hereto any rights or remedies
hereunder.
13.8 Entire Agreement. Except for the
________________
Confidentiality Agreement and the Ancillary Agreements, this
Agreement constitutes the entire agreement between the parties
with respect to the subject matter of this Agreement and
supersedes all
142
<PAGE> 149
prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter of this
Agreement. No representation, inducement, promise,
understanding, condition or warranty not set forth herein has
been made or relied upon by either party hereto.
13.9 Construction. This Agreement is the result of
____________
arms-length negotiations between the parties hereto and has been
prepared jointly by the parties. In applying and interpreting
the provisions of this Agreement, there shall be no presumption
that the Agreement was prepared by any one party or that the
Agreement shall be construed in favor of or against any one
party.
143
<PAGE> 150
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
THE TRAVELERS INSURANCE GROUP INC.
By: /s/ Jay S. Fishman
_______________________________
Name: Jay S. Fishman
Title: Vice Chairman and Chief
Financial Officer
AETNA LIFE AND CASUALTY COMPANY
By: /s/ Ronald E. Compton
________________________
Name: Ronald E. Compton
Title: Chairman and President
144
PAGE 1
AEtna Ronald E. Compton
Chairman
(203) 273-3087
January 19, 1995
Richard L. Huber
143 East 78th Street
Garden Apartment
New York, NY 10024
Dear Dick:
On behalf of Aetna, I am pleased to offer you the position of
Vice Chairman for Strategy and Finance. As we discussed, this
offer is subject to the approval of Aetna's Board of Directors.
The specifics of the offer are as follows:
1. Starting Date:
2. Base Salary: Your base salary will be $500,000 per annum
payable biweekly. This will be reviewed on the basis of
your performance during our annual salary review process in
1996 and each year thereafter as long as you are
employed by Aetna. The Company may also, from time to
time, review and adjust salaries to reflect appropriate
compensation for each position.
3. Annual Incentive Program: You will also be eligible for
consideration for an award under the Company's annual
incentive program beginning with the 1995 performance year
(payable in 1996) as long as the plan is in effect.
Payable in 1996 for the 1995 performance year, you will
receive a minimum award of $300,000 gross. Each year
thereafter, while you are employed at Aetna, you will be
eligible for consideration for additional awards under the
annual incentive program while the plan remains in effect.
As discussed during our interviews, the target bonus level
for your position is currently 60% of your base salary.
Awards are subject to both your performance and that of
Aetna.
4. Long-Term Incentive Program: You will be eligible for
consideration of an award under the Company's long-term
incentive program for the cycle running from 1995 through
1998. This award will vest, if at all, only upon
attainment of performance objectives determined by the
Company's Board Committee on Compensation and Organization.
5. Stock Options: We will recommend to the Aetna Board
Committee on Compensation and Organization that you be
granted an option to purchase 17,500 shares of Aetna's
common stock. The option will be based on the price of a
share on the date on which approval is secured from the
Committee. These options are not exercisable for the first
year after the date of grant and will vest in installments
thereafter. Thereafter while employed by Aetna, you will
be eligible for consideration for grants under the Stock
Incentive Plan while the plan remains in effect. In
addition, we will recommend a sign-on grant of 50,000 stock
options and 75,000 "premium" options (exercise price at 10%
above market at time of grant) based on the share price on
the effective date of the grant which will be the same as
the date you begin employment. These options are not
PAGE 2
exercisable for the first year after the date of grant and
will vest in installments thereafter. You will also
receive a sign-on grant of 28,000 ACEShares subject to
Committee approval for the performance cycle 1993 to 1996,
provided that any interim award will not vest until the end
of the performance period. Details of the Company's Long-
Term Incentive Program exercise, ownership and vesting
provisions are included with this offer letter.
6. Pension: Your participation in the pension plan will
automatically begin after you have completed one year of
service with Aetna. Under the terms of the plan currently
in effect, you will receive credit for years of service
from your date of employment, accumulating one year for
each year you remain in the employ of the Company
thereafter (but no more than 35 years, the maximum under
the plan) as long as the plan remains in effect. Under the
plan, your benefit vests after five years of credited
service.
7. Incentive Savings Plan: You will be eligible to participate
in the Aetna Incentive Savings Plan after you complete one
year of service. However, during your first year of
service, you will be eligible to defer up to six percent of
your base salary under a non-qualified supplemental plan.
Under the supplemental plan now in effect, the Company will
match 100% of the first 5% of base salary you defer.
8. Medical, Dental and Life Insurance: You will be eligible
to participate in our contributory flexible benefit plan.
9. Sick Pay: The Company will provide you with full pay for a
maximum of 26 weeks as soon as you begin work regardless of
the number of years of credited service.
10. Severance Pay: If your employment is involuntarily
terminated under circumstances that would call for
severance pay benefits, you will receive payment for not
less than 52 weeks of severance pay including amounts
payable under the Severance Pay Plan then in effect in
consideration for a customary release.
11. Vacation: In 1995, you will receive 20 days of accrued
vacation for our use as soon as you join the Company.
Thereafter, for the purpose of vacation day accrual only,
you will be treated like a 10-year employee. This means
you will accrue two days per month to a maximum of 20 days
per year. You will also have three discretionary days in
1995 and three per year thereafter.
12. Sign-On Bonus: A one-time payment of $200,000 gross will
be made as soon as possible after you begin work at Aetna
in recognition of your career move.
13. Relocation: The Company will assist you with relocation
expenses associated with your move to Connecticut including
Aetna's third-party home purchase program, movement of
household goods and temporary living expenses as covered in
the Standard New Hire transfer program. Contact Rachel
Frenette at 203-273-3570 for more information about this
program.
PAGE 3
14. Contingencies: This offer is dependent upon: (1)
successful completion of a drug test prior to the scheduled
_____
start date of your new job; and (2) receipt of documents
which show that you are legally entitled to work in the United
States.
Please read the enclosed Benefits Handbook carefully in order
to fully understand the terms and conditions of the plans
mentioned above.
We are delighted to extend this offer to you and look forward
to your acceptance. We hope this employment relationship will
be mutually enjoyable and lasting. Of course, you may
terminate your employment at any time, as may Aetna.
Please acknowledge your acceptance of this offer by initialing
the enclosing copy of this letter, completing the enclosed
employment application and returning both to me. I would
greatly appreciate your response within seven (7) days after
receipt of this letter. If you have any questions or would
like to discuss the terms of our offer, please do not hesitate
to call me.
Sincerely,
/s/ Ronald E. Compton
_______________________
Ronald E. Compton
/s/ Richard L. Huber
_______________________
Accepted
Richard L. Huber
Enclosures:
PAGE 1
EMPLOYMENT AGREEMENT
____________________
EMPLOYMENT AGREEMENT, dated as of October 27, 1995, by
and between Aetna Life and Casualty Company, a Connecticut
corporation (the "Company"), and Gary G. Benanav ("Executive").
W I T N E S S E T H:
_ _ _ _ _ _ _ _ _ _
WHEREAS, the Company is considering certain restructuring
alternatives that could result in significant changes in the
structure of its business, including, without limitation, dividing
the business of the Company into two or more separate publicly
traded companies or otherwise transferring a portion of the
business to a third party;
WHEREAS, the Company believes that Executive is a key
employee and that it is in the Company's best interests to retain
the services of Executive for the period during which such
restructuring alternatives are considered and, to the extent
applicable, implemented;
WHEREAS, the Company therefore desires to retain the
services of Executive and to enter into an agreement embodying the
terms of such employment (the "Agreement"); and
WHEREAS, Executive desires to accept such employment and
enter into such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as
follows:
1. Employment. Except as provided in Paragraph 6(a),
__________
the Company shall continue to employ Executive and Executive
agrees to remain employed by the Company under the terms of this
Agreement for the period commencing on the date first written
above (the "Commencement Date") and ending April 28, 1998. The
period during which Executive is employed pursuant to this
Agreement shall be referred to as the "Contract Employment
Period". Upon the expiration of the Contract Employment Period,
Executive's employment with the Company shall continue on an at-
will basis.
2. Position and Duties. During the Contract
___________________
Employment Period, Executive shall serve as Executive Vice
President, Property/Casualty of the Company and in such other
comparable or better position or positions with the Company and
its subsidiaries as the Chief Executive Officer or the Board of
Directors of the Company (the "Board") shall specify from time to
time. During the Contract Employment Period, Executive shall have
the duties, responsibilities and obligations customarily assigned
to individuals serving in the position or positions in which
Executive serves hereunder and such other duties, responsibilities
and obligations as the Chief Executive Officer or the Board shall
from time to time specify. Executive shall devote his full
business time to the services required of him hereunder, except
for vacation time and reasonable periods of absence due to
sickness, personal injury or other disability, and shall use his
best efforts, judgment, skill and energy to perform such services
in a manner consistent with the duties of his position and to
improve and advance the business and interests of the Company and
its subsidiaries. Nothing contained herein shall preclude
PAGE 2
Executive from (i) serving on the board of directors of any
_
business corporation on which he currently serves or, if the Board
consents to such service, on any other board of directors, (ii)
__
serving on the board of, or working for, any charitable or
community organization or (iii) pursuing his personal, financial
___
and legal affairs, so long as such activities, individually or
collectively, do not interfere with the performance of Executive's
duties hereunder.
3. Cash Compensation.
_________________
a. Base Salary. During the Contract Employment
___________
Period, the Company shall pay Executive a base salary at the
annual rate of $500,000. The Board shall periodically review
Executive's base salary and the Company may, in its discretion,
increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any
other obligation of the Company hereunder. Executive's annual
base salary payable hereunder, as it may be increased from time to
time and without reduction for any amounts deferred as described
above, is referred to herein as "Base Salary". Executive's Base
Salary, as in effect from time to time, may not be reduced by the
Company without Executive's consent, provided that the Base Salary
________ ____
payable under this paragraph shall be reduced to the extent
Executive elects to defer or reduce such salary under the terms of
any deferred compensation or savings plan or other employee
benefit arrangement maintained or established by the Company. The
Company shall pay Executive the portion of his Base Salary not
deferred in accordance with its customary payroll practices.
b. Incentive Compensation. During the term of the
______________________
Contract Employment Period, Executive shall remain eligible for
participation in the Company's existing and future annual and long
term incentive compensation programs at a level consistent with
his position at the Company and the Company's then current
policies and practices; provided that following any assignment of
________ ____
this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph
7(e)), the calculation of the amount payable as annual incentive
compensation and the conditions upon which such bonus shall be
payable shall be no less favorable to the Executive (taking into
account reasonable changes in the Company's goals and objectives)
than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such
assignment or Change in Control. Without limiting the generality
of the foregoing, for each calendar year ending during the term
hereof, Executive shall receive the opportunity to receive an
annual bonus of at least 60% of his Base Salary (the "Minimum
Bonus Percentage"), subject to satisfaction of such performance
criteria as shall be established with respect to such year.
c. Retention Bonus Payment. Unless Executive receives
_______________________
the alternative bonus described in Paragraph 3(d), the Company
shall pay Executive a bonus (the "Retention Bonus"), in addition
to Executive's base salary and the incentive compensation
opportunities set forth above, in an aggregate amount equal to
$1,000,000 or, if applicable, the amount determined after the
reduction, if any, specified by the Board in the manner set forth
below (the "Aggregate Amount"). Notwithstanding the preceding
sentence, unless the Option described in Paragraph 4 is canceled
PAGE 3
due to Executive's failure to agree to become employed by the New
Entity (as defined in Paragraph 6(a)) or a subsidiary thereof, the
Aggregate Amount shall be reduced, at the time and in the manner
set forth below, by an amount (the "Adjustment Amount") equal to
the lesser of (i) $500,000 or (ii) one-half of the product of
_ __
(A) the excess, if any, of
(1) the Option Share Value (as defined below)
over
(2) $57.00 times
(B) 45,000.
Unless Executive elects to defer the payment of all or a
portion of such Retention Bonus on such terms and conditions as
the Company shall permit, the amount, if any, payable to Executive
under this Paragraph 3(c) shall be paid to Executive in two
installments, as hereinafter set forth. Subject in each case to
Executive being continuously and comparably employed by the
Company through the date such installment would otherwise have
been paid,
(i) the first installment (the "First Installment")
shall be equal to the remainder of
(A) 75% of the Aggregate Amount minus
(B) the Adjustment Amount,
and will be payable as of the second anniversary
of the Commencement Date;
(ii) the second installment (the "Second Installment") shall
be equal to 25% of such Aggregate Amount and will be payable at
the end of the Contract Employment Period.
Notwithstanding anything in this Paragraph 3(c) to the
contrary, the Board may, by resolution and notice thereof to
Executive, reduce the amount to be paid to Executive as a
retention bonus under this Paragraph 3(c) by up to 100% if, prior
to December 31, 1995, the Board (i) affirmatively elects to
_
abandon the restructuring options being considered for the Company
without effecting any such option and (ii) elects to reduce any
__
similar payment to be made under any and all employment agreements
entered into by the Company in connection with the consideration
of the restructuring options by the same percentage.
For purposes of this Paragraph 3(c), the following terms have
the following meanings:
"Fair Market Value" means the closing price of the Company's
Common Stock as reported on the New York Stock Exchange
Consolidated Tape (or, if the Common Stock is not traded on the
New York Stock Exchange, the closing price on whichever exchange
on which the Common Stock is principally traded at such time or
the average of the closing bid and asked prices reported on the
national system of price quotations or which the Common Stock is
then quoted).
PAGE 4
"Option Share Value" means (i) except as provided in subclause
_
(ii) below, if Executive's employment does not terminate prior to
__
April 28, 1997, the average of the Fair Market Values for a period
of five consecutive trading days ending on April 28, 1997; (ii) if
__
there is a Change in Control (as defined in Paragraph 7(e)) prior
to April 27, 1997, the aggregate value of any cash and any
property received by the stockholders of the Company for a share
of Common Stock in the transaction giving rise to such Change in
Control (or if no such value is readily determinable, the Fair
Market Value on the last business day immediately preceding the
Change in Control on which shares of Common Stock are traded on an
established securities market); or (iii) solely for purposes of
___
determining the amount, if any, payable under Paragraph 6 in
respect of the Retention Bonus or a Pro Rata Retention Bonus, if
Executive's employment terminates prior to April 28, 1997 by
reason of a Termination due to death, a Termination due to
Disability, a Termination Without Cause or a Termination for Good
Reason (as each such term is defined in Paragraph 6 hereof), the
average of the Fair Market Values for a period of five consecutive
trading days ending on the date of such termination (or, if such
date is not a trading day, on the next following trading date).
The Option Share Value determined in accordance with the preceding
sentence shall apply for purposes of this Paragraph 3(c)
regardless of whether (x) Executive exercises the Option on or
_
before the relevant date, (y) such Option lapses on or before the
_
relevant date, or (z) continues in effect following the relevant
_
date or is replaced by an Alternative Option (as described in
Paragraph 7(b)) that continues in effect following the relevant
date.
d. Alternative Bonus. If the Company shall complete the sale
_________________
of its property casualty business (the "Property Casualty Sale")
to a strategic purchaser (that is, a purchaser which is already in
the property casualty business and is not primarily a financial
purchaser) prior to the second anniversary of the Commencement
Date, and Executive has not voluntarily terminated his employment
with the Company other than pursuant to a Termination for Good
Reason (as defined in Paragraph 6(d) below) or had his employment
terminated by the Company pursuant to a Termination for Cause (as
defined in Paragraph 6(d) below), the Company shall pay Executive
an additional bonus (the "Alternative Bonus") as soon as
practicable following the closing of the Property Casualty Sale in
an amount at least equal to $1,040,000, plus a share of the
aggregate Alternative Bonus pool for eligible property-casualty
employees, to the extent such pool exceeds the minimum pool size.
4. Stock Option Grants. Contingent upon the execution of
___________________
this Agreement by the Executive, the Company has granted Executive
an option, having a ten year term, to purchase 45,000 shares of
the Company's Common Stock at an exercise price per share equal to
$57 a share (the "Option"). Except to the extent specified below,
the terms of the Option shall be determined in accordance with the
terms of the 1994 Stock Incentive Plan (the "1994 Plan") and shall
be set forth in the separate agreement embodying the grant of such
Option (the "Option Agreement"), the form of which is attached
hereto as Exhibit A.
5. Benefits, Perquisites and Expenses.
__________________________________
PAGE 5
a. Benefits. During the Contract Employment Period,
________
Executive shall be eligible to participate in (i) each welfare
_
benefit plan sponsored or maintained by the Company, including,
without limitation, each group life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan
or program of the Company, and (ii) each pension, profit sharing,
__
retirement, deferred compensation or savings plan sponsored or
maintained by the Company, in each case, whether now existing or
established hereafter, to the extent that Executive is eligible to
participate in any such plan under the generally applicable
provisions thereof. Nothing in this Paragraph 5(a) shall be
construed to limit the ability of the Company to amend or
terminate any particular plan, program or arrangement, provided
_________
that, following the occurrence of a Change in Control (as defined
____
in Paragraph 7(e)) or the assignment of this Agreement to a New
Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b),
the benefits made available to the Executive thereafter shall be
at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such
Change in Control or assignment. Without limiting the generality
of the foregoing, Executive understands and acknowledges that the
amounts payable under Paragraph 3(c) or (d) shall not be taken
into account for purposes of determining any benefits provided to
Executive based, in whole or in part, on compensation.
With respect to the pension or retirement benefits payable to
Executive, Executive's service credited for purposes of
determining Executive's benefits and vesting shall be determined
in accordance with the terms of the applicable plan or program or,
if applicable, pursuant to any written agreement between Executive
and the Company (whether now existing or hereafter adopted) that
provides Executive a more favorable method of crediting service
for any purpose thereunder.
b. Perquisites. During the Contract Employment Period,
___________
Executive shall be entitled to receive such perquisites as are
generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the
Company.
c. Business Expenses. During the Contract Employment
_________________
Period, the Company shall pay or reimburse Executive for all
reasonable expenses incurred or paid by Executive in the
performance of Executive's duties hereunder, upon presentation of
expense statements or vouchers and such other information as the
Company may require and in accordance with the generally
applicable policies and procedures of the Company.
6. Termination of Employment.
_________________________
a. Early Termination of the Contract Employment Period.
___________________________________________________
Notwithstanding Paragraph 1, the Contract Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's
_
employment on account of Executive's death, (ii) a Termination due
__
to Disability, (iii) a Termination for Cause, (iv) a Termination
___ __
Without Cause, (v) a Termination for Good Reason or (vi) a
_ __
termination of Executive's employment by Executive other than a
Termination for Good Reason. For purposes of this Agreement, a
transfer of Executive's employment (i) to any other entity
_
PAGE 6
controlled by or under common control with the Company shall not
be treated as a termination unless and until such entity ceases to
be controlled by or under common control with the Company or (ii)
__
as a result of the implementation of any restructuring of the
Company (whether occurring by spin-off or otherwise) shall not be
treated as a termination of employment, provided that, in either
________ ____
case, the successor employer (the "New Entity") expressly assumes
and agrees to perform all of the Company's obligations under this
Agreement.
b. Benefits Payable Upon Termination. Following the end of the
_________________________________
Contract Employment Period pursuant to Paragraph 6(a), Executive
(or, in the event of his death, his surviving spouse, if any, or
his estate) shall be paid the type or types of compensation
determined to be payable in accordance with the following table at
the times established pursuant to Paragraph 6(c):
<TABLE>
<CAPTION>
Earned Vested Accrued Severance Additional
Salary Benefits Bonus Benefit Benefits
______ ________ _______ _________
Payable
_______
<C> <S> <S> <S> <S> <S>
Termination due Not Additional
to death Payable Payable Payable Payable Bonus
Termination due Not Additional
to Disability Payable Payable Payable Payable Bonus
Termination for Not Not None
Cause Payable Payable Payable Payable Payable
Termination Additional
Without Cause Payable Payable Payable Payable Bonus
Termination for Additional
Good Reason Payable Payable Payable Payable Bonus
Termination by
Executive other
than for Good Not Not None
Reason Payable Payable Payable Payable Payable
</TABLE>
c. Timing of Payments. Earned Salary and Accrued Bonus shall
__________________
be paid in a single lump sum as soon as practicable, but in no
event more than 30 days, following the end of the Contract
Employment Period. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or
agreement under which such benefits have accrued. Any Retention
Bonus or Pro-Rata Retention Bonus, as applicable, payable shall be
paid to Executive in a single lump sum payment within 30 business
days of Executive's termination of employment. Any amount payable
as an Additional Bonus in respect of the excess of the Alternative
Bonus over the Pro-Rata Retention Bonus or the Retention Bonus,
whichever is applicable, shall be payable as soon as practicable
following the closing of the Property Casualty Sale.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was
receiving his salary payments hereunder, for the greater of (i)
_
one year, (ii) the period over which such benefits would be
__
payable if paid to Executive under the Company's otherwise
applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid
___
to Executive under the Company's otherwise applicable plans,
policies or procedures, as in effect at the time of Executive's
termination of employment. Notwithstanding the foregoing,
PAGE 7
Executive may elect, by written notice given to the Company prior
to the first periodic payment and within ten business days after
such termination, that, instead of periodic installments Severance
Benefits shall be paid in either a single lump sum, payable within
ten business days of receipt by the Company of such election, or
in two equal installments, the first payable within ten business
days of receipt by the Company of such election, and the second
payable on the first business day of the following calendar year.
d. Definitions. For purposes of this Paragraph 6,
___________
capitalized terms have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the product
of (i) the annual incentive compensation Executive would have been
_
entitled to receive under Paragraph 3(b) for the calendar year in
which his active service for the Company terminates pursuant to
Paragraph 6(a) had he remained employed for the entire year and
assuming that all targets for such year had been met, multiplied
by (ii) a fraction, the numerator of which is equal to the number
__
of days in such calendar year occurring on or prior to the
termination of Executive's active service for the Company and the
denominator of which is 365.
"Additional Bonus" means (x) (i) in the case of a Termination
_ _
due to death or a Termination due to Disability, the Pro-Rata
Retention Bonus, or (ii) in the case of a Termination Without
__
Cause or a Termination for Good Reason, the Retention Bonus, and
(y) in case of a Termination due to death, a Termination due to
_
Disability, a Termination Without Cause or a Termination for Good
Reason, the excess, if any, of (i) the amount, if any, of the
_
Alternative Bonus that would otherwise be payable to Executive in
connection with the Property Casualty Sale pursuant to Paragraph
3(d) over (ii) the amount paid to Executive in respect of
__
whichever of the Pro-Rata Retention Bonus or the Retention Bonus
is payable to Executive hereunder.
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which
the Contract Employment Period ends (other than Base Salary
deferred pursuant to Executive's election, as provided in
Paragraph 3(a) hereof).
"Pro-Rata Retention Bonus" means
(i) if a Termination due to death or a Termination due to
Disability occurs prior to the date the First
Installment of the Retention Bonus otherwise would have
been paid, an amount equal to the product of (A) the
_
First Installment multiplied by (B) a fraction, the
_
numerator of which is equal to the number of calendar
days which have elapsed from the Commencement Date
until Executive's death or the date the Company
specifies as the date Executive's active service
terminates due to Disability, and the denominator of
which is the number of calendar days from the
Commencement Date until the date the First Installment
otherwise would have been paid; and
PAGE 8
(ii) if a Termination due to death or a Termination due to
Disability occurs after payment of the First
Installment, but prior to the date the Second
Installment of the Retention Bonus otherwise would have
been paid under Paragraph 3(c), an amount equal to the
product of (A) the Second Installment multiplied by (B)
_ _
a fraction, the numerator of which is equal to the
number of calendar days which have elapsed from the
date as of which the First Installment under Paragraph
3(c) was payable until Executive's death or the date
the Company specifies as the date Executive's active
service terminates due to Disability, and the
denominator of which is the number of calendar days
from the First Installment Date until the date the
Second Installment was otherwise scheduled to have been
paid.
"Severance Benefit" means an amount equal to the sum of (i)
and (ii) below, where (i) and (ii) are:
(i) the sum of
(A) the annual Base Salary payable to Executive
immediately prior to the end of the Contract
Employment Period; and
(B) an amount (the "Bonus Severance Amount") equal to
the product of Executive's Base Salary times the
greater of (1) the Minimum Bonus Percentage and
_
(2) the percentage of Base Salary that would have
_
been payable to Executive for the year of such
termination assuming achievement of target levels
of performance and Executive's continued
employment for the entire year, and
(ii) the amount otherwise payable to Executive under the
Company's otherwise applicable severance plans,
policies or programs as in effect on the date hereof
(or, if more favorable to Executive, as in effect on
the date of Executive's termination), assuming for
purposes of determining the amount payable thereunder
that Executive's employment was terminated as a result
of the elimination of his position, but calculated by
including the Bonus Severance Amount as part of
Executive's eligible compensation for purposes of
calculating the benefits payable under such plans,
policies or programs;
except that, in the event that Executive becomes
entitled to receive Severance Benefits hereunder
following the sale of the Company's property casualty
business or a Change in Control, the Severance Benefit
payable to Executive shall be determined under
whichever of Paragraph 6(g) or Paragraph 7(c) is
applicable. Additionally, while Executive is receiving
payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to
participate in the welfare benefit plans and programs
(excluding the long-term disability plan, the sick-pay
plan and vacation accruals) generally made available to
employees of the Company and in which he participated
PAGE 9
immediately prior to the termination of his employment
on the same terms and conditions as would have applied
had Executive continued to be employed. Upon an
election to receive Severance Benefits in either a
single lump sum payment or in two installments,
Executive will forfeit any right to continue to receive
any coverage under the Company's welfare benefit plans,
other than COBRA coverage (determined from the original
date of termination) at Executive's expense as required
by applicable law; provided that, if Executive elects
________ ____
to receive Severance Benefits in two installments
instead of periodic installments, the Company shall pay
one-half of the cost of Executive's COBRA coverage from
the date the first installment payment is made until
the date the second installment payment is made.
Notwithstanding the foregoing, receipt of a lump sum
payment or two installment payments hereunder shall not
cause Executive to cease to be eligible for any retiree
benefit programs for which he is otherwise eligible
under the terms of the Company's employee benefit
plans, policies or programs.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) the willful failure by
_
Executive to perform substantially Executive's duties as an
employee of the Company (other than due to physical or mental
illness) after reasonable notice to Executive of such failure,
(ii) Executive's engaging in serious misconduct that is injurious
__
to the Company or any subsidiary or any affiliate of the Company,
(iii) Executive's having been convicted of, or entered a plea of
___
nolo contendere to, a crime involving an act that is immoral or
____ __________
wrong in and of itself (e.g., burglary, larceny, murder and arson)
____
or a crime involving deceit, fraud, perjury or embezzlement, (iv)
__
the breach by Executive of any written covenant or agreement not
to compete with the Company or any subsidiary or any affiliate or
(v) the breach by Executive of his duty of loyalty to the Company
_
which shall include, without limitation, (A) the disclosure by
_
Executive of any confidential information pertaining to the
Company or any subsidiary or any affiliate of the Company, other
than (x) in the ordinary course of the performance of his duties
_
on behalf of the Company or (y) pursuant to a judicial or
_
administrative subpoena from a court or governmental authority
with jurisdiction over the matter in question, (B) the harmful
_
interference by Executive in the business or operations of the
Company or any subsidiary or any affiliate of the Company, (C) any
_
attempt by Executive directly or indirectly to induce any
employee, insurance agent, insurance broker or broker-dealer of
the Company or any subsidiary or any affiliate to be employed or
perform services elsewhere, (D) any attempt by Executive directly
_
or indirectly to solicit the trade of any customer or supplier, or
prospective customer or supplier, of the Company on behalf of any
person other than the Company or a subsidiary thereof or (E) any
_
breach or violation of the Company's Code of Conduct, as amended
from time to time. Notwithstanding the foregoing, a breach of
Executive's duty of loyalty to the Company as described in
subclause (A) or (E) of clause (v) of the preceding sentence shall
not be grounds for a Termination for Cause unless such breach has
had or could reasonably be expected to have a significant adverse
effect on the business or reputation of the Company.
PAGE 10
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been
incapable of substantially fulfilling the positions, duties,
responsibilities and obligations set forth in this Agreement
because of physical, mental or emotional incapacity resulting from
injury, sickness or disease for a period of (i) at least four
_
consecutive months or (ii) more than six months in any twelve
__
month period. Any question as to the existence, extent or
potentiality of Executive's disability shall be made by the
Company, except that Executive shall have the right to request
that the Company present the question of whether he is disabled to
a qualified, independent physician selected by the chief or
assistant chief (or the equivalent position) of the department
which treats the disease giving rise to Executive's absence at a
nationally or regionally recognized teaching hospital chosen by
the Company. The determination of any such physician shall be
final and conclusive for all purposes of this Agreement.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a
_
reduction in Executive's annual Base Salary or incentive
compensation opportunity as provided under Paragraph 3(b), (ii) a
__
material reduction in Executive's positions, duties and
responsibilities from those described in Paragraph 2 hereof, (iii)
___
the relocation of Executive's principal place of employment to a
location more than 50 miles from the location at which he
performed his principal duties on the date immediately prior to
such relocation, (iv) a breach of the obligation to provide
__
Executive with the benefits required to be provided in accordance
with Paragraph 5(a), (v) a failure by the Company to pay any
_
amounts due and owing to Executive within 10 days following
written notice from Executive of such failure to pay, or (vi) any
__
other material breach of the Company's obligations to Executive
hereunder that significantly affects the compensation or benefits
payable to Executive or materially impairs Executive's ability to
perform the duties and responsibilities of his position.
Notwithstanding the foregoing, a termination shall not be treated
as a Termination for Good Reason (i) if Executive shall have
_
consented in writing to the occurrence of the event giving rise to
the claim of Termination for Good Reason or (ii) unless Executive
__
shall have delivered a written notice to the Chief Executive
Officer of the Company within 60 days of his having actual
knowledge of the occurrence of one of such events stating that he
intends to terminate his employment for Good Reason and specifying
the factual basis for such termination, and such event shall not
have been cured within 30 days of the receipt of such notice.
"Termination Without Cause" means any termination of
Executive's employment by the Company other than (i) a Termination
_
due to Disability or (ii) a Termination for Cause. Subject to the
__
Company's obligations to make the payments, if any, required
pursuant to this paragraph 6, nothing in this Agreement shall be
construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without
reason.
PAGE 11
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or
in accordance with any plan, policy, practice or program of, or
any contract or agreement with, the Company or any of its
subsidiaries (including, without limitation, any supplemental
pension plan, supplemental savings plan or other deferred
compensation arrangement, the 1994 Plan and the Company's 1984
Stock Option Plan (the "1984 Plan"), at or subsequent to the date
of his termination without regard to the performance by Executive
of further services or the resolution of a contingency, provided
_________
that, at any time during which Executive is entitled to receive
____
the Severance Benefits hereunder, Executive shall not also be
entitled to receive any benefits under the Company's generally
applicable severance or other termination plans, policies or
programs.
e. Full Discharge of Company Obligations. Except to the
_____________________________________
extent provided in this Paragraph 6, the amounts payable to
Executive pursuant to this Paragraph 6 (including, without
limitation, under Paragraph 6(f)) following termination of his
employment shall be in full and complete satisfaction of
Executive's rights under this Agreement and any other claims he
may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages
with respect to any and all such rights and claims, shall not be
subject to any offset or mitigation, and, upon Executive's receipt
of such amounts, the Company shall be released and discharged from
any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's employment
with the Company and its subsidiaries. Notwithstanding anything
else contained herein to the contrary, (i) the Company's
_
obligations under this Paragraph 6 are expressly conditioned upon
Executive's execution of a release and waiver, substantially in
the form attached hereto as Exhibit B (subject to, in the event of
any change of law occurring after the date hereof, to such
modifications as shall be necessary or appropriate to place the
Company in a substantially the same position as though no change
in law had occurred), of any claims he may have in connection with
the termination of, or arising out of, his employment with the
Company and (ii) nothing in this Section 6(e) shall be construed
__
to waive, release or otherwise limit any amounts required to be
paid hereunder or any benefits due and payable to Executive under
the terms of any employee pension benefit plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended, or any other Vested Benefit.
f. Special Continuation of Certain Protection for the
___________________________________________________
Executive. Notwithstanding anything contained in this Agreement
_________
to the contrary, if, at the end of the Contract Employment Period,
(i) Executive remains an at-will employee of the Company and (ii)
_ __
within one year following the end of the Contract Employment
Period, the Company takes actions which, if they had occurred
within the Contract Employment Period, would have given Executive
the right to terminate his employment pursuant to a Termination
for Good Reason and Executive, after giving the Company timely
written notice of the events permitting a Termination for Good
Reason and the opportunity to cure described in the definition of
a Termination for Good Reason, voluntarily terminates his
employment within 90 days of the date of such actions by the
Company, then in either case, Executive shall receive payment of
the Severance Benefits that would otherwise have been payable to
Executive hereunder had his termination of employment occurred
PAGE 12
during the Contract Employment Period. Notwithstanding the
preceding sentence, this Section 6(f) shall not be applicable
unless Executive executes the waiver and release referred to in
Paragraph 6(e) above in connection with his termination of
employment pursuant to this Paragraph 6(f).
g. Enhanced Severance Payments. If Executive's employment
___________________________
is terminated following a sale of the Company's property and
casualty business pursuant to a Termination for Good Reason or a
Termination Without Cause, the Severance Benefit payable to
Executive pursuant to this Paragraph 6 shall be equal to three
times the sum of Executive's annual Base Salary and the Bonus
Severance Amount.
h. Outplacement Services. In addition to any other benefits
_____________________
described in this Paragraph 6, in the event Executive is eligible
to receive Severance Benefits, the Company shall also provide to
Executive, at its expense, individual outplacement services from a
qualified outplacement firm selected by the Company. The
outplacement services to be provided to Executive shall be no less
favorable to Executive than those made available to other
executives prior to the date hereof under the Company's generally
applicable policies, programs or arrangements.
7. Change in Control of the Company.
________________________________
a. Accelerated Vesting and Payment. Unless the Board (or the
_______________________________
appropriate committee thereof) shall otherwise determine in the
manner set forth in Paragraph 7(b), the Option shall become fully
exercisable upon the occurrence of a Change in Control (as defined
below) and shall remain exercisable for a period of one year
thereafter regardless of whether Executive continues to be
employed by the Company or, if longer, for the period during which
such Option would otherwise be exercisable in accordance with its
terms or the generally applicable provisions of the 1994 Plan. If
no Alternative Option is provided as set forth in Section 7(b)
below, and the Company does not survive as a publicly traded
corporation following a Change in Control, the Company shall pay
Executive, in full settlement of all rights with respect to the
Option, an aggregate amount in cash equal to the product of (i)
_
the lesser of (A) the Fair Market Value of a Share of the
Company's Common Stock on the date the Change in Control occurs
over (B) the per share exercise price for the Option times (ii)
__
the number of shares as to which such Option has not been
exercised at the time of the Change in Control. Any amount
payable pursuant to the preceding sentence shall be paid within 30
days following such Change in Control.
b. Alternative Options. Notwithstanding Paragraph 7(a), no
___________________
acceleration of exercisability shall occur with respect to any
Option if the Board (or the appropriate committee thereof)
reasonably determines in good faith, prior to the occurrence of a
Change in Control, that such Option shall be honored or assumed,
or new rights substituted therefor (such honored, assumed or
substituted Option being hereinafter referred to as an
"Alternative Option") by the successor in interest to the Company,
provided that any such Alternative Option must:
________ ____
PAGE 13
(i) provide Executive with rights and entitlements
substantially equivalent to or better than the rights,
terms and conditions applicable under the Option,
including, but not limited to, an identical or better
exercise and vesting schedule and identical or better
timing and methods of payment;
(ii) have substantially equivalent economic value to such
Option (determined at the time of the Change in
Control); and
(iii) have terms and conditions which provide that, in the
event that Executive's employment is terminated by the
Company for any reason or is terminated by Executive
pursuant to a Termination for Good Reason within two
years following a Change in Control, (A) any
_
conditions on Executive's rights under, or any
restrictions on exercisability applicable to, each
such Alternative Option shall be waived or shall
lapse, as the case may be and (B) the Alternative
_
Option shall remain exercisable until the second
anniversary of the Change in Control or, if longer,
for the period during which such Alternative Option
would otherwise be exercisable in accordance with its
terms or the provisions of the plan under which it is
granted that permit the longest post-termination
exercise period for involuntary terminations (other
than due to death, disability or retirement).
c. Enhanced Severance Payments. If Executive's
___________________________
employment is terminated following a Change in Control pursuant to
a Termination for Good Reason or a Termination Without Cause, the
Severance Benefit payable to Executive pursuant to Paragraph 6
shall be equal to three times the sum of Executive's annual Base
Salary and the Bonus Severance Amount.
d. Additional Payments by the Company.
__________________________________
(i) Application of Section 7(d). In the event that any
___________________________
amount or benefit paid or distributed to Executive
pursuant to this Agreement, taken together with any
amounts or benefits otherwise paid or distributed to
Executive by the Company or any affiliated company
(collectively, the "Covered Payments"), would be an
"excess parachute payment" as defined in Section 280G
of the Code and would thereby subject Executive to the
tax (the "Excise Tax") imposed under Section 4999 of
the Code (or any similar tax that may hereafter be
imposed), the provisions of this Section 7(d) shall
apply to determine the amounts payable to Executive
pursuant to this Agreement.
(ii) Calculation of Benefits. Immediately following
_______________________
delivery of any Notice of Termination, the Company
shall notify Executive of the aggregate present value
of all termination benefits to which he would be
entitled under this Agreement and any other plan,
program or arrangement as of the projected date of
termination, together with the projected maximum
payments, determined as of such projected date of
termination that could be paid without Executive being
subject to the Excise Tax.
PAGE 14
(iii) Imposition of Payment Cap. If the aggregate value of
_________________________
all compensation payments or benefits to be paid or
provided to Executive under this Agreement and any
other plan, agreement or arrangement with the Company
exceeds the amount which can be paid to Executive
without Executive incurring an Excise Tax by less than
105%, then the amounts payable to Executive under this
Agreement may, in the discretion of the Company, be
reduced (but not below zero) to the maximum amount
which may be paid hereunder without Executive becoming
subject to such an Excise Tax (such reduced payments
to be referred to as the "Payment Cap"). In the event
that Executive receives reduced payments and benefits
hereunder, Executive shall have the right to designate
which of the payments and benefits otherwise provided
for in this Agreement that he will receive in
connection with the application of the Payment Cap.
(iv) Further Payments by the Company. If the aggregate
_______________________________
value of all compensation payments or benefits to be
paid or provided to Executive under this Agreement and
any other plan, agreement or arrangement with the
Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax by
more than 105%, the Company shall pay to Executive
immediately following Executive's termination of
employment an additional amount (the "Tax
Reimbursement Payment") such that the net amount
retained by Executive with respect to such Covered
Payments, after deduction of any Excise Tax on the
Covered Payments and any Federal, state and local
income tax and Excise Tax on the Tax Reimbursement
Payment provided for by this Section 7(d)(iv), but
before deduction for any Federal, state or local
income or employment tax withholding on such Covered
Payments, shall be equal to the amount of the Covered
Payments.
(v) Application of Section 280G. For purposes of determining
___________________________
whether any of the Covered Payments will be subject to
the Excise Tax and the amount of such Excise Tax,
(A) such Covered Payments will be treated as "parachute
payments" within the meaning of Section 280G of the
Code, and all "parachute payments" in excess of the
"base amount" (as defined under Section 280G(b)(3) of
the Code) shall be treated as subject to the Excise
Tax, unless, and except to the extent that, in the
good faith judgment of the Company's independent
certified public accountants appointed prior to the
Effective Date or tax counsel selected by such
Accountants (the "Accountants"), the Company has a
reasonable basis to conclude that such Covered
Payments (in whole or in part) either do not
constitute "parachute payments" or represent
reasonable compensation for personal services
actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the "base
amount," or such "parachute payments" are otherwise
not subject to such Excise Tax, and
PAGE 15
(B) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by the
Accountants in accordance with the principles of
Section 280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining
____________________
whether Executive would receive a greater net after-
tax benefit were the amounts payable under this
Agreement reduced in accordance with Paragraph
7(d)(iii), Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable
marginal rate of Federal income taxation for the
calendar year in which the first amounts are to be
paid hereunder, and
(B) any applicable state and local income taxes at the
highest applicable marginal rate of taxation for such
calendar year, net of the maximum reduction in
Federal incomes taxes which could be obtained from
the deduction of such state or local taxes if paid in
such year;
provided, however, that Executive may request that such
determination be made based on his individual tax
circumstances, which shall govern such determination
so long as Executive provides to the Accountants such
information and documents as the Accountants shall
reasonably request to determine such individual
circumstances.
(vii) Adjustments in Respect of the Payment Cap. If
_________________________________________
Executive receives reduced payments and benefits
under this Section 7(d) (or this Section 7(d) is
determined not to be applicable to Executive because
the Accountants conclude that Executive is not
subject to any Excise Tax) and it is established
pursuant to a final determination of a court or an
Internal Revenue Service proceeding (a "Final
Determination") that, notwithstanding the good faith
of Executive and the Company in applying the terms of
this Agreement, the aggregate "parachute payments"
within the meaning of Section 280G of the Code paid
to Executive or for his benefit are in an amount that
would result in Executive being subject an Excise
Tax, then the amount equal to such excess parachute
payments shall be deemed for all purposes to be a
loan to Executive made on the date of receipt of such
excess payments, which Executive shall have an
obligation to repay to the Company on demand,
together with interest on such amount at the
applicable Federal rate (as defined in Section
1274(d) of the Code) from the date of the payment
hereunder to the date of repayment by Executive. If
this Section 7(d) is not applied to reduce
Executive's entitlements under this Section 7 because
the Accountants determine that Executive would not
receive a greater net-after tax benefit by applying
this Section 7(d) and it is established pursuant to a
Final Determination that, notwithstanding the good
faith of Executive and the Company in applying the
PAGE 16
terms of this Agreement, Executive would have received
a greater net after tax benefit by subjecting his
payments and benefits hereunder to the Payment Cap,
then the aggregate "parachute payments" paid to
Executive or for his benefit in excess of the Payment
Cap shall be deemed for all purposes a loan to
Executive made on the date of receipt of such excess
payments, which Executive shall have an obligation to
repay to the Company on demand, together with interest
on such amount at the applicable Federal rate (as
defined in Section 1274(d) of the Code) from the date
of the payment hereunder to the date of repayment by
Executive. If Executive receives reduced payments and
benefits by reason of this Section 7(d) and it is
established pursuant to a Final Determination that
Executive could have received a greater amount without
exceeding the Payment Cap, then the Company shall
promptly thereafter pay Executive the aggregate
additional amount which could have been paid without
exceeding the Payment Cap, together with interest on
such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code) from the original
payment due date to the date of actual payment by the
Company.
(viii) Adjustments in Respect of the Tax Reimbursement
________________________________________________
Payments. In the event that the Excise Tax is
________
subsequently determined by the Accountants or pursuant
to any proceeding or negotiations with the Internal
Revenue Service to be less than the amount taken into
account hereunder in calculating the Tax Reimbursement
Payment made, Executive shall repay to the Company, at
the time that the amount of such reduction in the
Excise Tax is finally determined, the portion of such
prior Tax Reimbursement Payment that would not have
been paid if such Excise Tax had been applied in
initially calculating such Tax Reimbursement Payment,
plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing, in the event any
portion of the Tax Reimbursement Payment to be
refunded to the Company has been paid to any Federal,
state or local tax authority, repayment thereof shall
not be required until actual refund or credit of such
portion has been made to Executive, and interest
payable to the Company shall not exceed interest
received or credited to Executive by such tax
authority for the period it held such portion.
Executive and the Company shall mutually agree upon
the course of action to be pursued (and the method of
allocating the expenses thereof) if Executive's good
faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined
by the Accountants or pursuant to any proceeding or
negotiations with the Internal Revenue Service to
exceed the amount taken into account hereunder at the
time the Tax Reimbursement Payment is made (including,
but not limited to, by reason of any payment the
existence or amount of which cannot be determined at
the time of the Tax Reimbursement Payment), the
PAGE 17
Company shall make an additional Tax Reimbursement
Payment in respect of such excess (plus any interest
or penalty payable with respect to such excess) at the
time that the amount of such excess is finally
determined.
(ix) Timing of Payment. Any Tax Reimbursement Payment (or
_________________
portion thereof) provided for in Section 7(d)(iv)
above shall be paid to Executive not later than 10
business days following the payment of the Covered
Payments; provided, however, that if the amount of
such Tax Reimbursement Payment (or portion thereof)
cannot be finally determined on or before the date on
which payment is due, the Company shall pay to
Executive by such date an amount estimated in good
faith by the Accountants to be the minimum amount of
such Tax Reimbursement Payment and shall pay the
remainder of such Tax Reimbursement Payment (together
with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined, but in no event later than
45 calendar days after payment of the related Covered
Payment. In the event that the amount of the
estimated Tax Reimbursement Payment exceeds the amount
subsequently determined to have been due, such excess
shall constitute a loan by the Company to Executive,
payable on the fifth business day after written demand
by the Company for payment (together with interest at
the rate provided in Section 1274(b)(2)(B) of the
Code).
e. Definition of "Change in Control". For purposes of
_________________________________
this Paragraph 7, a "Change in Control" means the
happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9)
of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and as used in Sections 13(d) and
14(d) thereof, including a "group" as defined in
Section 13(d) of the Exchange Act but excluding the
Company and any subsidiary thereof and any employee
benefit plan sponsored or maintained by the Company or
any Subsidiary (including any trustee of such plan
acting as trustee), directly or indirectly, becomes
the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act, as amended from time to time), of
securities of the Company representing 20 percent or
more of the combined voting power of the Company's then
outstanding securities;
(ii) When, during any period of 24 consecutive
months after the Commencement Date, the individuals who,
at the beginning of such period, constitute the Board
(the "Incumbent Directors") cease for any reason other
than death to constitute at least a majority thereof,
provided that a director who was not a director at the
________ ____
beginning of such 24-month period shall be deemed to
have satisfied such 24-month requirement (and be an
Incumbent Director) if such director was elected by, or
on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as
PAGE 18
Incumbent Directors either actually (because they were
directors at the beginning of such 24-month period) or
by prior operation of this Section 7(e)(ii); or
(iii) The occurrence of a transaction requiring
stockholder approval for the acquisition of the Company
by an entity other than the Company or a subsidiary
through purchase of assets, or by merger, or otherwise.
8. Noncompetition and Confidentiality.
__________________________________
a. Noncompetition. During the Contract Employment
______________
Period and for a period of one year following Executive's
termination of employment during the Contract Employment Period
other than due to a Termination Without Cause or a Termination for
Good Reason, Executive shall not become associated, whether as a
principal, partner, employee, consultant or shareholder (other
than as a holder of not in excess of 1% of the outstanding voting
shares of any publicly traded company), with any entity that is
actively engaged in any geographic area in any business which is
in substantial and direct competition with the business or
businesses of the Company for which Executive provides substantial
services or for which Executive has substantial responsibility,
provided that nothing in this Section 8(a) shall preclude
________ ____
Executive from performing services solely and exclusively for a
division or subsidiary of such an entity that is engaged in a non-
competitive business. Notwithstanding the foregoing, this Section
8(a) shall not be enforceable in any manner that would be in
violation of the rules contained in the Code of Professional
Responsibility with responsibility applicable with respect to
services as a lawyer.
b. Nondisclosure, Nonsolicitation and Cooperation.
______________________________________________
(i) Executive shall not (except to the extent required
by an order of a court having competent jurisdiction or under
subpoena from an appropriate government agency) disclose to any
third person, whether during or subsequent to the Executive's
employment with the Company, any trade secrets; customer lists;
product development and related information; marketing plans
and related information; sales plans and related information;
operating policies and manuals; business plans; financial
records; or other financial, commercial, business or technical
information related to the Company or any subsidiary or
affiliate thereof unless such information has been previously
disclosed to the public by the Company or has become public
knowledge other than by a breach of this Agreement; provided,
________
however, that this limitation shall not apply to any such
_______
disclosure made while Executive is employed by the Company, or
any subsidiary or affiliate thereof if such disclosure is
reasonably intended to benefit the Company, or any subsidiary
or affiliate;
(ii) during the Contract Employment Period and for two
years after the termination of such Period, Executive shall not
attempt, directly or indirectly, to induce any employee or
Insurance Agent (as defined below) of the Company, or any
subsidiary or any affiliate thereof to be employed or perform
services elsewhere;
PAGE 19
(iii) during the Contract Employment Period and for
two years after the termination of such Period, Executive shall
not attempt, directly or indirectly, to induce any insurance
agent or agency, insurance broker, broker-dealer or supplier of
the Company, or any subsidiary or affiliate thereof to cease
providing services to the Company, or any subsidiary or
affiliate thereof;
(iv) during the Contract Employment Period and for two
years after the termination of such Period, Executive shall not
attempt, directly or indirectly, to solicit, on behalf of any
person or entity other than the Company or any of its
subsidiaries, the trade of any individual or entity which, at
the time of the solicitation, is a customer of the Company, or
any subsidiary or affiliate thereof, or which the Company, or
any subsidiary or affiliate thereof is undertaking reasonable
steps to procure as a customer at the time of or immediately
preceding termination of the Contract Employment Period;
provided, however, that this limitation shall only apply to (x)
________ _______ _
any product or service which is in competition with a product
or service of the Company or any subsidiary or affiliate
thereof and (y) with respect to any customer or prospective
_
customer with whom Executive has or had (by virtue of
Executive's position or otherwise) a personal relationship; and
(v) following the termination of the Contract
Employment Period, Executive shall provide assistance to and
shall cooperate with the Company or any subsidiary or affiliate
thereof, upon its reasonable request, with respect to matters
within the scope of Executive's duties and responsibilities
during the Contract Employment Period. (The Company agrees and
acknowledges that it shall, to the maximum extent possible
under the then prevailing circumstances, coordinate (or cause a
subsidiary or affiliate thereof to coordinate) any such request
with Executive's other commitments and responsibilities to
minimize the degree to which such request interferes with such
commitments and responsibilities). The Company agrees that it
will reimburse Executive for reasonable travel expenses (i.e.,
____
travel, meals and lodging) that Executive may incur in
providing assistance to the Company hereunder.
Solely for purposes of Paragraph 8(b)(ii) above, the term
"Insurance Agent" shall mean those insurance agents or agencies
representing the Company or any subsidiary or affiliate thereof,
that are exclusive or career agents or agencies of the Company or
any subsidiary or affiliate thereof, or any insurance agents or
agencies which derive 50% or more of their business revenue from
the Company or any subsidiary or affiliate thereof (calculated on
an aggregate basis for the 12-month period prior to the date of
determination or such other similar period for which such
information is more readily available).
c. Company Property. Promptly following Executive's
________________
termination of employment, Executive shall return to the Company
all property of the Company, and all copies thereof in Executive's
possession or under his control.
d. Intention of the Parties. If any provision of Paragraph
________________________
8 is determined by an arbitrator (or a court of competent
jurisdiction asked to enforce the decision of the arbitrator) not
to be enforceable in the manner set forth in this Agreement, the
Company and Executive agree that it is the intention of the
PAGE 20
parties that such provision should be enforceable to the maximum
extent possible under applicable law and that such arbitrator (or
court) shall reform such provision to make it enforceable in
accordance with the intent of the parties. Executive acknowledges
that a material part of the inducement for the Company to provide
the salary and benefits evidenced hereby is Executive's covenants
set forth in Paragraph 8(a), (b) and (c) and that the covenants
and obligations of Executive with respect to nondisclosure and
nonsolicitation relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants
and obligations will cause the Company irreparable injury for
which adequate remedies are not available at law. Therefore,
Executive agrees that, if Executive shall breach any of those
covenants, the Company shall have no further obligation to pay
Executive any benefits otherwise payable hereunder and the Company
shall be entitled to an injunction, restraining order or such
other equitable relief (without the requirement to post a bond)
restraining Executive from committing any violation of the
covenants and obligations contained in Paragraph 8(a), (b) and
(c). The remedies in the preceding sentence are cumulative and
are in addition to any other rights and remedies the Company may
have at law or in equity as an arbitrator (or court) shall
reasonably determine.
e. Waiver. Without limiting the generality of the
______
foregoing, upon request of Executive prior to engaging in any
conduct otherwise prohibited by this Paragraph 8, the Company may,
in its sole discretion, waive in writing, on such terms and
conditions as it may deem appropriate, any violation of this
Paragraph 8 which would otherwise occur due to such conduct.
9. Miscellaneous.
_____________
a. Survival. Paragraphs 7 (relating to a Change in
________
Control), 8 (relating to noncompetition, nonsolicitation and
confidentiality) and 9 (relating, among other things, to survival,
assignment and governing law) shall survive the termination
hereof, whether such termination shall be by expiration of the
Contract Employment Period or an early termination pursuant to
Paragraph 6 hereof. Paragraph 6 ((other than Paragraph 6(f))
(relating to early termination) shall survive the termination
hereof to the extent that, prior thereto, Executive (or his
beneficiary) has become entitled to receive any of the benefits
payable thereunder. Paragraph 6(f) (and to the extent applicable
to such Paragraph 6(f), 6(e)) shall survive for one year following
the termination hereof.
b. Binding Effect. This Agreement shall be binding on, and
______________
shall inure to the benefit of, the Company and any person or
entity that succeeds to the interest of the Company (regardless of
whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a sale
of the assets of the business of the Company (or portion thereof)
in which Executive performs a majority of his services. Any
successor in interest to the Company shall acknowledge in writing
to Executive that it has assumed this Agreement and is responsible
to Executive for the performance of the Company's obligations
under this Agreement. Without limiting the generality of the
foregoing, the Company shall have the right, without the consent
of Executive, to assign this Agreement and its obligations
PAGE 21
hereunder to any New Entity or any subsidiary of any New Entity by
which Executive becomes employed, at the discretion of the
Company, by reason of the implementation of any restructuring of
the Company, and, following any such assignment, such New Entity
or subsidiary shall be treated as the Company for all purposes of
this Agreement. This Agreement shall also enure to the benefit of
Executive's heirs, executors, administrators and legal
representatives.
c. Assignment. Except as provided under Paragraph 9(b),
__________
neither this Agreement nor any of the rights or obligations
hereunder shall be assigned or delegated by any party hereto
without the prior written consent of the other party. In the
event the Company assigns this Agreement pursuant to Section 9(b),
the Company shall guarantee payment to Executive of any amounts at
any time due and payable hereunder in the event (and only to the
extent) that the assignee has become a debtor in bankruptcy, is
the subject of a receivership or similar preceding or has become
insolvent, provided that Executive shall be required to assign his
________ ____
rights against the assignee through subrogation as a condition of
receiving any payment under the Company's guarantee. In
consideration of such guarantee, Executive agrees that following
such assignment, the covenants of Executive in Paragraphs 8(b)(i)
and (v) shall continue to inure to the benefit of the Company, as
well as the assignee. The Company and Executive agree that
following any assignment all other covenants described herein in
favor of the Company shall, from and after the date of such
assignment, inure solely to the benefit of the assignee.
d. Entire Agreement. Except as expressly provided below,
________________
this Agreement, the Option Agreement and the portion, if any, of
any other agreement relating to pension service or credits
referred to in Paragraph 5(a) shall constitute the entire
agreement between the parties hereto with respect to the matters
referred to herein and any other agreement or any portion of any
such other agreement not expressly preserved hereby shall cease to
be effective upon the execution hereof and shall not become
reinstated upon the expiration or other termination of this
Agreement. There are no promises, representations, inducements or
statements between the parties other than those that are expressly
contained herein. Executive acknowledges that he is entering into
this Agreement of his own free will and accord, and with no
duress, that he has read this Agreement and that he understands it
and its legal consequences. Other than the provisions of
Paragraph 6 which limit Executive's eligibility to receive
severance benefits under the Company's generally applicable plans,
programs or agreements, nothing in this Agreement shall be
construed to limit or otherwise supersede Executive's rights or
entitlements under any compensatory plan, program or arrangement
made available generally to all employees or all officers of the
Company or under the 1994 Plan or the 1984 Plan and this Paragraph
9(d) shall not preclude reference to the documents governing any
such plan, program or arrangement to determine such rights and
entitlements.
PAGE 22
e. Severability; Reformation. In the event that one or more
_________________________
of the provisions of this Agreement shall become invalid, illegal
or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall
not be affected thereby. In the event any of Paragraph 8(a), (b)
or (c) is not enforceable in accordance with its terms, Executive
and the Company agree that such Paragraph shall be reformed to
make such Paragraph enforceable in a manner which provides the
Company the maximum rights permitted at law.
f. Waiver. Waiver by any party hereto of any breach or
______
default by the other party of any of the terms of this Agreement
shall not operate as a waiver of any other breach or default,
whether similar to or different from the breach or default waived.
No waiver of any provision of this Agreement shall be implied
from any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or his rights
hereunder on any occasion or series of occasions.
g. Notices. Any notice required or desired to be delivered
_______
under this Agreement shall be in writing and shall be delivered
personally, by courier service, by registered mail, return receipt
requested, or by telecopy and shall be effective upon actual
receipt by the party to which such notice shall be directed, and
shall be addressed as follows (or to such other address as the
party entitled to notice shall hereafter designate in accordance
with the terms hereof):
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut
Attention: Secretary
If to Executive:
Gary G. Benanav
_____________________________
20 Northmoor Road
_____________________________
West Hartford, CT 06117-1709
_____________________________
h. Arbitration. The Company and Executive agree that any
___________
claim, dispute or controversy arising under or in connection with
this Agreement, or otherwise in connection with Executive's
employment by the Company (including, without limitation, any such
claim, dispute or controversy arising under any federal, state or
local statute, regulation or ordinance or any of the Company's
employee benefit plans, policies or programs) shall be resolved
solely and exclusively by binding arbitration. The arbitration
shall be held in the city of Hartford, Connecticut (or at such
other location as shall be mutually agreed by the parties). The
arbitration shall be conducted in accordance with the Expedited
Employment Arbitration Rules (the "Rules") of the American
Arbitration Association (the "AAA") in effect at the time of the
arbitration, except that the arbitrator shall be selected by
alternatively striking from a list of five arbitrators supplied by
the AAA. All fees and expenses of the arbitration, including a
transcript if either requests, shall be borne equally by the
parties. If Executive prevails as to any material issue presented
to the arbitrator, the entire cost of such proceedings (including,
PAGE 23
without limitation, Executive's reasonable attorneys fees) shall
be borne by the Company. If Executive does not prevail as to any
material issue, each party will pay for the fees and expenses of
its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party
prevails on a claim for which attorney's fees are recoverable
under the Rules). Any action to enforce or vacate the
arbitrator's award shall be governed by the Federal Arbitration
Act, if applicable, and otherwise by applicable state law. If
either the Company or Executive pursues any claim, dispute or
controversy against the other in a proceeding other than the
arbitration provided for herein, the responding party shall be
entitled to dismissal or injunctive relief regarding such action
and recovery of all costs, losses and attorney's fees related to
such action.
i. Amendments. This Agreement may not be altered, modified
__________
or amended except by a written instrument signed by each of the
parties hereto.
j. Headings. Headings to paragraphs in this Agreement are
________
for the convenience of the parties only and are not intended to be
part of or to affect the meaning or interpretation hereof.
k. Counterparts. This Agreement may be executed in
____________
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
l. Withholding. Any payments provided for herein shall be
___________
reduced by any amounts required to be withheld by the Company from
time to time under applicable Federal, State or local income or
employment tax laws or similar statutes or other provisions of law
then in effect.
m. Governing Law. This Agreement shall be governed by the
_____________
laws of the State of Connecticut, without reference to principles
of conflicts or choice of law under which the law of any other
jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer and Executive has
hereunto set his hand as of the day and year first above written.
Aetna Life and Casualty Company
WITNESS:
/s/ Mary Ann Champlin /s/ Ronald E.Compton
_____________________ _______________________________
Mary Ann Champlin Ronald E. Compton
Chairman
WITNESS:
/s/ Donna R. LeMay /s/ Gary G. Benanav
_____________________ _______________________________
Donna R. LeMay Gary G. Benanav
PAGE 1
EMPLOYMENT AGREEMENT
____________________
EMPLOYMENT AGREEMENT, dated as of January 29, 1996 by and
between Aetna Life and Casualty Company, a Connecticut
corporation (the "Company"), and Ronald E. Compton ("Executive").
W I T N E S S E T H:
_ _ _ _ _ _ _ _ _ _
WHEREAS, the Company is considering certain restructuring
alternatives that could result in significant changes in the
structure of its business, including, without limitation, dividing
the business of the Company into two or more separate publicly
traded companies or otherwise transferring a portion of the
business to a third party;
WHEREAS, the Company believes that Executive is a key
employee and that it is in the Company's best interests to retain
the services of Executive for the period during which such
restructuring alternatives are considered and, to the extent
applicable, implemented;
WHEREAS, the Company therefore desires to retain the
services of Executive and to enter into an agreement embodying the
terms of such employment (the "Agreement"); and
WHEREAS, Executive desires to accept such employment and
enter into such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as
follows:
1. Employment. Except as provided in Paragraph 6(a),
__________
the Company shall continue to employ Executive and Executive
agrees to remain employed by the Company under the terms of this
Agreement for the period commencing on the date first written
above (the "Commencement Date") and ending on February 27, 1998.
