<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
_______________
Commission file number 1-5704
________
Aetna Services, Inc.
_____________________________________________________________________________
(Exact name of registrant as specified in its charter)
Connecticut 06-0843808
___________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
___________________________________________________________________________
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
______________________
Aetna Life and Casualty Company
______________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No _____
_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at July 18, 1996
________________ _________________
Common Capital Stock
without par value 115,721,039
<PAGE> 2
TABLE OF CONTENTS
_________________
Page
____
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders'
Equity 6
Consolidated Statements of Cash Flows 7
Condensed Notes to Financial Statements 8
Independent Auditors' Review Report 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 50
Item 2. Changes in Securities. 50
Item 4. Submission of Matters to a Vote of
Security Holders. 50
Item 5. Other Information. 51
Item 6. Exhibits and Reports on Form 8-K. 51
Signatures 55
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
AETNA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
_________________________ __________________________
(Millions, except share and per share data) 1996 1995 1996 1995
____ ____ ____ ____
<S> <C> <C> <C> <C>
Revenue:
Premiums..................................... $ 1,710.8 $ 1,822.5 $ 3,554.7 $ 3,704.6
Net investment income........................ 893.8 919.5 1,780.1 1,789.5
Fees and other income........................ 548.1 486.3 1,066.3 939.7
Net realized capital gains................... 4.4 15.9 66.4 2.7
____________ ____________ ____________ ____________
Total revenue............................ 3,157.1 3,244.2 6,467.5 6,436.5
____________ ____________ ____________ ____________
Benefits and expenses:
Current and future benefits.................. 2,059.4 2,256.2 4,296.3 4,531.9
Operating expenses........................... 801.0 769.8 1,591.2 1,510.5
Amortization of deferred policy acquisition
costs....................................... 38.1 36.6 75.1 69.1
Reduction of loss on discontinued products... (170.0) - (170.0) -
Facilities and severance charges............. 392.7 - 392.7 -
____________ ____________ ____________ ____________
Total benefits and expenses.............. 3,121.2 3,062.6 6,185.3 6,111.5
____________ ____________ ____________ ____________
Income from continuing operations before income
taxes........................................ 35.9 181.6 282.2 325.0
Federal and foreign income taxes (benefits):
Current...................................... 62.0 115.2 124.8 93.0
Deferred..................................... (50.4) (54.7) (32.4) 18.5
____________ ____________ ____________ ___________
Total federal and foreign income taxes... 11.6 60.5 92.4 111.5
____________ ____________ ____________ ___________
Income from continuing operations.............. 24.3 121.1 189.8 213.5
Discontinued operations, net of tax:
Income (Loss) from operations................ - (418.0) 182.2 (349.6)
Gain on sale................................. 263.7 - 263.7 -
____________ ____________ ____________ ___________
Net income (loss)........................ $ 288.0 $ (296.9) $ 635.7 $ (136.1)
____________ ____________ ____________ ___________
____________ ____________ ____________ ___________
Results per common share:
Income from continuing operations.............. $ .21 $ 1.07 $ 1.63 $ 1.89
Discontinued operations, net of tax:
Income (Loss) from operations................ - (3.69) 1.57 (3.09)
Gain on sale................................. 2.26 - 2.27 -
____________ ____________ ____________ ____________
Net income (loss) ........................... $ 2.47 $ (2.62) $ 5.47 $ (1.20)
_ ____________ ____________ ____________ ____________
_ ____________ ____________ ____________ ____________
Dividends declared........................... $ - $ .69 $ .69 $ 1.38
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Weighted average common shares and common
stock equivalents outstanding.............. 116,490,454 113,033,255 116,297,376 112,871,537
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 4
AETNA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1996 1995
_____________ ____________
<S> <C> <C>
Assets:
Investments:
Debt securities available for sale,
at fair value (amortized cost
$29,484.1 and $29,962.5)......... $ 29,827.8 $ 31,860.3
Equity securities, at fair value
(cost $985.8 and $597.8)........... 1,224.7 659.7
Short-term investments................ 1,729.5 607.8
Mortgage loans........................ 7,493.0 8,327.2
Real estate........................... 1,210.7 1,277.3
Policy loans.......................... 651.7 629.4
Other................................. 707.5 688.6
___________ ___________
Total investments............... 42,844.9 44,050.3
Cash and cash equivalents............. 4,253.5 1,712.7
Accrued investment income............. 557.2 618.3
Premiums due and other receivables.... 1,111.7 1,080.9
Deferred federal and foreign income
taxes................................ 538.9 271.5
Deferred policy acquisition costs..... 2,078.4 1,953.1
Other assets.......................... 1,051.8 1,004.4
Separate Accounts assets.............. 32,281.0 29,699.7
Net assets of Discontinued
Operations........................... - 3,932.8
____________ ___________
Total assets.................... $ 84,717.4 $ 84,323.7
____________ ___________
____________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 5
AETNA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
June 30, December 31,
(Millions, except share and per share data) 1996 1995
_____________ ____________
<S> <C> <C>
Liabilities:
Future policy benefits........................ $ 18,322.2 $ 18,372.9
Unpaid claims and claim expenses.............. 1,413.0 1,563.1
Unearned premiums............................. 244.8 142.4
Policyholders' funds left with the company.... 20,711.4 22,898.7
___________ ___________
Total insurance liabilities............... 40,691.4 42,977.1
Dividends payable to shareholders............. - 79.2
Short-term debt............................... 34.1 389.6
Long-term debt................................ 986.7 989.1
Current federal and foreign income taxes...... 71.0 154.0
Other liabilities............................. 2,903.7 2,344.2
Participating policyholders' interests........ 194.8 204.8
Separate Accounts liabilities................. 32,218.4 29,637.9
___________ ___________
Total liabilities......................... 77,100.1 76,775.9
___________ ___________
Minority interest in preferred
securities of subsidiary..................... 275.0 275.0
___________ ___________
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;
115,989,660 and 115,013,675 issued, and
115,704,114 and 114,727,093 outstanding)..... 1,499.6 1,448.2
Net unrealized capital gains.................. 103.2 641.1
Retained earnings............................. 5,751.6 5,195.6
Treasury stock, at cost (285,546 and
286,582 shares).............................. (12.1) (12.1)
___________ ___________
Total shareholders' equity................ 7,342.3 7,272.8
___________ ___________
Total liabilities, minority interest and
shareholders' equity..................... $ 84,717.4 $ 84,323.7
___________ ___________
___________ ___________
Shareholders' equity per common share......... $ 63.46 $ 63.39
___________ ___________
___________ ___________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 6
AETNA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Millions, except share data)
Net
Common Unrealized
Capital Capital Retained Treasury
Six Months Ended June 30, 1996 Total Stock Gains (Losses) Earnings Stock
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $7,272.8 $1,448.2 $ 641.1 $5,195.6 $ (12.1)
__________________________________________________________________________________________________________
Net income............................ 635.7 635.7
Change in net unrealized capital gains
or losses........................... (537.9) (537.9)
Common stock issued for benefit plans
(977,021 shares).................... 51.4 51.4
Common stock dividends declared....... (79.7) (79.7)
__________________________________________________________________
Balances at June 30, 1996 $7,342.3 $1,499.6 $ 103.2 $5,751.6 $ (12.1)
___________________________________________________________________________________________________________
___________________________________________________________________
Six Months Ended June 30, 1995
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $5,503.0 $1,419.2 $(1,071.5) $5,259.6 $ (104.3)
__________________________________________________________________________________________________________
Net loss.............................. (136.1) (136.1)
Change in net unrealized capital gains
or losses........................... 1,416.1 1,416.1
Common stock issued for benefit plans
(562,240 shares).................... 29.7 29.7
Loss on issuance of treasury stock.... (3.3) (3.3)
Common stock dividends declared....... (156.4) (156.4)
__________________________________________________________________
Balances at June 30, 1995 $6,653.0 $1,415.9 $ 344.6 $4,967.1 $ (74.6)
__________________________________________________________________________________________________________
__________________________________________________________________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 7
AETNA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
________________________
(Millions) 1996 1995
____ ____
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................................. $ 635.7 $ (136.1)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Income from Discontinued Operations............................ (182.2) 349.6
Decrease in accrued investment income.......................... 61.3 20.1
Decrease (Increase) in premiums due and other receivables...... 13.9 4.4
Increase in deferred policy acquisition costs.................. (123.4) (100.8)
Depreciation and amortization.................................. 90.3 70.1
(Decrease) Increase in federal and foreign income taxes........ (270.6) 19.7
Net increase (decrease) in other assets and other liabilities.. 655.9 (222.3)
(Decrease) Increase in insurance reserve liabilities........... (1,345.1) 170.6
Decrease in Minority interest.................................. - 4.1
Net realized capital gains..................................... (66.4) (2.7)
Net realized capital gains on sale of Discontinued Operations.. (263.7) -
Amortization of net investment discounts....................... (60.4) (66.5)
Other, net..................................................... .2 (61.8)
_________ _________
Net cash (used for) provided by operating activities......... (854.5) 48.4
_________ __________
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale............................. 7,681.8 6,594.3
Equity securities.............................................. 282.9 260.2
Mortgage loans................................................. 80.4 74.3
Real estate.................................................... 74.8 136.1
Short-term investments......................................... 17,489.7 24,842.6
Sale of Discontinued Operations................................ 4,134.1 -
Investment maturities and repayments of:
Debt securities available for sale............................. 1,730.0 722.8
Debt securities held for investment............................ - 176.2
Mortgage loans................................................. 691.7 823.5
Cost of investments in:
Debt securities available for sale............................. (8,026.7) (7,680.3)
Debt securities held for investment............................ - (7.2)
Equity securities.............................................. (643.1) (64.7)
Mortgage loans................................................. (98.3) (95.6)
Real estate.................................................... (23.9) (63.0)
Short-term investments......................................... (18,601.1) (24,963.6)
Decrease in property and equipment................................ (18.0) (82.6)
Net decrease in Separate Accounts................................. (1.0) (24.8)
Other, net........................................................ (47.3) (113.1)
_________ _________
Net cash provided by (used for) investing activities......... 4,706.0 535.1
_________ _________
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts........... 1,001.2 373.2
Withdrawals of investment contracts............................... (1,846.2) (1,367.9)
Issuance of long-term debt........................................ 4.6 3.8
Stock issued under benefit plans.................................. 51.4 26.4
Repayment of long-term debt....................................... (6.9) (1.6)
Net (decrease) increase in short-term debt........................ (356.1) 44.7
Dividends paid to shareholders.................................... (158.8) (156.4)
_________ _________
Net cash used for financing activities....................... (1,310.8) (1,077.8)
_________ _________
Effect of exchange rate changes on cash and cash
equivalents....................................................... .1 43.8
_________ _________
Net increase (decrease) in cash and cash equivalents................. 2,540.8 (450.5)
Cash and cash equivalents, beginning of period....................... 1,712.7 2,277.2
_________ _________
Cash and cash equivalents, end of period............................. $ 4,253.5 $ 1,826.7
_________ _________
_________ _________
Supplemental Cash Flow Information:
Interest paid..................................................... $ 56.1 $ 53.6
_________ _________
_________ _________
Income taxes paid ................................................ $ 202.5 $ 80.4
_________ _________
_________ _________
<FN>
See Condensed Notes to Financial Statements.
</TABLE>
<PAGE> 8
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements include Aetna Services, Inc.
(formerly Aetna Life and Casualty Company) and its majority-owned
subsidiaries (collectively, the "company"). Less than majority-
owned entities in which the company has at least a 20% interest
are reported on the equity basis. These consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1995 financial information to
conform to the 1996 presentation. These interim statements
necessarily rely heavily on estimates, including assumptions as to
annualized tax rates. In the opinion of management, all
adjustments necessary for a fair statement of results for the
interim periods have been made. All such adjustments are of a
normal, recurring nature.
(2) Merger with U.S. Healthcare
The company's merger transaction with U.S. Healthcare, Inc.
("U.S. Healthcare") was consummated on July 19, 1996. As a
result of the merger, the company and U.S. Healthcare are each
direct, wholly-owned subsidiaries of Aetna Inc. Pursuant to
the merger, each outstanding share of the company's common
stock became a share of common stock of Aetna Inc. and each
outstanding share of U.S. Healthcare common stock and Class B
Stock became a right to receive $34.20 in cash, 0.2246 shares
of Aetna Inc. common stock and 0.0749 shares of Aetna Inc.
6.25% Class C Voting Preferred Stock ("mandatorily convertible
preferred stock"). Aetna Inc. common stock and mandatorily
convertible preferred stock are traded on the New York Stock
Exchange.
The aggregate cash consideration paid to U.S. Healthcare
shareholders as a result of the merger was financed with $3.9
billion from the net proceeds received from the sale of the
company's property-casualty operations (see Note 4) and funds
made available from the issuance of $1.4 billion of commercial
paper by the company.
<PAGE> 9
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(3) Accounting Changes
Financial Accounting Standard ("FAS") No. 123, Accounting for
Stock-Based Compensation, is effective for 1996 reporting. This
statement addresses 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 has selected the disclosure alternative which
requires that such disclosures be included in full year financial
statements only.
(4) Sales of Subsidiaries
On April 2, 1996, the company completed the sale of its property-
casualty operations to an affiliate of the Travelers Insurance
Group Inc. ("Travelers") for approximately $4.1 billion in cash.
The sale resulted in a gain of approximately $263.7 million ($218.3
million pretax).
