SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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) April 2, 1996
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Travelers Group Inc.
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(Exact name of registrant as specified in its charter)
Delaware 1-9924 52-1568099
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
388 Greenwich Street, New York, New York 10013
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(Address of principal executive offices) (Zip Code)
(212) 816-8000
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(Registrant's telephone number, including area code)
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Explanatory Note
This amendment to Travelers Group Inc.'s Form 8-K dated April 2, 1996,
is being filed to restate the historical and pro forma financial information
contained therein to conform to the presentation of that information in the
Registration Statement on Form S-1 of Travelers/Aetna Property Casualty Corp.,
a majority-owned subsidiary of Travelers Group Inc. The amendment also
includes certain information under Item 5 of Form 8-K.
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TRAVELERS GROUP INC.
CURRENT REPORT ON FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 2, 1996, Travelers/Aetna Property Casualty Corp. ("TAP"), an
indirect majority-owned subsidiary of Travelers Group Inc. (the "Registrant"),
purchased from Aetna Life and Casualty Company ("Aetna") all of the outstanding
capital stock of The Aetna Casualty and Surety Company ("ACSC") and The Standard
Fire Insurance Company ("SFIC") for $4.16 billion in cash. TAP also owns The
Travelers Indemnity Company ("Travelers Indemnity"), and is the primary vehicle
through which the Registrant engages in the property and casualty insurance
industry.
To finance the purchase of ACSC and SFIC, TAP borrowed $2.65 billion
from a syndicate of banks under a five-year revolving credit facility that
expires on March 15, 2001 (the "Credit Facility"). TAP also sold shares of its
Class A Common Stock representing approximately 9% of its outstanding common
stock to four private investors, including Aetna, for an aggregate of $525
million. Aetna owns approximately 3% of TAP's outstanding common stock. The
Travelers Insurance Group Inc. ("TIGI"), a wholly owned subsidiary of the
Registrant, acquired approximately 328 million shares of Class B Common Stock of
TAP in exchange for contributing the outstanding capital stock of Travelers
Indemnity and a capital contribution of approximately $1.14 billion. In
addition, the Registrant purchased from TAP $540 million of Series Z Preferred
Stock of TAP.
The Registrant funded its purchase of Series Z Preferred Stock of TAP
and the capital contribution made by TIGI from the issuance of $920 million of
senior debt, and from $760 million of cash on hand.
Annexed hereto as Exhibit 99.01 and incorporated by reference herein
are the audited historical combined financial statements of ACSC and SFIC and
their subsidiaries as of December 31, 1995 and 1994 and for the years ended
December 31, 1995 and 1994, including the report of KPMG Peat Marwick LLP.
Annexed hereto as Exhibit 99.02 and incorporated by reference herein are the
unaudited pro forma condensed combined statement of income for the year ended
December 31, 1995 and the unaudited pro forma condensed combined statement of
financial position as of December 31, 1995 of the Registrant.
ITEM 5. OTHER EVENTS.
The allocation of the purchase price to the assets and liabilities of
ACSC and SFIC and their subsidiaries is subject to valuations as of the date
of the Registrant's acquisition of those companies based on appraisals and other
studies, which are not yet completed. Accordingly, the final allocations will
differ from the amounts reflected in the pro forma financial information
included herein. Adjustments of claims and claims adjustment expenses reserves
and certain other insurance accounts resulting from the valuation of these
accounts will be recorded in operations in the period or periods determined.
TAP is continuing to review the insurance reserves of ACSC, SFIC and their
subsidiaries, including the effect of applying TAP'S strategies, policies and
practices in determining such reserves. Based on the reviews at this stage, it
is possible that additional reserves of up to approximately $750 million in the
aggregate may be recorded upon completion of these reviews, which would result
in after-tax charges to income of up to approximately $488 million in the
aggregate, primarily relating to reserves for cumulative injury claims,
insurance products involving financial guarantees based on the fair value of
underlying collateral and certain insurance receivables. Stockholders' equity
would be correspondingly reduced by an equivalent after-tax amount as a result
of these charges. The Registrant believes that TAP'S reviews are likely to be
completed in 1996, although there can be no assurance as to the ultimate timing
thereof.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(a) Financial Statements of Businesses Acquired
Audited historical combined financial statements of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company
and their subsidiaries as of
2
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December 31, 1995 and 1994 and for the years ended December 31, 1995
and 1994, including the report of KPMG Peat Marwick LLP, filed as
Exhibit 99.01 hereto.
(b) Pro Forma Financial Information
Unaudited pro forma condensed combined statement of income for the
year ended December 31, 1995 and the unaudited pro forma condensed
combined statement of financial position as of December 31, 1995 of
the Registrant, together with the notes thereto, filed as Exhibit
99.02 hereto.
(c) Exhibits
Exhibit No. Description
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23.01 Consent of KPMG Peat Marwick
LLP.
99.01 Audited historical combined financial
statements of The Aetna Casualty and
Surety Company and The Standard Fire
Insurance Company and their subsidiaries
as of December 31, 1995 and 1994 and for
the years ended December 31, 1995 and
1994, including the report of KPMG Peat
Marwick LLP.
99.02 Unaudited pro forma condensed
combined statement of income for the
year ended December 31, 1995 and the
unaudited pro forma condensed combined
statement of financial position as of
December 31, 1995 of the Registrant,
together with the notes thereto.
3
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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: April 23, 1996
TRAVELERS GROUP INC.
By: /s/ William T. Bozarth
--------------------------------
William T. Bozarth
Vice President
4
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EXHIBIT INDEX
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Exhibit
No. Description Filing Method
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23.01 Consent of KPMG Peat Marwick LLP Electronic
99.01 Audited historical combined financial Electronic
statements of The Aetna Casualty and
Surety Company and The Standard Fire
Insurance Company and their subsidiaries
as of December 31, 1995 and 1994 and for
the years ended December 31, 1995 and
1994, including the report of KPMG Peat
Marwick LLP
99.02 Unaudited pro forma condensed Electronic
combined statement of income for the
year ended December 31, 1995 and the
unaudited pro forma condensed combined
statement of financial position as of
December 31, 1995 of the Registrant,
together with the notes thereto.
EXHIBIT 23.01
Consent of Independent Certified Public Accountants
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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:
o Form S-3 Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101,
33-52281, 33-54093, 33-62903 and 33-63663;
o 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
o Form S-4 Nos. 33-37089, 33-25532 and 33-51201
of our report dated February 28, 1996, with respect to the combined balance
sheets of The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company and their subsidiaries as of December 31, 1995 and 1994, and the related
combined statements of income, shareholder's equity, and cash flows for the
years then ended, which report appears in the Current Report on Form 8-K/A-1 of
Travelers Group Inc.
/S/ KPMG Peat Marwick LLP
Hartford, Connecticut
April 19, 1996
EXHIBIT 99.01
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
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PAGE 1
Page
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Financial Report
Independent Auditors' Report 1
Combined Financial Statements 2
Notes to Combined Financial Statements 6
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PAGE 1
Independent Auditors' Report
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Board of Directors
Aetna Life and Casualty Company:
We have audited the combined balance sheets of The Aetna Casualty and Surety
Company and The Standard Fire Insurance Company and their subsidiaries
(the "Companies") as of December 31, 1995 and 1994, and the related combined
statements of income, shareholder's equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the 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, 1995 and 1994, and the combined
results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 28, 1996
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PAGE 2
COMBINED STATEMENTS OF INCOME
For the years ended December 31,
(Millions) 1995 1994
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Revenue:
Premiums $4,117.7 $4,354.8
Net investment income 902.1 824.3
Fees and other income 82.0 115.8
Net realized capital gains 199.0 5.9
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Total revenue 5,300.8 5,300.8
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Claims and Expenses:
Claims and claim adjustment expenses 4,232.0 3,747.1
Operating expenses 851.8 1,011.2
Amortization of deferred policy
acquisition costs 622.7 633.7
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Total claims and expenses 5,706.5 5,392.0
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Loss before income tax benefits (405.7) (91.2)
Income tax benefits (162.8) (53.9)
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Net loss $ (242.9) $ (37.3)
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See Notes to Combined Financial Statements.
