SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 19, 1996
---------------------------
Travelers Group Inc.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9924 52-1568099
------------ ---------------- ---------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
388 Greenwich Street, New York, New York 10013
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 816-8000
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
This Form 8-K/A-1 is being filed to update certain
information contained in the historical financial information of the
businesses to be acquired by the Registrant from Aetna Life and Casualty
Company, which information was contained in the Registrant's Form 8-K dated
January 19, 1996.
<PAGE>
TRAVELERS GROUP INC.
Current Report on Form 8-K
Item 5. Other Events.
Reference is made to the Current Report on Form 8-K dated November 28, 1995, of
Travelers Group Inc. (the "Registrant"), wherein it was reported that The
Travelers Insurance Group Inc. ("TIGI"), an indirect wholly owned subsidiary of
the Registrant, had entered into an agreement (the "Agreement") with Aetna Life
and Casualty Company ("Aetna") to purchase Aetna's domestic property and
casualty insurance operations. The Agreement provides for the purchase by TIGI
or a subsidiary of all of the outstanding capital stock of The Aetna Casualty
and Surety Company and The Standard Fire Insurance Company (the "Transaction").
The Transaction is subject to various regulatory approvals and is expected to
close in March 1996.
Aetna has delivered to the Registrant certain financial information
regarding the businesses to be acquired. The audited historical financial
statements at and for the year ended December 31, 1994, and the unaudited
historical financial statements at and for the nine months ended September 30,
1995 and September 30, 1994 are set forth in Annexes A and B, respectively,
attached hereto and incorporated herein by reference (the "Aetna Historical
Financial Statements"). The Aetna Historical Financial Statements were prepared
by the management of Aetna and, to the extent audited, were audited by KPMG Peat
Marwick LLP, the independent auditors of Aetna.
Also set forth in Annex C and incorporated herein by reference are
unaudited pro forma financial statements of the Registrant and its subsidiaries
for the year ended December 31, 1994, and at and for the nine months ended
September 30, 1995, which give effect to the Transaction and certain other pro
forma adjustments.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
23.01 Consent of KPMG Peat Marwick LLP
2
<PAGE>
SIGNATURE
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 hereunto duly authorized.
Dated: February 6, 1996
TRAVELERS GROUP INC.
By: /s/ William T. Bozarth
---------------------------------
William T. Bozarth
Vice President
3
<PAGE>
Annex A
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994
<PAGE>
Page
Financial Report
Independent Auditors' Report 1
Combined Financial Statements 2
Notes to Combined Financial Statements 6
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors
Aetna Life and Casualty Company:
We have audited the combined balance sheet of The Aetna Casualty and Surety
Company and The Standard Fire Insurance Company and their subsidiaries ("the
Companies") as of December 31, 1994, and the related combined statements of
income, shareholder's equity, and cash flows for the year then ended. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company and their
subsidiaries as of December 31, 1994, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 7, 1995, except as to Note 16,
which is as of December 6, 1995
<PAGE>
PAGE 2
Combined Statement of Income
For the year ended December 31, 1994
(Millions)
- -------------------------------------------------------
Revenue:
Premiums $ 4,354.8
Net investment income 824.3
Fees and other income 115.8
Net realized capital gains 5.9
---------
Total revenue 5,300.8
- -------------------------------------------------------
Claims and Expenses:
Claims and claim adjustment expenses 3,747.1
Operating expenses 1,011.2
Amortization of deferred policy
acquisition cost 633.7
---------
Total claims and expenses 5,392.0
- -------------------------------------------------------
Loss before income tax benefits (91.2)
Income tax benefits (53.9)
---------
Net loss $ (37.3)
- ----------------------------------------------==========
See Notes to Combined Financial Statements.
<PAGE>
PAGE 3
Combined Balance Sheet
As of December 31, 1994
(Millions, except share data)
- ---------------------------------------------------------------------------
Assets:
Investments:
Debt securities:
Held for investment, at amortized cost (fair value $407.1) $ 413.5
Available for sale, at fair value (amortized cost $9,696.4) 9,096.8
Equity securities, at fair value (cost $779.5) 1,017.9
Short-term investments 106.0
Mortgage loans 1,453.7
Real estate 262.0
Other 301.2
--------
Total investments 12,651.1
- ---------------------------------------------------------------------------
Cash and cash equivalents 676.3
Reinsurance recoverables and receivables 4,623.2
Accrued investment income 178.0
Premiums due and other receivables 1,063.5
Federal and foreign income taxes:
Current 20.1
Deferred 862.5
Deferred policy acquisition costs 316.0
Other assets 1,000.4
--------
Total assets $ 21,391.1
===========================================================================
Liabilities:
Unpaid claims and claim adjustment expenses $ 15,697.2
Unearned premiums 1,423.8
Policyholders' funds left with the companies 46.7
----------
Total insurance liabilities 17,167.7
Short-term debt 9.1
Long-term debt 35.5
Other liabilities 1,057.9
----------
Total liabilities 18,270.2
- ---------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 14)
Shareholder's Equity:
Common capital stock (1,000 shares authorized, issued and outstanding with a
par value of $25,000 and 20,000 shares authorized, issued
and outstanding with a par value of $250) 30.0
Paid in capital 1,174.5
Net unrealized capital losses (387.9)
Retained earnings 2,304.3
----------
Total shareholder's equity 3,120.9
- ---------------------------------------------------------------------------
Total liabilities and shareholder's equity $21,391.1
===========================================================================
See Notes to Combined Financial Statements.
<PAGE>
PAGE 4
Combined Statement of Shareholder's Equity
For the year ended December 31, 1994
(Millions)
- ---------------------------------------------------------------------------
Shareholder's equity at December 31, 1993 $3,858.3
Net change in unrealized capital
gains and losses (700.1)
Net loss (37.3)
----------
Shareholder's equity at December 31, 1994 $3,120.9
- ---------------------------------------------------------------------------
See Notes to Combined Financial Statements.
<PAGE>
PAGE 5
Combined Statement of Cash Flows
For the year ended December 31, 1994
(Millions)
- ---------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (37.3)
Adjustments to reconcile net loss to
net cash used for operating activities:
Decrease in accrued investment income 25.4
Increase in premiums due and other receivables (232.8)
Increase in reinsurance recoverables and receivables (152.0)
Decrease in deferred policy acquisition costs 13.5
Depreciation and amortization 15.0
Decrease in federal and foreign income taxes (205.1)
Net increase in other assets and other liabilities (513.1)
Increase in insurance liabilities 384.0
Net realized capital gains (5.9)
Amortization of net investment discounts 55.0
Other, net 70.0
--------
Net cash used for operating activities (583.3)
--------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,173.2
Equity securities 550.0
Mortgage loans 33.1
Real estate 69.5
Short-term investments 7,361.3
Investment maturities and repayments of:
Debt securities available for sale 914.7
Debt securities held for investment 279.9
Mortgage loans 258.4
Cost of investment purchases in:
Debt securities available for sale (4,751.4)
Equity securities (420.4)
Mortgage loans (9.9)
Short-term investments (7,331.4)
Decrease in property and equipment 1.3
Other, net 135.3
--------
Net cash provided by investing activities 1,263.6
--------
Cash Flows from Financing Activities:
Repayment of long-term debt (12.3)
Net increase in short-term debt 9.1
--------
Net cash used for financing activities (3.2)
- ---------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (.3)
- ---------------------------------------------------------------------------
Net increase in cash and cash equivalents 676.8
Cash and cash equivalents, beginning of year (.5)
--------
Cash and cash equivalents, end of year $676.3
===========================================================================
See Notes to Combined Financial Statements.
<PAGE>
PAGE 6
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies
Principles of Combination
The combined financial statements include The Aetna Casualty and Surety Company
("AC&S") and The Standard Fire Insurance Company and their subsidiaries
(collectively, the "Companies") which are wholly-owned subsidiaries of Aetna
Life and Casualty Company ("Aetna"). The Companies' commercial insurance
operations provide most types of commercial property-casualty insurance
(primarily workers' compensation, auto, liability and other specialty products),
bonds, and insurance-related services for businesses, government units and
associations. The personal insurance operations underwrite private-passenger
auto and homeowners insurance, which is sold to individuals through independent
agents, with a significant market in the Northeastern states.
Due to the related business activities, common management control, common
ownership and the interdependence of the affiliated entities, combined financial
statements have been prepared in accordance with generally accepted accounting
principles. Intercompany transactions between the Companies have been
eliminated.
Accounting Changes
Offsetting of Amounts Related to Certain Contracts
Under certain insurance contracts with deductible features, the Companies are
obligated to pay the claimant for the full amount of a claim. The Companies are
subsequently reimbursed from the policyholder for the deductible. Prior to 1994,
unpaid claim reserves were reported net of such deductibles. In 1994, the
Companies implemented Financial Accounting Standards Board ("FASB")
Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, which
requires that unpaid claims under certain insurance contracts be reported on a
gross basis. Deductible amounts recoverable from policyholders of $352 million
are included in other assets at December 31, 1994, as a result of implementing
FASB Interpretation No. 39.
Future Application of Accounting Standards
Accounting by Creditors for Impairment of a Loan
The FASB issued FAS No. 114, Accounting by Creditors for Impairment of a Loan,
in 1993. This statement requires that loans be impaired when it is probable that
a creditor will be unable to collect all amounts (i.e., principal and interest)
contractually due, and the impairment be measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. The statement also allows impairments to be measured based on the loan's
market price or the fair value of the collateral if the loan is collateral
dependent. In October 1994, the FASB issued FAS No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures, which amends FAS
No. 114 to allow a creditor to use existing methods for recognizing income on
impaired loans. The Companies will adopt these standards effective January 1,
1995; it is not expected that implementation will have a material impact on net
income.
<PAGE>
PAGE 7
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies (continued)
Future Application of Accounting Standards (continued)
Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
In March 1995, the Financial Accounting Standards Board ("FASB") issued FAS No.
121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This statement requires write down to fair value when long-lived assets to
be held and used are impaired. The statement also requires long-lived assets to
be disposed of (e.g., real estate held for sale) to be carried at the lower of
cost or fair value less estimated selling costs and does not allow such assets
to be depreciated. This statement will be effective for 1996 financial
statements, although earlier adoption is permissible. The Companies will adopt
this statement in 1996 and the impact on earnings is not expected to be
material.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued FAS No. 123, Accounting for Stock-Based
Compensation. This statement 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 requirements of this statement will be effective for
1996 financial statements, although earlier adoption is permissible if an
enterprise elects to expense the cost of stock-based compensation. The
Companies, in conjunction with Aetna, are currently evaluating the disclosure
and expense recognition alternatives as permitted by this statement.
Please refer to Note 16 for a discussion of the Companies' subsequent events.
Investments
The Companies classify investments in debt securities (including redeemable
preferred stocks) in three categories: held for investment, available for sale
and trading.
Debt securities which the Companies have the positive intent and ability to hold
to maturity are classified as held for investment and are carried at amortized
cost, net of write-downs for other than temporary declines in value.
Debt securities which might be sold prior to maturity are classified as
available for sale and carried at fair value. Available for sale debt securities
are written down (as realized losses) for other than temporary declines in
value. Unrealized gains and losses related to available for sale securities, net
of related taxes, are reflected in shareholder's equity.
Debt securities which are held with the objective of trading to generate profits
on short-term differences in price ("trading securities") are carried at fair
value. The Companies had no trading securities at December 31, 1994.