The operating results of the property-casualty operations were
presented as discontinued operations through the sale date.
Operating results for the period from January 1 to April 2 were:
<TABLE>
<CAPTION>
Millions) 1996
______________________________________________________________
<S> <C>
Total revenue $1,539.3
____________________________________________________________
________
Income before taxes $ 262.7
Income taxes 80.5
________
Income from Discontinued Operations $ 182.2
____________________________________________________________
________
</TABLE>
As a result of the sale, the company retained no property-
casualty liabilities other than those associated with
indemnifying Travelers for a portion of certain potential
liability exposures. While there can be no assurances,
management currently does not believe that the aggregate
ultimate loss arising from these indemnifications, if any, will
be material to the annual net income, liquidity or financial
condition of the company, although it is reasonably possible.
<PAGE> 10
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(5) Facilities and Severance Charges
The company recorded a $235.5 million after tax ($362.7 million
pretax) facilities and severance charge in the corporate segment
in the second quarter of 1996. The severance portion of the
charge, which is a result of the actions taken to reduce the level
of corporate expenses and other costs previously absorbed by the
property-casualty operations, includes the elimination of 475
positions. In conjunction with the sale of the company's
property-casualty operations, Travelers subleased the space
currently occupied by the company in the CityPlace office facility
in Hartford for eight years at current market rates. Included in
the above charge is $190 million (after tax) which represents the
present value of the difference between rent required to be paid
by the company under the lease and future rentals expected to be
received by the company.
Facilities and severance charges of $19.5 million after tax ($30.0
million pretax) were taken by Aetna Health Plans in the second
quarter of 1996 primarily related to actions taken or expected to
be taken to reduce information technology costs and are not
related to the U.S. Healthcare merger. The severance portion of
the charge is based on a plan that includes the elimination of 675
positions from the Aetna Health Plans segment.
These facilities and severance charges included the following
(pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased
(Millions) Severance Write-Off Property Other Total
________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Aetna Health Plans $ 20.8 $ .9 $ 3.5 $ 4.8 $ 30.0
Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7
__________________________________________________________
Total Company $ 49.3 $ 18.9 $316.7 $ 7.8 $392.7
_________________________________________________________________________________________
__________________________________________________________
<FN>
(1) Includes $292.2 million related to the CityPlace lease.
</TABLE>
Charges against the reserve in the second quarter of 1996 included
$14.4 million (pretax) primarily for severance from the Aetna
Health Plans segment and $12.0 million (pretax) for severance and
vacated leased property from the Corporate segment. In
conjunction with these charges, positions eliminated included 384
positions from the Aetna Health Plans segment and 180 positions
from the Corporate segment.
These severance actions and the vacating of the leased office
space (excluding the CityPlace lease) are expected to be
substantially completed by December 31, 1997. The remaining lease
payments (net of expected subrentals) on such vacated facilities
are payable over approximately the next 3 years.
<PAGE> 11
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Discontinued Products
Under the company's accounting for its discontinued fully
guaranteed large case pension products (guaranteed investment
contracts ("GICs") and single-premium annuities ("SPAs")), the
respective reserves for anticipated future losses are reviewed by
management quarterly. Accordingly, as long as the reserves
represent management's then best estimates of expected future
losses, results of operations of the discontinued products,
including net realized capital gains and losses, are
credited/charged to the respective reserve and do not affect the
company's results of operations. Management's review of the
reserves in the second quarter of 1996 included a re-evaluation of
assumptions relating to future real estate market conditions
(e.g., rental rate growth and vacancy rates) and considered the
continuing and recent favorable developments (compared to what had
been anticipated) which had been experienced in such markets. As
a result of this review, management released $170 million (pretax)
of the reserve related to GICs. The resulting reserves reflect
management's best estimate of the anticipated future net losses
for GICs and SPAs. To the extent that actual future losses are
greater than anticipated future net losses, the company's results
of operations would be adversely affected. Conversely, if actual
future losses are less than anticipated future losses, the
company's results of operations would be favorably affected.
(Please refer to the company's 1995 Annual Report to Shareholders
for a more complete discussion of the reserve for anticipated
future losses on discontinued products.)
<PAGE> 12
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Discontinued Products (Continued)
Results of discontinued products were as follows (pretax, in
millions):
<TABLE>
<CAPTION>
Charged
(Credited) to
Guaranteed Single- Reserve for
Investment Premium Future
Three months ended June 30, 1996 Contracts Annuities Total Losses Net*
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net investment income $ 92.8 $ 108.0 $ 200.8 $ - $ 200.8
Net realized capital gains (losses) 14.9 (12.8) 2.1 (2.1) -
Interest earned on receivable
from continuing business 5.3 7.8 13.1 - 13.1
Other income 3.1 3.8 6.9 - 6.9
_____________________________________________________________
Total revenue 116.1 106.8 222.9 (2.1) 220.8
_____________________________________________________________
Current and future benefits 100.2 98.7 198.9 12.9 211.8
Operating expenses 4.5 4.5 9.0 - 9.0
_____________________________________________________________
Total benefits and expenses 104.7 103.2 207.9 12.9 220.8
_____________________________________________________________
Results of discontinued products $ 11.4 $ 3.6 $ 15.0 $(15.0) $ -
_____________________________________________________________________________________________________
_____________________________________________________________
Charged
(Credited) to
Guaranteed Single- Reserve for
Investment Premium Future
Three months ended June 30, 1995 Contracts Annuities Total Losses Net*
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net investment income $ 138.3 $ 112.2 $ 250.5 $ - $ 250.5
Net realized capital gains (losses) (12.6) 14.4 1.8 (1.8) -
Interest earned on receivable
from continuing business 5.1 7.6 12.7 - 12.7
Other income 2.4 3.0 5.4 - 5.4
_____________________________________________________________
Total revenue 133.2 137.2 270.4 (1.8) 268.6
_____________________________________________________________
Current and future benefits 145.1 113.2 258.3 4.4 262.7
Operating expenses 1.9 4.0 5.9 - 5.9
_____________________________________________________________
Total benefits and expenses 147.0 117.2 264.2 4.4 268.6
_____________________________________________________________
Results of discontinued products $ (13.8) $ 20.0 $ 6.2 $ (6.2) $ -
_____________________________________________________________________________________________________
_____________________________________________________________
<FN>
* Amounts are reflected in the 1996 and 1995 Consolidated Statements of Income, except for interest of
$13.1 million and $12.7 million for the three months ended June 30, 1996 and 1995, respectively,
earned on the receivable from continuing business which is eliminated in consolidation.
</TABLE>
<PAGE> 13
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Discontinued Products (Continued)
<TABLE>
<CAPTION>
Charged
(Credited) to
Guaranteed Single- Reserve for
Investment Premium Future
Six months ended June 30, 1996 Contracts Annuities Total Losses Net*
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net investment income $ 198.9 $ 224.9 $ 423.8 $ - $ 423.8
Net realized capital gains (losses) 25.7 (1.7) 24.0 (24.0) -
Interest earned on receivable
from continuing business 10.6 15.6 26.2 - 26.2
Change in Accounting
Policy - FAS 121 5.4 2.9 8.3 - 8.3
Other income 4.9 6.9 11.8 - 11.8
_____________________________________________________________
Total revenue 245.5 248.6 494.1 (24.0) 470.1
_____________________________________________________________
Current and future benefits 202.6 206.0 408.6 50.1 458.7
Operating expenses 6.2 5.2 11.4 - 11.4
_____________________________________________________________
Total benefits and expenses 208.8 211.2 420.0 50.1 470.1
_____________________________________________________________
Results of discontinued products $ 36.7 $ 37.4 $ 74.1 $ (74.1) $ -
_____________________________________________________________________________________________________
_____________________________________________________________
Charged
(Credited) to
Guaranteed Single- Reserve for
Investment Premium Future
Six months ended June 30, 1995 Contracts Annuities Total Losses Net*
_____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net investment income $ 270.6 $ 222.3 $ 492.9 $ - $ 492.9
Net realized capital gains (losses) (31.1) 22.4 (8.7) 8.7 -
Interest earned on receivable
from continuing business 10.2 15.2 25.4 - 25.4
Other income 4.9 6.0 10.9 - 10.9
_____________________________________________________________
Total revenue 254.6 265.9 520.5 8.7 529.2
_____________________________________________________________
Current and future benefits 300.3 227.6 527.9 (5.8) 522.1
Operating expenses 1.6 5.5 7.1 - 7.1
_____________________________________________________________
Total benefits and expenses 301.9 233.1 535.0 (5.8) 529.2
_____________________________________________________________
Results of discontinued products $ (47.3) $ 32.8 $(14.5) $ 14.5 $ -
_____________________________________________________________________________________________________
_____________________________________________________________
<FN>
* Amounts are reflected in the 1996 and 1995 Consolidated Statements of Income, except for interest of
$26.2 million and $25.4 million for the six months ended June 30, 1996 and 1995, respectively,
earned on the receivable from continuing business which is eliminated in consolidation.
</TABLE>
<PAGE> 14
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Discontinued Products (Continued)
Assets and liabilities of discontinued products were as follows
(in millions):
<TABLE>
<CAPTION>
June 30, 1996
_______________________________________
Guaranteed Single-
Investment Premium
Contracts Annuities Total
_______________________________________
<S> <C> <C> <C>
Debt securities available for sale $ 1,829.5 $ 3,290.2 $ 5,119.7
Mortgage loans 1,692.0 1,444.1 3,136.1
Real estate 453.2 193.7 646.9
Short-term and other investments 104.8 214.4 319.2
_______________________________________
Total investments 4,079.5 5,142.4 9,221.9
Current and deferred income taxes 82.2 123.1 205.3
Receivable from continuing business 329.8 509.2 839.0
_______________________________________
Total assets $ 4,491.5 $ 5,774.7 $10,266.2
______________________________________________________________________________
_______________________________________
Future policy benefits $ - $ 4,852.4 $ 4,852.4
Policyholders' funds left with
the company 4,135.1 - 4,135.1
Reserve for future losses on
discontinued products 88.1 774.8 862.9
Other 268.3 147.5 415.8
_______________________________________
Total liabilities $ 4,491.5 $ 5,774.7 $10,266.2
______________________________________________________________________________
_______________________________________
</TABLE>
Net unrealized capital gains as of June 30, 1996 on available for
sale debt securities are included above in other liabilities 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 activity in the reserve for anticipated future losses on
discontinued products was as follows (pretax, in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
________________________________________
Guaranteed Single-
Investment Premium
Contracts Annuities Total
_______________________________________________________________________________
<S> <C> <C> <C>
Reserve at beginning of period $ 221.4 $ 737.4 $ 958.8
Results of discontinued products 36.7 37.4 74.1
Reserve release (170.0) - (170.0)
______________________________________
Reserve at end of period $ 88.1 $ 774.8 $ 862.9
____________________________________________________________________________
______________________________________
</TABLE>
<PAGE> 15
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(6) Discontinued Products (Continued)
At the time of discontinuance, a receivable from Large Case
Pensions' continuing business 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 the
continuing business. The interest on such payable generally
offsets the investment income on the assets available to fund the
shortfall. At June 30, 1996, for GICs and SPAs, the receivables
from continuing business, net of the related deferred taxes payable
of $17.6 million and $26.0 million, respectively, on the accrued
interest income, were $312.2 million and $483.2 million,
respectively. As of June 30, 1996, no funding had taken place.
These amounts are eliminated in consolidation and are therefore not
reflected on the Consolidated Balance Sheets.
(7) Investments
Net investment income includes amounts allocable to experience
rated contractholders of $343.6 million and $367.9 million for the
three months ended June 30, 1996 and 1995, respectively, and
$696.7 million and $728.7 million for the six months ended June 30,
1996 and 1995, respectively. Interest credited to contractholders
is included in current and future benefits.
Net realized capital gains allocable to experience rated
contractholders of $45.6 million and $46.3 million for the three
months ended June 30, 1996 and 1995, respectively, and
$83.7 million and $11.3 million for the six months ended June 30,
1996 and 1995, respectively, were deducted from net realized
capital gains 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.
The company applies the provisions of 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, individually to all loans in the portfolio and does
not aggregate smaller balance, homogeneous loans for separate
evaluation nor does it aggregate loans by major risk
classifications for the purpose of applying such provisions. 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
(minimum delays (i.e., up to 60 days) will not result in a loan
being considered impaired). For impaired loans, the measurement
method used is to establish a specific impairment reserve for the
difference between the recorded investment in the mortgage loan and
the fair value of the collateral. The company records full or
partial charge-offs of loans at the time an event occurs with the
borrower affecting the legal status of the loan. This typically
occurs at the time of foreclosure (actual or in-substance) or upon
a loan modification giving rise to forgiveness of debt.
<PAGE> 16
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Investments (Continued)
General reserves are established for losses management believes
are likely to arise from loans in the portfolio other than those
which have been specifically reserved for, but cannot be
attributed to specific loans.
At June 30, 1996, the total recorded investment in 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
$455 million for which no specific reserves are considered
necessary. This includes $191 million related to one mortgage
loan where the borrower has declared bankruptcy. No specific
reserve has been established for this loan because the loan is
well secured and the company does not anticipate any future
losses.