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PAGE 3
COMBINED BALANCE SHEETS
As of December 31,
(Millions, except share data) 1995 1994
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Assets:
Investments:
Debt securities:
Available for sale, at fair value
(amortized cost $11,182.3 and $9,696.4) $11,598.3 $ 9,096.8
Held for investment, at amortized cost
(fair value $407.1) - 413.5
Equity securities, at fair value
(cost $289.5 and $779.5) 499.9 1,017.9
Short-term investments 137.2 106.0
Mortgage loans 1,061.7 1,453.7
Real estate 264.7 262.0
Other 291.1 301.2
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Total investments 13,852.9 12,651.1
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Cash and cash equivalents 1,136.5 676.3
Reinsurance recoverables and receivables 5,276.6 4,903.2
Accrued investment income 184.5 178.0
Premiums due and other receivables 1,002.1 1,063.5
Federal and foreign income taxes:
Current 12.6 20.1
Deferred 633.7 862.5
Deferred policy acquisition costs 305.8 316.0
Other assets 994.3 1,000.4
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Total assets $23,399.0 $21,671.1
==============================================================================
Liabilities:
Unpaid claims and claim adjustment expenses $16,558.5 $15,977.2
Unearned premiums 1,398.4 1,423.8
Policyholders' funds left with the companies 39.2 46.7
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Total insurance liabilities 17,996.1 17,447.7
Short-term debt - 9.1
Long-term debt 35.2 35.5
Other liabilities 1,486.3 1,057.9
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Total liabilities 19,517.6 18,550.2
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Commitments and Contingent Liabilities (Notes 12, 13 and 14)
Shareholder's Equity:
Common capital stock (1,000 share 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 1,477.5 1,174.5
Net unrealized capital gains (losses) 312.8 (387.9)
Retained earnings 2,061.1 2,304.3
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Total shareholder's equity 3,881.4 3,120.9
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Total liabilities and shareholder's equity $23,399.0 $21,671.1
==============================================================================
See Notes to Combined Financial Statements.
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PAGE 4
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
For the years ended December 31,
(Millions) 1995 1994
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Shareholder's equity, beginning of year $ 3,120.9 $ 3,858.3
Capital Contribution 303.0 -
Dividends to shareholder (.3) -
Net change in unrealized capital
gains and losses 700.7 (700.1)
Net loss (242.9) (37.3)
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Shareholder's equity, end of year $ 3,881.4 $ 3,120.9
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See Notes to Combined Financial Statements.
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PAGE 5
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Millions) 1995 1994
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Cash Flows from Operating Activities:
Net loss $ (242.9) $ (37.3)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities:
(Increase) Decrease in accrued investment income (6.6) 25.4
Decrease (Increase) in premiums due and other
receivables 154.0 (232.8)
Increase in reinsurance recoverables
and receivables (373.4) (191.9)
Decrease in deferred policy acquisition costs 10.2 13.5
Depreciation and amortization 8.6 15.0
(Decrease) Increase in federal and foreign income taxes 239.3 (205.1)
Net decrease (increase) in other assets and
other liabilities 413.1 (513.1)
Increase in insurance liabilities 555.5 423.9
Net realized capital gains (199.0) (5.9)
Amortization of net investment discounts 3.2 55.0
Other, net 0.9 70.0
-------------------------
Net cash provided by (used for)
operating activities 562.9 (583.3)
-------------------------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,845.9 4,173.2
Equity securities 1,041.4 550.0
Mortgage loans 29.0 33.1
Real estate 94.9 69.5
Short-term investments 9,917.5 7,361.3
Investment maturities and repayments of:
Debt securities available for sale 1,526.4 914.7
Debt securities held for investment - 279.9
Mortgage loans 319.2 258.4
Cost of investment purchases in:
Debt securities available for sale (6,508.1) (4,751.4)
Equity securities (317.3) (420.4)
Mortgage loans .3 (9.9)
Real estate (18.0) -
Short-term investments (9,955.7) (7,331.4)
Decrease in property and equipment 1.9 1.3
Other, net (373.0) 135.3
-------------------------
Net cash (used for) provided by investing
activities (395.6) 1,263.6
-------------------------
Cash Flows from Financing Activities:
Dividends paid to shareholder (.3) -
Capital contribution from shareholder 303.0 -
Repayment of long-term debt (.3) (12.3)
Net increase (decrease)in short-term debt (9.1) 9.1
---------------------------
Net cash provided by (used for)
financing activities 293.3 (3.2)
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Effect of exchange rate changes on cash
and cash equivalents (.4) (.3)
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Net increase in cash and cash equivalents 460.2 676.8
Cash and cash equivalents, beginning of year 676.3 (.5)
-------------------------
Cash and cash equivalents, end of year $ 1,136.5 $ 676.3
===============================================================================
See Notes to Combined Financial Statements.
<PAGE>
PAGE 6
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF ENTITY AND PRINCIPLES OF COMBINATION
The combined financial statements include The Aetna Casualty and Surety Company
and The Standard Fire Insurance Company and their subsidiaries (collectively,
the "Companies") which are wholly-owned subsidiaries of Aetna Life and Casualty
Company ("Aetna"). Aetna entered into a definitive agreement, dated November 28,
1995, to sell the Companies to The Travelers Insurance Group Inc. ("Travelers").
The sale is subject to state regulatory approval and other customary conditions
and is expected to be completed no later than midyear 1996. The 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 homeowner 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. Certain reclassifications have been made to 1994 financial
information to conform to 1995 presentation.
ACCOUNTING CHANGES
Accounting by Creditors for Impairment of a Loan
As of January 1, 1995, the Companies adopted Financial Accounting Standard
("FAS") No. 114, Accounting by Creditors for Impairment of a Loan and FAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. In accordance with these standards, a loan is considered impaired
when it is probable that the 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. Adoption of these standards had no
impact on 1995 net income.
<PAGE>
PAGE 7
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of
In March 1995, the FASB issued FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
requires write-down to fair value when long-lived assets to be held and used are
impaired. The statement also requires long-lived assets to be disposed of (e.g.,
real estate held for sale) to be carried at the lower of cost or fair value less
estimated selling costs and does not allow such assets to be depreciated. The
Companies will adopt this statement in 1996 and the impact on earnings is not
expected to be material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
Debt securities which may be sold prior to maturity are classified as available
for sale and carried at fair value. Available for sale debt securities are
written down (as realized losses) for other than temporary declines in value.
Unrealized gains and losses related to available for sale investments, net of
related taxes, are reflected in shareholder's equity.
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. The
Companies had no held for investment securities at December 31, 1995.
In December 1995, in accordance with guidance published by the FASB, the
Companies reassessed the classifications of all debt securities. As a result of
this review, debt securities with an amortized cost of $403.1 million (fair
value of $400.8 million) were reclassified from the held for investment category
to the available for sale category.
<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 impairment
reserves, and are generally secured. A mortgage 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. A
general reserve is established for losses management believes are likely to
arise from the overall portfolio but cannot be attributed to specific loans.
Investment real estate, which the Companies have the intent to hold for the
production of income, is carried at depreciated cost, including capital
additions, net of write-downs for other than temporary declines in fair value.
Properties held for sale (primarily acquired through foreclosure) are carried at
the lower of depreciated cost (fair value at foreclosure plus capital additions
less accumulated depreciation) or fair value less estimated selling costs.
Adjustments to the carrying value of properties held for sale are recorded in a
valuation reserve when the fair value less estimated selling costs is below
depreciated cost.
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.
<PAGE>
PAGE 9
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
The Companies utilize foreign exchange forward contracts and swap agreements for
other than trading purposes in order to manage investment returns and align
maturities, interest rates, currency rates and funds availability with its
obligations. (Please refer to Note 13.)
Foreign exchange forward contracts which are designated at inception and
effective as hedges of foreign translation exposures and foreign transaction
exposures related to investments classified as available for sale are accounted
for using the deferral method. Under the deferral method, realized and
unrealized gains and losses from these forward contracts are deferred on the
balance sheet, net of tax, in net unrealized capital gains or losses. Upon
disposal of the hedged item, deferred gains and losses are recognized in net
realized capital gains or losses in the Combined Statements of Income. Excess
realized or unrealized gain or loss, if any, from the foreign exchange forward
contract compared to the foreign investment being hedged, is reported as a net
realized gain or loss in the Combined Statements of Income.
Swap agreements which are designated as interest rate or foreign exchange rate
risk management instruments at inception are accounted for using the accrual
method. Under the accrual method, the difference between amounts paid and
received on such agreements is reported in net investment income in the Combined
Statements of Income; there is no recognition in the Combined Balance Sheets for
changes in the fair value of the agreement.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new and renewal
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts and certain agency expenses. 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, 1995 and 1994 was $12.1 million and
$20.9 million, respectively, and was net of accumulated depreciation of $92.8
million and $92.9 million, respectively.