The period during which Executive is employed pursuant to this
Agreement shall be referred to as the "Contract Employment
Period". Upon the expiration of the Contract Employment Period,
Executive's employment with the Company shall continue on an at-
will basis.
2. Position and Duties. During the Contract
___________________
Employment Period, Executive shall serve as the Chairman and
Chief Executive Officer of the Company. During the Contract
Employment Period, Executive shall have such duties,
responsibilities and obligations as the Board of Directors of the
Company (the "Board") shall specify from time to time. Executive
shall devote his full business time to the services required of
him hereunder, except for vacation time and reasonable periods of
absence due to sickness, personal injury or other disability, and
shall use his best efforts, judgment, skill and energy to perform
such services in a manner consistent with the duties of his
position and to improve and advance the business and interests of
the Company and its subsidiaries. Nothing contained herein shall
preclude Executive from (i) serving on the board of directors of
_
any business corporation on which he currently serves or, if the
Board consents to such service, on any other board of directors,
PAGE 2
(ii) serving on the board of, or working for, any charitable or
__
community organization or (iii) pursuing his personal, financial
___
and legal affairs, so long as such activities, individually or
collectively, do not interfere with the performance of Executive's
duties hereunder.
3. Cash Compensation.
_________________
a. Base Salary. During the Contract Employment
___________
Period, the Company shall pay Executive a base salary at the
annual rate of $810,000. The Board shall periodically review
Executive's base salary and the Company may, in its discretion,
increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any
other obligation of the Company hereunder. Executive's annual
base salary payable hereunder, as it may be increased from time to
time and without reduction for any amounts deferred as described
above, is referred to herein as "Base Salary". Executive's Base
Salary, as in effect from time to time, may not be reduced by the
Company without Executive's consent, provided that the Base Salary
________ ____
payable under this paragraph shall be reduced to the extent
Executive elects to defer or reduce such salary under the terms of
any deferred compensation or savings plan or other employee
benefit arrangement maintained or established by the Company. The
Company shall pay Executive the portion of his Base Salary not
deferred in accordance with its customary periodic payroll
practices.
b. Incentive Compensation. During the term of the
______________________
Contract Employment Period, Executive shall remain eligible for
participation in the Company's existing and future annual and long
term incentive compensation programs at a level consistent with
his position at the Company and the Company's then current
policies and practices; provided that following any assignment of
________ ____
this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph
7(e)), the calculation of the amount payable as annual incentive
compensation and the conditions upon which such bonus shall be
payable shall be no less favorable to the Executive (taking into
account reasonable changes in the Company's goals and objectives)
than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such
assignment or Change in Control. Without limiting the generality
of the foregoing, for each calendar year ending during the term
hereof, Executive shall receive the opportunity to receive an
annual bonus of at least 65% of his Base Salary (the "Minimum
Bonus Percentage"), subject to satisfaction of such performance
criteria as shall be established with respect to such year.
4. Stock Option Grant. Contingent upon the execution
__________________
of this Agreement by the Executive, the Company has granted
Executive an option, having a ten-year term, to purchase 100,000
shares of the Company's Common Stock at an exercise price per
share equal to $57 a share (the "Option"). Except to the extent
specified below, the terms of the Option shall be determined in
accordance with the terms of the 1994 Stock Incentive Plan (the
"1994 Plan") and shall be set forth in the separate agreement
embodying the grant of such Option (the "Option Agreement"), the
form of which is attached hereto as Exhibit A.
PAGE 3
5. Benefits, Perquisites and Expenses.
__________________________________
a. Benefits. During the Contract Employment Period,
________
Executive shall be eligible to participate in (i) each welfare
_
benefit plan sponsored or maintained by the Company, including,
without limitation, each group life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan
or program of the Company, and (ii) each pension, profit sharing,
__
retirement, deferred compensation or savings plan sponsored or
maintained by the Company, in each case, whether now existing or
established hereafter, to the extent that Executive is eligible to
participate in any such plan under the generally applicable
provisions thereof. Nothing in this Paragraph 5(a) shall be
construed to limit the ability of the Company to amend or
terminate any particular plan, program or arrangements, provided
_________
that, following the occurrence of a Change in Control (as defined
____
in Paragraph 7(e)) or the assignment of this Agreement to a New
Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b),
the benefits made available to the Executive thereafter shall be
at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such
Change in Control or assignment.
With respect to the pension or retirement benefits
payable to Executive, Executive's service credited for purposes of
determining Executive's benefits and vesting shall be determined
in accordance with the terms of the applicable plan or program or,
if applicable, pursuant to any written agreement between Executive
and the Company (whether now existing or hereafter adopted) that
provides Executive a more favorable method of crediting service
for any purpose thereunder.
b. Perquisites. During the Contract Employment
___________
Period, Executive shall be entitled to receive such perquisites as
are generally provided to the Chief Executive Officer of the
Company in accordance with the then current policies and practices
of the Company.
c. Business Expenses. During the Contract Employment
_________________
Period, the Company shall pay or reimburse Executive for all
reasonable expenses incurred or paid by Executive in the
performance of Executive's duties hereunder, upon presentation of
expense statements or vouchers and such other information as the
Company may require and in accordance with the generally
applicable policies and procedures of the Company.
6. Termination of Employment.
_________________________
a. Early Termination of the Contract Employment
_____________________________________________
Period. Notwithstanding Paragraph 1, the Contract Employment
______
Period shall end upon the earliest to occur of (i) a termination
_
of Executive's employment on account of Executive's death, (ii) a
__
Termination due to Disability, (iii) a Termination for Cause, (iv)
___ __
a Termination Without Cause, (v) a Termination for Good Reason or
_
(vi) a termination of Executive's employment by Executive other
__
than a Termination for Good Reason. For purposes of this
Agreement, a transfer of Executive's employment (i) to any other
_
entity controlled by or under common control with the Company
shall not be treated as a termination unless and until such entity
ceases to be controlled by or under common control with the
Company or (ii) as a result of the implementation of any
__
PAGE 4
restructuring of the Company (whether occurring by spin-off or
otherwise) shall not be treated as a termination of employment,
provided that, in either case, the successor employer (the "New
________ ____
Entity") expressly assumes and agrees to perform all of the
Company's obligations under this Agreement.
b. Benefits Payable Upon Termination. Following the
_________________________________
end of the Contract Employment Period pursuant to Paragraph 6(a),
Executive (or, in the event of his death, his surviving spouse, if
any, or his estate) shall be paid the type or types of
compensation determined to be payable in accordance with the
following table at the times established pursuant to Paragraph
6(c):
<TABLE>
<CAPTION>
Earned Vested Accrued Severance
Salary Benefits Bonus Benefit
________ __________ ________ ________
<C> <S> <S> <S> <S>
Termination due Payable Payable Payable Not Payable
to death
Termination due to Payable Payable Payable Not Payable
Disability
Termination for Payable Payable Not Payable Not Payable
Cause
Termination Without Payable Payable Payable Payable
Cause
Termination for Payable Payable Payable Payable
Good Reason
Termination by Payable Payable Not Payable Not Payable
Executive other than
for Good Reason
</TABLE>
c. Timing of Payments. Earned Salary and Accrued
__________________
Bonus shall be paid in a single lump sum as soon as practicable,
but in no event more than 30 days, following the end of the
Contract Employment Period. Vested Benefits shall be payable in
accordance with the terms of the plan, policy, practice, program,
contract or agreement under which such benefits have accrued.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was
receiving his salary payments hereunder, for the greater of (i)
_
one year, (ii) the period over which such benefits would be
__
payable if paid to Executive under the Company's otherwise
applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid
___
to Executive under the Company's otherwise applicable plans,
policies or procedures, as in effect at the time of Executive's
termination of employment. Notwithstanding the foregoing,
Executive may elect, by written notice given to the Company prior
to the first periodic payment and within ten business days after
such termination, that, instead of periodic installments,
Severance Benefits shall be paid in either a single lump sum,
payable within ten business days of receipt by the Company of such
election, or in two equal installments, the first payable within
ten business days of receipt by the Company of such election, and
PAGE 5
the second payable on the first business day of the following
calendar year.
d. Definitions. For purposes of this Paragraph 6,
___________
capitalized terms have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the
product of (i) the annual incentive compensation Executive would
_
have been entitled to receive under Paragraph 3(b) for the
calendar year in which his active service for the Company
terminates pursuant to Paragraph 6(a) had he remained employed for
the entire year and assuming that all targets for such year had
been met, multiplied by (ii) a fraction, the numerator of which is
__
equal to the number of days in such calendar year occurring on or
prior to the termination of Executive's active service for the
Company and the denominator of which is 365.
"Earned Salary" means any Base Salary earned, but unpaid,
for services rendered to the Company on or prior to the date on
which the Contract Employment Period ends (other than Base Salary
deferred pursuant to Executive's election, as provided in
Paragraph 3(a) hereof).
"Severance Benefit" means an amount equal to the sum of
(i) and (ii) below, where (i) and (ii) are:
(i) the sum of
(A) the annual Base Salary payable to Executive
immediately prior to the end of the Contract
Employment Period; and
(B) an amount (the "Bonus Severance Amount") equal to
the product of Executive's Base Salary times the
greater of (1) the Minimum Bonus Percentage and
_
(2) the percentage of Base Salary that would have
_
been payable to Executive for the year of such
termination assuming achievement of target levels
of performance and Executive's continued
employment for the entire year, and
(ii) the amount otherwise payable to Executive under the
Company's otherwise applicable severance plans, policies
or programs as in effect on the date hereof (or, if more
favorable to Executive, as in effect on the date of
Executive's termination), assuming for purposes of
determining the amount payable thereunder that
Executive's employment was terminated as a result of the
elimination of his position, but calculated by including
the Bonus Severance Amount as part of Executive's
eligible compensation for purposes of calculating the
benefits payable under such plans, policies or programs;
except that, in the event that Executive becomes entitled to
receive Severance Benefits hereunder following a Change in
Control, the Severance Benefit payable to Executive shall be
determined under Paragraph 7(c). Additionally, while Executive is
receiving payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to participate in the
welfare benefit plans and programs (excluding the long-term
disability plan, the sick-pay plan and vacation accruals)
PAGE 6
generally made available to employees of the Company and in which
he participated immediately prior to the termination of his
employment on the same terms and conditions as would have applied
had Executive continued to be employed. Upon an election to
receive Severance Benefits in either a single lump sum payment or
in two installments, Executive will forfeit any right to continue
to receive any coverage under the Company's welfare benefit plans,
other than COBRA coverage (determined from the original date of
termination) at Executive's expense as required by applicable law;
provided that, if Executive elects to receive Severance Benefits
________ ____
in two installments instead of periodic installments, the Company
shall pay one-half of the cost of Executive's COBRA coverage from
the date the first installment payment is made until the date the
second installment payment is made. Notwithstanding the
foregoing, receipt of a lump sum payment or two installment
payments hereunder shall not cause Executive to cease to be
eligible for any retiree benefit programs for which he is
otherwise eligible under the terms of the Company's employee
benefit plans, policies or programs.
"Termination for Cause" means a termination of
Executive's employment by the Company due to (i) the willful
_
failure by Executive to perform substantially Executive's duties
as an employee of the Company (other than due to physical or
mental illness) after reasonable notice to Executive of such
failure, (ii) Executive's engaging in serious misconduct that is
__
injurious to the Company or any subsidiary or any affiliate of the
Company, (iii) Executive's having been convicted of, or entered a
___
plea of nolo contendere to, a crime involving an act that is
____ __________
immoral or wrong in and of itself (e.g., burglary, larceny, murder
____
or arson) or a crime involving deceit, fraud, perjury or
embezzlement, (iv) the breach by Executive of any written covenant
__
or agreement not to compete with the Company or any subsidiary or
any affiliate or (v) the breach by Executive of his duty of
_
loyalty to the Company which shall include, without limitation,
(A) the disclosure by Executive of any confidential information
_
pertaining to the Company or any subsidiary or any affiliate of
the Company, other than (x) in the ordinary course of the
_
performance of his duties on behalf of the Company or (y) pursuant
_
to a judicial or administrative subpoena from a court or
governmental authority with jurisdiction over the matter in
question, (B) the harmful interference by Executive in the
_
business or operations of the Company or any subsidiary or any
affiliate of the Company, (C) any attempt by Executive directly or
_
indirectly to induce any employee, insurance agent, insurance
broker or broker-dealer of the Company or any subsidiary or any
affiliate to be employed or perform services elsewhere, (D) any
_
attempt by Executive directly or indirectly to solicit the trade
of any customer or supplier, or prospective customer or supplier,
of the Company on behalf of any person other than the Company or a
subsidiary thereof or (E) any breach or violation of the Company's
_
Code of Conduct, as amended from time to time. Notwithstanding
the foregoing, a breach of Executive's duty of loyalty to the
Company as described in subclause (A) or a breach of the Company's
Code of Conduct as described in subclause (E) of clause (v) of the
preceding sentence shall not be grounds for a Termination for
Cause unless such breach has had or could reasonably be expected
to have a significant adverse effect on the business or reputation
of the Company.
PAGE 7
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been
incapable of substantially fulfilling the positions, duties,
responsibilities and obligations set forth in this Agreement
because of physical, mental or emotional incapacity resulting from
injury, sickness or disease for a period of (i) at least four
_
consecutive months or (ii) more than six months in any twelve
__
month period. Any question as to the existence, extent or
potentiality of Executive's disability shall be made by a
qualified, independent physician selected by the chief or
assistant chief (or the equivalent position) of the department
which treats the disease giving rise to Executive's absence at a
nationally or regionally recognized teaching hospital chosen by
the Company. The determination of any such physician shall be
final and conclusive for all purposes of this Agreement.
Notwithstanding the foregoing, (i) a Termination for Disability
_
shall not affect Executive's right to receive any amount that
would otherwise have been payable to Executive under the Company's
plans, policies, practices or programs pertaining to short-term or
long-term disability had Executive's employment continued and (ii)
__
if it is determined, at the time Executive is first eligible to
receive long-term disability benefits under the Company's plans,
policies, practices or programs, that Executive is not entitled to
receive such long-term disability benefits (other than due to
Executive's failure to cooperate), Executive shall, for purposes
of this Paragraph 6, be deemed to have been terminated as of the
date of such determination pursuant to a Termination Without Cause
and to be entitled to receive any additional benefits payable
hereunder in respect of a Termination Without Cause.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a
_
reduction in Executive's annual Base Salary or incentive
compensation opportunity as provided under Paragraph 3(b), (ii) a
__
material reduction in Executive's positions, duties and
responsibilities from those described in Paragraph 2 hereof, (iii)
___
the relocation of Executive's principal place of employment to a
location more than 50 miles from the location at which he
performed his principal duties on the date immediately prior to
such relocation, (iv) a breach of the obligation to provide
__
Executive with the benefits required to be provided in accordance
with Paragraph 5(a), (v) a failure by the Company to pay any
_
amounts due and owing to Executive within 10 days following
written notice from Executive of such failure to pay, or (vi) any
__
other material breach of the Company's obligations to Executive
hereunder that significantly affects the compensation or benefits
payable to Executive or materially impairs Executive's ability to
perform the duties and responsibilities of his position.
Notwithstanding the foregoing, a termination shall not be treated
as a Termination for Good Reason (i) if Executive shall have
_
consented in writing to the occurrence of the event giving rise to
the claim of Termination for Good Reason or (ii) unless Executive
__
shall have delivered a written notice to the Board within 60 days
of his having actual knowledge of the occurrence of one of such
events stating that he intends to terminate his employment for
Good Reason and specifying the factual basis for such termination,
and such event shall not have been cured within 30 days of the
receipt of such notice.
"Termination Without Cause" means any termination of Executive's
employment by the Company other than (i) a Termination due to
_
Disability or (ii) a Termination for Cause.
__
PAGE 8
Subject to the Company's obligations to make the payments, if any,
required pursuant to this paragraph 6, nothing in this Agreement
shall be construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without
reason.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or
in accordance with any plan, policy, practice or program of, or
any contract or agreement with, the Company or any of its
subsidiaries (including, without limitation, any supplemental
pension plan, supplemental savings plan or other deferred
compensation arrangement, the 1994 Plan and the Company's 1984
Stock Option Plan (the "1984 Plan")), at or subsequent to the date
of his termination without regard to the performance by Executive
of further services or the resolution of a contingency, provided
_________
that, at any time during which Executive is entitled to receive
____
the Severance Benefits hereunder, Executive shall not also be
entitled to receive any benefits under the Company's generally
applicable severance or other termination plans, policies or
programs.
e. Full Discharge of Company Obligations. Except to
_____________________________________
the extent provided in this Paragraph 6, the amounts payable to
Executive pursuant to this Paragraph 6 (including, without
limitation, under Paragraph 6(f)) following termination of his
employment shall be in full and complete satisfaction of
Executive's rights under this Agreement and any other claims he
may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages
with respect to any and all such rights and claims, shall not be
subject to any offset or mitigation, and, upon Executive's receipt
of such amounts, the Company shall be released and discharged from
any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's employment
with the Company and its subsidiaries. Notwithstanding anything
else contained herein to the contrary, (i) the Company's
_
obligations under this Paragraph 6 are expressly conditioned upon
Executive's execution of a release and waiver, substantially in
the form attached hereto as Exhibit B (subject to, in the event of
any change of law occurring after the date hereof, to such
modifications as shall be necessary or appropriate to place the
Company in a substantially the same position as though no change
in law had occurred), of any claims he may have in connection with
the termination of, or arising out of, his employment with the
Company and (ii) nothing in this Section 6(e) shall be construed
__
to waive, release or otherwise limit any amounts required to be
paid hereunder or any benefits due and payable to Executive under
the terms of any employee pension benefit plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended, or any other Vested Benefit.
f. Special Continuation of Certain Protection for the
___________________________________________________
Executive. Notwithstanding anything contained in this Agreement
_________
to the contrary, if, at the end of the Contract Employment Period,
(i) Executive remains an at-will employee of the Company and (ii)
_ __
within one year following the end of the Contract Employment
Period, the Company takes actions which, if they had occurred
within the Contract Employment Period, would have given Executive
the right to terminate his employment pursuant to a Termination
for Good Reason and Executive, after giving the Company timely
PAGE 9
written notice of the events permitting a Termination for Good
Reason and the opportunity to cure described in the definition of
a Termination for Good Reason, voluntarily terminates his
employment within 90 days of the date of such actions by the
Company, then in either case, Executive shall receive payment of
the Severance Benefits that would otherwise have been payable to
Executive hereunder had his termination of employment occurred
during the Contract Employment Period. Notwithstanding the
preceding sentence, this Section 6(f) shall not be applicable
unless Executive executes the waiver and release referred to in
Paragraph 6(e) above in connection with his termination of
employment pursuant to this Paragraph 6(f).
g. Outplacement Services. In addition to any other
_____________________
benefits described in this Paragraph 6, in the event Executive is
eligible to receive Severance Benefits, the Company shall also
provide to Executive, at its expense, individual outplacement
services from a qualified outplacement firm selected by the
Company. The outplacement services to be provided to Executive
shall be no less favorable to Executive than those made available
to other executives prior to the date hereof under the Company's
generally applicable policies, programs or arrangements.
7. Change in Control of the Company.
________________________________
a. Accelerated Vesting and Payment. Unless the Board
_______________________________
(or the appropriate committee thereof) shall otherwise determine
in the manner set forth in Paragraph 7(b), the Option shall become
fully exercisable upon the occurrence of a Change in Control (as
defined below) and shall remain exercisable for a period of one
year thereafter regardless of whether Executive continues to be
employed by the Company or, if longer, for the period during which
such Option would otherwise be exercisable in accordance with its
terms or the generally applicable provisions of the 1994 Plan. If
no Alternative Option is provided as set forth in Section 7(b)
below, and the Company does not survive as a publicly traded
corporation following a Change in Control, the Company shall pay
Executive, in full settlement of all rights with respect to the
Option, an aggregate amount in cash equal to the product of (i)
_
(A) the Fair Market Value of a Share of the Company's Common Stock
on the date the Change in Control occurs minus (B) the per share
exercise price for the Option times (ii) the number of shares as
__
to which such Option has not been exercised at the time of the
Change in Control. Any amount payable pursuant to the preceding
sentence shall be paid within 30 days following such Change in
Control.
b. Alternative Options. Notwithstanding
___________________
Paragraph 7(a), no acceleration of exercisability shall occur with
respect to any Option if the Board (or the appropriate committee
thereof) reasonably determines in good faith, prior to the
occurrence of a Change in Control, that such Option shall be
honored or assumed, or new rights substituted therefor (such
honored, assumed or substituted Option being hereinafter referred
to as an "Alternative Option") by the successor in interest to the
Company, provided that any such Alternative Option must:
________ ____
(i) provide Executive with rights and entitlements
substantially equivalent to or better than the rights,
terms and conditions applicable under the Option,
including, but not limited to, an identical or better
PAGE 11
exercise and vesting schedule and identical or better
timing and methods of payment;
(ii) have substantially equivalent economic value to such
Option (determined at the time of the Change in
Control); and
(iii) have terms and conditions which provide that, in the
event that Executive's employment is terminated by the
Company for any reason or is terminated by Executive
pursuant to a Termination for Good Reason within two
years following a change in Control, (A) any conditions
_
on Executive's rights under, or any restrictions on
exercisability applicable to, each such Alternative
Option shall be waived or shall lapse, as the case may
be and (B) the Alternative Option shall
_
remain exercisable until the second anniversary of the
Change in Control or, if longer, for the period during
which such Alternative Option would otherwise be
exercisable in accordance with its terms or the
provisions of the plan under which it is granted that
permit the longest post-termination exercise period for
involuntary terminations (other than due to death,
disability or retirement).
c. Enhanced Severance Payments. If Executive's
__________________________
employment is terminated following a Change in Control pursuant to
a Termination for Good Reason or a Termination Without Cause, the
Severance Benefit payable to Executive pursuant to Paragraph 6
shall be equal to three times the sum of Executive's annual Base
Salary and the Bonus Severance Amount.
d. Additional Payments by the Company.
__________________________________
(i) Application of Paragraph 7(d). In the event that any
______________________________
amount or benefit paid or distributed to Executive
pursuant to this Agreement, taken together with any
amounts or benefits otherwise paid or distributed to
Executive by the Company or any affiliated company
(collectively, the "Covered Payments"), would be an
"excess parachute payment" as defined in Section 280G of
the Code and would thereby subject Executive to the tax
(the "Excise Tax") imposed under Section 4999 of the
code (or any similar tax that may hereafter be
imposed), the provisions of this Section 7(d) shall
apply to determine the amounts payable to Executive
pursuant to this agreement.
(ii) Calculation of Benefits. Immediately following delivery
_______________________
of any Notice of Termination, the Company shall notify
Executive of the aggregate present value of all
termination benefits to which he would be entitled under
this Agreement and any other plan, program or
arrangement as of the projected date of termination,
together with the projected maximum payments, determined
as of such projected date of termination that could be
paid without Executive being subject to the Excise Tax.
PAGE 11
(iii) Imposition of Payment Cap. If the aggregate value of
_________________________
all compensation payments or benefits to be paid or
provided to Executive under this Agreement and any
other plan, agreement or arrangement with the Company
exceeds the amount which can be paid to Executive
without Executive incurring an Excise Tax by less than
105%, then the amounts payable to Executive under this
Agreement may, in the discretion of the Company, be
reduced (but not below zero) to the maximum amount
which may be paid hereunder without Executive becoming
subject to such an Excise Tax (such reduced payments
to be referred to as the "Payment Cap"). In the event
that Executive receives reduced payments and benefits
hereunder, Executive shall have the right to designate
which of the payments and benefits otherwise provided
for in this Agreement that he will receive in
connection with the application of the Payment Cap.
(iv) Further Payments by the Company. If the aggregate
_______________________________
value of all compensation payments or benefits to be
paid or provided to Executive under this Agreement and
any other plan, agreement or arrangement with the
Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax by
more than 105%, the Company shall pay to Executive
immediately following Executive's termination of
employment an additional amount (the "Tax
Reimbursement Payment") such that the net amount
retained by Executive with respect to such Covered
Payments, after deduction of any Excise Tax on the
Covered Payments and any Federal, state and local
income tax and Excise Tax on the Tax Reimbursement
Payment provided for by this Paragraph 7(d)(iv), but
before deduction for any Federal, state or local
income or employment tax withholding on such Covered
Payments, shall be equal to the amount of the Covered
Payments.
(v) Application of Section 280G. For purposes of
___________________________
determining whether any of the Covered Payments will
be subject to the Excise Tax and the amount of such
Excise Tax,
(A) such Covered Payments will be treated as
"parachute payments" within the meaning of
Section 280G of the Code, and all "parachute
payments" in excess of the "base amount" (as
defined under Section 280G(b)(3) of the Code)
shall be treated as subject to the Excise Tax,
unless, and except to the extent that, in the
good faith judgment of the Company's independent
certified public accountants appointed prior to
the Effective Date or tax counsel selected by
such Accountants (the "Accountants"), the Company
has a reasonable basis to conclude that such
Covered Payments (in whole or in part) either do
not constitute "parachute payments" or represent
reasonable compensation for personal services
actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the "base
amount," or such "parachute payments" are
otherwise not subject to such Excise Tax, and
PAGE 12
(B) the value of any non-cash benefits or any
deferred payment or benefit shall be determined
by the Accountants in accordance with the
principles of Section 280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining
___________________
whether Executive would receive a greater net after-
tax benefit were the amounts payable under this
Agreement reduced in accordance with Paragraph
7(d)(iii), Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable
marginal rate of Federal income taxation for the
calendar year in which the first amounts are to be
paid hereunder, and
(B) any applicable state and local income taxes at the
highest applicable marginal rate of taxation for such
calendar year, net of the maximum reduction in Federal
incomes taxes which could be obtained from the
deduction of such state or local taxes if paid in such
year;
provided, however, that Executive may request that such
determination be made based on his individual tax
circumstances, which shall govern such determination so long
as Executive provides to the Accountants such information
and documents as the Accountants shall reasonably request to
determine such individual circumstances.
(vii) Adjustments in Respect of the Payment Cap. If Executive
________________________________________
receives reduced payments and benefits under this
Paragraph 7(d) (or this Paragraph 7(d) is determined not
to be applicable to Executive because the Accountants
conclude that Executive is not subject to any Excise Tax)
and it is established pursuant to a final determination
of a court or an Internal Revenue Service proceeding (a
"Final Determination") that, notwithstanding the good
faith of Executive and the Company in applying the terms
of this Agreement, the aggregate "parachute payments"
within the meaning of Section 280G of the Code paid to
Executive or for his benefit are in an amount that would
result in Executive being subject an Excise Tax, then the
amount equal to such excess parachute payments shall be
deemed for all purposes to be a loan to Executive made on
the date of receipt of such excess payments, which
Executive shall have an obligation to repay to the
Company on demand, together with interest on such amount
at the applicable Federal rate (as defined in Section
1274(d) of the Code) from the date of the payment
hereunder to the date of repayment by Executive. If this
Paragraph 7(d) is not applied to reduce Executive's
entitlements under this Paragraph 7 because the
Accountants determine that Executive would not receive a
greater net-after tax benefit by applying this Paragraph
7(d) and it is established pursuant to a Final
Determination that, notwithstanding the good faith of
Executive and the Company in applying the terms of this
Agreement, Executive would have received a greater net
after tax benefit by subjecting his payments and benefits
hereunder to the Payment Cap, then the aggregate
PAGE 13
"parachute payments" paid to Executive or for his benefit
in excess of the Payment Cap shall be deemed for all
purposes a loan to Executive made on the date of receipt
of such excess payments, which Executive shall have an
obligation to repay to the Company on demand, together
with interest on such amount at the applicable Federal
rate (as defined in Section 1274(d) of the Code) from the
date of the payment hereunder to the date of repayment by
Executive. If Executive receives reduced payments and
benefits by reason of this Paragraph 7(d) and it is
established pursuant to a Final Determination that
Executive could have received a greater amount without
exceeding the Payment Cap, then the Company shall
promptly thereafter pay Executive the aggregate
additional amount which could have been paid without
exceeding the Payment Cap, together with interest on such
amount at the applicable Federal rate (as defined in
Section 1274(d) of the Code) from the original payment
due date to the date of actual payment by the Company.
(viii) Adjustments in Respect of the Tax Reimbursement Payments.
________________________________________________________
In the event that the Excise Tax is subsequently
determined by the Accountants or pursuant to any
proceeding or negotiations with the Internal Revenue
Service to be less than the amount taken into account
hereunder in calculating the Tax Reimbursement Payment
made, Executive shall repay to the Company, at the time
that the amount of such reduction in the Excise Tax is
finally determined, the portion of such prior Tax
Reimbursement Payment that would not have been paid if
such Excise Tax had been applied in initially calculating
such Tax Reimbursement Payment, plus interest on the
amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. Notwithstanding the
foregoing, in the event any portion of the Tax
Reimbursement Payment to be refunded to the Company has
been paid to any Federal, state or local tax authority,
repayment thereof shall not be required until actual
refund or credit of such portion has been made to
Executive, and interest payable to the Company shall not
exceed interest received or credited to Executive by such
tax authority for the period it held such portion.
Executive and the Company shall mutually agree upon the
course of action to be pursued (and the method of
allocating the expenses thereof) if Executive's good
faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined by
the Accountants or pursuant to any proceeding or
negotiations with the Internal Revenue Service to exceed
the amount taken into account hereunder at the time the
Tax Reimbursement Payment is made (including, but not
limited to, by reason of any payment the existence or
amount of which cannot be determined at the time of the
Tax Reimbursement Payment), the Company shall make an
additional Tax Reimbursement Payment in respect of such
excess (plus any interest or penalty payable with respect
to such excess) at the time that the amount of such
excess is finally determined.
PAGE 14
(ix) Timing of Payment. Any Tax Reimbursement Payment (or
_________________
portion thereof) provided for in Paragraph 7(d)(iv) above
shall be paid to Executive not later than 10 business
days following the payment of the Covered Payments;
provided, however, that if the amount of such Tax
Reimbursement Payment (or portion thereof) cannot be
finally determined on or before the date on which payment
is due, the Company shall pay to Executive by such date
an amount estimated in good faith by the Accountants to
be the minimum amount of such Tax Reimbursement Payment
and shall pay the remainder of such Tax Reimbursement
Payment (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined, but in no event later than 45
calendar days after payment of the related Covered
Payment. In the event that the amount of the estimated
Tax Reimbursement Payment exceeds the amount subsequently
determined to have been due, such excess shall constitute
a loan by the Company to Executive, payable on the fifth
business day after written demand by the Company for
payment (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
e. Definition of "Change in Control". For purposes of
_________________________________
this Paragraph 7, a "Change in Control" means the happening of any
of the following:
(i) When any "person" as defined in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and as used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) of
the Exchange Act but excluding the Company and any subsidiary
thereof and any employee benefit plan sponsored or maintained
by the Company or any Subsidiary (including any trustee of
such plan acting as trustee), directly or indirectly, becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act, as amended from time to time), of securities of
the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months
after the Commencement Date, the individuals who, at the
beginning of such period, constitute the Board (the
"Incumbent Directors") cease for any reason other than death
to constitute at least a majority thereof, provided that a
________ ____
director who was not a director at the beginning of such 24-
month period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director
was elected by, or on the recommendation of or with the
approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors either actually (because
they were directors at the beginning of such 24-month period)
or by prior operation of this Paragraph 7(e)(ii); or
(iii) The occurrence of a transaction requiring
stockholder approval for the acquisition of the Company by an
entity other than the Company or a subsidiary through
purchase of assets, or by merger, or otherwise.
8. Noncompetition and Confidentiality.
_________________________________
a. Noncompetition. During the Contract Employment
______________
Period and for a period of one year following Executive's
termination of employment during the Contract Employment Period
other than due to a Termination Without Cause or a Termination for
Good Reason, Executive shall not become associated, whether as a
principal, partner, employee, consultant or shareholder (other
than as a holder of not in excess of 1% of the outstanding voting
shares of any publicly traded company), with any entity that is
actively engaged in any geographic area in any business which is
in substantial and direct competition with the business or
businesses of the Company for which Executive provides substantial
services or for which Executive has substantial responsibility,
provided that nothing in this Paragraph 8(a) shall preclude
________ ____
Executive from performing services solely and exclusively for a
division or subsidiary of such an entity that is engaged in a non-
competitive business.
b. Nondisclosure, Nonsolicitation and Cooperation.
______________________________________________
(i) Executive shall not (except to the extent required by
an order of a court having competent jurisdiction or under
subpoena from an appropriate government agency) disclose to any
third person, whether during or subsequent to the Executive's
employment with the Company, any trade secrets; customer lists;
product development and related information; marketing plans and
related information; sales plans and related information;
operating policies and manuals; business plans; financial records;
or other financial, commercial, business or technical information
related to the Company or any subsidiary or affiliate thereof
unless such information has been previously disclosed to the
public by the Company or has become public knowledge other than by
a breach of this Agreement; provided, however, that this
________ _______
limitation shall not apply to any such disclosure made while
Executive is employed by the Company, or any subsidiary or
affiliate thereof if such disclosure is reasonably intended to
benefit the Company, or any subsidiary or affiliate;
(ii) during the Contract Employment Period and for two
years after the termination of such Period, Executive shall not
attempt, directly or indirectly, to induce any employee or
Insurance Agent (as defined below) of the Company, or any
subsidiary or any affiliate thereof to be employed or perform
services elsewhere;
(iii) during the Contract Employment Period and for two
years after the termination of such Period, Executive shall not
attempt, directly or indirectly, to induce any insurance agent or
agency, insurance broker, broker-dealer or supplier of the
Company, or any subsidiary or affiliate thereof to cease providing
services to the Company, or any subsidiary or affiliate thereof;
(iv) during the Contract Employment Period and for two
years after the termination of such Period, Executive shall not
attempt, directly or indirectly, to solicit, on behalf of any
person or entity other than the Company or any of its subsidiaries,
the trade of any individual or entity which, at the time of the
solicitation, is a customer of the Company, or any subsidiary or
affiliate thereof, or which the Company, or any subsidiary or
affiliate thereof is undertaking reasonable steps to procure as a
customer at the time of or immediately preceding termination of
the Contract Employment Period; provided, however, that this
________ _______
PAGE 16
limitation shall only apply to (x) any product or service which is
_
in competition with a product or service of the Company or any
subsidiary or affiliate thereof and (y) with respect to any
_
customer or prospective customer with whom Executive has or had
(by virtue of Executive's position or otherwise) a personal
relationship; and
(v) following the termination of the Contract Employment
Period, Executive shall provide assistance to and shall cooperate
with the Company or any subsidiary or affiliate thereof, upon its
reasonable request, with respect to matters within the scope of
Executive's duties and responsibilities during the Contract
Employment Period. (The Company agrees and acknowledges that it
shall, to the maximum extent possible under the then prevailing
circumstances, coordinate (or cause a subsidiary or affiliate
thereof to coordinate) any such request with Executive's other
commitments and responsibilities to minimize the degree to which
such request interferes with such commitments and
responsibilities). The Company agrees that it will reimburse
Executive for reasonable travel expenses (i.e., travel, meals and
____
lodging) that Executive may incur in providing assistance to the
Company hereunder.
Solely for purposes of Paragraph 8(b)(ii) above, the term
"Insurance Agent" shall mean those insurance agents or agencies
representing the Company or any subsidiary or affiliate thereof,
that are exclusive or career agents or agencies of the Company or
any subsidiary or affiliate thereof, or any insurance agents or
agencies which derive 50% or more of their business revenue from
the Company or any subsidiary or affiliate thereof (calculated on
an aggregate basis for the 12-month period prior to the date of
determination or such other similar period for which such
information is more readily available).
c. Company Property. Promptly following Executive's
________________
termination of employment, Executive shall return to the Company
all property of the Company, and all copies thereof in Executive's
possession or under his control.
d. Intention of the Parties. If any provision of
________________________
Paragraph 8 is determined by an arbitrator (or a court of
competent jurisdiction asked to enforce the decision of the
arbitrator) not to be enforceable in the manner set forth in this
Agreement, the Company and Executive agree that it is the
intention of the parties that such provision should be enforceable
to the maximum extent possible under applicable law and that such
arbitrator (or court) shall reform such provision to make it
enforceable in accordance with the intent of the parties.
Executive acknowledges that a material part of the inducement for
the Company to provide the salary and benefits evidenced hereby is
Executive's covenants set forth in Paragraph 8(a), (b) and (c) and
that the covenants and obligations of Executive with respect to
nondisclosure and nonsolicitation relate to special, unique and
extraordinary matters and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable
injury for which adequate remedies are not available at law.
Therefore, Executive agrees that, if Executive shall breach any of
those covenants, the Company shall have no further obligation to
pay Executive any benefits otherwise payable hereunder and the
Company shall be entitled to an injunction, restraining order or
such other equitable relief (without the requirement to post a
PAGE 17
bond) restraining Executive from committing any violation of the
covenants and obligations contained in Paragraph 8(a), (b) and
(c). The remedies in the preceding sentence are cumulative and
are in addition to any other rights and remedies the Company may
have at law or in equity as an arbitrator (or court) shall
reasonably determine.
e. Waiver. Without limiting the generality of the
______
foregoing, upon request of Executive prior to engaging in any
conduct otherwise prohibited by this Paragraph 8, the Board may,
in its sole discretion, waive in writing, on such terms and
conditions as it may deem appropriate, any violation of this
Paragraph 8 which would otherwise occur due to such conduct.
9. Miscellaneous.
_____________
a. Survival. Paragraphs 7 (relating to a Change in
________
Control), 8 (relating to noncompetition, nonsolicitation and
confidentiality)and 9 (relating, among other things, to survival,
assignment and governing law) shall survive the termination
hereof, whether such termination shall be by expiration of the
Contract Employment Period or an early termination pursuant to
Paragraph 6 hereof. Paragraph 6((other than Paragraph 6(f))
(relating to early termination) shall survive the termination
hereof to the extent that, prior thereto, Executive (or his
beneficiary) has become entitled to receive any of the benefits
payable thereunder. Paragraph 6(f) (and to the extent applicable
to such Paragraph 6(f), 6(e)) shall survive for one year following
the termination hereof.
b. Binding Effect. This Agreement shall be binding on,
______________
and shall inure to the benefit of, the Company and any person or
entity that succeeds to the interest of the Company (regardless of
whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a sale
of the assets of the business of the Company (or portion thereof)
in which Executive performs a majority of his services. Any
successor in interest to the Company shall acknowledge in writing
to Executive that it has assumed this Agreement and is responsible
to Executive for the performance of the Company's obligations
under this Agreement. Without limiting the generality of the
foregoing, the Company shall have the right, without the consent
of Executive, to assign this Agreement and its obligations
hereunder to any New Entity or any subsidiary of any New Entity by
which Executive becomes employed, at the discretion of the
Company, by reason of the implementation of any restructuring of
the Company, and, following any such assignment, such New Entity
or subsidiary shall be treated as the Company for all purposes of
this Agreement. This Agreement shall also endure to the benefit
of Executive's heirs, executors, administrators and legal
representatives.
c. Assignment. Except as provided under Paragraph
__________
9(b), neither this Agreement nor any of the rights or obligations
hereunder shall be assigned or delegated by any party hereto
without the prior written consent of the other party. In the
event the Company assigns this Agreement pursuant to Section 9(b),
the Company shall guarantee payment to Executive of any amounts at
any time due and payable hereunder in the event (and only to the
PAGE 18
extent) that the assignee has become a debtor in bankruptcy, is
the subject of a receivership or similar preceding or has become
insolvent, provided that Executive shall be required to assign his
________ ____
rights against the assignee through subrogation as a condition of
receiving any payment under the Company's guarantee. In
consideration of such guarantee, Executive agrees that following
such assignment, the covenants of Executive in Paragraphs 8(b)(i)
and (v) shall continue to inure to the benefit of the Company, as
well as the assignee. The Company and Executive agree that
following any assignment all other covenants described herein in
favor of the Company shall, from and after the date of such
assignment, inure solely to the benefit of the assignee.
d. Entire Agreement. Except as expressly provided
________________
below, this Agreement, the Option Agreement, and the portion, if
any, of any other agreement relating to pension service or credits
referred to in Paragraph 5(a) shall constitute the entire
agreement between the parties hereto with respect to the matters
referred to herein and any other agreement or any portion of any
such other agreement not expressly preserved hereby shall cease to
be effective upon the execution hereof and shall not become
reinstated upon the expiration or other termination of this
Agreement. There are no promises, representations, inducements or
statements between the parties other than those that are expressly
contained herein. Executive acknowledges that he is entering into
this Agreement of his own free will and accord, and with no
duress, that he has read this Agreement and that he understands it
and its legal consequences. Other than the provisions of
Paragraph 6 which limit Executive's eligibility to receive
severance benefits under the Company's generally applicable plans,
programs or agreements, nothing in this Agreement shall be
construed to limit or otherwise supersede Executive's rights or
entitlements under any compensatory plan, program or arrangement
made available generally to all employees or all officers of the
Company or under the 1994 Plan or the 1984 Plan and this Paragraph
9(d) shall not preclude reference to the documents governing any
such plan, program or arrangement to determine such rights and
entitlements.
e. Severability; Reformation. In the event that one or
_________________________
more of the provisions of this Agreement shall become invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein
shall not be affected thereby. In the event any of Paragraph
8(a), (b) or (c) is not enforceable in accordance with its terms,
Executive and the Company agree that such Paragraph shall be
reformed to make such Paragraph enforceable in a manner which
provides the Company the maximum rights permitted at law.
f. Waiver. Waiver by any party hereto of any breach
______
or default by the other party of any of the terms of this
Agreement shall not operate as a waiver of any other breach or
default, whether similar to or different from the breach or
default waived. No waiver of any provision of this Agreement
shall be implied from any course of dealing between the parties
hereto or from any failure by either party hereto to assert its or
his rights hereunder on any occasion or series of occasions.
PAGE 19
g. Notices. Any notice required or desired to be
_______
delivered under this Agreement shall be in writing and shall be
delivered personally, by courier service, by registered mail,
return receipt requested, or by telecopy and shall be effective
upon actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate
in accordance with the terms hereof):
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: Corporate Secretary
If to Executive:
Ronald E. Compton
59 Northgate
Simsbury, Connecticut 06070
h. Arbitration. The Company and Executive agree that any
___________
claim, dispute or controversy arising under or in connection with
this Agreement, or otherwise in connection with Executive's
employment by the Company (including, without limitation, any such
claim, dispute or controversy arising under any federal, state or
local statute, regulation or ordinance or any of the Company's
employee benefit plans, policies or programs) shall be resolved
solely and exclusively by binding arbitration. The arbitration
shall be held in the city of Hartford, Connecticut (or at such
other location as shall be mutually agreed by the parties). The
arbitration shall be conducted in accordance with the Expedited
Employment Arbitration Rules (the "Rules") of the American
Arbitration Association (the "AAA") in effect at the time of the
arbitration, except that the arbitrator shall be selected by
alternatively striking from a list of five arbitrators supplied by
the AAA. All fees and expenses of the arbitration, including a
transcript if either requests, shall be borne equally by the
parties. If Executive prevails as to any material issue presented
to the arbitrator, the entire cost of such proceedings (including,
without limitation, Executive's reasonable attorneys fees) shall
be borne by the Company. If Executive does not prevail as to any
material issue, each party will pay for the fees and expenses of
its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party
prevails on a claim for which attorney's fees are recoverable
under the Rules). Any action to enforce or vacate the
arbitrator's award shall be governed by the Federal Arbitration
Act, if applicable, and otherwise by applicable state law. If
either the Company or Executive pursues any claim, dispute or
controversy against the other in a proceeding other than the
arbitration provided for herein, the responding party shall be
entitled to dismissal or injunctive relief regarding such action
and recovery of all costs, losses and attorney's fees related to
such action.
PAGE 20
i. Amendments. This Agreement may not be altered,
__________
modified or amended except by a written instrument signed by each
of the parties hereto.
j. Headings. Headings to paragraphs in this Agreement
________
are for the convenience of the parties only and are not intended
to be part of or to affect the meaning or interpretation hereof.
k. Counterparts. This Agreement may be executed in
____________
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
l. Withholding. Any payments provided for herein shall
___________
be reduced by any amounts required to be withheld by the Company
from time to time under applicable Federal, State or local income
or employment tax laws or similar statutes or other provisions of
law then in effect.
m. Governing Law. This Agreement shall be governed by
_____________
the laws of the State of Connecticut, without reference to
principles of conflicts or choice of law under which the law of
any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement
to be executed by its duly authorized officer and Executive has
hereunto set his hand as of the day and year first above written.
Aetna Life and Casualty Company
/s/ Mary Ann Champlin
________________________________
Mary Ann Champlin
Senior Vice President, Aetna
Human Resources
/s/ Ronald E. Compton
________________________________
Ronald E. Compton
PAGE 1
EMPLOYMENT AGREEMENT
____________________
EMPLOYMENT AGREEMENT, dated as of December 19, 1995, by
and between Aetna Life and Casualty Company, a Connecticut
corporation (the "Company"), and Daniel P. Kearney ("Executive").
W I T N E S S E T H:
_ _ _ _ _ _ _ _ _ _
WHEREAS, the Company is considering certain restructuring
alternatives that could result in significant changes in the
structure of its business, including, without limitation, dividing
the business of the Company into two or more separate publicly
traded companies or otherwise transferring a portion of the
business to a third party;
WHEREAS, the Company believes that Executive is a key
employee and that it is in the Company's best interests to retain
the services of Executive for the period during which such
restructuring alternatives are considered and, to the extent
applicable, implemented;
WHEREAS, the Company therefore desires to retain the
services of Executive and to enter into an agreement embodying the
terms of such employment (the "Agreement"); and
WHEREAS, Executive desires to accept such employment and
enter into such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as
follows:
1. Employment. Except as provided in Paragraph 6(a), the
__________
Company shall continue to employ Executive and Executive agrees to
remain employed by the Company under the terms of this Agreement
for the period commencing on the date first written above and
ending April 28, 1998. The period during which Executive is
employed pursuant to this Agreement shall be referred to as the
"Contract Employment Period". Upon the expiration of the Contract
Employment Period, Executive's employment with the Company shall
continue on an at-will basis.
2. Position and Duties. During the contract Employment
___________________
Period, Executive shall serve as Executive Vice President,
Investments/Financial Services, of the Company and in such other
comparable or better position or positions with the Company and
its subsidiaries as the Chief Executive Officer or the Board of
Directors of the Company (the "Board") shall specify from time to
time. During the Contract Employment Period, Executive shall have
the duties, responsibilities and obligations customarily assigned
to individuals serving
PAGE 2
in the position or positions in which Executive serves hereunder
and such other duties, responsibilities and obligations as the
Chief Executive Officer or the Board shall from time to time
specify. Executive shall devote his full business time to the
services required of him hereunder, except for vacation time and
reasonable periods of absence due to sickness, personal injury or
other disability, and shall use his best efforts, judgment, skill
and energy to perform such services in a manner consistent with
the duties of his position and to improve and advance the business
and interests of the Company and its subsidiaries. Nothing
contained herein shall preclude Executive from (i) serving on any
_
corporate or governmental board of directors on which he currently
serves or, if the Board consents to such service, on any other
board of directors, (ii) serving on the board of, or working for,
__
any charitable, not-for profit or community organization, (iii)
___
pursuing any other activity to which the Board consents or (iv)
__
pursuing his personal, financial and legal affairs, so long as
such activities, individually or collectively, do not interfere
with the performance of Executive's duties hereunder.
3. Cash Compensation.
_________________
a. Base Salary. During the Contract Employment Period,
___________
the Company shall pay Executive a base salary at the annual rate
of $525,000. The Board shall periodically review Executive's base
salary and the Company may, in its discretion, increase such base
salary by an amount it determines to be appropriate. Any such
increase shall not reduce or limit any other obligation of the
Company hereunder. Executive's annual base salary payable
hereunder, as it may be increased from time to time and without
reduction for any amounts deferred as described above, is referred
to herein as "Base Salary". Executive's Base Salary, as in effect
from time to time, may not be reduced by the Company without
Executive's consent, provided that the Base Salary payable under
________ ____
this paragraph shall be reduced to the extent Executive elects to
defer or reduce such salary under the terms of any deferred
compensation or savings plan or other employee benefit arrangement
maintained or established by the Company. The Company shall pay
Executive the portion of his Base Salary not deferred in
accordance with its customary periodic payroll practices.
b. Incentive Compensation. During the term of the
______________________
Contract Employment Period, Executive shall remain eligible for
participation in the Company's existing and future annual and long
term incentive compensation programs at a level consistent with
his position at the Company and the Company's then current
policies and practices; provided that following any assignment of
_____________
this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph
7(e)), the calculation of the amount payable as annual incentive
compensation and the conditions upon which such bonus shall be
payable shall be no less favorable to the Executive (taking into
account reasonable changes in the Company's goals and objectives)
PAGE 3
than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such
assignment or Change in Control. Without limiting the generality
of the foregoing, for each calendar year ending during the term
hereof, Executive shall receive the opportunity to receive an
annual bonus of at least 60% of his Base Salary (the "Minimum
Bonus Percentage"), subject to satisfaction of such reasonable
performance criteria as shall be established with respect to such
year.
4. Stock Option Grant. Contingent upon the execution of
__________________
this Agreement by the Executive, the Company has granted Executive
an option, having a ten-year term, to purchase 65,000 shares of
the Company's Common Stock at an exercise price per share equal to
$57 a share (the "Option"). Except to the extent specified below,
the terms of the Option shall be determined in accordance with the
terms of the 1994 Stock Incentive Plan (the "1994 Plan") and shall
be set forth in the separate agreement embodying the grant of such
Option (the "Option Agreement"), the form of which is attached
hereto as Exhibit A.
5. Benefits, Perquisites and Expenses.
__________________________________
a. Benefits. During the Contract Employment Period,
________
Executive shall be eligible to participate in (i) each welfare
_
benefit plan sponsored or maintained by the Company, including,
without limitation, each group life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan
or program of the Company, and (ii) each pension, profit sharing,
__
retirement, deferred compensation or savings plan sponsored or
maintained by the Company, in each case, whether now existing or
established hereafter, to the extent that Executive is eligible to
participate in any such plan under the generally applicable
provisions thereof. Nothing in this Paragraph 5(a) shall be
construed to limit the ability of the Company to amend or
terminate any particular plan, program or arrangements, provided
_________
that, following the occurrence of a Change in Control (as defined
____
in Paragraph 7(e)) or the assignment of this Agreement to a New
Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b),
the benefits made available to the Executive thereafter shall be
at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such
Change in Control or assignment.
With respect to the pension or retirement benefits payable to
Executive, Executive's service credited for purposes of
determining Executive's benefits and vesting shall be determined
in accordance with the terms of the applicable plan or program or,
if applicable, pursuant to any written agreement between Executive
and the Company (whether now existing or hereafter adopted) that
provides Executive a more favorable method of crediting service
for any purpose thereunder.
b. Perquisities. During the Contract Employment Period,
____________
Executive shall be entitled to receive such perquisites as are
PAGE 4
generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the
Company.
c. Business Expenses. During the Contract Employment
_________________
Period, the Company shall pay or reimburse Executive for all
reasonable expenses incurred or paid by Executive in the
performance of Executive's duties hereunder, upon presentation of
expense statements or vouchers and such other information as the
Company may require and in accordance with the generally
applicable policies and procedures of the Company.
6. Termination of Employment.
__________________________
a. Early Termination of the Contract Employment Period.
___________________________________________________
Notwithstanding Paragraph 1, the Contract Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's
_
employment on account of Executive's death, (ii) a Termination due
__
to Disability, (iii) a Termination for Cause, (iv) a Termination
___ __
Without Cause, (v) a Termination for Good Reason or (vi) a
_ __
termination of Executive's employment by Executive other than a
Termination for Good Reason. For purposes of this Agreement, a
transfer of Executive's employment (i) to any other entity
_
controlled by or under common control with the Company shall not
be treated as a termination unless and until such entity ceases to
be controlled by or under common control with the Company or (ii)
__
as a result of the implementation of any restructuring of the
Company (whether occurring by spin-off or otherwise) shall not be
treated as a termination of employment, provided that, in either
_____________
case, the successor employer (the "New Entity") expressly assumes
and agrees to perform all of the Company's obligations under this
Agreement.
b. Benefits Payable Upon Termination. Following the end
_________________________________
of the Contract Employment Period pursuant to Paragraph 6(a),
Executive (or, in the event of his death, his surviving spouse, if
any, or his estate) shall be paid the type or types of
compensation determined to be payable in accordance with the
following table at the times established pursuant to Paragraph
6(c):
<TABLE>
<CAPTION>
Earned Vested Accrued Severance
Salary Benefits Bonus Benefit
________ __________ ________ ________
<C> <S> <S> <S> <S>
Termination due Payable Payable Payable Not Payable
to death
Termination due to Payable Payable Payable Not Payable
Disability
Termination for Payable Payable Not Payable Not Payable
Cause
Termination Without Payable Payable Payable Payable
Cause
Termination for Payable Payable Payable Payable
Good Reason
Termination by Payable Payable Not Payable Not Payable
Executive other than
for Good Reason
</TABLE>
PAGE 5
c. Timing of Payments. Earned Salary and Accrued Bonus
__________________
shall be paid in a single lump sum as soon as practicable, but in
no event more than 30 days, following the end of the Contract
Employment Period. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or
agreement under which such benefits have accrued.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was
receiving his salary payments hereunder, for the greater of (i)
_
one year, (ii) the period over which such benefits would be
__
payable if paid to Executive under the Company's otherwise
applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid
___
to Executive under the Company's otherwise applicable plans,
policies or procedures, as in effect at the time of Executive's
termination of employment. Notwithstanding the foregoing,
Executive may elect, by written notice given to the Company prior
to the first periodic payment and within ten business days after
such termination, that, instead of periodic installments,
Severance Benefits shall be paid in either a single lump sum,
payable within ten business days of receipt by the Company of such
election, or in two equal installments, the first payable within
ten business days of receipt by the Company of such election, and
the second payable on the first business day of the following
calendar year.
d. Definitions. For purposes of this Paragraph 6,
___________
capitalized terms have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the product
of (i) the annual incentive compensation Executive would have been
_
entitled to receive under Paragraph 3(b) for the calendar year in
which his active service for the Company terminates pursuant to
Paragraph 6(a) had he remained employed for the entire year and
assuming that all targets for such year had been met, multiplied
by (ii) a fraction, the numerator of which is equal to the number
__
of days in such calendar year occurring on or prior to the
termination of Executive's active service for the Company
(including any period of absence due to disability) and the
denominator of which is 365.
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which
the Contract Employment Period ends (other than Base Salary
deferred pursuant to Executive's election, as provided in
Paragraph 3(a) hereof).
"Severance Benefit" means an amount equal to the sum of (i)
and (ii) below, where (i) and (ii) are:
(I) the sum of
(A) the annual Base Salary payable to Executive
immediately prior to the end of the Contract
Employment Period; and
PAGE 6
(B) an amount (the "Bonus Severance Amount") equal to the
product of Executive's Base Salary times the greater
of (1) the Minimum Bonus Percentage and (2) the
_ _
percentage of Base Salary that would have been payable
to Executive for the year of such termination assuming
achievement of target levels of performance and
Executive's continued employment for the entire year,
and
(ii) the amount otherwise payable to Executive under the
Company's otherwise applicable severance plans, policies or
programs as in effect on the date hereof (or, if more
favorable to Executive, as in effect on the date of
Executive's termination), assuming for purposes of
determining the amount payable thereunder that Executive's
employment was terminated as a result of the elimination of
his position, but calculated by including the Bonus
Severance Amount as part of Executive's eligible
compensation for purposes of calculating the benefits
payable under such plans, policies or programs;
except that, in the event that Executive becomes entitled to
receive Severance Benefits hereunder following a Change in
Control, the Severance Benefit payable to Executive shall be
determined under Paragraph 7(c). Additionally, while Executive is
receiving payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to participate in the
welfare benefit plans and programs (excluding the long-term
disability plan, the sick-pay plan and vacation accruals)
generally made available to employees of the Company and in which
he participated immediately prior to the termination of his
employment on the same terms and conditions as would have applied
had Executive continued to be employed. Upon an election to
receive Severance Benefits in either a single lump sum payment or
in two installments, Executive will forfeit any right to continue
to receive any coverage under the Company's welfare benefit plans,
other than COBRA coverage (determined from the original date of
termination) at Executive's expense as required by applicable law;
provided that, if Executive elects to receive Severance Benefits
_____________
in two installments instead of periodic installments, the Company
shall pay one-half of the cost of Executive's COBRA coverage from
the date the first installment payment is made until the date the
second installment payment is made. Notwithstanding the
foregoing, receipt of a lump sum payment or two installment
payments hereunder shall not cause Executive to cease to be
eligible for any retiree benefit programs for which he is
otherwise eligible under the terms of the Company's employee
benefit plans, policies or programs.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) the willful failure by
_
Executive to perform substantially Executive's duties as an
employee of the Company (other than due to physical or mental
illness) after reasonable notice to Executive of such failure,
(ii) Executive's engaging in misconduct that is materially
__
injurious to the Company or any subsidiary or any affiliate of the
Company, (iii) Executive's having been convicted of, or entered a
___
plea of nolo contendere to, a crime that constitutes a felony,
____ __________
(iv) the material breach by Executive of any written covenant or
__
agreement not to compete with the Company or any subsidiary or any
affiliate or (v) the breach by Executive of his duty of loyalty to
_
the Company which shall include, without limitation, (A) the
_
PAGE 7
disclosure by Executive of any confidential information pertaining
to the Company or any subsidiary or any affiliate of the Company,
other than (x) in the ordinary course of the performance of his
_
duties on behalf of the Company or (y) pursuant to a judicial or
_
administrative subpoena from a court or governmental authority
with jurisdiction over the matter in question, (B) the harmful
_
interference by Executive in the business or operations of the
Company or any subsidiary or any affiliate of the Company, (C) any
_
attempt by Executive directly or indirectly to induce any
employee, insurance agent, insurance broker or broker-dealer of
the Company or any subsidiary or any affiliate to be employed or
perform services elsewhere, other than actions taken by Executive
that are intended to benefit the Company or any subsidiary or
affiliate and do not benefit Executive financially other than as
an employee or stockholder of the Company, (D) any attempt by
_
Executive directly or indirectly to solicit the trade of any
customer or supplier, or prospective customer or supplier, of the
Company on behalf of any person other than the Company or a
subsidiary thereof, other than actions taken by Executive that are
intended to benefit the Company or any subsidiary or affiliate and
do not benefit Executive financially other than as an employee or
stockholder of the Company, provided, however, that this provision
________ _______
shall only apply to any product or service which is in competition
with a product or service of the Company or any subsidiary or
affiliate thereof or (E) any breach or violation of the Company's
_
Code of Conduct, as amended from time to time sufficient to
warrant a for cause termination consistent with the Company's past
practice. Notwithstanding the foregoing, a breach of Executive's
duty of loyalty to the Company as described in subclause (A) or a
breach of the Company's Code of Conduct as described in subclause
(E) of clause (v) of the preceding sentence shall not be grounds
for a Termination for Cause unless such breach has had or could
reasonably be expected to have a significant adverse effect on the
business or reputation of the Company.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been
incapable, with or without reasonable accommodation, of
substantially fulfilling the positions, essential duties,
responsibilities and obligations of Executive's positions set
forth in this Agreement because of physical, mental or emotional
incapacity resulting from injury, sickness or disease for a period
of (i) at least four consecutive months or (ii) more than six
_ __
months in any twelve month period. Any question as to the
existence, extent or potentiality of Executive's disability shall
be made by a qualified, independent physician selected by the
chief or assistant chief (or the equivalent position) of the
department which treats the condition giving rise to Executive's
absence at a nationally or regionally recognized teaching hospital
chosen by the Company. The determination of any such physician
shall be final and conclusive for all purposes of this Agreement.