<TABLE>
<CAPTION>
Total
Recorded Specific
(Millions) Investment Reserves
________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 743.2 $ 98.4
Supporting experience rated products 523.4 97.8
Supporting remaining products 261.1 29.8
___________________________
Total Impaired Loans $ 1,527.7 $ 226.0
_________________________________________________________________________
___________________________
</TABLE>
The activity in the specific and general reserves for the six
months ended June 30, 1996 is summarized below:
<TABLE>
<CAPTION>
Charged Balance
Balance at to net Charged at
December 31, realized to other Principal June 30,
(Millions) 1995 loss (gain) accounts(1) Write-offs 1996
_______________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Supporting discontinued
products $ 287.5 $ - $ - $ (127.5) $ 160.0
Supporting experience
rated products 228.3 - (39.4) (29.1) 159.8
Supporting remaining
products 89.1 (10.6) - (19.6) 58.9
________________________________________________________________
Total -
continuing operations $ 604.9 $ (10.6) $ (39.4) $ (176.2) $ 378.7
______________________________________________________________________________________________
________________________________________________________________
<FN>
(1) Reflects adjustments of reserves related to assets supporting experience rated products and
discontinued products.
</TABLE>
<PAGE> 17
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Investments (Continued)
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 three and six months ended
June 30, 1996 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
_________________________ ____________________________
Average Average
Impaired Income Income Impaired Income Income
(Millions) Loans Earned Received Loans Earned Received
________________________________________________________________ ____________________________
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $ 692.9 $ 15.0 $ 16.0 $ 694.1 $ 30.0 $ 31.6
Supporting experience rated products 506.4 10.3 9.8 503.9 19.8 19.6
Supporting remaining products 228.2 4.2 5.0 223.4 9.7 9.7
__________________________ ___________________________
Total continuing operations $1,427.5 $ 29.5 $ 30.8 $1,421.4 $ 59.5 $ 60.9
________________________________________________________________ ___________________________
__________________________ ___________________________
</TABLE>
As of January 1, 1996, the company adopted FAS No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of. This statement requires long-lived assets to be
held and used to be written down to fair value when they are
considered impaired. Long-lived assets to be disposed of (e.g.,
real estate held for sale) are to be carried at the lower of cost
or fair value less estimated selling costs. In addition, this
statement does not allow long-lived assets to be disposed of to be
depreciated. As a result of the adoption of FAS No. 121,
valuation reserves at January 1, 1996 were increased by $52.9
million in connection with the reversal of previously recorded
accumulated depreciation related to properties held for sale. The
adoption of FAS No. 121 resulted in an immaterial impact on
results of operations.
<PAGE> 18
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(8) Debt
The company has a revolving credit facility aggregating
$2.5 billion with a worldwide group of banks. The facility
replaces the company's price credit facilities and terminates in
June 2001. Various interest rate options are available under the
facility and any borrowings mature on the expiration date of the
applicable credit commitment. The company pays facility fees
ranging from .065% to .20% per annum, depending upon the company's
long-term senior unsecured debt rating. The company is currently
paying a facility fee of .08%. The commitments require the
company to maintain shareholders' equity, excluding net unrealized
capital gains and losses, of at least $5.0 billion. As a result
of the merger with U.S. Healthcare, the minimum shareholders'
equity requirement was increased to $7.5 billion, and Aetna Inc.
became a guarantor to the credit facility. These facilities also
support the company's commercial paper borrowing program. (Please
refer to Note 2 for discussion of additional debt incurred in
connection with the merger with U.S. Healthcare.)
Pursuant to shelf registration statements declared effective by
the Securities and Exchange Commission ("SEC"), the company may
offer and sell up to $2.0 billion of debt securities guaranteed by
Aetna Inc., and Aetna Capital L.L.C., a subsidiary of the company,
may offer and sell up to an additional $225 million of preferred
securities to be guaranteed by Aetna Inc. It is anticipated that
the company will repay, depending upon market conditions, the
commercial paper borrowings related to the U.S. Healthcare merger
from funds generated internally by Aetna Inc. or its subsidiaries
and/or other sources which may include the proceeds from the sale
of debt securities registered pursuant to the above-indicated
shelf registration statement for debt.
<PAGE> 19
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(9) Off-Balance-Sheet Financial Instruments
(including Derivative Financial Instruments)
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. (Please see General
Account Investments - Use of Derivatives and Other Investments on
page 46 of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 16 of the company's
1995 Annual Report to Shareholders for a description of the
company's hedging activities). The notional amounts, carrying
values and estimated fair values of the company's off-balance-
sheet financial instruments are as follows (in millions):
<TABLE>
<CAPTION>
Carrying
Value
Notional Asset Fair
June 30, 1996 Amount (Liability) Value
______________________________________________________________________________
<S> <C> <C> <C>
Foreign exchange forward contracts - sell:
Related to net investments in foreign
affiliates $ 159.8 $ (.6) $ (2.8)
Related to investments in nondollar
denominated assets 93.2 (.4) (.4)
Foreign exchange forward contracts - buy:
Related to net investments in foreign
affiliates 6.4 .2 (.2)
Related to investments in nondollar
denominated assets 32.5 .2 -
Interest rate swaps 43.0 - 6.7
Forward contracts to purchase investments 4.9 - 5.0
Futures contracts to purchase investments 58.0 .1 .1
</TABLE>
At June 30, 1996, the continuing operations of the company had
commitments to purchase investments for $104.8 million, the fair
market value of which is $105.4 million.
(10) Supplemental Cash Flow Information
Significant noncash investing and financing activities of
continuing operations include acquisition of real estate through
foreclosures (including in-substance foreclosures) of mortgage
loans amounting to $66.1 million and $136.9 million for the six
months ended June 30, 1996 and 1995, respectively.
<PAGE> 20
AETNA SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Continued)
(11) Earnings Per Share
Earnings per share are computed using net income divided by the
weighted average number of common shares outstanding (including
common share equivalents in 1996). There is no difference between
primary and fully diluted earnings per share.
(12) 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, 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> 21
Independent Auditors' Review Report
The Board of Directors
Aetna Services, Inc.:
We have reviewed the accompanying condensed consolidated balance
sheet of Aetna Services, Inc. (formerly Aetna Life and Casualty
Company) and Subsidiaries as of June 30, 1996, and the related
condensed consolidated statements of income for the three-month
and six-month periods ended June 30, 1996 and 1995, and the
related condensed consolidated statements of shareholders' equity
and cash flows for the six-month periods ended June 30, 1996 and
1995. These condensed consolidated financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Aetna
Services, Inc. and Subsidiaries as of December 31, 1995, and the
related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended (not presented herein); and
in our report dated February 6, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, is fairly
presented, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
July 25, 1996
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Consolidated Results of Operations
__________________________________
<TABLE>
<CAPTION>
Operating Summary
(Millions, except per share data) Three Months Ended June 30, Six Months Ended June 30,
___________________________________ ________________________________
1996 1995 % Change 1996 1995 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................. $ 1,710.8 $ 1,822.5 (6.1)% $ 3,554.7 $ 3,704.6 (4.0)%
Net investment income................ 893.8 919.5 (2.8) 1,780.1 1,789.5 (.5)
Fees and other income................ 548.1 486.3 12.7 1,066.3 939.7 13.5
Net realized capital gains........... 4.4 15.9 (72.3) 66.4 2.7 -
_________ __________ _________ __________
Total revenue.................... 3,157.1 3,244.2 (2.7) 6,467.5 6,436.5 .5
Current and future benefits.......... 2,059.4 2,256.2 (8.7) 4,296.3 4,531.9 (5.2)
Operating expenses................... 801.0 769.8 4.1 1,591.2 1,510.5 5.3
Amortization of deferred policy
acquisition costs................... 38.1 36.6 4.1 75.1 69.1 8.7
Reduction of loss on discontinued
products............................ (170.0) - - (170.0) - -
Facilities and severance charges..... 392.7 - - 392.7 - -
_________ __________ _________ _________
Total benefits and expenses...... 3,121.2 3,062.6 1.9 6,185.3 6,111.5 1.2
_________ __________ _________ _________
Income from continuing operations
before income taxes................. 35.9 181.6 (80.2) 282.2 325.0 (13.2)
Income taxes......................... 11.6 60.5 (80.8) 92.4 111.5 (17.1)
_________ __________ _________ __________
Income from continuing operations.... 24.3 121.1 (79.9) 189.8 213.5 (11.1)
Discontinued operations, net of tax:
Income (loss) from operations....... - (418.0) 100.0 182.2 (349.6) -
Gain on sale........................ 263.7 - - 263.7 - -
_________ __________ _________ __________
Net income (loss)................ $ 288.0 $ (296.9) - $ 635.7 $ (136.1) -
_________ __________ _________ __________
_________ __________ _________ __________
Net realized capital gains (losses)
from continuing operations, net of
tax (included above)................ $ 2.6 $ 9.4 (72.3) $ 44.0 $ (1.2) -
_________ __________ _________ __________
_________ __________ _________ __________
Results per common share:
Income from continuing operations... $ .21 $ 1.07 (80.4) $ 1.63 $ 1.89 (13.8)
Discontinued operations, net of tax:
Income (loss) from operations...... - (3.69) 100.0 1.57 (3.09) -
Gain on sale....................... 2.26 - - 2.27 - -
_________ __________ _________ __________
Net income (loss)................... $ 2.47 $ (2.62) - $ 5.47 $ (1.20) -
_________ __________ _________ __________
_________ __________ _________ __________
</TABLE>
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
________
Merger with U.S. Healthcare
The company's merger transaction with U.S. Healthcare, Inc. ("U.S.
Healthcare") was consummated on July 19, 1996. As a result of the
merger, the company and U.S. Healthcare are each direct, wholly-
owned subsidiaries of Aetna Inc. Pursuant to the merger, each
outstanding share of the company's common stock became a share of
common stock of Aetna Inc. and each outstanding share of U.S.
Healthcare common stock and Class B Stock became a right to
receive $34.20 in cash, 0.2246 shares of Aetna Inc. common stock
and 0.0749 shares of Aetna Inc. 6.25% Class C Voting Preferred
Stock ("mandatorily convertible preferred stock").Aetna Inc.
common stock and mandatorily convertible preferred stock are
traded on the New York Stock Exchange.
The aggregate cash consideration paid to U.S. Healthcare
shareholders as a result of the merger was financed with $3.9
billion from the net proceeds received from the sale of the
company's property-casualty operations (see below) and funds made
available from the issuance of $1.4 billion of commercial paper by
the company.
As a result of the merger, Aetna Inc. will file periodic reports
under the Securities Exchange Act of 1934 (the "1934 Act")
commencing with the three month period ended September 30, 1996
and its consolidated results of operations will include the
results of the company and the results of U.S. Healthcare for
periods subsequent to July 19, 1996. The financial statements of
Aetna Inc. will include summarized financial information of the
company. The company and U.S. Healthcare are not expected to file
separate reports under the 1934 Act.
See "Income from Continuing Operations" on page 24 and "Liquidity
and Capital Resources" on page 47 for a discussion of certain
factors that are expected to impact the company due to the merger
with U.S. Healthcare.
For financial and business information regarding U.S. Healthcare,
see its 1995 Form 10-K and other reports filed with the Securities
and Exchange Commission ("SEC"). For unaudited pro forma
condensed consolidated financial information of Aetna Inc. which
gives effect to the sale of the property-casualty operations and
the merger with U.S. Healthcare, as appropriate, for the six and
twelve months ended June 30, 1996 and December 31, 1995,
respectively, see Aetna Inc.'s Form 8-K filed with the SEC on July
26, 1996.
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Sale of Property-Casualty Operations
On April 2, 1996, the company completed the sale of its property-
casualty operations to an affiliate of The Travelers Insurance
Group Inc. ("Travelers") for approximately $4.1 billion in cash.
The sale resulted in a gain of approximately $264 million (after
tax). (Please see Note 4 of Condensed Notes to Financial
Statements for a discussion of certain indemnifications related to
the sale.)
See "Facilities and Severance Charges" on page 26 for a discussion
of certain charges related to the sale.
Strategic Outlook
The company's merger with U.S. Healthcare represents a major step
in the company's previously announced strategic decision to focus
its resources on pursuing growth opportunities in its health care
business, and evaluating opportunities for growth and development
of its financial services and international operations.
Income from Continuing Operations
The company reported income from continuing operations of
$24 million and $190 million for the three and six months ended
June 30, 1996, respectively, compared with $121 million and $214
million for the same periods a year ago. Income from continuing
operations, excluding net realized capital gains and losses, for
the three and six months ended June 30, 1996 decreased $90 million
and $69 million, respectively, from the same periods a year ago.
The following significant factors affect the comparison of results
of continuing operations:
Results of continuing operations for the three and six
months ended June 30, 1996 included facilities and
severance charges of $255 million (after tax) related to
the CityPlace office facility lease, actions taken or
expected to be taken to reduce the level of corporate
expenses and other costs previously absorbed by the
property-casualty operations, and actions taken or
expected to be taken by Aetna Health Plans primarily to
reduce information technology costs. (Please see
"Facilities and Severance Charges" on page 26 for
further discussion.)
Results of continuing operations for the three and six
months ended June 30, 1996 included an $111 million
benefit (after tax) related to a reduction of the
reserve for anticipated future losses on discontinued
products, primarily as a result of continuing and recent
favorable developments in real estate markets. (Please
see "Discontinued Products" on page 34 for further
discussion.)
Results of continuing operations for both the three and
six months ended June 30, 1996 included $30 million
(after tax) of interest income earned on the net
proceeds received from the property-casualty sale.