<PAGE>
PAGE 10
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INSURANCE LIABILITIES
Liabilities for unpaid claims and claim adjustment expenses include, to the
extent reasonably estimable, provisions for payments to be made on reported
claims, and claims incurred but not reported and for associated claim adjustment
expenses. (Please refer to Note 12.) Workers' compensation life table indemnity
reserves are discounted at 5% for voluntary business and 3.5% for involuntary
business. Workers' compensation life table indemnity reserves, net of the
related discount, totaled $863 million and $821 million at December 31, 1995 and
1994, respectively, which were 26% and 24% of the Companies' total workers'
compensation reserves for unpaid claims and claim adjustment expenses at
December 31, 1995 and 1994, respectively. Certain other reserves with fixed or
determinable payment patterns over periods of up to seven years, including
reserves related to certain environmental and asbestos-related claim
settlements, have also been discounted. The rates used in discounting such
reserves range from 4% to 7%, and the amount of such discounted reserves, net of
reinsurance was approximately $190 million at December 31, 1995.
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.
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 losses are provided.
Claims and expenses, including acquisition costs such as commissions, certain
premium taxes and certain other items, are charged to current operations as
incurred. Claims are reported net of salvage and subrogation received and
anticipated. Premiums, claims and expenses are also reported net of deductions
for reinsurance ceded.
STRUCTURED SETTLEMENTS
In cases where the Company has obtained a structured settlement with a qualified
assignment, i.e., the structured settlement annuity is owned by a party other
than the Company, the cost of the annuity is recognized as a paid loss and
gains, if any, are recognized in income. For cases where no qualified assignment
is obtained, the related loss amount and the annuity cost plus accrued interest
are included in loss reserves and reinsurance recoverables, respectively.
<PAGE>
PAGE 11
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. The severance and
facilities charge included costs related to vacating excess leased office space
and costs related to vacating and selling a property owned by Aetna in Hartford,
Connecticut. During 1995 and 1994, the Companies charged costs of $12.6 million
and $142.4 million (pretax), respectively, to the 1993 severance and facilities
reserve related to the cost reduction actions.
<PAGE>
PAGE 12
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Debt securities at December 31, 1995 were as follows:
<TABLE><CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
Available for Sale:
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 3,048.2 $ 122.3 $ 8.1 $ 3,162.4
Obligations of states and
political subdivisions 628.5 10.9 7.6 631.8
Utilities 735.3 37.6 2.5 770.4
Financial 1,304.7 83.9 1.2 1,387.4
Transportation/Capital Goods 649.8 27.1 4.9 672.0
Other corporate securities 366.4 12.0 2.0 376.4
Mortgage-backed securities 1,655.5 46.2 4.3 1,697.4
Other loan-backed securities 708.5 12.5 1.4 719.6
Foreign governments 1,125.7 64.6 6.5 1,183.8
Other 959.7 39.4 2.0 997.1
-----------------------------------------------------
Total Available for Sale $11,182.3 $ 456.5 $ 40.5 $11,598.3
- ----------------------------------------------------------------------------------------------
Debt securities at December 31, 1994 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
Available for Sale:
- ----------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 3,680.2 $ 1.2 $ 254.9 $ 3,426.5
Obligations of states and
political subdivisions 1,048.0 3.9 46.6 1,005.3
Utilities 519.7 1.4 22.8 498.3
Financial 530.2 .1 17.5 512.8
Transportation/Capital Goods 625.6 2.9 26.2 602.3
Other corporate securities 274.0 .6 21.1 253.5
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 759.4 1.8 74.0 687.2
Other 556.7 1.2 36.1 521.8
-----------------------------------------------------
Total Available for Sale $ 9,696.4 $ 16.6 $ 616.2 $ 9,096.8
- ----------------------------------------------------------------------------------------------
Held for Investment:
- ----------------------------------------------------------------------------------------------
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 3.7 .1 .3 3.5
Foreign governments 23.3 .1 .3 23.1
Other 46.1 1.8 .6 47.3
-----------------------------------------------------
Total Held for Investment $ 413.5 $ 3.9 $ 10.3 $ 407.1
- ----------------------------------------------------------------------------------------------
</TABLE>
The carrying and fair value of debt securities are shown below by contractual
maturity. Actual maturities may differ from contractual maturities because
securities may be restructured, called or prepaid.
1995
Amortized Fair
(Millions) Cost Value
- ------------------------------------------------------------------------
Available for Sale:
- ------------------------------------------------------------------------
Due to mature:
One year or less $ 793.7 $ 837.2
After one year through five years 3,812.9 3,864.4
After five years through ten years 2,494.6 2,610.3
After ten years 1,717.1 1,869.4
Mortgage-backed securities 1,655.5 1,697.4
Other loan-backed securities 708.5 719.6
- ------------------------------------------------------------------------
Total Available for Sale $11,182.3 $11,598.3
- ------------------------------------------------------------------------
<PAGE>
PAGE 13
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The Companies engage in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities, is
deposited by the borrower with a lending agent, and retained and invested by the
lending agent to generate additional income for the Companies. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value fluctuates. At December 31,
1995, the Companies had loaned securities (which are reflected as invested
assets on the Combined Balance Sheets) with a market value of approximately $.9
billion.
Investments in equity securities were as follows:
<TABLE><CAPTION>
Gross Gross
Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $ 289.5 $ 287.0 $ 76.6 $ 499.9
- ------------------------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------------------------
Equity securities $ 779.5 $ 335.8 $ 97.4 $1,017.9
- ------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, the Companies had an investment in common stock of MBIA,
Inc. with a carrying value of $286.0 million representing 7% of shareholder's
equity, and an investment in preferred stock of Federated Investors with a
carrying value of $100.7 million representing 3% of shareholder's equity.
Subsequent to December 31, 1995, the Companies sold all of their investment in
Federated Investors and 82% of their investment in MBIA, Inc. These sales
resulted in a combined realized capital gain of $173.8 million (pretax) which
will be reflected in 1996 results.
Real estate holdings at December 31 were as follows:
(Millions) 1995 1994
- -------------------------------------------------------------------
Properties held for sale $ 173.0 $ 98.6
Investment real estate 106.8 197.7
----------------------
279.8 296.3
Valuation reserve 15.1 34.3
----------------------
Net carrying value $ 264.7 $ 262.0
- --------------------------------------------------------------------
The accumulated depreciation for real estate was $29.0 million and $19.1 million
at December 31, 1995 and 1994, respectively.
Total real estate write-downs included in the net carrying value of the
Companies' real estate holdings on the Combined Balance Sheets at December 31,
1995 and 1994 were $116.4 million and $83.3 million, respectively.
At December 31, 1995, the total recorded investment in mortgage loans that are
considered to be impaired (which include problem loans, restructured loans and
potential problem loans) under FAS No. 114 and related specific reserves are
$164.4 million and $21.3 million, respectively. Included in the total recorded
investment are impaired loans of $61.0 million for which no specific reserves
are considered necessary.
<PAGE>
PAGE 14
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The activity in the mortgage loan impairment reserves for the twelve months
ended December 31, 1995 is summarized below:
(Millions)
- ------------------------------------------------------
Balance at December 31, 1994 $ 136.6
Charged to net realized capital loss 6.4
Principal write-offs (77.3)
---------
Balance at December 31, 1995 (1) $ 65.7
- ------------------------------------------------------
(1) Total reserves at December 31, 1995 included $21.3 million of
specific reserves and $44.4 million of general reserves.
The Companies accrue interest income on impaired loans to the extent it is
deemed collectible and the loan continues to perform under its original or
restructured contractual terms. Interest income on problem loans is generally
recognized on a cash basis. Cash payments on loans in the process of foreclosure
are generally treated as a return of principal.
Income earned (pretax) and received were each $12.2 million on the average
recorded investment in impaired loans of $227.0 million for the twelve months
ended December 31, 1995.
The carrying values of investments that were nonincome producing for the twelve
months preceding the balance sheet date were as follows:
(Millions) 1995 1994
- -------------------------------------------------------------------
Debt securities $ .6 $ 2.4
Equity securities 12.6 9.3
Mortgage loans .3 14.9
Real estate 71.4 47.9
---------------------
Total nonincome producing investments $ 84.9 $ 74.5
- -------------------------------------------------------------------
Significant noncash investing activities include acquisition of real estate
through foreclosures (including in-substance foreclosures) of mortgage loans
amounting to $40 million and $59 million in 1995 and 1994, respectively.