<PAGE>
PAGE 8
Notes to Combined Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Investments (continued)
Equity securities are classified as available for sale and carried at fair
value. Equity securities are written down (as realized losses) for other than
temporary declines in value. Unrealized gains and losses related to such
securities, net of related taxes, are reflected in shareholder's equity.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Purchases and sales of debt and equity securities are recorded on the trade
date. Purchases and sales of mortgage loans are recorded on the closing date.
Mortgage loans are carried at unpaid principal balances, net of valuation
reserves, and are generally secured. Valuation reserves for mortgage loans are
established based on the fair value of the collateral for impairments considered
probable of having been incurred, including those that management believes are
likely to arise from the overall portfolio. Investment real estate, which the
Companies have the intent to hold for the production of income, is carried at
depreciated cost plus capital additions, net of write-downs for other than
temporary declines in fair value. Properties held for sale (primarily acquired
through foreclosure) are carried at the lower of depreciated cost (fair value at
foreclosure plus capital additions less accumulated depreciation) or fair value
less estimated selling costs. Adjustments to the carrying value of properties
held for sale are recorded in a valuation reserve when the fair value less
estimated selling costs is below depreciated cost. The accumulated depreciation
for real estate was $23.1 million at December 31, 1994.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
Other invested assets consist primarily of partnerships, equity subsidiaries and
agency loans. Partnerships and equity subsidiaries are carried on an equity
basis and agency loans are carried at the unpaid principal balance.
The Companies utilize foreign exchange forward contracts, futures contracts and
swap agreements in order to align maturities, interest rates, currency rates and
funds availability with its obligations. (Please refer to Note 13.) Realized and
unrealized gains and losses from forward contracts hedging foreign translation
exposures are reflected, net of tax, in shareholder's equity. Realized and
unrealized gains and losses from forward contracts hedging foreign transaction
exposures are reflected in the Combined Statement of Income.
<PAGE>
PAGE 9
Notes to Combined Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Investments (continued)
Futures contracts are carried at fair value. Realized and unrealized gains and
losses on futures contracts which qualify as hedges are deferred and recognized
as an adjustment to the hedged asset or liability, and amortized over the life
of the related asset or liability as an adjustment to the yield. Realized and
unrealized gains and losses on futures contracts which do not qualify as hedges
are reflected in the Combined Statement of Income.
The difference between amounts paid and received on swap agreements utilized to
reduce the impact of changes in interest rates and currency exchange rates is
reflected in the Combined Statement of Income.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new business,
consist principally of commissions, premium taxes and certain expenses of
underwriting and issuing contracts. Acquisition costs are amortized over the
life of the insurance contract.
Deferred policy acquisition costs would be written off to the extent that it is
determined that future policy premiums and investment income would not be
adequate to cover related losses and expenses.
Other Assets
Property and equipment are reported at depreciated cost using the straight-line
method based upon the estimated useful lives of the assets. The carrying value
of property and equipment at December 31, 1994 was $20.9 million and was net of
accumulated depreciation of $92.9 million.
Insurance Liabilities
Liabilities for unpaid property-casualty claims and claim adjustment expenses
include, to the extent reasonably estimable, provisions for payments to be made
on reported losses, and losses incurred but not reported and for associated
claim adjustment expenses. (Please refer to Note 12.) Workers' compensation life
table indemnity reserves are discounted at 5% for voluntary business and 3.5%
for involuntary business, with mortality assumptions which reflect current
company and industry experience. Workers' compensation life table indemnity
reserves totaled $768 million at December 31, 1994 which was 22% of the
Companies' total workers' compensation reserves for unpaid claims and claim
adjustment expenses.
<PAGE>
PAGE 10
Notes to Combined Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Insurance Liabilities (continued)
The Companies' insurance reserve liabilities are reported net of estimated
amounts of salvage and subrogation.
Unearned premiums are calculated on a pro rata basis. Additional premiums under
retrospectively-rated policies are excluded from unearned premiums and
classified as premiums due on the Combined Balance Sheet.
Premiums, Claims and Expenses
Premiums are generally recognized as revenue on a pro rata basis over the policy
term. Certain policies allow the Companies to charge additional premiums as a
result of recognizing additional claim and expense costs under the policies.
Such premiums are recognized when the related claims are provided.
Claims and expenses, including acquisition costs such as commissions, premium
taxes and certain other items, are charged to current operations as incurred.
Claims are reported net of salvage and subrogation received and anticipated.
Premiums, claims and expenses are also reported net of deductions for
reinsurance ceded.
Federal and Foreign Income Taxes
The Companies are included in the consolidated federal income tax return of
Aetna. The Companies are taxed at regular corporate rates after adjusting
income/(loss) reported for financial statement purposes for certain items.
Foreign subsidiaries and U.S. subsidiaries operating outside of the United
States are taxed under applicable foreign statutes. Deferred income tax
expenses/(benefits) result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
<PAGE>
PAGE 11
Notes to Combined Financial Statements (continued)
2. Severance and Facilities Charge
The Companies recorded a $101 million after-tax ($155 million pretax) severance
and facilities charge in the fourth quarter of 1993. The planned actions
included the elimination of approximately 2,000 positions. As a result of the
planned elimination of these positions, the Companies determined that they would
have excess office space. Accordingly, the severance and facilities charge also
included costs related to vacating the excess leased office space, and costs
related to abandoning and preparing for sale a property owned by Aetna in
Hartford, Connecticut. The 1993 severance and facilities charge included the
following (pretax):
<TABLE><CAPTION>
Facility and
Asset Vacated
Severance Write-Off Leased
(Millions) Related Related(1)(2) Property Other Total
--------- ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Severance and facilities reserve at
December 31, 1993 $ 102.3 $ 26.4 $ 20.7 $ 5.6 $ 155.0
Charges against reserve 102.2 16.6 20.7 2.9 142.4
--------- ----------- ---------- -------- ---------
Severance and facilities reserve at
December 31, 1994 $ 0.1 $ 9.8 $ - $ 2.7 $ 12.6
========= =========== ========== ======== =========
</TABLE>
(1) Facility and asset write-off related charges
include the write-down to net realizable value (based on an internally
prepared appraisal) of an Aetna property that will be abandoned. The charge
does not include operating costs expected to be incurred prior to the date
of abandonment of the property. Facility and asset write-off related charges
also include costs to retire computer equipment used by employees whose
positions were, or are expected to be, eliminated and other related costs.
(2) Facility and asset write-off related charges are non-cash costs. All other
items shown above required, or will require, cash outlays.
Vacating the leased office space was substantially completed by December 31,
1994. The remaining lease payments (net of expected subrentals) on such vacated
facilities are payable over approximately the next six years.
<PAGE>
PAGE 12
Notes to Combined Financial Statements (continued)
3. Investments
Debt securities at December 31, 1994 were as follows:
<TABLE><CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
Held for Investment:
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 246.1 $ 1.1 $ 8.0 $ 239.2
Utilities 37.7 .1 .6 37.2
Financial 42.8 .2 .3 42.7
Transportation/Capital Goods 13.8 .5 .2 14.1
Other corporate securities 49.8 1.9 .9 50.8
Foreign governments 23.3 .1 .3 23.1
----------------------------------------------
Total Held for Investment $ 413.5 $ 3.9 $ 10.3 $ 407.1
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE><CAPTION>
Available for Sale:
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 3,660.1 $ 1.2 $ 254.9 $ 3,406.4
Obligations of states and
political subdivisions 1,060.4 3.9 46.4 1,017.9
Utilities 519.7 1.3 22.8 498.2
Financial 515.7 .1 17.5 498.3
Transportation/Capital Goods 625.6 2.9 26.2 602.3
Other corporate securities 841.2 .9 56.7 785.4
Mortgage-backed securities 1,370.4 3.5 102.3 1,271.6
Other loan-backed securities 332.2 - 14.7 317.5
Foreign governments 771.1 2.8 74.7 699.2
----------------------------------------------
Total Available for Sale $ 9,696.4 $ 16.6 $ 616.2 $ 9,096.8
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 13
Notes to Combined Financial Statements (continued)
3. Investments (continued)
The carrying and fair value of debt securities held for investment and available
for sale are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be restructured, called or
prepaid.
December 31, 1994
-------------------
Amortized Fair
(Millions) Cost Value
- -----------------------------------------------------------------------
Held for Investment:
- -----------------------------------------------------------------------
Due to mature:
One year or less $ 56.4 $ 56.2
After one year through five years 125.7 124.9
After five years through ten years 117.5 116.8
After ten years 113.9 109.2
- -----------------------------------------------------------------------
Total Held for Investment $ 413.5 $ 407.1
- -----------------------------------------------------------------------
Available for Sale:
- -------------------====================================================
Due to mature:
One year or less $ 982.9 $ 965.8
After one year through five years 4,413.1 4,172.6
After five years through ten years 1,439.3 1,314.9
After ten years 1,158.5 1,054.4
Mortgage-backed securities 1,370.4 1,271.6
Other loan-backed securities 332.2 317.5
- -----------------------------------------------------------------------
Total Available for Sale $9,696.4 $9,096.8
- -----------------------------------------------------------------------
Investments in available for sale equity securities at December 31, 1994 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------
Equity securities 779.5 $ 335.8 $ 97.4 $ 1,017.9
- -------------------------------------------------------------------------------
Real estate holdings at December 31, 1994 were as follows:
(Millions)
- ---------------------------------------------------------
Properties held for sale $ 98.6
Investment real estate 197.7
-------
296.3
Valuation reserve 34.3
-------
Net carrying value $ 262.0
- ---------------------------------------------------------
<PAGE>
PAGE 14
Notes to Combined Financial Statement (continued)
3. Investments (continued)
Total real estate write-downs included in the net carrying value of the
Companies' real estate holdings on the Combined Balance Sheet at December 31,
1994 were $117.6 million.
Impairment reserves at December 31, 1994 were as follows:
(Millions)
- ---------------------------------------------------------
Mortgage loans $ 136.6
Real estate 34.3
Other 6.0
---------
Total impairment reserves $ 176.9
- ---------------------------------------------------------
The carrying values of investments that were non-income producing for the twelve
months preceding the balance sheet date were as follows:
(Millions)
- ---------------------------------------------------------
Debt securities $ 2.4
Equity securities 9.3
Mortgage loans 14.9
Real estate 47.9
---------
Total non-income producing investments $ 74.5
- ---------------------------------------------------------
Significant non-cash investing and financing activities include acquisition of
real estate through foreclosures (including in-substance foreclosures) of
mortgage loans amounting to $59 million in 1994.
Please refer to Note 15 for concentrations of investment credit risk.
<PAGE>
PAGE 15
Notes to Combined Financial Statements (continued)
4. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold. Provisions for impairments and
changes in the fair value of real estate subsequent to foreclosure are also
included in net realized capital gains. Unrealized capital gains and losses on
available for sale securities, net of related taxes, are reflected in
shareholder's equity.
Net realized capital gains (losses) on investments for the year ended December
31, 1994 were as follows:
(Millions)
- ---------------------------------------------------------
Debt securities $ 11.7
Equity securities 33.2
Mortgage loans (52.8)
Real estate 12.2
Sales of subsidiaries 20.8
Other (19.2)
--------
Pretax realized capital gains $ 5.9
- ---------------------------------------------------------
After-tax realized capital gains $ 3.8
- ---------------------------------------------------------
Proceeds from sales of investments in debt securities available for sale during
1994 were $4.2 billion. Gross gains of $63.6 million and gross losses of $75.6
million were realized on those sales.