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Income from continuing operations, excluding net realized capital
gains and losses and the items noted above, were $25 million and
$46 million higher for the three and six months ended June 30,
1996, respectively, compared with the same periods a year ago.
Aetna Inc.'s earnings from continuing operations for the three months
ending September 30, 1996 will reflect the interest earned on the net
proceeds from the property-casualty sale through July 19, 1996, the
closing date of the merger with U.S. Healthcare. Earnings will then
include the earnings of U.S. Healthcare and will be affected by, among
other things, the costs of financing the merger and the amortization
of approximately $8 billion of intangible assets (primarily goodwill)
created as a result of the merger. Aetna Inc. also anticipates that
the merger will yield increased operating income for the combined
health businesses of the companies resulting from expense savings and
increased revenues (the "estimated synergies"). The annual increase
in operating income is expected to be approximately $300 million
(after tax) per year, and is expected to be achieved within 18 months
of the closing of the transaction. Aetna Inc. anticipates taking
facilities and severance charges related to the merger (see
"Facilities and Severance Charges" on page 26). The estimated
synergies and the timing of their anticipated realization are forward-
looking information. For discussion of factors regarding such
forward-looking information, see "Forward-Looking Information" on page
49.
Net Realized Capital Gains and Losses
Net realized after-tax capital gains and losses from continuing
operations included in net income, allocable to experience rated
pension contractholders, and supporting discontinued products were as
follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
___________________________ _________________________
1996 1995 1996 1995
____ ____ ____ ____
<S> <C> <C> <C> <C>
Net realized capital gains from sales $ 8.5 $ 11.5 $ 49.5 $ 2.9
Net realized capital losses from changes
in reserves for mortgage loans and
real estate (5.9) (2.1) (5.5) (4.1)
_______ _______ _______ _______
Net realized capital gains (losses) from
continuing operations $ 2.6 $ 9.4 $ 44.0 $ (1.2)
_______ _______ _______ _______
_______ _______ _______ _______
Net realized capital gains allocable
to experience rated pension contractholders
(excluded above) $ 29.6 $ 30.1 $ 54.4 $ 7.3
_______ _______ _______ _______
_______ _______ _______ _______
Net realized capital gains (losses) on
assets supporting discontinued products
(excluded above) $ 1.4 $ 1.2 $ 15.6 $ (5.6)
_______ _______ _______ _______
_______ _______ _______ _______
</TABLE>
Net realized capital gains from sales for the three months ended June
30, 1996 include $25 million related to the sale of Aetna Realty
Investors ("ARI") to TA Associates, which was substantially offset by
net realized capital losses related to bond sales. Net realized
capital gains from sales for the six months ended June 30, 1996 also
include a $15 million gain from the sale of an HMO subsidiary.
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overview (Continued)
____________________
Facilities and Severance Charges
In conjunction with the sale of the company's property-casualty
operations, Travelers subleased the space currently occupied by
the company in the CityPlace office facility in Hartford for eight
years at current market rates. The company reflected a charge of
$190 million (after tax) during the second quarter of 1996
representing the present value of the difference between rent
required to be paid by the company under the lease and future
rentals expected to be received by the company. The company also
recorded additional facilities and severance charges of
$45 million (after tax) during the second quarter of 1996 due to
actions taken or expected to be taken to reduce the level of
corporate expenses and other costs previously absorbed by the
property-casualty operations.
Facilities and severance charges of $20 million (after tax) were
taken by Aetna Health Plans in the second quarter of 1996
primarily related to actions taken or expected to be taken to
reduce information technology costs and are not related to the
U.S. Healthcare merger.
These facilities and severance charges included the following
(pretax):
<TABLE>
<CAPTION>
Vacated
Asset Write- Leased
(Millions) Severance Off Property Other Total
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Aetna Health Plans $ 20.8 $ .9 $ 3.5 $ 4.8 $ 30.0
Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7
________ ________ ________ ________ ________
Total Company $ 49.3 $ 18.9 $ 316.7 $ 7.8 $ 392.7
________ ________ ________ ________ ________
________ ________ ________ ________ ________
<FN>
(1) Includes $292.2 million related to the CityPlace lease.
</TABLE>
These severance actions and the vacating of the leased office
space (excluding the CityPlace lease) are expected to be
substantially completed by December 31, 1997. The remaining lease
payments (net of expected subrentals) on such vacated facilities
are payable over approximately the next 3 years.
Aetna Inc. anticipates reflecting a significant charge in the
third quarter of 1996 related to restructuring actions expected to
be taken as a result of the integration of U.S. Healthcare. The
amount of such charge cannot be reasonably estimated at this time.
In addition, the company continues to conduct strategic and
financial reviews of all of its continuing operations in order to
make them more competitive. Such reviews may result in additional
restructuring actions in 1996, although the amount of any such
charges cannot be estimated at this time.
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Health Plans
__________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
__________________________________ ________________________________
1996 1995 % Change 1996 1995 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 1,355.7 $ 1,461.8 (7.3)% $ 2,907.8 $ 2,956.5 (1.6)%
Net investment income............... 97.2 96.5 .7 191.0 181.2 5.4
Fees and other income............... 381.6 336.1 13.5 737.2 643.6 14.5
Net realized capital gains (losses). (5.9) (5.9) - 25.3 (10.1) -
_________ _________ _________ _________
Total revenue.................... 1,828.6 1,888.5 (3.2) 3,861.3 3,771.2 2.4
Current and future benefits......... 1,177.9 1,273.1 (7.5) 2,522.8 2,546.4 (.9)
Operating expenses.................. 529.6 498.9 6.2 1,059.5 983.9 7.7
Amortization of deferred policy
acquisition costs.................. 2.3 6.4 (64.1) 5.1 13.2 (61.4)
Facilities and severance charge..... 30.0 - - 30.0 - -
_________ _________ _________ _________
Total benefits and expenses...... 1,739.8 1,778.4 (2.2) 3,617.4 3,543.5 2.1
_________ _________ _________ _________
Income before income taxes.......... 88.8 110.1 (19.3) 243.9 227.7 7.1
Income taxes........................ 31.2 40.6 (23.2) 84.9 84.6 .4
_________ _________ _________ _________
Net income.......................... $ 57.6 $ 69.5 (17.1) $ 159.0 $ 143.1 11.1
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains (losses),
net of tax (included above)........ $ (3.9) $ (3.5) (11.4) $ 17.6 $ (6.3) -
_________ _________ _________ _________
_________ _________ _________ _________
</TABLE>
Aetna Health Plans' net income for the three and six months ended
June 30, 1996 decreased by $12 million and increased by $16 million,
respectively, compared with the same periods a year ago. Excluding
net realized capital gains and losses, results for the three and six
months ended June 30, 1996 decreased $12 million and $8 million,
respectively, from the same periods a year ago. Such decreases
reflected an after-tax facilities and severance charge of $20 million
in the second quarter of 1996 related primarily to actions taken or
expected to be taken to reduce information technology costs. (Please
see "Facilities and Severance Charges" on page 26 for further
discussion.) Excluding net realized capital gains and losses and the
second quarter 1996 facilities and severance charge, earnings for the
three and six months ended June 30, 1996 increased $8 million and $12
million, respectively, from the same periods a year ago.
Second quarter and year-to-date earnings in the Group Insurance
business increased in 1996 primarily as a result of growth in
membership. Earnings in the Health and Specialty Health businesses
decreased slightly, in the aggregate, for the three and six months
ended June 30, 1996 when compared with the same periods a year ago.
Such earnings declined principally due to both the loss of a risk
contract with the Civilian Health and Medical Program for the
Uniformed Services ("Champus") as of April 1, 1996 and lower HMO
earnings (see discussion below), substantially offset by favorable
developments in the pharmacy business. HMO earnings were $9 million
and $19 million for the three and six months ended June 30, 1996
compared with $12 million and $23 million for the same periods a year
ago, respectively. The decrease in HMO earnings reflects an increase
in the medical loss ratio which was partially offset by growth in
commercial membership. The HMO medical loss ratios were 86.5% and
86.8% for the three and six months ended June 30, 1996, respectively,
as compared with 83.7% and 84.1% for the same periods a year ago.
This increase in the loss ratio is primarily attributable to the
impact of competitive pressures on pricing for the commercial HMO
product.
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Health Plans (Continued)
______________________________
Revenue, excluding net realized capital gains and losses, for the
Health and Specialty Health businesses decreased by $88 million or 6%
and $6 million or less than 1% for the three and six months ended
June 30, 1996, respectively, primarily due to lower premiums
resulting from the loss of the Champus contract partially offset by
higher premiums and fees resulting from the shift in membership to
managed care products and increased revenues from physician
practices. Revenue, excluding net realized capital gains and losses,
for the Group Insurance business increased from the prior year by $28
million or 9% and $61 million or 9% for the three and six months
ended June 30, 1996 primarily due to increased membership.
Operating expenses in the Health business increased during the
three and six months ended June 30, 1996 compared with the same
periods in 1995 due primarily to the continued migration of
members from the indemnity to the more resource-intensive point-
of-service (POS) product, as well as from increased expenses
related to continued investments in physician practices. AHP is
continuing to refine its systems and processes in order to slow
the growth of the administrative costs associated with its managed
care products as the migration to those products from indemnity
products continues.
Net realized capital gains for the six months ended June 30, 1996
were primarily attributable to the sale of an HMO subsidiary. The
earnings of this subsidiary were not material to AHP's results.
The number of Health members participating in risk versus nonrisk
plans was as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
__________________________ ___________________________
(Millions) Risk Nonrisk Total Risk Nonrisk Total
___________________________________________________________ __________________________
<S> <C> <C> <C> <C> <C> <C>
Health
HMO
Commercial/Traditional 1.0 0.3 1.3 0.9 0.2 1.1
Commercial POS 0.2 - 0.2 0.2 - 0.2
__________________________ __________________________
Total Commercial 1.2 0.3 1.5 1.1 0.2 1.3
Medicare 0.1 - 0.1 0.1 - 0.1
Champus - - - 0.3 - 0.3
POS 0.3 2.2 2.5 0.1 1.8 1.9
__________________________ __________________________
Total HMO and POS 1.6 2.5 4.1 1.6 2.0 3.6
PPO
PPO excluding Champus 0.7 2.8 3.5 0.9 2.9 3.8
Champus - - - 0.4 - 0.4
__________________________ __________________________
Total PPO 0.7 2.8 3.5 1.3 2.9 4.2
Traditional Indemnity 0.6 2.9 3.5 0.9 3.3 4.2
__________________________ __________________________
Total Health Care Enrollment 2.9 8.2 11.1 3.8 8.2 12.0
__________________________ __________________________
__________________________ __________________________
</TABLE>
The decline in Health membership is primarily attributable to the
loss of the Champus contract.
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Health Plans (Continued)
______________________________
The number of members covered by Specialty Health products was as
follows (1):
<TABLE>
<CAPTION>
June 30,
_______________
(Millions) 1996 1995
_________________________________________________
<S> <C> <C>
Behavioral Health 15.0 14.9
____ ____
____ ____
Dental (2) 7.9 8.3
____ ____
____ ____
Managed Pharmacy 4.5 4.0
____ ____
____ ____
<FN>
(1) Many Specialty Health members participate in more than one type of AHP coverage and
are therefore counted in each.
(2) The decline in Dental membership was primarily a result of the competitive pricing
of such products. Such decline was not material to AHP's earnings.
</TABLE>
The number of members covered by Group Insurance products was as
follows (1):
<TABLE>
<CAPTION>
June 30,
________________
(Millions) 1996 1995
_________________________________________________
<S> <C> <C>
Group Life (2) 8.4 7.9
____ ____
____ ____
Disability 2.4 2.1
____ ____
____ ____
Long-Term Care .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>
Please see "Merger with U.S. Healthcare" on page 23 for a
discussion related to the merger of the company and U.S.
Healthcare.
<PAGE> 30
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (formerly named Aetna Life Insurance &
_________________________
Annuity)
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
___________________________________ ________________________________
1996 1995 % Change 1996 1995 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 29.5 $ 49.6 (40.5)% $ 55.5 $ 92.0 (39.7)%
Net investment income............... 264.6 258.1 2.5 531.9 503.6 5.6
Fees and other income............... 110.8 87.1 27.2 214.1 171.1 25.1
Net realized capital gains.......... 1.6 6.2 (74.2) 17.3 9.2 88.0
_________ _________ _________ _________
Total revenue.................... 406.5 401.0 1.4 818.8 775.9 5.5
Current and future benefits......... 241.8 244.5 (1.1) 473.9 469.0 1.0
Operating expenses.................. 84.8 77.6 9.3 167.6 151.9 10.3
Amortization of deferred policy
acquisition costs.................. 14.2 9.9 43.4 31.5 21.8 44.5
_________ _________ _________ _________
Total benefits and expenses...... 340.8 332.0 2.7 673.0 642.7 4.7
_________ _________ _________ _________
Income before income taxes.......... 65.7 69.0 (4.8) 145.8 133.2 9.5
Income taxes........................ 17.9 22.5 (20.4) 41.5 43.2 (3.9)
_________ _________ _________ _________
Net income.......................... $ 47.8 $ 46.5 2.8 $ 104.3 $ 90.0 15.9
_________ _________ _________ _________
_________ _________ _________ _________
Net realized capital gains, net
of tax (included above)............ $ 1.1 $ 4.1 (73.2) $ 11.3 $ 6.0 88.3
_________ _________ _________ _________
_________ _________ _________ _________
Deposits not included in premiums
above.............................. $ 1,203.2 $ 792.4 51.8 $ 2,272.6 $ 1,569.3 44.8
_________ _________ _________ _________
_________ _________ _________ _________
Assets under management (1)(2)...... $27,631.5 $22,479.0 22.9
_________ _________
_________ _________
<FN>
(1) Excludes net unrealized capital gains of approximately $155 million and $574 million
at June 30, 1996 and 1995, respectively.