Notwithstanding the foregoing, (i) a Termination for Disability
_
shall not affect Executive's right to receive any amount that
would otherwise have been payable to Executive under the Company's
plans, policies, practices or programs pertaining to short-term or
long-term disability had Executive's employment continued and (ii)
__
if it is determined, at the time Executive is first eligible to
receive long-term disability benefits under the Company's plans,
policies, practices or programs, that Executive is not entitled to
receive such long-term disability benefits (other than due to
Executive's failure to cooperate), Executive shall, for purposes
of this Paragraph 6, be deemed to have been terminated as of the
PAGE 8
date of such determination pursuant to a Termination Without Cause
and to be entitled to receive any additional benefits payable
hereunder in respect of a Termination Without Cause.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following
actual knowledge of (i) a reduction in Executive's annual Base
_
Salary or incentive compensation opportunity as provided under
Paragraph 3(b), (ii) a material reduction in Executive's
__
positions, duties and responsibilities from those described in
Paragraph 2 hereof, (iii) the relocation of Executive's principal
___
place of employment to a location more than 50 miles from the
location at which he performed his principal duties on the date
immediately prior to such relocation, (iv) a breach of the
__
obligation to provide Executive with the benefits required to be
provided in accordance with Paragraph 5(a), (v) a failure by the
__
Company to pay any amounts due and owing to Executive within 10
days following written notice from Executive of such failure to
pay, or (vi) any other material breach of the Company's
__
obligations to Executive hereunder that materially affects the
compensation or benefits payable to Executive or materially
impairs Executive's ability to perform the duties and
responsibilities of his position. Notwithstanding the foregoing,
a termination shall not be treated as a Termination for Good
Reason (i) if Executive shall have consented in writing to the
_
occurrence of the event giving rise to the claim of Termination
for Good Reason or (ii) unless Executive shall have delivered a
__
written notice to the Chief Executive Officer of the Company
within 60 days of his having actual knowledge of the occurrence of
one of such events stating that he intends to terminate his
employment for Good Reason and specifying the factual basis for
such termination, and such event shall not have been cured within
30 days of the receipt of such notice.
"Termination Without Cause" means any termination of
Executive's employment by the Company other than (i) a Termination
_
due to Disability or (ii) a Termination for Cause. Subject to the
__
Company's obligations to make the payments, if any, required
pursuant to this paragraph 6, nothing in this Agreement shall be
construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without
reason.
"Vested Benefits" means amounts payable under the terms of or
in accordance with any plan, policy or practice or program of, or
any contract or agreement with, the Company or any of its
subsidiaries (including, without limitation, any supplemental
pension plan, supplemental savings plan or other deferred
compensation arrangement, the 1994 Plan and the Company's 1984
Stock Option Plan (the "1984 Plan") with respect to which
Executive's rights to such amounts (i) have become vested and
_
nonforfeitable on or before Executive's termination of employment
or (ii) otherwise have or will become nonforfeitable at or
__
subsequent to his termination of employment without regard to the
performance by Executive of further services or the resolution of
a contingency that is not satisfied at or after such termination,
provided that, at any time during which Executive is entitled to
_____________
receive the Severance Benefits hereunder, Executive shall not also
be entitled to receive any benefits under the Company's generally
applicable severance or other termination plans, policies or
programs.
PAGE 9
e. Full Discharge of Company Obligations. Except to the
_____________________________________
extent provided in this Paragraph 6, the amounts payable to
Executive pursuant to this Paragraph 6 (including, without
limitation, under Paragraph 6(f)) following termination of his
employment shall be in full and complete satisfaction of
Executive's rights under this Agreement and, except to the extent
prohibited by law, any other claims he may have in respect of his
employment by the Company or any of its subsidiaries. Such
amounts shall constitute liquidated damages with respect to any
and all such rights and claims and shall not be subject to any
offset or mitigation. Notwithstanding anything else contained
herein to the contrary, unless the Company shall waive its rights
to any such release, the Company's obligations under this
Paragraph 6 are expressly conditioned upon Executive's execution
simultaneously with or immediately following such termination of
employment, of a release and waiver, substantially in the form
attached hereto as Exhibit B (subject to, in the event any change
of law occurring after the date hereof, to such modifications as
shall be necessary or appropriate to place the Company in a
substantially the same position as though no change in law had
occurred), of any claims he may have in connection with the
termination of, or arising out of, his employment with the
Company, provided that such release shall not be construed to
waive, release or otherwise limit any amounts required to be paid
hereunder or any benefits due and payable to Executive under the
terms of any employee pension benefit plan, as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as
amended, any other Vested Benefit or any right of Executive to be
indemnified by the Company pursuant to its applicable policies and
practices from and against any third party claims arising out of
or relating to Executive's employment with or other services on
behalf of the Company or any subsidiary of the Company.
f. Special Continuation of Certain Protection for the
___________________________________________________
Executive. Notwithstanding anything contained in this Agreement
_________
to the contrary, if, at the end of the Contract Employment Period,
(i) Executive remains an at-will employee of the Company and (ii)
_ __
within one year following the end of the Contract Employment
Period, the Company effects a Termination Without Cause or takes
actions which, if they had occurred within the Contract Employment
Period, would have given Executive the right to terminate his
employment pursuant to a Termination for Good Reason and
Executive, after giving the Company timely written notice of the
events permitting a Termination for Good Reason and the
opportunity to cure described in the definition of a Termination
for Good Reason, voluntarily terminates his employment within 90
days of the date of such actions by the Company, then in either
case, Executive shall receive payment of the Severance Benefits
that would otherwise have been payable to Executive hereunder had
his termination of employment occurred during the Contract
Employment Period. Notwithstanding the preceding sentence, this
Section 6(f) shall not be applicable unless Executive executes the
waiver and release referred to in Paragraph 6(e) above in
connection with his termination of employment pursuant to this
Paragraph 6(f).
g. Outplacement Services. In addition to any other
_____________________
benefits described in this Paragraph 6, in the event Executive is
eligible to receive Severance Benefits, the Company shall also
provide to Executive, at its expense, individual outplacement
services from a qualified outplacement firm selected by the
Company. The outplacement services to be provided to Executive
PAGE 10
shall be no less favorable to Executive than those made available
to other executives prior to the date hereof under the Company's
generally applicable policies, programs or arrangements.
7. Change in Control of the Company.
________________________________
a. Accelerated Vesting and Payment. Unless the Board (or
_______________________________
the appropriate committee thereof) shall otherwise determine in
the manner set forth in Paragraph 7(b), the Option shall become
fully exercisable upon the occurrence of a Change in Control (as
defined below) and shall remain exercisable for a period of one
year thereafter regardless of whether Executive continues to be
employed by the Company or, if longer, for the period during which
such Option would otherwise be exercisable in accordance with its
terms or the generally applicable provisions of the 1994 Plan. If
no Alternative Option is provided as set forth in Section 7(b)
below, and the Company does not survive as a publicly traded
corporation following a Change in Control, the Company shall pay
Executive, in full settlement of all rights with respect to the
Option, an aggregate amount in cash equal to the product of (i)
__
(A) the Fair Market Value of a Share of the Company's Common Stock
on the date the Change in Control occurs minus (B) the per share
exercise price for the Option times (ii) the number of shares as
__
to which such Option has not been exercised at the time of the
Change in Control. Any amount payable pursuant to the preceding
sentence shall be paid within 30 days following such Change in
Control.
b. Alternative Options. Notwithstanding Paragraph 7(a), no
___________________
acceleration of exercisability shall occur with respect to any
Option if the Board (or the appropriate committee thereof)
reasonably determines in good faith, prior to the occurrence of a
Change in Control, that such Option shall be honored or assumed,
or new rights substituted therefor (such honored, assumed or
substituted Option being hereinafter referred to as an
"Alternative Option") by the successor in interest to the Company,
provided that any such Alternative Option must:
________ ____
(i) provide Executive with rights and entitlements
substantially equivalent to or better than the rights,
terms and conditions applicable under the Option,
including, but not limited to, an identical or better
exercise and vesting schedule and identical or better
timing and methods of payment;
(ii) have substantially equivalent economic value to such
Option (determined at the time of the Change in
Control); and
(iii) have terms and conditions which provide that, in the
event that Executive's employment is terminated by the
Company for any reason or is terminated by Executive
pursuant to a Termination for Good Reason within two
years following a Change in Control, (A) any conditions
_
on Executive's rights under, or any restrictions on
exercisability applicable to, each such Alternative
Option shall be waived or shall lapse, as the case may
be and (B) the Alternative Option shall remain
_
exercisable until the second anniversary of the Change
in Control or, if longer, for the period during which
such Alternative Option would otherwise be exercisable
PAGE 11
in accordance with its terms or the provisions of the
plan under which it is granted that permit the longest
post-termination exercise period for involuntary
terminations (other than due to death, disability or
retirement).
c. Enhanced Severance Payments. If Executive's employment
___________________________
is terminated following a Change in Control pursuant to
a Termination for Good Reason or a Termination Without
Cause, the Severance Benefit payable to Executive
pursuant to Paragraph 6 shall be equal to three times
the sum of Executive's annual Base Salary and the Bonus
Severance Amount.
d. Additional Payments by the Company.
__________________________________
(i) Application of Paragraph 7(d). In the event that any
_____________________________
amount or benefit paid or distributed to Executive
pursuant to this Agreement, taken together with any
amounts or benefits otherwise paid or distributed to
Executive by the Company or any affiliated company
(collectively, the "Covered Payments"), would be an
"excess parachute payment" as defined in Section 280G of
the Code and would thereby subject Executive to the tax
(the "Excise Tax") imposed under Section 4999 of the Code
(or any similar tax that may hereafter be imposed), the
provisions of this Section 7(d) shall apply to determine
the amounts payable to Executive pursuant to this
Agreement.
(ii) Calculation of Benefits. Immediately following delivery
_______________________
of any Notice of Termination, the Company shall notify
Executive of the aggregate present value of all
termination benefits to which he would be entitled under
this Agreement and any other plan, program or arrangement
as of the projected date of termination, together with
the projected maximum payments, determined as of such
projected date of termination that could be paid without
Executive being subject to the Excise Tax.
(iii) Imposition of Payment Cap. If the aggregate value of all
_________________________
compensation payments or benefits to be paid or provided
to Executive under this Agreement and any other plan,
agreement or arrangement with the Company exceeds the
amount which can be paid to Executive without Executive
incurring an Excise Tax by less than 105%, then the
amounts payable to Executive under this Agreement may, in
the discretion of the Company, be reduced (but not below
zero) to the maximum amount which may be paid hereunder
without Executive becoming subject to such an Excise Tax
(such reduced payments to be referred to as the "Payment
Cap"). In the event that Executive receives reduced
payments and benefits hereunder, Executive shall have the
right to designate which of the payments and benefits
otherwise provided for in this Agreement that he will
receive in connection with the application of the Payment
Cap.
PAGE 12
(iv) Further Payments by the Company. If the aggregate value
_______________________________
of all compensation payments or benefits to be paid or
provided to Executive under this Agreement and any other
plan, agreement or arrangement with the Company exceeds
the amount which can be paid to Executive without
Executive incurring an Excise Tax by more than 105%, the
Company shall pay to Executive immediately following
Executive's termination of employment an additional
amount (the "Tax Reimbursement Payment") such that the
net amount retained by Executive with respect to such
Covered Payments, after deduction of any Excise Tax on
the Covered Payments and any Federal, state and local
income tax and Excise Tax on the Tax Reimbursement
Payment provided for by this Paragraph 7(d)(iv), but
before deduction for any Federal, state or local income
or employment tax withholding on such Covered Payments,
shall be equal to the amount of the Covered Payments.
(v) Application of Section 280G. For purposes of determining
___________________________
whether any of the Covered Payments will be subject to
the Excise Tax and the amount of such Excise Tax,
(A) such Covered Payments will be treated as
"parachute payments" within the meaning of Section
280G of the Code, and all "parachute payments" in
excess of the "base amount" (as defined under
Section 280G(b)(3) of the Code) shall be treated
as subject to the Excise Tax, unless, and except
to the extent that, in the good faith judgment of
the Company's independent certified public
accountants appointed prior to the Effective Date
or tax counsel selected by such Accountants (the
"Accountants"), the Company has a reasonable basis
to conclude that such Covered Payments (in whole
or in part) either do not constitute "parachute
payments" or represent reasonable compensation for
personal services actually rendered (within the
meaning of Section 280G(b)(4)(B) of the Code) in
excess of the "base amount," or such "parachute
payments" are otherwise not subject to such Excise
Tax, and
(B) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by the
Accountants in accordance with the principles of
Section 280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining
____________________
whether Executive would receive a greater net after-tax
benefit were the amounts payable under this Agreement
reduced in accordance with Paragraph 7(d)(iii),
Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable
marginal rate of Federal income taxation for the
calendar year in which the first amounts are to
be paid hereunder, and
PAGE 13
(B) any applicable state and local income taxes at
the highest applicable marginal rate of taxation
for such calendar year, net of the maximum
reduction in Federal incomes taxes which could be
obtained from the deduction of such state or
local taxes if paid in such year;
provided, however, that Executive may request that such
determination be made based on his individual tax
circumstances, which shall govern such determination so
long as Executive provides to the Accountants such
information and documents as the Accountants shall
reasonably request to determine such individual
circumstances.
(vii) Adjustments in Respect of the Payment Cap. If
_________________________________________
Executive receives reduced payments and benefits under
this Paragraph 7(d) (or this Paragraph 7(d) is
determined not to be applicable to Executive because
the Accountants conclude that Executive is not subject
to any Excise Tax) and it is established pursuant to a
final determination of a court or an Internal Revenue
Service proceeding (a "Final Determination") that,
notwithstanding the good faith of Executive and the
Company in applying the terms of this Agreement, the
aggregate "parachute payments" within the meaning of
Section 280G of the Code paid to Executive or for his
benefit are in an amount that would result in Executive
being subject an Excise Tax, then the amount equal to
such excess parachute payments shall be deemed for all
purposes to be a loan to Executive made on the date of
receipt of such excess payments, which Executive shall
have an obligation to repay to the Company on demand,
together with interest on such amount at the applicable
Federal rate (as defined in Section 1274(d) of the
Code) from the date of the payment hereunder to the
date of repayment by Executive. If this Paragraph 7(d)
is not applied to reduce Executive's entitlements under
this Paragraph 7 because the Accountants determine that
Executive would not receive a greater net-after tax
benefit by applying this Paragraph 7(d) and it is
established pursuant to a Final Determination that,
notwithstanding the good faith of Executive and the
Company in applying the terms of this Agreement,
Executive would have received a greater net after tax
benefit by subjecting his payments and benefits
hereunder to the Payment Cap, then the aggregate
"parachute payments" paid to Executive or for his
benefit in excess of the Payment Cap shall be deemed
for all purposes a loan to Executive made on the date
of receipt of such excess payments, which Executive
shall have an obligation to repay to the Company on
demand, together with interest on such amount at the
applicable Federal rate (as defined in Section
1274(d) of the Code) from the date of the payment
hereunder to the date of repayment by Executive. If
Executive receives reduced payments and benefits by
reason of this Paragraph 7(d) and it is established
pursuant to a Final Determination that Executive could
have received a greater amount without exceeding
the Payment Cap, then the Company shall promptly
thereafter pay
PAGE 14
Executive the aggregate additional amount which could
have been paid without exceeding the Payment Cap,
together with interest on such amount at the applicable
Federal rate (as defined in Section 1274(d) of the
Code) from the original payment due date to the date of
actual payment by the Company.
(viii) Adjustments in Respect of the Tax Reimbursement
________________________________________________
Payments. In the event that the Excise Tax is
________
subsequently determined by the Accountants or pursuant
to any proceeding or negotiations with the Internal
Revenue Service to be less than the amount taken into
account hereunder in calculating the Tax Reimbursement
Payment made, Executive shall repay to the Company,
at the time that the amount of such reduction in the
Excise Tax is finally determined, the portion of such
prior Tax Reimbursement Payment that would not have
been paid if such Excise Tax had been applied in
initially calculating such Tax Reimbursement Payment,
plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing, in the event any portion
of the Tax Reimbursement Payment to be refunded to the
Company has been paid to any Federal, state or local
tax authority, repayment thereof shall not be required
until actual refund or credit of such portion has been
made to Executive, and interest payable to the Company
shall not exceed interest received or credited to
Executive by such tax authority for the period it held
such portion. Executive and the Company shall mutually
agree upon the course of action to be pursued (and the
method of allocating the expenses thereof) if
Executive's good faith claim for refund or credit is
denied.
In the event that the Excise Tax is later determined by
the Accountants or pursuant to any proceeding or
negotiations with the Internal Revenue Service to
exceed the amount taken into account hereunder at the
time the Tax Reimbursement Payment is made (including,
but not limited to, by reason of any payment the
existence or amount of which cannot be determined at
the time of the Tax Reimbursement Payment), the Company
shall make an additional Tax Reimbursement Payment in
respect of such excess (plus any interest or penalty
payable with respect to such excess) at the time that
the amount of such excess is finally determined.
(ix) Timing of Payment. Any Tax Reimbursement Payment (or
_________________
portion thereof) provided for in Paragraph 7(d)(iv)
above shall be paid to Executive not later than 10
business days following the payment of the Covered
Payments; provided, however, that if the amount of such
Tax Reimbursement Payment (or portion thereof) cannot
be finally determined on or before the date on which
payment is due, the Company shall pay to Executive by
such date an amount estimated in good faith by the
Accountants to be the minimum amount of such Tax
Reimbursement Payment and shall pay the remainder of
such Tax Reimbursement Payment (together with interest
at the rate provided in Section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined,
PAGE 15
but in no event later than 45 calendar days after
payment of the related Covered Payment. In the event
that the amount of the estimated Tax Reimbursement
Payment exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by
the Company to Executive, payable on the fifth business
day after written demand by the Company for payment
(together with interest at the rate provided in Section
1274(b)(2)(B) of the Code).
e. Definition of "Change in Control". For purposes
________________________________
of this Paragraph 7, a "Change in Control" means
the happening of any of the following:
(i) When any "person" as defined in Section 3(a)(9) of
the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and as used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) of
the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored
or maintained by the Company or any Subsidiary (including
any trustee of such plan acting as trustee), directly or
indirectly, becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20 percent
or more of the combined voting power of the Company's then
outstanding securities;
(ii) When, during any period of 24 consecutive months
after the Commencement Date, the individuals who, at the
beginning of such period, constitute the Board (the
"Incumbent Directors") cease for any reason other than death
to constitute at least a majority thereof, provided that a
________ ____
director who was not a director at the beginning of such 24-
month period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director
was elected by, or on the recommendation of or with the
approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors either actually (because
they were directors at the beginning of such 24-month
period) or by prior operation of this Paragraph 7(e)(ii); or
(iii) The occurrence of a transaction requiring
stockholder approval for the acquisition of the Company by
an entity other than the Company or a subsidiary through
purchase of assets, or by merger, or otherwise.
8. Noncompetition and Confidentiality.
__________________________________
a. Noncompetition. During the Contract
______________
Employment Period and for a period of one year following
Executive's termination of employment during the Contract
Employment Period other than due to a Termination Without Cause
or a Termination for Good Reason, Executive shall not become
associated, whether as a principal, partner, employee, consultant
or shareholder (other than as a holder of not in excess of 1% of
the outstanding voting shares of any publicly traded company),
with any entity that is actively engaged in any geographic area
in any business which is in substantial and direct competition
with the business or businesses of the Company for which
Executive provides substantial services or for which Executive
has substantial responsibility, provided that nothing in this
________ ____
PAGE 16
Paragraph 8(a) shall preclude Executive from performing services
solely and exclusively for a division or subsidiary of such an
entity that is engaged in a non-competitive business.
b. Nondisclosure, Nonsolicitation and Cooperation.
______________________________________________
(i) Executive shall not (except to the extent
required by an order of a court having competent
jurisdiction or under subpoena from an appropriate
government agency) disclose to any third person, whether
during or subsequent to the Executive's employment with the
Company, any trade secrets; customer lists; product
development and related information; marketing plans and
related information; sales plans and related information;
operating policies and manuals; business plans; financial
records; or other financial, commercial, business or
technical information related to the Company or any
subsidiary or affiliate thereof unless such information has
been previously disclosed to the public by the Company or
has become public knowledge other than by a breach of this
Agreement; provided, however, that this limitation shall not
________ _______
apply to any such disclosure made while Executive is
employed by the Company, or any subsidiary or affiliate
thereof in the ordinary course of the performance of
Executive's duties;
(ii) during the Contract Employment Period and for
two years after the termination of such Period, Executive
shall not attempt, directly or indirectly, to induce any
employee or Insurance Agent (as defined below) of the
Company, or any subsidiary or any affiliate thereof to be
employed or perform services elsewhere provided that this
________ ____
covenant shall not preclude Executive from taking any
actions during the Contract Employment Period that (x) are
_
intended to benefit the Company or any subsidiary or
affiliate and (y) do not benefit Executive financially other
_
than as an employee or stockholder of the Company;
(iii) during the Contract Employment Period and for
two years after the termination of such Period, Executive
shall not attempt, directly or indirectly, to induce any
insurance agent or agency, insurance broker, broker-dealer
or supplier of the Company, or any subsidiary or affiliate
thereof to cease providing services to the Company, or any
subsidiary or affiliate thereof provided that this covenant
________ ____
shall not preclude Executive from taking any actions during
the Contract Employment Period that (x) are intended to
_
benefit the Company or any subsidiary or affiliate and (y)
_
do not benefit Executive financially other than as an
employee or stockholder of the Company;
(iv) during the Contract Employment Period and for
two years after the termination of such Period, Executive
shall not attempt, directly or indirectly, to solicit, on
behalf of any person or entity other than the Company or any
of its subsidiaries, the trade of any individual or entity
which, at the time of the solicitation, is a customer of the
Company, or any subsidiary or affiliate thereof, or which
the Company, or any subsidiary or affiliate thereof is
undertaking reasonable steps to procure as a customer at the
time of or immediately preceding termination of the Contract
PAGE 17
Employment Period; provided, however, that this limitation
________ _______
shall only apply to (x) any product or service which is in
_
competition with a product or service of the Company or any
subsidiary or affiliate thereof and (y) with respect to any
_
customer or prospective customer with whom Executive has or
had (by virtue of Executive's position or otherwise) a
personal relationship; and
(v) following the termination of the Contract
Employment Period, Executive shall provide assistance to and
shall cooperate with the Company or any subsidiary or
affiliate thereof, upon its reasonable request, with respect
to matters within the scope of Executive's duties and
responsibilities during the Contract Employment Period.
(The Company agrees and acknowledges that it shall, to the
maximum extent possible under the then prevailing
circumstances, coordinate (or cause a subsidiary or
affiliate thereof to coordinate) any such request with
Executive's other commitments and responsibilities to
minimize the degree to which such request interferes with
such commitments and responsibilities). The Company agrees
that it will reimburse Executive for reasonable travel
expenses (i.e., travel, meals and lodging) that Executive
____
may incur in providing assistance to the Company hereunder.
Solely for purposes of Paragraph 8(b)(ii) above, the term "
Insurance Agent" shall mean those insurance agents or agencies
representing the Company or any subsidiary or affiliate thereof,
that are exclusive or career agents or agencies of the Company or
any subsidiary or affiliate thereof, or any insurance agents or
agencies which derive 50% or more of their business revenue from
the Company or any subsidiary or affiliate thereof (calculated on
an aggregate basis for the 12-month period prior to the date of
determination or such other similar period for which such
information is more readily available).
c. Company Property. Promptly following Executive's
________________
termination of employment, Executive shall return to the Company
all property of the Company, and all copies thereof in Executive's
possession or under his control.
d. Intention of the Parties. If any provision of
________________________
Paragraph 8 is determined by an arbitrator (or a court of
competent jurisdiction asked to enforce the decision of the
arbitrator) not to be enforceable in the manner set forth in this
Agreement, the Company and Executive agree that it is the
intention of the parties that such provision should be enforceable
to the maximum extent possible under applicable law and that such
arbitrator (or court) shall reform such provision to make it
enforceable in accordance with the intent of the parties.
Executive acknowledges that a material part of the inducement for
the Company to provide the salary and benefits evidenced hereby is
Executive's covenants set forth in Paragraph 8(a), (b) and (c) and
that the covenants and obligations of Executive with respect to
nondisclosure and nonsolicitation relate to special, unique and
extraordinary matters and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable
injury for which adequate remedies are not available at law.
Therefore, Executive agrees that, if Executive shall materially
breach any of those covenants following termination of employment,
the Company shall have no further obligation to pay Executive any
benefits otherwise payable hereunder and the Company shall be
entitled to an injunction, restraining order or such other
PAGE 18
equitable relief (without the requirement to post a bond)
restraining Executive from committing any violation of the
covenants and obligations contained in Paragraph 8(a), (b) and
(c). The remedies in the preceding sentence are cumulative and
are in addition to any other rights and remedies the Company may
have at law or in equity as an arbitrator (or court) shall
reasonably determine.
e. Waiver. Without limiting the generality of the
______
foregoing, upon request of Executive prior to engaging in any
conduct otherwise prohibited by this Paragraph 8, the Company may,
in its sole discretion, waive in writing, on such terms and
conditions as it may deem appropriate, any violation of this
Paragraph 8 which would otherwise occur due to such conduct.
9. Miscellaneous.
_____________
a. Survival. Paragraphs 5(c) (dealing with reimbursement
________
of expenses), 7 (relating to a Change in Control), 8 (relating to
noncompetition, nonsolicitation and confidentiality) and 9
(relating, among other things, to survival, assignment and
governing law) shall survive the termination hereof, whether such
termination shall be by expiration of the Contract Employment
Period or an early termination pursuant to Paragraph 6 hereof.
Paragraph 6((other than Paragraph 6(f)) (relating to early
termination) shall survive the termination hereof to the extent
that, prior thereto, or at the time of termination, Executive (or
his beneficiary) has become or becomes entitled to receive any of
the benefits payable thereunder. Paragraph 6(f) (and to the
extent applicable to such Paragraph 6(f), 6(e)) shall survive for
one year following the termination hereof. The option referred to
in Paragraph 4 survives for the term specified in Attachment A.
b. Binding Effect. This Agreement shall be binding on,
______________
and shall inure to the benefit of, the Company and any person or
entity that succeeds to the interest of the Company (regardless of
whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless in the case of a sale involving less than all
or substantially all of the Company's assets the Company otherwise
elects in writing, a sale of the assets of the business of the
Company (or portion thereof) in which Executive performs a
majority of his services. Any successor in interest to the
Company shall acknowledge in writing to Executive that it has
assumed this Agreement and is responsible to Executive for the
performance of the Company's obligations under this Agreement.
Without limiting the generality of the foregoing, the Company
shall have the right, without the consent of Executive, to assign
this Agreement and its obligations hereunder to any New Entity or
any subsidiary of any New Entity by which Executive becomes
employed, at the discretion of the Company, by reason of the
implementation of any restructuring of the Company, and, following
any such assignment, such New Entity or subsidiary shall be
treated as the Company for all purposes of this Agreement. This
Agreement shall also enure to the benefit of Executive's heirs,
executors, administrators and legal representatives.
c. Assignment. Except as provided under Paragraph 9(b),
__________
neither this Agreement nor any of the rights or obligations
hereunder shall be assigned or delegated by any party hereto
without the prior written consent of the other party. In the
PAGE 19
event the Company assigns this Agreement pursuant to Section 9(b),
the Company shall guarantee payment to Executive of any amounts at
any time due and payable hereunder in the event (and only to the
extent) that the assignee has become a debtor in bankruptcy, is
the subject of a receivership or similar preceding or has become
insolvent, provided that Executive shall be required to assign his
________ ____
rights against the assignee through subrogation as a condition of
receiving any payment under the Company's guarantee. In
consideration of such guarantee, Executive agrees that following
such assignment, the covenants of Executive in Paragraphs 8(b)(i)
and (v) shall continue to inure to the benefit of the Company, as
well as the assignee. The Company and Executive agree that
following any assignment all other covenants described herein in
favor of the Company shall, from and after the date of such
assignment, inure solely to the benefit of the assignee.
d. Entire Agreement. Except as expressly provided below,
________________
this Agreement, the Option Agreement and Paragraph 3 of the letter
dated February 7, 1991 from Ronald E. Compton to Executive shall
constitute the entire agreement between the parties hereto with
respect to the matters referred to herein and any other agreement
or any portion of any such other agreement not expressly preserved
hereby shall cease to be effective upon the execution hereof and
shall not become reinstated upon the expiration or other
termination of this Agreement. There are no promises,
representations, inducements or statements between the parties
other than those that are expressly contained herein. Executive
acknowledges that he is entering into this Agreement of his own
free will and accord, and with no duress, that he has read this
Agreement and that he understands it and its legal consequences.
Other than the provisions of Paragraph 6 which limit Executive's
eligibility to receive severance benefits under the Company's
generally applicable plans, programs or agreements, nothing in
this Agreement shall be construed to limit or otherwise supersede
Executive's rights or entitlements under any compensatory plan,
program or arrangement made available generally to all employees
or all officers of the Company or under the 1994 Plan or the 1984
Plan and this Paragraph 9(d) shall not preclude reference to the
documents governing any such plan, program or arrangement to
determine such rights and entitlements.
e. Severability; Reformation. In the event that one or
_________________________
more of the provisions of this Agreement shall become invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein
shall not be affected thereby. In the event any of Paragraph
8(a), (b) or (c) is not enforceable in accordance with its terms,
Executive and the Company agree that such Paragraph shall be
reformed to make such Paragraph enforceable in a manner which
provides the Company the maximum rights permitted at law.
f. Waiver. Waiver by any party hereto of any breach or
______
default by the other party of any of the terms of this Agreement
shall not operate as a waiver of any other breach or default,
whether similar to or different from the breach or default waived.
No waiver of any provision of this Agreement shall be implied
from any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or his rights
hereunder on any occasion or series of occasions.
PAGE 20
g. Notices. Any notice required or desired to be
_______
delivered under this Agreement shall be in writing and shall be
delivered personally, by courier service, by registered mail,
return receipt requested, or by telecopy and shall be effective
upon actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate
in accordance with the terms hereof):
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut
Attention: Corporate Secretary
If to Executive:
Daniel P. Kearney
13 Flint Street
Marblehead, Massachusetts 01945
h. Arbitration. The Company and Executive agree that any
___________
claim, dispute or controversy arising under or in connection with
this Agreement, or otherwise in connection with Executive's
employment by the Company (including, without limitation, any such
claim, dispute or controversy arising under any federal, state or
local statute, regulation or ordinance or any of the Company's
employee benefit plans, policies or programs) shall be resolved
solely and exclusively by binding arbitration. The arbitration
shall be held in the city of Hartford, Connecticut (or at such
other location as shall be mutually agreed by the parties). The
arbitration shall be conducted in accordance with the Expedited
Employment Arbitration Rules (the "Rules") of the American
Arbitration Association (the "AAA") in effect at the time of the
arbitration, except that the arbitrator shall be selected by
alternatively striking from a list of five arbitrators supplied by
the AAA. All fees and expenses of the arbitration, including a
transcript if either requests, shall be borne equally by the
parties. If Executive prevails as to any material issue presented
to the arbitrator, the entire cost of such proceedings (including,
without limitation, Executive's reasonable attorneys fees) shall
be borne by the Company. If Executive does not prevail as to any
material issue, each party will pay for the fees and expenses of
its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party
prevails on a claim for which attorney's fees are recoverable
under the Rules). Any action to enforce or vacate the
arbitrator's award shall be governed by the Federal Arbitration
Act, if applicable, and otherwise by applicable state law. If
either the Company or Executive pursues any claim, dispute or
controversy against the other in a proceeding other than the
arbitration provided for herein, the responding party shall be
entitled to dismissal or injunctive relief regarding such action
and recovery of all costs, losses and attorney's fees related to
such action.
PAGE 21
i. Amendments. This Agreement may not be altered,
__________
modified or amended except by a written instrument signed by each
of the parties hereto.
j. Headings. Headings to paragraphs in this Agreement
________
are for the convenience of the parties only and are not intended
to be part of or to affect the meaning or interpretation hereof.
k. Counterparts. This Agreement may be executed in
____________
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
l. Withholding. Any payments provided for herein shall
___________
be reduced by any amounts required to be withheld by the Company
from time to time under applicable Federal, State or local income
or employment tax laws or similar statutes or other provisions of
law then in effect.
m. Governing Law. This Agreement shall be governed by
_____________
the laws of the State of Connecticut, without reference to
principles of conflicts or choice of law under which the law of
any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer and Executive has
hereunto set his hand as of the day and year first above written.
Aetna Life and Casualty Company
/s/ Ronald E. Compton
_______________________________
Ronald E. Compton
Chairman
/s/ Daniel P. Kearney
_______________________________
Daniel P. Kearney
<PAGE> 1
EMPLOYMENT AGREEMENT
____________________
EMPLOYMENT AGREEMENT, dated as of January 19, 1996, by
and between Aetna Life and Casualty Company, a Connecticut
corporation (the "Company"), and James W. McLane ("Executive").
W I T N E S S E T H:
_ _ _ _ _ _ _ _ _ _
WHEREAS, the Company is considering certain restructuring
alternatives that could result in significant changes in the
structure of its business, including, without limitation, dividing
the business of the Company into two or more separate publicly
traded companies or otherwise transferring a portion of the
business to a third party;
WHEREAS, the Company believes that Executive is a key
employee and that it is in the Company's best interests to retain
the services of Executive for the period during which such
restructuring alternatives are considered and, to the extent
applicable, implemented;
WHEREAS, the Company therefore desires to retain the
services of Executive and to enter into an agreement embodying the
terms of such employment (the "Agreement"); and
WHEREAS, Executive desires to accept such employment and
enter into such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment. Except as provided in Paragraph 6(a),
__________
the Company shall continue to employ Executive and Executive
agrees to remain employed by the Company under the terms of this
Agreement for the period commencing on the date first written
above and ending April 28, 1998. The period during which
Executive is employed pursuant to this Agreement shall be referred
to as the "Contract Employment Period". Upon the expiration of
the Contract Employment Period, Executive's employment with the
Company shall continue on an at-will basis.
2. Position and Duties. During the Contract
___________________
Employment Period, Executive shall serve as Executive Vice
President, Health/Group Life, of the Company and in such other
comparable or better position or positions with the Company and
its subsidiaries as the Chief Executive Officer or the Board of
Directors of the Company (the "Board") shall specify from time to
time. During the Contract Employment Period, Executive shall have
the duties, responsibilities and obligations customarily assigned
to individuals serving in the position or positions in which
Executive serves hereunder and such other duties, responsibilities
and obligations as the Chief Executive Officer or the Board shall
from time to time specify. Executive shall devote his full
business time to the services required of him hereunder, except
for vacation time and reasonable periods of absence due to
sickness, personal injury or other disability, and shall use his
best efforts, judgment, skill and energy to perform such services
in a manner consistent with the duties of his position and to
improve and advance the business and interests of the Company and
its subsidiaries.
<PAGE> 2
Nothing contained herein shall preclude Executive from (i) serving
_
on any corporate or governmental board of directors on which he
currently serves or, if the Board consents to such service, on any
other board of directors, (ii) serving on the board of, or working
__
for, any charitable, not-for-profit or community organization,
(iii) pursuing any other activity to which the Board consents or
___
(iv) pursuing his personal, financial and legal affairs, so long
__
as such activities, individually or collectively, do not interfere
with the performance of Executive's duties hereunder.
3. Cash Compensation.
_________________
a. Base Salary. During the Contract Employment
___________
Period, the Company shall pay Executive a base salary at the
annual rate of $600,000. The Board shall periodically review
Executive's base salary and the Company may, in its discretion,
increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any
other obligation of the Company hereunder. Executive's annual
base salary payable hereunder, as it may be increased from time to
time and without reduction for any amounts deferred as described
above, is referred to herein as "Base Salary". Executive's Base
Salary, as in effect from time to time, may not be reduced by the
Company without Executive's consent, provided that the Base Salary
________ ____
payable under this paragraph shall be reduced to the extent
Executive elects to defer or reduce such salary under the terms of
any deferred compensation or savings plan or other employee
benefit arrangement maintained or established by the Company. The
Company shall pay Executive the portion of his Base Salary not
deferred in accordance with its customary periodic payroll
practices.
b. Incentive Compensation. During the term of the
______________________
Contract Employment Period, Executive shall remain eligible for
participation in the Company's existing and future annual and long
term incentive compensation programs at a level consistent with
his position at the Company and the Company's then current
policies and practices; provided that following any assignment of
________ ____
this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph
7(e)), the calculation of the amount payable as annual incentive
compensation and the conditions upon which such bonus shall be
payable shall be no less favorable to the Executive (taking into
account reasonable changes in the Company's goals and objectives)
than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such
assignment or Change in Control. Without limiting the generality
of the foregoing, for each calendar year ending during the term
hereof, Executive shall receive the opportunity to receive an
annual bonus of at least 60% of his Base Salary (the "Minimum
Bonus Percentage"), subject to satisfaction of such reasonable
performance criteria as shall be established with respect to such
year.
4. Stock Option Grant. Contingent upon the execution
__________________
of this Agreement by the Executive, the Company has granted
Executive an option, having a ten-year term, to purchase 75,000
shares of the Company's Common Stock at an exercise price per
share equal to $57 a share (the "Option"). Except to the extent
specified below, the terms of the Option shall be determined in
accordance with the terms of the 1994 Stock Incentive Plan (the
"1994 Plan") and shall be set forth in the separate agreement
embodying the grant of such Option (the "Option Agreement"), the
form of which is attached hereto as Exhibit A.
<PAGE> 3
5. Benefits, Perquisites and Expenses.
__________________________________
a. Benefits. During the Contract Employment Period,
________
Executive shall be eligible to participate in (i) each welfare
_
benefit plan sponsored or maintained by the Company, including,
without limitation, each group life, hospitalization, medical,
dental, health, accident or disability insurance or similar plan
or program of the Company, and (ii) each pension, profit sharing,
__
retirement, deferred compensation or savings plan sponsored or
maintained by the Company, in each case, whether now existing or
established hereafter, to the extent that Executive is eligible to
participate in any such plan under the generally applicable
provisions thereof. Nothing in this Paragraph 5(a) shall be
construed to limit the ability of the Company to amend or
terminate any particular plan, program or arrangements, provided
_________
that, following the occurrence of a Change in Control (as defined
____
in Paragraph 7(e)) or the assignment of this Agreement to a New
Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b),
the benefits made available to the Executive thereafter shall be
at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such
Change in Control or assignment.
With respect to the pension or retirement benefits
payable to Executive, Executive's service credited for purposes of
determining Executive's benefits and vesting shall be determined
in accordance with the terms of the applicable plan or program or,
if applicable, pursuant to any written agreement between Executive
and the Company (whether now existing or hereafter adopted) that
provides Executive a more favorable method of crediting service
for any purpose thereunder.
b. Perquisites. During the Contract Employment
___________
Period, Executive shall be entitled to receive such perquisites as
are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the
Company.
c. Business Expenses. During the Contract Employment
_________________
Period, the Company shall pay or reimburse Executive for all
reasonable expenses incurred or paid by Executive in the
performance of Executive's duties hereunder, upon presentation of
expense statements or vouchers and such other information as the
Company may require and in accordance with the generally
applicable policies and procedures of the Company.
6. Termination of Employment.
_________________________
a. Early Termination of the Contract Employment
____________________________________________
Period. Notwithstanding Paragraph 1, the Contract Employment
______
Period shall end upon the earliest to occur of (i) a termination
_
of Executive's employment on account of Executive's death, (ii) a
__
Termination due to Disability, (iii) a Termination for Cause, (iv)
___ __
a Termination Without Cause, (v) a Termination for Good Reason or
_
(vi) a termination of Executive's employment by Executive other
__
than a Termination for Good Reason. For purposes of this
Agreement, a transfer of Executive's employment (i)to any other
_
entity controlled by or under common control with the Company
shall not be treated as a termination unless and until such entity
ceases to be controlled by or under common control with the
Company or (ii) as a result of the implementation of any
__
restructuring of the Company (whether occurring by spin-off or
otherwise) shall not be treated as a termination of employment,
<PAGE> 4
provided that, in either case, the successor employer (the "New
________ ____
Entity") expressly assumes and agrees to perform all of the
Company's obligations under this Agreement.
b. Benefits Payable Upon Termination. Following the
_________________________________
end of the Contract Employment Period pursuant to Paragraph 6(a),
Executive (or, in the event of his death, his surviving spouse, if
any, or his estate) shall be paid the type or types of
compensation determined to be payable in accordance with the
following table at the times established pursuant to Paragraph
6(c):
<TABLE>
<CAPTION>
Earned Vested Accrued Severance
Salary Benefits Bonus Benefit
________ __________ ________ ________
<C> <S> <S> <S> <S>
Termination due Payable Payable Payable Not Payable
to death
Termination due to Payable Payable Payable Not Payable
Disability
Termination for Payable Payable Not Payable Not Payable
Cause
Termination Without Payable Payable Payable Payable
Cause
Termination for Payable Payable Payable Payable
Good Reason
Termination by Payable Payable Not Payable Not Payable
Executive other than
for Good Reason
</TABLE>
c. Timing of Payments. Earned Salary and Accrued
__________________
Bonus shall be paid in a single lump sum as soon as practicable,
but in no event more than 30 days, following the end of the
Contract Employment Period. Vested Benefits shall be payable in
accordance with the terms of the plan, policy, practice, program,
contract or agreement under which such benefits have accrued.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was
receiving his salary payments hereunder, for the greater of (i)
_
one year, (ii) the period over which such benefits would be
__
payable if paid to Executive under the Company's otherwise
applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid
___
to Executive under the Company's otherwise applicable plans,
policies or procedures, as in effect at the time of Executive's
termination of employment. Notwithstanding the foregoing,
Executive may elect, by written notice given to the Company prior
to the first periodic payment and within ten business days after
such termination, that, instead of periodic installments,
Severance Benefits shall be paid in either a single lump sum,
payable within ten business days of receipt by the Company of such
election, or in two equal installments, the first payable within
ten business days of receipt by the Company of such election, and
the second payable on the first business day of the following
calendar year.
<PAGE> 5
b. Definitions. For purposes of this Paragraph 6,
___________
capitalized terms have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the
product of (i) the annual incentive compensation Executive would
_
have been entitled to receive under Paragraph 3(b) for the
calendar year in which his active service for the Company
terminates pursuant to Paragraph 6(a) had he remained employed for
the entire year and assuming that all targets for such year had
been met, multiplied by (ii) a fraction, the numerator of which is
__
equal to the number of days in such calendar year occurring on or
prior to the termination of Executive's active service for the
Company (including any period of absence due to disability) and
the denominator of which is 365.
"Earned Salary" means any Base Salary earned, but unpaid,
for services rendered to the Company on or prior to the date on
which the Contract Employment Period ends (other than Base Salary
deferred pursuant to Executive's election, as provided in
Paragraph 3(a) hereof).
"Severance Benefit" means an amount equal to the sum of
(i) and (ii) below, where (i) and (ii) are:
(i) the sum of
(A) the annual Base Salary payable to Executive
immediately prior to the end of the Contract
Employment Period; and
(B) an amount (the "Bonus Severance Amount") equal to
the product of Executive's Base Salary times the
greater of (1) the Minimum Bonus Percentage and
_
(2) the percentage of Base Salary that would
_
have been payable to Executive for the year of
such termination assuming achievement of target
levels of performance and Executive's continued
employment for the entire year, and
(ii) the amount otherwise payable to Executive under
the Company's otherwise applicable severance
plans, policies or programs as in effect on the
date hereof (or, if more favorable to Executive,
as in effect on the date of Executive's
termination), assuming for purposes of determining
the amount payable thereunder that Executive's
employment was terminated as a result of the
elimination of his position, but calculated by
including the Bonus Severance Amount as part of
Executive's eligible compensation for purposes of
calculating the benefits payable under such plans,
policies or programs;
except that, in the event that Executive becomes entitled to
receive Severance Benefits hereunder following a Change in
Control, the Severance Benefit payable to Executive shall be
determined under Paragraph 7(c). Additionally, while Executive is
receiving payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to participate in the
welfare benefit plans and programs (excluding the long-term
disability plan, the sick-pay plan and vacation accruals)
generally made available to employees of the Company and in which
he participated immediately prior to the termination of his
<PAGE> 6
employment on the same terms and conditions as would have applied
had Executive continued to be employed. Upon an election to
receive Severance Benefits in either a single lump sum payment or
in two installments, Executive will forfeit any right to continue
to receive any coverage under the Company's welfare benefit plans,
other than COBRA coverage (determined from the original date of
termination) at Executive's expense as required by applicable law;
provided that, if Executive elects to receive Severance Benefits
________ ____
in two installments instead of periodic installments, the Company
shall pay one-half of the cost of Executive's COBRA coverage from
the date the first installment payment is made until the date the
second installment payment is made. Notwithstanding the
foregoing, receipt of a lump sum payment or two installment
payments hereunder shall not cause Executive to cease to be
eligible for any retiree benefit programs for which he is
otherwise eligible under the terms of the Company's employee
benefit plans, policies or programs.
"Termination for Cause" means a termination of
Executive's employment by the Company due to (i) the willful
_
failure by Executive to perform substantially Executive's duties
as an employee of the Company (other than due to physical or
mental illness) after reasonable notice to Executive of such
failure, (ii) Executive's engaging in misconduct that is
__
materially injurious to the Company or any subsidiary or any
affiliate of the Company, (iii) Executive's having been convicted
___
of, or entered a plea of nolo contendere to, a crime that
____ __________
constitutes a felony, (iv) the material breach by Executive of any
__
written covenant or agreement not to compete with the Company or
any subsidiary or any affiliate or (v) the breach by Executive of
_
his duty of loyalty to the Company which shall include, without
limitation, (A) the disclosure by Executive of any confidential
_
information pertaining to the Company or any subsidiary or any
affiliate of the Company, other than (x) in the ordinary course of
_
the performance of his duties on behalf of the Company or (y)
_
pursuant to a judicial or administrative subpoena from a court or
governmental authority with jurisdiction over the matter in
question, (B) the harmful interference by Executive in the
_
business or operations of the Company or any subsidiary or any
affiliate of the Company, (C) any attempt by Executive directly or
_
indirectly to induce any employee, insurance agent, insurance
broker or broker-dealer of the Company or any subsidiary or any
affiliate to be employed or perform services elsewhere, other than
actions taken by Executive that are intended to benefit the
Company or any subsidiary or affiliate and do not benefit
Executive financially other than as an employee or stockholder of
the Company, (D) any attempt by Executive directly or indirectly
_
to solicit the trade of any customer or supplier, or prospective
customer or supplier, of the Company on behalf of any person other
than the Company or a subsidiary thereof, other than actions taken
by Executive that are intended to benefit the Company or any
subsidiary or affiliate and do not benefit Executive financially
other than as an employee or stockholder of the Company, provided,
________
however, that this provision shall only apply to any product or
_______
service which is in competition with a product or service of the
Company or any subsidiary or affiliate thereof or (E) any breach
_
or violation of the Company's Code of Conduct, as amended from
time to time sufficient to warrant a for cause termination
consistent with the Company's past practice. Notwithstanding the
foregoing, a breach of Executive's duty of loyalty to the Company
as described in subclause (A) or a breach of the Company's Code of
Conduct as described in subclause (E) of clause (v) of the
preceding sentence shall not be grounds for a Termination for
<PAGE> 7
Cause unless such breach has had or could reasonably be expected
to have a significant adverse effect on the business or reputation
of the Company.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been
incapable, with or without reasonable accommodation, of
substantially fulfilling the positions, essential duties,
responsibilities and obligations of Executive's positions set
forth in this Agreement because of physical, mental or emotional
incapacity resulting from injury, sickness or disease for a period
of (i) at least four consecutive months or (ii) more than six
_ __
months in any twelve month period. Any question as to the
existence, extent or potentiality of Executive's disability shall
be made by a qualified, independent physician selected by the
chief or assistant chief (or the equivalent position) of the
department which treats the condition giving rise to Executive's
absence at a nationally or regionally recognized teaching hospital
chosen by the Company. The determination of any such physician
shall be final and conclusive for all purposes of this Agreement.
Notwithstanding the foregoing, (i) a Termination for Disability
_
shall not affect Executive's right to receive any amount that
would otherwise have been payable to Executive under the Company's
plans, policies, practices or programs pertaining to short-term or
long-term disability had Executive's employment continued and (ii)
__
if it is determined, at the time Executive is first eligible to
receive long-term disability benefits under the Company's plans,
policies, practices or programs, that Executive is not entitled to
receive such long-term disability benefits (other than due to
Executive's failure to cooperate), Executive shall, for purposes
of this Paragraph 6, be deemed to have been terminated as of the
date of such determination pursuant to a Termination Without Cause
and to be entitled to receive any additional benefits payable
hereunder in respect of a Termination Without Cause.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following
actual knowledge of (i) a reduction in Executive's annual Base
_
Salary or incentive compensation opportunity as provided under
Paragraph 3(b), (ii) a material reduction in Executive's
__
positions, duties and responsibilities from those described in
Paragraph 2 hereof, (iii) the relocation of Executive's principal
___
place of employment to a location more than 50 miles from the
location at which he performed his principal duties on the date
immediately prior to such relocation, (iv) a breach of the
__
obligation to provide Executive with the benefits required to be
provided in accordance with Paragraph 5(a), (v) a failure by the
_
Company to pay any amounts due and owing to Executive within 10
days following written notice from Executive of such failure to
pay, or (vi) any other material breach of the Company's
__
obligations to Executive hereunder that materially affects the
compensation or benefits payable to Executive or materially
impairs Executive's ability to perform the duties and
responsibilities of his position. Notwithstanding the foregoing,
a termination shall not be treated as a Termination for Good
Reason (i) if Executive shall have consented in writing to the
_
occurrence of the event giving rise to the claim of Termination
for Good Reason or (ii) unless Executive shall have delivered a
__
written notice to the Chief Executive Officer of the Company
within 60 days of his having actual knowledge of the occurrence of
one of such events stating that he intends to terminate his
employment for Good Reason and specifying the factual basis for
such termination, and such event shall not have been cured within
30 days of the receipt of such notice.
<PAGE> 8
"Termination Without Cause" means any termination of
Executive's employment by the Company other than (i) a Termination
_
due to Disability or (ii) a Termination for Cause. Subject to the
__
Company's obligations to make the payments, if any, required
pursuant to this Paragraph 6, nothing in this Agreement shall be
construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without
reason.
"Vested Benefits" means amounts payable under the terms
of or in accordance with any plan, policy or practice or program
of, or any contract or agreement with, the Company or any of its
subsidiaries (including, without limitation, any supplemental
pension plan, supplemental savings plan or other deferred
compensation arrangement, the 1994 Plan and the Company's 1984
Stock Option Plan (the "1984 Plan") with respect to which
Executive's rights to such amounts (i) have become vested and
nonforfeitable on or before Executive's termination of employment
or (ii) otherwise have or will become nonforfeitable at or
subsequent to his termination of employment without regard to the
performance by Executive of further services or the resolution of
a contingency that is not satisfied at or after such termination,
provided that, at any time during which Executive is entitled to
________ ____
receive the Severance Benefits hereunder, Executive shall not also
be entitled to receive any benefits under the Company's generally
applicable severance or other termination plans, policies or
programs.
e. Full Discharge of Company Obligations. Except to
_____________________________________
the extent provided in this Paragraph 6, the amounts payable to
Executive pursuant to this Paragraph 6 (including, without
limitation, under Paragraph 6(f)) following termination of his
employment shall be in full and complete satisfaction of
Executive's rights under this Agreement and, except to the extent
prohibited by law, any other claims he may have in respect of his
employment by the Company or any of its subsidiaries. Such
amounts shall constitute liquidated damages with respect to any
and all such rights and claims and shall not be subject to any
offset or mitigation. Notwithstanding anything else contained
herein to the contrary, unless the Company shall waive its rights
to any such release, the Company's obligations under this
Paragraph 6 are expressly conditioned upon Executive's execution
simultaneously with or immediately following such termination of
employment, of a release and waiver, substantially in the form
attached hereto as Exhibit B (subject to, in the event any change
of law occurring after the date hereof, to such modifications as
shall be necessary or appropriate to place the Company in a
substantially the same position as though no change in law had
occurred), of any claims he may have in connection with the
termination of, or arising out of, his employment with the
Company, provided that such release shall not be construed to
waive, release or otherwise limit any amounts required to be paid
hereunder or any benefits due and payable to Executive under the
terms of any employee pension benefit plan, as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as
amended, any other Vested Benefit or any right of Executive to be
indemnified by the Company pursuant to its applicable policies and
practices from and against any third party claims arising out of
or relating to Executive's employment with or other services on
behalf of the Company or any subsidiary of the Company.
<PAGE> 9
f. Special Continuation of Certain Protection for the
___________________________________________________
Executive. Notwithstanding anything contained in this Agreement
_________
to the contrary, if, at the end of the Contract Employment Period,
(i) Executive remains an at-will employee of the Company and (ii)
_ __
within one year following the end of the Contract Employment
Period, the Company effects a Termination Without Cause or takes
actions which, if they had occurred within the Contract Employment
Period, would have given Executive the right to terminate his
employment pursuant to a Termination for Good Reason and
Executive, after giving the Company timely written notice of the
events permitting a Termination for Good Reason and the
opportunity to cure described in the definition of a Termination
for Good Reason, voluntarily terminates his employment within 90
days of the date of such actions by the Company, then in either
case, Executive shall receive payment of the Severance Benefits
that would otherwise have been payable to Executive hereunder
(including, without limitation, the enhanced benefit described in
Section 7(c)) had his termination of employment occurred during
the Contract Employment Period. Notwithstanding the preceding
sentence, this Section 6(f) shall not be applicable unless
Executive executes the waiver and release referred to in Paragraph
6(e) above in connection with his termination of employment
pursuant to this Paragraph 6(f).
g. Outplacement Services. In addition to any other
_____________________
benefits described in this Paragraph 6, in the event Executive is
eligible to receive Severance Benefits, the Company shall also
provide to Executive, at its expense, individual outplacement
services from a qualified outplacement firm selected by the
Company. The outplacement services to be provided to Executive
shall be no less favorable to Executive than those made available
to other executives prior to the date hereof under the Company's
generally applicable policies, programs or arrangements.
7. Change in Control of the Company.
________________________________
a. Accelerated Vesting and Payment. Unless the Board
_______________________________
(or the appropriate committee thereof) shall otherwise determine
in the manner set forth in Paragraph 7(b), the Option shall become
fully exercisable upon the occurrence of a Change in Control (as
defined below) at any time during the term hereof or thereafter
during the period Executive is eligible for the protections
afforded under Section 6(f) and shall remain exercisable for a
period of one year thereafter regardless of whether Executive
continues to be employed by the Company or, if longer, for the
period during which such Option would otherwise be exercisable in
accordance with its terms or the generally applicable provisions
of the 1994 Plan. If no Alternative Option is provided as set
forth in Section 7(b) below, and the Company does not survive as a
publicly traded corporation following a Change in Control, the
Company shall pay Executive, in full settlement of all rights with
respect to the Option, an aggregate amount in cash equal to the
product of (i) (A) the Fair Market Value of a Share of the
_
Company's Common Stock on the date the Change in Control occurs
minus (B) the per share exercise price for the Option times (ii)
__
the number of shares as to which such Option has not been
exercised at the time of the Change in Control. Any amount
payable pursuant to the preceding sentence shall be paid within 30
days following such Change in Control.
<PAGE> 10
b. Alternative Options. Notwithstanding
___________________
Paragraph 7(a), no acceleration of exercisability shall occur with
respect to any Option if the Board (or the appropriate committee
thereof) reasonably determines in good faith, prior to the
occurrence of a Change in Control, that such Option shall be
honored or assumed, or new rights substituted therefor (such
honored, assumed or substituted Option being hereinafter referred
to as an "Alternative Option") by the successor in interest to the
Company, provided that any such Alternative Option must:
________ ____
(i) provide Executive with rights and entitlements
substantially equivalent to or better than the
rights, terms and conditions applicable under the
Option, including, but not limited to, an identical
or better exercise and vesting schedule and
identical or better timing and methods of payment;
(ii) have substantially equivalent economic value to
such Option (determined at the time of the Change
in Control); and
(iii) have terms and conditions which provide that, in
the event that Executive's employment is terminated
by the Company for any reason or is terminated by
Executive pursuant to a Termination for Good Reason
within two years following a Change in Control, (A)
_
any conditions on Executive's rights under, or any
restrictions on exercisability applicable to, each
such Alternative Option shall be waived or shall
lapse, as the case may be and (B) the Alternative
_
Option shall remain exercisable until the second
anniversary of the Change in Control or, if longer,
for the period during which such Alternative Option
would otherwise be exercisable in accordance with
its terms or the provisions of the plan under
which it is granted that permit the longest post-
termination exercise period for involuntary
terminations (other than due to death, disability
or retirement).
c. Enhanced Severance Payments. If Executive's
___________________________
employment is terminated following a Change in Control pursuant to
a Termination for Good Reason or a Termination Without Cause, the
Severance Benefit payable to Executive pursuant to Paragraph 6
shall be equal to three times the sum of Executive's annual Base
Salary and the Bonus Severance Amount.
d. Additional Payments by the Company.
___________________________________
(i) Application of Paragraph 7(d). In the event that
_____________________________
any amount or benefit paid or distributed to
Executive pursuant to this Agreement, taken
together with any amounts or benefits otherwise
paid or distributed to Executive by the Company or
any affiliated company (collectively, the "Covered
Payments"), would be an "excess parachute payment"
as defined in Section 280G of the Code and would
thereby subject Executive to the tax (the "Excise
Tax") imposed under Section 4999 of the Code (or
any similar tax that may hereafter be imposed),
the
provisions of this Section 7(d) shall apply to
determine the amounts payable to Executive pursuant
to this Agreement.
(ii) Calculation of Benefits. Immediately following
_______________________
delivery of any notice of termination, the Company
shall notify Executive of the aggregate present
value of all termination benefits to which he would
be entitled under this Agreement and any other
plan, program or arrangement as of the projected
date of termination, together with the projected
maximum payments that could be paid without
Executive being subject to the Excise Tax.
(iii) Imposition of Payment Cap. If the aggregate value
_________________________
of all compensation payments or benefits to be paid
or provided to Executive under this Agreement and
any other plan, agreement or arrangement with the
Company exceeds the amount which can be paid to
Executive without Executive incurring an Excise Tax
by less than 105%, then the amounts payable to
Executive under this Agreement may, in the
discretion of the Company, be reduced (but not
below zero) to the maximum amount which may be paid
hereunder without Executive becoming subject to
such an Excise Tax (such reduced payments to be
referred to as the "Payment Cap"). In the event
that Executive receives reduced payments and
benefits hereunder, Executive shall have the right
to designate which of the payments and benefits
otherwise provided for in this Agreement that he
will receive in connection with the application of
the Payment Cap.
(iv) Further Payments by the Company. If the aggregate
_______________________________
value of all compensation payments or benefits to
be paid or provided to Executive under this
Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount
which can be paid to Executive without Executive
incurring an Excise Tax by more than 105%, the
Company shall pay to Executive immediately
following Executive's termination of employment an
additional amount (the "Tax Reimbursement Payment")
such that the net amount retained by Executive with
respect to such Covered Payments, after deduction
of any Excise Tax on the Covered Payments and any
Federal, state and local income tax and Excise Tax
on the Tax Reimbursement Payment provided for by
this Paragraph 7(d)(iv), but before deduction for
any Federal, state or local income or employment
tax withholding on such Covered Payments, shall be
equal to the amount of the Covered Payments.
(v) Application of Section 280G. For purposes of
___________________________
determining whether any of the Covered Payments
will be subject to the Excise Tax and the amount of
such Excise Tax,
<PAGE> 12
(A) such Covered Payments will be treated as
"parachute payments" within the meaning of
Section 280G of the Code, and all "parachute
payments" in excess of the "base amount" (as
defined under Section 280G(b)(3) of the Code)
shall be treated as subject to the Excise Tax,
unless, and except to the extent that, in the
good faith judgment of the Company's
independent certified public accountants
appointed prior to the Effective Date or tax
counsel selected by such Accountants (the
"Accountants"), the Company has a reasonable
basis to conclude that such Covered Payments
(in whole or in part) either do not constitute
"parachute payments" or represent reasonable
compensation for personal services actually
rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the
"base amount," or such "parachute payments"
are otherwise not subject to such Excise Tax,
and
(B) the value of any non-cash benefits or any
deferred payment or benefit shall be determined
by the Accountants in accordance with the
principles of Section 280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining
____________________
whether Executive would receive a greater net after-
tax benefit were the amounts payable under this
Agreement reduced in accordance with Paragraph
7(d)(iii), Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable
marginal rate of Federal income taxation for
the calendar year in which the first amounts
are to be paid hereunder, and
(B) any applicable state and local income taxes at
the highest applicable marginal rate of
taxation for such calendar year, net of the
maximum reduction in Federal income taxes
which could be obtained from the deduction of
such state or local taxes if paid in such year;
provided, however, that Executive may request that
such determination be made based on his individual tax
circumstances, which shall govern such determination
so long as Executive provides to the Accountants such
information and documents as the Accountants shall
reasonably request to determine such individual
circumstances.