Net realized capital gains included a $14 million after-tax gain resulting from
the sale of a portion of an unconsolidated subsidiary.
Shareholder's equity included changes in unrealized capital gains (losses), for
the year ended December 31, 1994 as follows:
(Millions)
- ----------------------------------------------------------
Equity securities $ (132.9)
Debt securities available for sale (808.1)
Foreign exchange and other, net 35.2
--------
(905.8)
Decrease in deferred federal income taxes (205.7)
--------
Net change in unrealized capital gains (losses) $(700.1)
- ----------------------------------------------------------
<PAGE>
PAGE 16
Notes to Combined Financial Statements (continued)
4. Capital Gains and Losses on Investment Operations (continued)
The change in unrealized capital gains (losses) for the year ended December 31,
1994 excludes pretax changes in debt securities carried at amortized cost. The
unrecorded (depreciation) for debt securities carried at amortized cost is the
difference between estimated market and carrying values, and amounted to $(6.4)
million at December 31, 1994. The change in unrecorded
appreciation/(depreciation) was $(27.0) million in 1994.
Shareholder's equity included the following unrealized capital gains/(losses) at
December 31, 1994:
(Millions)
- -----------------------------------------------------------
Equity securities:
Gross unrealized capital gains $ 335.8
Gross unrealized capital losses (97.4)
-----------
238.4
Debt securities available for sale:
Gross unrealized capital gains 16.6
Gross unrealized capital losses (616.2)
-----------
(599.6)
Foreign exchange and other, net (63.7)
Deferred federal income tax benefits (37.0)
-----------
Net unrealized capital losses $ (387.9)
- -----------------------------------------------------------
At December 31, 1994, approximately $290 million of net unrealized capital
losses, primarily on available for sale debt and equity securities, were
reflected in shareholder's equity without deferred tax benefits. (Please refer
to Note 8 for a discussion of the tax treatment for unrealized capital losses on
available for sale debt and equity securities.)
5. Net Investment Income
Sources of net investment income for the year ended December 31, 1994 were as
follows:
(Millions)
- ----------------------------------------------------------
Debt securities $ 626.5
Equity securities 27.0
Mortgage loans 154.4
Real estate 59.2
Other 8.8
Cash equivalents (including short-term
investments) 25.6
-------
Gross investment income 901.5
Less investment expenses 77.2
-------
Net investment income $ 824.3
- ----------------------------------------------------------
<PAGE>
PAGE 17
Notes to Combined Financial Statements (continued)
6. Dividend Restrictions and Shareholder's Equity
The amount of dividends that may be paid to Aetna by AC&S and The Standard Fire
Insurance Company in 1995, without prior approval by the Insurance Commissioner
of the State of Connecticut is $251.6 million. Dividend payments by the domestic
insurance subsidiaries of AC&S and The Standard Fire Insurance Company are
subject to similar restrictions in Connecticut and other states, and are limited
in 1995 to approximately $100.5 million in the aggregate.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts determined in
conformity with statutory accounting practices prescribed or permitted by the
Department, which differ in certain respects from generally accepted accounting
principles.
Statutory net loss was $170.1 million for the year ended December 31, 1994.
Statutory shareholder's equity was $2,525.7 million as of December 31, 1994.
In recent years, state insurance regulators have been considering changes in
statutory accounting practices and other initiatives to strengthen solvency
regulation. Under the risk-based capital ("RBC") standards for property-casualty
insurers adopted by the NAIC, each of the Companies applies the RBC formula
which compares adjusted surplus to required surplus and reflects the risk
profile of the company (RBC ratio). The RBC ratio at December 31, 1994 for each
of the Companies is above the levels which would require regulatory action.
As of December 31, 1994, the Companies do not utilize any statutory accounting
practices which are not prescribed by insurance regulators that, individually or
in the aggregate, materially affect statutory shareholder's equity.
Please refer to Note 16 for a discussion of the Companies' subsequent events.
7. Long-Term Debt
December 31,
(Millions) 1994
- ---------------------------------------------------------
Long-term debt:
Mortgage Notes and Other Notes, 6.9%-11%
due in varying amounts to 2018 $ 35.5
-------
Aggregate maturities of long-term debt and sinking fund requirements for 1995
through 1999 are $.4 million, $.3 million, $.2 million, $29.5 million, $.1
million, respectively, and $5.0 million thereafter.
<PAGE>
PAGE 18
Notes to Combined Financial Statements (continued)
8. Federal and Foreign Income Taxes
The Companies are included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it would
have incurred were it not a member of the consolidated group, and credits the
member for the use of its tax saving attributes in the consolidated return.
Components of income tax benefits for the year ended December 31, 1994 were as
follows:
(Millions)
- ----------------------------------------------------------
Current taxes (benefits):
Income - from operations $ 4.2
Realized capital losses (47.4)
---------
(43.2)
Deferred taxes (benefits):
Loss - from operations (60.2)
Realized capital gains 49.5
---------
(10.7)
---------
Total $ (53.9)
- ----------------------------------------------------------
Income tax benefits on losses were different from the amount computed by
applying the federal income tax rate to loss before income tax benefits as of
December 31, 1994 for the following reasons:
(Millions)
- -----------------------------------------------------------
Loss before income tax benefits $ (91.2)
Tax rate 35%
----------
Application of the tax rate (31.9)
Tax effect of:
Tax-exempt interest (31.1)
Foreign operations 6.9
Excludable dividends (8.1)
Other, net 10.3
----------
Income tax benefits $ (53.9)
- -----------------------------------------------------------
<PAGE>
PAGE 19
Notes to Combined Financial Statements (continued)
8. Federal and Foreign Income Taxes (continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31, 1994 are presented below:
(Millions)
- ----------------------------------------------------------
Deferred tax assets:
Insurance reserves $ 756.6
Reserve for severance and facilities expense 26.3
Impairment reserves 49.5
Net unrealized capital losses 139.5
Net operating loss 113.2
Other 9.4
---------
Total gross assets 1,094.5
Less valuation allowance 102.1
---------
Assets net of valuation 992.4
Deferred tax liabilities:
Deferred policy acquisition costs 110.5
Market discount 17.1
Other 2.3
---------
Total gross liabilities 129.9
---------
Net deferred tax asset $ 862.5
- ----------------------------------------------------------
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. At December 31, 1994, approximately $290 million of net
unrealized capital losses primarily on available for sale debt and equity
securities were reflected in shareholder's equity without deferred tax benefits.
For federal income tax purposes, capital losses are deductible only against
capital gains in the year of sale or during the carryback and carryforward
periods (three and five years, respectively). Due to the expected full
utilization of capital gains in the carryback period and the uncertainty of
future capital gains, a valuation allowance of $102.1 million related to the net
unrealized capital losses has been reflected in shareholder's equity. Any
reversals of the valuation allowance are contingent upon the recognition of
future capital gains in Aetna's federal income tax return or a change in
circumstances which causes the recognition of the benefits to become more likely
than not. Non-recognition of the deferred tax benefits on net unrealized losses
described above had no impact on net income for 1994, but has the potential to
adversely affect future results if such losses are realized.
Management believes that it is more likely than not that the Companies will
realize the benefit of the net deferred tax asset of $862.5 million. Aetna's
election of special estimated tax payments in years 1989 through 1993 assures
realizability of a substantial portion of deferred tax assets arising from the
discounting of property-casualty reserves. The Companies have more than 15 years
to generate sufficient taxable income to cover the reversal of its temporary
differences due to the long-term reversal patterns of these differences. Because
of Aetna's long-term history of taxable income, which is projected to continue,
and the availability of significant tax planning strategies, such as converting
tax-exempt bonds to taxable bonds, the Companies expect sufficient taxable
income in the future to realize the net deferred tax asset.
<PAGE>
PAGE 20
Notes to Combined Financial Statements (continued)
8. Federal and Foreign Income Taxes (continued)
The net deferred tax asset includes $113.2 million related to the Companies'
expected utilization of its current U.S. net operating loss carryforward of
$323.4 million, $107.0 million of which expires in the year 2008 and $216.4
million of which expires in the year 2009.
The Companies generally have not recognized any deferred tax liabilities
attributable to the undistributed earnings of their controlled foreign
corporations because the Companies do not expect repatriation. Such amounts are
not material.
The Internal Revenue Service (the "Service") has completed examination of the
consolidated federal income tax returns of Aetna through 1986. Discussions are
being held with the Service with respect to proposed adjustments. However,
management believes there are adequate defenses against, or sufficient reserves
recorded by Aetna to provide for, such adjustments. The Service has commenced
its examination for the years 1987 through 1990. Management believes that any
additional taxes assessed as a result of these examinations, would not
materially impact the Companies' overall financial position.
The Companies received a net federal income tax refund of $60.7 million in 1994.
9. Benefit Plans
Pension Plans - The Companies, in conjunction with Aetna, have non-contributory
defined benefit plans covering substantially all employees and certain agents.
The plans provide pension benefits based on years of service and average annual
compensation (measured over 60 consecutive months of highest earnings in a 120-
month period). Contributions are determined by using the Entry Age Normal Cost
Method and, for qualified plans subject to ERISA requirements, are limited to
the amounts that are currently deductible for tax reporting purposes. The
accumulated benefit obligations and plan assets are recorded by Aetna. Data on a
separate company basis regarding the proportionate share of the accumulated
benefit obligation and plan assets is not available. The accumulated plan assets
exceed accumulated benefits. Pretax charges to operations for the pension plan
(based on the Companies' total salary cost as a percentage of Aetna's total
salary cost) were $12.0 million in 1994. There has been no funding to the plan
in 1994.
Postretirement Benefits - In addition to providing pension benefits, Aetna also
provides certain postretirement health care and life insurance benefits for
retired employees. A comprehensive medical and dental plan is offered to all
full-time employees retiring at age 50 with 15 years of service or at age 65
with 10 years of service. Retirees are generally required to contribute to the
plans based on their years of service with Aetna.
In January 1994, Aetna announced a modification of its postretirement benefit
plan to cap the portion of the cost paid by Aetna relating to medical and dental
benefits for individuals retiring after March 1, 1994. The accumulated benefit
obligations and plan assets are recorded by Aetna. Data on a separate company
basis regarding the proportionate share of employee costs is not available. An
allocation, based on headcount, of Aetna's total cash costs for retirees is
reflected in the Combined Statement of Income.
<PAGE>
PAGE 21
Notes to Combined Financial Statements (continued)
9. Benefit Plans (continued)
Incentive Saving Plan - Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested in
common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. The Companies' pretax charges to operations for the
incentive savings plan were $24.3 million in 1994.
1994 Stock Incentive Plan - Certain employees participate in Aetna's 1994 stock
incentive plan (which replaced the 1984 stock option plan). No new options will
be granted under the 1984 plan, however, options currently outstanding will
continue to be in effect. The 1994 plan provides for stock options (see (1)
Stock Option Plans), and deferred contingent common stock or cash awards (see
(2) Incentive Units) to certain key employees. The Companies' pretax charges to
operations for the Stock Incentive Plan were $8.4 million in 1994.