(2) Includes $3.8 billion and $1.4 billion at June 30, 1996 and 1995, respectively, of
assets held and managed by unaffiliated mutual funds.
</TABLE>
Aetna Retirement Services' net income for the three and six months
ended June 30, 1996 increased $1 million and $14 million,
respectively, from the same periods a year ago. Excluding net
realized capital gains, results for the three and six months ended
June 30, 1996 increased $4 million and $9 million, respectively,
from the same periods a year ago.
Second quarter and year-to-date results in 1996 benefited from
increased fee income primarily due to the growth in assets under
management resulting from continued business growth and overall
improvement in the stock market, as well as overall increased
interest margins. Partially offsetting such favorable increases
in fee income were increased operating expenses. The increase in
operating expenses primarily reflects continued business growth
and investments in nontraditional distribution channels (e.g.,
broker/dealers and banks).
The average earned rate on investments supporting fully guaranteed
contracts was 7.9% and 8.0% and the average earned rate on
investments supporting experience rated contracts was 8.1% and 8.2%
for the six months ended June 30, 1996 and 1995, respectively. The
average credited rate on fully guaranteed contracts was 5.3% and 5.3%
and the average credited rate on experience rated contracts was 6.1%
and 6.3% for the six months ended June 30, 1996 and 1995,
respectively. The resulting interest margins on fully guaranteed
contracts was 2.6% and 2.7% and on experience rated contracts was
2.0% and 1.9% for the six months ended June 30, 1996 and 1995,
respectively.
<PAGE> 31
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Aetna Retirement Services (Continued)
_____________________________________
The duration of the investment portfolios supporting Aetna Retirement
Services' liabilities is regularly monitored and adjusted in order to
maintain an aggregate duration that is within 0.5 years of the
estimated duration of the underlying liabilities. For a complete
discussion of the company's asset/liability management practices
please see the company's 1995 Annual Report to Shareholders.
Premiums decreased 41% and 40% during the three and six months
ended June 30, 1996, respectively, compared to the same periods in
1995 primarily because Aetna Retirement Services ceased writing
structured settlement annuities in the fourth quarter of 1995.
The cessation of writing this product did not and is not expected
to have a material effect on results of the segment.
<PAGE> 32
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
International
_____________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
___________________________________ ________________________________
1996 1995 % Change 1996 1995 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 278.0 $ 252.3 10.2% $ 517.6 $ 472.9 9.5%
Net investment income............... 82.8 87.1 (4.9) 165.8 155.4 6.7
Fees and other income............... 32.5 29.4 10.5 61.9 55.7 11.1
Net realized capital gains (losses). .2 2.1 (90.5) 1.3 (1.7) -
_________ _________ _________ ________
Total revenue.................... 393.5 370.9 6.1 746.6 682.3 9.4
Current and future benefits......... 237.0 219.4 8.0 450.2 416.2 8.2
Operating expenses.................. 90.5 97.1 (6.8) 176.8 180.4 (2.0)
Amortization of deferred policy
acquisition costs.................. 21.6 20.3 6.4 38.5 34.1 12.9
_________ _________ _________ ________
Total benefits and expenses...... 349.1 336.8 3.7 665.5 630.7 5.5
_________ _________ _________ ________
Income before income taxes.......... 44.4 34.1 30.2 81.1 51.6 57.2
Income taxes ....................... 17.1 10.5 62.9 29.1 13.9 109.4
_________ _________ _________ ________
Net income.......................... $ 27.3 $ 23.6 15.7 $ 52.0 $ 37.7 37.9
_________ _________ _________ ________
_________ _________ _________ ________
Net realized capital gains (losses),
net of tax (included above)........ $ .2 $ .3 (33.3) $ .8 $ (2.5) -
_________ _________ _________ ________
_________ _________ _________ ________
</TABLE>
International's net income for the three and six months ended June
30, 1996 increased by $4 million and $14 million, respectively,
compared with the same periods a year ago. Excluding net realized
capital gains and losses, results for the three and six months
ended June 30, 1996 increased $4 million and $11 million,
respectively, from the same periods a year ago. The improvement
in results reflected increased earnings in Chile primarily
resulting from lower operating expenses due to tighter controls
over such costs and lower interest expense and from continued
revenue growth in the Pacific Rim. Partially offsetting the
improvement in second quarter results was lower net investment
income resulting from a decline in Mexico's interest rate
environment.
The company continues to explore opportunities for additional
investments in emerging growth markets. In July, the company
reached an agreement in principle with its Mexican partner to
acquire a 49.0% stake in a joint venture that will offer insurance
products through the partner's bank subsidiary. The company has
agreed to invest $115 million in the joint venture initially and
up to an additional $63 million based on the performance of the
new company over the first five years of operations. The company
has also agreed to increase its ownership in its current Mexican
insurance joint venture from 44.5% to 49.0% for an additional $20
million. Completion of these transactions is subject to receipt
of regulatory approvals.
<PAGE> 33
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions
___________________
<TABLE>
<CAPTION>
Operating Summary
(Millions) Three Months Ended June 30, Six Months Ended June 30,
___________________________________ ________________________________
1996 1995 % Change 1996 1995 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Premiums............................ $ 47.6 $ 58.8 (19.0)% $ 73.8 $ 183.2 (59.7)%
Net investment income............... 395.5 477.3 (17.1) 838.4 945.5 (11.3)
Fees and other income............... 23.2 33.0 (29.7) 52.5 68.1 (22.9)
Net realized capital gains.......... 2.5 13.6 (81.6) 12.7 5.9 115.3
_________ _________ __________ _________
Total revenue.................... 468.8 582.7 (19.5) 977.4 1,202.7 (18.7)
Current and future benefits......... 402.7 519.2 (22.4) 849.4 1,100.3 (22.8)
Operating expenses.................. 22.9 22.5 1.8 43.2 43.1 .2
Reduction of loss on discontinued
products........................... (170.0) - - (170.0) - -
_________ _________ ________ _________
Total benefits and expenses...... 255.6 541.7 (52.8) 722.6 1,143.4 (36.8)
_________ _________ __________ _________
Income before income taxes.......... 213.2 41.0 - 254.8 59.3 -
Income taxes........................ 75.3 12.3 - 90.1 19.3 -
_________ _________ __________ _________
Net income.......................... $ 137.9 $ 28.7 - $ 164.7 $ 40.0 -
_________ _________ __________ _________
_________ _________ __________ _________
Net realized capital gains,
net of tax (included above)....... $ 1.7 $ 8.8 (80.7) $ 8.3 $ 3.8 118.4
_________ _________ __________ _________
_________ _________ __________ _________
Deposits not included in premiums
above............................. $ 528.0 $ 471.5 12.0 $ 922.4 $ 894.3 3.1
_________ _________ __________ _________
_________ _________ __________ _________
Assets under management (1)(2)...... $ 36,884.9 $46,492.9 (20.7)
__________ _________
__________ _________
<FN>
(1) Excludes net unrealized capital gains of approximately $150 million and $391 million at
June 30, 1996 and 1995, respectively.
(2) Includes assets related to discontinued products.
</TABLE>
Large Case Pensions' net income for the three and six months ended
June 30, 1996 increased by $109 million and $125 million,
respectively, compared with the same periods a year ago.
Excluding net realized capital gains and a benefit of $111 million
(after tax) attributable to a reduction of the reserve for
anticipated future losses on discontinued products, results for
the three and six months ended June 30, 1996 increased $6 million
and $10 million, respectively, from the same periods a year ago
reflecting increases in net interest margins and in net investment
income from the assets supporting the capital in Large Case
Pensions. (Please see "Discontinued Products" on page 34 for a
discussion of the reserve reduction.)
After-tax net realized capital gains for the quarter ended June
30, 1996 include a gain of $25 million related to the sale of ARI
to TA Associates, which was partially offset by net realized
capital losses related to bond sales. ARI contributed $1 million
and $3 million for the three and six months ended June 30, 1996,
respectively, and $2 million and $4 million for the same periods a
year ago to Large Case Pensions' net income.
Year-to-date 1995 premiums reflected additional premiums from
existing contractholders which did not have a material effect on
earnings.
<PAGE> 34
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
Assets under management at June 30, 1996 were 21% lower than a
year earlier, primarily as a result of the sale of Insurance
Company Investment Management ("ICIM"), a specialized asset
manager conducting business through the company's Aeltus
Investment Management subsidiary ("Aeltus"), in the first quarter
of 1996. ICIM was not a significant contributor to Large Case
Pensions' earnings in 1995 or in the first quarter of 1996.
Experience rated contractholder and participant withdrawals and
transfers were as follows (excluding contractholder transfers to
other company products) (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
___________________________ _________________________
1996 1995 1996 1995
____ ____ ____ ____
<S> <C> <C> <C> <C>
Scheduled contract maturities
and benefit payments (1) $ 289.8 $ 235.7 $ 607.9 $ 506.0
________ ________ ________ ________
________ ________ ________ ________
Contractholder withdrawals other
than scheduled contract maturities
and benefit payments $ 47.1 $ 91.0 $ 362.3 (2) $ 188.6
________ ________ ________ ________
________ ________ ________ ________
Participant withdrawals $ 44.7 $ 43.1 $ 101.1 $ 97.6
________ ________ ________ ________
________ ________ ________ ________
<FN>
(1) Includes payments made upon contract maturity and other amounts distributed in accordance
with contract schedules.
(2) Increase primarily relates to an unscheduled withdrawal by one contractholder in the first
quarter of 1996.
</TABLE>
Discontinued Products
Under the company's accounting for its discontinued fully guaranteed
large case pension products (guaranteed investment contracts ("GICs")
and single-premium annuities ("SPAs")), the respective reserves for
anticipated future losses are reviewed by management quarterly.
Accordingly, as long as the reserves represent management's then best
estimates of expected future losses, results of operations of the
discontinued products, including net realized capital gains and
losses, are credited/charged to the respective reserve and do not
affect the company's results of operations. Management's review of
the reserves in the second quarter of 1996 included a re-evaluation
of assumptions relating to future real estate market conditions
(e.g., rental rate growth and vacancy rates) and considered the
continuing and recent favorable developments (compared to what had
been anticipated) which had been experienced in such markets. As a
result of this review, management released $170 million (pretax) of
the reserve related to GICs. The resulting reserves reflect
management's best estimate of the anticipated future net losses for
GICs and SPAs. To the extent that actual future losses are greater
than anticipated future net losses, the company's results of
operations would be adversely affected. Conversely, if actual future
losses are less than anticipated future losses, the company's results
of operations would be favorably affected. (Please refer to the
company's 1995 Annual Report to Shareholders for a more complete
discussion of the reserve for anticipated future losses on
discontinued products.)
<PAGE> 35
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
At the time of discontinuance, a receivable from Large Case
Pensions' continuing business 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 the continuing business. The interest
on such payable generally offsets the investment income on the
assets available to fund the shortfall. At June 30, 1996, for
GICs and SPAs, the receivables from continuing business, net of
the related deferred taxes payable of $18 million and $26 million,
respectively, on the accrued interest income, were $312 million
and $483 million, respectively. As of June 30, 1996, no funding
had taken place.
Results of discontinued products were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1996 Six Months Ended June 30, 1996
________________________________ ______________________________
GICs SPAs Total GICs SPAs Total
____ ____ _____ ____ ____ _____
<S> <C> <C> <C> <C> <C> <C>
Interest margin (a) $ (4.8) $ 6.0 $ 1.2 $ (2.4) $ 12.3 $ 9.9
Net realized capital gains (losses) 9.7 (8.3) 1.4 16.7 (1.1) 15.6
Interest earned on receivable from
continuing business 3.5 5.1 8.6 6.9 10.1 17.0
Other, net (1.9) .1 (1.8) .8 4.2 5.0
________ ________ ________ ________ ________ _______
Results of discontinued products,
after-tax $ 6.5 $ 2.9 $ 9.4 $ 22.0 $ 25.5 $ 47.5
________ ________ ________ ________ ________ _______
________ ________ ________ ________ ________ _______
Results of discontinued products, pretax $ 11.4 $ 3.6 $ 15.0 $ 36.7 $ 37.4 $ 74.1
________ ________ ________ ________ ________ _______
________ ________ ________ ________ ________ _______
Net realized capital gains (losses) from
sales of bonds, after tax, included
above $ (.7) $ (8.4) $ (9.1) $ 1.4 $ (4.0) $ (2.6)
________ ________ ________ ________ ________ _______
________ ________ ________ ________ ________ _______
Three Months Ended June 30, 1995 Six Months Ended June 30, 1995
_________________________________ ______________________________
GICs SPAs Total GICs SPAs Total
____ ____ _____ ____ ____ ______
<S> <C> <C> <C> <C> <C> <C>
Negative interest margin (a) $ (4.4) $ (.6) $ (5.0) $ (19.3) $ (3.4) $ (22.7)
Net realized capital gains (losses) (8.2) 9.4 1.2 (20.2) 14.6 (5.6)
Interest earned on receivable from
continuing business 3.3 4.9 8.2 6.6 9.9 16.5
Other, net (.4) .1 (.3) .7 1.7 2.4
________ ________ ________ _______ _______ _______
Results of discontinued products,
after-tax $ (9.7) $ 13.8 $ 4.1 $ (32.2) $ 22.8 $ (9.4)
________ ________ ________ _______ _______ _______
________ ________ ________ _______ _______ _______
Results of discontinued products, pretax $ (13.8) $ 20.0 $ 6.2 $ (47.3) $ 32.8 $ (14.5)
________ ________ ________ _______ _______ _______
________ ________ ________ _______ _______ _______
Net realized capital gains (losses)
from sales of bonds, after tax,
included above $ (3.3) $ 13.7 $ 10.4 $ (9.0) $ 23.1 $ 14.1
________ ________ ________ _______ _______ _______
________ ________ ________ _______ _______ _______
<FN>
(a) Represents the amount by which interest credited to holders of fully guaranteed large case
pension contracts (exceeds) or is less than interest earned on invested assets supporting such contracts.