(vii) Adjustments in Respect of the Payment Cap. If
_________________________________________
Executive receives reduced payments and benefits under
this Paragraph 7(d) (or this Paragraph 7(d) is
determined not to be applicable to Executive because
the Accountants conclude that Executive is not subject
to any Excise Tax) and it is established pursuant to a
final determination of a court or an Internal Revenue
Service proceeding (a "Final Determination") that,
notwithstanding the good faith of Executive and the
Company in applying the terms of this Agreement, the
<PAGE> 13
aggregate "parachute payments" within the meaning of
Section 280G of the Code paid to Executive or for his
benefit are in an amount that would have resulted in
the imposition of the Payment Cap under Section
7(d)(iii) and result in Executive being subject an
Excise Tax, then the amount equal to such excess
parachute payments shall be deemed for all purposes to
be a loan to Executive made on the date of receipt of
such excess payments, which Executive shall have an
obligation to repay to the Company on demand, together
with interest on such amount at the applicable Federal
rate (as defined in Section 1274(d) of the Code) from
the date of the payment hereunder to the date of
repayment by Executive. If the Payment Cap was
applied, and it is established pursuant to a Final
Determination that the aggregate "parachute payments"
payable to Executive equals or exceeds 105% of the
amount which could be paid to Executive without
Executive incurring an Excise Tax, Executive shall be
entitled to receive the benefits available under
Section 7(d)(iv). If this Paragraph 7(d) is not
applied to reduce Executive's entitlements under this
Paragraph 7 because the Accountants determine that
Executive would not receive a greater net-after tax
benefit by applying this Paragraph 7(d) and it is
established pursuant to a Final Determination that,
notwithstanding the good faith of Executive and the
Company in applying the terms of this Agreement,
Executive would have received a greater net after tax
benefit by subjecting his payments and benefits
hereunder to the Payment Cap, then the aggregate
"parachute payments" paid to Executive or for his
benefit in excess of the Payment Cap shall be deemed
for all purposes a loan to Executive made on the date
of receipt of such excess payments, which Executive
shall have an obligation to repay to the Company on
demand, together with interest on such amount at the
applicable Federal rate (as defined in Section 1274(d)
of the Code) from the date of the payment hereunder to
the date of repayment by Executive. If Executive
receives reduced payments and benefits by reason of
this Paragraph 7(d) and it is established pursuant to
a Final Determination that Executive could have
received a greater amount without exceeding the
Payment Cap, then the Company shall promptly
thereafter pay Executive the aggregate additional
amount which could have been paid without exceeding
the Payment Cap, together with interest on such amount
at the applicable Federal rate (as defined in Section
1274(d) of the Code) from the original payment due
date to the date of actual payment by the Company.
(viii) Adjustments in Respect of the Tax Reimbursement
______________________________________________
Payments. In the event that the Excise Tax is
________
subsequently determined by the Accountants or pursuant
to any proceeding or negotiations with the Internal
Revenue Service to be less than the amount taken into
account hereunder in calculating the Tax Reimbursement
Payment made, Executive shall repay to the Company, at
the time that the amount of such reduction in the
Excise Tax is finally determined, the portion of such
prior Tax Reimbursement Payment that would not have
<PAGE> 14
been paid if such Excise Tax had been applied in
initially calculating such Tax Reimbursement Payment,
plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing, in the event any
portion of the Tax Reimbursement Payment to be
refunded to the Company has been paid to any Federal,
state or local tax authority, repayment thereof shall
not be required until actual refund or credit of such
portion has been made to Executive, and interest
payable to the Company shall not exceed interest
received or credited to Executive by such tax
authority for the period it held such portion.
Executive and the Company shall mutually agree upon
the course of action to be pursued (and the method of
allocating the expenses thereof) if Executive's good
faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined
by the Accountants or pursuant to any proceeding or
negotiations with the Internal Revenue Service to
exceed the amount taken into account hereunder at the
time the Tax Reimbursement Payment is made (including,
but not limited to, by reason of any payment the
existence or amount of which cannot be determined at
the time of the Tax Reimbursement Payment), the
Company shall make an additional Tax Reimbursement
Payment in respect of such excess (plus any interest
or penalty payable with respect to such excess) at the
time that the amount of such excess is finally
determined.
(ix) Timing of Payment. Any Tax Reimbursement Payment (or
_________________
portion thereof) provided for in Paragraph 7(d)(iv)
above shall be paid to Executive not later than 10
business days following the payment of the Covered
Payments; provided, however, that if the amount of
such Tax Reimbursement Payment (or portion thereof)
cannot be finally determined on or before the date on
which payment is due, the Company shall pay to
Executive by such date an amount estimated in good
faith by the Accountants to be the minimum amount of
such Tax Reimbursement Payment and shall pay the
remainder of such Tax Reimbursement Payment (together
with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined, but in no event later than
45 calendar days after payment of the related Covered
Payment. In the event that the amount of the
estimated Tax Reimbursement Payment exceeds the amount
subsequently determined to have been due, such excess
shall constitute a loan by the Company to Executive,
payable on the fifth business day after written demand
by the Company for payment (together with interest at
the rate provided in Section 1274(b)(2)(B) of the
Code).
e. Definition of "Change in Control". For
_________________________________
purposes of this Paragraph 7, a "Change in Control" means the
happening of any of the following:
<PAGE> 15
(i) when any "person" as defined in section 3(a)(9)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and as used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d)
of the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored
or maintained by the Company or any Subsidiary (including
any trustee of such plan acting as trustee), directly or
indirectly, becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20
percent or more of the combined voting power of the
Company's then outstanding securities;
(ii) When, during any period of 24 consecutive
months after the date of this Agreement, the individuals
who, at the beginning of such period, constitute the Board
(the "Incumbent Directors") cease for any reason other
than death to constitute at least a majority thereof,
provided that a director who was not a director at the
________ ____
beginning of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-
thirds of the directors who then qualified as Incumbent
Directors either actually (because they were directors at
the beginning of such 24-month period) or by prior
operation of this Paragraph 7(e)(ii); or
(iii) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by
an entity other than the Company or a subsidiary through
purchase of assets, or by merger, or otherwise.
8. Noncompetition and Confidentiality.
__________________________________
a. Noncompetition. During the Contract Employment
______________
Period and for a period of one year following Executive's
termination of employment during the Contract Employment Period
other than due to a Termination Without Cause or a Termination for
Good Reason, Executive shall not become associated, whether as a
principal, partner, employee, consultant or shareholder (other
than as a holder of not in excess of 1% of the outstanding voting
shares of any publicly traded company), with any entity that is
actively engaged in any geographic area in any business which is
in substantial and direct competition with the business or
businesses of the Company for which Executive provides substantial
services or for which Executive has substantial responsibility,
provided that nothing in this Paragraph 8(a) shall preclude
________ ____
Executive from performing services solely and exclusively for a
division or subsidiary of such an entity that is engaged in a non-
competitive business.
b. Nondisclosure, Nonsolicitation and Cooperation.
______________________________________________
(i) Executive shall not (except to the extent
required by an order of a court having competent
jurisdiction or under subpoena from an appropriate
government agency) disclose to any third person, whether
during or subsequent to the Executive's employment with
the Company, any trade secrets; customer lists; product
development and related information; marketing plans and
related information; sales plans and related information;
operating policies and manuals; business plans; financial
records; or other
<PAGE> 16
financial, commercial, business or technical information
related to the Company or any subsidiary or affiliate
thereof unless such information has been previously
disclosed to the public by the Company or has become
public knowledge other than by a breach of this
Agreement; provided, however, that this limitation shall
________ _______
not apply to any such disclosure made while Executive is
employed by the Company, or any subsidiary or affiliate
thereof in the ordinary course of the performance of
Executive's duties;
(ii) during the Contract Employment Period and for
two years after the termination of such Period, Executive
shall not attempt, directly or indirectly, to induce any
employee or Insurance Agent (as defined below) of the
Company, or any subsidiary or any affiliate thereof to be
employed or perform services elsewhere provided that this
________ ____
covenant shall not preclude Executive from taking any
actions during the Contract Employment Period that (x) are
_
intended to benefit the Company or any subsidiary or
affiliate and (y) do not benefit Executive financially
_
other than as an employee or stockholder of the Company;
(iii) during the Contract Employment Period and for
two years after the termination of such Period, Executive
shall not attempt, directly or indirectly, to induce any
insurance agent or agency, insurance broker, broker-dealer
or supplier of the Company, or any subsidiary or affiliate
thereof to cease providing services to the Company, or any
subsidiary or affiliate thereof provided that this
________ ____
covenant shall not preclude Executive from taking any
actions during the Contract Employment Period that (x) are
_
intended to benefit the Company or any subsidiary or
affiliate and (y) do not benefit Executive financially
_
other than as an employee or stockholder of the Company;
(iv) during the Contract Employment Period and for
two years after the termination of such Period, Executive
shall not attempt, directly or indirectly, to solicit, on
behalf of any person or entity other than the Company or
any of its subsidiaries, the trade of any individual or
entity which, at the time of the solicitation, is a
customer of the Company, or any subsidiary or affiliate
thereof, or which the Company, or any subsidiary or
affiliate thereof is undertaking reasonable steps to
procure as a customer at the time of or immediately
preceding termination of the Contract Employment Period;
provided, however, that this limitation
________ _______
shall only apply to (x) any product or service which is in
_
competition with a product or service of the Company or
any subsidiary or affiliate thereof and (y) with respect
_
to any customer or prospective customer with whom
Executive has or had (by virtue of Executive's position or
otherwise) a personal relationship; and
(v) following the termination of the Contract
Employment Period, Executive shall provide assistance to
and shall cooperate with the Company or any subsidiary or
affiliate thereof, upon its reasonable request, with
respect to matters within the scope of Executive's duties
and responsibilities during the Contract Employment
Period. (The Company agrees and acknowledges that it
shall, to the maximum extent possible under the then
prevailing circumstances, coordinate (or cause a
subsidiary or affiliate thereof to coordinate) any such
request with Executive's other commitments and
responsibilities to minimize the degree to which such
request interferes with such commitments and
responsibilities). The Company agrees that it will
reimburse Executive for reasonable travel expenses (i.e.,
____
travel, meals and lodging) that Executive may incur in
providing assistance to the Company hereunder.
<PAGE> 17
Solely for purposes of Paragraph 8(b)(ii) above, the term
"Insurance Agent" shall mean those insurance agents or agencies
representing the Company or any subsidiary or affiliate thereof,
that are exclusive or career agents or agencies of the Company or
any subsidiary or affiliate thereof, or any insurance agents or
agencies which derive 50% or more of their business revenue from
the Company or any subsidiary or affiliate thereof (calculated on
an aggregate basis for the 12-month period prior to the date of
determination or such other similar period for which such
information is more readily available).
c. Company Property. Promptly following
________________
Executive's termination of employment, Executive shall return to
the Company all property of the Company, and all copies thereof in
Executive's possession or under his control.
d. Intention of the Parties. If any provision of
________________________
Paragraph 8 is determined by an arbitrator (or a court of
competent jurisdiction asked to enforce the decision of the
arbitrator) not to be enforceable in the manner set forth in this
Agreement, the Company and Executive agree that it is the
intention of the parties that such provision should be enforceable
to the maximum extent possible under applicable law and that such
arbitrator (or court) shall reform such provision to make it
enforceable in accordance with the intent of the parties.
Executive acknowledges that a material part of the inducement for
the Company to provide the salary and benefits evidenced hereby is
Executive's covenants set forth in Paragraph 8(a), (b) and (c) and
that the covenants and obligations of Executive with respect to
nondisclosure and nonsolicitation relate to special, unique and
extraordinary matters and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable
injury for which adequate remedies are not available at law.
Therefore, Executive agrees that, if Executive shall materially
breach any of those covenants following termination of employment,
the Company shall have no further obligation to pay Executive any
benefits otherwise payable hereunder and the Company shall be
entitled to an injunction, restraining order or such other
equitable relief (without the requirement to post a bond)
restraining Executive from committing any violation of the
covenants and obligations contained in Paragraph 8(a), (b) and
(c). The remedies in the preceding sentence are cumulative and
are in addition to any other rights and remedies the Company may
have at law or in equity as an arbitrator (or court) shall
reasonably determine.
<PAGE> 18
e. Waiver. Without limiting the generality of the
______
foregoing, upon request of Executive prior to engaging in any
conduct otherwise prohibited by this Paragraph 8, the Company may,
in its sole discretion, waive in writing, on such terms and
conditions as it may deem appropriate, any violation of this
Paragraph 8 which would otherwise occur due to such conduct.
9. Miscellaneous.
_____________
a. Survival. Paragraphs 5(c) (dealing with
________
reimbursement of expenses), 7 (relating to a Change in Control), 8
(relating to noncompetition, nonsolicitation and confidentiality)
and 9 (relating, among other things, to survival, assignment and
governing law) shall survive the termination hereof, whether such
termination shall be by expiration of the Contract Employment
Period or an early termination pursuant to Paragraph 6 hereof.
Paragraph 6((other than Paragraph 6(f)) (relating to early
termination) shall survive the termination hereof to the extent
that, prior thereto, or at the time of termination, Executive (or
his beneficiary) has become or becomes entitled to receive any of
the benefits payable thereunder. Paragraph 6(f) (and to the
extent applicable to such Paragraph 6(f), 6(e)) shall survive for
one year following the termination hereof. The option referred to
in Paragraph 4 survives for the term specified in Attachment A.
b. Binding Effect. This Agreement shall be binding
______________
on, and shall inure to the benefit of, the Company and any person
or entity that succeeds to the interest of the Company (regardless
of whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless in the case of a sale involving less than all
or substantially all of the Company's assets the Company otherwise
elects in writing, a sale of the assets of the business of the
Company (or portion thereof) in which Executive performs a
majority of his services. Any successor in interest to the
Company shall acknowledge in writing to Executive that it has
assumed this Agreement and is responsible to Executive for the
performance of the Company's obligations under this Agreement.
Without limiting the generality of the foregoing, the Company
shall have the right, without the consent of Executive, to assign
this Agreement and its obligations hereunder to any New Entity or
any subsidiary of any New Entity by which Executive becomes
employed, at the discretion of the Company, by reason of the
implementation of any restructuring of the Company, and, following
any such assignment, such New Entity or subsidiary shall be
treated as the Company for all purposes of this Agreement. This
Agreement shall also inure to the benefit of Executive's heirs,
executors, administrators and legal representatives.
c. Assignment. Except as provided under Paragraph
__________
9(b), neither this Agreement nor any of the rights or obligations
hereunder shall be assigned or delegated by any party hereto
without the prior written consent of the other party. In the
event the Company assigns this Agreement pursuant to Section 9(b),
the Company shall guarantee payment to Executive of any amounts at
any time due and payable hereunder in the event (and only to the
extent) that the assignee has become a debtor in bankruptcy, is
the subject of a receivership or similar preceding or has become
insolvent, provided that Executive shall be required to assign his
________ ____
<PAGE> 19
rights against the assignee through subrogation as a condition of
receiving any payment under the Company's guarantee. In
consideration of such guarantee, Executive agrees that following
such assignment, the covenants of Executive in Paragraphs 8(b)(i)
and (v) shall continue to inure to the benefit of the Company, as
well as the assignee. The Company and Executive agree that
following any assignment all other covenants described herein in
favor of the Company shall, from and after the date of such
assignment, inure solely to the benefit of the assignee.
d. Entire Agreement. Except as expressly provided
________________
below, this Agreement, the Option Agreement and the portion, if
any, of any other agreement relating to pension service or credits
referred to in Paragraph 5(a) shall constitute the entire
agreement between the parties hereto with respect to the matters
referred to herein and any other agreement or any portion of any
such other agreement not expressly preserved hereby shall cease to
be effective upon the execution hereof and shall not become
reinstated upon the expiration or other termination of this
Agreement, provided that paragraph 2(h) of that certain letter
dated January 2, 1991 from Edmund F. Kelly to Executive relating
to severance pay benefits payable for 52 weeks shall become
reinstated upon expiration of this Agreement. There are no
promises, representations, inducements or statements between the
parties other than those that are expressly contained herein.
Executive acknowledges that he is entering into this Agreement of
his own free will and accord, and with no duress, that he has read
this Agreement and that he understands it and its legal
consequences. Other than the provisions of Paragraph 6 which
limit Executive's eligibility to receive severance benefits under
the Company's generally applicable plans, programs or agreements,
nothing in this Agreement shall be construed to limit or otherwise
supersede Executive's rights or entitlements under any
compensatory plan, program or arrangement made available generally
to all employees or all officers of the Company or under the 1994
Plan or the 1984 Plan and this Paragraph 9(d) shall not preclude
reference to the documents governing any such plan, program or
arrangement to determine such rights and entitlements.
e. Severability; Reformation. In the event that
_________________________
one or more of the provisions of this Agreement shall become
invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained
herein shall not be affected thereby. In the event any of
Paragraph 8(a), (b) or (c) is not enforceable in accordance with
its terms, Executive and the Company agree that such Paragraph
shall be reformed to make such Paragraph enforceable in a manner
which provides the Company the maximum rights permitted at law.
f. Waiver. Waiver by any party hereto of any
______
breach or default by the other party of any of the terms of this
Agreement shall not operate as a waiver of any other breach or
default, whether similar to or different from the breach or
default waived. No waiver of any provision of this Agreement
shall be implied from any course of dealing between the parties
hereto or from any failure by either party hereto to assert its or
his rights hereunder on any occasion or series of occasions.
<PAGE> 20
g. Notices. Any notice required or desired to be
_______
delivered under this Agreement shall be in writing and shall be
delivered personally, by courier service, by registered mail,
return receipt requested, or by telecopy and shall be effective
upon actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate
in accordance with the terms hereof):
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut
Attention: Corporate Secretary
If to Executive:
James W. McLane
20 Colony Road
West Hartford, Connecticut 06117
h. Arbitration. The Company and Executive agree
___________
that any claim, dispute or controversy arising under or in
connection with this Agreement, or otherwise in connection with
Executive's employment by the Company (including, without
limitation, any such claim, dispute or controversy arising under
any federal, state or local statute, regulation or ordinance or
any of the Company's employee benefit plans, policies or programs)
shall be resolved solely and exclusively by binding arbitration.
The arbitration shall be held in the city of Hartford, Connecticut
(or at such other location as shall be mutually agreed by the
parties). The arbitration shall be conducted in accordance with
the Expedited Employment Arbitration Rules (the "Rules") of the
American Arbitration Association (the "AAA") in effect at the time
of the arbitration, except that the arbitrator shall be selected
by alternatively striking from a list of five arbitrators supplied
by the AAA. All fees and expenses of the arbitration, including a
transcript if either requests, shall be borne equally by the
parties. If Executive prevails as to any material issue presented
to the arbitrator, the entire cost of such proceedings (including,
without limitation, Executive's reasonable attorneys fees) shall
be borne by the Company. If Executive does not prevail as to any
material issue, each party will pay for the fees and expenses of
its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party
prevails on a claim for which attorney's fees are recoverable
under the Rules). Any action to enforce or vacate the
arbitrator's award shall be governed by the Federal Arbitration
Act, if applicable, and otherwise by applicable state law. If
either the Company or Executive pursues any claim, dispute or
controversy against the other in a proceeding other than the
arbitration provided for herein, the responding party shall be
entitled to dismissal or injunctive relief regarding such action
and recovery of all costs, losses and attorney's fees related to
such action.
i. Amendments. This Agreement may not be altered,
__________
modified or amended except by a written instrument signed by each
of the parties hereto.
<PAGE> 21
j. Headings. Headings to paragraphs in this
________
Agreement are for the convenience of the parties only and are not
intended to be part of or to affect the meaning or interpretation
hereof.
k. Counterparts. This Agreement may be executed in
____________
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
l. Withholding. Any payments provided for herein
___________
shall be reduced by any amounts required to be withheld by the
Company from time to time under applicable Federal, State or local
income or employment tax laws or similar statutes or other
provisions of law then in effect.
m. Governing Law. This Agreement shall be governed
_____________
by the laws of the State of Connecticut, without reference to
principles of conflicts or choice of law under which the law of
any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this
Agreement to be executed by its duly authorized officer and
Executive has hereunto set his hand as of the day and year first
above written.
Aetna Life and Casualty Company
/s/ Ronald E. Compton
_______________________________
Ronald E. Compton
Chairman
/s/ James W. McLane
_______________________________
James W. McLane
<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>
(Millions) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9)
Add back fixed charges 187.0 170.8 154.7 171.5 200.5
Minority interest 16.1 11.4 7.0 8.6 5.9
_________ _________ _________ _________ _________
Income (loss) as adjusted $ 929.3 $ 809.7 $ (853.0) $ 325.6 $ 108.5
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Fixed charges:
Interest on indebtedness $ 115.9 (1) $ 98.6 (1) $ 77.4 $ 81.4 $ 110.9
Portion of rents representative
of interest factor 71.1 72.2 77.3 90.1 89.6
_________ _________ _________ _________ _________
Total fixed charges $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Preferred stock dividend
requirements - - - - -
_________ _________ _________ _________ _________
Total combined fixed charges
and preferred stock dividend
requirements $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Ratio of earnings to fixed
charges 4.97 4.74 (5.51) 1.90 .54
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
Ratio of earnings to combined
fixed charges and preferred
stock dividends 4.97 4.74 (5.51) 1.90 .54
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
<FN>
(1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11
of Notes to Financial Statements in the 1995 Annual Report to Shareholders.)
</TABLE>
<PAGE> 1
Selected Financial Data
<TABLE>
<CAPTION>
(Millions, except per share data) 1995 1994 1993 1992 1991
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Revenue:
Premiums:
Aetna Health Plans $ 5,949.7 $ 5,611.5 $ 4,700.6 $ 4,586.7 $ 4,467.3
Aetna Life Insurance & Annuity 178.3 168.3 125.7 111.9 174.5
International 1,038.5 887.1 909.5 814.8 500.0
Large Case Pensions 264.9 234.4 185.9 204.2 292.4
__________________________________________________________
Total premiums 7,431.4 6,901.3 5,921.7 5,717.6 5,434.2
_____________________________________________________________________________________________________
Net Investment Income, Fees and Other
Income, and Net Realized Capital Gains
and Losses:
Aetna Health Plans 1,665.7 1,527.6 1,405.4 1,345.4 1,124.2
Aetna Life Insurance & Annuity 1,445.9 1,269.1 1,269.6 1,129.9 1,046.6
International 421.3 409.9 369.8 387.6 390.2
Large Case Pensions 2,004.0 2,120.8 2,380.1 2,547.1 2,730.6
Corporate: Other 9.7 (9.7) (6.9) (42.7) (11.7)
Federated Investors - - - - -
__________________________________________________________
Total net investment income, fees
and other income, and net realized
capital gains and losses 5,546.6 5,317.7 5,418.0 5,367.3 5,279.9
_____________________________________________________________________________________________________
Total Revenue from Continuing
Operations $ 12,978.0 $ 12,219.0 $ 11,339.7 $ 11,084.9 $ 10,714.1
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments:
Aetna Health Plans $ 286.0 $ 341.7 $ 272.2 $ 274.3 $ 382.6
Aetna Life Insurance & Annuity 198.0 159.1 111.4 99.0 115.1
International 86.6 71.2 55.0 25.1 38.2
Large Case Pensions 89.2 54.4 (822.3) (17.3) (167.0)
Corporate: Interest (70.4) (60.5) (44.7) (50.9) (65.0)
Other (115.5) (156.5) (173.9) (229.2) (163.5)
Federated Investors - - - - -
_____________________________________________________________________________________________________
Income (Loss) from Continuing
Operations before Extraordinary Item and
Cumulative Effect Adjustments 473.9 409.4 (602.3) 101.0 140.4
_____________________________________________________________________________________________________
Income (Loss) from Discontinued Operations (222.2) 58.1 290.3 324.8 364.8
_____________________________________________________________________________________________________
Cumulative Effect Adjustments for
continuing operations - - (49.2) (369.8) -
_____________________________________________________________________________________________________
Net Income (Loss) $ 251.7 $ 467.5 $ (365.9) $ 56.0 $ 505.2
_____________________________________________________________________________________________________
Net Realized Capital Gains (Losses),
Net of Tax (from Continuing Operations)
(included above) 29.5 (41.2) (42.0) (76.7) (200.6)
_____________________________________________________________________________________________________
Total Assets (1) 84,323.7 75,486.7 81,572.8 77,022.0 78,966.8
_____________________________________________________________________________________________________
Total Long-Term Debt 989.1 1,079.2 1,112.2 900.9 976.0
_____________________________________________________________________________________________________
Minority Interest in Preferred Securities
of Subsidiary 275.0 275.0 - - -
_____________________________________________________________________________________________________
Redeemable Preferred Stock,
Net of Treasury Shares - - - - -
_____________________________________________________________________________________________________
Shareholders' Equity 7,272.8 5,503.0 7,043.1 7,238.3 7,384.5
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
Per Common Share Data:
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments $ 4.16 $ 3.63 $ (5.42) $ .92 $ 1.28
Income (Loss) from Discontinued
Operations (1.95) .51 2.61 2.95 3.31
Cumulative Effect Adjustments for
continuing operations - - (.44) (3.36) -
Net Income (Loss) 2.21 4.14 (3.29) .51 4.59
Dividends Declared 2.76 2.76 2.76 2.76 2.76
Shareholders' Equity 63.39 48.85 62.77 65.64 67.09
Market Price at Year End 69.25 47.13 60.38 46.50 44.00
_____________________________________________________________________________________________________
<FN>
See Notes to Financial Statements and Management's Discussion and Analysis for significant events
affecting the comparability of current year results with 1994 and 1993 results.
(1) Total assets at December 31, 1995, 1994, and 1993 include $10.6 billion, $12.4 billion and
$15.2 billion, respectively, of assets attributable to discontinued fully guaranteed large
case pension products.
</TABLE>
<PAGE> 2
Selected Financial Data
<TABLE>
<CAPTION>
(Millions, except per share data) 1990 1989 1988 1987 1986 1985
____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Premiums:
Aetna Health Plans $ 4,190.1 $ 3,730.7 $ 2,770.1 $ 2,562.8 $ 2,893.5 $ 2,556.0
Aetna Life Insurance & Annuity 272.9 302.0 286.7 270.0 253.1 242.3
International 415.9 310.5 389.1 421.8 343.1 372.7
Large Case Pensions 597.0 1,303.8 855.3 1,767.5 1,130.2 410.9
________________________________________________________________
Total premiums 5,475.9 5,647.0 4,301.2 5,022.1 4,619.9 3,581.9
___________________________________________________________________________________________________________
Net Investment Income, Fees and Other
Income, and Net Realized Capital Gains
and Losses:
Aetna Health Plans 1,086.8 920.8 703.9 564.4 663.2 660.1
Aetna Life Insurance & Annuity 973.2 865.5 715.0 631.7 593.4 475.6
International 257.0 258.8 244.7 277.2 200.5 133.1
Large Case Pensions 3,069.9 3,162.5 3,083.7 2,884.7 2,917.9 2,709.3
Corporate: Other (.7) (17.1) 17.6 15.4 (79.3) (13.7)
Federated Investors - 240.3 193.5 209.2 180.6 149.3
________________________________________________________________
Total net investment income, fees
and other income, and net realized
capital gains and losses 5,386.2 5,430.8 4,958.4 4,582.6 4,476.3 4,113.7
___________________________________________________________________________________________________________
Total Revenue from Continuing
Operations $ 10,862.1 $11,077.8 $ 9,259.6 $ 9,604.7 $ 9,096.2 $ 7,695.6
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
Income (Loss) from Continuing Operations
before Extraordinary Item and Cumulative
Effect Adjustments:
Aetna Health Plans $ 288.3 $ 254.8 $ 152.4 $ 182.1 $ 277.6 $ 289.5
Aetna Life Insurance & Annuity 85.5 67.7 82.6 61.7 112.6 72.8
International (48.2) (14.1) (18.0) 28.5 39.1 (32.7)
Large Case Pensions 1.1 107.0 125.1 83.8 185.9 144.2
Corporate: Interest (73.8) (68.9) (62.5) (51.2) (39.4) (53.2)
Other (127.9) (146.4) (120.8) (127.7) (198.8) (117.9)
Federated Investors - 54.0 54.6 58.3 49.4 38.7
___________________________________________________________________________________________________________
Income from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments 125.0 254.1 213.4 235.5 426.4 341.4
___________________________________________________________________________________________________________
Income (Loss) from Discontinued Operations 489.1 385.3 486.1 631.3 434.0 19.9
___________________________________________________________________________________________________________
Cumulative Effect Adjustments
for continuing operations - - - - - -
___________________________________________________________________________________________________________
Net Income (Loss) $ 614.1 $ 676.4 $ 713.3 $ 915.3 $ 1,015.6 $ 365.3
___________________________________________________________________________________________________________
Net Realized Capital Gains (Losses),
Net of Tax (from Continuing Operations)
(included above) (117.0) 57.7 34.0 (12.0) 88.6 24.5
___________________________________________________________________________________________________________
Total Assets 77,686.1 75,534.2 69,934.4 64,371.8 59,477.1 50,802.9
___________________________________________________________________________________________________________
Total Long-Term Debt 975.5 1,002.4 1,058.5 902.8 644.2 520.5
___________________________________________________________________________________________________________
Minority Interest in Preferred Securities
of Subsidiary - - - - - -
___________________________________________________________________________________________________________
Redeemable Preferred Stock,
Net of Treasury Shares - - 118.6 177.1 200.0 75.0
___________________________________________________________________________________________________________
Shareholders' Equity 7,072.4 6,936.7 6,453.8 6,015.7 5,633.4 4,745.9
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
Per Common Share Data:
Income (Loss) from Continuing Operations
before Extraordinary Item and
Cumulative Effect Adjustments $ 1.12 $ 2.25 $ 1.82 $ 1.92 $ 3.60 $ 3.00
Income (Loss) from Discontinued
Operations 4.40 3.44 4.31 5.56 3.89 .19
Cumulative Effect Adjustments for
Continuing Operations - - - - - -
Net Income (Loss) 5.52 6.02 6.25 7.91 8.87 3.23
Dividends Declared 2.76 2.76 2.76 2.76 2.64 2.64
Shareholders' Equity 64.23 61.94 57.50 52.95 48.58 41.19
Market Price at Year End 39.00 56.50 47.25 45.25 56.38 53.50
___________________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 3
Consolidated Results of Operations: Operating Summary
<TABLE>
<CAPTION>
(Millions, except per share data) 1995 1994 1993
_________________________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 7,431.4 $ 6,901.3 $ 5,921.7
Net investment income 3,575.1 3,631.4 3,966.6
Fees and other income 1,924.3 1,741.5 1,512.6
Net realized capital gains (losses) 47.2 (55.2) (61.2)
________________________________________
Total revenue 12,978.0 12,219.0 11,339.7
________________________________________
Current and future benefits 9,027.2 8,652.0 8,189.2
Operating expenses 3,087.5 2,805.9 2,632.8
Amortization of deferred policy
acquisition costs 137.1 133.6 101.7
Loss on discontinuance of products - - 1,270.0
Severance and facilities charge - - 160.7
________________________________________
Total benefits and expenses 12,251.8 11,591.5 12,354.4
________________________________________
Income (Loss) from continuing operations
before income taxes, extraordinary item
and cumulative effect adjustments 726.2 627.5 (1,014.7)
Income taxes (benefits) 252.3 218.1 (412.4)
________________________________________
Income (Loss) from continuing operations
before extraordinary item and cumulative
effect adjustments 473.9 409.4 (602.3)
Income (Loss) from Discontinued Operations,
net of tax (222.2) 58.1 290.3
________________________________________
Income (Loss) before extraordinary item and
cumulative effect adjustments 251.7 467.5 (312.0)
Extraordinary loss on debenture redemption,
net of tax - - (4.7)
Cumulative effect adjustments, net of tax - - (49.2)
________________________________________
Net income (loss) $ 251.7 $ 467.5 $ (365.9)
_________________________________________________________________________________________
________________________________________
Net realized capital gains (losses) from
continuing operations, net of tax
(included above) $ 29.5 $ (41.2) $ (42.0)
_________________________________________________________________________________________
________________________________________
Per common share data:
Income (Loss) from continuing operations
before extraordinary item and
cumulative effect adjustments $ 4.16 $ 3.63 $ (5.42)
Income (Loss) from Discontinued Operations,
net of tax (1.95) .51 2.61
Extraordinary loss on debenture redemption,
net of tax - - (.04)
Cumulative effect adjustments, net of tax - - (.44)
________________________________________
Net income (loss) $ 2.21 $ 4.14 $ (3.29)
________________________________________
________________________________________
Dividends declared $ 2.76 $ 2.76 $ 2.76
________________________________________
________________________________________
Shareholders' equity $ 63.39 $ 48.85 $ 62.77
_________________________________________________________________________________________
________________________________________
Sources of earnings:
Aetna Health Plans $ 286.0 $ 341.7 $ 272.2
Aetna Life Insurance & Annuity 198.0 159.1 111.4
International 86.6 71.2 55.0
Large Case Pensions 89.2 54.4 (822.3)
Corporate: Interest (70.4) (60.5) (44.7)
Other (115.5) (156.5) (173.9)
________________________________________
Total from continuing operations 473.9 409.4 (602.3)
Discontinued Operations (222.2) 58.1 290.3
Extraordinary loss on debenture redemption,
net of tax - - (4.7)
Cumulative effect adjustments, net of tax - - (49.2)
________________________________________
Net income (loss) $ 251.7 $ 467.5 $ (365.9)
_________________________________________________________________________________________
________________________________________
<FN>
* This Management's Discussion and Analysis is as of February 6, 1996.
</TABLE>
<PAGE> 4
Overview
The company entered into a definitive agreement, dated
November 28, 1995, to sell its property-casualty operations to The
Travelers Insurance Group Inc. for $4.0 billion in cash, subject
to various closing adjustments. The sale is subject to state
regulatory approval and other customary conditions and is expected
to be completed no later than midyear 1996. (Please see "Sale of
Property-Casualty Operations" on page 6.)
The agreement to sell the company's property-casualty business
reflects the company's strategic decision to focus its resources
on pursuing growth opportunities in its managed care business and
other remaining businesses. The company is considering a variety
of strategic options, and is looking for opportunities to make
managed care investments or acquisitions to further strengthen the
company's overall market position. The company also expects to
evaluate opportunities for growth of its financial services
businesses and strengthen their competitive position, and
opportunities to develop its current international operations and
enter selected new markets where suitable opportunities exist.
Net Income
Aetna's 1995 net income was $252 million, compared with net income
of $468 million in 1994 and a net loss of $366 million in 1993.
Net income in 1995 included a loss from property-casualty
operations (Discontinued Operations) of $222 million compared with
income of $58 million in 1994 and $290 million (includes a $276
million cumulative effect benefit for accounting changes) in 1993.
The 1993 net loss also included a charge of $49 million for
cumulative effect adjustments for accounting changes. (Please see
Notes 1 and 2 of Notes to Financial Statements for further
discussions related to cumulative effect adjustments.)
Adjusted Earnings from Continuing Operations
For purposes of the discussions which follow, adjusted earnings
represent income (loss) from continuing operations before
cumulative effect adjustments excluding after-tax net realized
capital gains (losses) in 1995, 1994 and 1993, the 1993 after-tax
severance and facilities charge and the 1993 after-tax loss on
discontinuance of products. Adjusted earnings by segment were as
follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Aetna Health Plans $ 293.1 $ 355.3 $ 332.4
Aetna Life Insurance & Annuity 171.0 162.9 125.3
International 88.7 69.1 73.7
Large Case Pensions 78.2 71.4 47.4
Corporate (186.6) (208.1) (209.7)
</TABLE>
<PAGE> 5
Overview (Continued)
Summary Segment Results
The following summary of segment results is based upon adjusted
earnings.
Aetna Health Plans:
Results in 1995 reflected an increase in managed care investments
and a deterioration of medical trend in the first half of the year
on indemnity and preferred provider organization health products,
partially offset by increased earnings from health maintenance
organization operations and improved expense management in the
Specialty Health and Group Insurance businesses. Results in 1994
reflected improved earnings in the Health business.
Aetna Life Insurance & Annuity:
Results improved in 1995 primarily due to increased revenues
associated with growth in assets under management, which were
partially offset by an increase in operating expenses reflecting
continued business growth. Results in 1994 principally reflected
a decrease in operating expenses and strong sales growth.
International:
Results in 1995 and 1994 reflected continued improvement in the
Pacific Rim operations and increased investment income from
Mexico. Results in 1994 also reflected earnings from the
company's increased investment in a Mexican insurance operation.
Large Case Pensions:
Results in 1995 improved, reflecting an increase in fees and other
income and in net interest margins partially offset by the effect
of reduced net investment income as a result of returning capital
to the parent company and lower interest rates.
Corporate:
Results in 1995 and 1994 reflected higher interest expense
resulting from the issuance by a subsidiary of 9 1/2% cumulative
monthly income preferred securities in November 1994. Results in
1995 and 1994 also reflected lower corporate staff area expenses
as a result of previous restructurings.
Results of Continuing Operations
Income from continuing operations (before extraordinary item and
cumulative effect adjustments) was $474 million in 1995, compared with
$409 million in 1994 and a loss of $602 million in 1993. The following
significant factors affect the comparison of results of continuing
operations:
Results of continuing operations in 1993 included an after-tax charge
for anticipated future losses on discontinuance of fully guaranteed
large case pension products of $825 million and losses on these
discontinued products of $90 million ($53 million excluding net realized
capital losses). Results of discontinued products for the years ended
December 31, 1995 and 1994 were charged against the reserve for
anticipated future losses and did not impact the company's net income.
(Please see pages 23 through 26 for a discussion of discontinued
products.)
<PAGE> 6
Overview (Continued)
Results of Continuing Operations (continued)
Results of continuing operations in 1993 included an after-tax severance
and facilities charge of $104 million. (Please see "Severance and
Facilities Charge" on page 9.)
Results of continuing operations in 1995 included net after-tax realized
capital gains of $30 million compared with net after-tax realized
capital losses of $41 million in 1994 and $42 million in 1993. (Please
see "Net Realized Capital Gains and Losses" on page 7.)
Sale of Property-Casualty Operations
The company entered into a definitive agreement, dated November 28,
1995, to sell its property-casualty operations to The Travelers
Insurance Group Inc. ("Travelers") for $4.0 billion in cash, subject to
various closing adjustments. The sale is subject to state regulatory
approval and other customary conditions and is expected to be completed
no later than midyear 1996. In light of the sale agreement, the
company's property-casualty operations have been classified as
Discontinued Operations. Results of the Discontinued Operations will be
included in the company's consolidated results of operations until the
closing. While such results will not adjust the purchase price, income
or loss from such operations will decrease or increase, respectively,
the gain expected to be recognized on such sale.
As part of the agreement, Travelers will sublease the space currently
occupied by the company in the CityPlace office facility in Hartford for
eight years at current market rates. The company expects to take a
charge of approximately $190 million (after tax). Such charge
represents the present value of the difference between rent required to
be paid by the company under the master lease and future rentals
expected to be received by the company. The company also anticipates
taking other restructuring charges in 1996 due to actions expected to be
taken to reduce the level of corporate expenses and other costs
previously absorbed by the property-casualty operations.
For a further discussion of Discontinued Operations, please see
"Discontinued Operations - Property-Casualty Operations" on page 28.
<PAGE> 7
Overview (Continued)
Net Realized Capital Gains and Losses
Net realized after-tax capital gains (losses) included in results of
continuing operations, on assets supporting discontinued products,
allocable to experience rated pension contractholders, and on assets
related to Discontinued Operations were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_________________________________________________________________________________
<S> <C> <C> <C>
Net realized capital gains (losses) from sales $ 38.5 $ (11.1) $ 291.7
Net realized capital losses from changes in
reserves for mortgage loans and real estate (9.0) (27.7) (321.1)
Net realized capital losses from
write-downs of debt and equity securities - (2.4) (12.6)
_______ _______ ________
Net realized capital gains (losses) included in
results of continuing operations $ 29.5 $ (41.2) $ (42.0)
_______ _______ ________
_______ _______ ________
Net realized capital losses on assets
supporting discontinued products
(excluded above) $ (8.6)* $(135.8)* $ **
_______ _______ ________
_______ _______ ________
Net realized capital gains (losses) allocable
to experience rated pension contractholders
(excluded above) $ 59.4 $(126.8) $ (117.1)
_______ _______ ________
_______ _______ ________
Net realized capital gains (losses) on
assets related to Discontinued
Operations (excluded above) $ 106.0 $ (1.4) $ 128.0
_______ _______ ________
_______ _______ ________
<FN>
* Charged to the reserve for future losses on discontinued products. (Please see
"Large Case Pensions - Discontinued Products" on page 23.)
** Net realized capital losses of $37.4 million for 1993 on assets supporting
discontinued products are included in the $42.0 million of capital losses
included in results of continuing operations above.
</TABLE>
Net realized capital gains from sales in 1995 include gains from
the sale of debt securities. Net realized capital losses from
changes in reserves for mortgage loans and real estate in 1995 and
1994 declined and reflect improvements in certain segments of the
commercial real estate markets. Net realized capital gains
(losses) from sales in 1993 include a $12 million loss on the sale
of the U.K. life and investment management operations.
Net realized capital gains in 1995 on assets related to
Discontinued Operations include $156 million of gains resulting
from the sale of equity securities primarily due to the company's
efforts to reduce volatility in its statutory surplus, and
increase income, and in connection with the agreement to sell the
property-casualty operations. Such gains are partially offset by
a $23 million loss from the write-down of the company's investment
in a consolidated subsidiary, Aetna Re-Insurance Company (U.K.)
Ltd., which it intends to sell. Net realized capital gains
(losses) on assets related to Discontinued Operations include a
$14 million gain resulting from the sale of a portion of an
unconsolidated subsidiary in 1994 and a $27 million gain in 1993
from the redemption of preferred stock received in connection with
the sale of American Re-Insurance Company.
<PAGE> 8
Overview (Continued)
Income Taxes
During 1995, the company moved from a net unrealized capital loss
position of $1,072 million ($381 million of which related to
Discontinued Operations) at December 31, 1994 to a net unrealized
capital gain position of $641 million ($303 million of which
related to Discontinued Operations) at December 31, 1995,
primarily due to decreases in interest rates. As a result, the
$475 million of valuation allowances related to deferred tax
assets on these losses at December 31, 1994 (of which $102 million
related to Discontinued Operations) were reversed, with no impact
on 1995 net income. The establishment of the valuation allowances
described above had no impact on net income for 1994.
Management believes that it is more likely than not that the
company will realize the benefit of its net deferred tax assets of
$272 million for continuing operations and $642 million for
Discontinued Operations. (Please see Note 10 of Notes to
Financial Statements.)
Return on Shareholders' Equity
Return on shareholders' equity for the years ended December 31 was
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
_______________________________________________________________________________________
<S> <C> <C> <C>
Return on shareholders' equity 3.9% 7.5% (5.1)%
Return on shareholders' equity
excluding additions to environmental
and asbestos-related claims reserves 14.8% 10.0% (3.9)%
</TABLE>
<PAGE> 9
Overview (Continued)
Revenue
Total revenue from continuing operations, excluding net realized
capital gains and losses, increased 5% in 1995, primarily as a
result of increased premiums and fees and other income, partially
offset by a decrease in net investment income. Premium income
increased 8% in 1995. Such increase primarily reflects a movement
toward higher revenue products in the Aetna Health Plans segment
and increases in the volume of business sold in the Pacific Rim
and Latin American markets in the International segment. Fees and
other income increased 10%, reflecting an increase in the Aetna
Health Plans segment primarily due to growth in covered members
related to the point-of-service product and the Aetna Life
Insurance & Annuity segment primarily due to an increase in fees
assessed against policyholders related to growth in assets under
management. (Please see "Discontinued Operations - Property-
Casualty Operations" on page 30 for further discussions related to
revenue.)
Severance and Facilities Charge
In 1993 the company recorded a $200 million after-tax
($308 million pretax) severance and facilities charge to fourth
quarter 1993 earnings (of which $96 million after tax and
$147 million pretax related to Discontinued Operations). The
planned actions included the elimination of approximately 4,000
positions (2,000 of which related to Discontinued Operations).
The severance and facilities charge also included costs related to
vacating excess leased office space and costs related to vacating
and selling an owned property in Hartford, Connecticut.
All of the positions expected to be eliminated had been completed
by December 31, 1995 and the related severance benefits charged
against the reserve. The annualized after-tax savings of
approximately $200 million resulting from these and other cost
reduction actions (of which $120 million related to Discontinued
Operations) had been realized as of December 31, 1995.
(Please see Note 4 of Notes to Financial Statements for further
discussions related to severance and facilities charges.)
The company continues to conduct strategic and financial reviews
of its continuing operations in order to make such operations more
competitive. Such reviews may result in restructuring actions in
1996 which would be in addition to the severance and facilities
charges anticipated in connection with the sale of the company's
property-casualty operations, though the amount of any such
charges cannot be estimated at this time. (Please see "Sale of
Property-Casualty Operations" on page 6.)
<PAGE> 10
Aetna Health Plans
<TABLE>
<CAPTION>
Operating Summary (Millions) 1995 1994 1993
____________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 5,949.7 $ 5,611.5 $ 4,700.6
Net investment income 364.0 351.6 376.3
Fees and other income 1,312.3 1,197.2 1,039.5
Net realized capital losses (10.6) (21.2) (10.4)
_________________________________
Total revenue 7,615.4 7,139.1 6,106.0
_________________________________
Current and future benefits 5,100.4 4,755.1 3,989.3
Operating expenses 2,038.4 1,805.4 1,592.6
Amortization of deferred policy
acquisition costs 22.2 40.5 29.4
Severance and facilities charge - - 79.8
_________________________________
Income before taxes 454.4 538.1 414.9
Income taxes 168.4 196.4 142.7
_________________________________
Income before cumulative
effect adjustments $ 286.0 $ 341.7 $ 272.2
____________________________________________________________________________
_________________________________
Net realized capital losses, net of tax
(included above) $ (7.1) $ (13.6) $ (8.3)
____________________________________________________________________________
_________________________________
</TABLE>
The Aetna Health Plans ("AHP") segment consists of Health,
Specialty Health and Group Insurance businesses.
The Health business provides a full spectrum of managed care and
traditional indemnity plans, providing its members with a choice
of health plans to meet their individual needs. Managed care
products vary with respect to the extent to which the company
manages health care costs and utilization. Such products range
from preferred provider organization (PPO) plans to point-of-
service (POS) and health maintenance organization (HMO) plans. In
addition, the company owns and manages physician practices for use
by its members and other consumers. The number of health members
covered at December 31 was approximately:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
___________________________________________________________
<S> <C> <C> <C>
Health
HMO 1.5 1.5 1.4
POS 2.3 1.5 0.5
_______________________
Total Gated Managed Care (1) 3.8 3.0 1.9
PPO 4.2 4.0 3.5
_______________________
Total Managed Care 8.0 7.0 5.4
Traditional Indemnity (2) 4.0 4.8 5.9
________________________
Total Health 12.0 11.8 11.3
________________________
________________________
<FN>
(1) Gated managed care refers to the role of the primary care physician (i.e., gatekeeper).
In the HMO and POS products, the physician is selected by the member to coordinate the
total health care of the member and seeks to ensure that only appropriate and high-
quality services are provided.
(2) During 1995, AHP redefined its traditional indemnity membership in order to better align
the components of such membership with its businesses. Accordingly, AHP "dental-only"
members of 3.8 million in 1994 and 3.7 million in 1993, previously included in traditional
indemnity, are now included solely in Specialty Health.
</TABLE>
<PAGE> 11
Aetna Health Plans (Continued)
Membership attributable to a risk contract with the Civilian
Health and Military Program of the Uniformed Services (Champus),
of .7 million, .7 million and .2 million members at December 31,
1995, 1994 and 1993, respectively, is included in managed care
membership. Champus has awarded renewal of the contract to
another provider, although the company will remain the primary
provider through March 31, 1996.
Specialty Health products include behavioral health, pharmacy and
dental plans, which provide managed care or indemnity features.
The number of members covered by Specialty Health products at December
31 was approximately:
<TABLE>
<CAPTION>
(Millions) 1995 (1) 1994 (1) 1993 (1)
_____________________________________________________________
<S> <C> <C> <C>
Behavioral Health 14.9 15.3 13.3
______________________________
______________________________
Dental 8.3 8.3 8.6
______________________________
______________________________
Managed Pharmacy 4.2 3.3 2.7
______________________________
______________________________
<FN>
(1) Many Specialty Health members participate in more than one type of AHP coverage
and are therefore counted in each.
</TABLE>
The Group Insurance business provides life insurance, disability,
including managed disability, and long-term care plans. The
number of members covered by Group Insurance products at December
31 was approximately:
<TABLE>
<CAPTION>
(Millions) 1995 (1) 1994 (1) 1993 (1)
_____________________________________________________________
<S> <C> <C> <C>
Group Life (2) 8.0 7.8 7.7
_____________________________
_____________________________
Disability 2.2 2.1 2.1
_____________________________
_____________________________
Long-Term Care .1 .1 .1
_____________________________
_____________________________
<FN>
(1) Many Group Insurance members participate in more than one type of AHP coverage
and are therefore counted in each.
(2) Group life includes members with accident coverages.
</TABLE>
<PAGE> 12
Aetna Health Plans (Continued)
Products and services for AHP's businesses are marketed primarily
to employers (i.e., plan sponsors) for the benefit of employees
and their dependents (i.e., members). Plans may be insured, in
whole or in part, or benefits may be entirely funded by the plan
sponsor ("self-funded"). Insured plans generally involve the
assumption of all or a portion of health care cost and utilization
risk by the company ("risk plans"). Self-funded plans do not
involve the assumption of significant risk by the company
("nonrisk plans") and thus typically generate lower, but more
consistent, earnings than comparable insured plans. Stop loss
arrangements are available to self-funded plan sponsors, which
limit the risk they retain.
Revenue produced by risk plans is reflected in "premiums" and by
nonrisk plans is reflected in "fees and other income." Benefit
expenses provided under risk plans are reflected in current and
future benefits. Administrative expenses are associated with both
risk and nonrisk plans and are reflected in operating expenses.
The number of Health members at December 31, 1995 participating in
risk versus nonrisk plans was as follows:
<TABLE>
<CAPTION>
(Millions) Risk Nonrisk Total
______________________________________________________________
<S> <C> <C> <C>
Health
HMO 1.2 .3 1.5
POS .4 1.9 2.3
_____________________________
Total Gated Managed Care 1.6 2.2 3.8
PPO 1.4 2.8 4.2
_____________________________
Total Managed Care 3.0 5.0 8.0
Traditional Indemnity .7 3.3 4.0
_____________________________
Total Health 3.7 8.3 12.0
_____________________________
_____________________________
</TABLE>
At December 31, 1995, the majority of AHP's Specialty Health
members participated in nonrisk plans, while the majority of AHP's
Group Insurance members were covered by risk plans.
The risk/nonrisk composition of AHP's 1995 total membership is
generally consistent with the composition of 1994 and 1993 total
membership.
<PAGE> 13
Aetna Health Plans (Continued)
AHP's adjusted earnings (after tax) follow:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Income before cumulative effect adjustments $ 286.0 $ 341.7 $ 272.2
Less:
Net realized capital losses (7.1) (13.6) (8.3)
Severance and facilities charge - - (51.9)
_______ _______ _______
Adjusted earnings $ 293.1 $ 355.3 $ 332.4
_______ _______ _______
_______ _______ _______
</TABLE>
AHP's adjusted earnings decreased $62 million in 1995, compared
with an increase of $23 million in 1994. The lower earnings in
1995 are primarily due to the expenses associated with an increase in
managed care investments and a deterioration of medical trend in the
first half of the year on indemnity and PPO health products, partially
offset by increased earnings from HMO operations and improved expense
management in the Specialty Health and Group Insurance businesses.
HMO earnings were $41 million, $30 million and $11 million in
1995, 1994 and 1993, respectively, and the related medical loss
ratios were 84.3%, 84.6% and 84.6%, respectively. The increase in
HMO earnings is due to growth of membership in risk plans of over
80,000 members in 1995 and 120,000 members in 1994 and to stronger
management of medical costs in both years. 1994 adjusted earnings
reflected improved earnings in the Health business which resulted
from an increase in premiums and fees, offset in part by an
increase in expenses related to investments in managed care.
Group Insurance earnings represented approximately one-third of
AHP's earnings for 1995, and were comparable to the earnings in
1994 and 1993.
Revenue for the Health and Specialty Health businesses increased
approximately $540 million or 10% in 1995 and increased
approximately $1 billion or 23% in 1994. The 1995 and 1994
increases were primarily due to the shift in membership to managed
care products. Group Insurance represented approximately 18%, 20%
and 24% of AHP's revenue for 1995, 1994 and 1993, respectively.
Health and Specialty Health benefit expense increased from 1994 to
1995 due to higher medical costs in the nongated indemnity and PPO
risk products, which was partially offset by reduced membership in
the indemnity product. HMO benefit expense also increased due to
growth in membership, although it has improved on a per member
basis. In 1994, the Health and Specialty Health benefit expense
increased evenly with revenue.
Operating expenses increased significantly for the Health and
Specialty Health businesses in 1995 and 1994 due to planned
investments in managed care-related systems and processes, and in
primary care physician practices, which have grown from 21
practices in six cities in 1994 to 62 practices in eight cities in
1995. In addition, the migration of members from indemnity to the
more resource intensive POS product contributed to the increase in
operating expenses in both 1995 and 1994.
<PAGE> 14
Aetna Health Plans (Continued)
Outlook
Management expects that AHP will continue to be a primary source
of earnings to the company. With the market shift from
traditional indemnity plans toward managed care, the continued
profitability of AHP is dependent upon growing its managed care
business while effectively managing the health care costs and
operating expenses of that business, as well as the quality of
services provided. Factors that may affect AHP's ability to
control these costs and expenses include competition, changes in
health care practices, inflation, contracts with providers,
changing medical technologies, government imposed surcharges,
taxes or assessments, and changes in federal or state laws.
Legislative efforts to change the health insurance system have
received increased attention in recent years at both the state and
national levels, including various proposals to reform the federal
Medicare program. AHP actively supports proposals designed to
enhance managed care and expand access to health care coverage
through private sector competition. Management is not able to
predict the outcome of state and federal legislative efforts, or
the effect any additional legislation, if adopted, would have on
the company.
AHP will continue to invest in its managed care infrastructure in
its effort to effectively manage health care costs and operating
expenses, and the quality of services provided. The company is
looking for opportunities to make managed care investments or
acquisitions to further strengthen the company's overall market
position. The Specialty Health and Group Insurance businesses
will concentrate on increased cross-selling of their products to
current AHP members, as well as marketing to non-AHP customers.
<PAGE> 15
Aetna Life Insurance & Annuity
<TABLE>
<CAPTION>
Operating Summary (Millions) 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 178.3 $ 168.3 $ 125.7
Net investment income 1,044.1 958.7 962.4
Fees and other income 359.1 316.0 294.4
Net realized capital gains (losses) 42.7 (5.6) 12.8
____________________________________
Total revenue 1,624.2 1,437.4 1,395.3
____________________________________
Current and future benefits 979.5 916.1 882.9
Operating expenses 305.8 258.9 287.7
Amortization of deferred policy
acquisition costs 44.1 27.4 20.6
Severance and facilities charge - - 30.8
____________________________________
Income before taxes 294.8 235.0 173.3
Income taxes 96.8 75.9 61.9
____________________________________
Income before cumulative
effect adjustments $ 198.0 $ 159.1 $ 111.4
_______________________________________________________________________________
____________________________________
Net realized capital gains (losses),
net of tax (included above) $ 27.0 $ (3.8) $ 6.1
_______________________________________________________________________________
____________________________________
Deposits not included in premiums above:
Annuities:
Fully guaranteed $ 415.7 $ 249.0 $ 263.7
Experience rated 928.6 1,058.2 970.5
Non-guaranteed 2,019.4 1,340.4 1,040.1
____________________________________
Total annuities 3,363.7 2,647.6 2,274.3
Individual Life 539.1 318.7 268.7
____________________________________
Total $ 3,902.8 $ 2,966.3 $ 2,543.0
_______________________________________________________________________________
____________________________________
Assets under management:(1)(2)
Fully guaranteed $ 3,408.4 $ 2,626.7 $ 2,428.1
Experience rated 10,999.9 9,272.0 9,241.5
Non-guaranteed 11,522.9 8,064.6 7,111.0
____________________________________
Total $ 25,931.2 $ 19,963.3 $ 18,780.6
_______________________________________________________________________________
____________________________________
<FN>
(1) Included above are net unrealized capital gains (losses) of approximately
$800 million, $(390) million and $750 million at December 31, 1995, 1994 and
1993, respectively.
(2) Includes $2,604.2 million, $902.9 million and $369.0 million at December 31, 1995,
1994 and 1993, respectively, related to assets held and managed by unaffiliated
mutual funds.
</TABLE>
The Aetna Life Insurance & Annuity segment ("ALIAC") markets and
services two principal types of products: (1) financial services
and (2) life insurance.
The financial services products include individual and group
annuity contracts which offer a variety of funding and
distribution options for personal and employer-sponsored
retirement plans that qualify under IRC Sections 401, 403, 408 and
457, and individual and group nonqualified annuity contracts.
These contracts may be immediate or deferred and are offered
primarily to individuals, pension plans, small businesses and
employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and
corporate markets. Financial services also include pension plan
administrative services.
The life insurance products include universal life, variable
universal life, interest-sensitive whole life and term insurance.
These products are offered primarily to individuals, small
businesses, employer-sponsored groups and executives of Fortune
2000 companies.
<PAGE> 16
Aetna Life Insurance & Annuity (Continued)
The annuity and life insurance contracts marketed by ALIAC include
fully guaranteed, experience rated and non-guaranteed investment
options and are written primarily by Aetna Life Insurance and
Annuity Company. Fully guaranteed options provide guarantees on
investment return, maturity values, and if applicable, benefit
payments. The experience rated options require the customer to
assume investment (including realized capital gains and losses)
and other risks subject, among other things, to certain minimum
guarantees. The effect of such realized gains and losses does not
impact the company's results. The non-guaranteed investment
options provide for full assumption by the customer of investment
results. Assets supporting non-guaranteed options are held in
separate accounts that invest in Aetna and unaffiliated mutual
funds (which are included in assets under management) and are
managed by the company for a fee. Separate account investment
income and realized capital gains and losses are not reflected in
the company's consolidated results of operations. Aetna retail
mutual funds also are available to individual and institutional
investors outside of the ALIAC retirement products.
ALIAC's adjusted earnings (after tax) follow:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Income before cumulative effect adjustments $ 198.0 $ 159.1 $ 111.4
Less:
Net realized capital gains (losses) 27.0 (3.8) 6.1
Severance and facilities charge - - (20.0)
_______ _______ _______
Adjusted earnings $ 171.0 $ 162.9 $ 125.3
_______ _______ _______
_______ _______ _______
</TABLE>
ALIAC's adjusted earnings increased $8 million in 1995, following
a $38 million increase in 1994. Results in 1995 reflected
improved earnings in the financial services products, while
earnings in the life insurance products were level with the prior
year. The improvement in earnings related to the financial
services products reflected an increase in fees assessed against
policyholders and increased net investment income related to the
growth in assets under management which were partially offset by
an increase in operating expenses. This increase in operating
expenses primarily reflects continued business growth. The
improvement in ALIAC's 1994 adjusted earnings reflected improved
earnings in both the life insurance and financial services
products primarily as a result of a decrease in operating expenses
reflecting savings associated with prior restructurings in ALIAC's
life insurance and pension plan administrative service businesses.
The 1994 improvement also reflected an increase in fees assessed
against policyholders, primarily due to an increase in the volume
of business in force for certain universal life and annuity
contracts.
<PAGE> 17
Aetna Life Insurance & Annuity (Continued)
Premiums relate to term life, whole life and annuity products
containing life contingencies. Premiums increased by $10 million
in 1995 and by $43 million in 1994. The 1995 and 1994 increases
resulted primarily from increases in immediate annuity sales.
Deposits relate to annuity contracts not involving life
contingencies and universal life contracts. Deposits increased
32% in 1995, which included the assumption of a $471 million
variable annuity and universal life block of business. The
increase in 1994 reflected the $215 million assumption of a block
of primarily individual annuity business and strong universal life
sales.
Assets under management increased by 30% during 1995 primarily as
a result of continued business growth and overall improvement in
the stock and bond markets.
ALIAC's contracts typically impose surrender fees which decline
over the duration of the contract. Assets held under experience
rated general account options have transfer and withdrawal
limitations. Withdrawals from the fully guaranteed accumulation
options prior to maturity include an adjustment intended to
reflect the estimated fair value of the assets supporting the
contract at the time of withdrawal. Withdrawals from non-
guaranteed options are based on the actual market value of the
assets in the separate account. Approximately 91% and 90% of
assets under management at December 31, 1995 and 1994,
respectively, allowed for contractholder withdrawal, 63% and 57%
of which, respectively, are subject to market value adjustments or
deferred surrender charges at December 31, 1995.
Outlook
ALIAC's sales of life insurance and tax-qualified annuities are
expected to continue to be strong in 1996. Sales of nonqualified
products, a primary focus for 1995, are expected to significantly
exceed 1995 levels as relationships formed with broker/dealers and
banks in 1995 build sales momentum. ALIAC intends to expand its
retirement planning capabilities. The company expects to evaluate
opportunities for growth of its financial services businesses and
strengthen their competitive position. Management expects that
ALIAC will continue to be a significant source of earnings to the
company.