(1) Stock Option Plans - Executive and middle management employees may be
granted options to purchase common stock of Aetna at the market price on the
date of grant. Certain options granted prior to 1992 contain stock appreciation
rights permitting the employee to exercise those rights and receive the excess
of fair market value at the date of exercise over the grant date fair market
value in cash and/or stock.
(2) Incentive Units - Executive and middle management employees may be granted
incentive units under the Aetna 1994 Stock Incentive Plan, which are rights to
receive Aetna common stock or cash at the end of a vesting period (currently
1996) conditioned upon the employee's continued employment during that period
and achievement of Aetna performance goals. The incentive unit holders are not
entitled to dividends during the vesting period.
10. Related Party Transactions
A substantial portion of the administrative and support functions of the
Companies are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures appropriate for
the type and nature of service provided. The Companies have agreements and
contracts with certain Aetna affiliates to provide administrative and technical
services. The types of services provided by Aetna and its affiliates to the
Companies related to such functions include, but are not limited to, general
ledger processing, including subsidiary expense ledgers, use of the corporate
conference center, office services, purchasing, security, facilities management,
payroll and other human resources services, bank administration and other
treasury services. The Companies are also allocated charges for certain
corporate staff area costs which include, but are not limited to, salaries,
certain employee benefit and incentive plans, legal fees, travel, taxes
(including payroll and personal property) and severance and facilities charges
associated with restructuring initiatives.
<PAGE>
PAGE 22
Notes to Combined Financial Statements (continued)
10. Related Party Transactions (continued)
Hartford-area home office properties occupied by the Companies are owned by
Aetna affiliates. The Companies are charged rent based on their proportionate
share (based on square footage occupied) of the total occupancy cost (including
depreciation) of Aetna's Hartford-area properties. Certain other facilities
owned by the Companies, either directly or through partnerships, are leased by
Aetna and its affiliates. In addition, the Combined Balance Sheet reflects
certain mortgages and real estate investments that are held jointly by the
Companies and Aetna affiliates.
The Companies, by virtue of their participation in the consolidated operations
of Aetna, benefit from certain costs which are incurred in other Aetna legal
entities and not subsequently allocated back to the Companies. Such costs
include, but are not limited to, advertising, interest expense, charitable
contributions, certain postretirement benefits other than pensions, certain
postemployment benefits and certain other employee benefit plans.
The Companies utilize intercompany receivable/payable accounts to settle
allocated charges primarily related to general and administrative expenses of
Aetna and its affiliates. Such expenses are paid by the parent company, Aetna
Life and Casualty Company, and subsequently transferred to AC&S which acts as a
clearinghouse in allocating such expenses to each of the parent company's
subsidiaries. Settlements generally take place within 45 days after the end of
each month.
AC&S entered into a stop-loss agreement with an affiliate Aetna Re-Insurance
Company (U.K.) Ltd., a wholly-owned subsidiary of Aetna. Such agreement covers
all policies-in-force, written, renewed or accepted during 1992 and prior years.
AC&S has a 100% participation in net losses in excess of the retention limits
which result from adverse development on known losses valued as of December 31,
1992 and/or reported subsequent to December 31, 1992. As of December 31, 1994,
reserves of approximately $33.8 million had been established for such coverage.
11. Reinsurance
The Companies utilize reinsurance agreements to reduce their exposure to large
losses in all aspects of their insurance business. Reinsurance permits recovery
of a portion of losses from reinsurers, although it does not discharge the
primary liability of the Companies as direct insurers of the risks reinsured.
The Companies evaluate the financial strength of potential reinsurers and
continually monitor the financial condition of present reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Combined Balance Sheet.
Prepaid reinsurance premiums were $.3 billion for the year ended December 31,
1994. A summary of earned premiums for the year ended December 31, 1994 was as
follows:
(Millions)
- ----------------------------------------------------------
Direct Amount $5,093.4
Ceded to Other Companies 1,177.7(1)
Assumed from Other Companies 439.1(2)
--------
Net Amount $4,354.8
- ----------------------------------------------------------
(1) Includes $184.7 million of premiums ceded to Aetna affiliates.
(2) Includes $130.8 million of premiums assumed from Aetna affiliates.
<PAGE>
PAGE 23
Notes to Combined Financial Statements (continued)
11. Reinsurance (continued)
There is not a material difference in premiums on a written versus an earned
basis.
Ceded claims and claim adjustment expenses were $1.2 billion for the year ended
December 31, 1994.
Certain subsidiaries of the Companies act as servicing carriers for several
involuntary pools. This business is ceded completely to the pools, and the
Companies have no direct underwriting risk associated with it. Reinsurance
recoverables for this business were approximately $1.8 billion as of December
31, 1994. The Companies also participate as members in a number of the
involuntary pools, and as a result assume their share of premiums and losses
associated with these pools.
Unpaid claims and claim adjustment expenses and reinsurance recoverables on the
Combined Balance Sheet are reported net of amounts ceded to and assumed from
affiliates. The total amount of unpaid claims and claim adjustment expense and
reinsurance recoverables related to these reinsurance agreements at December 31,
1994 was $642.0 million, of which $639.9 million relates to an arrangement which
will be commuted on January 1, 1996.
12. Reserves
The following represents changes in aggregate reserves for unpaid claims and
claim adjustment expenses as of December 31, 1994:
(Millions)
- -------------------------------------------------------------------
Gross unpaid claims and claim adjustment expenses
at beginning of year $ 15,395
Less: Reinsurance recoverables 4,151
--------
Net unpaid claims and claim adjustment expenses
at beginning of year 11,244
Incurred claims and claim adjustment expenses:
Provision for insured events of the current year 3,483
Provision for insured events of prior years 264
- -------------------------------------------------------------------
Total incurred claims and claim adjustment expenses 3,747
- -------------------------------------------------------------------
Payments: Attributable to insured events of the
current year 1,276
Attributable to insured events of
prior years 2,708
- -------------------------------------------------------------------
Total payments 3,984
- -------------------------------------------------------------------
Net unpaid claims and claim adjustment expenses at
end of the year 11,007
Plus: Reinsurance recoverables 4,338
Deductible amounts recoverable from policyholders 352
- -------------------------------------------------------------------
Gross unpaid claims and claim adjustment expenses
at end of the year $15,697
- -------------------------------------------------------------------
<PAGE>
PAGE 24
Notes to Combined Financial Statements (continued)
12. Reserves (continued)
Environmental and Asbestos-Related Claims
Reserving for environmental and asbestos-related claims is subject to
significant uncertainties. Because of these significant uncertainties,
management is currently unable to make a reasonable estimate as to the ultimate
amount of losses or a reasonable range of losses for all environmental and
asbestos-related claims and related litigation expenses. To the extent that such
liabilities are not reasonably estimable, no reserve has been provided. However,
reserves for these liabilities are evaluated by management regularly, and,
subject to the significant uncertainties, adjustments have been and are expected
to be made to such reserves as developing loss patterns and other information
appear to warrant.
Environmental and asbestos-related loss and loss adjustment expense reserves at
December 31, 1994, as reflected on the Combined Balance Sheet were as follows
(before reinsurance, in millions):
- ----------------------------------------------------------
Environmental Liability $ 436
Asbestos Bodily Injury 296
Asbestos Property Damage 30
-------
Total Environmental and
Asbestos-Related Reserves $ 762
- ---------------------------------------------------=======
Please refer to Note 16 for a discussion of the Companies' subsequent events.
Workers' Compensation Claims
Estimating workers' compensation reserves is particularly difficult (and,
therefore, more subject to change than many other types of property-casualty
claims), largely because of the length of the "tail" associated with workers'
compensation claims. Workers' compensation claim costs are dependent on a number
of complex factors including social and economic trends and changes in doctrines
of legal liability and damage awards.
Other
Policyholders of the Companies also seek insurance coverage from the Companies
for other long-term exposure claims against them, including claims relating to
silicone-based personal products, lead paint and other allegedly toxic or
harmful substances. Evaluating and reserving for these types of exposures is
complex and subject to many uncertainties including those stemming from coverage
issues, long latency periods and changing laws.
<PAGE>
PAGE 25
Notes to Combined Financial Statements (continued)
12. Reserves (continued)
Other (continued)
The Companies have noted evidence of adverse loss developments in their
commercial general liability line of business. The Companies believe that such
developments largely are attributable to the unusual frequency and size of
claims in this line of business. The Companies also believe that the unusual
frequency and size of construction defect claims brought against contractor
policyholders (observed by the Companies in 1994) and the increasing size of
other types of claims brought against contractor policyholders (observed by the
Companies to be continuing in 1994) are contributing to these loss developments.
The Companies believe that it is reasonably possible that these adverse loss
developments will continue, and if so they would adversely affect the Companies'
future results although the Companies are currently unable to estimate the
extent to which results would be affected. Management has and continues to
review the factors contributing to these developments (by, for example,
segregating and examining data on an individual policyholder basis) and to
adjust its reserves as more current data becomes available.
13. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of the Companies' financial
instruments at December 31, 1994 were as follows:
Carrying Fair
Value Value
-------- --------
Assets:
Cash and cash equivalents $ 676.3 $ 676.3
Short-term investments 106.0 106.0
Debt securities 9,510.3 9,503.9
Equity securities 1,017.9 1,017.9
Mortgage loans 1,453.7 1,416.0
Liabilities:
Short-term debt 9.1 9.1
Long-term debt 35.5 35.5
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Companies' entire holdings of a particular financial instrument,
nor do they consider the tax impact of the realization of unrealized gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Companies' management
of interest rate and liquidity risk, and currency exposures, the fair values of
all assets and liabilities should be taken into consideration, not only those
presented above.
<PAGE>
PAGE 26
Notes to Combined Financial Statements (continued)
13. Financial Instruments (continued)
Estimated Fair Value (continued)
The following valuation methods and assumptions were used by the Companies in
estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not available,
the carrying amounts reported in the Combined Balance Sheet approximate fair
value. Short-term instruments have a maturity date of one year or less and
include cash and cash equivalents, short-term investments and short-term debt.
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimates
of mortgage loans of lower credit quality, including problem and restructured
loans, are based on the estimated fair value of the underlying collateral.
Long-term debt: Fair value is based on quoted market prices for the same or
similar issued debt or, if no quoted market prices are available, on the current
rates estimated to be available to the Companies for debt of similar terms and
remaining maturities.
Off-Balance-Sheet Financial Instruments (including Derivative Financial
Instruments):
The notional amounts, carrying values and estimated fair values of the
Companies' off-balance-sheet financial instruments at December 31, 1994 were as
follows:
Carrying
Value
Notional Asset Fair
(Millions) Amount (Liability) Value
- ------------------------------------------------------------------------------
Foreign exchange forward contracts - sell:
Related to net investments in
foreign affiliates $ 27.1 $ .2 $ .2
Related to investments in
non-dollar denominated assets 206.1 .2 (1.5)
Foreign exchange forward contracts - buy:
Related to investments in
non-dollar denominated assets 3.8 (.4) -
Interest rate swaps:
Unrecognized gains 386.4 - 18.3
Unrecognized losses 386.4 - (18.3)
- ------------------------------------------------------------------------------
<PAGE>
PAGE 27
Notes to Combined Financial Statements (continued)
13. Financial Instruments (continued)
Off-Balance-Sheet Financial Instruments (including Derivative Financial
Instruments):
The notional amounts of these instruments do not represent the risk of loss to
the Companies. The fair value amounts of these instruments were estimated based
on quoted market prices, dealer quotations or internal price estimates believed
to be comparable to dealer quotations. These amounts reflect the estimated
amounts that the Companies would have to pay or would receive if the contracts
were terminated.