Please refer to Note 15 for concentrations of investment credit risk.
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 investments, net of related taxes, are reflected in
shareholder's equity.
Net realized capital gains (losses) on investments were as follows:
(Millions) 1995 1994
- --------------------------------------------------------------------
Debt securities $ (38.0) $ 9.7
Equity securities 239.5 30.7
Mortgage loans (5.5) (52.8)
Real estate 28.7 12.2
Sales of subsidiaries - 20.8
Other (25.7) (14.7)
----------------------
Pretax realized capital gains $ 199.0 $ 5.9
- --------------------------------------------------------------------
After tax realized capital gains $ 128.6 $ 3.8
- --------------------------------------------------------------------
<PAGE>
PAGE 15
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
Proceeds from the sale of investments in debt securities available for sale
during 1995 were $3.8 billion. Gross gains of $56.5 million and gross losses of
$94.5 million were realized on those sales. Proceeds from sales of investments
in held for investment and available for sale during 1994 were $4.2 billion.
Gross gains of $66.5 million and gross losses of $57.9 million were realized on
those sales.
Net realized capital gains in 1994 included a $14 million after tax gain
resulting from the sale of a portion of an unconsolidated subsidiary.
Changes in shareholder's equity included changes in unrealized capital gains
(losses), for the periods as follows:
(Millions) 1995 1994
- -------------------------------------------------------------------
Equity securities $ (28.0) $(132.9)
Debt securities available for sale 1,015.6 (808.1)
Foreign exchange and other, net (33.0) 35.2
---------------------
954.6 (905.8)
Increase (Decrease) in deferred federal
income taxes 253.9 (205.7)
Net changes in unrealized capital gains ---------------------
(losses) $ 700.7 $(700.1)
- -------------------------------------------------------------------
Changes in unrealized capital gains (losses) for the periods exclude pretax
changes in debt securities carried at amortized cost. The unrecorded
appreciation (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 $6.4 million and $(27.0) million in 1995 and 1994,
respectively.
Shareholder's equity included the following unrealized capital gains (losses) at
December 31:
(Millions) 1995 1994
- -------------------------------------------------------------------
Equity securities:
Gross unrealized capital gains $ 287.0 $ 335.8
Gross unrealized capital losses (76.6) (97.4)
---------------------
210.4 238.4
Debt securities available for sale:
Gross unrealized capital gains 456.5 16.6
Gross unrealized capital losses (40.5) (616.2)
---------------------
416.0 (599.6)
Foreign exchange and other, net (96.7) (63.7)
Deferred federal income taxes (benefits) 216.9 (37.0)
---------------------
Net unrealized capital gains (losses) $ 312.8 $ (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.)
<PAGE>
PAGE 16
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. NET INVESTMENT INCOME
Sources of net investment income were as follows:
(Millions) 1995 1994
- -------------------------------------------------------------------
Debt securities $ 683.2 $ 626.5
Equity securities 31.3 27.0
Short-term investments .8 -
Mortgage loans 121.8 154.4
Real estate 56.6 59.2
Other 23.0 8.8
Cash equivalents 48.3 25.6
---------------------
Gross investment income 965.0 901.5
Less investment expenses 62.9 77.2
---------------------
Net investment income $ 902.1 $ 824.3
- -------------------------------------------------------------------
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 1996, without prior approval by the Insurance Commissioner
of the State of Connecticut (the "Department") is $216.6 million (the sale
agreement with Travelers prohibits the payment of dividends from the Companies).
Dividends of $.3 million were paid by AC&S to Aetna in 1995. No dividends have
been paid by The Standard Fire Insurance Company during 1995. 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 1996 to approximately $164.4 million in the aggregate. Dividends
of $5.0 million were paid to AC&S by the domestic insurance subsidiaries during
1995.
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 $196.2 million and $170.1 million for the years ended
December 31, 1995 and 1994, respectively. Statutory shareholder's equity was
$2,793.4 million and $2,525.7 million as of December 31, 1995 and 1994,
respectively.
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, 1995 for each
of the Companies is above the levels which would require regulatory action.
As of December 31, 1995, 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.
<PAGE>
PAGE 17
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
(Millions) 1995 1994
- -----------------------------------------------------------------------
Long-term debt:
Mortgage Notes and Other Notes, 6.9%-11%
due in varying amounts to 2018 $35.2 $35.5
------------------
Aggregate maturities of long-term debt and sinking fund requirements for 1996
through 2000 are $.3 million, $.2 million, $29.5 million, $.1 million, $.1
million, respectively, and $5.0 million thereafter.
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 were as follows:
(Millions) 1995 1994
- ------------------------------------------------------------------
Current taxes (benefits):
Income (Loss) - from operations $(179.7) $ 4.2
Income - foreign taxes .9 -
Realized capital gains (losses) 65.6 (47.4)
--------------------
(113.2) (43.2)
Deferred taxes (benefits):
Loss - from operations (54.3) (60.2)
Income - foreign taxes (.1) -
Realized capital gains 4.8 49.5
--------------------
(49.6) (10.7)
--------------------
Total $(162.8) $ (53.9)
- ------------------------------------------------------------------
Income tax benefits on loss from continuing operations were different from the
amount computed by applying the federal income tax rate to loss from continuing
operations before income tax benefits for the following reasons:
(Millions) 1995 1994
- ----------------------------------------------------------------------
Loss before income tax benefits $ (405.7) $ (91.2)
Tax rate 35% 35%
-------------------------
Application of the tax rate (142.0) (31.9)
Tax effect of:
Tax-exempt interest (16.2) (31.1)
Foreign operations .8 6.9
Excludable dividends (6.2) (8.1)
Other, net .8 10.3
------------------------
Income tax benefits $ (162.8) $ (53.9)
- ----------------------------------------------------------------------
<PAGE>
PAGE 18
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 are presented below:
(Millions) 1995 1994
- ----------------------------------------------------------------------
Deferred tax assets:
Insurance reserves $ 814.4 $ 756.6
Reserve for severance and facilities
expense 5.6 26.3
Impairment reserves 1.8 49.5
Net unrealized capital losses - 139.5
Net operating loss carryforward 122.2 113.2
Other 27.4 9.4
------------------------
Total gross assets 971.4 1,094.5
Less valuation allowance - 102.1
------------------------
Assets net of valuation 971.4 992.4
Deferred tax liabilities:
Deferred policy acquisition costs 107.0 110.5
Market discount 11.2 17.1
Net unrealized capital gains 216.9 -
Other 2.6 2.3
------------------------
Total gross liabilities 337.7 129.9
------------------------
Net deferred tax asset $ 633.7 $ 862.5
- ----------------------------------------------------------------------
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. During the twelve months ended December 31, 1995, the
Companies moved from a net unrealized capital loss position of $(387.9) million
at December 31, 1994, to a net unrealized capital gain position of $312.8
million at December 31, 1995, primarily due to decreases in interest rates. As a
result, the $102.1 million of valuation allowances previously established in
1994 related to deferred tax assets were reversed, which had no impact on net
income in 1995.
Management believes that it is more likely than not that the Companies will
realize the benefit of the net deferred tax asset of $633.7 million. Aetna's
election of special estimated tax payments in years 1989 through 1994 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.
The net deferred tax asset includes $122.2 million related to the Companies'
expected utilization of its current U.S. net operating loss carryforward of
$349.2 million, $111.2 million of which expires in the year 2008, $226.3 million
of which expires in the year 2009 and $11.7 million of which expires in the year
2010.
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. The Service
has commenced its examination for the years 1987 through 1990. However,
management believes there are adequate defenses against, or sufficient reserves
recorded by Aetna to provide for, such challenges.
<PAGE>
PAGE 19
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED)
The Companies received net federal income tax refunds of $148.4 million and
$60.8 million in 1995 and 1994, respectively.
9. BENEFIT PLANS
Pension Plans - The Companies, in conjunction with Aetna, have noncontributory
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 Projected Unit
Credit Method and, for qualified plans subject to ERISA requirements, are
limited to the amounts that are currently deductible for tax reporting purposes.
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 $22.3 million and $12.0 million in 1995 and 1994,
respectively. There has been no funding to the plan in 1995 or 1994.
Postretirement Benefits - In addition to providing pension benefits, Aetna also
provides certain health care and life insurance benefits for retired employees.
A comprehensive medical and dental plan is offered to all full-time employees
retiring at age 50 with 15 years of service or at age 65 with 10 years of
service. Retirees are generally required to contribute to the plans based on
their years of service with 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 was
approximately $5.0 million (pretax) in 1995 and 1994, respectively, and is
reflected in the Combined Statements of Income.