<PAGE> 18
International
<TABLE>
<CAPTION>
Operating Summary (Millions) 1995 1994 1993
____________________________________________________________________________
<S> <C> <C> <C>
Premiums $1,038.5 $ 887.1 $ 909.5
Net investment income 308.7 308.4 311.6
Fees and other income 115.0 97.0 83.4
Net realized capital gains (losses) (2.4) 4.5 (25.2)
________________________________
Total revenue 1,459.8 1,297.0 1,279.3
________________________________
Current and future benefits 911.2 782.7 860.1
Operating expenses 350.5 349.8 354.3
Amortization of deferred policy
acquisition costs 70.8 65.7 51.7
Severance and facilities charge - - 11.0
________________________________
Income before taxes 127.3 98.8 2.2
Income taxes (benefits) 40.7 27.6 (52.8)
________________________________
Income before cumulative
effect adjustments $ 86.6 $ 71.2 $ 55.0
____________________________________________________________________________
________________________________
Net realized capital gains (losses),
net of tax (included above) $ (2.1) $ 2.1 $ (11.6)
____________________________________________________________________________
________________________________
</TABLE>
The International segment, through subsidiaries and joint venture
operations, sells primarily life insurance and financial services
products in non-U.S. markets including Canada, Mexico, Taiwan,
Chile, Malaysia, Hong Kong, New Zealand, Peru, Argentina and
Indonesia.
International's adjusted earnings (after tax) follow:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Income before cumulative effect adjustments $ 86.6 $ 71.2 $ 55.0
Less:
Net realized capital gains (losses) (2.1) 2.1 (11.6)
Severance and facilities charge - - (7.1)
_______ _______ _______
Adjusted earnings $ 88.7 $ 69.1 $ 73.7
_______ _______ _______
_______ _______ _______
</TABLE>
International's adjusted earnings increased $20 million in 1995,
following a $5 million decrease in 1994. Results in 1995 and 1994
primarily reflected continued improvement in the Pacific Rim
operations and increased investment income from Mexico. Results
in 1994 also reflected earnings from the company's increased
investment (from 30% ownership in 1993 to 45% ownership in 1994)
in its Mexican insurance operation. 1993 adjusted earnings
included $37 million of tax benefits from prior year operating
losses related to the sale of the U.K. life and investment
management operations.
<PAGE> 19
International (Continued)
During 1994, the company changed its accounting for an affiliate
from the consolidated basis of accounting to the equity basis of
accounting. Prior to the change, the company recognized revenue
of $98 million and $173 million in 1994 and 1993, respectively,
and benefits and expenses of $98 million and $180 million in 1994
and 1993, respectively, from the affiliate. During the first
quarter of 1995, the company sold its interest in the affiliate at
book value.
Premiums in 1995 were 17% higher than in 1994, following a 2%
decrease in 1994 premiums as compared with 1993. Excluding the
change in accounting for the affiliate discussed above, premiums
increased 29% and 5% in 1995 and 1994, respectively, primarily due
to increases in the volume of business sold in the Pacific Rim and
Latin American markets.
Outlook
International's strategy is to invest in areas outside the U.S.
that have the potential for attractive returns, with emphasis on
the emerging insurance and financial services markets. Recently,
International has entered new markets in Argentina and Indonesia,
and has obtained a license to sell life and health insurance
products in the Philippines.
Approximately 28% of International's 1995 adjusted earnings are
derived from the company's Mexican affiliate. The current
difficult economic environment in Mexico is expected to limit the
ability of this affiliate to increase its earnings contribution.
Conducting business and investing in international markets pose
unique risks which vary from country to country. Such risks
include, but are not limited to, political developments, including
tax changes, nationalization and changes in regulatory policy,
currency restrictions, currency fluctuations, as well as the
consequence of hostilities and unrest.
Management believes that its continued focus on entering new
markets where suitable opportunities exist and development of
existing operations will help to reduce the exposure to the above-
indicated risks through further diversification of its operations,
and that International will be a meaningful contributor to overall
company results.
<PAGE> 20
Large Case Pensions
<TABLE>
<CAPTION>
Operating Summary (Millions) 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 264.9 $ 234.4 $ 185.9
Net investment income 1,850.6 2,017.4 2,327.7
Fees and other income 135.3 128.4 95.3
Net realized capital gains (losses) 18.1 (25.0) (42.9)
____________________________________
Total revenue 2,268.9 2,355.2 2,566.0
____________________________________
Current and future benefits 2,036.1 2,175.9 2,428.1
Operating expenses 100.1 98.2 120.2
Loss on discontinuance of products - - 1,270.0
Severance and facilities charge - - 21.9
____________________________________
Income (Loss) before taxes 132.7 81.1 (1,274.2)
Income taxes (benefits) 43.5 26.7 (451.9)
____________________________________
Income (Loss) before cumulative
effect adjustments $ 89.2 $ 54.4 $ (822.3)
_______________________________________________________________________________
____________________________________
Net realized capital gains (losses),
net of tax (included above) $ 11.0 $ (17.0) $ (30.5)
_______________________________________________________________________________
____________________________________
Net loss attributable to discontinued
products, net of tax $ * $ * $ (915.4)
_________________________________________________________________________________
______________________________________
Deposits not included in premiums above:
Fully guaranteed $ 31.5 $ 212.3 $ 797.7
Experience rated 719.9 630.8 677.4
Non-guaranteed 872.3 1,072.5 1,316.5
____________________________________
Total $ 1,623.7 $ 1,915.6 $ 2,791.6
_______________________________________________________________________________
____________________________________
Assets under management: (1)
Fully guaranteed $ 10,324.6 $ 11,905.3 $ 14,695.1
Experience rated 17,446.4 15,944.9 17,020.6
Non-guaranteed 18,634.1 18,491.9 21,050.2
____________________________________
Total $ 46,405.1 $ 46,342.1 $ 52,765.9
_______________________________________________________________________________
____________________________________
<FN>
(1) Included above are net unrealized capital gains (losses) of approximately
$790 million, $(540) million and $750 million at December 31, 1995, 1994 and
1993, respectively.
* Results of discontinued products in 1995 and 1994 (losses of $26.2 million and
$172.1 million, respectively) were charged against the reserve for anticipated
future losses and did not impact net income of the segment. (Please see
"Discontinued Products" on page 23.)
</TABLE>
The Large Case Pensions segment manages a variety of retirement
and other savings products (including pension and annuity
products) and offers investment management and advisory services
to nonpension customers. Large case pension products are offered
primarily by Aetna Life Insurance Company and certain of its
registered investment advisor affiliates, and generally are
tailored for defined benefit and defined contribution pension
plans that qualify under Internal Revenue Code ("IRC") Section 401
for tax-preferred treatment. Contracts provide fully guaranteed,
partially guaranteed (experience rated) and non-guaranteed
investment options. As discussed below, fully guaranteed large
case pension products are no longer offered by the company.
(Please see "Discontinued Products" on page 23.)
<PAGE> 21
Large Case Pensions (Continued)
Large Case Pensions' adjusted earnings (after tax) follow:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Income (Loss) before cumulative effect
adjustments $ 89.2 $ 54.4 $(822.3)
Less:
Net realized capital gains (losses) 11.0 (17.0) (30.5)
Severance and facilities charge - - (14.2)
Loss on discontinuance of products - - (825.0)
_______ _______ _______
Adjusted earnings $ 78.2 $ 71.4 $ 47.4
_______ _______ _______
_______ _______ _______
</TABLE>
Large Case Pensions' adjusted earnings increased $7 million in
1995, following a $24 million increase in 1994. 1995 and 1994
adjusted earnings reflect net benefits from the absence of losses
from discontinued fully guaranteed products. 1995 adjusted
earnings also reflected an increase in fees and other income and
in net interest margins. Such favorable results were partially
offset by the effect of reduced net investment income as a result
of returning capital to the parent company and lower interest
rates. 1994 adjusted earnings were adversely affected by the
decline in the level of general account assets under management.
The increase in 1995 premiums primarily related to additional
premiums from existing contractholders and did not have a material
effect on results.
Experience rated products are supported by either general account
or separate account assets. Such products supported by general
account assets have declined in recent years, initially due to
customer concerns about the company's ratings, as well as the life
insurance industry's financial strength, and the company's
investment concentrations in mortgage loans and real estate. More
recently, the decline has slowed, and management believes that
such decline is more attributable to competitive pressures and a
shift to separate account products. Experience rated products
supported by separate accounts have increased to $4.6 billion at
December 31, 1995 from $3.3 billion at December 31, 1994.
General account assets supporting experience rated products may be
subject to participant and/or contractholder withdrawal. At
December 31, 1995, approximately $2.7 billion of such contracts
allowed for unscheduled contractholder withdrawals, subject to
timing restrictions and formula-based market value adjustments.
Further, at December 31, 1995, approximately $4.0 billion of the
experience rated pension contracts supported by general account
assets could be withdrawn or transferred to other plan investment
options at the direction of plan participants without market value
adjustment. Participant withdrawals are generally subject to
significant tax and plan constraints.
<PAGE> 22
Large Case Pensions (Continued)
Experience rated contractholder and participant withdrawals and
transfers were as follows (excluding contractholder transfers to
other company products) for the years ended December 31:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
___________________________________________________________________________________
<S> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $1,012.3 $1,000.1 $1,049.8
Contractholder withdrawals other than scheduled
contract maturities and benefit payments 381.3 590.6 893.2
Participant withdrawals 182.2 183.6 222.5
<FN>
(1) Includes payments made upon contract maturity and other amounts distributed in
accordance with contract schedules.
</TABLE>
Outlook
The company's ability to retain and grow its continuing large case
pension business is affected by consumer confidence in both the
company and the life insurance industry. Consumer confidence may
be influenced by such factors as reduced insurance company ratings
(please see "Liquidity and Capital Resources" on page 65) and
perceived financial difficulties in the industry. Management
believes that a continuation of the substantial competitive
pressures in the large case pension market is likely to cause
assets under management to continue to decline.
Although the company is seeing some improvement in certain
segments of the commercial real estate market, capital losses on
experience rated pension business may increase in the future if
the company's capacity to pass through future investment losses to
experience rated contractholders is reduced. Changes in customer
withdrawal activity, interest rate changes, future losses on
investments and experience rated contract modifications, if any,
could further 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.
Earnings for Large Case Pensions are expected to decline as
general account assets under management decline. A slowing in the
earnings decline is dependent upon new separate account deposits,
the recapture of general account maturities and withdrawals,
higher interest rates and a continued reduction in operating
costs. As assets decline, management expects to continue to
redeploy capital to other businesses.
The company is exploring sale or other alternatives for certain
portions of its large case pension investment management and
advisory business conducted through its subsidiary, Aeltus
Investment Management. Such actions have included the signing, in
1996, of a letter of intent by the company to sell Aetna Realty
Investors ("ARI") to TA Associates. ARI contributed $6 million to
Large Case Pensions' net income in 1995 as compared to $5 million
in 1994.
<PAGE> 23
Large Case Pensions (Continued)
Discontinued Products
In January 1994, the company announced its decision to discontinue
the sale of its fully guaranteed large case pension products. As
a result of this decision, the company recognized an after-tax
loss on discontinuance of $825 million in 1993 and established a
reserve of $1,270 million at December 31, 1993 for anticipated
future losses expected on the runoff of these products. The 1993
loss on discontinuance was composed of $390 million for guaranteed
investment contracts ("GICs") and $435 million for single-premium
annuities ("SPAs").
The reserve for anticipated future losses on discontinued products
was established based on 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 as
of December 31, 1993. To the extent that actual future losses
differ from anticipated future losses, the company's results of
operations would be affected. Management believes the reserve for
anticipated losses at December 31, 1995 is adequate to provide for
future losses associated with the guaranteed product liabilities.
Results of discontinued products for 1995 and 1994, as shown in
the following tables, were charged to the reserve and did not
affect the company's results of operations. Future losses
(including capital losses) for each product will be charged to the
respective reserve at the time such losses are realized.
At the time of discontinuance, a receivable from continuing
products was established for each discontinued product equivalent
to the net present value of the anticipated cash flow shortfalls.
The receivables, on which interest is accrued at the discount
rates used to calculate the loss on discontinuance, will be
funded, net of taxes on the accrued interest, from invested assets
supporting Large Case Pensions. The offsetting payable, on which
interest is similarly accrued, was established in continuing
products. The interest on such payable generally offsets the
investment income on the assets available to fund the shortfall.
At December 31, 1995, for GICs and SPAs, the receivables from
continuing operations, net of the related deferred taxes payable
of $14 million and $21 million, respectively, on the accrued
interest income, were $416 million and $473 million, respectively.
At December 31, 1994, for GICs and SPAs, the receivables from
continuing operations, net of the related deferred taxes payable
of $7 million and $10 million, respectively, on the accrued
interest income, were $403 million and $453 million, respectively.
As of December 31, 1995 no funding had taken place.
<PAGE> 24
Large Case Pensions (Continued)
Results of discontinued products for years ended December 31 were
as follows:
<TABLE>
<CAPTION>
(Millions) 1995
_____________________________________________________________________________
GICs SPAs Total
____ ____ ______
<S> <C> <C> <C>
Interest margin $ (61.1) $ 2.5 $ (58.6)
Net realized capital gains (losses) (38.8) 30.2 (8.6)
Interest earned on receivable from
continuing operations 13.2 19.8 33.0
Other, net 3.9 4.1 8.0
________ ________ _______
Results of discontinued products,
after tax $ (82.8) $ 56.6 $ (26.2)
________ ________ ________
________ ________ ________
Results of discontinued products, pretax $ (124.2) $ 86.0 $ (38.2)
________ ________ ________
________ ________ ________
Net realized capital gains (losses)
from sales of bonds, after tax,
included above $ (1.8) $ 41.7 $ 39.9
________ ________ ________
________ ________ ________
1994
________________________________
GICs SPAs Total
____ ____ ______
<C> <C> <C>
Negative interest margin $ (86.1) $ (.7) $ (86.8)
Net realized capital losses (97.6) (38.2) (135.8)
Interest earned on receivable from
continuing operations 12.6 18.3 30.9
Other, net 6.5 13.1 19.6
________ ________ _______
Results of discontinued products,
after tax $ (164.6) $ (7.5) $ (172.1)
________ ________ ________
________ ________ ________
Results of discontinued products, pretax $ (254.4) $ (18.6) $ (273.0)
________ ________ ________
________ ________ ________
Net realized capital losses
from sales of bonds, after tax,
included above $ (35.5) $ (15.7) $ (51.2)
________ ________ ________
________ ________ ________
1993
________
Total
______
<C>
Negative interest margin $ (87.9)
Net realized capital losses (37.4)
Nonrecurring gains on futures contracts 18.8
Other, net 16.1
________
Results of discontinued products,
after tax $ (90.4)
________
________
Results of discontinued products, pretax $ (137.8)
________
________
</TABLE>
The interest margin for the discontinued products represents the
difference between the interest earned on the invested assets
supporting fully guaranteed large case pension contracts and the
interest credited to the holders of such contracts. The negative
interest margins for the GIC products for years ended December 31,
1995 and 1994 include a loss (pretax) of $50 million and
$4 million, respectively, due to the early retirement of
approximately $730 million and $630 million of contract
liabilities in 1995 and 1994, respectively. These losses are
expected to reduce the level of negative interest margins in
future periods.
The company periodically reviews its liquidity needs related to
meeting contract liabilities for both GICs and SPAs. The early
retirement of GICs in 1995 and 1994, as well as potential
additional such retirements in the future, may require the company
to consider the need for such liquidity resources as borrowings
between GICs and SPAs or from continuing operations, as well as
funding of the receivables from continuing operations.
<PAGE> 25
Large Case Pensions (Continued)
The activity in the reserve for anticipated future losses on
discontinued products for the years ended December 31, 1995 and
1994 was as follows (pretax):
<TABLE>
<CAPTION>
(Millions) GICs SPAs Total
___________________________________________________________________
<S> <C> <C> <C>
Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0
Results of discontinued products (254.4) (18.6) (273.0)
________ ________ ________
Reserve at December 31, 1994 345.6 651.4 997.0
Results of discontinued products (124.2) 86.0 (38.2)
________ ________ ________
Reserve at December 31, 1995 $ 221.4 $ 737.4 $ 958.8
________ ________ ________
________ ________ ________
</TABLE>
Discontinued fully guaranteed products provide guarantees on
investment return, maturity values, and if applicable, benefit
payments. The interest credited on these contracts during 1995
ranged from 3.0% to 17.7% with an average rate of 8.9% (unchanged
from 1994). For the contracts remaining at December 31, 1995, the
average credited rate was 8.6%. None of these contracts allow for
contractholder withdrawal, except in extraordinary circumstances.
Distributions on GICs and SPAs for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
(Millions) 1995
___________________________________________________________________
GICs SPAs Total
____ ____ _____
<S> <C> <C> <C>
Scheduled contract maturities,
GIC settlements and benefit
payments (1) $2,685.6 $ 522.9 $3,208.5
Participant directed withdrawals 92.8 - 92.8
1994 1993
______________________________ ________
GICs SPAs Total Total
____ ____ _____ _____
<C> <C> <C> <C>
Scheduled contract maturities,
GIC settlements and benefit
payments (1) $2,340.3 $ 531.6 $2,871.9 $2,672.2
Participant directed withdrawals 198.5 - 198.5 232.2
<FN>
(1) Includes payments made upon contract maturity, early settlement of approximately
$730 million and $630 million of GIC liabilities in 1995 and 1994, respectively,
and other amounts distributed in accordance with contract schedules.
</TABLE>
Cash required to meet the above payments was provided by earnings
on, sales of (including a securitization of mortgage loans), and
scheduled payments on invested assets.
<PAGE> 26
Large Case Pensions (Continued)
At December 31, 1995, contractholder liabilities were $5.1 billion
and $4.9 billion for GICs and SPAs, respectively. Scheduled
maturities, future benefit payments, and other expected payments
of GICs and SPAs, including future interest, were as follows (in
millions):
<TABLE>
<CAPTION>
GICs SPAs
________ ________
<S> <C> <C> <C>
1996 $1,962.5 $ 520.9
1997 1,276.5 513.7
1998 967.8 507.4
1999 770.3 501.4
2000 437.9 495.3
2001-2005 605.0 2,388.0
2006-2010 15.2 2,185.3
2011-2015 2.5 1,880.9
2016-2020 .6 1,503.7
Thereafter - 2,807.6
</TABLE>
Please see Note 3 of Notes to Financial Statements and "General
Account Investments" on pages 42 through 60 for additional
discussions related to discontinued products.
<PAGE> 27
Corporate
<TABLE>
<CAPTION>
Operating Summary (Millions, after tax) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Interest expense $ 70.4 $ 60.5 $ 44.7
Other expense, net $ 115.5 $ 156.5 $ 173.9
</TABLE>
The Corporate segment includes interest expense and other net
corporate expenses which are not directly related to the company's
business segments. "Other net corporate expense" includes items
such as corporate staff areas, advertising and contributions,
partially offset by net investment income.
The 1995 and 1994 increase in interest expense resulted primarily
from the issuance by a subsidiary of 9 1/2% cumulative monthly
income preferred securities in November 1994. Other expense for
1993 included after-tax severance and facilities charges of
$11 million. Other expense also included after-tax realized
capital gains of $1 million in 1995, after-tax realized capital
losses of $9 million in 1994 and after-tax realized capital gains
of $2 million in 1993. Excluding the 1993 severance and
facilities charge and realized capital gains and losses in all
three years, the decrease in other expenses in 1995 and 1994
resulted from a reduction of corporate staff area expenses as a
result of previous restructurings.
In connection with the sale of the company's property-casualty
operations, Travelers will sublease the space currently occupied
by the company in the CityPlace office facility in Hartford for
eight years at current market rates. The company expects to take
a charge of approximately $190 million (after tax). Such charge
represents the present value of the difference between rent
required to be paid by the company under the master lease and
future rentals expected to be received by the company. The
company also anticipates taking other restructuring charges in
1996 due to actions expected to be taken to reduce the level of
corporate expenses and other costs previously absorbed by the
property-casualty operations.
<PAGE> 28
Discontinued Operations - Property-Casualty Operations
<TABLE>
<CAPTION>
Operating Summary (Millions) 1995 1994 1993
_____________________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 4,118.9 $ 4,390.8 $ 4,653.2
Net investment income 901.7 832.1 952.4
Fees and other income 82.0 115.6 144.3
Net realized capital gains 155.6 .4 178.0
____________________________________
Total revenue 5,258.2 5,338.9 5,927.9
____________________________________
Current and future benefits 4,232.5 3,746.8 4,214.7
Operating expenses 787.3 914.1 1,025.4
Amortization of deferred policy
acquisition costs 622.7 647.2 646.2
Severance and facilities charge - - 147.3
____________________________________
Income (Loss) before taxes (384.3) 30.8 (105.7)
Income tax benefits(1) (162.1) (27.3) (119.7)
____________________________________
Income (Loss) before cumulative
effect adjustments $ (222.2) $ 58.1 $ 14.0
_____________________________________________________________________________________
____________________________________
Cumulative effect adjustments, net of tax $ - $ - $ 276.3
_____________________________________________________________________________________
____________________________________
Net realized capital gains (losses), net of tax
(included above) $ 106.0 $ (1.4) $ 128.0
_____________________________________________________________________________________
____________________________________
Catastrophe losses, net of tax
(included above) $ 65.1 $ 189.6 $ 85.0
_____________________________________________________________________________________
____________________________________
Statutory combined ratio 136.7% 123.3% 125.2%
_____________________________________________________________________________________
____________________________________
Statutory combined ratio (2) 136.7% 123.3% 116.4%
_____________________________________________________________________________________
____________________________________
Statutory combined ratio (3) 108.1% 117.1% 113.6%
_____________________________________________________________________________________
____________________________________
GAAP combined ratio (4) 135.1% 117.7% 122.5%
_____________________________________________________________________________________
____________________________________
GAAP combined ratio (2) 135.1% 117.7% 113.6%
_____________________________________________________________________________________
____________________________________
GAAP combined ratio (3) 106.6% 111.5% 110.8%
_____________________________________________________________________________________
____________________________________
<FN>
(1) Income tax benefits resulted from pretax losses in 1995 and 1993 and tax-exempt
interest income in 1995, 1994 and 1993.
(2) The 1993 combined ratios have been adjusted for the cumulative effect benefit
of discounting of workers' compensation life table indemnity reserves
($250.0 million, after tax).
(3) Excludes the effect of additions to environmental and asbestos-related claims reserves,
and in 1993, has also been adjusted for the cumulative effect benefit of discounting
of workers' compensation life table indemnity reserves ($250.0 million, after tax).
(4) The difference between the statutory and GAAP combined ratios primarily reflects the
establishment of a reserve for statutory purposes for severance and facilities charges
(affecting 1995 and 1994) and the settlement of Proposition 103 (affecting 1994), which
were both previously reserved for on a GAAP basis.
</TABLE>
The company entered into a definitive agreement, dated November
28, 1995, to sell its property-casualty operations to The
Travelers Insurance Group Inc. for $4.0 billion in cash, subject
to various closing adjustments. The sale is subject to state
regulatory approval and other customary conditions and is expected
to be completed no later than midyear 1996. (Please see "Overview
- - Sale of Property-Casualty Operations" on page 6 for further
discussion of Discontinued Operations.)
Discontinued Operations provide most types of commercial and
personal property-casualty insurance, bonds, and insurance-related
services for businesses, government units and associations and
individuals.
<PAGE> 29
Discontinued Operations - Property-Casualty Operations (Continued)
Discontinued Operations' adjusted earnings (after tax) follow:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Income (Loss) before cumulative effect
adjustments $(222.2) $ 58.1 $ 14.0
Less:
Net realized capital gains (losses) 106.0 (1.4) 128.0
Additions to environmental-related
claims reserves (505.7) (149.9) (26.0)
Additions to asbestos-related
claims reserves (259.5) (25.4) (57.7)
Severance and facilities charge - - (95.6)
_______ _______ _______
Adjusted earnings $ 437.0 $ 234.8 $ 65.3
_______ _______ _______
_______ _______ _______
</TABLE>
Discontinued Operations' adjusted earnings increased $202 million
in 1995, following a $170 million increase in 1994. The following
significant factors impact the comparison of adjusted earnings:
Catastrophe losses (after tax and net of reinsurance) were
$65 million, $190 million and $85 million in 1995, 1994 and 1993
($190 million, $504 million and $174 million pretax and before
reinsurance), respectively. Such losses contributed 2.4 points to
the combined ratio in 1995, compared with 6.4 points and 2.8
points for 1994 and 1993, respectively. Catastrophe losses in
1994 included $161 million ($453 million pretax and before
reinsurance) from the Los Angeles earthquake and the severe winter
weather.
1994 adjusted earnings reflected after-tax reductions of
$66 million in prior year loss reserves related to the personal
auto business. 1993 adjusted earnings included an increase of
$259 million (after tax and after discounting) in workers'
compensation reserves for prior accident years. Adjusted earnings
in 1993 were also adversely affected by after-tax additions to
loss and loss expense reserves for prior accident years of
$29 million from the company's U.K. reinsurance operation, arising
principally on discontinued lines and, non-U.S. property
exposures. (Please see "Discontinued Operations' Reserves" on
page 31.)
Adjusted earnings in 1993 also reflected a net tax benefit of
$23 million related to revaluing the deferred tax asset as a
result of the increase in federal income tax rates.
<PAGE> 30
Discontinued Operations - Property-Casualty Operations (Continued)
Adjusted earnings in 1995 as compared to 1994 reflected a
reduction in the level of ongoing operating expenses, primarily
due to actions taken by management in prior years to lower costs,
increased emphasis on underwriting and claims handling, and higher
net investment income resulting from the reinvestment of proceeds
from the sale of equity and U.S. Treasury securities in higher
yielding corporate bonds. 1994 adjusted earnings as compared to
1993 also reflected a reduction in operating expenses, primarily
due to management's efforts to lower costs and exiting
unprofitable markets. Partially offsetting the improvements in
1994 adjusted earnings was lower net investment income primarily
due to lower investment yields.
Earned premiums decreased approximately 6% in both 1995 and 1994.
The decline in 1995 was due primarily to the transferring of
additional risk through restructured and expanded reinsurance
programs, and reductions in residual market business assumed as a
result of exiting certain markets. During 1995, the company
continued to evaluate personal auto market conditions in each
state and attempted to maintain or increase the company's presence
in those states that offered acceptable returns and reduce its
presence in those remaining states where the company was unable to
earn acceptable returns. Reductions in personal auto and workers'
compensation exposures, a decrease in commercial auto exposures,
generally stricter underwriting in commercial lines, and the
competitive marketplace contributed to the premium decline in
1994.
Personal auto and homeowners policies in force at December 31
were:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
____________________________________________________________
<S> <C> <C> <C>
Auto .6 .6 .7
Homeowners 1.5 1.5 1.5
</TABLE>
Please see "Severance and Facilities Charge" on page 9 for a
discussion related to Discontinued Operations' severance and
facilities charges.
Net realized capital gains (after tax) in 1995 include
$156 million resulting from the sale of equity securities in the
property-casualty investment portfolio primarily due to the
company's efforts to reduce volatility in its statutory surplus,
and increase income, and in connection with the agreement to sell
the property-casualty operations. Such gains are partially offset
by a $23 million realized capital loss from the write-down of the
company's investment in a consolidated subsidiary, Aetna Re-
Insurance Company (U.K.) Ltd., which it intends to sell. Net
realized capital gains (losses) (after tax) include a $14 million
gain resulting from the sale of a portion of an unconsolidated
subsidiary in 1994 and a $27 million gain in 1993 from the
redemption of preferred stock received in connection with the sale
of American Re-Insurance Company.
<PAGE> 31
Discontinued Operations - Property-Casualty Operations (Continued)
Discontinued Operations' Reserves
Loss and loss expense reserves represent the estimated liability
for the ultimate cost, to the extent reasonably estimable, of
claims (including claim adjustment expenses) that have been
reported but not settled and claims that have been incurred but
not reported ("IBNR"). Such reserves at December 31 were as
follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
______________________________________________________________________
<S> <C> <C> <C>
Loss and Loss Expense Reserves (1) $ 16,569 $ 16,089 $ 15,806
________________________________
________________________________
<FN>
(1) Loss and loss expense reserves are shown without reduction for
reinsurance recoverables in all three years and deductible amounts
recoverable from policyholders in 1995 and 1994. Reinsurance
recoverables and deductible amounts recoverable from policyholders
were $4.4 billion and $412 million, respectively, at
December 31, 1995 and $4.6 billion and $352 million, respectively,
at December 31, 1994. Reinsurance recoverables were $4.4 billion
at December 31, 1993.
</TABLE>
The length of time between occurrence and settlement of a claim
varies depending on the coverage and type of claim involved.
Estimates become more difficult to make (and are, therefore, more
subject to change) as such length of time increases. Actual claim
costs are dependent upon a number of complex factors including
social and economic trends and changes in doctrines of legal
liability and damage awards. Reserves are continually monitored
and adjusted using a variety of actuarial and statistical
techniques as more current information becomes available.
Additions to Reserves for Prior Accident Years
The table below shows the changes in loss estimates (net of
reinsurance) related to prior accident years, most of which were
for losses and related expenses for environmental liability risks,
asbestos and other product liability risks, and workers'
compensation claims. Additions (reductions) to reserves for prior
accident years reduce (increase) net income for the period in
which the adjustment is made.
<TABLE>
<CAPTION>
(Millions) 1995 (1) 1994 1993 (2)
_____________________________________________________________________
<S> <C> <C> <C>
Pretax $1,134 $ 259 $ 65
After tax 737 168 42
<FN>
(1) Reserve additions in 1995 include the addition to environmental reserves
of $750 million ($488 million, after tax) upon the completion of the company's
1995 environmental study in the second quarter of 1995 and the addition to asbestos
reserves of $335 million ($218 million, after tax) in the fourth quarter of 1995.
(2) Reserve additions in 1993 are net of the cumulative effect of $514 million (pretax)
related to the implementation of discounting of workers' compensation life table indemnity
reserves.
</TABLE>
<PAGE> 32
Discontinued Operations - Property-Casualty Operations (Continued)
Environmental and Asbestos-Related Claims
Reserving for environmental and asbestos-related claims is subject
to significant uncertainties. Reserves for these liabilities are
evaluated by management regularly and adjustments are made to such
reserves as developing loss patterns, reserving methodologies and
other information appear to warrant. As a result of developments
that have occurred inside and outside of the company (discussed
below), reserves for environmental and asbestos-related claims
were increased significantly in 1995.
The company takes reinsurance into account in its reserve
calculations for environmental and asbestos-related claims only
when it is probable of collection, based on past experience or
agreements with reinsurers. The company believes that the
reinsurance recoveries which have been taken into account in its
reserve calculations are probable of recovery; however, there can
be no assurances that reinsurance for these types of claims will
not become subject to coverage disputes with reinsurers, or that
all reinsurers will have the ability to pay the company for such
claims.
Environmental-Related Claims
Background. The company has been a major writer of commercial
__________
insurance policies which are the types of policies alleged to
cover hazardous waste cleanup costs. The company generally
disputes that there is insurance coverage for environmental
claims, and is vigorously litigating coverage and related issues
that will ultimately determine, in many cases, whether and to what
extent insurance coverage exists for environmental claims.
Environmental claims, particularly large coverage disputes, are
complex and subject to significant uncertainties in addition to
the vagaries of and risks inherent in major litigation generally.
These uncertainties include estimation of the underlying liability
of a claimant as a potentially responsible party ("PRP") at waste
disposal sites and whether insurance policies will be found to
cover PRP liabilities. Courts have reached inconsistent
conclusions regarding a wide range of insurance coverage issues
relating to an insurer's indemnity and defense obligations for
environmental-related liabilities. Because of these uncertainties
and a lack of historically developed data, such liabilities are
not estimable using conventional actuarial reserving techniques.
<PAGE> 33
Discontinued Operations - Property-Casualty Operations (Continued)
The Company's Environmental Study. The company has continued to
_________________________________
gather and analyze legal and factual information on environmental-
related claims, and reassess its environmental reserving
techniques as developments have occurred over time. During 1994
and 1995, certain of the company's environmental claims in
litigation matured (providing the company with additional
information relating to the claim) or settled. The maturing and
settling of these claims, coupled with increasing expertise in
handling environmental claims, also better enabled the company to
understand the profile of its other environmental claims.
Additionally, supplemental data bases and alternative
methodologies were being developed by outside firms for possible
use in estimating environmental liabilities. In connection with
these developments, the company conducted a comprehensive
environmental reserving review during the first half of 1995, and,
upon completion of the review, significantly increased its
reserves for environmental-related claims.
The company developed a sophisticated methodology which, when used
in conjunction with other methods and information available to it,
assisted the company in estimating indemnity-related liabilities
for all of its known environmental claims. This methodology (the
"exposure methodology"), while not a conventional actuarial
reserving technique, is a detailed analysis that involves the
estimation of indemnity-related liabilities for environmental
claims from direct policies on a site-by-site, policyholder-by-
policyholder basis. The exposure methodology depends heavily upon
management's subjective judgment, in that it requires management
to make numerous assumptions as to, among other things, estimated
total cleanup costs for each site, allocation of site cleanup
costs to particular policyholders under joint and several
liability principles, resolution of unsettled coverage questions,
and resolution of unsettled questions involving the allocation of
losses to specific insurance policies. As all of the information
necessary to estimate liability on a particular site frequently is
not available, the exposure methodology also simulates data in
such cases from available data. Although the exposure methodology
relies heavily upon management judgment and simulated data, the
use of simulation models is an appropriate, accepted actuarial
practice to estimate liabilities subject to significant
uncertainties.
<PAGE> 34
Discontinued Operations - Property-Casualty Operations (Continued)
In addition to estimating indemnity-related liabilities on known
claims, as part of its reserving review the company also estimated
losses for incurred but not reported environmental claims
("IBNR"), unallocated loss adjustment expenses ("ULAE") associated
with environmental claims, and additional costs of expected future
coverage litigation. The company's estimation of IBNR, ULAE and
coverage litigation costs are based on a combination of historical
data and various assumptions about the future, including
assumptions regarding the number and severity of new environmental
claims that will arise, and trends in the volume and cost of
future litigation.
Upon completing its 1995 reserving review, the company added
$750 million (pretax) ($488 million, after tax) to environmental-
related claims reserves. While the company expects to recover
some of its environmental losses from its reinsurers, due to the
uncertainty in estimating amounts to be recovered, no reinsurance
benefits were recorded in establishing this reserve addition.
The table below reflects activity in the reserve for environmental
liability claims (pretax and before reinsurance) for the years
ended December 31:
<TABLE>
<CAPTION>
Environmental Liability Claims (Millions) 1995 1994 1993
_______________________________________________________________________________
<S> <C> <C> <C>
Beginning reserve $ 436.1 $ 233.3 $ 237.8
Reserve additions for incurred losses (1) 827.0 289.5 37.2
Payments for claims and claim
adjustment expense (2,3) 257.2 86.7 41.7
_______________________________
Ending reserve (4) $1,005.9 $ 436.1 $ 233.3
_______________________________________________________________________________
_______________________________
<FN>
(1) Before reduction for reinsurance of $49 million in 1995, $59 million in 1994
and $(3) million in 1993. In 1995, includes the addition to reserves of
$750 million upon the completion of the company's 1995 environmental study.
(2) Before reduction for reinsurance of $78 million in 1995, $4 million in 1994 and
$2 million in 1993.
(3) Includes legal fees paid of $46 million in 1995, $52 million in 1994 and
$31 million in 1993.
(4) Before reduction for reinsurance of $29 million in 1995, $58 million in 1994 and
$3 million in 1993 and net of $32 million of discount on settlements in 1995.
</TABLE>
The reserves at December 31, 1995 consist of approximately
$560 million for indemnity-related environmental liabilities for
all of the company's known environmental claims. The remainder of
the reserve represents IBNR, estimated coverage litigation costs,
and ULAE. The reserve at December 31, 1994 consists of
approximately $299 million for estimated indemnity-related liabilities,
and the remainder represented a bulk reserve for legal fees. In
1994, the company added $290 million pretax and before reinsurance
($231 million pretax and after reinsurance) to reserves for
environmental liability claims primarily for certain indemnity-
related liabilities.
<PAGE> 35
Discontinued Operations - Property-Casualty Operations (Continued)
Conclusion. In the opinion of management, the company's reserves
__________
for environmental-related claims at December 31, 1995 represent
the company's best estimate of its ultimate environmental-related
liability, based on currently known facts, current law (including
Superfund), current technology, and assumptions considered
reasonable where facts are not known. Due to the significant
uncertainties and related management judgment involved in
estimating the company's environmental liability, no assurances
can be given that the environmental reserve represents the amount
that will ultimately be paid by the company for all environmental-
related losses. The amount ultimately paid could differ
materially from the company's currently recorded reserve as legal
and factual issues are clarified, but any difference cannot be
reasonably estimated at this time.
The company actively manages its environmental claims through a
special environmental claim unit. The number of environmental-
related liability claims the company had as of December 31 (and
policyholders involved in those claims) were as follows: (1)
<TABLE>
<CAPTION>
1995 1994 1993
______ ______ ______
<S> <C> <C> <C>
Beginning balance 4,587 3,860 2,913
New claims 1,242 1,765 1,903
Closed claims 2,058 1,038 956
______ ______ ______
Ending balance (2) 3,771 4,587 3,860
______ ______ ______
______ ______ ______
Policyholders 1,007 1,146 1,132
______ ______ ______
______ ______ ______
<FN>
(1) For purposes of this table, "claims" are calculated separately for
each of the categories described in (2) below and are calculated on
a "per policyholder, per site" basis. The "claims" numbers reflect
cases where policyholders have notified the company of a claim under
primary insurance policies. In addition, policyholders have placed
the company on notice of possible claims that may potentially involve
excess general liability policies. The company generally does not
consider these notifications open "claims" (and the claims numbers
above do not include these notifications) because under these policies
(i) the company does not have a duty to defend the policyholder and
(ii) the policyholders must first exhaust their primary insurance
coverage for such claims before they can look to the company for coverage.
(2) Of the claims open at December 31, 1995, 1994 and 1993, approximately 88%,
87% and 87%, respectively, represented environmental pollution-related
cleanup cases (including Superfund claims) against policyholders, and
the balance represented environmental pollution-related third-party bodily
injury and property damage claims against policyholders. Of the claims open
at December 31, 1995, 1994 and 1993, approximately 44%, 53% and 48%, respectively,
were involved in coverage disputes between the company and its policyholders that
had reached the litigation stage.
</TABLE>
The closed claims in 1995 reflect the settlement of certain of the
company's large cases (which involved multiple claims per case)
and include claims for which there are remaining reserves of $119
million which have been discounted and will be paid over a number
of years, in accordance with a fixed payment schedule. Management
believes that year over year there is not a meaningful correlation
between the number of outstanding environmental claims and either
the indemnity or loss expense portions of the environmental
liability. In addition, loss expenses do not increase
proportionately with the number of outstanding claims primarily
because of the company's management of legal costs and because a
number of new claims involve additional sites relating to
preexisting policyholder coverage disputes which should not
proportionately increase legal fees. Legal costs may vary in
particular years, however, due to other factors, such as the
timing of stages of certain large litigation.
<PAGE> 36
Discontinued Operations - Property-Casualty Operations (Continued)
Congress was scheduled to reauthorize the Superfund law in 1995,
but did not do so. 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. 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 1996, what the substance of the
enacted legislation will be, or what the effect of any such
reforms will be on the company.
Asbestos-Related Claims
Reserving for asbestos-related claims is subject to significant
uncertainties and management is currently unable to make a
reasonable estimate as to the ultimate amount of losses or a
reasonable range of losses for all asbestos-related claims and
related litigation expenses. Management has continued to evaluate
the company's reserves for asbestos liabilities as the company
continued to gather and analyze new information and reassess its
reserving techniques for these claims in order to determine
whether it can better estimate its liability. In connection with
such evaluation, the company added $335 million ($218 million,
after tax) to asbestos-related claims reserves in the fourth
quarter of 1995. While the company expects to recover some of its
asbestos losses from its reinsurers, due to the uncertainty in
estimating amounts to be recovered, no reinsurance benefits were
recorded in establishing this addition to reserves. Further
adjustments may be made to such reserves as loss patterns develop
and other information is obtained, and the amount ultimately paid
for such claims could differ materially from reserves, although
any difference cannot be reasonably estimated at this time.
Asbestos Bodily Injury Claims
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. In order to control
transaction costs and provide efficient claim handling, the Center
for Claims Resolution ("CCR") was formed in 1988 to handle
asbestos-related bodily injury claims on behalf of its member
producers. The company participates in CCR by virtue of its
insurance contracts with certain CCR members and is assessed a fee
by CCR for its claim-handling services. The company also provides
insurance coverage to producers that are not CCR members.
A large number of asbestos bodily injury actions that were pending
in pretrial stages in various courts have been consolidated and
transferred to single federal or state courts. In January 1993,
CCR announced a global proposal involving plaintiffs, attorneys,
producers and insurers to settle asbestos bodily injury claims
over the next 10 years. The proposed settlement is subject to,
among other things, court approval and acceptance by a minimum
number of plaintiffs, and no assurance can be given that all such
claims will be settled, or settled on the terms proposed. To
date, the CCR proposed settlement has not received final approval
by the courts.
<PAGE> 37
Discontinued Operations - Property-Casualty Operations (Continued)
Over the last few years, asbestos bodily injury claims also have
been filed by plaintiffs against entities that installed asbestos
products and others involved in ancillary ways with asbestos
products or processes, including insureds of the company.
Additionally, some policyholders have attempted to recharacterize
asbestos bodily injury product liability claims in an effort to
avoid applicable policy coverage limits on product liability
claims (i.e., nonproducts asbestos claims).
In 1995 the company settled a case involving one such major
producer that had exhausted applicable policy limits on asbestos
products claims and asserted coverage under policy provisions for
other types of liability. The company obtained a release from the
insured for all current and future asbestos bodily injury claims
and certain asbestos property damage claims (along with all
environmental claims) under existing policies in exchange for
fixed, scheduled cash payments, which were recorded on a
discounted basis. In connection with this settlement,
$120 million of property-casualty reserves not previously
classified as covering asbestos-related claims were transferred to
asbestos reserves. No amounts were transferred from environmental
reserves, and the environmental-related portion of the settlement
was covered by existing environmental reserves. As a result, this
settlement did not affect 1995 results of operations. As part of
the settlement, the company also agreed, among other things, to
make insurance coverage available to the insured in the year 2000
(on a one-time basis), for a percentage of all asbestos defense
and indemnity claim payments made by the insured in the years 2000
through 2007. The company's payment obligations would be subject
to annual dollar caps. Given the uncertainty as to whether the
insured will elect to purchase this additional insurance, no
related premiums or losses have been recorded by the company at
this time.
The table below reflects activity in the reserve for asbestos
bodily injury claims (pretax and before reinsurance) for the years
ended December 31:
<TABLE>
<CAPTION>
Asbestos Bodily Injury Claims (Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Beginning reserve $ 295.9 $ 248.1 $ 294.9
Reserve additions for incurred losses (1) 436.6 117.3 95.2
Transfers 107.4 - -
Payments for claims and claim
adjustment expense (2,3) 85.6 69.5 142.0
_______________________________
Ending reserve (4) $ 754.3 $ 295.9 $ 248.1
________________________________________________________________________________
_______________________________
<FN>
(1) Before reduction for reinsurance of $37 million in 1995, $82 million in 1994
and $20 million in 1993.
(2) Before reduction for reinsurance of $9 million in 1995, $65 million in 1994
and $27 million in 1993.
(3) Includes legal fees paid of $29 million in 1995, $30 million in 1994 and
$56 million in 1993.
(4) Before reduction for reinsurance of $90 million in 1995, $62 million in 1994
and $45 million in 1993 and net of $26 million of discount on settlements in
1995.
</TABLE>
<PAGE> 38
Discontinued Operations - Property-Casualty Operations (Continued)
At December 31, 1995 and 1994, approximately 26% and 33%,
respectively, of reserves (pretax and before reinsurance)
represented legal fees. 1993 payment levels primarily reflect
increased settlements of asbestos bodily injury claims, including
settlements of certain large claims for which reserves had
previously been established.
The company's indemnity payments per claim with respect to all
asbestos bodily injury claims have varied over time and from case
to case, due primarily to wide variations in insureds, policy
terms, types of claims, injury and the results of claim-settling
mechanisms (such as CCR). Management cannot predict whether
indemnity payments per claim will increase, decrease or remain the
same.
The number of asbestos bodily injury claims the company had as of
December 31 (and policyholders involved in those claims) were as
follows: (1)
<TABLE>
<CAPTION>
1995 1994 1993
_____ _____ _____
<S> <C> <C> <C>
Beginning balance 1,277 1,283 1,864
New claims 261 271 248
Closed claims 540 277 829
_____ _____ _____
Ending balance (2) 998 1,277 1,283
_____ _____ _____
_____ _____ _____
Policyholders 329 318 287
_____ _____ _____
_____ _____ _____
<FN>
(1) The "claims" numbers above reflect cases where policyholders have notified the company
of a claim under primary insurance policies. In addition, they reflect cases where
policyholders have placed the company on notice of possible claims that may potentially
involve excess general liability policies in those instances where the company believes
its excess policies are likely to be accessed.
(2) Certain of the company's claims represent a claim by an individual claimant and others
represent a claim on behalf of multiple claimants. At December 31, 1995, 1994 and 1993,
approximately 83%, 84% and 83%, respectively, represent claims which have multiple claimants.
</TABLE>
Management believes that there is not a high correlation between
the number of outstanding asbestos claims and the recorded
reserves for such claims. The new claims generally relate to
policyholders having a small number of claims and lower exposure
individually. The closed claims in 1995 reflect the consolidation
of certain multiple claimant claims into a single claim count, and
the settlement of a large nonproducts asbestos case. Reserves
with a discounted value of $92 million related to this 1995
settlement will be paid over a number of years, in accordance with
a fixed payment schedule. The closed claims in 1993 reflect the
increased activity related to a small number of large
policyholders pertaining to the CCR settlement.
Asbestos Property Damage Claims
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. It is the company's
position that in most cases its product liability policies do not
cover this replacement expense. Management cannot predict whether
the courts will ultimately support the company's position.
Recently, however, the company has selectively settled claims
where it has considered it reasonable and appropriate to do so.
<PAGE> 39
Discontinued Operations - Property-Casualty Operations (Continued)
The table below reflects activity in the reserve for asbestos
property damage claims (pretax and before reinsurance) for the
years ended December 31:
<TABLE>
<CAPTION>
Asbestos Property Damage Claims (Millions) 1995 1994 1993
_____________________________________________________________________________
<S> <C> <C> <C>
Beginning reserve $ 29.9 $ 28.7 $ 31.3
Reserve additions for incurred losses (1) .2 6.2 16.9
Transfers 12.6 - -
Payments for claims and claim
adjustment expense (2) 20.4 5.0 19.5
______________________________
Ending reserve (3) $ 22.3 $ 29.9 $ 28.7
_____________________________________________________________________________
______________________________
<FN>
(1) Before reduction for reinsurance of less than $1 million in 1995 and $3 million
in each of 1994 and 1993.
(2) Before reduction for reinsurance of $8 million in 1995 and $3 million in 1994.
There were no such reinsurance recoveries in 1993.
(3) Before reduction for reinsurance of $(1) million in 1995 and $7 million in each
of 1994 and 1993.
</TABLE>
In the limited number of asbestos property damage cases where
payments have been made by the company, indemnity payments per
claim have varied over time and from case to case primarily
because of variations in insurance policies and policy limits, the
type of asbestos product installed and relevant state law.
Management cannot predict whether such indemnity payments per
claim will increase, decrease or remain the same.
The number of asbestos property damage claims the company had as
of December 31 (and policyholders involved on those claims) were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Beginning balance 275 336 308
New claims 18 53 53
Closed claims 167 114 25
___ ___ ___
Ending balance (1) 126 275 336
___ ___ ___
___ ___ ___
Policyholders 19 48 43
___ ___ ___
___ ___ ___
<FN>
(1) Certain of the company's claims represent claims related to individual properties and
others represent claims related to multiple properties. At December 31, 1995, 1994
and 1993, approximately 62%, 44% and 32%, respectively, represent claims which relate
to multiple properties.
</TABLE>
The closed claims in 1995 reflect management's efforts to settle
certain significant cases and extinguish the company's potential
liability for such claims.
<PAGE> 40
Discontinued Operations - Property-Casualty Operations (Continued)
Workers' Compensation Claims
The company added $579 million (pretax, before the cumulative
effect of implementing discounting) to prior accident year loss
reserves in 1993 for workers' compensation claims. Of this
addition, approximately $250 million related to reserves for
workers' compensation life table indemnity claims. The increase
of $579 million resulted from a study of the company's workers'
compensation reserves and the factors which were contributing to
its adverse developments. Concurrent with this addition to
workers' compensation reserves, the company implemented a change
in accounting to discount reserves for workers' compensation life
table indemnity claims in order to more accurately reflect the
economic value of the company's obligations and improve the
matching of revenues and expenses. Such discounting was
consistent with industry practice. This discounting resulted in a
reduction as of December 31, 1993 of $614 million (pretax) to loss
reserves for workers' compensation claims. (Please see Note 2 of
Notes to Financial Statements.)
Estimating workers' compensation reserves is particularly
difficult (and, therefore, more subject to change than many other
types of property-casualty claims), largely because of the length
of the "tail" associated with workers' compensation claims.
Workers' compensation claim costs are dependent on a number of
complex factors including social and economic trends and changes
in doctrines of legal liability and damage awards.
Other
Policyholders of the company also seek insurance coverage from the
company for other long-term exposure claims against them,
including claims relating to silicone-based personal products,
lead paint and other allegedly toxic or harmful substances.
Evaluating and reserving for these types of exposures is complex
and subject to many uncertainties including those stemming from
coverage issues, long latency periods and changing or expanding
laws and legal theories of liability. Adjustments will be made to
such reserves as claims mature or settle and as new information
becomes available to the company, and such adjustments may be
material.
As a result of the sale of the property-casualty operations, Aetna
currently expects to retain no property-casualty claim liability other
than an obligation to indemnify Travelers for a portion of certain
potential liability exposures which are currently under discussion with
insureds. While there can be no assurances, management does not believe
that the ultimate loss arising from this indemnification, if any, will
be material to the company.
In connection with the 1992 sale of American Re-Insurance Company
("Am Re"), Am Re and a property-casualty subsidiary ("the
subsidiary") entered into a reinsurance agreement which provides
that to the extent Am Re incurred losses in 1991 and prior that
were still outstanding at January 1, 1992 in excess of $2.7
billion (or $362 million in excess of Am Re's reserves as of
December 31, 1991, adjusted for certain reinsurance transactions),
the subsidiary has an 80% participation in payments on those
losses up to a maximum payment by the subsidiary of $500 million.
In 1995, Am Re increased reserves for asbestos, environmental and
other latent liabilities. As a result of this increase, losses of
approximately $228 million ($120 million after discount), which
were largely workers' compensation life table indemnity claims,
were ceded to the subsidiary. There was no material impact on 1995
earnings as the subsidiary had previously established reserves.
It is reasonably possible that additional undiscounted losses of
up to approximately $270 million pretax could be ceded to the
company in the future.
<PAGE> 41
Discontinued Operations - Property-Casualty Operations (Continued)
Outlook
The company expects that the sale of its property-casualty
operations will be completed no later than midyear 1996 with a
resulting gain on sale. Company earnings up through the close of
the transaction are subject to variability due to the results of
the property-casualty operations. While such results will not
adjust the purchase price, income or loss from such operations
will decrease or increase, respectively, the gain expected to be
recognized on such sale.
<PAGE> 42
General Account Investments
Investment-related amounts disclosed in the following investment
section relate to assets supporting continuing operations
(including assets supporting discontinued products and experience
rated products) and assets supporting Discontinued Operations.
(Please see "Large Case Pensions" on page 23 for a discussion of
discontinued products and "Discontinued Operations - Property-
Casualty Operations" on page 28.)
<TABLE>
<CAPTION>
December 31,
________________________
(Millions) 1995 1994
____________________________________________________________________________
<S> <C> <C>
Invested Assets:
Fully Guaranteed $ 13,490.3 $ 14,415.9
Experience Rated 18,763.4 16,362.3
Other 11,796.6 10,751.6
__________ _________
Total General Account Invested Assets -
continuing operations, net of impairment reserves $ 44,050.3 $ 41,529.8
____________________________________________________________________________
________________________
Net investment income - continuing operations $ 3,575.1 $ 3,631.4
____________________________________________________________________________
________________________
Invested Assets - Discontinued Operations $ 13,986.5 $ 12,763.5
____________________________________________________________________________
________________________
Net investment income - Discontinued Operations $ 901.7 $ 832.1
____________________________________________________________________________
________________________
</TABLE>
At December 31, 1995 and 1994, the company's invested assets
supporting continuing operations were comprised of the following,
net of impairment reserves:
<TABLE>
<CAPTION>
(Millions) 1995 1994
__________________________________________________________________________
<S> <C> <C>
Debt securities:
Available for sale, at fair value
(amortized cost $29,962.5 and $27,208.3) $ 31,860.3 $ 25,938.1
Held for investment, at amortized
cost (fair value $1,584.1)* - 1,587.3
Equity securities, at fair value
(cost $597.8 and $594.0) 659.7 614.6
Short-term investments 607.8 344.4
Mortgage loans 8,327.2 10,389.9
Real estate 1,277.3 1,283.7
Policy loans 629.4 533.8
Other 688.6 838.0
__________________________________________________________________________
Total invested assets - continuing operations $ 44,050.3 $ 41,529.8
__________________________________________________________________________
________________________
<FN>
* Please see Note 1 of Notes to Financial Statements for a discussion of
transfers of securities from Held for Investment to Available for Sale
in 1995.
</TABLE>
<PAGE> 43
General Account Investments (Continued)
At December 31, 1995 and 1994, the company's invested assets
supporting Discontinued Operations were comprised of the
following, net of impairment reserves:
<TABLE>
<CAPTION>
(Millions) 1995 1994
__________________________________________________________________________
<S> <C> <C>
Debt securities:
Available for sale, at fair value
(amortized cost $11,293.8 and $9,775.9) $ 11,705.6 $ 9,172.6
Held for investment, at amortized
cost (fair value $407.1)* - 413.5
Equity securities, at fair value
(cost $313.8 and $802.5) 525.5 1,041.0
Short-term investments 137.2 106.0
Mortgage loans 1,061.7 1,453.7
Real estate 264.7 262.0
Other 291.8 314.7
__________________________________________________________________________
Total invested assets - Discontinued Operations $ 13,986.5 $ 12,763.5
__________________________________________________________________________
________________________
<FN>
* Please see Note 1 of Notes to Financial Statements for a discussion of
transfers of securities from Held for Investment to Available for Sale
in 1995.
</TABLE>
The company's investment objective for both continuing operations
and Discontinued Operations is to fund policyholder and other
liabilities in a manner which enhances shareholder and
contractholder value, subject to appropriate risk constraints. It
is the company's intention that this investment objective be met
by a mix of investments which reflects the characteristics 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 asset
portfolios.
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. (Please see "Use of
Derivatives and Other Investments" on page 59.)
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 1995, the company operated within such
investment guidelines by maintaining a mix of investments that
diversifies its assets and reflects the characteristics of the
liabilities which they support.
<PAGE> 44
General Account Investments (Continued)
The change in the invested assets portfolio supporting continuing
operations from December 31, 1994 to December 31, 1995 primarily
reflected appreciation of debt securities due to a decrease in
interest rates, partially offset by a net decrease in the mortgage
loan and real estate portfolios. Debt securities reflected net
unrealized capital gains of $1.9 billion at December 31, 1995,
compared with net unrealized capital losses of $1.3 billion at
December 31, 1994. Of such net unrealized capital gains at
December 31, 1995, $421 million and $960 million related to assets
supporting discontinued products and experience rated pension
contractholders, respectively. The net decrease in the mortgage
loan and real estate portfolios of $2.1 billion principally
reflected prepayments, payments at maturity on mortgage loans,
write-offs on foreclosures and sales of foreclosed properties and
loans.
The risks associated with investments supporting experience rated
pension and annuity products are assumed by those customers
subject to, among other things, certain minimum guarantees. The
anticipated future losses associated with investments supporting
discontinued large case pension products were provided for in the
reserve on discontinuance of products.
The change in the invested assets portfolio supporting
Discontinued Operations from December 31, 1994 to December 31,
1995 reflected increases in debt securities due to appreciation of
value resulting from a decrease in interest rates and reinvestment
of proceeds from sales of equity securities, and a net decrease in
the mortgage loan and real estate portfolios. Debt securities
reflected net unrealized capital gains of $412 million at
December 31, 1995, compared with net unrealized capital losses of
$603 million at December 31, 1994. The net decrease in the
mortgage loan and real estate portfolios of $389 million
principally reflected prepayments, payments at maturity on
mortgage loans, write-offs on foreclosures and sales of foreclosed
properties and loans. The net decrease in the equity securities
portfolio of $516 million principally reflected sales which were
completed in an effort to reduce volatility in statutory surplus,
and increase income, as well as in connection with the sale of
this business to The Travelers Insurance Group Inc. ("Travelers").
Such decreases were partially offset by market appreciation in the
equity securities portfolio. The company intends to continue to
reduce the equity securities portfolio through the closing date of
the sale to Travelers through a combination of sales, including
the sale of a significant portion of its holdings in MBIA Inc. to
the public, and transfers to continuing operations.
Debt Securities
As of December 31, 1995 and 1994, the company's investments in
debt securities (including those supporting Discontinued
Operations) represented 75% and 68%, respectively, of total
general account invested assets and were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
____________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 5,765.2 $ 6,155.0
Supporting experience rated products 14,243.4 11,770.5
Supporting remaining products 11,851.7 9,599.9
____________________________________________________________________________
Total debt securities - continuing operations $31,860.3 $27,525.4
____________________________________________________________________________
____________________________
Debt securities - Discontinued Operations $11,705.6 $ 9,586.1
____________________________________________________________________________
____________________________
</TABLE>
<PAGE> 45
General Account Investments (Continued)
It is management's objective that the continuing operations and
Discontinued Operations portfolios of debt securities be of high
quality and be well-diversified by market sector. The debt
securities in the company's portfolios are generally rated by
external rating agencies, and, if not externally rated, are rated
by the company on a basis believed to be similar to that used by
the rating agencies.
As of December 31, 1995 and 1994, the company's investments in
debt securities supporting continuing operations and Discontinued
Operations by quality ratings and market sector were as follows:
<TABLE>
<CAPTION>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations_
______________________________________ ___________________________________________________
<S> <C> <C> <C> <C> <C>
December 31, 1995: December 31, 1995:
_________________ _________________
AAA 39.6% 53.9% Corporate 38.4% 27.6%
AA 13.3% 11.1% Treasuries/Agencies 14.3% 27.8%
A 26.7% 20.8% Mortgage-Backed Securities 18.1% 14.5%
BBB 15.3% 10.9% Financial 15.1% 11.9%
BB & Below 5.1% 3.3% Public Utilities 8.0% 6.6%
Other Loan Backed 5.5% 6.1%
Average Rating AA- AA Municipals .6% 5.5%
December 31, 1994: December 31, 1994:
_________________ _________________
AAA 44.6% 58.8% Corporate 30.0% 22.5%
AA 10.6% 10.2% Treasuries/Agencies 18.7% 36.5%
A 23.2% 18.0% Mortgage-Backed Securities 19.8% 13.3%
BBB 16.3% 8.7% Financial 18.1% 5.8%
BB & Below 5.3% 4.3% Public Utilities 7.7% 5.6%
Other Loan Backed 4.9% 3.3%
Average Rating AA AA Municipals .8% 13.0%
</TABLE>
<PAGE> 46
General Account Investments (Continued)
Included in the company's total debt security balances were the
following categories of debt securities:
<TABLE>
<CAPTION>
(Millions) December 31, 1995
_______________________________________________________________________________________________________
"Below Investment "Problem" Debt "Potential Problem"
Grade" Securities Securities Debt Securities
_________________ ______________ __________________
<S> <C> <C> <C>
Total - continuing operations $1,623.8 (1) $ 81.0 $ 90.4
________ ________ ________
________ ________ ________
Percentage of total - continuing
operations:
Supporting discontinued products 26.1% 36.9% 57.5%
Supporting experience rated products 42.6 12.5 24.1
Supporting remaining products 31.3 50.6 18.4
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
Total - Discontinued Operations $ 381.3 (1) $ .6 $ -
________ ________ ________
________ ________ ________
December 31, 1994
________________________________________________________________
"Below Investment "Problem" Debt "Potential Problem"
Grade" Securities Securities Debt Securities
_________________ ______________ __________________
<S> <C> <C> <C>
Total - continuing operations $1,462.3 (1) $ 143.4 $ 149.5
________ ________ ________
________ ________ ________
Percentage of total - continuing
operations:
Supporting discontinued products 35.7% 36.3% 31.7%
Supporting experience rated products 33.0 14.7 33.7
Supporting remaining products 31.3 49.0 34.6
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
Total - Discontinued Operations $ 410.7 (1) $ 3.0 $ 20.5
________ ________ ________
________ ________ ________
<FN>
(1) "Below Investment Grade" securities supporting continuing operations at December 31, 1995 and
1994 include $625.1 million and $900.2 million, respectively, of securities that were investment
grade when purchased, but have since deteriorated in quality. Likewise, "Below Investment
Grade" securities supporting Discontinued Operations at December 31, 1995 and 1994 include
$113.5 million and $186.5 million, respectively, of securities that were investment grade when
purchased, but have since deteriorated in quality.