The Companies engage 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 and
swap agreements. These instruments involve, to varying degrees, elements of
market risk and credit risk in excess of the amounts recognized in the Combined
Balance Sheet. The Companies evaluate the risks associated with off-balance-
sheet financial instruments in a manner similar to that used to evaluate the
risks associated with on-balance-sheet financial instruments. Market risk is the
possibility that future changes in market prices may make a financial instrument
less valuable. For off-balance-sheet financial instruments used for hedging,
such market price changes are generally offset by the market price changes in
the hedged instruments held by the Companies. Credit risk arises from the
possibility that counterparties may fail to perform under the terms of the
contract, which could result in an unhedged position. However, unlike on-
balance-sheet financial instruments, where credit risk generally is represented
by the notional or principal amount, the off-balance-sheet financial
instruments' risk of credit loss generally is significantly less than the
notional value of the instrument and is represented by the positive fair value
of the instrument. The Companies generally do not require collateral or other
security to support the financial instruments discussed below. However, the
Companies control their exposure to credit risk through credit approvals, credit
limits and regular monitoring procedures. There were no material concentrations
of off-balance-sheet financial instruments at December 31, 1994.
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange fixed amounts of
two different currencies at a specified future date and at a specified price.
The Companies utilize foreign exchange forward contracts to hedge their foreign
currency exposure arising from certain investments in foreign affiliates and
non-dollar denominated investment securities. The Companies generally utilize
foreign currency contracts with terms of up to three months.
At December 31, 1994, the Companies had unhedged foreign currency exposures of
$15.3 million related to investments in non-dollar denominated assets. These
exposures include $14.4 million of investments denominated in currencies for
which effective markets for hedging vehicles do not currently exist.
<PAGE>
PAGE 28
Notes to Combined Financial Statements (continued)
13. Financial Instruments (continued)
Off-Balance-Sheet Financial Instruments (including Derivative Financial
Instruments):
Interest Rate Swaps
The Companies utilize interest rate swaps to manage certain exposures related to
changes in interest rates. This swap activity includes transactions which were
entered into in prior years where the Companies act as an intermediary for
entities whose debt the Companies have guaranteed to allow them to convert
variable rate debt to a fixed rate, with the Companies retaining no interest
rate risk. (Please refer to Note 14.) Interest rate swap activity also includes
exchanging variable rate asset returns for fixed rate returns.
14. Commitments and Contingent Liabilities
Commitments
Commitments to extend credit are legally binding agreements to lend monies at a
specified interest rate and within a specified time period. Risk arises from the
potential inability of counterparties to perform under the terms of the
contracts and from interest rate fluctuations. The Companies' exposure to credit
risk is reduced by the existence of conditions within the commitment agreements
which release the Companies from their obligations in the event of a material
adverse change in the counterparty's financial condition. At December 31, 1994,
the Companies had $120.0 million in commitments to fund partnerships.
Financial Guarantees
The Companies no longer write municipal bond insurance and such business
previously written by the Companies was reinsured with another company. It is
not practicable to estimate the fair value of the business that has been ceded.
AC&S was a writer of financial guarantees on obligations secured by real estate,
corporate debt obligations, and of municipal and non-municipal tax-exempt
entities through December 31, 1987, and ceased writing such guarantees as of
January 1, 1988. The aggregate net par value of financial guarantees outstanding
at December 31, 1994 was $728.3 million. Future runoff of financial guarantees
as of December 31, 1994 is estimated to be $205.1 million for 1995, $29.2
million for 1996, $136.5 million for 1997, $277.5 million for 1998, $5.1 million
for 1999 and $74.9 million thereafter. It is not practicable to estimate a fair
value for AC&S' financial guarantees because AC&S no longer writes such
guarantees, there is no quoted market price for such contracts, and it is not
practicable to reliably estimate the timing and amount of all future cash flows
due to the unique nature of each of these contracts.
Total reserves for the financial guarantee business, which include reserves for
defaults, probable losses not yet identified and unearned premiums, were $47.7
million at December 31, 1994. Premium income received from such guarantees is
recognized pro rata over the contract coverage period.
<PAGE>
PAGE 29
Notes to Combined Financial Statements (continued)
14. Commitments and Contingent Liabilities (continued)
Reinsurance Agreement
In connection with the sale of American Re-Insurance Company ("Am Re"), Am Re
and AC&S entered into a reinsurance agreement which provides that to the extent
Am Re incurred losses in 1991 and prior that were still outstanding at January
1, 1992 in excess of $2.7 billion (or $362 million in excess of Am Re's reserves
as of December 31, 1991, adjusted for certain reinsurance transactions), AC&S
has an 80% participation in payments on those losses up to a maximum payment by
AC&S of $500 million. AC&S has not yet been required to make any payments under
this agreement, though it is reasonably possible that AC&S may be required to do
so in the future.
Structured Settlements
The Companies had contingent liabilities in the amount of $1,097.2 million for
structured settlements at December 31, 1994. Included in such liabilities is
$280.0 million of structured settlements purchased from affiliates, consisting
of $153.4 million from Aetna Life Insurance Company and $126.6 million from
Aetna Life Insurance and Annuity Company. Structured settlements, net of the
affiliate amounts, are reflected in reinsurance recoverables on the Combined
Balance Sheet.
Litigation
Beginning in 1988, the attorneys general of 20 states each filed separate
antitrust suits against AC&S and over 30 other insurers, reinsurers, trade
associations and brokers. The suits are on behalf of the states themselves and,
in most cases, alleged classes of their political subdivisions. Additionally, 20
class actions were filed in various courts on behalf of private plaintiffs. The
attorneys general suits and the private plaintiff actions all were consolidated
for pretrial proceedings in the United States District Court for the Northern
District of California ("U.S. District Court").
All of the suits allege that the defendants violated various federal or state
antitrust laws (or laws related to business trade practices) by, among other
things, conspiring to restrict the terms and coverages of commercial general
liability insurance and also reinsurance. The state suits seek civil penalties,
unspecified damages and extensive injunctive relief. The private suits seek
unspecified treble damages and broad injunctive relief.
In September 1989, the U.S. District Court dismissed with prejudice all federal
antitrust claims in all of the complaints before it. The court declined to
exercise jurisdiction over the state claims in the attorneys general complaints.
The U.S. Court of Appeals for the Ninth Circuit subsequently reversed the
District Court's dismissal of the federal antitrust claims and, after further
proceedings, the U.S. Supreme Court agreed to review the Court of Appeals'
decision.
<PAGE>
PAGE 30
Notes to Combined Financial Statements (continued)
14. Commitments and Contingent Liabilities (continued)
Litigation (continued)
In June 1993, the Supreme Court returned the suit to the Court of Appeals. The
Supreme Court held unanimously that AC&S and the other defendant insurers did
not forfeit their otherwise available McCarran-Ferguson Act immunity when they
acted with reinsurers to produce acceptable policy terms. The Supreme Court also
held that AC&S and the other defendant insurers could lose their immunity under
the "boycott" exception to the McCarran exemption only if the plaintiffs could
prove that the defendant insurers attempted to coerce acceptance of insurance
policy terms by means of refusals to deal in separate and unrelated
transactions. After further proceedings the District Court ordered the parties
to undertake discovery on the remaining issues.
On October 5, 1994, all of the plaintiffs signed a letter evidencing a
settlement in principle of the litigation with all the defendants, including
AC&S. The agreement provides that the defendants will pay plaintiffs an
aggregate of $36 million plus the costs of class notice (currently estimated at
$2 million). AC&S' share of the settlement is not material. The settlement has
received preliminary court approval, and notice of the settlement terms has been
sent to class members. The settlement is subject to final court approval, and a
hearing regarding such approval is scheduled to occur in the first half of 1995.
The Companies are continuously involved in numerous other lawsuits arising, for
the most part, in the ordinary course of their business operations either as
liability insurers defending third-party claims brought against their insureds
or as insurers defending coverage claims brought against the Companies,
including lawsuits related to issues of policy coverage and judicial
interpretation. One such area of coverage litigation involves legal liability
for environmental and asbestos-related claims. These lawsuits and other factors
make reserving for these claims subject to significant uncertainties.
While the ultimate outcome of the litigation described herein cannot be
determined at this time, such litigation (other than that related to
environmental and asbestos-related claims, which is subject to significant
uncertainties), net of reserves established therefor and giving effect to
reinsurance probable of recovery, is not expected to result in judgments for
amounts material to the financial condition of the Companies, although it may
adversely affect results of operations in future periods. The Companies are
expected to be affected adversely in the future by losses for environmental and
asbestos-related claims and related litigation expenses and such effect could be
material to the Companies' future results, liquidity and/or capital resources.
Please refer to Note 16 for a discussion of the Companies' subsequent events.
<PAGE>
PAGE 31
Notes to Combined Financial Statements (continued)
15. Concentrations of Investment Credit Risk
At December 31, 1994, the Companies had an investment in common stock of MBIA,
Inc. with a carrying value of $214 million representing 7% of shareholder's
equity and an investment in common stock of Am Re with a carrying value of $96.8
million representing 3% of shareholder's equity.
The Companies' holdings in debt securities were $9.5 billion as of December 31,
1994. The debt securities in the Companies' portfolio are generally rated by
external rating agencies, and, if not externally rated, are rated by the
Companies on a basis believed to be similar to that used by the rating agencies.
At December 31, 1994, the composition of the Companies' debt securities quality
ratings were as follows:
AAA 59%
AA 10%
A 18%
BBB 9%
BB & Below 4%
The average quality rating of the Companies' portfolio of debt securities was AA
at December 31, 1994.
At December 31, 1994, the composition of the Companies' debt securities
portfolio by market sector was as follows:
Treasuries/Agencies 36%
Corporate 23%
Mortgage-Backed Securities 13%
Municipals 13%
Financial 6%
Public Utilities 6%
Other Loan-Backed 3%
<PAGE>
PAGE 32
Notes to Combined Financial Statements (continued)
15. Concentrations of Investment Risk (continued)
At December 31, 1994, the Companies' mortgage loan balances, net of specific
impairment reserves, by property type and geographic region were as follows:
<TABLE><CAPTION>
Hotel/ Mixed
(Millions) Office Retail Apartment Motel Industrial Use/Other Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
South Atlantic $ 163.2 $ 165.6 $ 58.8 $ 62.1 $ 3.2 $ 59.1 $ 512.0
Middle Atlantic 196.1 67.0 30.0 - 17.8 0.3 311.2
New England 122.6 73.7 59.5 45.2 0.4 3.8 305.2
South Central 32.1 12.1 12.8 1.9 3.8 0.8 63.5
North Central 31.6 40.5 55.5 23.0 0.8 1.3 152.7
Pacific and Mountain 118.7 29.2 7.6 - 7.6 4.4 167.5
Other - - - - - 0.1 0.1
- ------------------------------------------------------------------------------------------------------
Total $ 664.3 $ 388.1 $ 224.2 $ 132.2 $ 33.6 $ 69.8 $ 1,512.2
- ------------------------------------------------------------------------------------------------------
Less general portfolio loss reserve 58.5
- ------------------------------------------------------------------------------------------------------
Adjusted total, net of reserves $1,453.7
- ----------------------------------------------------------------------------------------------========
</TABLE>
At December 31, 1994, the Companies' problem, potential problem and restructured
mortgage loan balance was $274.1 million. The Companies' problem, potential
problem and restructured mortgage loans by property type and geographic region
were as follows:
Problem, Potential Problem and Geographic Distribution of Problem,
Restructured Mortgage Loans by Potential Problem and Restructured
Property Type Mortgage Loans
- ------------------------------ ----------------------------------
Office 77% North Central 27%
Retail 14% Pacific and Mountain 22%
Apartment 8% Middle Atlantic 19%
Hotel/Motel 1% South Central 16%
South Atlantic 15%
New England 1%
"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.