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. Pretax charges to operations for the incentive savings
plan were $21.5 million and $24.3 million in 1995 and 1994, respectively.
1994 Stock Incentive Plan - Certain employees participate in Aetna's 1994 stock
incentive plan (which replaced the 1984 stock option plan). 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
$12.7 million in 1995. There was an immaterial impact to the results of
operations in 1994.
<PAGE>
PAGE 20
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. BENEFIT PLANS (CONTINUED)
(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 and 1998) 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 which
management considers reasonable and 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 and taxes (including payroll and personal
property).
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 Sheets reflect
certain mortgage and real estate investments that are held jointly by 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.
<PAGE>
PAGE 21
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
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 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 had entered into a stop-loss agreement with an affiliate, Aetna
Re-Insurance Company (U.K.) Ltd., a wholly-owned subsidiary of Aetna. Such
agreement covered all policies-in-force, written, renewed or accepted during
1992 and prior years. AC&S had a 100% participation, capped at a maximum of
$58.0 million, 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. Effective December 31, 1995, AC&S
entered into an agreement with Aetna whereby Aetna was substituted as primary
obligor under the stop-loss agreement for a payment equal to the held reserves
for such coverage of $35.7 million.
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 Sheets.
Prepaid reinsurance premiums were $.4 billion and $.3 billion for the years
ended December 31, 1995 and 1994, respectively. A summary of earned premiums for
the years ended December 31 was as follows:
(Millions) 1995 1994
- -----------------------------------------------------------------
Direct Amount $ 5,006.4 $ 5,093.4
Ceded to Other Companies(1) 1,307.0 1,177.7
Assumed from Other Companies(2) 418.3 439.1
-------------------------
Net Amount $ 4,117.7 $ 4,354.8
- -----------------------------------------------------------------
Percentage of Amount Assumed to Net 10.2% 10.1%
- -----------------------------------------------------------------
(1) Includes $165.4 million and $184.7 million in 1995 and 1994, respectively,
of premiums ceded to Aetna affiliates.
(2) Includes $115.3 million and $130.8 million in 1995 and 1994, respectively,
of premiums assumed from Aetna affiliates.
There is not a material difference in premiums on a written versus an earned
basis.
Ceded claims and claim adjustment expenses were $.8 billion and $1.2 billion for
the years ended December 31, 1995 and 1994, respectively.
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 $1.7 billion and $1.8 billion
as of December 31, 1995 and 1994, respectively. 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.
<PAGE>
PAGE 22
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE (CONTINUED)
The Companies also utilize a variety of reinsurance agreements, primarily with
nonaffiliated insurers, to control their exposure to large property-casualty
losses. These agreements, most of which are renegotiated annually as to
coverage, limits and price, are structured either on a treaty basis (where all
risks meeting prescribed criteria are automatically covered) or on a facultative
basis (where the circumstances of specific individual insurance risks are
reflected). The amount of risk retained by the Companies depends on the
underwriter's evaluation of the specific risk, subject to maximum limits based
on risk characteristics and the type of coverage. The principal catastrophe
reinsurance agreement currently in force covers approximately 90% of specified
property losses between $150 million and $325 million. The Companies also have
in place an aggregate excess of loss arrangement with respect to all of its
property-casualty lines for accident year 1995, providing up to approximately
$250 million of additional net protection.
Unpaid claims and claim adjustment expenses and reinsurance recoverables on the
Combined Balance Sheets are reported net of amounts ceded to and assumed from
certain affiliates. The total amount of unpaid claims and claim adjustment
expenses and reinsurance recoverables related to these reinsurance agreements
was $658.8 million and $642.0 million at December 31, 1995 and 1994,
respectively, of which $657.1 million and $639.9 million, respectively, relates
to an arrangement which terminated effective January 1, 1996. There was no
impact to the Combined Statements of Income in 1995 or 1994 as a result of these
agreements.
12. RESERVES
The following represents changes in aggregate reserves for unpaid claims and
claim adjustment expenses:
(Millions) 1995 1994
- ------------------------------------------------------------------------------
Net unpaid claims and claim adjustment expenses
at beginning of year $11,022 $11,259
Incurred claims and claim adjustment expenses:
Provision for insured events of the current year 3,095 3,484
Increases in provision for insured events
of prior years (1) 1,137 263
- -------------------------------------------------------------------------------
Total incurred claims and claim adjustment expenses 4,232 3,747
- -------------------------------------------------------------------------------
Payments: Claim and claim adjustment expenses
attributable to insured events of the current year 1,118 1,275
Claim and claim adjustment expenses
attributable to insured events of prior years 2,563 2,709
- -------------------------------------------------------------------------------
Total payments 3,681 3,984
- -------------------------------------------------------------------------------
Net unpaid claims and claim adjustment expenses at
end of the year 11,573 11,022
Plus: Reinsurance recoverables 4,573 4,603
Deductible amounts recoverable from policyholders 412 352
- -------------------------------------------------------------------------------
Gross unpaid claims and claim adjustment expenses
at end of the year $16,558 $15,977
- -------------------------------------------------------------------------------
(1) 1995 includes increases in provision for insured events of prior years of
$399 million related to asbestos-related claims and $778 million related to
environmental-related claims.
<PAGE>
PAGE 23
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. RESERVES (CONTINUED)
Environmental and Asbestos-Related Claims
The Companies added $778 million ($505.7 million, after tax) to
environmental-related claims reserves in 1995. In the opinion of management, the
Companies' reserves for environmental-related claims at December 31, 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 $303 million of additional capital to the Companies in the fourth
quarter of 1995 in order to restore capital levels (including risk-based
capital), to appropriate levels for regulatory and other purposes.
In conjunction with the reserve addition for environmental-related claims, the
Companies purchased reinsurance which provided aggregate protection of $335
million for the adverse loss development beyond reserves held (net of existing
reinsurance). Under this arrangement, approximately $165 million of the existing
reserves for such losses were ceded at the time the contract was entered into.
As a result of the asbestos-related reserve addition (see below) and other
reserve developments, substantially all of, the available statutory surplus
protection was utilized during 1995. There was an immaterial benefit to the
results of operations under this arrangement.
In 1995, the Companies settled a case involving a policyholder (a major producer
of asbestos and asbestos products) that had exhausted applicable policy limits
on asbestos products claims and asserted coverage under policy provisions for
other types of liability. The Companies obtained a release from the insured for
all current and future asbestos bodily injury claims and certain asbestos
property damage claims (along with all environmental claims) under existing
policies in exchange for fixed, scheduled cash payments, which were recorded on
a discounted basis. In connection with this settlement, $120 million of
property-casualty reserves not previously classified as covering
asbestos-related claims were transferred to asbestos reserves. No amounts were
transferred from environmental reserves, and the environmental-related portion
of the settlement was covered by existing environmental reserves. As a result,
this settlement did not affect 1995 results of operations. As part of the
settlement, the Companies also agreed, among other things, to make insurance
coverage available to the insured in the year 2000 (on a one-time basis), for a
percentage of all asbestos defense and indemnity claim payments made by the
insured during the years 2000 through 2007. The 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. Related premiums and
losses will be recorded if it becomes probable that the insured will elect to
purchase the additional insurance coverage.
<PAGE>
PAGE 24
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. RESERVES (CONTINUED)
Environmental and Asbestos-Related Claims (continued)
Reserving for asbestos-related claims is subject to significant uncertainties
and management is currently unable to make a reasonable estimate as to the
ultimate amount of losses or a reasonable range of losses for all
asbestos-related claims and related litigation expenses. Management has
continued to evaluate reserves for asbestos liabilities as the Companies
continue to gather and analyze new information and reassess its reserving
techniques for these claims in order to determine whether it can better estimate
its liability. In connection with such evaluation, the 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 its
asbestos losses from its reinsurers, due to the uncertainty in estimating
amounts to be recovered, no reinsurance benefits were recorded in establishing
this addition to reserves. Further adjustments may be made to such reserves as
loss patterns develop and other information is obtained, and the amount
ultimately paid for such claims could differ materially from reserves, although
any difference cannot be reasonably estimated at this time.