</TABLE>
"Below investment grade" securities (which include "problem" debt
securities and "potential problem" debt securities described
below) are defined to be securities that carry a rating below BBB-
/Baa3. Such debt securities have been written down for other than
temporary declines in value.
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 significant financial difficulties. Identifying
such potential problem debt securities requires significant
judgment as to likely future market conditions and developments
specific to individual debt securities.
<PAGE> 47
General Account Investments (Continued)
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 years ended December 31 was as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
______________________________________________________________________
<S> <C> <C> <C>
Allocable to discontinued products $ 1.5 $ 3.4 $ 3.5
Allocable to experience rated products 1.3 1.0 .5
Allocable to remaining products 2.5 4.8 .6
______________________________________________________________________
Total lost investment income -
continuing operations $ 5.3 $ 9.2 $ 4.6
______________________________________________________________________
_____________________________
Lost investment income - Discontinued
_
Operations $ .6 $ 1.0 $ 1.0
______________________________________________________________________
_____________________________
</TABLE>
Collateralized Mortgage Obligations
Included in the company's total collateralized mortgage
obligations ("CMOs") balances were the following categories of
CMOs:
<TABLE>
<CAPTION>
(Millions) 1995 1994
___________________________________________________________________________________________
Fair Amortized Fair Amortized
Value Cost Value Cost___
_________ _________ ________ _________
<S> <C> <C> <C> <C>
Total CMOs - continuing operations (1) $ 3,082.8 $ 2,876.1 $ 3,091.4 $ 3,249.8
_________ _________ _________ _________
_________ _________ _________ _________
Percentage of total CMOs -
continuing operations:
Sequential and planned
amortization class bonds 76.6% 83.7%
Z-tranches 15.8 8.8
Interest-only strips and
principal-only strips 2.3 3.2
Other 5.3 4.3
_________ _________
Total - continuing operations 100.0% 100.0%
_________ _________
_________ _________
Total CMOs - Discontinued Operations (1) $ 306.0 $ 304.4 $ 278.1 $ 312.9
_________ _________ _________ _________
_________ _________ _________ _________
<FN>
(1) At December 31, 1995 and 1994, approximately 74% and 77%, respectively, of the
company's continuing operations' CMO holdings and approximately 38% and 44%,
respectively, of the company's Discontinued Operations' CMO holdings were
collateralized by residential mortgage loans, on which the timely payment of
principal and interest is backed by specified government agencies (e.g., GNMA,
FNMA, FHLMC).
</TABLE>
<PAGE> 48
General Account Investments (Continued)
The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in
interest rates whereby the value of the CMOs would be subject to
variability on the repayment of principal from the underlying
mortgages earlier or later than originally anticipated. If due to
declining interest rates, principal was to be repaid earlier than
originally anticipated, the company could be affected by a
decrease in investment income due to the reinvestment of these
funds at a lower interest rate. Such prepayments may also result
in a duration mismatch between assets and liabilities, which could
be corrected as cash from prepayments could be reinvested at an
appropriate duration to adjust the mismatch. Conversely, if due
to increasing interest rates, principal was to be repaid slower
than originally anticipated, the company could be affected by a
decrease in cash flow, which reduces the ability to reinvest
expected principal repayments at higher interest rates. Such
slower payments may also result in a duration mismatch between
assets and liabilities, which could be corrected as available cash
flow could be reinvested at an appropriate duration to adjust the
mismatch.
The various categories of CMOs are subject to different degrees of
risk from changes in interest rates and defaults (for non-agency-
backed bonds). Sequential and planned amortization class bonds
are subject to less prepayment and extension risk than other CMO
instruments. Interest-only strips ("IOs") receive payments of
interest and principal-only strips ("POs") receive payments of
principal on the underlying pool of residential mortgages. The
company has mitigated the risks associated with holding IOs and
POs by holding positions in both types of instruments such that
exposure from significant changes in interest rates is reduced.
Z-tranches receive principal payments from the underlying mortgage
pool only after all other priority classes have been retired.
<PAGE> 49
General Account Investments (Continued)
Mortgage Loans
During 1995, the total mortgage loan portfolio was reduced 21% to
$9.4 billion, net of impairment reserves. At December 31, 1995
and 1994, the company's total mortgage loan investments, net of
impairment reserves, supported the following types of business:
<TABLE>
<CAPTION>
(Millions) 1995 1994
______________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 3,388.6 $ 4,294.9
Supporting experience rated products 2,642.6 3,652.1
Supporting remaining products 2,296.0 2,442.9
______________________________________________________________________
Total mortgage loan investments -
continuing operations $ 8,327.2 $10,389.9
______________________________________________________________________
___________________________
Mortgage loan investments - Discontinued
Operations $ 1,061.7 $ 1,453.7
______________________________________________________________________
___________________________
</TABLE>
The company continued to manage its mortgage loan portfolio during
1995 to reduce the balance in absolute terms and relative to
invested assets, and to reduce its overall risk. The $2.5 billion
decrease in the total mortgage loan portfolio since December 31,
1994 reflects the effect of repayments of maturing loans, loan
prepayments and foreclosures (actual and in-substance).
Additionally, in December 1995, the company completed the sale and
securitization of $443 million of commercial mortgage loans
supporting discontinued products. Concurrent with the sale, the
company retained approximately $108 million of subordinate and
residual certificates which were classified as debt securities at
December 31, 1995. The net proceeds from the sale were
approximately $338 million.
<PAGE> 50
General Account Investments (Continued)
At December 31, 1995 and 1994, the company's mortgage loan
balances, net of specific impairment reserves, by property type
and geographic region were as follows:
<TABLE>
<CAPTION>
December 31, 1995
_________________
Hotel/ Mixed
(Millions) Office Retail Apartment Motel Industrial Use Other Total
__________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
South Atlantic $ 538.8 $ 301.6 $ 114.0 $ 426.7 $ 195.3 $ 152.1 $ 27.1 $ 1,755.6
Middle Atlantic 807.3 400.3 116.3 81.7 33.8 118.5 4.8 1,562.7
New England 555.6 214.9 .5 124.2 41.7 37.5 11.0 985.4
South Central 300.2 192.4 56.7 54.6 29.3 - 23.4 656.6
North Central 537.1 146.4 62.9 101.3 28.5 24.6 32.3 933.1
Pacific and
Mountain 786.4 426.7 122.4 113.2 334.0 21.6 98.5 1,902.8
Other 94.5 152.1 127.8 20.2 64.3 6.5 309.3 774.7
__________________________________________________________________________________________________
Total - continuing
operations $ 3,619.9 $ 1,834.4 $ 600.6 $ 921.9 $ 726.9 $ 360.8 $ 506.4 8,570.9
__________________________________________________________________________________________________
Less general portfolio
loss reserve 243.7
__________________________________________________________________________________________________
Adjusted total - continuing operations, net of reserves $ 8,327.2
__________________________________________________________________________________________________
_________
Total - Discontinued
Operations $ 527.2 $ 256.3 $ 168.7 $ 59.7 $ 31.1 $ 42.8 $ 20.3 $ 1,106.1
__________________________________________________________________________________________________
Less general portfolio
loss reserve 44.4
__________________________________________________________________________________________________
Adjusted total - Discontinued Operations, net of reserves $ 1,061.7
__________________________________________________________________________________________________
_________
December 31, 1994
_________________
Hotel/ Mixed
(Millions) Office Retail Apartment Motel Industrial Use Other Total
__________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
South Atlantic $ 667.9 $ 380.6 $ 205.6 $ 610.3 $ 232.9 $ 153.2 $ 33.0 $ 2,283.5
Middle Atlantic 944.3 452.6 188.0 124.0 52.2 118.5 9.2 1,888.8
New England 635.6 217.2 4.8 75.8 44.2 209.9 28.9 1,216.4
South Central 314.1 274.3 153.3 63.6 46.4 - 27.3 879.0
North Central 585.5 235.8 77.2 144.8 29.0 47.6 45.0 1,164.9
Pacific and
Mountain 1,052.3 535.9 242.7 143.0 435.3 76.6 80.0 2,565.8
Other 95.8 149.1 131.3 21.0 59.8 3.4 222.6 683.0
__________________________________________________________________________________________________
Total - continuing
operations $ 4,295.5 $ 2,245.5 $ 1,002.9 $ 1,182.5 $ 899.8 $ 609.2 $ 446.0 10,681.4
__________________________________________________________________________________________________
Less general portfolio
loss reserve 291.5 *
__________________________________________________________________________________________________
Adjusted total - continuing operations, net of reserves $10,389.9
__________________________________________________________________________________________________
_________
Total - Discontinued
Operations $ 660.6 $ 379.4 $ 224.4 $ 132.7 $ 33.6 $ 50.9 $ 30.6 $ 1,512.2
__________________________________________________________________________________________________
Less general portfolio
loss reserve 58.5
__________________________________________________________________________________________________
Adjusted total - Discontinued Operations, net of reserves $ 1,453.7
__________________________________________________________________________________________________
_________
<FN>
* The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million
related to experience rated products. Had such reserves been included, the general reserve would
have been $500.0 million. In connection with the company's adoption of FAS Nos. 114 and 118,
the general reserve at December 31, 1995 included such reserves, related to experience rated
products. The inclusion of these reserves did not impact earnings or shareholders' equity.
</TABLE>
The company has a comprehensive process for managing mortgage
loans which includes an ongoing risk assessment to evaluate key
attributes of the mortgage investment, specifically, debt service
coverage, cash flow sustainability, property condition, loan to
value, market/economic trends, deal structure, borrower strength
and ability to refinance. Action plans are established with the
objective of reducing potential risk and maximizing the return on
the investment. In addition, a collateral valuation is performed
on a regular basis for mortgage loans with a balance greater than
$5 million (approximately 90% of the total principal balance of
the portfolios supporting continuing operations and Discontinued
Operations), to help determine whether adjustments to impairment
reserves are warranted.
<PAGE> 51
General Account Investments (Continued)
The company has a troubled debt restructuring program, the primary
objective of which is to restructure eligible loans in a manner
which creates a market rate transaction which will perform in
accordance with its restructured terms. The program is applied to
those loans which have sound property and borrower fundamentals
but suffer from excess debt. An important feature of these loans
is that in exchange for principal forgiveness on a portion of the
loan, the company typically retains the right to participate in
property appreciation to the extent market conditions improve in
the future.
In those situations where the property fundamentals do not support
a restructuring of the loan, the company generally acquires the
collateral through foreclosure. Loans with a principal balance of
$309 million and collateral with a fair market value of
$210 million (of which $9 million and $7 million, respectively,
relates to loans supporting Discontinued Operations) were
foreclosed upon in 1995. Additional loans with a principal
balance of $120 million ($19 million of which relates to loans
supporting Discontinued Operations) were in the process of
foreclosure at year end. In certain cases, the company has taken
substantive possession of the property supporting its loan,
coupled with the borrower surrendering its interest in the future
economic benefits in the property. Where this has occurred, the
loans are considered in-substance foreclosures, written down to
their fair market value less selling costs and classified as real
estate held for sale. At December 31, 1995 and 1994, there were
$190 million and $172 million, respectively, of in-substance
foreclosures, (net of write-offs of $126 million and $126 million,
respectively) in portfolios supporting continuing operations.
Likewise, at December 31, 1995 and 1994 there were $54 million and
$21 million, respectively, of in-substance foreclosures (net of
write-offs of $65 million and $10 million, respectively) in
portfolios supporting Discontinued Operations.
<PAGE> 52
General Account Investments (Continued)
Included in the company's total mortgage loan balances were the
following categories of mortgage loans:
<TABLE>
<CAPTION>
(Millions) December 31, 1995
_______________________________________________________________________________________________________
Restructured Potential
Problem Loans Loans Problem Loans* Total
_____________ ____________ _____________ _____
<S> <C> <C> <C> <C>
Total - continuing operations $ 160.3 $ 514.1 $ 839.1 $1,513.5
________ ________ ________ ________
________ ________ ________ ________
Percentage of total - continuing
operations:
Supporting discontinued products 22.6% 50.9% 54.3%
Supporting experience rated products 39.7 30.7 25.2
Supporting remaining products 37.7 18.4 20.5
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
Impairment reserves on loans -
continuing operations (1) $ 604.9
________
________
Impairment reserves as a percentage
of total - continuing operations 40.0%
________
________
Total - Discontinued Operations $ 20.1 $ 35.8 $ 92.1 $ 148.0
________ ________ ________ ________
________ ________ ________ ________
Impairment reserves on loans -
Discontinued Operations $ 65.7
________
________
Impairment reserves as a percentage
of total - Discontinued Operations 44.4%
________
________
December 31, 1994
________________________________________________________________
Restructured Potential
Problem Loans Loans Problem Loans* Total
_____________ ____________ _____________ _____
<S> <C> <C> <C> <C>
Total - continuing operations $ 567.1 $ 618.0 $ 881.7 $2,066.8
________ ________ ________ ________
________ ________ ________ ________
Percentage of total - continuing
operations:
Supporting discontinued products 43.8% 44.6% 50.8%
Supporting experience rated products 36.5 35.5 26.6
Supporting remaining products 19.7 19.9 22.6
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
Impairment reserves on loans -
continuing operations (1) $ 647.5**
________
________
Impairment reserves as a percentage
of total - continuing operations 31.3%
________
________
Total - Discontinued Operations $ 106.0 $ 88.1 $ 37.0 $ 231.1
________ ________ ________ ________
________ ________ ________ ________
Impairment reserves on loans -
Discontinued Operations $ 136.6
________
________
Impairment reserves as a percentage
of total - Discontinued Operations 59.1%
________
________
<FN>
(1) Please see Note 5 of Notes to Financial Statements for composition of impairment
reserves between specific and general impairment reserves.
* In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995
(please see Note 1 of Notes to Financial Statements), management has revised the
definition of "potential problem loans." (Please see "potential problem loans"
on page 54.)
** The general reserve at December 31, 1994 excluded reserves of approximately
$208.5 million related to experience rated products. Had such reserves been included,
total reserves would have been $856.0 million. In connection with the company's adoption
of FAS Nos. 114 and 118, the general reserve at December 31, 1995 included such reserves,
related to experience rated products. The inclusion of these reserves did not impact
earnings or shareholders' equity.
</TABLE>
<PAGE> 53
General Account Investments (Continued)
As of December 31, 1995 and 1994, the company's investments in
problem, potential problem and restructured mortgage loans
supporting continuing operations and Discontinued Operations by
property type and geographic distribution were as follows:
<TABLE>
<CAPTION>
Problem, Potential Problem and Restructured Geographic Distribution of Problem, Potential
Mortgage Loans by Property Type Problem and Restructured Mortgage Loans
Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations_
_________________________________________ ____________________________________________
<S> <C> <C> <C> <C> <C>
December 31, 1995: December 31, 1995:
__________________ __________________
Agriculture 1.5% -
Apartment 3.5% 13.3% Middle Atlantic 15.5% 11.9%
Hotel/Motel 4.8% - New England 23.9% .2%
Industrial 3.0% - North Central 10.3% 13.4%
Mixed Use 9.4% - Pacific and Mountain 27.8% 62.2%
Office 58.2% 48.8% South Atlantic 11.0% 12.3%
Retail 15.0% 37.9% South Central 7.2% -
Other 4.6% - Non-U.S. 4.3% -
December 31, 1994: December 31, 1994:
__________________ __________________
Agriculture 1.1% -
Apartment 5.3% 9.0% Middle Atlantic 12.0% 22.1%
Hotel/Motel 8.8% .8% New England 21.7% 1.3%
Industrial 6.5% - North Central 17.0% 32.6%
Mixed Use 7.7% - Pacific and Mountain 25.6% 7.3%
Office 54.5% 72.4% South Atlantic 16.6% 17.6%
Retail 13.4% 17.0% South Central 4.7% 19.1%
Other 2.7% .8% Non-U.S. 2.4% -
</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 supporting continuing operations decreased
to $101 million at December 31, 1995 from $364 million at
December 31, 1994. Likewise, loans on properties in the process
of foreclosure supporting Discontinued Operations decreased to
$19 million at December 31, 1995 from $58 million at December 31,
1994.
"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 mortgage loans within the total portfolio supporting
continuing operations and Discontinued Operations at December 31,
1995 and 1994 yielded cash returns of approximately 7% and 6%,
respectively.
<PAGE> 54
General Account Investments (Continued)
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. 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. During 1995 two loans in
the continuing operations portfolio which had been restructured,
with a carrying value of $17 million (net of write-offs of
$6 million) and an average current yield of 8%, were classified as
performing. Likewise, during 1995 two loans in the Discontinued
Operations portfolio which had been restructured, with a carrying
value of $20 million (net of write-offs of $15 million) and an
average current yield of 9%, were classified as performing.
In connection with the company's adoption of FAS Nos. 114 and 118
on January 1, 1995 (please see Note 1 of Notes to Financial
Statements), management has revised the definition of "potential
problem loans" to include all loans which are performing pursuant
to existing terms and are considered likely to become classified
as problem or restructured loans. Prior to January 1, 1995,
potential problem loans were performing loans which management
believed were likely to become classified as problem or
restructured loans in the next 12 months or so. As a result of
the revised definition, potential problem loans at December 31,
1995 supporting continuing operations and Discontinued Operations
are approximately $293 million and $65 million, respectively,
higher than they would have been had the definition not been
changed. Potential problem loans are identified through the
portfolio review process on the basis of known information about
the ability of borrowers to comply with present loan terms.
Identifying such potential problem loans requires significant
judgment as to likely future market conditions and developments
specific to individual properties and borrowers. Provision for
losses that management believes are likely to arise from such
potential problem loans is included in the specific impairment
reserves. (Please see Note 5 of Notes to Financial Statements for
a discussion of mortgage loan impairment reserves.)
<PAGE> 55
General Account Investments (Continued)
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 problem and restructured
loans outstanding at December 31 and the portion thereof actually
recorded as income for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
____________________________________________________________________
<S> <C> <C> <C>
Income which would have been recorded
under original terms of loans -
continuing operations $ 72.2 $ 127.2 $ 269.6
Income recorded 42.4 64.5 133.9
_______ _______ _______
Lost investment income - continuing
operations $ 29.8 $ 62.7 $ 135.7
_______ _______ _______
_______ _______ _______
Lost investment income allocated to
investments supporting discontinued
products (included above) $ 10.4 $ 28.8 $ 73.8
_______ _______ _______
_______ _______ _______
Lost investment income allocated to
investments supporting experience
rated pension products
(included above) $ 15.4 $ 22.5 $ 41.7
_______ _______ _______
_______ _______ _______
Lost investment income allocated to
investments supporting remaining
products (included above) $ 4.0 $ 11.4 $ 20.2
_______ _______ _______
_______ _______ _______
Lost investment income - Discontinued
Operations $ 2.2 $ 13.9 $ 13.5
_______ _______ _______
_______ _______ _______
</TABLE>
<PAGE> 56
General Account Investments (Continued)
Real Estate
The company's equity real estate balances, net of write-downs and
reserves, were as follows:
<TABLE>
<CAPTION>
(Millions) December 31, 1995
________________________________________________________________________________________________
Investment Properties Total Equity
Real Estate Held for Sale Real Estate
___________ _____________ ____________
<S> <C> <C> <C>
Total equity real estate -
continuing operations $ 153.0 $1,124.3 (1) $1,277.3
________ ________ ________
________ ________ ________
Percentage of total equity real
estate - continuing operations:
Supporting discontinued products 7.5% 55.5%
Supporting experience rated products 7.8 24.4
Supporting remaining products 84.7 20.1
________ ________
100.0% 100.0%
________ ________
________ ________
Total equity real estate -
Discontinued Operations $ 106.8 $ 157.9 (1) $ 264.7
________ ________ ________
________ ________ ________
December 31, 1994
_________________________________________________________
Investment Properties Total Equity
Real Estate Held for Sale Real Estate
___________ _____________ ____________
<S> <C> <C> <C>
Total equity real estate -
continuing operations $ 241.5 $1,042.2 (1) $1,283.7
________ ________ ________
________ ________ ________
Percentage of total equity real
estate - continuing operations:
Supporting discontinued products 37.6% 61.3%
Supporting experience rated products 13.2 24.1
Supporting remaining products 49.2 14.6
________ ________
100.0% 100.0%
________ ________
________ ________
Total equity real estate -
Discontinued Operations $ 140.8 $ 121.2 (1) $ 262.0
________ ________ ________
________ ________ ________
<FN>
(1) Includes $190.4 million and $172.4 million of in-substance foreclosures supporting continuing
operations and $54.1 million and $21.0 million supporting Discontinued Operations at
December 31, 1995 and 1994, respectively. (Please see "Mortgage Loans" on page 51 for
discussion of in-substance foreclosures.)
</TABLE>
<PAGE> 57
General Account Investments (Continued)
As of December 31, 1995 and 1994, the company's investments in
equity real estate by property type and geographic distribution
were as follows:
<TABLE>
<CAPTION>
Equity Real Estate by Property Type Geographic Distribution of Equity Real Estate
Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations
______________________________________ __________________________________________________
<S> <C> <C> <C> <C> <C>
December 31, 1995: December 31, 1995:
__________________ __________________
Apartment 5.2% - Middle Atlantic 11.1% 7.9%
Hotel/Motel 7.4% 21.3% New England 2.9% 12.5%
Industrial 4.4% 8.6% North Central 16.1% 18.3%
Land 1.2% 14.3% Pacific and Mountain 20.7% 37.9%
Mixed Use 2.1% - South Atlantic 29.0% 16.7%
Office 60.8% 47.1% South Central 8.2% 6.7%
Retail 16.0% 7.6% Non-U.S. 12.0% -
Other 2.9% 1.1%
December 31, 1994: December 31, 1994:
__________________ __________________
Apartment 7.4% 6.0% Middle Atlantic 8.1% 8.2%
Hotel/Motel 7.8% 17.3% New England 9.0% 16.1%
Industrial 3.8% 8.7% North Central 12.3% 12.3%
Land 2.5% 13.2% Pacific and Mountain 16.9% 40.1%
Mixed Use 2.5% - South Atlantic 31.7% 20.4%
Office 54.2% 44.1% South Central 11.8% 2.9%
Retail 20.2% 9.5% Non-U.S. 10.2% -
Other 1.6% 1.2%
</TABLE>
All real estate acquired through foreclosure, including in-
substance foreclosures, is classified as properties held for sale.
Foreclosed real estate supporting continuing operations was
carried at 61% of the company's cash investment (unpaid mortgage
balance plus capital additions) at December 31, 1995 and 1994.
Likewise, foreclosed real estate of Discontinued Operations was
carried at 53% and 49% of the company's cash investment at
December 31, 1995 and 1994, respectively.
Investment real estate, which is generally carried at depreciated
cost, is written down to fair value to reflect other than
temporary declines in market value. The fair value of assets
acquired through foreclosure is established as the cost basis at
the time of foreclosure. Subsequent to acquisition, properties
classified as held for sale are carried at the lower of cost or
fair value less estimated selling costs. Adjustments to the
carrying value of properties held for sale resulting from changes
in fair value are recorded in a valuation reserve. Property
valuations are reviewed regularly by investment management.
Capital additions and asset improvements increase the cost basis
of the asset while depreciation reduces the cost basis.
<PAGE> 58
General Account Investments (Continued)
Total real estate write-downs and valuation reserves on properties
included in the company's equity real estate balances at
December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
_____________________________________________________________
<S> <C> <C>
Allocable to discontinued products $ 381.0 $ 376.0
Allocable to experience rated products 208.2 179.6
Allocable to remaining products 96.8 89.0
_____________________________________________________________
Total real estate write-downs and
valuation reserves - continuing
operations $ 686.0 $ 644.6
_____________________________________________________________
______________________
Real estate write-downs and valuation
reserves - Discontinued Operations $ 131.5 $ 117.6
_____________________________________________________________
______________________
</TABLE>
For the years ended December 31, total after-tax net realized
capital (gains) losses from real estate write-downs and changes in
the valuation reserves were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_____________________________________________________________________
<S> <C> <C> <C>
Allocable to discontinued products $ 30.9 (1) $ 12.8 (1) $ 55.1
Allocable to experience rated
products (2) 5.1 2.9 51.5
Allocable to remaining products 2.2 (3.0) 31.4
_____________________________________________________________________
Total after-tax net realized
capital losses -
continuing operations $ 38.2 $ 12.7 $138.0
_____________________________________________________________________
______________________________
Total after-tax net realized
capital (gains) losses -
Discontinued Operations $(10.6) * $ 2.2 $ 33.1
_____________________________________________________________________
______________________________
<FN>
(1) Write-downs and impairment expense allocable to discontinued products for the years
ended December 31, 1995 and 1994 were charged against the reserve for future losses
and did not affect the company's results of operations.
(2) Write-downs and impairment expense allocable to experience rated products do not affect
the company's results of operations.
* Includes a $12.8 million realized capital gain related to the reversal of valuation
reserves on a foreclosed property that appreciated in value.
</TABLE>
<PAGE> 59
General Account Investments (Continued)
Use of Derivatives and Other Investments
The company's use of derivatives is limited to hedging activity and has
principally consisted of using futures, forward contracts and
interest rate swaps to hedge interest rate risk and currency risk.
These instruments, viewed separately, subject the company to
varying degrees of market and credit risk. However, when used for
hedging, the expectation is that these instruments would reduce
overall market risk. Market risk is the possibility that future
changes in market prices may decrease the market value of one or
all of these financial instruments. 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 Note 16
of Notes to Financial Statements for a discussion of the company's
hedging activities.)
The company also had investments in certain debt instruments with
derivative characteristics, including those where 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 debt securities portfolios
supporting continuing operations and Discontinued Operations, as
of December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Continuing Discontinued
Operations Operations
______________________ _______________________
Amortized Fair Amortized Fair
(Millions) Cost Value Cost Value_
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Collateralized mortgage obligations: $ 2,876.1 $ 3,082.8 $ 304.4 $ 306.0
Principal-only strips (included above) 38.7 50.0 - -
Interest-only strips (included above) 11.9 21.3 - -
Structured notes (1) 95.0 100.3 - -
Warrants to purchase debt securities (2) 2.8 4.5 - -
<FN>
(1) Represents nonleveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed-income securities and
interest rate swap agreements.
(2) Represents the right to purchase specific debt securities and is accounted
for as a hedge. Upon exercise, the cost of the warrants will be added to the
basis of the debt securities purchased and amortized over their lives.
</TABLE>
<PAGE> 60
General Account Investments (Continued)
Outlook
Management intends that continuing operations general account
investments in new mortgage loans for the foreseeable future will
be restricted largely to extending and refinancing existing
mortgages as they mature. (Please see "Liquidity and Capital
Resources" on page 62.) It is management's objective over the
next several years, real estate and capital market conditions
permitting, to continue to reduce the size and the risk 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 reduce risk,
maximize returns and reduce portfolio levels.
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
relating to the $4.0 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. (Please
see "Discontinued Products" on page 23.)
During 1995, Discontinued Operations began to sell equity
securities primarily in an effort to reduce volatility in
statutory surplus and increase income. Such sales were increased
in connection with the anticipated sale of the company's property-
casualty operations. The company intends to continue to reduce
the equity portfolio through the closing date of the sale of the
property-casualty operations through a combination of sales,
including the sale of a significant portion of its holdings in
MBIA Inc. to the public, and transfers to continuing operations.
<PAGE> 61
Liquidity and Capital Resources
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
______________________________________________________________________
<S> <C> <C> <C>
Consolidated Assets (1) $84,323.7 $75,486.7 $81,572.8
______________________________________________________________________
________________________________
Shareholders' Equity $ 7,272.8 $ 5,503.0 $ 7,043.1
______________________________________________________________________
________________________________
Cash and Cash Equivalents
and Short-Term Investments (2) $ 2,320.5 $ 2,621.6 $ 2,096.5
______________________________________________________________________
________________________________
Minority Interest in
Preferred Securities
of Subsidiary $ 275.0 $ 275.0 $ -
______________________________________________________________________
________________________________
____
Long-Term Debt (2) $ 989.1 $ 1,079.2 $ 1,112.2
______________________________________________________________________
________________________________
Average Short-Term Debt (2) $ 96.0 $ 213.7 $ 205.5
______________________________________________________________________
________________________________
Interest Expense (2) $ 115.9 $ 98.6 $ 77.4
______________________________________________________________________
________________________________
<FN>
(1) Includes net assets of Discontinued Operations of $3,932.8 million,
$3,167.3 million and $3,873.0 million in 1995, 1994 and 1993, respectively.
(2) Excludes Discontinued Operations.
</TABLE>
Liquidity needs of the company's businesses have generally been
met by cash provided by premiums, deposits, asset maturities and
income received on investments. Cash provided from these sources
is used primarily for claim and benefit payments, fund withdrawals
and operating expenses.
Please see "Large Case Pensions" on pages 20 through 26 for a
discussion of the liquidity requirements specific to the large
case pension business. The following discussion addresses the
sources of liquidity available to meet the needs of all of the
company's continuing businesses.
Bonds, redeemable preferred stocks and mortgage loans have
durations that were selected to approximate the durations of the
liabilities they support. The duration of these investments is
monitored, and investment purchases and sales are executed with
the objective of having adequate funds available to satisfy the
company's maturing liabilities.
As the company's investment strategy focuses on matching asset and
liability durations, and not specific cash flows, and
additionally, since these duration assessments are dependent on
numerous cash flow assumptions, asset sales may be required, from
time to time, to satisfy liability obligations and/or rebalance
asset portfolios. The investment portfolios are closely monitored
to assess asset and liability matching in order to rebalance the
portfolios as conditions warrant.
As a result of the addition by the company of $750 million
($488 million, after tax) to the environmental-related claims
reserves in the second quarter of 1995, the company contributed
$303 million of additional capital to its Discontinued Operations
in the fourth quarter of 1995 in order to restore capital levels
(including risk-based capital), to appropriate levels for
regulatory and other purposes. The funding for such capital
contributions was obtained through short-term parent company
borrowings.
<PAGE> 62
Liquidity and Capital Resources (Continued)
The company has significant short-term liquidity supporting its
businesses. At year-end 1995, cash and cash equivalents
supporting continuing operations and Discontinued Operations were
$1.7 billion and $1.2 billion, respectively, and short-term
securities were $.6 billion and $.1 billion, respectively.
Given the high quality of the total debt securities portfolio
supporting continuing operations and Discontinued Operations
(please see "General Account Investments" on page 45), management
expects the vast majority of the company's investments in debt
securities to be repaid in accordance with contractual terms. In
addition, the mortgage-backed securities, treasuries and public
bonds included within the debt securities portfolio are highly
marketable and thus can be used to enhance cash flow before
maturity.
At December 31, 1995 and 1994, approximately 91% of the
outstanding principal balance of the total mortgage loan portfolio
consisted of commercial loans with balloon maturity features. 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 due to tight
lending practices by banks and other financial institutions over
the past several years. In 1995 the mortgage loan portfolio
generated $2.3 billion in cash ($346 million of which relates to
Discontinued Operations) which included $805 million of payoffs or
39% of scheduled combined maturities ($154 million of which
relates to Discontinued Operations), $732 million of prepayments
($149 million of which relates to Discontinued Operations),
$601 million of loan sales ($29 million of which relates to
Discontinued Operations) and $181 million of amortization
($14 million of which relates to Discontinued Operations).
Despite various indications that liquidity has returned to certain
real estate markets, the company expects it will continue to
extend or refinance maturing loans.
At December 31, 1995, scheduled mortgage loan principal repayments
were as follows:
<TABLE>
<CAPTION>
Continuing Discontinued
(Millions) Operations Operations
______________________________________________________________
<S> <C> <C> <C>
1996 $1,509.5 $136.5
1997 1,133.9 108.7
1998 822.9 61.5
1999 1,019.5 344.8
2000 1,282.1 250.4
Thereafter 3,155.6 225.3
</TABLE>
<PAGE> 63
Liquidity and Capital Resources (Continued)
Consolidated Cash Flows
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
___________________________________________________________________________
<S> <C> <C> <C>
Net cash provided by (used for)
operating activities:
Continuing Operations $ 647.7 $ 840.8 $ (160.2)
______________________________________
______________________________________
Discontinued Operations $ 688.7 $ (586.7) $ (1,027.0)
______________________________________
______________________________________
Net cash provided by (used for)
investing activities:
Continuing Operations $ 381.8 $ 1,416.0 $ 204.6
______________________________________
______________________________________
Discontinued Operations $ (461.4) $ 1,342.7 $ 592.1
______________________________________
______________________________________
Net cash provided by (used for)
financing activities:
Continuing Operations $ (1,596.0) $ (1,529.0) $ (382.2)
______________________________________
______________________________________
Discontinued Operations $ 250.5 $ (84.0) $ (73.0)
______________________________________
______________________________________
Cash and cash equivalents:
Continuing Operations $ 1,712.7 $ 2,277.2 $ 1,553.6
______________________________________
______________________________________
Discontinued Operations $ 1,153.6 $ 676.4 $ 4.2
______________________________________
______________________________________
</TABLE>
The company's cash flow requirements for 1995 were met by funds
provided from operations, from the maturity and sale of
investments and from financing activities.
Net cash provided by (used for) operating activities related to
continuing operations included $880 million used for net purchases
of debt trading securities in 1993.
Net cash provided by investing activities related to continuing
operations included $2,048 million, $2,359 million and
$2,617 million from net sales, including a securitization in 1995,
as well as maturities and repayments of mortgage loans and real
estate in 1995, 1994 and 1993, respectively.
Net cash used for financing activities related to continuing
operations during 1995 included a $303 million capital
contribution to Discontinued Operations. Please see "Liquidity
and Capital Resources" on page 61 for a further discussion of the
capital contribution. Net cash used for financing activities also
includes cash generated by sales of investment contracts which was
lower in 1995, 1994 and 1993 than cash paid for maturing
investment contracts and other withdrawals. In 1995, 1994 and
1993, the company paid annual dividends to shareholders of $2.76
per share (approximately $315 million in 1995). (Please see
"Parent Company Cash Flow" on page 65 and "Debt and Short-Term
Borrowing" on page 66.)
<PAGE> 64
Liquidity and Capital Resources (Continued)
Net cash provided by (used for) operating activities related to
Discontinued Operations included $1,209 million used for net
purchases of debt trading securities in 1993.
Net cash provided by (used for) investing activities related to
Discontinued Operations included $1,164 million from increases in
debt securities in 1995, $617 million from decreases in debt
securities in 1994 and $232 million from net sales, as well as
maturities and repayments of mortgage loans and real estate in
1993.
Net cash provided by (used for) financing activities related to
Discontinued Operations during 1995 included a $303 million
infusion of capital from continuing operations.
Sale of Property-Casualty Operations
The sale of the property-casualty operations to The Travelers
Insurance Group Inc. is expected to close no later than midyear
1996. The expected net proceeds of approximately $4.0 billion
from this sale are expected to be utilized primarily to support
the company's strategic initiatives.
The agreement to sell the property-casualty operations prohibits
the payment of further cash dividends from the property-casualty
businesses to the parent company, Aetna Life and Casualty Company,
although the effect of such prohibition is not expected to be
material to the company's liquidity position.
Other Factors Affecting Cash Flow
Cash flow may be influenced by general economic conditions,
including general interest rate levels, investment returns,
competition for business, and the perceived financial strength of
the company. Financial strength is significant because of
questions about insurers' asset quality and the well-publicized
insolvencies of certain insurers. Adverse changes in, among other
factors, claims-paying ratings, general economic conditions, or
overall customer confidence have the effect of decreasing new
sales and deposits and increasing withdrawals and surrenders.
Additionally, lower debt and commercial paper ratings may
adversely affect the availability and cost of certain external
funding sources.
<PAGE> 65
Liquidity and Capital Resources (Continued)
During 1995 and 1994, ratings of Aetna Life and Casualty Company
and certain of its subsidiaries were lowered by certain of the
rating agencies. Aetna's ratings at February 7, 1995 and at
February 6, 1996 follow:
<TABLE>
<CAPTION>
Rating Agencies
____________________________________________________________
Moody's Investors Standard
A.M. Best Duff & Phelps Service & Poor's
____________________________________________________________
<S> <C> <C> <C> <C>
Aetna Life and Casualty Company
(senior debt)
February 7, 1995 * A+ A2 A+
February 6, 1996 * A *** A2 A- ***
Aetna Life and Casualty Company
(commercial paper)
February 7, 1995 * D-1 P-1 A-1
February 6, 1996 * D-1 *** P-1 A-2 ***
Aetna Life Insurance Company
(claims paying)
February 7, 1995 A AA **** Aa3 A+
February 6, 1996 A AA- *** Aa3 A+ ***
Aetna Life Insurance and Annuity Company
(claims paying)
February 7, 1995 A++ AA+ Aa2 AA
February 6, 1996 A+ AA+ Aa2 AA ***
The Aetna Casualty and Surety Company
(claims paying)
February 7, 1995 A- AA- A1 A+
February 6, 1996 A- A+ A1 A
Aetna Casualty and Surety Company of America
(claims paying)
February 7, 1995 A ** ** **
February 6, 1996 A ** ** **
<FN>
* Not rated by the agency.
** Not rated on a separate company basis.
*** On rating watch-up or credit watch with positive implications.
**** On rating watch-down.
</TABLE>
Parent Company Cash Flow
Cash flow needs at the parent company level include primarily
shareholder dividends and debt service. The Board of Directors
("the Board") reviews the company's common stock dividend each
quarter. Among the factors considered by the Board are the
company's results of operations, and the capital requirements,
growth and other characteristics of its businesses. The parent
company also may fund growth or meet capital needs of the
company's businesses. Such parent company cash flow needs
historically have been met, in large part, through a combination
of borrowings and dividends from operating subsidiaries. As a
matter of course, the company monitors existing and alternative
financing sources to support the parent company's capital and
liquidity needs including, but not limited to, debt issuance,
preferred stock issuance, intercompany borrowings and pledging or
selling of assets. The sale of the property-casualty operations
is expected to generate substantial cash which will be available
for investment in one or more of the remaining businesses.
Efforts to simultaneously grow certain of the company's remaining
businesses to their full potential and meet capital requirements
of other businesses may require significant future capital.
<PAGE> 66
Liquidity and Capital Resources (Continued)
Should significant cash flow reductions occur in any of the
company's businesses, for any combination of the reasons discussed
above, the company has several alternatives for meeting its cash
requirements. These include, among other things, selling or
pledging public bond investments or other assets, borrowing among
affiliates and using external borrowing or other capital-raising
capacity.
The company has credit facilities aggregating $1 billion with a
group of worldwide banks. One $500 million facility terminates in
July 1996. Another $500 million facility terminates in July 1999.
The company intends to obtain an extension of the facility that
terminates in July 1996. (Please see Note 9 of Notes to Financial
Statements.)
The company has agreed with Travelers Group Inc. to invest up to
$200 million in a potential offering of common stock in a new
property-casualty entity to be established by Travelers Group Inc.
Minority Interest in Preferred Securities of Subsidiary
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a subsidiary
of the company, issued $275 million (11,000,000 shares) of 9 1/2%
cumulative monthly income preferred securities. ACLLC loaned the
proceeds from the preferred stock issuance to the company. The
company used the proceeds of the loan for general corporate
purposes. (Please see Note 11 of Notes to Financial Statements.)
Debt and Short-Term Borrowing
Long-term debt of continuing operations at December 31, 1995 was
approximately $1.0 billion, of which $66 million was attributable
to the company's international subsidiaries.
Pursuant to shelf registration statements declared effective by
the Securities and Exchange Commission, the company may offer and
sell up to an additional $550 million of various types of
securities, and ACLLC may offer and sell up to an additional
$225 million of preferred securities.
Short-term borrowing through commercial paper and other markets is
used to fund interim cash requirements. Funding interim cash
requirements with short-term borrowing allows funds that support
the insurance lines to remain invested at higher rates, thus
benefiting the company's earnings.
Treasury Stock
The company issued 1,994,935 shares, 457,191 shares and 1,930,085
shares of treasury stock for benefit plans in 1995, 1994 and 1993,
respectively. In 1995, 1994 and 1993, the company did not acquire
any shares of its common stock.
<PAGE> 67
Liquidity and Capital Resources (Continued)
Dividend Restrictions
Because Aetna Life and Casualty Company is a Connecticut insurance
company, the amount of dividends that it may pay to shareholders
in 1996 without prior approval by the Insurance Commissioner of
the State of Connecticut is $660 million. Dividend payments by
the domestic insurance subsidiaries to Aetna Life and Casualty
Company are subject to similar restrictions in Connecticut and
other states, and are limited in 1996 to approximately
$657 million ($217 million of which relates to Discontinued
Operations) in the aggregate.
Please see "Sale of Property-Casualty Operations" on page 64 for
additional discussions regarding dividend restrictions.
Regulatory Environment
Solvency Regulation
In recent years, state insurance regulators have been considering
changes in statutory accounting practices and other initiatives to
strengthen solvency regulation. The National Association of
Insurance Commissioners ("NAIC") has adopted risk-based capital
("RBC") standards for both life and property-casualty insurers.
The RBC formula is a regulatory tool designed to identify weakly
capitalized companies by comparing the adjusted surplus to the
required surplus, which reflects the risk profile of the company
(RBC ratio). Within certain ratio ranges, regulators have
increasing authority to take action as the RBC ratio decreases.
There are four levels of regulatory action ranging from requiring
insurers to submit a comprehensive plan (an RBC plan) to the state
insurance commissioner to when the state insurance commissioner
places the insurer under regulatory control. The RBC ratio for
each of the company's primary insurance subsidiaries as measured
at December 31, 1995 was significantly above the levels which
would require regulatory action. Rating agencies also use their
own risk-based capital standards as part of determining a
company's rating.
The NAIC also is considering several other solvency-related
regulations including risk-based capital standards for HMOs and
the development of a model investment law and amendments to the
model insurance holding company law which would limit types and
amounts of investments by insurance companies. In addition, in
recent years there has been growing interest among certain members
of Congress concerning possible federal roles in the regulation of
the insurance industry. Because these other initiatives are in a
preliminary stage, management cannot assess the potential impact
of their adoption on the company.
<PAGE> 68
Regulatory Environment (Continued)
Federal Employee Benefit Regulation
The company provides a variety of products and services to
employee benefit plans that are covered by the Employee Retirement
Income Security Act of 1974 ("ERISA").
In December 1993, in a case involving an employee benefit plan and
an insurance company, the United States Supreme Court ruled that
assets in the insurance company's general account that were
attributable to the non-guaranteed portion of a group pension
contract issued to the plan were "plan assets" for purposes of
ERISA and that the insurance company was an ERISA fiduciary with
respect to those assets. In reaching its decision, the Court
declined to follow a 1975 Department of Labor ("DOL") interpretive
bulletin that had suggested that insurance company general account
assets were not plan assets.
The company and other insurers are seeking clarification from the
DOL of the effects, if any, of the decision on their businesses,
as well as pursuing clarification of the decision through Federal
legislation. Management is not currently able to predict how the
decision, or the outcome of any legislative or regulatory
initiatives, will ultimately affect its businesses.
New Accounting Pronouncements
Please see Notes 1 and 2 of Notes to Financial Statements for a
discussion of recently issued accounting pronouncements.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 ("the Act")
provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about their
companies, so long as those statements are identified as forward-
looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The
company desires to take advantage of the "safe harbor" provisions
of the Act. Certain information contained herein, particularly
the information appearing under the heading "Outlook" contained in
the discussion of results of operations of the company's business
segments, is forward-looking. Information regarding certain
important factors that could cause actual results of operations or
outcomes of other events to differ materially from any such
forward-looking statement appear together with such statement,
and/or elsewhere herein. Information regarding additional factors
that may affect such statements appears in the company's 1995
Annual Report on Form 10-K filed with the Securities and Exchange
Commission (see Item 1-Business, including descriptions of the
company's business segments and "Other Matters - Regulation" in
the Form 10-K).
<PAGE> 69
Management's Responsibility for Financial Statements
Management is responsible for the financial statements of Aetna
Life and Casualty Company, which have been prepared in accordance
with generally accepted accounting principles. The financial
statements are the product of a number of processes that include
the gathering of financial data developed from the records of the
company's day-to-day business transactions. Informed judgments
and estimates are used for those transactions not yet complete or
for which the ultimate effects cannot be measured precisely. The
company emphasizes the selection and training of personnel who are
qualified to perform these functions. In addition, company
personnel are subject to rigorous standards of ethical conduct
that are widely communicated throughout the organization.
The company's internal controls are designed to reasonably assure
that company assets are safeguarded from unauthorized use or
disposition and that company transactions are authorized, executed
and recorded properly. Company personnel maintain and monitor
these internal controls on an ongoing basis. In addition, the
company's internal auditors review and report upon the functioning
of these controls with the right of full access to all company
personnel.
The company engages KPMG Peat Marwick LLP as independent auditors
to audit its financial statements and express their opinion
thereon. Their audits include reviews and tests of the company's
internal controls to the extent they believe necessary to
determine and conduct the audit procedures that support their
opinion. Members of that firm also have the right of full access
to each member of management in conducting their audits. The
report of KPMG Peat Marwick LLP appears on page 123.
Aetna's Board of Directors has an Audit Committee composed solely
of independent directors. The committee meets periodically with
management, the internal auditors and KPMG Peat Marwick LLP to
oversee and monitor the work of each and to inquire of each as to
their assessment of the performance of the others in their work
relating to the company's financial statements. Both the
independent and internal auditors have, at all times, the right of
full access to the Audit Committee, without management present, to
discuss any matter they believe should be brought to the attention
of the committee.
<PAGE> 70
Consolidated Statements of Income
For the years ended December 31,
<TABLE>
<CAPTION>
(Millions, except share and per share data) 1995 1994 1993
_________________________________________________________________________________________________
<S> <C> <C> <C>
Revenue:
Premiums $ 7,431.4 $ 6,901.3 $ 5,921.7
Net investment income 3,575.1 3,631.4 3,966.6
Fees and other income 1,924.3 1,741.5 1,512.6
Net realized capital gains (losses) 47.2 (55.2) (61.2)
_______________________________________________
Total revenue 12,978.0 12,219.0 11,339.7
_________________________________________________________________________________________________
Benefits and Expenses:
Current and future benefits 9,027.2 8,652.0 8,189.2
Operating expenses 3,087.5 2,805.9 2,632.8
Amortization of deferred policy
acquisition costs 137.1 133.6 101.7
Loss on discontinuance of products - - 1,270.0
Severance and facilities charge - - 160.7
_______________________________________________
Total benefits and expenses 12,251.8 11,591.5 12,354.4
_________________________________________________________________________________________________
Income (Loss) from continuing operations
before income taxes, extraordinary item
and cumulative effect adjustments 726.2 627.5 (1,014.7)
Income taxes (benefits) 252.3 218.1 (412.4)
_______________________________________________
Income (Loss) from continuing operations
before extraordinary item and
cumulative effect adjustments 473.9 409.4 (602.3)
Income (Loss) from Discontinued Operations,
net of tax (222.2) 58.1 290.3
_______________________________________________
Income (Loss) before extraordinary item
and cumulative effect adjustments 251.7 467.5 (312.0)
Extraordinary loss on debenture redemption,
net of tax - - (4.7)
Cumulative effect adjustments, net of tax - - (49.2)
_______________________________________________
Net income (loss) $ 251.7 $ 467.5 $ (365.9)
_______________________________________________
_______________________________________________
Results Per Common Share:
Income (Loss) from continuing operations
before extraordinary item and
cumulative effect adjustments $ 4.16 $ 3.63 $ (5.42)
Income (Loss) from Discontinued Operations,
net of tax (1.95) .51 2.61
_______________________________________________
Income (Loss) before extraordinary item
and cumulative effect adjustments 2.21 4.14 (2.81)
Extraordinary loss on debenture redemption,
net of tax - - (.04)
Cumulative effect adjustments, net of tax - - (.44)
_______________________________________________
Net income (loss) $ 2.21 $ 4.14 $ (3.29)
_________________________________________________________________________________________________
_______________________________________________
Weighted average common shares outstanding 113,897,633 112,848,653 111,062,954
_________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 71
Consolidated Balance Sheets
As of December 31,
<TABLE>
<CAPTION>
(Millions, except share and per share data) 1995 1994
__________________________________________________________________________________
<S> <C> <C>
Assets:
Investments:
Debt securities:
Available for sale, at fair value
(amortized cost $29,962.5 and $27,208.3) $ 31,860.3 $ 25,938.1
Held for investment, at amortized cost
(fair value $1,584.1) - 1,587.3
Equity securities, at fair value (cost $597.8
and $594.0) 659.7 614.6
Short-term investments 607.8 344.4
Mortgage loans 8,327.2 10,389.9
Real estate 1,277.3 1,283.7
Policy loans 629.4 533.8
Other 688.6 838.0
____________________________
Total investments 44,050.3 41,529.8
__________________________________________________________________________________
Cash and cash equivalents 1,712.7 2,277.2
Reinsurance recoverables and receivables 109.4 129.4
Accrued investment income 618.3 596.8
Premiums due and other receivables 971.5 593.7
Deferred federal and foreign income taxes 271.5 404.2
Deferred policy acquisition costs 1,953.1 1,691.0
Other assets 1,004.4 974.7
Separate Accounts assets 29,699.7 24,122.6
Net assets of Discontinued Operations 3,932.8 3,167.3
____________________________
Total assets $ 84,323.7 $ 75,486.7
__________________________________________________________________________________
__________________________________________________________________________________
Liabilities:
Future policy benefits $ 18,372.9 $ 17,971.5
Unpaid claims and claim expenses 1,563.1 1,389.4
Unearned premiums 142.4 179.4
Policyholders' funds left with the company 22,898.7 23,176.4
____________________________
Total insurance liabilities 42,977.1 42,716.7
Dividends payable to shareholders 79.2 77.7
Short-term debt 389.6 14.8
Long-term debt 989.1 1,079.2
Current federal and foreign income taxes 154.0 4.2
Other liabilities 2,344.2 1,642.0
Participating policyholders' interests 204.8 170.5
Separate Accounts liabilities 29,637.9 24,003.6
____________________________
Total liabilities 76,775.9 69,708.7
__________________________________________________________________________________
Minority interest in preferred securities
of subsidiary 275.0 275.0
__________________________________________________________________________________
Commitments and Contingent Liabilities
(Notes 2, 16 and 17)
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; 115,013,675 and 114,939,275 issued,
and 114,727,093 and 112,657,758 outstanding) 1,448.2 1,419.2
Net unrealized capital gains (losses) 641.1 (1,071.5)
Retained earnings 5,195.6 5,259.6
Treasury stock, at cost (286,582 and
2,281,517 shares) (12.1) (104.3)
____________________________
Total shareholders' equity 7,272.8 5,503.0
__________________________________________________________________________________
Total liabilities, minority interest and
shareholders' equity $ 84,323.7 $ 75,486.7
__________________________________________________________________________________
__________________________________________________________________________________
Shareholders' equity per common share $ 63.39 $ 48.85
__________________________________________________________________________________
__________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 72
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Net
Unrealized
Three Years Ended December 31, 1995 Common Capital Retained Treasury
(Millions, except share data) Total Stock Gains (Losses) Earnings Stock
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 $ 7,238.3 $ 1,417.7 $ 259.6 $ 5,777.9 $ (216.9)
______________________________________________________________________________________________________
Net loss (365.9) (365.9)
Net change in unrealized capital
gains and losses 388.6 388.6
Common stock issued for benefit plans
(1,930,085 shares) 86.5 86.5
Gain on issuance of treasury stock 4.3 4.3
Common stock dividends declared (308.7) (308.7)
_____________________________________________________________
Balances at December 31, 1993 7,043.1 1,422.0 648.2 5,103.3 (130.4)
______________________________________________________________________________________________________
Net income 467.5 467.5
Net change in unrealized capital
gains and losses (1,719.7) (1,719.7)
Common stock issued for benefit plans
(457,191 shares) 26.1 26.1
Loss on issuance of treasury stock (2.8) (2.8)
Common stock dividends declared (311.2) (311.2)
_____________________________________________________________
Balances at December 31, 1994 5,503.0 1,419.2 (1,071.5) 5,259.6 (104.3)
______________________________________________________________________________________________________
Net income 251.7 251.7
Net change in unrealized capital
gains and losses 1,712.6 1,712.6
Common stock issued for benefit plans
(2,069,335 shares) 97.4 5.2 92.2
Gain on issuance of treasury stock 23.8 23.8
Common stock dividends declared (315.7) (315.7)
______________________________________________________________
Balances at December 31, 1995 $ 7,272.8 $ 1,448.2 $ 641.1 $ 5,195.6 $ (12.1)
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 73
Consolidated Statements of Cash Flows
For the years ended December 31,
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
______________________________________________________________________________________________________
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 251.7 $ 467.5 $ (365.9)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Cumulative effect adjustments - - 49.2
Extraordinary loss on debenture redemption - - 4.7
Loss (Income) from Discontinued Operations 222.2 (58.1) (290.3)
Increase in accrued investment income (21.0) (25.9) (4.4)
Increase in premiums due and other
receivables (271.8) (110.9) (102.6)
Decrease in reinsurance recoverables
and receivables 21.1 255.2 49.8
Increase in deferred policy acquisition costs (267.1) (193.5) (159.0)
Depreciation and amortization 175.8 174.1 179.2
Increase (Decrease) in federal and foreign income taxes 263.0 321.9 (453.9)
Net (increase) decrease in other assets and
other liabilities (55.5) 10.3 278.5
Increase in other insurance liabilities 522.4 95.8 1,733.2
Net sales (purchases) of debt trading securities - 52.3 (880.1)
Net realized capital (gains) losses (47.2) 55.2 61.2
Amortization of net investment discounts (123.7) (141.3) (175.7)
Other, net (22.2) (61.8) (84.1)
Discontinued Operations, net 688.7 (586.7) (1,027.0)
___________________________________________
Net cash provided by (used for) operating activities 1,336.4 254.1 (1,187.2)
___________________________________________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 13,747.2 14,801.6 -
Debt securities held for investment - 5.6 -
Debt securities, prior to adoption of FAS No. 115 - - 4,093.6
Equity securities 355.9 124.2 174.4
Mortgage loans 668.4 162.1 194.4
Real estate 317.1 543.4 427.1
Short-term investments 48,763.1 51,936.7 55,569.0
Investment maturities and repayments of:
Debt securities available for sale 2,190.9 2,499.6 -
Debt securities held for investment - 573.5 -
Debt securities, prior to adoption of FAS No. 115 - - 4,457.2
Mortgage loans 1,404.2 1,960.5 2,319.0
Cost of investment purchases in:
Debt securities available for sale (16,842.1) (17,639.5) -
Debt securities held for investment - (350.3) -
Debt securities, prior to adoption of FAS No. 115 - - (10,558.2)
Equity securities (353.2) (353.7) (245.4)
Mortgage loans (244.9) (247.7) (231.8)
Real estate (96.9) (59.1) (91.4)
Short-term investments (49,024.1) (51,811.1) (55,160.9)
Increase in property and equipment (155.3) (135.9) (138.6)
Other, net (348.5) (593.9) (603.8)
Discontinued Operations, net (461.4) 1,342.7 592.1
___________________________________________
Net cash (used for) provided by investing activities (79.6) 2,758.7 796.7
___________________________________________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 2,017.1 3,063.7 3,909.5
Withdrawals of investment contracts (3,442.3) (4,609.1) (4,358.3)
Issuance of long-term debt 52.4 62.5 689.9
Repayment of long-term debt (144.6) (91.8) (483.3)
Issuance of preferred securities by subsidiary - 275.0 -
Capital contribution to Discontinued Operations (303.0) - -
Stock issued under benefit plans 121.2 23.3 90.8
Net increase (decrease) in short-term debt 375.5 (22.2) 11.7
Corporate expenses paid by Discontinued Operations 43.4 80.8 66.2
Dividends paid to shareholders (315.7) (311.2) (308.7)
Discontinued Operations, net 250.5 (84.0) (73.0)
___________________________________________
Net cash used for financing activities (1,345.5) (1,613.0) (455.2)
______________________________________________________________________________________________________
Effect of exchange rate changes on cash
and cash equivalents 1.4 (4.0) (11.5)
Net decrease (increase) in cash and cash equivalents
of Discontinued Operations (477.2) (672.2) 511.5
______________________________________________________________________________________________________
Net (decrease) increase in cash and cash equivalents (564.5) 723.6 (345.7)
Cash and cash equivalents, beginning of year 2,277.2 1,553.6 1,899.3
___________________________________________
Cash and cash equivalents, end of year $ 1,712.7 $ 2,277.2 $ 1,553.6
______________________________________________________________________________________________________
______________________________________________________________________________________________________
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE> 74
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life and Casualty Company and its subsidiaries provide
insurance and financial services, primarily in the United States.
The company's continuing business segments are Aetna Health Plans,
Aetna Life Insurance & Annuity, International and Large Case
Pensions. Aetna Health Plans markets health care and related
products and services, and other group insurance products
primarily to employers for the benefit of employees and their
dependents. Aetna Life Insurance & Annuity markets a variety of
financial services and life insurance products, including
individual and group annuities, financial and administrative
services and mutual funds to individuals, pension plans, small
businesses and employer-sponsored groups. The International
segment markets a variety of life insurance and financial services
products, primarily in non-U.S. markets. Group retirement and
other savings products (other than fully guaranteed products which
have been discontinued and are in run-off) are offered to Large
Case Pensions' customers. The Discontinued Operations include
commercial and personal property-casualty operations. The
commercial insurance operations provide most types of commercial
property-casualty insurance (primarily workers' compensation,
auto, liability and other specialty products), bonds and
insurance-related services for businesses, government units and
associations. The personal insurance operations underwrite
private-passenger auto and homeowner insurance, which is sold to
individuals through independent agents, with a significant market
in the Northeastern states. The Discontinued Operations also
include the international reinsurance business.
Principles of Consolidation
The consolidated financial statements include Aetna Life and
Casualty Company and its majority-owned subsidiaries
(collectively, the "company"). The company has agreed to sell its
property-casualty operations to The Travelers Insurance Group Inc.
("Travelers") and, accordingly, they are classified as
Discontinued Operations (please refer to Note 2). 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. Certain
reclassifications have been made to 1994 and 1993 financial
information to conform to 1995 presentation.
<PAGE> 75
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Accounting Changes
Accounting by Creditors for Impairment of a Loan
As of January 1, 1995, the company adopted Financial Accounting
Standard ("FAS") No. 114, Accounting by Creditors for Impairment
of a Loan and FAS No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures. In accordance
with these standards, a loan is considered impaired when it is
probable that the company will be unable to collect amounts due
according to the contractual terms of the loan agreement. For
impaired loans, a specific impairment reserve is established for
the difference between the recorded investment in the mortgage
loan and the fair value of the collateral. General reserves are
established for losses management believes are likely to arise
from the overall portfolio but cannot be attributed to specific
loans. Prior to the adoption of FAS Nos. 114 and 118, the company
included the reserve for estimated losses on potential problem
loans (other than those allocable to experience rated products)
which management believed were likely to become classified as
problem or restructured in the next 12 months or so in the general
reserve. Adoption of these standards had no impact on 1995 net
income.
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the company adopted FAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, which
requires the classification of debt securities into three
categories and equity securities into two categories. (Please
refer to Note 5.)
Initial adoption of this standard in 1993 resulted in a cumulative
effect charge of $.7 million ($.01 per common share), net of taxes
of $.4 million, which is reflected in the 1993 Consolidated
Statement of Income. These amounts exclude gains and losses
allocable to discontinued products and experience rated
contractholders. Adoption of FAS No. 115 did not have a material
effect on deferred policy acquisition costs.
Accounting for Postemployment Benefits
In 1993, the company adopted, retroactive to January 1, 1993, FAS
No. 112, Employers' Accounting for Postemployment Benefits, which
requires that employers accrue the cost and recognize the
liability for providing certain benefits (primarily long-term
disability) to former or inactive employees after employment but
before retirement. A cumulative effect charge of $48.5 million
($.44 per common share), net of taxes of $26.1 million, related to
the adoption of this standard is reflected in the 1993
Consolidated Statement of Income. Adoption of FAS No. 112 had no
impact on the 1993 loss from continuing operations before
extraordinary item and cumulative effect adjustments.