"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.
"Potential problem loans" are currently performing loans which management
believes are likely to become classified as problem or restructured loans in the
next 12 months or so. 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 and
restructured loans requires significant judgment as to likely future market
conditions, developments specific to individual properties and borrowers, and
the timing of potential defaults. Provision for losses that management believes
are likely to arise from such potential problem and restructured loans is
included in the general reserve.
<PAGE>
PAGE 33
Notes to Combined Financial Statements (continued)
15. Concentrations of Investment Risk (continued)
The Companies' equity real estate balance was $262.0 million at December 31,
1994. The Companies' equity real estate balance at December 31, 1994 by property
type and geographic region was as follows:
Equity Real Estate Geographic Distribution of
by Property Type Equity Real Estate
- ---------------------------- -----------------------------
Office 43% Pacific and Mountain 41%
Hotel/Motel 17% South Atlantic 20%
Land 13% New England 16%
Industrial 9% North Central 12%
Retail 9% Middle Atlantic 8%
Apartment 6% South Central 3%
Other 3%
16. Subsequent Events
Environmental and Asbestos-Related Claims Reserves
The Companies added $750 million ($487.5 million, after-tax) to environmental-
related claims reserves in the second quarter of 1995. In the opinion of
management, the Companies' reserves for environmental-related claims at
September 30, 1995 represent the Companies' best estimate of their ultimate
environmental-related liability, based on currently known facts, current law
(including Superfund), current technology, and assumptions considered reasonable
where facts are not known. Due to the significant uncertainties and related
management judgment involved in estimating the Companies' environmental
liability, no assurances can be given that the environmental reserve represents
the amount that will ultimately be paid by the Companies for all environmental-
related losses. The amount ultimately paid could differ materially from the
Companies' currently recorded reserve as legal and factual issues are clarified,
but any difference cannot be reasonably estimated at this time.
As a result of this addition to the environmental-related claims reserves, Aetna
contributed additional capital to the Companies in order to restore capital
levels (including risk-based capital), to appropriate levels for regulatory and
other purposes, consistent with year-end 1994. Such infusion of capital of $303
million was made on December 6, 1995.
<PAGE>
PAGE 34
Notes to Combined Financial Statements (continued)
16. Subsequent Events (continued)
Environmental and Asbestos-Related Claims Reserves (continued)
A case, involving a policyholder (a major producer of asbestos and asbestos
products) that had exhausted applicable policy limits on asbestos products
claims and asserted coverage under policy provisions for other types of
liability which had been submitted to binding arbitration, was settled in the
third quarter of 1995. The Companies obtained a release from the insured for all
current and future asbestos bodily injury claims and certain asbestos property
damage claims (along with all environmental claims) under existing policies in
exchange for fixed, scheduled cash payments over time, which were recorded on a
discounted basis. In connection with this settlement, $120 million of
property-casualty reserves not previously classified as covering
asbestos-related claims were transferred to asbestos reserves. No amounts were
transferred from environmental reserves, and the environmental-related portion
of the settlement was covered by existing environmental reserves. As a result,
this settlement did not affect results of operations in the third quarter of
1995. As part of the settlement, the Companies also agreed, among other things,
to make insurance coverage available to the insured in the year 2000 (on a
one-time basis), for a percentage of all asbestos defense and indemnity claim
payments made by the insured during the years 2000 through 2007. The Companies'
payment obligations would be subject to annual dollar caps. Given the
uncertainty as to whether the insured will elect to purchase this additional
insurance, no related premiums or losses have been recorded by the Companies at
this time.
Reserving for asbestos-related claims is subject to significant uncertainties
and management is currently unable to make a reasonable estimate as to the
ultimate amount of losses or a reasonable range of losses for all asbestos-
related claims and related litigation expenses. However, reserves for asbestos
liabilities are being evaluated by management as the Companies continue to
gather and analyze new information and reassess their reserving techniques for
these claims in order to determine whether they can better estimate their
liability. Adjustments may be made to such reserves as loss patterns develop and
other information is obtained.
Litigation
Please refer to Note 14 for a full description of the Attorneys General
Antitrust Litigation.
On March 29, 1995, the U.S. District Court approved the plaintiffs' settlement
of this litigation with all defendants, including AC&S. AC&S' share of the
settlement is not material.
Strategic Outlook
On November 29, 1995, Aetna announced that, as part of a strategic refocusing of
the company, it has entered into a definitive agreement to sell the Companies to
The Travelers Insurance Group Inc. for $4.0 billion in cash. The sale has been
approved by both companies' boards of directors and is subject to regulatory
approval and other customary conditions.
<PAGE>
PAGE 35
Notes to Combined Financial Statements (continued)
16. Subsequent Events (continued)
Accounting Changes
As of January 1, 1995, the Companies adopted FAS No. 114, Accounting by
Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. In accordance with
these standards, a loan is considered impaired when it is probable that the
Companies will be unable to collect amounts due according to the contractual
terms of the loan agreement. When the Companies determine that a loan is
impaired, a specific impairment reserve is established for the difference
between the recorded investment (i.e., cost less valuation reserves) in the
mortgage loan and the fair value of the collateral. General reserves are
established for losses management believes are likely to arise from the overall
portfolio but cannot be attributed to specific loans. Prior to the adoption of
FAS Nos. 114 and 118, the Companies included the impairment provision for
potential problem loans which management believed were likely to become
classified as problem or restructured in the next 12 months or so in the general
reserve. FAS Nos. 114 and 118 had no impact on 1995 net income and balance
sheet.
17. Event (Unaudited) Subsequent to the Date of the Independent Auditor's
Report
Asbestos-Related Claims Reserves
In connection with an evaluation of reserves for asbestos liabilities, the
Companies added $335 million ($218 million, after tax) to asbestos-related
claims reserves in the fourth quarter of 1995. While the Companies expect
to recover some of their asbestos losses from their reinsurers, due to the
uncertainty in estimating amounts to be recovered, no reinsurance benefits
were recorded in establishing this addition to reserves. Further adjustments
may be made to such reserves as loss patterns develop and other information is
obtained, and the amount ultimately paid for such claims could differ materially
from reserves, although any difference cannot be reasonably estimated at this
time.
<PAGE>
Annex B
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995 and 1994
<PAGE>
Combined Statement of Income
For the nine months ended September 30,
<TABLE><CAPTION>
(Millions) 1995 1994
- ------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C>
Premiums $ 3,074.8 $ 3,259.1
Net investment income 671.7 621.4
Fees and other income 65.0 88.6
Net realized capital gains 4.5 .8
---------------------------------------
Total revenue 3,816.0 3,969.9
- ------------------------------------------------------------------------------------------
Claims and Expenses:
Claims and claim adjustment expenses 3,131.8 2,877.5
Operating expenses 636.3 736.3
Amortization of deferred policy
acquisition costs 474.9 489.0
--------------------------------------
Total claims and expenses 4,243.0 4,102.8
- ------------------------------------------------------------------------------------------
Loss before income tax benefits (427.0) (132.9)
Income tax benefits (168.0) (72.5)
--------------------------------------
Net loss $ (259.0) $ (60.4)
==========================================================================================
</TABLE>
See Condensed Notes to Combined Financial Statements.
<PAGE>
Combined Balance Sheet
As of September 30,
<TABLE><CAPTION>
(Millions, except share data) 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Debt securities:
Held for investment, at amortized cost (fair value $432.5
and $456.3) $ 431.5 459.4
Available for sale, at fair value (amortized cost $10,213.5
and $9,842.4) 10,373.0 9,267.9
Equity securities, at fair value (cost $583.7 and $691.7) 936.8 1,073.0
Short-term investments 97.2 262.6
Mortgage loans 1,236.2 1,544.2
Real estate 301.9 238.0
Other 287.9 300.1
------------------------
Total investments 13,664.5 13,145.2
- ------------------------------------------------------------------------------------------
Cash and cash equivalents 694.9 417.4
Reinsurance recoverables and receivables 4,906.0 4,553.8
Accrued investment income 172.4 178.6
Premiums due and other receivables 1,053.3 1,014.9
Federal and foreign income taxes:
Current 25.6 85.6
Deferred 706.5 881.2
Deferred policy acquisition costs 299.7 322.2
Other assets 989.2 1,051.9
------------------------
Total assets $ 22,512.1 $21,650.8
==========================================================================================
Liabilities:
Unpaid claims and claim adjustment expenses $ 16,177.6 $ 15,722.9
Unearned premiums 1,492.2 1,409.2
Policyholders' funds left with the companies 46.1 46.4
------------------------
Total insurance liabilities 17,715.9 17,178.5
Long-term debt 35.3 35.7
Other liabilities 1,247.7 1,101.4
------------------------
Total liabilities 18,998.9 18,315.6
- ------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 7)
Shareholder's Equity:
Common capital stock (1,000 shares authorized, issued and outstanding with a
par value of $25,000 and 20,000 shares authorized, issued and outstanding
with a par value of $250) 30.0 30.0
Paid in capital 1,174.5 1,174.5
Net unrealized capital gains (losses) 289.6 (150.5)
Retained earnings 2,019.1 2,281.2
------------------------
Total shareholder's equity 3,513.2 3,335.2
- ------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 22,512.1 $ 21,650.8
==========================================================================================
</TABLE>
See Condensed Notes to Combined Financial Statements.
<PAGE>
Combined Statement of Shareholder's Equity
For the nine months ended September 30, 1995 and 1994
(Millions)
- --------------------------------------------------------------
Shareholder's equity at December 31, 1994 $ 3,120.9
Net change in unrealized capital
gains and losses 651.3
Net loss (259.0)
----------
Shareholder's equity at September 30, 1995 $ 3,513.2
==============================================================
- --------------------------------------------------------------
Shareholder's equity at December 31, 1993 $ 3,858.3
Net change in unrealized capital
gains and losses (462.7)
Net loss (60.4)
----------
Shareholder's equity at September 30, 1994 $ 3,335.2
==============================================================
See Condensed Notes to Combined Financial Statements.