</TABLE>
<PAGE> 36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Large Case Pensions (Continued)
_______________________________
The results of the discontinued products in the first six months
of 1996 were favorably affected by and the respective reserves for
anticipated future losses were credited for nonrecurring items
including rental income received on a foreclosed property of $6
million (after tax) related to GICs and $3 million (after tax)
related to SPAs. Such rental income had previously not been
recognized due to uncertainties associated with its ultimate
collection. Additionally, the adoption of FAS No. 121, favorably
impacted the results of GICs by $4 million (after tax) and SPAs by
$2 million (after tax).
The activity in the reserve for anticipated future losses on
discontinued products was as follows (pretax, in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
______________________________
GICs SPAs Total
____ ____ _____
<S> <C> <C> <C>
Reserve at December 31, 1995 $ 221.4 $ 737.4 $ 958.8
Results of discontinued products 36.7 37.4 74.1
Release of reserve (170.0) - (170.0)
________ ________ ________
Reserve at June 30, 1996 $ 88.1 $ 774.8 $ 862.9
________ ________ ________
________ ________ ________
</TABLE>
Distributions on GICs and SPAs were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1996 Six Months Ended June 30, 1996
________________________________ _______________________________
GICs SPAs Total GICs SPAs Total
____ ____ _____ ____ ____ _____
<S> <C> <C> <C> <C> <C> <C>
Scheduled contract maturities,
GIC settlements and benefit
payments (1) $ 597.9 $ 135.8 $ 733.7 $1,098.1 $ 268.8 $1,366.9
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
Participant directed withdrawals $ 14.9 $ - $ 14.9 $ 30.4 $ - $ 30.4
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
Three Months Ended June 30, 1995 Six Months Ended June 30, 1995
________________________________ _______________________________
GICs SPAs Total GICs SPAs Total
____ ____ _____ ____ ____ _____
<S> <C> <C> <C> <C> <C> <C>
Scheduled contract maturities,
GIC settlements and benefit
payments (1) $ 614.5 $ 128.5 $ 743.0 $1,259.3 $ 262.2 $1,521.5
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
Participant directed withdrawals $ 22.2 $ - $ 22.2 $ 49.3 $ - $ 49.3
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
<FN>
(1) Includes early contractual settlements of GIC liabilities of approximately $175 million and
$182 million for the three and six months ended June 30, 1996 and approximately $30 million
and $87 million for the same periods a year ago.
</TABLE>
Cash required to meet the above payments was provided by earnings
on, sales of, and scheduled payments on, invested assets.
(Please see "General Account Investments" on page 38 for a
discussion of investments supporting discontinued products.)
<PAGE> 37
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Corporate
_________
<TABLE>
<CAPTION>
Operating Summary
(Millions, after tax) Three Months Ended June 30, Six Months Ended June 30,
___________________________________ ________________________________
1996 1995 % Change 1996 1995 % Change
____ ____ ________ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C>
Interest expense.................... $ 17.5 $ 17.8 (1.7)% $ 36.9 $ 35.9 2.8%
Other expense, net.................. 228.8 29.4 - 253.3 61.4 -
</TABLE>
Other expense for the three and six months ended June 30, 1996
included after-tax net realized capital gains of $4 million and
$6 million, respectively. Other expense for the six months ended
June 30, 1995 included after-tax net realized capital losses of $2
million. Net realized capital losses were less than $1 million
for the three months ended June 30, 1995. Excluding net realized
capital gains and losses, the increase of $203 million and $200
million, respectively, for the three and six months ended June 30,
1996 in other expense compared with the same periods a year ago
primarily resulted from the $235 million (after tax) facilities
and severance charge discussed below, partially offset by interest
income of $30 million (after tax) earned from the investment of
the net proceeds received from the property-casualty sale.
In conjunction with the sale of the company's property-casualty
operations, Travelers subleased the space currently occupied by
the company in the CityPlace office facility in Hartford for eight
years at current market rates. The company reflected a charge of
$190 million (after tax) during the second quarter of 1996
representing the present value of the difference between rent
required to be paid by the company under the lease and future
rentals expected to be received by the company. The company also
recorded additional facilities and severance charges of $45
million (after tax) during the second quarter of 1996 due to
actions taken or expected to be taken to reduce the level of
corporate expenses and other costs previously absorbed by the
property-casualty operations. (See "Facilities and Severance
Charges" on page 26 for further discussion regarding the merger
with U.S. Healthcare and the continuing strategic and financial
reviews of the company.)
<PAGE> 38
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments
___________________________
The company's invested assets were comprised of the following, net
of impairment reserves:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1996 1995
____________________________________________________________________________
<S> <C> <C>
Debt securities:
Available for sale, at fair value
(amortized cost $29,484.1 and $29,962.5) $ 29,827.8 $ 31,860.3
Equity securities, at fair value
(cost $985.8 and $597.8) 1,224.7 659.7
Short-term investments 1,729.5 607.8
Mortgage loans 7,493.0 8,327.2
Real estate 1,210.7 1,277.3
Policy loans 651.7 629.4
Other 707.5 688.6
__________________________________________________________________________
Total invested assets $ 42,844.9 $ 44,050.3
__________________________________________________________________________
________________________
</TABLE>
Please refer to the company's 1995 Annual Report to Shareholders for
a description of the company's investment objectives and policies.
The change in the invested assets portfolio from December 31, 1995 to
June 30, 1996 primarily reflected depreciation of debt securities due
to an increase in interest rates and a net decrease in the aggregate
mortgage loan and real estate portfolios. Debt securities reflected
net unrealized capital gains of $344 million at June 30, 1996,
compared with $1.9 billion at December 31, 1995. Of such net
unrealized capital gains at June 30, 1996, $125 million and $162
million related to assets supporting discontinued products and
experience rated pension contractholders, respectively. The net
decrease in the aggregate mortgage loan and real estate portfolios of
$901 million principally reflected prepayments and payments at
maturity on mortgage loans and sales of foreclosed properties.
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
fully guaranteed large case pension products are provided for in the
reserve for anticipated future losses. (Please see "Discontinued
Products" on page 34 for further discussion.)
<PAGE> 39
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Debt Securities
As of June 30, 1996 and December 31, 1995, the company's
investments in debt securities represented 70% and 72%,
respectively, of total general account invested assets and were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1996 1995
________________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 5,119.7 $ 5,765.2
Supporting experience rated products 14,098.8 14,243.4
Supporting remaining products 10,609.3 11,851.7
_____________________________
Total debt securities $ 29,827.8 $ 31,860.3
_____________________________
_____________________________
</TABLE>
Included in the company's debt security balances were the
following categories of debt securities:
<TABLE>
<CAPTION>
(Millions) June 30, 1996
_______________________________________________________________________________________________________
"Below Investment "Problem" Debt "Potential Problem"
Grade" Securities Securities Debt Securities
_________________ ______________ ___________________
<S> <C> <C> <C>
Total $1,705.8 $ 58.6 $ 73.4
________ ________ ________
________ ________ ________
Percentage of total:
Supporting discontinued products 27.3% 28.0% 31.3%
Supporting experience rated products 45.4 21.7 31.3
Supporting remaining products 27.3 50.3 37.4
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
December 31, 1995
________________________________________________________________
"Below Investment "Problem" Debt "Potential Problem"
Grade" Securities Securities Debt Securities
_________________ ______________ ___________________
<S> <C> <C> <C>
Total $1,623.8 $ 81.0 $ 90.4
________ ________ ________
________ ________ ________
Percentage of total:
Supporting discontinued products 32.7% 36.9% 57.5%
Supporting experience rated products 42.6 12.5 24.1
Supporting remaining products 24.7 50.6 18.4
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
</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.
<PAGE> 40
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
"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.
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
was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
__________________ _________________
(Millions) 1996 1995 1996 1995
______________________________________________________________________________________
<S> <C> <C> <C> <C>
Allocable to discontinued products $ .2 $ .4 $ .5 $ .8
Allocable to experience rated products .2 .4 .4 .6
Allocable to remaining products .5 .5 .8 1.4
__________________ _________________
Total lost investment income $ .9 $ 1.3 $ 1.7 $ 2.8
__________________ _________________
__________________ _________________
</TABLE>
Included in the company's total collateralized mortgage
obligations ("CMOs") balances were the following categories of
CMOs:
<TABLE>
<CAPTION>
(Millions) June 30, 1996 December 31, 1995
_______________________________________________________________ _______________________
Fair Amortized Fair Amortized
Value Cost Value Cost
_________ _________ _________ _________
<S> <C> <C> <C> <C>
Total CMOs (1) $ 2,786.5 $ 2,748.1 $ 3,191.1 $ 2,984.4
_________ _________ _________ _________
_________ _________ _________ _________
Percentage of total CMOs:
Sequential and planned
amortization class bonds 67.7% 73.1%
Z-tranches 17.5 15.2
Interest-only strips and
principal-only strips 3.7 3.2
Other 11.1 8.5
_________ _________
100.0% 100.0%
_________ _________
_________ _________
<FN>
(1) At June 30, 1996 and December 31, 1995, approximately 70% and 74%, respectively,
of the company's 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> 41
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 based on the repayment of principal from the
underlying mortgages earlier or later than originally anticipated.
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.
Mortgage Loans
During the first six months of 1996, the mortgage loan portfolio
was reduced 10% to $7.5 billion, net of impairment reserves. The
company's total mortgage loan investments, net of impairment
reserves, supported the following types of business:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1996 1995
______________________________________________________________________
<S> <C> <C>
Supporting discontinued products $ 3,136.1 $ 3,388.6
Supporting experience rated products 2,736.4 3,013.4
Supporting remaining products 1,620.5 1,925.2
_____________________________
Total mortgage loan investments $ 7,493.0 $ 8,327.2
_____________________________
_____________________________
</TABLE>
During the first six months of 1996, the company continued to manage
its mortgage loan portfolio to reduce the balance in absolute terms
and relative to invested assets, and to reduce its overall risk. The
principal balance of mortgage loans decreased $1.1 billion since
December 31, 1995 primarily reflecting the effect of repayments of
maturing loans, loan prepayments and foreclosures.
Loans with a principal balance of $168 million and collateral with a
fair market value of $63 million were foreclosed upon in the first
six months of 1996. Additional loans with a principal balance of
$132 million were in the process of foreclosure at June 30, 1996. 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. Activity related
to in-substance foreclosures for the six months ended June 30, 1996
did not significantly impact the balance of mortgage loans.
<PAGE> 42
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Included in the company's total mortgage loan balances were the
following categories of mortgage loans:
<TABLE>
<CAPTION>
(Millions) June 30, 1996
_________________________________________________________________________________________________________
Restructured Potential
Problem Loans Loans Problem Loans Total
_____________ ____________ _____________ _____
<S> <C> <C> <C> <C>
Total $ 454.0 (1) $ 461.0 $ 612.7 $1,527.7
________ ________ ________ ________
________ ________ ________ ________
Percentage of total:
Supporting discontinued products 41.3% 55.0% 49.3%
Supporting experience rated products 37.0 28.0 36.9
Supporting remaining products 21.7 17.0 13.8
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
Specific impairment reserves on
loans (2) $ 226.0
________
________
Specific impairment reserves as a
percentage of total 14.8%
________
________
December 31, 1995
_________________________________________________________________________________________________________
Restructured Potential
Problem Loans Loans Problem Loans Total
_____________ ____________ _____________ _____
<S> <C> <C> <C> <C>
Total $ 160.3 $ 514.1 $ 839.1 $1,513.5
________ ________ ________ ________
________ ________ ________ ________
Percentage of total:
Supporting discontinued products 22.6% 50.9% 54.3%
Supporting experience rated products 51.8 35.5 29.1
Supporting remaining products 25.6 13.6 16.6
________ ________ ________
100.0% 100.0% 100.0%
________ ________ ________
________ ________ ________
Specific impairment reserves on
loans (2) $ 361.2
________
________
Specific impairment reserves as a
percentage of total 23.9%
________
________
<FN>
(1) The increase in problem loans from December 31, 1995 to June 30, 1996 includes
$191 million related to one mortgage loan where the borrower has declared
bankruptcy. No specific reserve has been established for this loan because
the loan is well secured and the company does not anticipate any future losses.
(2) Please see Note 7 of Condensed Notes to Financial Statements for further
disclosures related to mortgage loan impairment reserves.
</TABLE>
"Problem loans" are defined to be loans with payments over 60 days
past due, loans on properties in the process of foreclosure, loans on
properties involved in bankruptcy proceedings and loans on properties
subject to redemption. Loans on properties in the process of
foreclosure increased to $132 million at June 30, 1996 from
$101 million at December 31, 1995.