<PAGE> 76
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards
Accounting for The Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of
In March 1995, the Financial Accounting Standards Board ("FASB")
issued FAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. This
statement requires write down to fair value when long-lived assets
to be held and used are impaired. The statement also requires
long-lived assets to be disposed of (e.g., real estate held for
sale) to be carried at the lower of cost or fair value less
estimated selling costs and does not allow such assets to be
depreciated. The company will adopt this statement in 1996 and
the impact on earnings is not expected to be material.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued FAS No. 123, Accounting for
Stock-Based Compensation. This statement addressed the accounting
for the cost of stock-based compensation, such as stock options.
FAS No. 123 permits either expensing the cost of stock-based
compensation over the vesting period or disclosing in the
financial statement footnotes what this expense would have been.
This cost would be measured at the grant date based upon estimated
fair values, using option pricing models. The company expects to
adopt the disclosure alternative of this statement in 1996.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market
instruments and other debt issues with a maturity of 90 days or
less when purchased.
Investments
Debt securities which may be sold prior to maturity are classified
as available for sale and carried at fair value. Available for
sale debt securities are written down (as realized losses) for
other than temporary declines in value. Unrealized gains and
losses related to available for sale investments, after deducting
amounts allocable to experience rated contractholders,
discontinued products and related taxes, are reflected in
shareholders' equity.
Debt securities which the company has the positive intent and
ability to hold to maturity are classified as held for investment
and are carried at amortized cost, net of write-downs for other
than temporary declines in value. The company had no held for
investment securities at December 31, 1995.
<PAGE> 77
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
In December 1995, in accordance with guidance published by the
FASB, the company reassessed the classifications of all debt
securities. As a result of this review, debt securities with an
amortized cost of $1,859.7 million (fair value of $1,896.3
million) were reclassified from the held for investment category
to the available for sale category.
Debt securities which are held with the objective of trading to
generate profits on short-term differences in price ("trading
securities") are carried at fair value. Changes in fair value
related to the trading portfolio are reflected in net realized
capital gains or losses in the Consolidated Statements of Income.
The company had no trading securities at December 31, 1995 or
1994.
Equity securities are classified as available for sale and carried
at fair value. Equity securities are written down (as realized
losses) for other than temporary declines in value. Unrealized
gains and losses related to such securities, after deducting
amounts allocable to experience rated contractholders and net of
related taxes, are reflected in shareholders' equity.
Fair values for debt and equity securities are based on quoted
market prices or dealer quotations. Where quoted market prices or
dealer quotations are not available, fair values are measured
utilizing quoted market prices for similar securities or by using
discounted cash flow methods. Cost for mortgage-backed securities
is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining
term of the securities, adjusted for anticipated prepayments.
Purchases and sales of debt and equity securities are recorded on
the trade date. Purchases and sales of mortgage loans are
recorded on the closing date.
Mortgage loans and policy loans are carried at unpaid principal
balances, net of impairment reserves, and are generally secured. A
mortgage loan is considered impaired when it is probable that the
company will be unable to collect amounts due according to the
contractual terms of the loan agreement. For impaired loans, a
specific impairment reserve is established for the difference
between the recorded investment in the mortgage loan and the fair
value of the collateral. A general reserve is established for
losses management believes are likely to arise from the overall
portfolio but cannot be attributed to specific loans.
Investment real estate, which the company has the intent to hold
for the production of income, is carried at depreciated cost
including capital additions net of write-downs for other than
temporary declines in fair value. Properties held for sale
(primarily acquired through foreclosure) are carried at the lower
of depreciated cost (fair value at foreclosure plus capital
additions less accumulated depreciation) or fair value less
estimated selling costs. Adjustments to the carrying value of
properties held for sale are recorded in a valuation reserve when
the fair value less estimated selling costs is below depreciated
cost.
<PAGE> 78
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
Short-term investments, consisting primarily of money market
instruments and other debt issues purchased with a maturity of
91 days to one year, are considered available for sale and are
carried at fair value, which approximates amortized cost.
Other invested assets consist primarily of partnerships, equity
subsidiaries and agency loans. Partnerships and equity
subsidiaries are carried on an equity basis, and agency loans are
carried at the unpaid principal balance.
The company utilizes foreign exchange forward contracts, futures
contracts and swap agreements for other than trading purposes in
order to manage investment returns and to align maturities,
interest rates, currency rates and funds availability with its
obligations. (Please refer to Note 16.)
Foreign exchange forward contracts which are designated at
inception and are effective as hedges of foreign translation
exposures and foreign transaction exposures related to investments
classified as available for sale are accounted for using the
deferral method. Under the deferral method, realized and
unrealized gains and losses from these forward contracts are
deferred on the Consolidated Balance Sheets, net of tax, in net
unrealized capital gains or losses. Upon disposal of the hedged
item, deferred gains and losses are recognized in net realized
capital gains or losses in the Consolidated Statements of Income.
Excess realized or unrealized gain or loss, if any, from the
foreign exchange forward contract compared to the foreign
investment being hedged, is reported as a net realized gain or
loss in the Consolidated Statements of Income.
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that
qualify as hedges are deferred and recognized as an adjustment to
the hedged asset or liability. Deferred gains or losses on such
futures contracts are amortized over the life of the acquired
asset or liability as a yield adjustment or through realized
capital gains or losses upon disposal of an asset. Changes in the
fair value of futures contracts that do not qualify as hedges are
reflected in net realized capital gains or losses in the
Consolidated Statements of Income. Hedge designation requires
specific asset or liability identification and at inception, a
probability of high correlation between the hedge instrument and
the position that underlies the hedge. The company's policy
requires that high correlation be maintained. If a hedging
instrument ceases to be highly correlated with the position
underlying the hedge, excess gains and losses on the hedging
instrument would be reflected in net realized capital gains or
losses in the Consolidated Statements of Income.
Swap agreements which are designated as interest rate or foreign
exchange rate risk management instruments at inception are
accounted for using the accrual method. Under the accrual method,
the difference between amounts paid and received on such
agreements is reported in net investment income in the
Consolidated Statements of Income; there is no recognition in the
Consolidated Balance Sheets for changes in the fair value of the
agreement.
<PAGE> 79
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These
costs, all of which vary with and are primarily related to the
production of new and renewal business, consist principally of
commissions, certain expenses of underwriting and issuing
contracts, and certain agency expenses. For fixed ordinary life
and annuity contracts, such costs are amortized over expected
premium-paying periods. For universal life and certain annuity
and pension contracts, such costs are amortized in proportion to
estimated gross profits and adjusted to reflect actual gross
profits. These costs are amortized over 20 years for annuity and
pension contracts, and over the contract period for universal life
type contracts. For all other lines of business, acquisition
costs are amortized over the life of the insurance contract.
Deferred policy acquisition costs would be written off to the
extent that it is determined that future policy premiums and
investment income or gross profits would not be adequate to cover
related losses and expenses.
Other Assets
Property and equipment are reported at depreciated cost using the
straight-line method based upon the estimated useful lives of the
assets. The carrying value of property and equipment for
continuing operations at December 31, 1995 and 1994 was
$644.3 million and $645.4 million, respectively, and was net of
accumulated depreciation of $823.8 million and $765.0 million,
respectively.
Goodwill, which represents the excess of cost over the fair value
of net assets of acquired subsidiaries and affiliates, is
amortized on a straight-line basis over periods not exceeding 40
years. Total unamortized goodwill, which is included in other
assets for continuing operations, was $147.3 million and
$148.8 million at December 31, 1995 and 1994, respectively.
Separate Accounts
Separate Accounts assets and liabilities generally represent funds
maintained in accounts to meet specific investment objectives of
contractholders who bear the investment risk, subject to minimum
guaranteed rates for certain contractholders. Investment income
and investment gains and losses generally accrue directly to such
contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any
other business of the company. The assets and liabilities are
carried at market value. Deposits, net investment income and
realized and unrealized capital gains and losses on Separate
Accounts assets are not reflected in the Consolidated Statements
of Income. Management fees charged to contractholders are
included in fees and other income.
<PAGE> 80
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Insurance Liabilities
Future policy benefits include reserves for universal life,
limited payment and traditional life insurance contracts.
Reserves for universal life contracts are equal to cumulative
premiums less charges plus credited interest thereon. Reserves
for limited payment and traditional life insurance contracts are
computed on the basis of assumed investment yield, mortality,
morbidity and expenses, including a margin for adverse deviation,
which generally vary by plan, year of issue and policy duration.
Reserve interest rates range from 2.25% to 11.50%. Investment
yield is based on the company's experience. Mortality, morbidity
and withdrawal rate assumptions are based on the experience of the
company and are periodically reviewed against both industry
standards and experience. Policyholders' funds left with the
company includes reserves for pension and annuity investment
contracts. Reserves on such contracts are equal to cumulative
deposits less charges plus credited interest thereon (rates range
from 2.50% to 17.80%) net of adjustments for investment experience
that the company is entitled to reflect in future credited
interest. Reserves on contracts subject to experience rating
reflect the rights of contractholders, plan participants and the
company.
Reserves for group health products (included in unpaid claims and
claim adjustment expenses) reflect estimates, derived from past
experience, of the ultimate cost of incurred claims including
claims that have been incurred but not reported, and claims that
have been reported, but not settled.
Revenue Recognition
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 in the Consolidated Statements of 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, specialty health and insurance premiums are
generally recorded as premium revenue over the term of the
coverage. Some group contracts allow for premiums to be adjusted
to reflect emerging experience. Such premiums are recognized as
the related experience emerges. Fees for contracts providing
claim processing or other administrative services are recorded
over the period the service is provided and are reflected in fees
and other income.
<PAGE> 81
Notes of Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Federal and Foreign Income Taxes
The company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain
items. The company files a consolidated federal income tax
return. The Internal Revenue Code limits the amount of non-life
insurance company losses that may offset life insurance company
taxable income. Foreign subsidiaries and U.S. subsidiaries
operating outside of the United States are taxed under applicable
foreign statutes. Deferred income tax expenses/benefits result
from changes during the year in cumulative temporary differences
between the tax basis and book basis of assets and liabilities and
non-life net operating losses.
Earnings Per Share
Earnings per common share are computed using net income divided by
the weighted average number of common shares outstanding,
including common share equivalents. There is no difference between
primary and fully diluted earnings per share.
Reinsurance
The continuing operations of the company utilize reinsurance
agreements to reduce exposure to large losses in all aspects of
its insurance business. Reinsurance permits recovery of a portion
of losses from reinsurers, although it does not discharge the
primary liability of the company as direct insurer of the risks
reinsured. The company evaluates the financial strength of
potential reinsurers and continually monitors the financial
condition of present reinsurers. Only those reinsurance
recoverables deemed probable of recovery are reflected as assets
on the company's Consolidated Balance Sheets.
2. Sales of Subsidiaries
Property-Casualty Subsidiaries
The company entered into a definitive agreement, dated
November 28, 1995, to sell The Aetna Casualty and Surety Company
and The Standard Fire Insurance Company and their subsidiaries
(collectively, the "P&C companies"), to Travelers. The sale is
subject to state regulatory approval and other customary
conditions and is expected to be completed no later than midyear
1996. The operating results of the Property-Casualty Operations
are presented as Discontinued Operations. The company also
intends to sell its subsidiary, Aetna Re-Insurance Company (U.K.)
Ltd., and, accordingly, the operating results of this subsidiary
are included in Discontinued Operations. Results of the
Discontinued Operations will be included in the company's
consolidated results of operations until the closing. While such
results will not adjust the purchase price, income or loss from
such operations will decrease or increase, respectively, the gain
expected to be recognized on the sale. All prior year financial
data has been restated to reflect the presentation as Discontinued
Operations.
<PAGE> 82
Notes of Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Property-Casualty Subsidiaries (Continued)
Results of Discontinued Operations for the years ended December 31,
were:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
______________________________________________________________________________________________
<S> <C> <C> <C>
Revenue:
Premiums $4,118.9 $4,390.8 $4,653.2
Net investment income 901.7 832.1 952.4
Fees and other income 82.0 115.6 144.3
Net realized capital gains 155.6 .4 178.0
____________________________________________
Total revenue 5,258.2 5,338.9 5,927.9
______________________________________________________________________________________________
Claims and Expenses:
Claims and claim adjustment expenses 4,232.5 3,746.8 4,214.7
Operating expenses 787.3 914.1 1,025.4
Amortization of deferred policy
acquisition costs 622.7 647.2 646.2
Severance and facilities charge - - 147.3
____________________________________________
Total claims and expenses 5,642.5 5,308.1 6,033.6
______________________________________________________________________________________________
Income (Loss) before income tax benefits and
cumulative effect adjustments (384.3) 30.8 (105.7)
Income tax benefits (162.1) (27.3) (119.7)
____________________________________________
Income (Loss) before cumulative
effect adjustments (222.2) 58.1 14.0
Cumulative effect adjustments, net of tax - - 276.3
____________________________________________
Net income (loss) $ (222.2) $ 58.1 $ 290.3
____________________________________________
____________________________________________
Pro forma net income (loss) assuming the
discounting of workers' compensation life table
indemnity reserves is applied retroactively $ (222.2) $ 58.1 $ 40.3
____________________________________________
____________________________________________
Pro forma net income (loss) assuming the
accounting for retrospectively rated
reinsurance contracts is applied retroactively $ (222.2) $ 58.1 $ 264.0
______________________________________________________________________________________________
____________________________________________
</TABLE>
<PAGE> 83
Notes of Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
The Balance Sheets of the Discontinued Operations at December 31,
were:
<TABLE>
<CAPTION>
(Millions) 1995 1994
_________________________________________________________________________________
<S> <C> <C>
Assets:
Investments:
Debt securities:
Available for sale, at fair value
(amortized cost $11,293.8 and $9,775.9) $11,705.6 $ 9,172.6
Held for investment, at amortized cost
(1994 fair value, $407.1) - 413.5
Equity securities, at fair value
(cost $313.8 and $802.5) 525.5 1,041.0
Short-term investments 137.2 106.0
Mortgage loans 1,061.7 1,453.7
Real estate 264.7 262.0
Other 291.8 314.7
___________________________
Total investments 13,986.5 12,763.5
_________________________________________________________________________________
Cash and cash equivalents 1,153.6 676.4
Reinsurance recoverables and receivables 5,144.0 4,881.6
Accrued investment income 188.3 180.4
Premiums due and other receivables 1,057.4 1,129.2
Federal and foreign income taxes:
Current 13.6 22.5
Deferred 642.3 862.5
Deferred policy acquisition costs 305.8 316.0
Other assets 1,010.9 1,017.5
___________________________
Total assets $23,502.4 $21,849.6
_________________________________________________________________________________
_________________________________________________________________________________
Liabilities:
Unpaid claims and claim expenses $16,569.3 $16,088.9
Unearned premiums 1,400.3 1,425.5
Policyholders' funds left with the companies 39.1 46.7
___________________________
Total insurance liabilities 18,008.7 17,561.1
Short-term debt - 9.1
Long-term debt 35.2 35.5
Other liabilities 1,525.7 1,076.6
___________________________
Total liabilities 19,569.6 18,682.3
_________________________________________________________________________________
Total shareholder's equity (including
net unrealized capital gains (losses) of
$303.1 and $(381.3)) 3,932.8 3,167.3
_________________________________________________________________________________
Total liabilities and shareholder's equity $23,502.4 $21,849.6
_________________________________________________________________________________
_________________________________________________________________________________
</TABLE>
<PAGE> 84
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
In addition to the applicable accounting policies of the
continuing operations of the company (please refer to Note 1),
Discontinued Operations have the following accounting policies:
Discounting of Workers' Compensation Life Table Indemnity Reserves
In 1993, the company elected to change, retroactive to January 1,
1993, the 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. A
cumulative effect benefit of $250.0 million ($2.25 per common
share), net of taxes of $134.7 million, was reported in income
from Discontinued Operations in the 1993 Consolidated Statement of
Income. The effect of the change for the year ended December 31,
1993 was an increase to results from Discontinued Operations
before cumulative effect adjustments of $78.0 million ($.70 per
common share), net of taxes of $42.0 million.
Accounting for Retrospectively Rated Reinsurance Contracts
In 1993, the company changed its method of accounting for
retrospectively rated reinsurance contracts to conform to the
consensus reached by the Emerging Issues Task Force of the FASB.
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.
The company reported a cumulative effect benefit related to this
accounting change of $26.3 million ($.24 per common share), net of
taxes of $8.6 million, in income from Discontinued Operations in
the 1993 Consolidated Statement of Income. The effect of the
change for the year ended December 31, 1993 was an increase to
results from Discontinued Operations before extraordinary item and
cumulative effect adjustments of $3.3 million ($.03 per common
share), net of taxes of $1.8 million.
Insurance Liabilities
Liabilities for unpaid property-casualty claims and claim
adjustment expenses include, to the extent reasonably estimable,
provisions for payments to be made on reported claims, and claims
incurred but not reported and for associated claim adjustment
expenses (see Environmental and Asbestos-Related Claims).
Workers' compensation life table indemnity reserves are discounted
at 5% for voluntary business and 3.5% for involuntary business.
Workers' compensation life table indemnity reserves, net of the
related discount, totaled $863 million and $821 million at
December 31, 1995 and 1994, respectively, which were 26% and 24%
of the P&C companies' total workers' compensation reserves for
unpaid claims and claim adjustment expenses at December 31, 1995
and 1994, respectively. Certain other reserves with fixed or
reasonably determinable payment patterns over periods of up to
seven years, including reserves related to certain environmental
and asbestos-related claim settlements, also have been discounted.
The rates used in discounting such reserves range from 4% to 7%,
and the amount of such discounted reserves, net of reinsurance,
was approximately $190 million at December 31, 1995.
<PAGE> 85
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Insurance Liabilities (Continued)
The P&C companies' insurance reserve liabilities are reported net
of estimated amounts of salvage and subrogation.
Revenue Recognition
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.
Claims and expenses, including acquisition costs such as
commissions, certain premium taxes and certain other items, are
charged to current operations as incurred. Claims are reported
net of salvage and subrogation received and anticipated.
Premiums, claims and expenses are also reported net of deductions
for reinsurance ceded.
Reinsurance
Prepaid reinsurance premiums were $.4 billion for the year ended
December 31, 1995 and $.3 billion for both the years ended
December 31, 1994 and 1993. A summary of earned premiums for the
years ended December 31 was as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_________________________________________________________________________________
<S> <C> <C> <C>
Direct Amount $ 5,007.6 $ 5,094.8 $ 5,477.8
Ceded to Other Companies 1,307.0 1,206.0 1,232.6
Assumed from Other Companies 418.3 502.0 408.0
_________________________________________
Net Amount $ 4,118.9 $ 4,390.8 $ 4,653.2
_________________________________________________________________________________
</TABLE>
There is not a material difference in premiums on a written versus
an earned basis.
Ceded claims and claim adjustment expenses were $.9 billion for
the year ended December 31, 1995 and $1.2 billion for both the
years ended December 31, 1994 and 1993.
Certain subsidiaries of the P&C companies act as servicing
carriers for several involuntary pools. This business is ceded
completely to the pools, and the P&C companies have no direct
underwriting risk associated with it. Reinsurance recoverables
for this business were approximately $1.7 billion and $1.8 billion
as of December 31, 1995 and 1994, respectively. The P&C companies
also participate as members in a number of the involuntary pools,
and as a result assume their share of premiums and losses
associated with these pools.
<PAGE> 86
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Reinsurance (Continued)
The P&C companies also utilize a variety of reinsurance
agreements, primarily with nonaffiliated insurers, to control
their exposure to large property-casualty losses. These
agreements, most of which are renegotiated annually as to
coverage, limits and price, are structured either on a treaty
basis (where all risks meeting prescribed criteria are
automatically covered) or on a facultative basis (where the
circumstances of specific individual insurance risks are
reflected). The amount of risk retained by the P&C companies
depends on the underwriter's evaluation of the specific risk,
subject to maximum limits based on risk characteristics and the
type of coverage. The principal catastrophe reinsurance agreement
currently in force covers approximately 90% of specified property
losses between $150 million and $325 million. The P&C companies
also have in place an aggregate excess of loss arrangement with
respect to all of its property-casualty lines for accident year
1995, providing up to approximately $250 million of additional net
protection.
Reserves
The following represents changes in aggregate reserves for the P&C
companies:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
___________________________________________________________________________________________
<S> <C> <C> <C>
Net unpaid claims and claim adjustment expenses
at beginning of year $ 11,144 $ 11,412 $ 11,733
Incurred claims and claim adjustment expenses:
Provision for insured events of the
current year 3,099 3,488 3,536
Increases in provision for insured
events of prior years 1,134 (1) 259 65 (2)
___________________________________________________________________________________________
Total incurred claims and claim adjustment expenses 4,233 3,747 3,601
___________________________________________________________________________________________
Payments: Claims and claim adjustment expenses
attributable to insured events of
the current year 1,092 1,240 1,039
Claims and claim adjustment expenses
attributable to insured events of
prior years 2,540 2,775 2,883
___________________________________________________________________________________________
Total payments 3,632 4,015 3,922
___________________________________________________________________________________________
Net unpaid claims and claim adjustment expenses
at end of the year 11,745 11,144 11,412
Plus: Reinsurance recoverables 4,412 4,593 4,394
Deductible amounts recoverable
from policyholders 412 352 -
___________________________________________________________________________________________
Gross unpaid claims and claim adjustment expenses
at end of the year $ 16,569 $ 16,089 $ 15,806
___________________________________________________________________________________________
___________________________________
<FN>
(1) Includes increases in provision for insured events of prior years of $399 million
related to asbestos-related claims and $778 million related to environmental-
related claims.
(2) Includes increases in provision for insured events of prior years of $679 million,
offset by the cumulative effect adjustment related to the change in accounting to
report workers' compensation life table indemnity claims on a discounted basis of
$(514) million and the current year effect of this change in accounting of
$(100) million related to the provision for insured events of prior years.
</TABLE>
<PAGE> 87
Notes to Combined Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Environmental and Asbestos-Related Claims
The P&C companies added $778 million ($505.7 million, after tax)
to environmental-related claims reserves in 1995. In the opinion
of management, the P&C companies' reserves for environmental-
related claims at December 31, 1995 represent the company's best
estimate of the P&C companies' ultimate environmental-related
liability, based on currently known facts, current law (including
Superfund), current technology, and assumptions considered
reasonable where facts are not known. Due to the significant
uncertainties and related management judgment involved in
estimating the P&C companies' environmental liability, no
assurances can be given that the environmental reserve represents
the amount that will ultimately be paid by the P&C companies for
all environmental-related losses. The amount ultimately paid
could differ materially from the P&C companies' currently recorded
reserve as legal and factual issues are clarified, but any
difference cannot be reasonably estimated at this time.
As a result of this addition to the environmental-related claims
reserves, the company contributed $303 million of additional
capital to the P&C companies in the fourth quarter of 1995 in
order to restore capital levels (including risk-based capital), to
appropriate levels for regulatory and other purposes. The funding
for such capital contribution was obtained through short-term
parent company borrowings.
In conjunction with the reserve addition for environmental-related
claims, the P&C companies purchased reinsurance which provided
aggregate protection of $335 million for the adverse loss
development beyond reserves held (net of existing reinsurance).
Under this arrangement, approximately $165 million of the existing
reserves for such losses were ceded at the time the contract was
entered into. As a result of the asbestos-related reserve addition
(see below) and other reserve developments, substantially all of
the available statutory surplus protection was utilized during
1995. There was an immaterial benefit to results of Discontinued
Operations under this arrangement.
<PAGE> 88
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Environmental and Asbestos-Related Claims (Continued)
In 1995, the P&C companies settled a case involving a policyholder
(a major producer of asbestos and asbestos products) that had
exhausted applicable policy limits on asbestos products claims and
asserted coverage under policy provisions for other types of
liability. The P&C companies obtained a release from the insured
for all current and future asbestos bodily injury claims and
certain asbestos property damage claims (along with all
environmental claims) under existing policies in exchange for
fixed, scheduled cash payments, which were recorded on a
discounted basis. In connection with this settlement,
$120 million of property-casualty reserves not previously
classified as covering asbestos-related claims were transferred to
asbestos reserves. No amounts were transferred from environmental
reserves, and the environmental-related portion of the settlement
was covered by existing environmental reserves. As a result, this
settlement did not affect 1995 results of operations. As part of
the settlement, the companies also agreed, among other things, to
make insurance coverage available to the insured in the year 2000
(on a one-time basis), for a percentage of all asbestos defense
and indemnity claim payments made by the insured during the years
2000 through 2007. The P&C companies' payment obligations would
be subject to annual dollar caps. Given the uncertainty as to
whether the insured will elect to purchase this additional
insurance, no related premiums or losses have been recorded by the
P&C companies at this time.
Reserving for asbestos-related claims is subject to significant
uncertainties and management is currently unable to make a
reasonable estimate as to the ultimate amount of losses or a
reasonable range of losses for all asbestos-related claims and
related litigation expenses. Management has continued to evaluate
reserves for asbestos liabilities as the company continued to
gather and analyze new information and reassess its reserving
techniques for these claims in order to determine whether it can
better estimate its liability. In connection with such
evaluation, the company added $335 million ($218 million, after
tax) to asbestos-related claims reserves in the fourth quarter of
1995. While the company expects to recover some of its asbestos
losses from its reinsurers, due to the uncertainty in estimating
amounts to be recovered, no reinsurance benefits were recorded in
establishing this addition to reserves. Further adjustments may
be made to such reserves as loss patterns develop and other
information is obtained, and the amount ultimately paid for such
claims could differ materially from reserves, although any
difference cannot be reasonably estimated at this time.
<PAGE> 89
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Environmental and Asbestos-Related Claims (Continued)
Environmental and asbestos-related loss and loss adjustment
expense reserves, as reflected on the Balance Sheets at
December 31, were as follows (before reinsurance and net of
discounts on certain environmental and asbestos settlements):
<TABLE>
<CAPTION>
(Millions) 1995 1994
______________________________________________________________
<S> <C> <C>
Environmental Liability $ 1,005.9 $ 436.1
Asbestos Bodily Injury* 754.3 295.9
Asbestos Property Damage* 22.3 29.9
_____________________
Total Environmental and
Asbestos-Related Reserves $ 1,782.5 $ 761.9
_____________________________________________________________
______________________
</TABLE>
[FN]
*Includes $107.4 million and $12.6 million of reserves transferred to asbestos
bodily injury and asbestos property damage reserves, respectively, in
1995.
Workers' Compensation Claims
Estimating workers' compensation reserves is particularly
difficult (and, therefore, more subject to change than many other
types of property-casualty claims), largely because of the length
of the "tail" associated with workers' compensation claims.
Workers' compensation claim costs are dependent on a number of
complex factors including social and economic trends and changes
in doctrines of legal liability and damage awards. Adjustments
may be made to such reserves as loss patterns develop and other
information is obtained.
Other
Policyholders of the P&C companies also seek insurance coverage
from the P&C companies for other long-term exposure claims against
them, including claims relating to silicone-based personal
products, lead paint and other allegedly toxic or harmful
substances. Evaluating and reserving for these types of exposures
is complex and subject to many uncertainties including those
stemming from coverage issues, long latency periods and changing
or expanding laws and legal theories of liability. Adjustments
will be made to such reserves as loss patterns develop and new
information becomes available, and such adjustments may be
material to Discontinued Operations.
Sale of American Re-Insurance Company
On September 30, 1992, Aetna Casualty and Surety Company ("AC&S")
completed the sale of American Re-Insurance Company ("Am Re"),
formerly a wholly owned subsidiary. As part of the sale, AC&S
received 70,000 shares of American Re Corporation's (the new
holding company) Preferred Stock, which were redeemed in 1993
resulting in an after-tax gain of $27.0 million.
<PAGE> 90
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Sale of American Re-Insurance Company (Continued)
In connection with the 1992 sale of Am Re, Am Re and AC&S entered
into a reinsurance agreement which provides that to the extent Am
Re incurred losses in 1991 and prior that were still outstanding
at January 1, 1992 in excess of $2.7 billion, AC&S has an 80%
participation in payments on those losses up to a maximum payment
by AC&S of $500 million. In 1995, Am Re increased reserves for
asbestos, environmental and other latent liabilities. As a result
of this increase, losses of approximately $228 million
($120 million after discount), which were largely workers'
compensation life table indemnity claims, were ceded to AC&S.
There was no material impact on 1995 earnings as AC&S had
previously established reserves. It is reasonably possible that
additional undiscounted losses of up to approximately $270 million
pretax could be ceded to the company in the future.
Financial Guarantees
The company no longer writes municipal bond insurance, and such
business previously written by the company was reinsured with
another company. It is not practicable to estimate the fair value
of the business that has been ceded.
AC&S was a writer of financial guarantees on obligations secured
by real estate, corporate debt obligations, and of municipal and
nonmunicipal tax-exempt entities through December 31, 1987, and
ceased writing such guarantees as of January 1, 1988. The
aggregate net par value of financial guarantees outstanding at
December 31, 1995 and 1994 was $656.4 million and $728.3 million,
respectively. Future runoff of financial guarantees as of
December 31, 1995, after adjusting for extensions granted on
certain guarantees, is estimated to be $31.9 million for 1996,
$135.4 million for 1997, $276.7 million for 1998, $3.8 million for
1999, $7.4 million for 2000 and $201.2 million thereafter. It is
not practicable to estimate a fair value for AC&S' financial
guarantees because AC&S no longer writes such guarantees, there is
no quoted market price for such contracts, and it is not
practicable to reliably estimate the timing and amount of all
future cash flows due to the unique nature of each of these
contracts.
Total reserves for the financial guarantee business, which include
reserves for defaults, probable losses not yet identified and
unearned premiums, were $40.5 million and $47.7 million at
December 31, 1995 and 1994, respectively. Premium income received
from such guarantees is recognized pro rata over the contract
coverage period.
<PAGE> 91
Notes to Financial Statements (Continued)
2. Sales of Subsidiaries (Continued)
Structured Settlements
The P&C companies had contingent liabilities in the amount of
$1,189.3 million and $1,097.2 million for structured settlements
at December 31, 1995 and 1994, respectively. Included in such
liabilities is $352.4 million and $280.0 million of structured
settlements purchased from affiliates, consisting of
$177.2 million and $153.4 million from Aetna Life Insurance
Company at December 31, 1995 and 1994, respectively, and
$175.2 million and $126.6 million from Aetna Life Insurance and
Annuity Company at December 31, 1995 and 1994, respectively.
Structured settlements, net of the affiliate amounts, are
reflected in reinsurance recoverables on the Discontinued
Operations' Balance Sheets.
Litigation
The P&C companies are continuously involved in numerous lawsuits
arising, for the most part, in the ordinary course of their
business operations either as liability insurers defending third-
party claims brought against their insureds or as insurers
defending coverage claims brought against them, including lawsuits
related to issues of policy coverage and judicial interpretation.
One such area of coverage litigation involves legal liability for
environmental and asbestos-related claims. These lawsuits and
other factors make reserving for these claims subject to
significant uncertainties.
While the ultimate outcome of such litigation cannot be determined
at this time, such litigation, net of reserves established
therefor and giving effect to reinsurance probable of recovery, is
not expected to result in judgments for amounts material to the
financial condition of the P&C companies, although it may
adversely affect results of operations in future periods.
Other Subsidiaries
On June 30, 1993, the company completed the sale of its U.K. life
and investment management operations. The company realized a
continuing operations after-tax capital 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.
<PAGE> 92
Notes to Financial Statements (Continued)
3. Discontinued Products
Results of discontinued fully guaranteed large case pension
products (guaranteed investment contracts ("GICs") and single-
premium annuities ("SPAs")) for the years ended December 31, 1995
and 1994 were charged to the reserve for anticipated future losses
and did not affect the company's results of operations. Assets
supporting the discontinued products are distinguished from other
continuing operation assets. Future losses (including capital
losses) for each product will be charged to the respective reserve
at the time such losses are realized. Management believes the
reserve for anticipated losses at December 31, 1995 is adequate to
provide for future losses associated with these products. To the
extent that actual future losses differ from anticipated future
losses or future projected cash flows are revised, the company's
results of operations would be affected.
Results of discontinued products were as follows (pretax):
<TABLE>
<CAPTION>
Guaranteed Single- Charged to
Investment Premium Reserve for
(Millions) Contracts Annuities Total Future Losses Net(1)
____________________________________________________________________________________________________________
1995
<S> <C> <C> <C> <C> <C>
Net investment income $ 515.4 $ 447.5 $ 962.9 $ - $ 962.9
Net realized capital gains (losses) (56.4) 49.3 (7.1) 7.1 -
Interest earned on receivable from
continuing business 20.3 30.5 50.8 - 50.8
Other income 8.8 11.9 20.7 - 20.7
_______________________________________________________________________
Total revenue 488.1 539.2 1,027.3 7.1 1,034.4
_______________________________________________________________________
Current and future benefits (2) 609.4 443.7 1,053.1 (31.1) 1,022.0
Operating expenses 2.9 9.5 12.4 - 12.4
_______________________________________________________________________
Total benefits and expenses 612.3 453.2 1,065.5 (31.1) 1,034.4
_______________________________________________________________________
Results of discontinued products $ (124.2) $ 86.0 $ (38.2) $ 38.2 $ -
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
1994
Premiums $ - $ 57.3 $ 57.3 $ - $ 57.3
Net investment income 633.1 433.0 1,066.1 - 1,066.1
Net realized capital losses (150.2) (58.8) (209.0) 209.0 -
Interest earned on receivable from
continuing business 19.4 28.1 47.5 - 47.5
Other income 14.9 16.2 31.1 - 31.1
_______________________________________________________________________
Total revenue 517.2 475.8 993.0 209.0 1,202.0
_______________________________________________________________________
Current and future benefits 765.5 491.4 1,256.9 (64.0) 1,192.9
Operating expenses 6.1 3.0 9.1 - 9.1
_______________________________________________________________________
Total benefits and expenses 771.6 494.4 1,266.0 (64.0) 1,202.0
_______________________________________________________________________
Results of discontinued products $ (254.4) $ (18.6) $ (273.0) $ 273.0 $ -
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
<FN>
(1) Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of
$50.8 million and $47.5 million, respectively, earned on the receivable from continuing business
which is eliminated in consolidation.
(2) Current and future benefits include losses of $50 million (pretax) due to early retirement of GICs.
</TABLE>
Deposits of $31.5 million and $212.3 million were received during
1995 and 1994, respectively, under preexisting GICs.
<PAGE> 93
Notes to Financial Statements (Continued)
3. Discontinued Products (Continued)
Assets and liabilities of discontinued products were as follows (1):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
_______________________________________________________________________________
Guaranteed Single- Guaranteed Single-
Investment Premium Investment Premium
(Millions) Contracts Annuities Total Contracts Annuities Total
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Debt securities
available for sale $ 2,120.3 $ 3,644.9 $ 5,765.2 $ 2,978.5 $ 3,176.5 $ 6,155.0
Mortgage loans 1,883.0 1,505.6 3,388.6 2,749.6 1,545.3 4,294.9
Real estate 457.3 177.7 635.0 555.0 175.0 730.0
Short-term and other
investments 425.3 110.5 535.8 587.4 138.0 725.4
______________________________________________________________________________
Total investments 4,885.9 5,438.7 10,324.6 6,870.5 5,034.8 11,905.3
Current and deferred
income taxes 135.7 123.1 258.8 218.8 115.4 334.2
Receivable from continuing
products (1) 429.7 493.6 923.3 409.4 463.1 872.5
Other - - - 90.7 92.9 183.6
______________________________________________________________________________
Total Assets $ 5,451.3 $ 6,055.4 $ 11,506.7 $ 7,589.4 $ 5,706.2 $ 13,295.6
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
Future policy benefits $ - $ 4,924.5 $ 4,924.5 $ - $ 5,032.6 $ 5,032.6
Policyholders' funds left
with the company 5,058.9 - 5,058.9 7,224.4 - 7,224.4
Reserve for future losses
on discontinued products 221.4 737.4 958.8 345.6 651.4 997.0
Other 171.0 393.5 564.5 19.4 22.2 41.6
___________________________________________________________________________________________________________
Total Liabilities $ 5,451.3 $ 6,055.4 $ 11,506.7 $ 7,589.4 $ 5,706.2 $ 13,295.6
___________________________________________________________________________________________________________
___________________________________________________________________________________________________________
<FN>
(1) The receivable from continuing products is eliminated in consolidation at December 31,
1995 and 1994.
</TABLE>
Net unrealized capital gains in 1995 and losses in 1994 on
available for sale debt securities are included above in other
liabilities and other assets, respectively, and are not reflected
in consolidated shareholders' equity. The reserve for anticipated
future losses on GICs is included in policyholders' funds left
with the company, and the reserve for anticipated 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 (at the risk free rate at the time of
discontinuance, consistent with the duration of the liabilities)
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 anticipated 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. Projections of
future investment results took into account both industry and
company data and were based on 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 runoff of the liabilities.
<PAGE> 94
Notes to Financial Statements (Continued)
3. Discontinued Products (Continued)
At December 31, 1995 and 1994, estimated future after-tax realized
capital losses of $92.8 million and $127.7 million ($142.8 million
and $196.4 million, pretax), respectively, attributable to
mortgage loans and real estate supporting GICs, and $38.0 million
and $47.7 million ($58.5 million and $73.4 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 $(56.4) million and $49.3 million
of net realized capital (losses) gains (pretax) on GICs and SPAs,
respectively, for the year ended December 31, 1995, are (losses)
gains from the sale of bonds of $(2.8) million and $64.2 million,
respectively. Included in the $150.2 million and $58.8 million of
net realized capital losses (pretax) on GICs and SPAs,
respectively, for the year ended December 31, 1994, are losses
from the sale of bonds of $54.6 million and $24.1 million,
respectively.
The activity in the reserve for anticipated future losses on
discontinued products for the years ended December 31, 1995 and
1994 was as follows:
<TABLE>
<CAPTION>
Guaranteed Single-
Investment Premium
(Millions) Contracts Annuities Total
______________________________________________________________________________
<S> <C> <C> <C>
Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0
Results of discontinued products (254.4) (18.6) (273.0)
______________________________________
Reserve at December 31, 1994 345.6 651.4 997.0
Results of discontinued products (124.2) 86.0 (38.2)
______________________________________
Reserve at December 31, 1995 $ 221.4 $ 737.4 $ 958.8
______________________________________________________________________________
______________________________________________________________________________
</TABLE>
At the time of discontinuance, a receivable from continuing
products was established for each discontinued product equivalent
to the net present value of the anticipated cash flow shortfalls.
The receivables, on which interest is accrued at the discount
rates used to calculate the loss on discontinuance, will be
funded, net of taxes on the accrued interest, from invested assets
supporting Large Case Pensions. The offsetting payable, on which
interest is similarly accrued, was established in continuing
products. The interest on such payable generally offsets the
investment income on the assets available to fund the shortfall.
At December 31, 1995, for GICs and SPAs, the receivables from
continuing products, net of the related deferred taxes payable of
$13.9 million and $20.5 million, respectively, on the accrued
interest income were $415.8 million and $473.1 million,
respectively. At December 31, 1994, for GICs and SPAs, the
receivables from continuing products, net of the related deferred
taxes payable of $6.8 million and $9.8 million, respectively, on
the accrued interest income were $402.6 million and
$453.3 million, respectively. As of December 31, 1995, no funding
had taken place. These amounts are eliminated in consolidation
and are therefore not reflected on the Consolidated Balance
Sheets.
<PAGE> 95
Notes to Financial Statements (Continued)
4. Severance and Facilities Charge
The company recorded a $200 million after-tax ($308 million
pretax) severance and facilities charge in the fourth quarter of
1993 (of which $96 million after-tax and $147 million pretax
related to Discontinued Operations). The planned actions included
the elimination of approximately 4,000 positions (2,000 of which
related to Discontinued Operations). The severance and facilities
charge included costs related to vacating excess leased office
space and costs related to vacating and selling an owned property
in Hartford, Connecticut. The 1993 severance and facilities
charge included the following (pretax):
<TABLE>
<CAPTION>
Facility and Vacated
Severance Asset Write- Leased
(Millions) Related Off Related Property Other Total
_________ ____________ ________ _______ _______
<S> <C> <C> <C> <C> <C>
Aetna Health Plans..................... $ 44.4 $ 20.4 $ 11.8 $ 3.2 $ 79.8
Aetna Life Insurance & Annuity......... 10.9 5.1 1.4 13.4 (1) 30.8
International.......................... 4.6 2.9 2.0 1.5 11.0
Large Case Pensions.................... 11.5 8.4 1.0 1.0 21.9
Corporate: Other...................... 12.2 5.0 - - 17.2
_______ _______ _______ _______ _______
Total Continuing Operations (2)........ $ 83.6 $ 41.8 (3) $ 16.2 $ 19.1 $ 160.7
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Discontinued Operations................ $ 96.8 $ 24.2 $ 20.7 $ 5.6 $ 147.3
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
<FN>
(1) Includes a charge of $13.0 million related to the cessation of a business providing
administrative services to defined contribution pension plans. The charge includes
broker buyout, direct losses on runoff of the existing contracts and other related costs.
(2) Facility and asset write-off related charges are noncash costs. All other items shown above
required, or will require, cash outlays.
(3) Facility and asset write-off related charges included the write-down of a company property that
was vacated and sold. Facility and asset write-off related charges also included costs to retire
computer equipment used by employees whose positions were eliminated and other related costs.
</TABLE>
During 1995 and 1994, the company charged costs of $83.9 million
and $224.1 million (pretax) (of which $12.6 million and $134.7
million related to Discontinued Operations), respectively, to the
1993 severance and facilities reserve related to the cost
reduction actions.
The remaining lease payments (net of expected subrentals) on
vacated leased office space are payable over approximately the
next five years.
<PAGE> 96
Notes to Financial Statements (Continued)
5. Investments
<TABLE>
<CAPTION>
Debt securities at December 31, 1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 3,452.2 $ 183.5 $ .7 $ 3,635.0
Obligations of states and
political subdivisions 292.5 41.3 .6 333.2
Utilities 2,599.4 213.8 3.4 2,809.8
Financial 5,158.3 245.6 13.5 5,390.4
Transportation/Capital Goods 1,967.5 205.3 2.4 2,170.4
Other corporate securities 4,058.1 299.8 13.0 4,344.9
Mortgage-backed securities 5,393.4 381.4 11.1 5,763.7
Other loan-backed securities 1,720.4 46.0 1.2 1,765.2
Foreign governments 3,102.9 178.4 17.7 3,263.6
Other 2,217.8 175.3 9.0 2,384.1
______________________________________________________
Total Available for Sale -
continuing operations $ 29,962.5 $ 1,970.4 $ 72.6 $ 31,860.3
_______________________________________________________________________________________________
______________________________________________________
Available for sale securities of
discontinued products
(included above) $ 5,344.1 $ 435.5 $ 14.4 $ 5,765.2
_______________________________________________________________________________________________
______________________________________________________
Available for sale securities -
Discontinued Operations $ 11,293.8 $ 456.4 $ 44.6 $ 11,705.6
_______________________________________________________________________________________________
______________________________________________________
</TABLE>
<PAGE> 97
Notes to Financial Statements (Continued)
5. Investments (Continued)
<TABLE>
<CAPTION>
Debt securities at December 31, 1994 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
________________________________________________________________________________________________
Available for Sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 4,668.9 $ 12.4 $ 375.0 $ 4,306.3
Obligations of states and
political subdivisions 331.6 7.3 7.0 331.9
Utilities 2,084.4 50.8 113.5 2,021.7
Financial 4,640.2 28.6 238.7 4,430.1
Transportation/Capital Goods 2,088.6 58.2 88.5 2,058.3
Other corporate securities 2,195.6 27.9 113.4 2,110.1
Mortgage-backed securities 5,643.1 119.6 323.0 5,439.7
Other loan-backed securities 1,359.0 .2 41.8 1,317.4
Foreign governments 1,997.4 10.4 192.0 1,815.8
Other 2,199.5 26.9 119.6 2,106.8
_______________________________________________________
Total Available for Sale -
continuing operations $ 27,208.3 $ 342.3 $ 1,612.5 $ 25,938.1
________________________________________________________________________________________________
_______________________________________________________
Available for sale securities -
discontinued products
(included above) $ 6,349.8 $ 137.9 $ 332.7 $ 6,155.0
________________________________________________________________________________________________
_______________________________________________________
Available for sale securities -
Discontinued Operations $ 9,775.9 $ 16.6 $ 619.9 $ 9,172.6
________________________________________________________________________________________________
_______________________________________________________
Held for Investment:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 6.5 .5 $ - $ 7.0
Obligations of states and
political subdivisions 29.2 .4 1.6 28.0
Utilities 98.3 - 1.0 97.3
Financial 181.3 1.9 1.3 181.9
Transportation/Capital Goods 207.7 3.3 1.5 209.5
Other corporate securities 49.8 - - 49.8
Mortgage-backed securities 10.5 - .6 9.9
Other loan-backed securities 15.0 - .6 14.4
Foreign governments 600.1 .3 .1 600.3
Other 388.9 4.3 7.2 386.0
_______________________________________________________
Total Held for Investment -
continuing operations $ 1,587.3 $ 10.7 $ 13.9 $ 1,584.1
________________________________________________________________________________________________
_______________________________________________________
Held for Investment - Discontinued
Operations $ 413.5 $ 3.9 $ 10.3 $ 407.1
________________________________________________________________________________________________
_______________________________________________________
</TABLE>
At December 31, 1995 and 1994, net unrealized appreciation
(depreciation) from continuing operations of $1,897.8 million and
$(1,270.2) million, respectively, on available for sale debt
securities included $960.0 million and $(607.3) million,
respectively, related to experience rated contractholders and
$421.1 million and $(194.8) million, respectively, related to
discontinued products, which were not reflected in shareholders'
equity.
<PAGE> 98
Notes to Financial Statements (Continued)
5. Investments (Continued)
The carrying and fair value of debt securities are shown below by
contractual maturity. Actual maturities may differ from
contractual maturities because securities may be restructured,
called or prepaid.
<TABLE>
<CAPTION>
1995 Amortized Fair
(Millions) Cost Value
____________________________________________________________________
<S> <C> <C>
Available for Sale - Continuing Operations
Due to mature:
One year or less $ 1,515.7 $ 1,520.7
After one year through five years 7,218.3 7,388.1
After five years through ten years 5,990.1 6,401.5
After ten years 8,124.6 9,021.1
Mortgage-backed securities 5,393.4 5,763.7
Other loan-backed securities 1,720.4 1,765.2
_____________________________________________________________________
Total $ 29,962.5 $ 31,860.3
_____________________________________________________________________
_________________________
Available for Sale - Discontinued
Operations
Due to mature:
One year or less $ 808.9 $ 851.7
After one year through five years 3,873.0 3,922.3
After five years through ten years 2,530.9 2,645.2
After ten years 1,718.3 1,870.5
Mortgage-backed securities 1,655.5 1,697.5
Other loan-backed securities 707.2 718.4
_____________________________________________________________________
Total $ 11,293.8 $ 11,705.6
_____________________________________________________________________
_________________________
</TABLE>
The company engages in securities lending whereby certain
securities from its portfolio are loaned to other institutions for
short periods of time. Cash collateral, which is in excess of the
market value of the loaned securities, is deposited by the
borrower with a lending agent, and retained and invested by the
lending agent to generate additional income for the company. The
market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the
market value fluctuates. At December 31, 1995, the company had
loaned securities (which are reflected as invested assets on the
Consolidated Balance Sheets) with a market value of approximately
$1.3 billion (an additional $.9 billion is included in
Discontinued Operations assets).
Investments in equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
_________________________________________________________________________________
<S> <C> <C> <C> <C>
1995
_________________________________________________________________________________
Equity securities -
continuing operations $ 597.8 $ 85.1 $ 23.2 $ 659.7
_________________________________________________________________________________
____________________________________________________
Equity securities -
Discontinued Operations $ 313.8 $ 288.3 $ 76.6 $ 525.5
_________________________________________________________________________________
____________________________________________________
1994
_________________________________________________________________________________
Equity securities -
continuing operations $ 594.0 $ 63.6 $ 43.0 $ 614.6
_________________________________________________________________________________
____________________________________________________
Equity securities -
Discontinued Operations $ 802.5 $ 336.1 $ 97.6 $ 1,041.0
_________________________________________________________________________________
____________________________________________________
</TABLE>
<PAGE> 99
Notes to Financial Statements (Continued)
5. Investments (Continued)
Real Estate holdings at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
_____________________________________________________________________
<S> <C> <C>
Properties held for sale $ 1,230.2 $ 1,198.5
Investment real estate 177.7 196.6
_______________________
1,407.9 1,395.1
Valuation reserve 130.6 111.4
_______________________
Net carrying value of real estate
of continuing operations $ 1,277.3 $ 1,283.7
_____________________________________________________________________
_______________________
Net carrying value of real estate of
discontinued products (included above) $ 635.0 $ 730.0
_____________________________________________________________________
_______________________
Net carrying value of real estate of
Discontinued Operations $ 264.7 $ 262.0
_____________________________________________________________________
_______________________
</TABLE>
The accumulated depreciation for real estate for continuing
operations was $116.6 million and $102.4 million at December 31,
1995 and 1994, respectively. Discontinued Operations' accumulated
depreciation for real estate was $29.0 million and $19.1 million
at December 31, 1995 and 1994, respectively.
Total real estate write-downs included in the net carrying value
of the company's continuing operations real estate holdings on the
Consolidated Balance Sheets at December 31, 1995 and 1994 were
$555.4 million and $533.2 million, respectively, (including
$299.2 million and $315.8 million, respectively, attributable to
assets of discontinued products). Real estate write-downs
included in the real estate holdings of Discontinued Operations
were $116.4 million and $83.3 million at December 31, 1995 and
1994, respectively.
At December 31, 1995, the total recorded investment in mortgage
loans that are considered to be impaired (which include problem
loans, restructured loans and potential problem loans) under FAS
No. 114 and related specific reserves are presented in the table
below. Included in the total recorded investment are impaired
loans of $478 million ($61 million of which are related to
Discontinued Operations) for which no specific reserves are
considered necessary.
<TABLE>
<CAPTION>
Total
Recorded Specific
(Millions) Investment Reserves
_________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 755.4 $ 200.9
Supporting experience rated products 439.2 115.1
Supporting remaining products 329.8 45.2
___________________________
Total Impaired Loans - continuing
operations $ 1,524.4 $ 361.2
_________________________________________________________________________
___________________________
Supporting Discontinued Operations $ 164.4 $ 21.3
_________________________________________________________________________
___________________________
</TABLE>
<PAGE> 100
Notes to Financial Statements (Continued)
5. Investments (Continued)
The activity in the specific and general reserves as of December 31,
1995 is summarized below:
<TABLE>
<CAPTION>
General
Reserve
Balance at Allocated to Balance at Charged
December 31, Experience December 31, to net Charged Balance at
1994, as Rated 1994, as realized to other Principal December 31,
(Millions) reported Products (1) adjusted loss accounts (2) Write-offs 1995 (3)
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Supporting
discontinued
products $ 372.1 $ - $ 372.1 $ - $ 25.2 $ (109.8) $ 287.5
Supporting
experience
rated
products 156.1 208.5 364.6 - (30.2) (106.1) 228.3
Supporting
remaining
products 119.3 - 119.3 10.4 - (40.6) 89.1
_______________________________________________________________________________________________
Total
continuing
operations $ 647.5 $ 208.5 $ 856.0 $ 10.4 $ (5.0) $ (256.5) $ 604.9
____________________________________________________________________________________________________________
_______________________________________________________________________________________________
Supporting
Discontinued
Operations $ 136.6 $ - $ 136.6 $ 6.4 $ - $ (77.3) $ 65.7
____________________________________________________________________________________________________________
_______________________________________________________________________________________________
<FN>
(1) The general reserve at December 31, 1994 excluded reserves of $208.5 million related to experience
rated products.
(2) Reflects additions to (releases of) reserves related to assets supporting experience rated products
and discontinued products which do not affect the company's results of operations.
(3) Total reserves for continuing operations at December 31, 1995 include $361.2 million of specific
reserves and $243.7 million of general reserves.
</TABLE>
The company accrues interest income on impaired loans to the
extent it is deemed collectible and the loan continues to perform
under its original or restructured contractual terms. Interest
income on problem loans is generally recognized on a cash basis.
Cash payments on loans in the process of foreclosure are generally
treated as a return of principal.
Income earned (pretax) and received on the average recorded
investment in impaired loans for the twelve months ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Average
Impaired Income Income
(Millions) Loans Earned Received
____________________________________________________________________
<S> <C> <C> <C>
Supporting discontinued products $ 952.9 $ 81.9 $ 81.0
Supporting experience rated products 739.8 50.6 51.6
Supporting remaining products 292.5 21.6 22.1
_____________________________
Total - continuing operations $1,985.2 $ 154.1 $ 154.7
___________________________________________________________________
_____________________________
Supporting Discontinued Operations $ 227.0 $ 12.2 $ 12.2
___________________________________________________________________
_____________________________
</TABLE>
<PAGE> 101
Notes to Financial Statements (Continued)
5. Investments (Continued)
The carrying values of investments that were nonincome producing
for the twelve months preceding the Balance Sheet date were as
follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
____________________________________________________________________________________
Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations
__________ ____________ __________ ____________
<S> <C> <C> <C> <C>
Debt securities $ 6.9 $ .6 $ 5.5 $ 2.4
Equity securities - 12.6 11.0 9.3
Mortgage loans 57.9 .3 65.2 14.9
Real estate 95.8 71.4 111.9 47.9
______________________________________________________
Total nonincome
producing assets $ 160.6 $ 84.9 $ 193.6 $ 74.5
____________________________________________________________________________________
______________________________________________________
Nonincome producing
assets of discontinued
products (included above) $ 33.9 $ - $ 68.0 $ -
______________________________________________________
______________________________________________________
</TABLE>
Significant noncash investing and financing activities include
acquisition of real estate through foreclosures (including in-
substance foreclosures) of mortgage loans amounting to
$264 million in 1995, $649 million in 1994 and $278 million in
1993 for continuing operations and $40 million in 1995,
$59 million in 1994 and $17 million in 1993 for Discontinued
Operations.
Disclosure of concentrations of credit risk for bonds and mortgage
loans is incorporated herein by reference to Management's
Discussion and Analysis of Financial Condition and Results of
Operations on pages 42 through 55.
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the
carrying value and sale proceeds of specific investments sold.
Provisions for impairments and changes in the fair value of real
estate subsequent to foreclosure are also included in net realized
capital gains or losses. Unrealized capital gains and losses on
available for sale investments, after deducting amounts allocable
to experience rated contractholders and discontinued products, and
net of related taxes, are reflected in shareholders' equity.
Net realized capital gains allocable to experience rated
contractholders of $96.5 million for the year ended December 31,
1995 and net realized capital losses of $195.0 million and
$180.1 million for the years ended December 31, 1994 and 1993,
respectively, were deducted from net realized capital gains
(losses) as reflected on the Consolidated Statements of Income,
and an offsetting amount is reflected on the Consolidated Balance
Sheets in policyholders' funds left with the company.
<PAGE> 102
Notes to Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Net realized capital gains (losses) on investments were as
follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_______________________ ________________________ _____________________
<S> <C> <C> <C>
Continuing Discontinued Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations Operations Operations
__________ ____________ __________ ____________ __________ ____________
Debt securities $ 34.4 $ (38.0) $ (42.3) $ 9.7 $ 375.8 $ 230.5
Equity securities 18.2 239.5 .8 30.7 15.4 75.9
Mortgage loans (9.4) (5.5) (39.0) (52.8) (328.2) (107.5)
Real estate 3.5 28.7 30.0 12.2 (99.6) (51.9)
Sales of subsidiaries - (43.3) (1) (3.9) 20.8 (18.2) 27.0
Other .5 (25.8) (.8) (20.2) (6.4) 4.0
______________________________________________________________________
Pretax realized
capital gains (losses) $ 47.2 $ 155.6 $ (55.2) $ .4 $ (61.2) $ 178.0
_______________________________________________________________________________________________
_____________________________________________________________________
After tax realized
capital gains (losses) $ 29.5 $ 106.0 $ (41.2) $ (1.4) $ (42.0) $ 128.0
_______________________________________________________________________________________________
<FN>
(1) A loss of $43.3 million ($22.5 million, after tax) is included in net realized
capital losses in Discontinued Operations to reflect a write-down of the carrying value of
Aetna Re-Insurance Company (U.K.) Ltd.
</TABLE>
In December 1995, the company completed the sale and
securitization of $443 million of commercial mortgage loans
supporting discontinued products. Concurrent with the sale, the
company retained approximately $108 million of subordinate and
residual certificates which were classified as debt securities at
December 31, 1995. The net proceeds from the sale were
approximately $338 million.
Proceeds from the sale of investments in available for sale, held
for investment and trading debt securities and the related gross
gains and losses on those sales were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_______________________________________________________________________
<S> <C> <C> <C>
Continuing Discontinued Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations Operations Operations
__________ ____________ __________ ____________ __________ ____________
Proceeds on sales $ 13,747.2 $ 3,871.0 $ 14,807.2 $ 4,210.3 $ 34,183.1 $ 7,906.5
Gross gains 124.0 56.5 62.3 66.5 441.0 257.8
Gross losses 89.6 94.5 100.8 57.9 54.2 20.9
</TABLE>
Changes in shareholders' equity included changes in unrealized
capital gains (losses), excluding changes in unrealized capital
gains (losses) related to experience rated contractholders and
discontinued products, for the periods as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_______________________________________________________________________________________
<S> <C> <C> <C>
Continuing Operations:
Equity securities $ 41.3 $ (28.9) $ 22.2
Debt trading securities - - (35.5)
Debt securities available for sale 984.8 (867.9) 399.8
Foreign exchange and other, net (23.3) (82.5) 17.4
Discontinued Operations 900.9 (910.5) 178.4
_________________________________________
Subtotal 1,903.7 (1,889.8) 582.3
Increase (Decrease) in deferred federal
income taxes 191.1 (170.1) 193.7
_________________________________________
Net changes in unrealized capital gains
(losses) $ 1,712.6 $ (1,719.7) $ 388.6
_______________________________________________________________________________________
_________________________________________
</TABLE>
<PAGE> 103
Notes to Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in unrealized capital gains (losses) for the periods
exclude pretax changes in debt securities carried at amortized
cost. The unrecorded appreciation (depreciation) for continuing
operations related to debt securities carried at amortized cost is
the difference between estimated market and carrying values, and
amounted to $(3.2) million and $125.8 million at December 31, 1994
and 1993, respectively. Such unrecorded appreciation
(depreciation) includes amounts allocable to experience rated
contractholders. The change in unrecorded appreciation
(depreciation) for such securities was $3.2 million,
$(129.0) million and $(1,325.6) million in 1995, 1994 and 1993,
respectively.
Shareholders' equity included the following unrealized capital
gains (losses), which are net of amounts allocable to experience
rated contractholders and amounts related to discontinued
products, at December 31:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
___________________________________________________________________________________
<S> <C> <C> <C>
Continuing Operations:
Equity securities:
Gross unrealized capital gains $ 85.1 $ 63.6 $ 55.0
Gross unrealized capital losses (23.2) (43.0) (5.5)
_____________________________________
61.9 20.6 49.5
Debt securities available for sale:
Gross unrealized capital gains 574.9 72.4 420.0
Gross unrealized capital losses (58.2) (540.5) (20.2)
_____________________________________
516.7 (468.1) 399.8
Foreign exchange and other, net (66.3) (43.0) 39.5
Discontinued Operations 474.0 (426.9) 483.6
Deferred federal income taxes 345.2 154.1 324.2
_____________________________________
Net unrealized capital gains (losses) $ 641.1 $(1,071.5) $ 648.2
___________________________________________________________________________________
_____________________________________
</TABLE>
At December 31, 1994, $749.0 million of net unrealized capital
losses (of which $293.7 million related to Discontinued
Operations) primarily on available for sale debt and equity
securities were reflected in shareholders' equity without deferred
tax benefits. An additional valuation allowance of $213 million
was established at December 31, 1994 for potential loss of tax
benefits on net unrealized capital losses on assets allocable to
experience rated contractholders. (Please refer to Note 10 for
discussion of the tax treatment for unrealized capital losses on
available for sale debt and equity securities.)
<PAGE> 104
Notes to Financial Statements (Continued)
7. Net Investment Income
Net investment income includes amounts allocable to experience
rated contractholders of $1.5 billion, $1.4 billion and $1.6
billion for the years ended December 31, 1995, 1994 and 1993,
respectively. Interest credited to contractholders is included
in current and future benefits.