<PAGE>
Combined Statement of Cash Flows
For the nine months ended September 30,
<TABLE><CAPTION>
(Millions) 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (259.0) $ (60.4)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities:
Decrease in accrued investment income 5.4 24.8
(Decrease) increase in premiums due and other receivables 42.6 (146.1)
Increase in reinsurance recoverables and receivables (282.7) (59.9)
Decrease in deferred policy acquisition costs 16.3 7.5
Depreciation and amortization 6.8 11.5
(Increase) decrease in federal and foreign income taxes 147.4 (288.0)
Net decrease (increase) in other assets and other liabilities 136.3 (528.7)
Increase in insurance liabilities 548.2 393.9
Net sales of debt trading securities - 34.8
Net realized capital gains 4.5 .8
Amortization of net investment discounts 19.9 43.3
Other 7.8 41.3
------------------------
Net cash provided by (used for) operating activities 393.5 (525.2)
------------------------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 2,622.4 3,704.3
Equity securities 483.8 423.4
Mortgage loans 14.5 33.1
Real estate 10.2 67.3
Short-term investments 6,964.6 5,356.0
Investment maturities and repayments of:
Debt securities available for sale 853.4 755.2
Debt securities held for investment 80.9 232.7
Mortgage loans 156.9 191.5
Cost of investment purchases in:
Debt securities available for sale (4,069.7) (4,167.4)
Debt securities held for investment (101.0) -
Equity securities (227.2) (331.6)
Mortgage loans - (8.4)
Real estate (19.6) -
Short-term investments (6,955.8) (5,482.9)
Other, net (178.5) 182.3
------------------------
Net cash (used for) provided by investing activities (365.1) 955.5
------------------------
Cash Flows from Financing Activities:
Repayment of long-term debt (0.2) (11.3)
Net decrease in short-term debt (9.1) (.9)
------------------------
Net cash used for financing activities (9.3) (12.2)
- ------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (0.5) (0.2)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18.6 417.9
Cash and cash equivalents, beginning of period 676.3 (0.5)
------------------------
Cash and cash equivalents, end of period $ 694.9 $ 417.4
==========================================================================================
</TABLE>
See Condensed Notes to Combined Financial Statements.
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Basis of Presentation
The combined financial statements include The Aetna Casualty & Surety
Company ("AC&S")and The Standard Fire Insurance Company and their
subsidiaries (collectively, the "companies"). Less than majority-owned
entities in which the companies have at least a 20% interest are reported on
the equity basis. These combined financial statements have been prepared in
accordance with generally accepted accounting principles and are unaudited.
Certain reclassifications have been made to 1994 financial information to
conform to 1995 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) Future Application of Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 121, Accounting for Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This statement requires write down
to fair value when long-lived assets to be held and used are impaired. The
statement also requires long-lived assets to be disposed of (e.g., real
estate held for sale) to be carried at the lower of cost or fair value less
estimated selling costs and does not allow such assets to be depreciated.
This statement will be adopted in 1996 and the impact on earnings is not
expected to be material.
In October 1995, the Financial Accounting Standards Board issued FAS No.
123, Accounting for Stock-Based Compensation. 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
requirements of this statement will be effective for 1996 financial
statements, although earlier adoption is permissible if an enterprise elects
to expense the cost of stock- based compensation. The companies are
currently evaluating the disclosure and expense recognition alternatives as
permitted by this statement.
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) Insurance Liabilities
Workers' compensation life table indemnity reserves are discounted at 5%
for voluntary business and 3.5% for involuntary business, with mortality
assumptions that reflect current company and industry experience. Workers'
compensation life table indemnity reserves totaled $713 million and $774
million at September 30, 1995 and 1994, respectively, which was 21% and 22%
of the total workers' compensation reserves for unpaid claims and claim
adjustment expenses. Certain other property-casualty reserves with fixed
and determinable payment patterns over periods of up to 7 years, including
reserves related to a small number of environmental and asbestos-related
claim settlements, have also been discounted. The risk free rates used in
discounting such reserves range from 4% to 7%, and the amount of such
discounted reserves was approximately $187 million at September 30, 1995.
(4) Investments
As of January 1, 1995, the company adopted FAS No. 114, Accounting by
Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures. In
accordance with these standards, a loan is considered impaired when it is
probable that the companies will be unable to collect amounts due according
to the contractual terms of the loan agreement. For impaired loans, a
specific impairment reserve is established for the difference between the
recorded investment in the mortgage loan and the fair value of the
collateral. General reserves are established for losses management believes
are likely to arise from the overall portfolio but cannot be attributed to
specific loans. Prior to the adoption of FAS Nos. 114 and 118, the
companies included the reserve for estimated losses on potential problem
loans which management believed were likely to become classified as problem
or restructured in the next 12 months or so in the general reserve.
(5) Federal and Foreign Income Taxes
Net unrealized capital gains and losses are presented in shareholders'
equity net of deferred taxes. During the nine months ended September 30,
1995, the companies moved from a net unrealized capital loss position of
$(361.7) million at December 31, 1994, to a net unrealized capital gain
position of $289.6 million at September 30, 1995, primarily due to
decreases in interest rates. As a result, the $102.1 of valuation
allowances previously established related to deferred tax assets on these
capital losses were reversed, which had no impact on net loss for the nine
months ended September 30, 1995.
(6) Reinsurance
Ceded earned premiums were $.8 billion and $.9 billion for the nine months
ended September 30, 1995 and 1994, respectively. Ceded current and future
benefits were $.8 billion and $.9 billion for the nine months ended
September 30, 1995 and 1994, respectively.
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) Commitments and Contingent Liabilities
Environmental and Asbestos-Related Claims
The companies added $750 million ($487.5 million, after-tax) to
environmental-related claims reserves in the second quarter of 1995. In the
opinion of management, the companies' reserves for environmental-related
claims at September 30, 1995 represent the companies' best estimate of its
ultimate environmental-related liability, based on currently known facts,
current law (including Superfund), current technology, and assumptions
considered reasonable where facts are not known. Due to the significant
uncertainties and related management judgment involved in estimating the
companies' environmental liability, no assurances can be given that the
environmental reserve represents the amount that will ultimately be paid by
the companies' for all environmental-related losses. The amount ultimately
paid could differ materially from the companies' currently recorded reserve
as legal and factual issues are clarified, but any difference cannot be
reasonably estimated at this time.
Reserving for asbestos-related claims is subject to significant
uncertainties and management is currently unable to make a reasonable
estimate as to the ultimate amount of losses or a reasonable range of
losses for all asbestos-related claims and related litigation expenses.
However, reserves for asbestos liabilities are being evaluated by
management as the companies continue to gather and analyze new information
and reassess reserving techniques for these claims in order to determine
whether they can better estimate their liability. Adjustments may be made
to such reserves as loss patterns develop and other information is
obtained.
Environmental and asbestos-related loss and loss adjustment expense
reserves, as reflected on the Combined Balance Sheet, were as follows
(before reinsurance and net of discount on certain environmental and
asbestos settlements, in millions):
September 30, September 30,
(Millions) 1995 1994
-----------------------------------------------------------------
Environmental Liability $ 1,067.4 $ 409.2
Asbestos Bodily Injury* 421.9 277.8
Asbestos Property Damage* 30.2 29.5
------------ -----------
Total Environmental and
Asbestos-Related Reserves $ 1,519.5 $ 716.5
============ ===========
* Includes $107.4 million and $12.6 million of reserves transferred to
asbestos bodily injury and asbestos property damage reserves, respectively,
in 1995.
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(8) Litigation
The companies are continuously involved in numerous lawsuits arising, for
the most part, in the ordinary course of its business operations either as
a liability insurer defending third-party claims brought against its
insureds or as an insurer defending coverage claims brought against itself,
including lawsuits related to issues of policy coverage and judicial
interpretation. One such area of coverage litigation involves legal
liability for environmental and asbestos-related claims. These lawsuits and
other factors make reserving for these claims subject to significant
uncertainties.
While the ultimate outcome of such litigation cannot be determined at this
time, such litigation, net of reserves established therefore and giving
effect to reinsurance probable of recovery, is not expected to result in
judgments for amounts material to the financial condition of the companies,
although it may adversely affect results of operations in future periods.
(9) Subsequent Events
On November 29, 1995, Aetna announced that, as part of a strategic
refocusing of the company, it has entered into a definitive agreement to
sell the companies to The Travelers Insurance Group Inc. for $4.0 billion
cash. The sale has been approved by both companies' boards of directors and
is subject to regulatory approval and other customary conditions.
Asbestos-Related Claims Reserves
Reserving for asbestos-related claims is subject to significant
uncertainties and management is currently unable to make a reasonable
estimate as to the ultimate amount of losses or a reasonable range of
losses for all asbestos-related claims and related litigation expenses.
Management continues to evaluate the companies' reserves for asbestos
liabilities as the companies continue to gather and analyze new information
and reassess their reserving techniques for these claims in order to
determine whether they can better estimate their liability. In connection
with such evaluation, the companies added $335 million ($218 million,
after tax) to asbestos-related claims reserves in the fourth quarter of
1995. While the companies expect to recover some of their asbestos losses
from their reinsurers, due to the uncertainty in estimating amounts to be
recovered, no reinsurance benefits were recorded in establishing this
addition to reserves. Further adjustments may be made to such reserves as
loss patterns develop and other information is obtained, and the amount
ultimately paid for such claims could differ materially from reserves,
although any difference cannot be reasonably estimated at this time.
<PAGE>
Annex C
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statements of
income of Travelers Group Inc. (the "Company") for the nine months ended
September 30, 1995 and year ended December 31, 1994, present results for the
Company as if its planned acquisition of the property and casualty operations of
Aetna Life and Casualty Company (the "Aetna P&C" operations) had occurred as of
January 1, 1994. The accompanying unaudited pro forma condensed consolidated
statement of financial position as of September 30, 1995 gives effect to the
planned acquisition as if it had occurred as of September 30, 1995. The
unaudited pro forma data do not purport to represent what the Company's
financial position or results of operations actually would have been had the
acquisition in fact occurred on the dates indicated, or to project the Company's
financial position or results of operations for any future date or period. The
pro forma adjustments are based on available information and certain assumptions
that the Company currently believes are reasonable in the circumstances. The
unaudited pro forma consolidated financial information should be read in
conjunction with the accompanying notes thereto; the separate historical
financial statements of the Company as of and for the nine months ended
September 30, 1995, and for the year ended December 31, 1994 which are contained
in the Company's Form 10-Q for the quarterly period ended September 30, 1995 and
its annual report on Form 10-K for the fiscal year ended December 31, 1994,
respectively; and the separate historical combined financial statements of The
Aetna Casualty and Surety Company and The Standard Fire Insurance Company and
their subsidiaries as of and for the nine months ended September 30, 1995 and
year ended December 31, 1994, which are contained herein.
The pro forma adjustments and pro forma combined amounts are provided for
informational purposes only, and if the acquisition is consummated, the
Company's financial statements will reflect the effects of the acquisition only
from the date such acquisition occurs. The pro forma adjustments are applied to
the historical financial statements to account for the acquisition as a
purchase. Under purchase accounting, total purchase cost will be allocated to
the Aetna P&C assets and liabilities based on their relative fair values.
Allocations are subject to valuations as of the date of the acquisition based on
appraisals and other studies, which are not yet completed. Accordingly, the
final allocations will be different from the amounts reflected herein. Although
the final allocations will differ, the pro forma condensed financial information
reflects management's best estimate based on currently available information.