Environmental and asbestos-related loss and loss adjustment expense reserves as
reflected on the Combined Balance Sheets at December 31, were as follows (before
reinsurance and net of discounts on certain environmental and asbestos
settlement):
<TABLE><CAPTION>
(Millions) 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Environmental Liability $ 1,005.9 $ 436.1
Asbestos Bodily Injury* 754.3 295.9
Asbestos Property Damage* 22.3 29.9
-----------------------------
Total Environmental and Asbestos-Related Reserves $ 1,782.5 $ 761.9
- -----------------------------------------------------------=============================
</TABLE>
*Includes $107.4 million and $12.6 million of reserves transferred to asbestos
bodily injury and asbestos property damage reserves, respectively, in 1995.
Workers' Compensation Claims
Estimating workers' compensation reserves is particularly difficult (and,
therefore, more subject to change than many other types of property-casualty
claims), largely because of the length of the "tail" associated with workers'
compensation claims. Workers' compensation claim costs are dependent on a number
of complex factors including social and economic trends and changes in doctrines
of legal liability and damage awards. Adjustments will be made to such reserves
as loss patterns develop and new information becomes available and such
adjustments may be material.
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 or expanding laws and legal theories
of liability. Adjustments will be made to such reserves as loss patterns develop
and new information becomes available and such adjustments may be material.
<PAGE>
PAGE 25
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of the Companies' financial
instruments at December 31, 1995 and 1994 were as follows:
1995 1994
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
ASSETS:
Cash and cash equivalents $ 1,136.5 $ 1,136.5 $ 676.3 $ 676.3
Short-term investments 137.2 137.2 106.0 106.0
Debt securities 11,598.3 11,598.3 9,510.3 9,503.9
Equity securities 499.9 499.9 1,017.9 1,017.9
Mortgage loans 1,061.7 1,052.7 1,453.7 1,416.0
LIABILITIES:
Short-term debt $ -- $ -- $ 9.1 $ 9.1
Long-term debt 35.2 35.2 35.5 35.5
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.
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 Sheets approximate fair
value. Short-term instruments have a maturity date of one year or less and
include cash and cash equivalents, short-term investments and short-term debt.
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimates
of mortgage loans of lower credit quality, including problem and restructured
loans, are based on the estimated fair value of the underlying collateral.
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.
<PAGE>
PAGE 26
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. FINANCIAL INSTRUMENTS (CONTINUED)
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, 1995 and 1994
were as follows:
Carrying
Value
Notional Asset Fair
(Millions) Amount (Liability) Value
- ---------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------
Foreign exchange forward contracts
- sell:
Related to investments in
nondollar denominated assets $ 65.2 $ (.1) $ (.2)
Interest rate swaps:
Unrecognized gains 380.0 - 20.4
Unrecognized losses 380.0 - (20.2)
Carrying
Value
Notional Asset Fair
(Millions) Amount (Liability) Value
- ---------------------------------------------------------------------------
1994
- ---------------------------------------------------------------------------
Foreign exchange forward contracts
- sell:
Related to net investments in
foreign affiliates $ 27.1 $ .2 $ .2
Related to investments in
nondollar denominated assets 206.1 .2 (1.5)
Foreign exchange forward contracts
- buy:
Related to investments in
nondollar denominated assets 3.8 (.4) (.1)
Interest rate swaps:
Unrecognized gains 386.4 - 18.3
Unrecognized losses 386.4 - (18.3)
The notional amounts of these instruments do not represent the Companies' risk
of loss. 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.
<PAGE>
PAGE 27
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS): (CONTINUED)
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
interest rate swap agreements. All of these instruments involve, to varying
degrees, elements of market risk and credit risk in excess of the amounts
recognized in the Combined Balance Sheets. 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, 1995.
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange fixed amounts of
two different currencies at a specified future date and at a specified price.
The Companies utilize foreign exchange forward contracts to hedge their foreign
currency exposure arising from certain investments in foreign affiliates and
nondollar denominated investment securities. The Companies generally utilize
foreign currency contracts with terms of up to three months.
At December 31, 1995 the Companies has unhedged foreign currency exposures of
$29.8 million and $41.2 million related to net investments in foreign affiliates
and investments in nondollar denominated assets, respectively. These exposures
include $40.1 million of investments in nondollar denominated assets for which
effective markets for hedging vehicles do not currently exist.
Interest Rate Swaps
The Companies utilize interest rate swaps to manage certain exposures related to
changes in interest rates. This swap activity included 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.
<PAGE>
PAGE 28
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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, 1995
and 1994, the Companies had $79.8 million and $120.0 million, respectively, in
commitments to fund partnerships.
Through the normal course of investment operations, the Companies commit to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either a higher or lower replacement
cost. Also, there is likely to be a change in the value of the securities
underlying the commitments. At December 31, 1995, the Companies had commitments
to purchase investments of $66.9 million, the fair value of which was $67.3
million. The Companies had no commitments to purchase investments in 1994.
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, 1995 and 1994 was $656.4 million and $728.3 million,
respectively. Future runoff of financial guarantees as of December 31, 1995
after adjusting for extensions granted on certain guarantees, is estimated to be
$31.9 million for 1996, $135.4 million for 1997, $276.7 million for 1998, $3.8
million for 1999, $7.4 million for 2000 and $201.2 million thereafter. It is not
practicable to estimate a fair value for AC&S' financial guarantees because AC&S
no longer writes such guarantees, there is no quoted market price for such
contracts, and it is not practicable to reliably estimate the timing and amount
of all future cash flows due to the unique nature of each of these contracts.
Total reserves for the financial guarantee business, which include reserves for
defaults, probable losses not yet identified and unearned premiums, were $40.5
million and $47.7 million at December 31, 1995 and 1994, respectively. Premium
income received from such guarantees is recognized pro rata over the contract
coverage period.
<PAGE>
PAGE 29
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
REINSURANCE AGREEMENT
In connection with the 1992 sale of Am Re, Am Re and AC&S entered into a
reinsurance agreement which provides that to the extent Am Re incurred losses in
1991 and prior that were still outstanding at January 1, 1992 in excess of $2.7
billion, AC&S has an 80% participation in payments on those losses up to a
maximum payment by AC&S of $500 million. In 1995, Am Re increased reserves for
asbestos, environmental and other latent liabilities. As a result of this
increase, losses of approximately $228 million ($120 million after discount),
which were largely workers' compensation life table indemnity claims, were ceded
to AC&S. There was no material impact on 1995 earnings as AC&S had previously
established reserves. It is reasonably possible that additional undiscounted
losses of up to approximately $270 million pretax could be ceded to the company
in the future.
STRUCTURED SETTLEMENTS
The Companies have settled claims through the purchase of structured settlement
annuities under which they remain liable to the claimants. Such structured
settlements of $1,189.3 million and $1,097.2 million are reflected in
reinsurance recoverables on the Combined Balance Sheet at December 31, 1995 and
1994, respectively. Included in such liabilities is $352.4 million and $280.0
million of structured settlements purchased from affiliates, consisting of
$177.2 million and $153.4 million from Aetna Life Insurance Company at December
31, 1995 and 1994, respectively, and $175.2 million and $126.6 million from
Aetna Life Insurance and Annuity Company at December 31, 1995 and 1994,
respectively.
LITIGATION
The Companies are continuously involved in numerous lawsuits arising, for the
most part, in the ordinary course of their business operations either as
liability insurers defending third-party claims brought against their insureds
or as insurers defending coverage claims brought against them, including
lawsuits related to issues of policy coverage and judicial interpretation. One
such area of coverage litigation involves legal liability for environmental and
asbestos-related claims. These lawsuits and other factors make reserving for
these claims subject to significant uncertainties.
While the ultimate outcome of such litigation cannot be determined at this time,
such litigation, net of reserves established 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.
<PAGE>
PAGE 30
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. CONCENTRATIONS OF INVESTMENT CREDIT RISK
At December 31, 1995, the Companies had an investment in common stock of MBIA,
Inc. with a carrying value of $286.0 million representing 7% of shareholder's
equity, and an investment in preferred stock of Federated Investors with a
carrying value of $100.7 million representing 3% of shareholder's equity.
Subsequent to December 31, 1995, the Companies sold all of their investment in
Federated Investors and 82% of their investment in MBIA, Inc. These sales
resulted in a combined realized capital gain of $173.8 million (pretax) which
will be reflected in 1996 results.