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_______________________ _______________________ _______________________
Continuing Discontinued Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations Operations Operations
__________ ____________ __________ ____________ __________ ____________
<S> <C> <C> <C>
Debt securities $ 2,275.9 $ 683.2 $ 2,250.0 $ 632.1 $ 2,276.8 $ 726.6
Equity securities 22.0 31.3 29.2 27.7 43.1 12.7
Short-term investments 25.1 .8 14.0 - 41.9 13.4
Mortgage loans 962.6 121.8 1,146.8 154.4 1,397.7 189.1
Real estate 306.4 56.6 302.0 59.2 308.4 70.1
Policy loans 30.6 - 28.0 - 29.9 -
Other 133.2 22.6 86.2 10.1 146.8 13.4
Cash equivalents 151.8 48.3 109.1 26.0 65.0 11.7
________________________________________________________________________
Gross investment
income 3,907.6 964.6 3,965.3 909.5 4,309.6 1,037.0
Less investment
expenses 332.5 62.9 333.9 77.4 343.0 84.6
________________________________________________________________________
Net investment
income $ 3,575.1 $ 901.7 $ 3,631.4 $ 832.1 $ 3,966.6 $ 952.4
_______________________________________________________________________________________________
________________________________________________________________________
</TABLE>
8. Dividend Restrictions and Shareholders' Equity
The amount of dividends that may be paid to shareholders in 1996
without prior approval by the Insurance Commissioner of the State
of Connecticut is $659.9 million. Dividend payments by the
domestic insurance subsidiaries of Aetna Life and Casualty Company
are subject to similar restrictions in Connecticut and other
states, and are limited in 1996 to approximately $657.3 million in
the aggregate of which $216.6 million relates to Discontinued
Operations (the sale agreement with Travelers prohibits the
payment of dividends from the property-casualty subsidiaries).
During 1995, subsidiaries paid $451.7 million in dividends to
Aetna Life and Casualty Company, none of which relates to
Discontinued Operations.
The amounts of statutory net loss for the years ended and
shareholders' equity as of December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
___________________________________________________________________________________
<S> <C> <C> <C>
Statutory net loss $ (13.4) $ (389.8) $ (40.7)
___________________________________________________________________________________
_______________________________________
Statutory shareholders' equity $ 4,275.1 $ 3,996.5
____________________________________________________________________
________________________
</TABLE>
As of December 31, 1995, the company does not utilize any
statutory accounting practices which are not prescribed by
insurance regulators that, individually or in the aggregate,
materially affect statutory shareholders' equity.
<PAGE> 105
Notes to Financial Statements (Continued)
9. Debt
<TABLE>
<CAPTION>
(Millions) 1995 1994
____________________________________________________________________________
<S> <C> <C>
Long-term debt:
Domestic:
Eurodollar Notes, 9 1/2% due 1995 $ - $ 100.2
Notes, 8 5/8% due 1998 99.8 99.8
Notes, 6 3/8% due 2003 198.9 198.9
Debentures, 6 3/4% due 2013 198.4 198.4
Eurodollar Notes, 7 3/4% due 2016 63.5 63.5
Debentures, 8% due 2017 199.1 199.1
Mortgage Notes and Other Notes, 3%-11%
due in varying amounts to 2018 13.1 5.9
Debentures, 7 1/4% due 2023 198.3 198.3
International:
Mortgage Notes, 6 1/2%-11 7/8% due in
varying amounts to 2006 18.0 15.1
______________________
Total $ 989.1 $ 1,079.2
____________________________________________________________________________
______________________
</TABLE>
At December 31, 1995, $389.6 million of short-term borrowings were
outstanding. Total unused committed bank lines available to the
company at December 31, 1995 amounted to $1,020 million, including
credit facilities aggregating $1.0 billion with a group of
worldwide banks. One $500 million facility terminates in July
1996, which the company intends to extend. Another $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 billion.
These facilities also support the company's commercial paper
borrowing program.
During 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 below. The remaining proceeds were
used for general corporate purposes. Pursuant to shelf
registration statements declared effective by the Securities and
Exchange Commission ("SEC"), the company may offer and sell up
to an additional $550 million of various types of securities.
(Please refer to Note 11.)
During 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 on the
debenture redemption of $4.7 million (after taxes of
$2.4 million). Additionally, $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 1993.
The 8% Debentures due 2017 are subject to various redemption
options beginning on January 15, 1997.
<PAGE> 106
Notes to Financial Statements (Continued)
9. Debt (Continued)
Aggregate maturities of long-term debt and sinking fund
requirements for 1996 through 2000 for continuing operations are
$11.9 million, $6.4 million, $100.0 million, $1.2 million and
$3.0 million, respectively, and $866.6 million thereafter.
Total interest expense for continuing operations was
$115.9 million, $98.6 million and $77.4 million in 1995, 1994 and
1993, respectively, and interest paid was $122.7 million,
$98.7 million and $74.1 million in 1995, 1994 and 1993,
respectively.
10. Federal and Foreign Income Taxes
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.
The enactment of OBRA resulted in an increase of $27.4 million, of
which $23.0 million related to Discontinued Operations, in the
company's deferred tax asset.
Income tax expense (benefits) consists of:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_______________________ _______________________ _______________________
Continuing Discontinued Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations Operations Operations
__________ ____________ __________ ____________ __________ ____________
<S> <C> <C> <C>
Current taxes
(benefits):
Income - federal
taxes $ 225.7 $ (156.7) $ 267.8 $ 6.4 $ 187.1 $ (139.8)
Income - foreign
taxes 8.0 .9 6.6 2.0 1.6 .4
Realized capital
gains (losses) 34.4 65.6 (292.5) (47.5) (37.9) 63.3
________________________________________________________________________
268.1 (90.2) (18.1) (39.1) 150.8 (76.1)
Deferred taxes
(benefits):
Income - federal
taxes (10.2) (55.5) (44.2) (37.2) (587.3) (30.4)
Income - foreign
taxes 9.9 (.1) .5 (.3) (1.4) -
Realized capital
gains (losses) (15.5) (16.3) 279.9 49.3 25.5 (13.2)
________________________________________________________________________
(15.8) (71.9) 236.2 11.8 (563.2) (43.6)
________________________________________________________________________
Total $ 252.3 $ (162.1) $ 218.1 $ (27.3) $ (412.4) $ (119.7)
_______________________________________________________________________________________________
________________________________________________________________________
</TABLE>
<PAGE> 107
Notes to Financial Statements (Continued)
10. Federal and Foreign Income Taxes (Continued)
Income tax expense (benefits)on income (loss) was different from
the amount computed by applying the federal income tax rate to
income (loss) before income tax expense (benefits) for the
following reasons:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_______________________ _______________________ _______________________
Continuing Discontinued Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations Operations Operations
__________ ____________ __________ ____________ __________ ____________
<S> <C> <C> <C>
Income (Loss) from U.S.
operations $ 544.8 $ (384.3) $ 502.2 $ 30.8 $(1,079.2) $ (105.7)
Income from non-U.S.
operations 181.4 - 125.3 - 64.5 -
________________________________________________________________________
Income (Loss) before
taxes 726.2 (384.3) 627.5 30.8 (1,014.7) (105.7)
Tax rate 35% 35% 35% 35% 35% 35%
________________________________________________________________________
Application of the tax
rate 254.2 (134.5) 219.6 10.8 (355.2) (37.0)
Tax effect of:
Tax-exempt interest (4.3) (16.2) (7.8) (28.9) (12.9) (42.0)
Foreign operations 10.1 (5.2) (1.8) .1 (47.6) .7
Excludable dividends (9.8) (6.2) (8.8) (6.7) (8.5) (12.0)
Tax rate change on
deferred assets
and liabilities - - - - (2.0) (22.0)
Goodwill 5.5 - 8.6 - 6.8 -
Other, net (3.4) - 8.3 (2.6) 7.0 (7.4)
________________________________________________________________________
Income taxes (benefits)
on income (loss) $ 252.3 $ (162.1) $ 218.1 $ (27.3) $ (412.4) $ (119.7)
_______________________________________________________________________________________________
________________________________________________________________________
</TABLE>
The tax effects of temporary differences that give rise to
deferred tax assets and deferred tax liabilities at December 31
are presented below:
<TABLE>
<CAPTION>
(Millions) 1995 1994
_______________________ _______________________
<S> <C> <C>
Continuing Discontinued Continuing Discontinued
Operations Operations Operations Operations
__________ ____________ __________ ____________
Deferred tax assets:
Insurance reserves $ 560.8 $ 814.4 $ 385.5 $ 756.6
Reserve for loss on
discontinued products 325.4 - 344.1 -
Reserve for severance and
facilities expenses 13.9 5.6 31.3 26.3
Impairment reserves 49.2 1.8 63.7 49.5
Other postretirement benefits 229.4 - 230.6 -
Net unrealized capital losses - - 462.1 139.5
Net operating loss carryforward 79.4 122.2 111.8 113.2
Other (18.2) 39.5 (1.7) 9.4
______________________________________________
Total gross assets 1,239.9 983.5 1,627.4 1,094.5
Less valuation allowance 34.3 - 444.5 102.1
______________________________________________
Assets net of valuation allowance 1,205.6 983.5 1,182.9 992.4
Deferred tax liabilities:
Deferred policy acquisition costs 571.8 107.0 446.5 110.5
Unrealized losses allocable to
experience rated contracts - - 213.0 -
Net unrealized capital gains 282.8 220.4 - -
Market discount 62.1 11.2 73.9 17.1
Other 17.4 2.6 45.3 2.3
______________________________________________
Total gross liabilities 934.1 341.2 778.7 129.9
______________________________________________
Net deferred tax asset $ 271.5 $ 642.3 $ 404.2 $ 862.5
____________________________________________________________________________________
_______________________________________________
</TABLE>
<PAGE> 108
Notes to Financial Statements (Continued)
10. Federal and Foreign Income Taxes (Continued)
The 1995 and 1994 valuation allowance relates to future tax
benefits of $27.5 million and $22.9 million, respectively, on
purchased domestic net operating losses; $6.8 million and
$48.5 million, respectively, on foreign net operating losses and
$475.2 million in 1994 on unrealized capital losses, the
realization of which are uncertain.
The valuation allowance on foreign net operating losses was
reduced primarily due to a tax rate reduction in the foreign
jurisdiction; a corresponding reduction in the deferred tax asset
resulted in no impact on net income.
Net unrealized capital gains and losses are presented in
shareholders' equity net of deferred taxes. At December 31, 1994,
$749 million of net unrealized capital losses primarily on
available for sale debt and equity securities were reflected in
shareholders' equity without deferred tax benefits. As of
December 31, 1995, no valuation allowance was required for
unrealized capital gains and losses. The reversal of the
valuation allowance had no impact on net income in 1995.
Management believes that it is more likely than not that the
company will realize the benefit of the net deferred tax asset of
$913.8 million of which $642.3 million related to Discontinued
Operations. The company's election of special estimated tax
payments in years 1989 through 1994 assures realizability of a
substantial portion of the deferred tax asset from the discounting
of property-casualty reserves included in Discontinued Operations.
The company has more than 15 years to generate sufficient taxable
income to cover the reversal of its temporary differences due to
the long-term reversal patterns of these differences. Because of
the company's long-term history of taxable income, which is
projected to continue, and the availability of significant tax
planning strategies, such as converting tax-exempt bonds to
taxable bonds, the company expects sufficient taxable income in
the future to realize the net deferred tax asset.
The net deferred tax asset includes $3.5 million related to the
company's expected utilization of its foreign net operating loss
carryforward and $163.8 million related to the company's expected
utilization of its current U.S. net operating loss carryforward of
$468.0 million, $162.6 million which expires in the year 2008 of
which $111.2 million relates to Discontinued Operations,
$285.1 million which expires in the year 2009 of which
$226.3 million relates to Discontinued Operations and $20.3
million which expires in 2010 of which $11.7 million relates to
Discontinued Operations.
The company has not recognized deferred taxes related to the
estimated cumulative amount of undistributed earnings of
approximately $225 million on its controlled foreign corporations
because the company does not expect to repatriate these earnings.
A deferred tax liability will be recognized when the company
expects that it will recover these undistributed earnings in a
taxable manner, such as through a receipt of dividends or a sale
of the investment.
<PAGE> 109
Notes to Financial Statements (Continued)
10. Federal and Foreign Income Taxes (Continued)
The "Policyholders' Surplus Account," which arose under prior tax
law, is generally that portion of a life insurance company's
statutory income that has not been subject to taxation. As of
December 31, 1983, no further additions could be made to the
Policyholders' Surplus Account for tax return purposes under the
Deficit Reduction Act of 1984. The balance in such account was
$857.2 million at December 31, 1995. This amount would be taxed
only under certain conditions. No income taxes have been provided
on this amount since management believes the conditions under
which such taxes would become payable are remote.
The Internal Revenue Service (the "Service") has completed
examination of the consolidated federal income tax returns of
Aetna Life and Casualty and Affiliated Companies through 1986.
Discussions are being held with the Service with respect to
proposed adjustments. The Service has commenced its examination
for the years 1987 through 1990. However, management believes
there are adequate defenses against, or sufficient reserves to
provide for, such challenges.
The company paid net federal income taxes for continuing
operations of $127.1 million in 1995 and received net federal
income tax refunds of $13.3 million in 1994 and paid net federal
income taxes of $242.8 million in 1993.
The company received net federal income tax refunds for
Discontinued Operations of $148.4 million, $60.8 million and
$141.2 million in 1995, 1994 and 1993, respectively.
11. Minority Interest in Preferred Securities of Subsidiary
On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly
owned subsidiary of the company, issued $275 million (11,000,000
shares) of 9 1/2% Cumulative Monthly Income Preferred Securities,
Series A, on which payments are guaranteed to a certain extent by
the company on a subordinated basis. The securities are
redeemable, at the option of ACLLC with the company's consent, in
whole or in part, from time to time, on or after November 30,
1999, or at any time under certain limited circumstances related
to tax events, at a redemption price of $25 per security plus
accumulated and unpaid dividends to the redemption date. The
securities are scheduled to become due and payable in 2024. The
maturity date may be changed under certain circumstances.
ACLLC has loaned the proceeds from the preferred stock issuance
and the common capital contributions to the company. In return,
the company issued approximately $348 million principal amount of
9 1/2% subordinated debentures to ACLLC due in 2024. Interest on
these debentures is payable monthly, and under certain
circumstances, principal may be due prior to or later than the
original maturity date. This loan is eliminated in the
Consolidated Balance Sheets.
ACLLC may offer and sell up to an additional $225 million of
preferred securities under a shelf registration statement declared
effective by the SEC.
<PAGE> 110
Notes to Financial Statements (Continued)
12. Common Stock
At December 31, 1995 and 1994, 3,802,256 common shares were
reserved for issuance under the dividend reinvestment plan,
10,732,316 and 6,702,878 common shares, respectively, were
reserved for the stock option plans, and 946,675 common shares
were reserved for other benefit plans.
In 1995 and 1994, the company did not acquire any shares of its
common stock.
Pursuant to the company's amended Share Purchase Rights Plan, a
dividend of one share purchase right (a "Right") was made payable
for each share of Aetna Life and Casualty Common Capital Stock
("Common Stock") outstanding on November 7, 1989, and one Right
will attach to each share of Common Stock subsequently issued,
prior to the time at which the Rights become exercisable, expire
or are redeemed.
The Rights trade with the Common Stock until they become
exercisable. The Rights become exercisable 10 days after: (i) a
public announcement that a person or group ("person") has acquired
15% or more of the outstanding shares of Common Stock or, 10% or
more of the outstanding shares of Common Stock if such person is
declared by the Board of Directors to be an "adverse person"
("triggering acquisition"); or (ii) a person commences a tender
offer which, upon consummation, could result in such person owning
15% or more of the Common Stock; or (iii), in either event, such
later date as the Board of Directors may determine.
Upon becoming exercisable, each Right will entitle the holder
thereof (the "Holder") to purchase one one-hundredth of a share of
Aetna Life and Casualty Company's Class B Voting Preferred Stock,
Series A (a "Fractional Preferred Share") at a price of $200 (the
"Exercise Price"). Each Fractional Preferred Share has dividend,
voting and liquidation rights designed to make it approximately
equal in value to one share of Common Stock. Under certain
circumstances, including a triggering acquisition, each Right
(other than Rights that were or are owned by the acquirer)
thereafter will entitle the Holder to purchase Common Stock worth
twice the Exercise Price. Under certain circumstances, including
the acquisition of Aetna Life and Casualty Company in a merger
(following a triggering acquisition), each Right thereafter will
entitle the Holder to purchase equity securities of the acquirer
at a 50% discount.
Under certain circumstances, Aetna Life and Casualty Company may
redeem all of the Rights at a price of $.01 per Right. The Rights
will expire on November 7, 1999, unless earlier redeemed. The
Rights have no dilutive effect on earnings per share until
exercised. Aetna Life and Casualty Company has authorized
2,500,000 Preferred Shares for issuance upon exercise of the
Rights.
<PAGE> 111
Notes to Financial Statements (Continued)
13. Participating Policyholders' Interests
Under participating life insurance contracts issued by the
company, the policyholder is entitled to share in the earnings of
such contracts. This business is accounted for in the company's
Consolidated Financial Statements on a statutory basis since any
adjustments to policy acquisition costs and reserves on this
business would have no effect on the company's net income or
shareholders' equity. Premiums and assets allocable to the
participating policyholders were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
______________________________________________________________________________
<S> <C> <C> <C>
Premiums $ 50.1 $ 52.0 $ 52.4
_______________________________________________________________________________
Assets $ 688.3 $ 700.8 $ 704.8
_______________________________________________________________________________
</TABLE>
14. Benefit Plans
Pension Plans - The company has noncontributory defined benefit
pension plans covering substantially all employees and certain
agents. The plans provide pension benefits based on years of
service and average annual compensation (measured over 60
consecutive months of highest earnings in a 120-month period).
Contributions are determined by using the Projected Unit Credit
Method and, for qualified plans subject to ERISA requirements, are
limited to the amounts that are currently deductible for tax
reporting purposes.
Components of the net periodic pension cost were as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
________________________________________________________________________________
<S> <C> <C> <C>
Return on plan assets $ 427.5 $ 8.2 $ 178.7
Service cost - benefits earned
during the period (86.7) (92.7) (82.2)
Interest cost on projected
benefit obligation (192.9) (175.2) (169.3)
Net amortization and deferral (222.0) 202.3 31.3
_________________________________________________________________________________
Net periodic pension cost $ (74.1) $ (57.4) $ (41.5)
_________________________________________________________________________________
</TABLE>
<PAGE> 112
Notes to Financial Statements (Continued)
14. Benefit Plans (continued)
The measurement dates used to determine the funded status of the
plans were September 30, 1995 and 1994. The funded status of plans
for which assets exceeded accumulated benefits was as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
____________________________________________________________________
<S> <C> <C>
Actuarial present value of vested
benefit obligation $ 2,451.0 $ 1,930.3
____________________________________________________________________
Actuarial present value of
accumulated benefit obligation $ 2,472.1 $ 1,952.1
____________________________________________________________________
Plan assets at fair value $ 2,506.3 $ 2,176.4
Actuarial present value of
projected benefit obligation 2,650.5 2,333.3
______________________
Plan assets less than
projected benefit obligation (144.2) (156.9)
Unrecognized net loss 129.1 216.7
Unrecognized service cost - prior
period 7.5 9.1
Unrecognized net asset at date of
adoption of FAS No. 87 (30.1) (58.2)
______________________
(Accrued) prepaid pension cost $ (37.7) $ 10.7
____________________________________________________________________
______________________
</TABLE>
At 1995 and 1994, nonfunded plans had projected benefit
obligations of $166.5 million and $130.1 million, respectively.
The accumulated benefit obligations at 1995 and 1994 related to
these plans were $155.6 million and $105.3 million, respectively,
and the related accrued pension cost was $121.2 million and
$107.9 million, respectively.
The weighted average discount rate was 7.5% for 1995, 8.0% for
1994 and 7.5% for 1993. The expected long-term rate of return on
plan assets was 8.5% for 1995 and 1994 and 9.0% for 1993. The
rate of increase in future compensation was 4.5% for 1995, 5.0%
for 1994 and 4.5% for 1993. The future annual cost-of-living
adjustment was 3.0% for 1995, 1994 and 1993.
All of the assets are held in trust and administered under an
Immediate Participation Guarantee Contract issued by Aetna Life
Insurance Company. Assets are held in the general account of
Aetna Life Insurance Company and in various separate accounts.
Postretirement Benefits - In addition to providing pension
benefits, the company currently provides certain health care and
life insurance benefits for retired employees. A comprehensive
medical and dental plan is offered to all full-time employees
retiring at age 50 with 15 years of service or at age 65 with 10
years of service. Retirees are generally required to contribute
to the plans based on their years of service with the company.
In January 1994, the company announced a modification of its
postretirement benefit plan to cap the portion of the cost paid by
the company relating to medical and dental benefits for
individuals retiring after March 1, 1994.
<PAGE> 113
Notes to Financial Statements (Continued)
14. Benefit Plans (Continued)
Components of the net periodic postretirement benefit cost were as
follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
_________________________________________________________________________________
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ (8.3) $ (8.6) $ (19.0)
Interest cost (34.7) (34.2) (42.9)
Net amortization 28.3 31.2 11.7
Return on plan assets 2.0 3.2 3.1
___________________________________
Net periodic postretirement
benefit cost $ (12.7) $ (8.4) $ (47.1)
_________________________________________________________________________________
___________________________________
</TABLE>
The measurement dates used to determine the funded status of the
postretirement benefit plans were September 30, 1995 and 1994. The
funded status of the plans was as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994
____________________________________________________________________
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 313.5 $ 285.2
Fully eligible active employees 70.9 64.3
Active employees not eligible to
retire 107.6 97.2
______________________
Total 492.0 446.7
Plan assets at fair value 54.3 48.1
______________________
Accumulated postretirement benefit
obligation in excess of plan assets 437.7 398.6
Unrecognized net gain 24.8 43.9
Prior service cost 173.6 204.3
____________________________________________________________________
Accrued postretirement benefit cost $ 636.1 $ 646.8
____________________________________________________________________
______________________
</TABLE>
The weighted average discount rates were 7.5% for 1995, 8.0% for
1994 and 7.5% for 1993. The health care cost trend rate for the
1995 valuation decreased gradually from 10.5% for 1996 to 5.5% by
the year 2005. For the 1994 valuation, the rates decreased
gradually from 11.5% for 1995 to 5.5% by the year 2005.
Increasing the health care cost trend rate by one percentage point
would increase the accumulated postretirement benefit obligation
at 1995 by $32.3 million and would increase the net periodic
postretirement benefit cost for 1995 by $3.0 million (pretax).
It is the company's practice to fund amounts for postretirement
life insurance benefits to the extent the contribution is
deductible for federal income taxes. The plan assets are held in
trust and administered by Aetna Life Insurance Company. The
assets are in the general account of Aetna Life Insurance Company,
and the expected rate of return on the plan assets was 7% for
1995, 1994 and 1993.
Incentive Savings Plan - Substantially all employees are eligible
to participate in a savings plan under which designated
contributions, which may be invested in common stock of Aetna Life
and Casualty Company or certain other investments, are matched, up
to 5% of compensation, by the company. Pretax charges to
operations (including continuing and Discontinued Operations) for
the incentive savings plan were $60.0 million, $59.9 million and
$58.9 million for 1995, 1994 and 1993, respectively. The Plan
trustee held 5,015,075 shares, 6,380,355 shares and 5,996,806
shares of Aetna Life and Casualty Company's common stock for Plan
participants at the end of 1995, 1994 and 1993, respectively.
<PAGE> 114
Notes to Financial Statements (Continued)
14. Benefit Plans (Continued)
1994 Stock Incentive Plan - The company's 1994 stock incentive
plan replaced the 1984 stock option plan. The 1994 plan provides
for stock options (see (1) Stock Options), and deferred
contingent common stock or cash awards (see (2)Incentive Units) to
certain key employees. The maximum number of shares of common
stock issuable under the 1994 Stock Incentive Plan is 8 million, of
which options and units to receive 2,374,540 and 1,502,900 shares were
granted during 1995 and 1994, respectively. The total amount charged to
operations (including continuing and Discontinued Operations) for the
1994 Stock Incentive Plan, which was determined from factors relating to
various performance measures, was $36.3 million and $19.2 million,
pretax, for the years ended December 31, 1995 and 1994, respectively.
(1) Stock Options - Executive and middle management employees
may be granted options to purchase common stock of the company at or
above the market price on the date of grant. Certain options granted
prior to 1992 contain stock appreciation rights permitting the
employee to exercise those rights and receive the excess of fair
market value at the date of exercise over the grant date fair
market value in cash and/or stock.
Stock option transactions under the 1994 Stock Incentive Plan and
the 1984 Stock Option Plan are summarized below:
<TABLE>
<CAPTION>
Range of
Number Option Prices
of Shares Per Share
____________________________________________________________________
<S> <C> <C>
Outstanding at December 31, 1992 5,789,649 $29.50-$61.50
Granted 1,034,560 $46.75-$55.00
Exercised (2,025,696) $29.50-$61.50
Canceled or expired (188,990) $29.50-$61.50
____________________________________________________________________
Outstanding at December 31, 1993 4,609,523 $29.50-$61.50
Granted 1,140,100 $46.50-$55.25
Exercised (464,790) $29.50-$61.50
Canceled or expired (211,875) $29.50-$61.50
____________________________________________________________________
Outstanding at December 31, 1994 5,072,958 $41.50-$61.50
Granted 2,131,100 $50.50-$72.25
Exercised (2,198,219) $41.50-$61.50
Canceled or expired (122,178) $42.13-$61.50
____________________________________________________________________
Outstanding at December 31, 1995 4,883,661 $41.50-$72.25
____________________________________________________________________
Range of expiration dates 6/96-10/2005
____________________________________________________________________
Options exercisable at
December 31, 1995 2,110,474
____________________________________________________________________
</TABLE>
(2) Incentive Units - Executive and middle management employees
may be granted incentive units under the 1994 Stock Incentive
Plan, which are rights to receive common stock or cash at the end
of a vesting period (currently 1996 and 1998) conditioned upon the
employee's continued employment during that period and achievement
of company performance goals. The incentive unit holders are not
entitled to dividends during the vesting period.
<PAGE> 115
Notes to Financial Statements (Continued)
14. Benefit Plans (Continued)
Incentive unit transactions related to the 1994 Stock Incentive
Plan under which holders may be entitled to receive common stock,
are summarized below:
<TABLE>
<CAPTION>
Number
of Shares
_______________________________________________________
<S> <C>
Granted 362,800
Canceled or expired (17,000)
__________
Outstanding at December 31, 1994 345,800
Granted 243,440
Vested (24,320)
__________
Outstanding at December 31, 1995 564,920
__________
__________
</TABLE>
15. Segment Information (1)(2)(3)(4)(5)
Summarized financial information for the company's principal
operations was as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
__________________________________________________________________________________
<S> <C> <C> <C>
Revenue:
Aetna Health Plans $ 7,615.4 $ 7,139.1 $ 6,106.0
Aetna Life Insurance & Annuity 1,624.2 1,437.4 1,395.3
International 1,459.8 1,297.0 1,279.3
Large Case Pensions 2,268.9 2,355.2 2,566.0
Corporate: Other 9.7 (9.7) (6.9)
_________________________________
Total revenue $12,978.0 $12,219.0 $11,339.7
__________________________________________________________________________________
_________________________________
Income (Loss) from continuing operations
before income taxes, extraordinary item
and cumulative effect adjustments:
Aetna Health Plans $ 454.4 $ 538.1 $ 414.9
Aetna Life Insurance & Annuity 294.8 235.0 173.3
International 127.3 98.8 2.2
Large Case Pensions 132.7 81.1 (1,274.2)
Corporate: Interest (108.3) (94.8) (69.3)
Other (174.7) (230.7) (261.6)
_________________________________
Total income (loss) from continuing
operations before income taxes,
extraordinary item and
cumulative effect adjustments $ 726.2 $ 627.5 $(1,014.7)
__________________________________________________________________________________
_________________________________
Net income (loss):
Aetna Health Plans $ 286.0 $ 341.7 $ 272.2
Aetna Life Insurance & Annuity 198.0 159.1 111.4
International 86.6 71.2 55.0
Large Case Pensions 89.2 54.4 (822.3)
Corporate: Interest (70.4) (60.5) (44.7)
Other (115.5) (156.5) (173.9)
_________________________________
Income (Loss) from continuing operations
before extraordinary item and
cumulative effect adjustments 473.9 409.4 (602.3)
Income (Loss) from Discontinued Operations,
net of tax (222.2) 58.1 290.3
_________________________________
Income (Loss) before extraordinary
item and cumulative effect
adjustments 251.7 467.5 (312.0)
Extraordinary loss on debenture redemption - - (4.7)
Cumulative effect adjustments - - (49.2)
_________________________________
Net income (loss) $ 251.7 $ 467.5 $ (365.9)
__________________________________________________________________________________
_________________________________
</TABLE>
<PAGE> 116
Notes to Financial Statements (Continued)
15. Segment Information (1)(2)(3)(4)(5) (Continued)
<TABLE>
<CAPTION>
(Millions) 1995 1994
__________________________________________________________________
<S> <C> <C>
Assets:
Aetna Health Plans $ 6,784.0 $ 6,184.7
Aetna Life Insurance & Annuity 27,509.6 21,318.2
International 4,383.8 4,532.9
Large Case Pensions 40,833.4 40,525.1
Corporate 880.1 (241.5)
Discontinued Operations, net 3,932.8 3,167.3
_________________________
Total assets $ 84,323.7 $ 75,486.7
___________________________________________________________________
_________________________
<FN>
(1) The 1993 results from continuing operations before extraordinary item and cumulative effect
adjustments include an after-tax loss on the discontinuance of fully guaranteed large case
pension products of $825.0 million ($1,270.0 million pretax). This loss affected the Large
Case Pensions segment only.
(2) Assets at December 31, 1995 and 1994 include $10.6 billion and $12.4 billion, respectively,
of assets attributable to discontinued products. Discontinued products are included in the
Large Case Pensions segment.
(3) The 1993 results from continuing operations before extraordinary item and cumulative effect
adjustments include a net benefit of $21.8 million related to a change in the federal
corporate tax rate from 34% to 35%. Of the $21.8 million benefit, $2.9 million reduced Aetna
Health Plans results, $1.8 million reduced Large Case Pensions results, $4.4 million reduced
Aetna Life Insurance & Annuity results, $.6 million increased International results,
$7.6 million increased Corporate results, and $23.0 million increased results from
Discontinued Operations.
(4) The 1993 results reflect after tax severance and facilities charges of $200.0 million
($308.0 million pretax). Of the total 1993 charge, $51.9 million ($79.8 million pretax) was
allocated to Aetna Health Plans, $20.0 million ($30.8 million pretax) to Aetna Life Insurance
& Annuity, $7.1 million ($11.0 million pretax) to International, $14.2 million ($21.9 million
pretax) to Large Case Pensions, $11.2 million ($17.2 million pretax) to Corporate and
$95.6 million ($147.3 million pretax) to Discontinued Operations.
(5) The 1995 results from Discontinued Operations include a $259.5 million after tax charges for
asbestos-related claims and a $505.7 million after tax charges for environmental-related
claims.
</TABLE>
<PAGE> 117
Notes to Financial Statements (Continued)
16. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of the company's
financial instruments at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
Continuing Operations
_________________________________________________
(Millions) 1995 1994
_________________________________________________
Carrying Fair Carrying Fair
Value Value Value Value
________ _____ ________ _____
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,712.7 $ 1,712.7 $ 2,277.2 $ 2,277.2
Short-term investments 607.8 607.8 344.4 344.4
Debt securities 31,860.3 31,860.3 27,525.4 27,522.2
Equity securities 659.7 659.7 614.6 614.6
Mortgage loans 8,327.2 8,544.0 10,389.9 10,109.9
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 9,779.6 $ 9,738.2 $11,562.3 $11,555.1
Without a fixed maturity 12,316.2 12,332.7 11,250.6 10,927.9
Short-term debt 389.6 389.6 14.8 14.8
Long-term debt 989.1 988.3 1,079.2 973.9
Discontinued Operations
_________________________________________________
(Millions) 1995 1994
_________________________________________________
Carrying Fair Carrying Fair
Value Value Value Value
________ _____ ________ _____
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,153.6 $ 1,153.6 $ 676.4 $ 676.4
Short-term investments 137.2 137.2 106.0 106.0
Debt securities 11,705.6 11,705.6 9,586.1 9,579.7
Equity securities 525.5 525.5 1,041.0 1,041.0
Mortgage loans 1,061.7 1,052.7 1,453.7 1,416.0
Liabilities:
Short-term debt $ - $ - $ 9.1 $ 9.1
Long-term debt 35.2 35.2 35.5 35.5
</TABLE>
Fair value estimates are made at a specific point in time, based
on available market information and judgments about the financial
instrument, such as estimates of timing and amount of expected
future cash flows. Such estimates do not reflect any premium or
discount that could result from offering for sale at one time the
company's entire holdings of a particular financial instrument,
nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent
markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the company's
management of interest rate and liquidity risk, and currency
exposures, the fair values of all assets and liabilities should be
taken into consideration, not only those presented above.
<PAGE> 118
Notes to Financial Statements (Continued)
16. Financial Instruments (continued)
Estimated Fair Value (continued)
The following valuation methods and assumptions were used by the
company in estimating the fair value of the above financial
instruments:
Short-term instruments: Fair values are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, the carrying amounts reported in the
Consolidated Balance Sheets approximate fair value. Short-term
instruments have a maturity date of one year or less and include
cash and cash equivalents, short-term investments and short-term
debt.
Debt and equity securities: Fair values are based on quoted
market prices or dealer quotations. Where quoted market prices or
dealer quotations are not available, fair values are estimated by
using quoted market prices for similar securities or discounted
cash flow methods.
Mortgage loans: Fair values are estimated by discounting expected
mortgage loan cash flows at market rates which reflect the rates
at which similar loans would be made to similar borrowers. The
rates reflect management's assessment of the credit quality and
the remaining duration of the loans. The fair value estimates of
mortgage loans of lower credit quality, including problem and
restructured loans, are based on the estimated fair value of the
underlying collateral.
Investment contract liabilities (included in policyholders' funds
left with the company):
With a fixed maturity: Fair value is estimated by discounting
cash flows at interest rates currently being offered by, or
available to, the company for similar contracts.
Without a fixed maturity: Fair value is estimated as the amount
payable to the contractholder upon demand. However, the company
has the right under such contracts to delay payment of withdrawals
which may ultimately result in paying an amount different than
that determined to be payable on demand.
Long-term debt: Fair value is based on quoted market prices for
the same or similar issued debt or, if no quoted market prices are
available, on the current rates estimated to be available to the
company for debt of similar terms and remaining maturities.
<PAGE> 119
Notes to Financial Statements (Continued)
16. Financial Instruments (Continued)
Off-Balance-Sheet Financial Instruments (including Derivative
Financial Instruments):
The notional amounts, carrying values and estimated fair values of
the company's off-balance-sheet financial instruments at
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
___________________________ ___________________________
Carrying Carrying
Value Value
Notional Asset Fair Notional Asset Fair
(Millions) Amount (Liability) Value Amount (Liability) Value
____________________________ ___________________________
1995
_____________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange forward
contracts - sell:
Related to net investments in
foreign affiliates $210.4 $ (2.0) $ (3.5) $ - $ - $ -
Related to investments in
nondollar denominated assets 54.0 (.1) (.1) 65.2 (.1) (.2)
Foreign exchange forward
contracts - buy:
Related to net investments in
foreign affiliates 2.7 .2 .4 - - -
Related to investments in
nondollar denominated assets 43.8 .1 .6 - - -
Interest rate swaps:
Unrecognized gains 43.0 - 9.5 380.0 - 20.4
Unrecognized losses - - - 380.0 - (20.2)
Futures contracts to sell
investments 20.9 .2 .2 - - -
Forward swap agreement 100.0 - .1 - - -
</TABLE>
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
____________________________ ____________________________
Carrying Carrying
Value Value
Notional Asset Fair Notional Asset Fair
(Millions) Amount (Liability) Value Amount (Liability) Value
____________________________ ___________________________
1994
_________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange forward
contracts - sell:
Related to net investments in
foreign affiliates $470.7 $ (2.7) $ (4.9) $ 27.1 $ .2 $ .2
Related to investments in
nondollar denominated assets 60.8 (1.0) (.1) 206.1 .2 (1.5)
Foreign exchange forward
contracts - buy:
Related to net investments in
foreign affiliates 48.5 5.2 4.8 - - -
Related to investments in
nondollar denominated assets 37.1 .5 .3 3.8 (.4) (.1)
Futures contracts to purchase
investments 122.5 .1 .1 - - -
Interest rate swaps:
Unrecognized gains 43.0 - 2.4 386.4 - 18.3
Unrecognized losses - - - 386.4 - (18.3)
</TABLE>
The notional amounts of these instruments do not represent the
company's risk of loss. The fair value amounts of these
instruments was estimated based on quoted market prices, dealer
quotations or internal price estimates believed to be comparable
to dealer quotations. These amounts reflect the estimated amounts
that the company would have to pay or would receive if the
contracts were terminated.
<PAGE> 120
Notes to Financial Statements (Continued)
16. Financial Instruments (Continued)
The company engages in hedging activities to manage foreign
exchange and interest rate risk. Such hedging activities have
principally consisted of using off-balance-sheet instruments
including foreign exchange forward contracts, futures and forward
contracts, and interest rate swap agreements. All of these
instruments involve, to varying degrees, elements of market risk
and credit risk in excess of the amounts recognized in the
Consolidated Balance Sheets. The company evaluates the risks
associated with off-balance-sheet financial instruments in a
manner similar to that used to evaluate the risks associated with
on-balance-sheet financial instruments. (Please see General
Account Investments - Use of Derivatives and Other Investments on
page 59 of Management's Discussion and Analysis of Financial
Condition and Results of Operations.) Market risk is the
possibility that future changes in market prices may make a
financial instrument less valuable. For off-balance-sheet
financial instruments used for hedging, such market price changes
are generally offset by the market price changes in the hedged
instruments held by the company. Credit risk arises from the
possibility that counterparties may fail to perform under the
terms of the contract, which could result in an unhedged position.
However, unlike on-balance-sheet financial instruments, where
credit risk generally is represented by the notional or principal
amount, the off-balance-sheet financial instruments' risk of
credit loss generally is significantly less than the notional
value of the instrument and is represented by the positive fair
value of the instrument. The company generally does not require
collateral or other security to support the financial instruments
discussed below. However, the company controls its exposure to
credit risk through credit approvals, credit limits and regular
monitoring procedures. There were no material concentrations of
off-balance-sheet financial instruments at December 31, 1995.
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange
fixed amounts of two different currencies at a specified future
date and at a specified price. The company utilizes foreign
exchange forward contracts to hedge its foreign currency exposure
arising from certain investments in foreign affiliates (primarily
Canada and Great Britain) and nondollar denominated investment
securities. The company generally utilizes foreign currency
contracts with terms of up to three months.
At December 31, 1995, the company had unhedged foreign currency
exposures for continuing operations of $555.8 million related to
net investments in foreign affiliates (primarily Taiwan, Mexico
and Chile) and $61.6 million related to investments in nondollar
denominated assets. These exposures include $317.8 million and
$8.6 million in net investments in foreign affiliates and
investments in nondollar denominated assets, respectively, for
which effective markets for hedging vehicles do not currently
exist. The unhedged foreign currency exposures for Discontinued
Operations were immaterial.
<PAGE> 121
Notes to Financial Statements (Continued)
16. Financial Instruments (Continued)
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
securities or money market instruments at a specified future date
and at a specified price or yield. Futures contracts trade on
organized exchanges and, therefore, have minimal credit risk.
Interest Rate Swaps:
The company utilizes interest rate swaps to manage certain
exposures related to changes in interest rates in Discontinued
Operations. This swap activity included transactions which were
entered into in prior years where the company acts as an
intermediary for entities whose debt the company has guaranteed to
allow them to convert variable rate debt to a fixed rate, with the
company retaining no interest rate risk. (Please refer to
Note 2.) Interest rate swap activity also includes exchanging
variable rate asset returns for fixed-rate returns.
17. Commitments and Contingent Liabilities
Commitments
Commitments to extend credit are legally binding agreements to
lend monies at a specified interest rate and within a specified
time period. Risk arises from the potential inability of
counterparties to perform under the terms of the contracts and
from interest rate fluctuations. The company's exposure to credit
risk is reduced by the existence of conditions within the
commitment agreements that release the company from its
obligations in the event of a material adverse change in the
counterparty's financial condition. At December 31, 1995 and
1994, the continuing operations of the company had $21.5 million
and $19.6 million, respectively, in commitments to fund
partnerships. The Discontinued Operations of the company had
$79.8 million and $120.0 million in commitments to fund
partnerships at December 31, 1995 and 1994, respectively.
Through the normal course of investment operations, the company
commits to either purchase or sell securities or money market
instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments
may result in either a higher or lower replacement cost. Also,
there is likely to be a change in the value of the securities
underlying the commitments. At December 31, 1995, the continuing
operations of the company had commitments to purchase investments
for $49.1 million, the fair value of which was $49.2 million.
<PAGE> 122
Notes to Financial Statements (Continued)
17. Commitments and Contingent Liabilities (Continued)
At December 31, 1995, the Discontinued Operations had commitments
to purchase investments for $66.9 million, the fair value of which
was $67.3 million.
The company has agreed with Travelers Group Inc. to invest up to
$200 million in a potential offering of common stock in a new
property-casualty entity to be established by Travelers Group Inc.
Leases
The company has entered into operating leases for office space and
certain computer and other equipment. Rental expenses for
continuing operations for these items were $203.0 million,
$206.4 million and $220.9 million for 1995, 1994 and 1993,
respectively. Future net minimum payments under noncancelable
leases as of December 31, 1995 for continuing operations are
estimated to be $159.3 million for 1996, $134.4 million for 1997,
$115.7 million for 1998, $110.9 million for 1999, $95.3 million
for 2000 and $622.8 million thereafter.
Included in these future payments are $149.9 million and
$328.5 million, attributable to the next five and subsequent eight
years, respectively, of a master lease for office space.
Concurrent with the sale of the Discontinued Operations, Travelers
will sublease the space currently occupied by the company at
market rates for a period of eight years. The company expects to
record a charge to continuing operations of approximately
$290.0 million pretax ($190.0 million after tax). Such charge
represents the present value of the difference between rent
required to be paid by the company under the master lease and
future rentals expected to be received by the company.
Litigation
The company is continuously involved in numerous lawsuits arising,
for the most part, in the ordinary course of its business
operations as an insurer. While the ultimate outcome of such
litigation cannot be determined at this time, such litigation, net
of reserves established therefor and giving effect to reinsurance
probable of recovery, 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.
<PAGE> 123
Independent Auditors' Report
The Shareholders and Board of Directors
Aetna Life and Casualty Company:
We have audited the consolidated balance sheets of Aetna Life and
Casualty Company and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial
statements present fairly, in all material respects, the financial
position of Aetna Life and Casualty Company and Subsidiaries at
December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial
statements, in 1993 the company changed its methods of accounting
for certain investments in debt and equity securities,
postemployment benefits, workers' compensation life table
indemnity reserves and retrospectively rated reinsurance
contracts.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
<PAGE> 124
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
(Millions, except per share data) First Second Third Fourth
__________________________________________________________________________________________________
<S> <C> <C> <C> <C>
1995 (1)(2)
__________________________________________________________________________________________________
Total revenue $ 3,192.3 $ 3,244.2 $ 3,191.0 $ 3,350.5
__________________________________________________________________________________________________
Income from continuing
operations before income taxes $ 143.4 $ 181.6 $ 176.0 $ 225.2
Federal and foreign income taxes 51.0 60.5 63.4 77.4
________________________________________________________
Income from continuing operations $ 92.4 $ 121.1 $ 112.6 $ 147.8
Income (Loss) from discontinued
operations, net of tax 68.4 (418.0) 99.5 27.9
________________________________________________________
Net income (loss) $ 160.8 $ (296.9) $ 212.1 $ 175.7
__________________________________________________________________________________________________
Per Share Results:
Income from continuing operations $ .82 $ 1.07 $ .99 $ 1.28
Income (Loss) from discontinued
operations, net of tax .60 (3.69) .87 .25
________________________________________________________
Net income (loss) $ 1.42 $ (2.62) $ 1.86 $ 1.53
__________________________________________________________________________________________________
Common Stock Data:
Dividends Declared $ .69 $ .69 $ .69 $ .69
Common Stock Prices, High 57.00 64.25 74.38 75.88
Common Stock Prices, Low 46.88 54.50 60.38 67.88
__________________________________________________________________________________________________
<FN>
(1) Second quarter 1995 net income includes reserve additions of $487.5 million, after tax,
related to environmental-related claims.
(2) Fourth quarter 1995 net income includes reserve additions of $218.1 million, after tax,
related to asbestos-related claims.
</TABLE>
<TABLE>
<CAPTION>
(Millions, except per share data) First Second Third Fourth
__________________________________________________________________________________________________
<S> <C> <C> <C> <C>
1994 (1)(2)(3)
__________________________________________________________________________________________________
Total revenue $ 2,935.5 $ 3,088.4 $ 3,099.4 $ 3,095.7
__________________________________________________________________________________________________
Income from continuing
operations before income taxes $ 119.1 $ 169.8 $ 157.8 $ 180.8
Federal and foreign income taxes 47.2 57.4 54.4 59.1
________________________________________________________
Income from continuing operations $ 71.9 $ 112.4 $ 103.4 $ 121.7
Income (Loss) from discontinued
operations, net of tax (26.2) 20.0 26.0 38.3
________________________________________________________
Net income $ 45.7 $ 132.4 $ 129.4 $ 160.0
__________________________________________________________________________________________________
Per Share Results:
Income from continuing operations $ .64 $ 1.00 $ .92 $ 1.08
Income (Loss) from discontinued
operations, net of tax (.24) .17 .23 .34
________________________________________________________
Net income $ .40 $ 1.17 $ 1.15 $ 1.42
__________________________________________________________________________________________________
Common Stock Data:
Dividends Declared $ .69 $ .69 $ .69 $ .69
Common Stock Prices, High 65.75 57.88 57.50 48.00
Common Stock Prices, Low 53.13 50.00 45.13 43.25
__________________________________________________________________________________________________
<FN>
Earnings per share calculations are based on results of stand-alone quarters.
Common stock prices are as reported on the NYSE-Composite Tape.
See Notes to Financial Statements.
(1) The 1994 net income includes net realized capital losses from additions to reserves
for mortgage loans and real estate and real estate write-downs, after taxes
and after gains and losses allocated to experience rated pension contractholders,
of $22.2 million, $19.8 million, $17.9 million and $6.5 million for the first,
second, third and fourth quarters of 1994, respectively.
(2) First quarter 1994 net income includes catastrophe losses of $123.8 million,
after tax, related primarily to the Los Angeles earthquake and severe winter weather.
(3) Second quarter 1994 net income includes prior year reserve additions of
$82.4 million, after tax, primarily related to environmental indemnity claims, offset
by $53.5 million, after tax, of prior year reserve releases in the personal auto
business.
</TABLE>
<PAGE> 125
Appendix to Exhibit 13
The following information, which is included/presented in tabular
form in this exhibit, is presented in the form of pie charts or a
graph in the printed 1995 annual report to shareholders of Aetna
Life and Casualty Company:
<TABLE>
<CAPTION>
Page No. in this Exhibit Description
________________________ ___________
<S> <C>
8 1995 Health Membership (1)
9 1995 Specialty Health Membership (1)
9 1995 Group Insurance Membership (1)
10 Participation in Risk versus Nonrisk Health Plans (2)
<FN>
(1) 1995 membership (included in tabular form with 1994 and 1993 membership) is
also presented in the form of a pie chart in the printed 1995 annual report to
shareholders of Aetna Life and Casualty Company.
(2) Presented in the form of a bar graph in the printed 1995 annual report to
shareholders of Aetna Life and Casualty Company.
</TABLE>
59
<PAGE> 1
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
<S> <C> <C>
Aetna Life and Casualty Company CT -
Aetna Life Insurance Company CT 100% owned by Aetna Life and Casualty Company
The Standard Fire Insurance Company CT 100% owned by Aetna Life and Casualty Company
The Aetna Casualty and Surety
Company CT 100% owned by Aetna Life and Casualty Company
Aetna Life Insurance Company of
Illinois IL 100% owned by Aetna Life and Casualty Company
Aetna Capital L.L.C. DE 95% owned by Aetna Life and Casualty Company(2)
Aetna Re-Insurance Company, (U.K.)
Ltd. United Kingdom 100% owned by Aetna Life and Casualty Company
Aetna International, Inc. CT 100% owned by Aetna Life and Casualty Company
Aetna Retirement Services, Inc. CT 100% owned by Aetna Life and Casualty Company
Aeltus Investment Management, Inc CT 100% owned by Aetna Life Insurance Company
CMBS Holding, Inc. TX 100% owned by Aetna Life Insurance Company
CDI Equity, Inc. DE 100% owned by Aetna Life Insurance Company
AHP Holdings, Inc. CT 100% owned by Aetna Life Insurance Company
Aetna Casualty Company CT 100% owned by Aetna Life Insurance Company
Human Affairs International,
Incorporated UT 100% owned by Aetna Life Insurance Company
The Automobile Insurance Company
of Hartford, Connecticut CT 100% owned by The Standard Fire Insurance
Company
Aetna Personal Security Insurance
Company CT 100% owned by The Standard Fire Insurance
Company
Aetna Insurance Company of Illinois IL 100% owned by The Standard Fire Insurance
Company
Aetna Insurance Company CT 100% owned by The Standard Fire Insurance
Company
Aetna Canada Holdings Limited Canada 100% owned by Aetna International, Inc.
Aetna Life Insurance Company of
America CT 100% owned by Aetna International, Inc.
Aetna Capital Holdings, Inc. CT 100% owned by Aetna International, Inc.
Aetna Life & Casualty (Bermuda) Ltd. Bermuda 100% owned by Aetna International, Inc.
Aetna Life Insurance and Annuity
Company CT 100% owned by Aetna Retirement Services, Inc.
Aetna Realty Investors, Inc. DE 100% owned by Aeltus Investment Management,
Inc.
Aeltus Capital, Inc. CT 100% owned by Aeltus Investment Management,
Inc.
Smith Whiley & Company DE 35% owned by Aeltus Investment Management,
Inc.
Aetna Health Plans of Ohio, Inc. OH 100% owned by AHP Holdings, Inc.
Aetna Health Plans of the
Mid-Atlantic, Inc. VA 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Florida, Inc. FL 100% owned by AHP Holdings, Inc.
Aetna Health Plans of the
Carolinas, Inc. NC 100% owned by AHP Holdings, Inc.
Aetna Dental Care of Kentucky, Inc. KY 100% owned by AHP Holdings, Inc.
Partners Health Plan of
Pennsylvania, Inc. PA 81% owned by AHP Holdings, Inc.
Aetna Health Plans of Central and
Eastern Pennsylvania, Inc. PA 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Georgia, Inc. GA 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Louisiana, Inc. LA 100% owned by AHP Holdings, Inc.
Aetna Dental Care of Texas, Inc. TX 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Arizona, Inc. AZ 100% owned by AHP Holdings, Inc.
Med Southwest, Inc. TX 55% owned by AHP Holdings, Inc.
Aetna Dental Care of California, Inc. CA 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Illinois, Inc. IL 100% owned by AHP Holdings, Inc.
Aetna Health Plans of Texas, Inc. TX 100% owned by AHP Holdings, Inc.
<FN>
(1) Percentages are rounded to the nearest whole percent and are based on ownership of
voting rights.
(2) Aetna Capital Holdings, Inc. owns 5% of Aetna Capital L.L.C.
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation Ownership (1)
<S> <C> <C>
PHPSNE Parent Corporation DE 55% owned by AHP Holdings, Inc.
Aetna Health Plans of Tennessee, Inc. TN 100% owned by AHP Holdings, Inc.
Healthways Systems, Inc. DE 100% owned by AHP Holdings, Inc.
Aetna Professional Management
Corporation CT 100% owned by AHP Holdings, Inc.
Aetna Health Management, Inc. TX 100% owned by AHP Holdings, Inc.
Aetna National Accounts U.K. Ltd. United Kingdom 100% owned by The Aetna Casualty
and Surety Company
Aetna Casualty Company of Connecticut CT 100% owned by The Aetna Casualty
and Surety Company
Aetna Excess and Surplus Lines
Company CT 100% owned by The Aetna Casualty
and Surety Company
Aetna Lloyds of Texas Insurance
Company TX 100% owned by The Aetna Casualty
and Surety Company
Aetna Casualty & Surety Company
of Illinois IL 100% owned by The Aetna Casualty
and Surety Company
Aetna Casualty & Surety Company of
Canada Canada 100% owned by The Aetna Casualty
and Surety Company
Aetna Casualty & Surety Company of
America CT 100% owned by The Aetna Casualty
and Surety Company
Executive Risk Inc. DE 39% owned by The Aetna Casualty
and Surety Company
Farmington Casualty Company CT 100% owned by The Aetna Casualty
and Surety Company
Aetna Commercial Insurance Company CT 100% owned by The Aetna Casualty
and Surety Company
Aetna Life Insurance Company of
Canada Canada 100% owned by Aetna Canada Holdings
Limited
Aetna Variable Encore Fund MA 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Variable Fund MA 98% owned by Aetna Life Insurance
and Annuity Company
Aetna Income Shares MA 99% owned by Aetna Life Insurance
and Annuity Company
Aetna Health Plans of Western
Pennsylvania, Inc. PA 100% owned by Partners Health Plan of
Pennsylvania, Inc.
Aetna Insurance Company of America CT 100% owned by Aetna Life Insurance
and Annuity Company
Southwest Physicians Life Insurance
Company TX 100% owned by Med Southwest, Inc.
Aetna Health Plans of North Texas, Inc. TX 100% owned by Med Southwest, Inc.
Executive Re Inc. DE 100% owned by Executive Risk Inc.
Aetna Series Fund MD 5% owned by Aetna Life Insurance
and Annuity Company(2)
Aetna Investment Advisers Fund, Inc. MD 100% owned by Aetna Life Insurance
and Annuity Company
Aetna Health Plans of Southern
New England, Inc. CT 100% owned by PHPSNE Parent Corporation
Aetna Health Plans of New York, Inc. NY 100% owned by Healthways Systems, Inc.
Aetna Health Plans of New Jersey, Inc. NJ 100% owned by Healthways Systems, Inc.
Aetna Health Plans of California, Inc. CA 100% owned by Aetna Health Management, Inc.
Aetna Government Health Plans, Inc. CA 100% owned by Aetna Health Management, Inc.
Executive Risk Indemnity, Inc. DE 100% owned by Executive Re Inc.
Executive Risk Specialty Insurance
Company CT 100% owned by Executive Risk Indemnity, Inc.
<FN>
(1) Percentages are rounded to the nearest whole percent and are based on ownership of
voting rights.
(2) Aetna Life Insurance Company owns 1%.
</TABLE>
<PAGE> 1
Consent of Independent Auditors
_______________________________
The Board of Directors
Aetna Life and Casualty Company:
We consent to incorporation by reference in the Registration Statements
(No. 33-12993 on Form S-3, No. 33-49543 on Form S-3, No. 33-50427 on
Form S-3, No. 33-52819 and No. 33-52819-01 on Form S-3, No. 2-91514 on
Form S-8 and No. 2-73911 on Form S-8 and No 33-62893 on Form S-8) of
Aetna Life and Casualty Company of our reports dated February 6, 1996,
relating to the consolidated balance sheets of Aetna Life and Casualty
Company and Subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, shareholders' equity, and
cash flows and related schedules for each of the years in the three-year
period ended December 31, 1995, which reports appear in or are
incorporated by reference in the December 31, 1995 annual report on Form
10-K of Aetna Life and Casualty Company.
Our reports refer to changes in 1993 in the Company's accounting for
certain investments in debt and equity securities, postemployment
benefits, workers' compensation life table indemnity reserves and
retrospectively rated reinsurance contracts.
By /s/ KPMG Peat Marwick LLP
_____________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
February 26, 1996
<PAGE> 1
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life and Casualty
Company (the "Company"), hereby severally constitute and appoint Zoe
Baird, Richard L. Huber and Robert J. Price, and each of them
individually, our true and lawful attorneys, with full power to them and
each of them to sign for us, and in our names and in the capacities
indicated below, the Company's 1995 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K
and to any and all amendments thereto.
WITNESS our hands and common seal on this 16th day of February, 1996.
<TABLE>
<CAPTION>
<S> <C>
_____________________________ ______________________________
Ronald E. Compton Ellen M. Hancock
Chairman, President and Director Director
(Principal Executive Officer)
/s/ Wallace Barnes
_____________________________ ______________________________
Wallace Barnes Michael H. Jordan
Director Director
_____________________________ ______________________________
William H. Donaldson Jack D. Kuehler
Director Director
_____________________________ ______________________________
Barbara Hackman Franklin Frank R. O'Keefe, Jr.
Director Director
_____________________________ ______________________________
Earl G. Graves Judith Rodin
Director Director
______________________________ _______________________________
Gerald Greenwald Richard L. Huber
Director Vice Chairman for Strategy and Finance
(Principal Financial Officer)
</TABLE>
<PAGE> 2
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life and Casualty
Company (the "Company"), hereby severally constitute and appoint Zoe
Baird, Richard L. Huber and Robert J. Price, and each of them
individually, our true and lawful attorneys, with full power to them and
each of them to sign for us, and in our names and in the capacities
indicated below, the Company's 1995 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K
and to any and all amendments thereto.
WITNESS our hands and common seal on this 22nd day of February, 1996.
<TABLE>
<CAPTION>
<S> <C>
_____________________________ ______________________________
Ronald E. Compton Ellen M. Hancock
Chairman, President and Director Director
(Principal Executive Officer)
_____________________________ ______________________________
Wallace Barnes Michael H. Jordan
Director Director
_____________________________ ______________________________
William H. Donaldson Jack D. Kuehler
Director Director
_____________________________ ______________________________
Barbara Hackman Franklin Frank R. O'Keefe, Jr.
Director Director
/s/ Earl G. Graves
_____________________________ ______________________________
Earl G. Graves Judith Rodin
Director Director
______________________________ _______________________________
Gerald Greenwald Richard L. Huber
Director Vice Chairman for Strategy and Finance
(Principal Financial Officer)
</TABLE>
<PAGE> 3
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life and Casualty
Company (the "Company"), hereby severally constitute and appoint Zoe
Baird, Richard L. Huber and Robert J. Price, and each of them
individually, our true and lawful attorneys, with full power to them and
each of them to sign for us, and in our names and in the capacities
indicated below, the Company's 1995 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to the Form 10-K
and to any and all amendments thereto.
WITNESS our hands and common seal on this 23rd day of February, 1996.
<TABLE>
<CAPTION>
<S> <C>
/s/ R. E. Compton /s/ Ellen M. Hancock
_____________________________ ______________________________
Ronald E. Compton Ellen M. Hancock
Chairman, President and Director Director
(Principal Executive Officer)
/s/ Michael H. Jordon
_____________________________ ______________________________
Wallace Barnes Michael H. Jordan
Director Director
/s/ William H. Donaldson /s/ Jack D. Kuehler
_____________________________ _____________________________
William H. Donaldson Jack D. Kuehler
Director Director
/s/ Barbara H. Franklin /s/ Frank R. O'Keefe, Jr.
_____________________________ ______________________________
Barbara Hackman Franklin Frank R. O'Keefe, Jr.
Director Director
/s/ Judith Rodin
_____________________________ ______________________________
Earl G. Graves Judith Rodin
Director Director
/s/ G. Greenwald /s/ R. L. Huber
_____________________________ ______________________________
Gerald Greenwald Richard L. Huber
Director Vice Chairman for Strategy and Finance
(Principal Financial Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-K for the fiscal year ended
December 31, 1995 for Aetna Life and Casualty Company and is qualified in its
entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 31,860
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 660
<MORTGAGE> 8,327
<REAL-ESTATE> 1,277
<TOTAL-INVEST> 44,050
<CASH> 1,713
<RECOVER-REINSURE> 109
<DEFERRED-ACQUISITION> 1,953
<TOTAL-ASSETS> 84,324
<POLICY-LOSSES> 18,373
<UNEARNED-PREMIUMS> 142
<POLICY-OTHER> 1,563
<POLICY-HOLDER-FUNDS> 22,899
<NOTES-PAYABLE> 989
<COMMON> 1,448
0
0
<OTHER-SE> 5,825
<TOTAL-LIABILITY-AND-EQUITY> 84,324
7,431
<INVESTMENT-INCOME> 3,575
<INVESTMENT-GAINS> 47
<OTHER-INCOME> 1,924
<BENEFITS> 9,027
<UNDERWRITING-AMORTIZATION> 137
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 726
<INCOME-TAX> 252
<INCOME-CONTINUING> 474
<DISCONTINUED> (222)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 11,144<F2>
<PROVISION-CURRENT> 3,099
<PROVISION-PRIOR> 1,134
<PAYMENTS-CURRENT> 1,092
<PAYMENTS-PRIOR> 2,540
<RESERVE-CLOSE> 11,745<F2>
<CUMULATIVE-DEFICIENCY> (1,134)
<FN>
<F1>There is not a significant difference between primary and fully diluted
earnings per share.
<F2>Amounts are net of reinsurance recoverables and deductible amounts
recoverable from policyholders.
</FN>
</TABLE>