<PAGE>
TRAVELERS GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 1995
(in millions of dollars)
<TABLE>
<CAPTION>
Travelers Pro Forma
Group Aetna P&C Pro Forma Travelers
Assets Historical Historical Adjustments Group
- ------ ---------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents $1,462 $695 $2,157
Investments:
Fixed maturities:
Available for sale, at market value 27,283 10,373 $900 (A,C) 38,556
Held to maturity, at amortized cost 72 432 (38)(B) 466
Equity securities, at market value 797 937 1,734
Mortgage loans 4,581 1,236 (205)(B) 5,612
Real estate 361 302 (80)(B) 583
Policy loans 1,888 1,888
Short-term and other 4,119 385 4,504
- -----------------------------------------------------------------------------------------------------------------
Total investments $39,101 $13,665 $577 $53,343
- -----------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 19,589 19,589
Brokerage receivables 6,596 6,596
Trading securities owned, at market value 9,061 9,061
Net consumer finance receivables 6,998 6,998
Reinsurance recoverables 6,762 4,906 (5)(B) 11,663
Value of insurance in force and deferred policy acquisition costs 2,138 300 (104)(B) 2,334
Cost of acquired businesses in excess of net assets 1,940 1,048 (B) 2,988
Separate and variable accounts 6,471 6,471
Other receivables 3,903 1,225 (32)(B) 5,096
Other assets 8,278 1,721 11 (A) 10,468
463 (B)
(5)(B)
- -----------------------------------------------------------------------------------------------------------------
Total assets $112,299 $22,512 $1,953 $136,764
=================================================================================================================
Liabilities
- -----------
Investment banking and brokerage borrowings $2,471 $2,471
Short-term borrowings 1,343 $547 (A) 1,890
Long-term debt 8,791 $35 3,664 (A) 12,487
(3)(B)
Securities loaned or sold under agreements to repurchase 20,815 20,815
Brokerage payables 3,016 3,016
Trading securities sold not yet purchased 5,160 5,160
Contractholder funds 14,976 14,976
Insurance policy and claims reserves 27,262 17,716 305 (B) 45,283
Separate and variable accounts 6,439 6,439
Accounts payable and other liabilities 10,988 1,248 328 (A) 13,117
553 (B)
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 101,261 18,999 5,394 125,654
- -----------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (67) (67)
- -----------------------------------------------------------------------------------------------------------------
168 168
Stockholders' equity
- --------------------
Preferred stock 800 800
Common stock 4 30 (30)(D) 4
Additional paid-in capital 6,741 1,174 300 (C) 6,741
(1,474)(D)
Retained earnings 4,981 2,019 72 (A) 5,053
(2,019)(D)
Treasury stock, at cost (1,682) (1,682)
Unrealized gain on investment securities and other, net 26 290 (290)(D) 26
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,870 3,513 (3,441) 10,942
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $112,299 $22,512 $1,953 $136,764
=================================================================================================================
</TABLE>
See Accompanying Notes
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Unaudited Pro Forma Statement of Financial Position
(in millions of dollars)
A. The following pro forma adjustments reflect the funding of the acquisition,
the formation of a subsidiary ("Newco") to be comprised of the Company's
present property and casualty operations together with the Aetna P&C
operations, and a contribution to Newco's capital:
Long-term debt net of issuance costs $3,600
Proceeds from issuance and sale of Newco common stock
representing an approximately 6% interest in Newco's
common equity ($328 increase to minority interest and
$72 gain on sale of subsidiary stock) 400
--------
Total purchase price 4,000
--------
Borrowings for additional capital contribution to Newco
Short-term 547
Long-term 53
--------
Total funded $4,600
--------
The above pro forma presentation does not reflect the planned issuance of
long-term debt, preferred stock and common stock by Newco. The above pro
forma presentation reflects bridge financing with a five-year term that is
available based on a commitment from a group of banks in the amount of
$2.65 billion.
B. Pro forma adjustments resulting from allocation of purchase price based on
relative fair value of underlying net assets acquired. The amounts and
assumptions related to the principal adjustments are as follows:
Assets Debit (Credit)
------ --------------
Discount allocated to investments in
fixed maturities based on the fair
value of the investments $(38)
<PAGE>
Adjustment of carrying amount of
investments in mortgage loans based on
fair value of underlying collateral
reflecting the Company's sales strategy $ (205)
Adjustment of carrying amount of real estate
to fair value reflecting the Company's sales
strategy $ (80)
Adjustment to deferred acquisition costs to reflect
the Company's policy of deferring only commissions
and premium taxes on sale of property and casualty
insurance policies $ (104)
Excess of purchase price over fair value of net
assets acquired $ 1,048
Adjustment to reflect the net deferred tax benefit
of purchase accounting adjustments $ 463
All other assets $ (42)
Liabilities
-----------
Insurance policy and claims reserves
Adjustment to reserves for financial guarantees
based on the fair value of underlying collateral
reflecting the Company's strategy as to
resolution $ (188)
Other (117)
--------
Total insurance policy and claims reserves $ (305)
--------
The Company is continuing to review Aetna P&C's reserves for
cumulative injury claims, including the effect of applying the
Company's strategies, policies and practices in determining such
reserves and in handling such claims. Based on the review at this
stage, it is possible that additional reserves of up to
approximately $1 billion may be recorded. Had additional
reserves of $1 billion been included in this pro forma
presentation, the excess of purchase price over fair value of
net assets acquired would have been increased by $650, the after-
tax amount of the increase in reserves. The amortization of
this amount would have increased expense in the pro forma
statement of income by $16 annually.
Accounts payable and other liabilities
Amount allocated to liabilities for estimated cost of
restructuring businesses acquired $(250)
<PAGE>
Adjustment to the liability for loss based assessments
for second injury funds (125)
Other (178)
--------
Total Other Liabilities $(553)
--------
All other $ 3
--------
C. Contribution by Aetna Life and Casualty Company to the capital
of Aetna P&C required by purchase agreement. $ 300
--------
D. Adjustment to eliminate the Aetna P&C common equity.
<PAGE>
TRAVELERS GROUP INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Travelers Pro Forma
Group Aetna P&C Pro Forma Travelers
Historical Historical Adjustments Group
---------- ---------- ----------- -------
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums $3,893 $3,075 $6,968
Commissions and fees 2,074 2,074
Interest and dividends 3,254 672 $3 (a) 3,929
Finance related interest and other charges 833 833
Principal transactions 762 762
Asset management fees 751 751
Other income 855 69 924
- --------------------------------------------------------------------------------------------------------
Total revenues 12,422 3,816 3 16,241
- --------------------------------------------------------------------------------------------------------
EXPENSES
Policyholder benefits and claims 3,964 3,132 7,096
Non-insurance compensation and benefits 2,548 2,548
Insurance underwriting, acquisition and operating 1,427 1,111 11 (a) 2,549
Interest 1,462 191 (b) 1,653
Provision for credit losses 122 122
Other operating 1,140 1,140
- --------------------------------------------------------------------------------------------------------
Total expenses 10,663 4,243 202 15,108
- --------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 1,759 (427) (199) 1,133
Provision for income taxes 621 (168) (63)(c) 390
Minority interest, net of income taxes 0 0 4 (d) 4
- --------------------------------------------------------------------------------------------------------
Income from continuing operations $1,138 ($259) ($132) $747
========================================================================================================
NET INCOME PER SHARE OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS:
Income from continuing operations $3.39 $2.16
========================================================================================================
Weighted average common shares outstanding
and common stock equivalents (millions) 317 317
========================================================================================================
</TABLE>
See Accompanying Notes
<PAGE>
TRAVELERS GROUP INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(in millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Travelers Pro Forma
Group Aetna P&C Pro Forma Travelers
Historical* Historical Adjustments Group
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums $5,144 $4,355 $9,499
Commissions and fees 2,526 2,526
Interest and dividends 3,401 824 ($4)(a) 4,221
Finance related interest and other charges 1,030 1,030
Principal transactions 900 900
Asset management fees 1,010 1,010
Other income 932 122 1,054
- ----------------------------------------------------------------------------------------------------------------
Total revenues 14,943 5,301 (4) 20,240
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Policyholder benefits and claims 5,227 3,747 8,974
Non-insurance compensation and benefits 3,241 3,241
Insurance underwriting, acquisition and operating 1,867 1,645 6 (a) 3,518
Interest 1,284 255 (b) 1,539
Provision for credit losses 152 152
Other operating 1,524 1,524
- ----------------------------------------------------------------------------------------------------------------
Total expenses 13,295 5,392 261 18,948
- ----------------------------------------------------------------------------------------------------------------
Gain on sale of subsidiaries and affiliates 226 226
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 1,874 (91) (265) 1,518
Provision for income taxes 717 (54) (83)(c) 580
Minority interest, net of income taxes 0 0 (2)(d) (2)
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations $1,157 ($37) ($184) $936
================================================================================================================
NET INCOME PER SHARE OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS:
Income from continuing operations $3.34 $2.65
===============================================================================================================
Weighted average common shares outstanding
and common stock equivalents (millions) 322 322
================================================================================================================
</TABLE>
* Restated to reflect the Managed Care and Employee Benefits Operations as a
discontinued operation.
See Accompanying Notes
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
(in millions of dollars)
(a) Principal adjustments resulting from the allocation of purchase price
based on relative fair value of underlying net assets, as follows:
amortization of net premium or discount allocated to investments on a
level yield basis over the life of the investments ($3 net discount in
1995; $4 net premium in 1994); amortization of liability for loss based
assessments for second injury funds ($13 in 1995; $26 in 1994); and
amortization of excess of purchase price over fair value of net assets
acquired over 40 years ($20 in 1995; $26 in 1994). All other pro forma
adjustments to pre-tax income resulting from purchase accounting amount to
$(4) in 1995 and $(6) in 1994.
(See Note B of Notes to the Unaudited Pro Forma Condensed Consolidated
Statement of Financial Position for additional information.)
(b) Pro forma adjustment to account for increased interest expense resulting
from funding requirements of the acquisition.
(c) Adjustment to reflect the income tax effects of (a) and (b) above.
(d) Adjustment to reflect the minority interest resulting from the sale of
approximately 6% of Newco's common stock.
(e) As noted in the introduction to the Unaudited Pro Forma Financial
Information, the pro forma information is not necessarily indicative of
future consolidated results of operations.
Included in the historical results of Aetna P&C for the nine months ended
September 30, 1995, is a charge of $750 ($487.5 after tax) representing an
addition to environmental-related claims reserves in the second quarter of
1995.
As the Aetna P&C operations are integrated with the existing property and
casualty insurance operations of the Company, management expects to
realize, over a two-year period, cost savings from economies of scale
estimated to amount to $300 annually ($195 after tax). These future cost
savings are not reflected in the Unaudited Pro Forma Financial Information.
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit No. Method of Filing
- ---------- ----------------
23.01 Consent of KPMG Peat Marwick, LLP Electronic
Exhibit 23.01
-------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
THE BOARD OF DIRECTORS
AETNA LIFE AND CASUALTY COMPANY:
We consent to the incorporation by reference in the registration statements of
Travelers Group Inc. on:
- - Form S-3 Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101,
33-52281, 33-54093, 33-62903 and 33-63663; and
- - Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-37399, 33-7665,
33-28110, 33-43883, 33-21099, 33-29711, 33-47437,
33-39025, 33-40469, 33-38109, 33-50206, 33-39985,
33-51769, 33-51783, 33-52029 and 33-64985; and
- - Form S-4 Nos. 33-37089, 33-25532 and 33-51201
of our report dated February 7, 1995, except as to Note 16, which is as of
December 6, 1995, with respect to the combined balance sheet of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company and their
subsidiaries as of December 31, 1994, and the related combined statements of
income, shareholder's equity and cash flows for the year then ended,
which report appears in the Current Report on Form 8-K of Travelers
Group Inc. dated January 19, 1996, as amended by the Current Report on Form
8-K/A-1 filed on February 6, 1996.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