The Companies' holdings in debt securities were $11.6 billion and $9.5 billion
as of December 31, 1995 and 1994, respectively. 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, 1995 and 1994, the
average quality rating of the Companies' portfolio of debt securities was AA and
the composition by quality ratings and market sector were as follows:
<TABLE><CAPTION>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
December 31, December 31,
1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AAA 54% 59% Corporate 28% 23%
AA 11% 10% Treasuries/Agencies 27% 36%
A 21% 18% Mortgage-Backed Securities 15% 13%
BBB 11% 9% Financial 12% 6%
BB & Below 3% 4% Public Utilities 7% 6%
Other Loan Backed 6% 3%
Municipals 5% 13%
</TABLE>
At December 31, 1995 and 1994, mortgage loan balances, net of specific
impairment reserves, by property type and geographic region were as follows:
December 31, 1995
<TABLE><CAPTION>
Mixed
Hotel/ Use/
(Millions) Office Retail Apartment Motel Industrial Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
South Atlantic $ 175.6 $ 60.9 $ 51.8 $ 2.7 $ 3.1 $ 49.5 $ 343.6
Middle Atlantic 147.1 64.8 - - 19.9 .1 231.9
New England 120.5 66.9 59.7 44.2 - - 291.3
South Central 10.7 14.6 .5 1.7 - - 27.5
North Central 3.4 20.2 38.3 11.1 .8 .9 74.7
Pacific and
Mountain 69.9 28.9 18.4 - 7.3 3.1 127.6
Other - - - - - 9.5 9.5
- -----------------------------------------------------------------------------------------------
Total $ 527.2 $ 256.3 $ 168.7 $ 59.7 $ 31.1 $ 63.1 1,106.1
- -----------------------------------------------------------------------------------------------
Less general portfolio loss reserve 44.4
- -----------------------------------------------------------------------------------------------
Adjusted total, net of reserves $ 1,061.7
- --------------------------------------------------------------------------------------=========
<CAPTION>
December 31, 1994
Mixed
Hotel/ Use/
(Millions) Office Retail Apartment Motel Industrial Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
South Atlantic $ 159.5 $ 165.2 $ 58.9 $ 62.1 $ 3.2 $ 59.0 $ 507.9
Middle Atlantic 196.1 67.0 30.1 - 17.6 .5 311.3
New England 122.6 65.6 59.4 45.1 .4 3.8 296.9
South Central 32.1 12.1 13.3 2.0 3.8 .9 64.2
North Central 31.7 40.3 55.1 23.5 .9 1.2 152.7
Pacific and
Mountain 118.6 29.2 7.6 - 7.7 4.3 167.4
Other - - - - - 11.8 11.8
- -----------------------------------------------------------------------------------------------
Total $ 660.6 $ 379.4 $ 224.4 $ 132.7 $ 33.6 $ 81.5 1,512.2
- -----------------------------------------------------------------------------------------------
Less general portfolio loss reserve 58.5
- -----------------------------------------------------------------------------------------------
Adjusted total, net of reserves $ 1,453.7
- --------------------------------------------------------------------------------------=========
</TABLE>
<PAGE>
PAGE 31
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
15. CONCENTRATIONS OF INVESTMENT CREDIT RISK (CONTINUED)
As of December 31, 1995 and 1994, the Companies' investments in problem,
potential problem and restructured mortgage loans by property type and
geographic distribution were as follows:
<TABLE><CAPTION>
Problem, Potential Problem and Restructured Geographic Distribution of Problem, Potential
Mortgage Loans by Property Type Problem and Restructured Mortgage Loans
December 31, December 31,
1995 1994 1995 1994
- ------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Apartment 13.3% 9.0% Middle Atlantic 11.9% 22.1%
Hotel/Motel -% .8% New England .2% 1.3%
Office 48.8% 72.4% North Central 13.4% 32.6%
Retail 37.9% 17.0% Pacific and Mountain 62.2% 7.3%
Other -% .8% South Atlantic 12.3% 17.6%
South Central -% 19.1%
</TABLE>
"Problem loans" are defined to be loans with payments over 60 days past due,
loans on properties in the process of foreclosure, loans on properties involved
in bankruptcy proceedings and loans on properties subject to redemption.
"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.
In connection with the Companies' adoption of FAS Nos. 114 and 118 on January 1,
1995 (please see Note 1 of Notes to Combined Financial Statements), management
has revised the definition of "potential problem loans" to include all loans
which are performing pursuant to existing terms and are considered likely to
become classified as problem or restructured loans. Prior to January 1, 1995,
potential problem loans were performing loans which management believed were
likely to become classified as problem or restructured loans in the next 12
months or so. As a result of the revised definition, potential problem loans at
December 31, 1995 are approximately $65 million higher than they would have been
had the definition not been changed. Potential problem loans are identified
through the portfolio review process on the basis of known information about the
ability of borrowers to comply with present loan terms. Identifying such
potential problem loans requires significant judgment as to likely future market
conditions and developments specific to individual properties and borrowers.
Provision for losses that management believes are likely to arise from such
potential problem loans is included in the specific impairment reserves. (Please
see Note 3 for a discussion of mortgage loan impairment reserves.)
The Companies' equity real estate balances were $264.7 million and $262.0
million at December 31, 1995 and 1994, respectively. The Companies' equity real
estate balances at December 31, 1995 and 1994 by property type and geographic
distribution were as follows:
<TABLE><CAPTION>
Equity Real Estate by Property Type Geographic Distribution of Equity Real Estate
December 31, December 31,
1995 1994 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Apartment -% 6.0% Middle Atlantic 7.9% 8.2%
Hotel/Motel 21.3% 17.3% New England 12.5% 16.1%
Industrial 8.6% 8.7% North Central 18.3% 12.3%
Land 14.3% 13.2% Pacific and Mountain 37.9% 40.1%
Office 47.1% 44.1% South Atlantic 16.7% 20.4%
Retail 7.6% 9.5% South Central 6.7% 2.9%
Other 1.1% 1.2%
</TABLE>
<PAGE>
PAGE 32
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. SEGMENT INFORMATION
<TABLE><CAPTION>
Commercial Personal
(millions) Lines Lines Combined
- ----------------------------------------------------------------------------------------
1995
<S> <C> <C> <C>
Revenues
Premiums $2,833 $1,285 $4,118
Net investment income 757 145 902
Fee & other income 78 4 82
Realized investment gains (losses) 151 48 199
------------------------------------------
Total 3,819 $1,482 5,301
------------------------------------------
Income (loss) before federal income taxes (607) 201 (406)
Net income (loss) (377) 134 (243)
------------------------------------------
Total assets 19,670 3,729 23,399
- ----------------------------------------------------------------------------------------
1994
Revenues
Premiums $3,006 $1,349 $4,355
Net investment income 661 163 824
Fee & other income 110 6 116
Realized investment gains (losses) (2) 8 6
------------------------------------------
Total 3,775 1,526 5,301
------------------------------------------
Income (loss) before federal income taxes (135) 44 (91)
Net income (loss) (74) 37 (37)
------------------------------------------
Total assets 18,057 3,614 21,671
=======================================================================================
</TABLE>
Exhibit 99.02
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of
income of Travelers Group Inc. (the "Company") for the year ended December 31,
1995, presents results for the Company as if the Company's acquisition of the
domestic property and casualty insurance operations of Aetna Life and Casualty
Company (the "Aetna P&C" operations) and transactions related to the funding of
the acquisition, had occurred as of January 1, 1995. The accompanying unaudited
pro forma condensed combined statement of financial position of the Company as
of December 31, 1995 gives effect to the acquisition and related transactions as
if they had occurred as of December 31, 1995. The unaudited pro forma financial
information does not purport to represent what the Company's financial position
or results of operations actually would have been had the acquisition and
related transactions 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 financial information should be read in
conjunction with the accompanying notes thereto; the separate historical
consolidated financial statements of the Company as of and for the year ended
December 31, 1995 which are contained in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1995; and the separate historical
combined financial statements of Aetna P&C and its subsidiaries as of and for
the year ended December 31, 1995, which are contained herein.
The pro forma adjustments and pro forma combined amounts are provided
for informational purposes only. The Company's financial statements will reflect
the effects of the acquisition and related transactions only from the date such
events occur. The pro forma adjustments are applied to the historical financial
statements to, among other things, account for the acquisition as a purchase.
Under purchase accounting, the total purchase cost will be allocated to the
Aetna P&C assets and liabilities based on their 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 unaudited pro forma financial information reflects
management's best estimate based on currently available information.
Included in the historical results of Aetna P&C for the year ended
December 31, 1995 are charges of $750 million ($488 million after tax)
representing an addition to environmental-related claims reserves in the second
quarter of 1995 and $335 million ($218 million after tax) representing an
addition to asbestos reserves in the fourth 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, $300 million ($195 million after tax) in annual cost
savings from reduction of overhead expenses, changes in the corporate
infrastructure of Aetna P&C and elimination of redundant expenses. There can be
no assurance that the Company will achieve its expected cost savings. These
expected future cost savings are not reflected in the unaudited pro forma
financial information.