"Restructured loans" are loans whose original contract terms have
been modified to grant concessions to the borrower and are
currently performing pursuant to such modified terms.
Restructured loans that have a market rate of interest at the time
of the restructure (which represents the interest rate the company
would charge for a new loan with comparable risk) and demonstrate
sustainable performance (as generally evidenced by six months of
pre- or post-restructuring payment performance in accordance with
the restructured terms) may be returned to performing status.
(Please see the company's 1995 Annual Report to Shareholders for a
complete description of the company's restructuring program.) No
such restructures and transfers to performing status occurred
during the six months ended June 30, 1996.
<PAGE> 43
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
"Potential problem loans" include all loans which are performing
pursuant to existing terms and are considered likely to become
classified as problem or restructured loans. Such 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 7 of Condensed
Notes to Financial Statements for a discussion of mortgage loan
impairment reserves.)
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 June 30 and the portion thereof actually
recorded as income were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
__________________ _________________
(Millions) 1996 1995 1996 1995
_________________________________________________________ _________________
<S> <C> <C> <C> <C>
Income which would have been
recorded under original terms
of loans $ 30.8 $ 25.5 $ 48.8 $ 48.1
Income recorded 23.9 14.9 35.3 24.8
_______ _______ _______ _______
Lost investment income $ 6.9 $ 10.6 $ 13.5 $ 23.3
_______ _______ _______ _______
_______ _______ _______ _______
Lost investment income allocated to
investments supporting discontinued
products (included above) $ 2.9 $ 2.6 $ 5.5 $ 8.7
_______ _______ _______ _______
_______ _______ _______ _______
Lost investment income allocated to
investments supporting experience
rated pension products
(included above) $ 2.1 $ 5.3 $ 5.1 $ 8.5
_______ _______ _______ _______
_______ _______ _______ _______
Lost investment income allocated to
investments supporting remaining
products (included above) $ 1.9 $ 2.7 $ 2.9 $ 6.1
_______ _______ _______ _______
_______ _______ _______ _______
</TABLE>
<PAGE> 44
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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) June 30, 1996
________________________________________________________________________________________________
Investment Properties Total Equity
Real Estate Held for Sale Real Estate
___________ _____________ ____________
<S> <C> <C> <C>
Total equity real estate $ 166.7 $1,044.0 (1) $1,210.7
________ ________ ________
________ ________ ________
Percentage of total equity real
estate:
Supporting discontinued products 23.1% 58.3%
Supporting experience rated products 7.9 26.8
Supporting remaining products 69.0 14.9
________ ________
100.0% 100.0%
________ ________
________ ________
December 31, 1995
_________________________________________________________
Investment Properties Total Equity
Real Estate Held for Sale Real Estate
___________ _____________ ____________
<S> <C> <C> <C>
Total equity real estate $ 153.0 $1,124.3 (1) $1,277.3
________ ________ ________
________ ________ ________
Percentage of total equity real
estate:
Supporting discontinued products 7.5% 55.5%
Supporting experience rated products 7.8 29.2
Supporting remaining products 84.7 15.3
________ ________
100.0% 100.0%
________ ________
________ ________
<FN>
(1) Includes $142.1 million and $190.4 million of in-substance foreclosures
at June 30, 1996 and December 31, 1995, respectively. (Please see "Mortgage
Loans" on page 41 for discussion of in-substance foreclosures.)
</TABLE>
Real estate which the company has the intent to hold for the
production of income is classified as investment real estate.
Investment real estate is carried at depreciated cost plus capital
additions, net of impairment write downs.
All real estate acquired through foreclosure, including in-
substance foreclosures, is classified as properties held for sale.
The fair value at foreclosure is established as the new cost basis
for these assets, which are carried at the lower of cost or fair
value less estimated selling costs. As a result of adopting FAS
No. 121 on January 1, 1996 (please see Note 7 of Condensed Notes
to Financial Statements), the company no longer depreciates
properties held for sale. Adjustments to the carrying value of
properties held for sale are recorded in a valuation reserve when
the fair value less estimated selling costs is below cost. Fair
value is generally determined using a discounted future cash flow
analysis in conjunction with comparable sales information.
Property valuations are reviewed regularly by investment
management. The company intends to sell a significant amount of
the properties held for sale over the next one to two years, real
estate and capital market conditions permitting.
<PAGE> 45
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
General Account Investments (Continued)
_______________________________________
Foreclosed real estate classified as properties held for sale was
carried at 60% and 61% of the company's cash investment (unpaid
mortgage balance plus capital additions) at June 30, 1996 and
December 31, 1995, respectively. Net investment income included
$30 million and $80 million (pretax) from the net operations of
properties held for sale for the three and six months ended June
30, 1996, respectively.
Total real estate write-downs and valuation reserves on properties
included in the company's equity real estate balances were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Millions) 1996 1995
______________________________________________________________________
<S> <C> <C>
Allocable to discontinued products $ 414.8 $ 381.0
Allocable to experience rated products 184.0 208.2
Allocable to remaining products 116.5 96.8
________ ________
Total real estate write-downs and
valuation reserves $ 715.3 (*) $ 686.0
________ ________
________ ________
<FN>
(*) As a result of the adoption of FAS No. 121, valuation reserves at January 1, 1996
were increased by $52.9 million in connection with the reversal of previously recorded
accumulated depreciation related to properties held for sale. The adoption of
FAS No. 121 resulted in an immaterial impact on results of operations.
</TABLE>
For the periods shown below, total after-tax net realized capital
(gains) losses from real estate write-downs and changes in the
valuation reserves were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
___________________ _________________
(Millions) 1996 1995 1996 1995
___________________________________________________________________________________________
<S> <C> <C> <C> <C>
Allocable to discontinued products (1) $ .1 $ - $ (3.0) $ -
Allocable to experience rated products (2) - - .1 -
Allocable to remaining products 16.2 - 16.2 -
<FN>
(1) Write-downs and impairment expense allocable to discontinued products are charged
against the reserve for future losses and do 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.
</TABLE>
<PAGE> 46
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
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 foreign exchange forward
contracts, futures and forward contracts and interest rate swap
agreements 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 its current hedging activity will
have a material effect on the company's liquidity or results of
operations. (Please see Note 9 of Condensed 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 portfolio as of
June 30, 1996 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
_____________________________________________________________________________
<S> <C> <C>
Collateralized mortgage obligations: $ 2,748.1 $ 2,786.5
Interest-only strips (included above) 37.5 47.0
Principal-only strips (included above) 46.5 54.8
Structured notes (1) 114.2 116.9
Warrants to purchase debt securities (2) 2.8 3.0
<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> 47
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources
_______________________________
Cash and cash equivalents at June 30, 1996 and December 31, 1995
were $4.3 billion and $1.7 billion, respectively. The net
proceeds from the property-casualty sale of $3.9 billion were
primarily invested in cash and cash equivalents at June 30, 1996
and were subsequently used in financing a portion of the cash
consideration paid in connection with the U.S. Healthcare merger.
Short-term borrowings are used from time to time to provide for
timing differences between receipts and disbursements in various
portfolios. The maximum amount of domestic short-term borrowings
outstanding during the first six months of 1996 was $491 million.
In order to fund a portion of the cash consideration paid in
connection with the U.S. Healthcare merger, the company issued
$1.4 billion of commercial paper subsequent to June 30, 1996.
The company has a revolving credit facility in an aggregate amount
of $2.5 billion with a worldwide group of banks. The facility
replaces the company's prior credit facilities and terminates in
June 2001. (Please see Note 8 of Condensed Notes to Financial
Statements.)
Pursuant to shelf registration statements declared effective by
the SEC, the company may offer and sell up to $2.0 billion of debt
securities guaranteed by Aetna Inc., and Aetna Capital L.L.C., a
subsidiary of the company, may offer and sell up to an additional
$225 million of preferred securities to be guaranteed by Aetna
Inc. It is anticipated that the company will repay, depending
upon market conditions, the commercial paper borrowings related to
the U.S. Healthcare merger from funds generated internally by
Aetna Inc. or its subsidiaries and/or other sources which may
include the proceeds from the sale of debt securities registered
pursuant to the above-indicated shelf registration statement for
debt.
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. For the six months ended June 30, 1996,
the mortgage loan portfolio generated $732 million in cash which
included $208 million of payoffs or 34% of scheduled maturities,
$419 million of prepayments, $41 million of loan sales and
$64 million of amortization. Despite various indications that
liquidity has returned to certain real estate markets, the company
expects it will continue to extend or refinance certain maturing
loans.
<PAGE> 48
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
___________________________________________
Rating Agencies
The ratings of Aetna Services, Inc. (formerly Aetna Life and Casualty
Company) and certain of its subsidiaries at February 6, 1996, as set
forth in the 1995 Form 10-K, and at July 26, 1996 follow:
<TABLE>
<CAPTION>
Rating Agencies
____________________________________________________________
Moody's Investors Standard
A.M. Best Duff & Phelps Service & Poor's
____________________________________________________________
<S> <C> <C> <C> <C>
Aetna Services, Inc. (1)
(senior debt)
February 6, 1996 * A ** A2 A- **
July 26, 1996 * A ** A2 A-
Aetna Services, Inc. (1)
(commercial paper)
February 6, 1996 * D-1 ** P-1 A-2 **
July 26, 1996 * D-1 ** P-1 A-2
Aetna Life Insurance Company
(claims paying)
February 6, 1996 A AA- ** Aa3 A+ **
July 26, 1996 A AA- ** Aa3 A
Aetna Life Insurance and Annuity Company
(claims paying)
February 6, 1996 A+ AA+ Aa2 AA **
July 26, 1996 A+ AA+ Aa2 AA-
<FN>
* Not rated by the agency.
** On credit watch with positive implications.
(1) Beginning on July 19, 1996, all debt issued or issuable under the shelf
registration statements of Aetna Services, Inc is/will be guaranteed by
Aetna Inc.
</TABLE>
Dividends
On July 19, 1996, the Board of Directors of Aetna Inc. (the
"Board") declared a quarterly dividend of $.20 per share of common
stock to shareholders of record at the close of business on July
26, 1996, payable August 15, 1996. On July 19, 1996, the Board
also declared a dividend of $0.3701 per share of mandatorily
convertible preferred stock to shareholders of record of such
preferred stock at the close of business on July 26, 1996. Such
preferred stock dividend represents that portion of the dividend
accrued and payable from the date of the U.S. Healthcare merger,
July 19, 1996, to the payment date for such preferred stock
dividend, August 15, 1996.
<PAGE> 49
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
New Accounting Pronouncements
_____________________________
Please see Note 3 of Condensed 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 new "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 new "safe harbor"
provisions of the Act. Certain information contained herein,
particularly the information relating to the estimated synergies
and the timing of their anticipated realization anticipated from
the merger with U.S. Healthcare appearing under the heading
"Overview" herein, is forward-looking. The estimate of synergies
is based upon a variety of assumptions relating to the business of
the company and U.S. Healthcare which may not be realized and are
subject to significant uncertainties and contingencies, many of
which are beyond the control of the company and, U.S. Healthcare
and Aetna Inc. For example, the achievement of such synergies
depends upon, among other things, (i) the successful offering of
U.S. Healthcare managed care products to existing company
corporate customers and cross-selling of company group life,
specialty health and other products through U.S. Healthcare's
existing network; (ii) timely integration of U.S. Healthcare
management and information systems with those of the company;
(iii) timely elimination of redundant administrative expenses; and
(iv) achievement of revenue enhancements and medical cost
reductions. See also prior SEC filings of the company and U.S.
Healthcare, including their 1995 Form 10-Ks and Annual Reports to
Shareholders, for additional factors that may affect the company's
health and other businesses.
<PAGE> 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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, 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 2. Changes in Securities.
See Part I Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview," for
information regarding the effect of the company's merger with U.S.
Healthcare upon the shares of the company's common stock. (Aetna
Inc. common stock is substantially identical to the company's
common stock).
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders of the company was held on
Friday, April 26, 1996.
(b) Directors elected at the Meeting:
<TABLE>
<CAPTION>
Votes Votes Broker
For Withheld Non-Votes
___ ________ _________
<S> <C> <C> <C>
Ronald E. Compton 102,465,035 1,244,755 0
William H. Donaldson 102,647,579 1,062,211 0
Barbara Hackman Franklin 102,616,326 1,093,464 0
Earl G. Graves 102,658,117 1,051,673 0
Gerald Greenwald 102,722,312 987,478 0
Ellen M. Hancock 102,694,234 1,015,556 0
Michael H. Jordan 102,706,099 1,003,691 0
Jack D. Kuehler 102,678,221 1,031,569 0
Frank R. O'Keefe, Jr. 102,683,683 1,026,107 0
Judith Rodin 102,671,050 1,038,740 0
</TABLE>
(c) Other matters voted upon:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstain Non-Votes
_____ _______ _______ _________
<S> <C> <C> <C> <C>
(1) Appointment of Independent Auditors 102,674,221 746,595 288,974 0
(2) Approval of Certain Terms of Annual
Incentive Plan 98,121,824 4,633,243 954,723 0
(3) Approval of the Amendment and
Restatement of the 1994 Non-Employee
Director Deferred Stock Plan 94,290,523 8,302,598 1,116,669 0
</TABLE>
<PAGE> 51
Item 5. Other Information.
(a) Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth the company's ratio of earnings to
fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Years ended December 31,
____________________________________
June 30, 1996 1995 1994 1993 1992 1991
_________________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 4.04 4.97 4.74 (a) 1.90 .54(b)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends 4.04 4.97 4.74 (a) 1.90 .54(b)
<FN>
(a) The company 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 company's 1995 Annual Report to Shareholders.) For the six
months ended June 30, 1996 and 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3) Articles of Incorporation and By-Laws.
(3.1) Aetna Inc. Amended and Restated Certificate of
Incorporation, incorporated herein by reference to
Aetna Inc.'s Registration Statement on Form S-4 filed
on June 12, 1996.
(3.2) Aetna Inc. Bylaws, incorporated herein by reference to
Aetna Inc.'s Registration Statement on Form S-4 filed
on June 12, 1996.
(3.3) Amended and Restated Certificate of Incorporation of
Aetna Services, Inc., incorporated by reference to
Appendix M to the Proxy Statement/Prospectus included
in Aetna Inc.'s Registration Statement on Form S-4
filed on June 12, 1996.
<PAGE> 52
Item 6. Exhibits and Reports on Form 8-K (Continued).
(a) Exhibits (Continued)
(4) Instruments defining the rights of security holders,
including indentures.
(4.1) Form of Senior Indenture between Aetna Services, Inc.,
Aetna Inc. and State Street Bank and Trust Company of
Connecticut, National Association, as Trustee
(including the forms of the Senior Debt Securities and
Senior Debt Guarantees), incorporated herein by
reference to Aetna Inc.'s and Aetna Services, Inc.'s
(formerly Aetna Life and Casualty Company) Registration
Statement on Form S-3 filed on June 28, 1996.
(4.2) Form of Subordinated Indenture between Aetna Services,
Inc., Aetna Inc. and State Street Bank and Trust
Company of Connecticut, National Association, as
Trustee (including the forms of the Subordinated Debt
Securities and Subordinated Debt Guarantees),
incorporated herein by reference to Aetna Inc.'s and
Aetna Services, Inc.'s (formerly Aetna Life and
Casualty Company) Registration Statement on Form S-3
filed on June 28, 1996.
(10) Material Contracts.
(10.1) Amendment No. 1, dated as of May 30, 1996, to the
Agreement and Plan of Merger, dated as of March 30,
1996, among Aetna Services, Inc. (formerly Aetna Life
and Casualty Company), U.S. Healthcare, Inc., Aetna
Inc., (formerly known as Butterfly, Inc.), Antelope
Sub. Inc. and New Merger Corporation, incorporated
herein by reference to Aetna Inc.'s Registration
Statement on Form S-4 filed on June 12, 1996.
(10.2) Amendment No. 1, dated as of May 30, 1996, to the
Voting Agreement, dated as of March 30, 1996, among
Leonard Abramson, Aetna Life Insurance Company and
Aetna Life Insurance and Annuity Company, incorporated
herein by reference to Aetna Inc.'s Registration
Statement on Form S-4 filed on June 12, 1996.
(10.3) Aetna Life and Casualty Company $2.5 billion Credit
Facility, incorporated herein by reference to Aetna
Life and Casualty Company's Current Report on Form 8-K
filed on July 16, 1996.
(10.4) Amendment No. 1, dated as of May 30, 1996, to the
Registration Rights Agreement, dated as of March 30,
1996 between Aetna Inc. (formerly known as Butterfly,
Inc.) and Leonard Abramson, incorporated herein by
reference to Aetna Inc.'s Registration Statement on
Form S-4 filed on June 12, 1996.
(10.5) Amended and Restated Agreement dated as of May 30, 1996
between Aetna Inc. (formerly Butterfly, Inc.) and
Leonard Abramson, incorporated herein by reference to
Aetna Inc.'s Registration Statement on Form S-4 filed
on June 12, 1996.
<PAGE> 53
Item 6. Exhibits and Reports on Form 8-K (Continued).
(a) Exhibits (Continued)
(10.6) The Aetna Inc. 1996 Stock Incentive Plan, incorporated
herein by reference to Aetna Inc.'s Registration
Statement on Form S-4 filed on June 12, 1996.
(10.7) The Aetna Inc. Annual Incentive Plan, incorporated
herein by reference to Aetna Inc.'s Registration
Statement on Form S-4 filed on June 12, 1996.
(10.8) The Aetna Inc. Non-Employee Director Deferred Stock and
Deferred Compensation Plan, incorporated herein by
reference to Aetna Inc.'s Registration Statement on
Form S-4 filed on June 12, 1996.
(10.9) Amendment No. 1 dated March 1, 1996 to Letter Agreement
dated January 19, 1995 between Aetna Life and Casualty
Company and Richard L. Huber, incorporated herein by
reference to Aetna Inc.'s Registration Statement on
Form S-4 filed on June 12, 1996.
(10.10) Amended and Restated U.S. Healthcare, Inc. Savings
Plan, incorporated herein by reference to U.S.
Healthcare, Inc.'s 1995 Form 10-K filed on March 25,
1996.
(10.11) Amended and Restated Pension Plan for Employees of U.S.
Healthcare, Inc., incorporated herein by reference to
U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March
25, 1996.
(10.12) Split Dollar Insurance Agreement, dated as of February
1, 1990, among Madlyn K. Abramson, Marcy A. Shoemaker
(formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc.,
and the related Collateral Assignment Agreement, dated
as of February 1, 1990, among Madlyn K. Abramson, Marcy
A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson,
Judith Abramson and David B. Soll, and U.S. Healthcare,
Inc., incorporated herein by reference to U.S.
Healthcare, Inc.'s 1995 Form 10-K filed on March 25,
1996.
(10.13) Split Dollar Insurance Agreement, dated as of January
21, 1991, among Marcy A. Shoemaker (formerly Marcy
Abramson), Nancy Wolfson, Judith Abramson, David B.
Soll, Jerome Goodman and Edward M. Glickman, and U.S.
Healthcare, Inc., and the related Collateral Assignment
Agreement, dated as of January 21, 1991, among Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson,
Judith Abramson, David B. Soll, Jerome Goodman
and Edward M. Glickman, and U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare,
Inc.'s 1995 Form 10-K filed on March 25, 1996.
(10.14) Description of Deferred Compensation Plan, incorporated
herein by reference to U.S. Healthcare, Inc.'s 1995
Form 10-K filed on March 25, 1996.
<PAGE> 54
Item 6. Exhibits and Reports on Form 8-K. (Continued)
(a) Exhibits (Continued)
(12) Statement Re Computation of Ratios.
(12.1) Computation of ratio of earnings to fixed charges and
ratio of earnings to combined fixed charges and
preferred stock dividends for the six months ended
June 30, 1996 and for the years ended December 31,
1995, 1994, 1993, 1992 and 1991.
(15) Letter Re Unaudited Interim Financial Information.
(15.1) Letter from KPMG Peat Marwick LLP acknowledging
awareness of the use of a report on unaudited interim
financial information, dated July 25, 1996.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The company filed a report on Form 8-K on April 1, 1996,
relating to the company entering into a definitive
agreement, dated March 30, 1996, to merge with U.S.
Healthcare, Inc.
The company filed a report on Form 8-K on April 15, 1996
relating to the completion of the sale of its property-
casualty operations to Travelers/Aetna Property Casualty Corp.
The company filed a report on Form 8-K on June 28, 1996 relating
to certain unaudited condensed consolidated pro forma financial
statements for the three and twelve months ended March 31, 1996
and December 31, 1995, respectively, an audited consolidated balance
sheet of Aetna Inc., and the deferral by the company's Board of
Directors of the declaration of the quarterly dividend
pending the closing of the proposed merger with U.S. Healthcare,
Inc.
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
______Aetna Services, Inc.___
________________________
(Registrant)
Date July 26, 1996 By /s/ Robert J. Price
______________________________
(Signature)
Robert J. Price
Vice President
and Corporate Controller
(Chief Accounting Officer)
<PAGE> 1
AETNA SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,_ _________
___________________________________________________
(Millions) __June 30, 1996__ 1995 1994 1993 1992 1991
_______________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $ 282.2 $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9)
Add back fixed charges........... 95.5 187.0 170.8 154.7 171.5 200.5
Minority interest................ 8.1 16.1 11.4 7.0 8.6 5.9
________ _______ _______ ________ _______ _______
Income (loss) as adjusted..... $ 385.8 $ 929.3 809.7 $ (853.0) $ 325.6 $ 108.5
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Fixed charges:
Interest on indebtedness....... $ 60.4(1) $ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9
Portion of rents representative
of interest factor............ 35.1 71.1 72.2 77.3 90.1 89.6
________ _______ _______ _________ _______ _______
Total fixed charges........... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Preferred stock dividend
requirements.................... - - - - - -
________ _______ _______ _________ _______ _______
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Ratio of earnings to fixed
charges......................... 4.04 4.97 4.74 (5.51) 1.90 .54
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 4.04 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 company's 1995 Annual
Report to Shareholders.)
</TABLE>
<PAGE> 1
Letter Re: Unaudited Interim Financial Information
___________________________________________________
Aetna Services, Inc.
Hartford, Connecticut
Gentlemen:
Re: Registration Statements No. 33-52819, 33-52819-01, 333-05791,
333-07167, 333-07169, 333-08427, 333-08429 and 333-08431
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
July 25, 1996 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11
of the Act.
By /s/ KPMG PEAT MARWICK LLP
_____________________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
July 25, 1996
<PAGE> 1
July 26, 1996
Securities and Exchange Commission
Room 1004
450 Fifth Street, N.W.
Washington, DC 20549
RE: AETNA SERVICES, INC. (FORMERLY AETNA LIFE AND CASUALTY
COMPANY SECOND QUARTER 1996 FORM 10-Q: FILE NO. 1-5704
Gentlemen:
This submits for Aetna Services, Inc. (formerly Aetna Life and
Casualty Company via direct electronic transmission the Form 10-Q
Report for the quarter ended June 30, 1996.
Please acknowledge receipt of the transmission of this
document via MCI mail at 309-3926.
Very truly yours,
/s/ ROBERT W. GRANOW
___________________________________
Robert W. Granow
Vice President, Financial Reporting
cc: and one manually signed copy of Form 10-Q to:
New York Stock Exchange
Department of Stock List
20 Broad Street
New York, New York 10005
Pacific Stock Exchange
301 Pine Street
San Francisco, CA 94104
<PAGE> 1
AETNA SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,_ _________
___________________________________________________
(Millions) __June 30, 1996__ 1995 1994 1993 1992 1991
_______________ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations........... $ 282.2 $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9)
Add back fixed charges........... 95.5 187.0 170.8 154.7 171.5 200.5
Minority interest................ 8.1 16.1 11.4 7.0 8.6 5.9
________ _______ _______ ________ _______ _______
Income (loss) as adjusted..... $ 385.8 $ 929.3 809.7 $ (853.0) $ 325.6 $ 108.5
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Fixed charges:
Interest on indebtedness....... $ 60.4(1) $ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9
Portion of rents representative
of interest factor............ 35.1 71.1 72.2 77.3 90.1 89.6
________ _______ _______ _________ _______ _______
Total fixed charges........... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Preferred stock dividend
requirements.................... - - - - - -
________ _______ _______ _________ _______ _______
Total combined fixed charges
and preferred stock dividend
requirements.................... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Ratio of earnings to fixed
charges......................... 4.04 4.97 4.74 (5.51) 1.90 .54
________ _______ _______ _________ _______ _______
________ _______ _______ _________ _______ _______
Ratio of earnings to combined
fixed charges and preferred
stock dividends................. 4.04 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 company's 1995 Annual
Report to Shareholders.)
</TABLE>
<PAGE> 1
Letter Re: Unaudited Interim Financial Information
___________________________________________________
Aetna Services, Inc.
Hartford, Connecticut
Gentlemen:
Re: Registration Statements No. 33-52819, 33-52819-01, 333-05791,
333-07167, 333-07169, 333-08427, 333-08429 and 333-08431.
With respect to the subject registration statements, we
acknowledge our awareness of the use therein of our report dated
July 25, 1996 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such
report is not considered a part of a registration statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11
of the Act.
By /s/ KPMG PEAT MARWICK LLP
_____________________________
(Signature)
KPMG Peat Marwick LLP
Hartford, Connecticut
July 25, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period
ended June 30, 1996 for Aetna Services, Inc. (formerly 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 29,828
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,225
<MORTGAGE> 7,493
<REAL-ESTATE> 1,211
<TOTAL-INVEST> 42,845
<CASH> 4,254
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,078
<TOTAL-ASSETS> 84,717
<POLICY-LOSSES> 18,322
<UNEARNED-PREMIUMS> 245
<POLICY-OTHER> 1,413
<POLICY-HOLDER-FUNDS> 20,711
<NOTES-PAYABLE> 987
0
0
<COMMON> 1,500
<OTHER-SE> 5,842
<TOTAL-LIABILITY-AND-EQUITY> 84,717
3,555
<INVESTMENT-INCOME> 1,780
<INVESTMENT-GAINS> 66
<OTHER-INCOME> 1,066
<BENEFITS> 4,296
<UNDERWRITING-AMORTIZATION> 75
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 282
<INCOME-TAX> 92
<INCOME-CONTINUING> 190
<DISCONTINUED> 446
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 636
<EPS-PRIMARY> 5.47
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>There is no difference between primary and fully
diluted earnings per share.
</FN>
</TABLE>