<PAGE>
Travelers Group Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Financial Position
As of December 31, 1995
(in millions of dollars)
<TABLE><CAPTION>
Pro Forma Adjustments
Travelers ------------------------
Group Aetna P&C for the for the Pro Forma
Assets Historical Historical Transactions Offerings Combined
------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $1,866 $1,137 $3,003
Investments:
Fixed maturities, primarily available for sale at market value 30,712 11,598 $710 (A) 42,993
(27)(B)
Equity securities, at market value 856 500 1,356
Mortgage loans 4,048 1,062 (166)(B) 4,944
Real estate held for sale 321 265 (67)(B) 519
Policy loans 1,888 1,888
Short-term and other 3,140 428 (200)(A) 3,368
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 40,965 13,853 250 0 55,068
- -----------------------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 19,601 19,601
Brokerage receivables 6,559 6,559
Trading securities owned, at market value 8,984 8,984
Net consumer finance receivables 7,092 7,092
Reinsurance recoverables 6,461 5,277 11,738
Value of insurance in force and deferred policy acquisition costs 2,172 306 (101)(B) 2,377
Cost of acquired businesses in excess of net assets 1,928 848 (B) 2,776
Separate and variable accounts 6,949 6,949
Other receivables 3,564 1,187 4,751
Other assets 8,334 1,639 1 (A) $10 (D) 10,227
(18)(A)
306 (B)
(45)(B)
===================================================================================================================================
Total assets $114,475 $23,399 $1,241 $10 $139,125
===================================================================================================================================
Liabilities
Investment banking and brokerage borrowings $2,955 $2,955
Short-term borrowings 1,468 $759 (A) 2,227
Long-term debt 9,190 $35 3,370 (A) ($2,650)(D) 10,891
946 (D)
Securities loaned or sold under agreements to repurchase 20,619 20,619
Brokerage payables 4,403 4,403
Trading securities sold not yet purchased, at market value 4,563 4,563
Contractholder funds 14,535 14,535
Insurance policy and claims reserves 26,920 17,957 44,877
Separate and variable accounts 6,916 6,916
Accounts payable and other liabilities 11,028 1,526 457 (A) 544 (D) 14,018
468 (B) (5)(D)
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 102,597 19,518 5,054 (1,165) 126,004
- -----------------------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (67) (67)
- -----------------------------------------------------------------------------------------------------------------------------------
168 168
TAP-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trusts holding solely Junior Subordinated
Debt Securities 900 (D) 900
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock 800 800
Common stock 4 30 (30)(C) 4
Additional paid-in capital 6,785 1,477 (1,477)(C) (23)(D) 6,762
Retained earnings 5,503 2,061 68 (A) 298 (D) 5,869
(2,061)(C)
Treasury stock, at cost (1,835) (1,835)
Unrealized gain on investment securities and other, net 453 313 (313)(C) 453
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,710 3,881 (3,813) 275 12,053
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
Total liabilities and stockholders' equity $114,475 $23,399 $1,241 $10 $139,125
===================================================================================================================================
See Accompanying Notes
<PAGE>
Travelers Group Inc.
Notes to Unaudited Pro Forma Condensed Combined 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, Travelers/Aetna Property Casualty Corp.
("TAP"), comprised of the Company's present property and casualty
operations together with the Aetna P&C operations, and a contribution to
TAP's capital. Together these are referred to as the Transactions:
Sources
-------
Issuance of long-term debt $3,370
Related issuance costs (1)
Short-term borrowings 759
Proceeds from issuance and sale of TAP's common stock to
private investors representing an approximately 8% interest
in TAP's common equity ($457 to minority interest and $68
gain on sale of subsidiary stock) 525
Settlement of receivables from Aetna 18
Short-term investments 200
-----
Total sources $4,871
======
Uses
----
Purchase price for Aetna P&C $4,161
Additional capital contribution to TAP (invested in
fixed maturities) 710
-----
Total uses $4,871
======
The above pro forma presentation does not reflect the planned issuance of
long-term debt securities, trust preferred securities and common stock in
an initial public offering by TAP (the "Offerings"). The above pro forma
presentation reflects bridge financing with a five-year term borrowed by
TAP under a revolving credit facility with a group of banks in the amount
of $2.65 billion. See Note D for information concerning the Offerings.
<PAGE>
B. The following pro forma adjustments result from the allocation of purchase
price of the acquisition based on fair value of the underlying net assets
acquired. The amounts and assumptions related to the primary adjustments
are as follows:
</TABLE>
<TABLE><CAPTION>
Assets Debit (Credit)
------ --------------
<S> <C>
Discount allocated to investments in fixed maturities based on the
fair value of the investments $(27)
Adjustment of carrying amount of investments in
mortgage loans based on fair value of underlying
collateral reflecting the Company's sales strategy $(166)
Adjustment of carrying amount of real estate to fair
value reflecting the Company's sales strategy $(67)
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 $(101)
Excess of purchase price for the acquisition over fair
value of net assets acquired $848
Adjustment to reflect the net deferred tax benefit of
purchase accounting adjustments $306
Adjustments to other assets
$(45)
Liabilities
-----------
Adjustments to accounts payable and other liabilities:
Amounts allocated to restructuring costs
Severance and benefit payments for employees to
be terminated $(120)
Rent expense for excess or unused office space (65)
Lease payments for unused office and data
processing equipment and software (40)
Cost of relocating employees and other related
costs (25)
Adjustment to the liability for loss based
assessments for second injury funds (124)
Other (94)
----
Total adjustments $(468)
=====
C. Adjustment to eliminate the Aetna P&C stockholder's equity
D. The following pro forma adjustments reflect the Offerings:
Issuance of long-term debt (1) $946
Related issuance costs (10)
Issuance of common stock of TAP
Minority interest 544
Gain on sale of subsidiary stock 298
Issuance of TAP-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts holding
solely Junior Subordinated Debt Securities 900
Related issuance costs charged to additional paid-in
capital (23)
Related issuance costs charged to minority interest (5)
----
$2,650
======
Decrease in long-term debt due to repayment of
bridge financing $(2,650)
======
</TABLE>
(1) The Company may, subject to market conditions and other factors, issue
commercial paper or other short-term instruments in lieu of up to $600
of the long-term debt securities.
<PAGE>
Travelers Group Inc.
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 1995
(in millions of dollars, except per share amounts)
<TABLE><CAPTION>
Pro Forma Adjustments
Travelers ---------------------------
Group Aetna P&C for the for the Pro Forma
Historical Historical Transactions Offerings Combined
-------------------------------------------- ------------- -----------
Revenues
<S> <C> <C> <C> <C> <C>
Insurance premiums $4,977 $4,118 $9,095
Commissions and fees 2,874 2,874
Interest and dividends 4,355 902 ($35)(a) 5,222
Finance related interest and other charges 1,119 1,119
Principal transactions 1,016 1,016
Asset management fees 1,052 1,052
Other income 1,190 281 1,471
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 16,583 5,301 (35) 0 21,849
- --------------------------------------------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 5,017 4,232 9,249
Non-insurance compensation and benefits 3,442 3,442
Insurance underwriting, acquisition and operating 1,912 1,475 (10)(a) 3,377
Interest 1,956 261 (c) ($86)(e) 2,131
Provision for credit losses 171 171
Other operating 1,544 1,544
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 14,042 5,707 251 (86) 19,914
- --------------------------------------------------------------------------------------------------------------------------------
Loss on sale of subsidiaries and affiliates (20) (20)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest 2,521 (406) (286) 86 1,915
Provision for income taxes (tax benefits) 893 (163) (93)(g) 30 (g) 667
Minority interest, net of income taxes (5)(d) (48)(f) (53)
================================================================================================================================
Income (loss) from continuing operations $1,628 ($243) ($198) $8 $1,195
================================================================================================================================
Net income per share of common stock and
common stock equivalents:
Continuing operations $4.86 $3.50
================================================================================================================================
Weighted average common shares outstanding
and common stock equivalents (millions) 317.4 317.4
================================================================================================================================
See Accompanying Notes
<PAGE>
Travelers Group Inc.
Notes to Unaudited Pro Forma Condensed Combined Statement of Income
(in millions of dollars)
(a) Principal adjustments resulting from the allocation of purchase price based
on fair value of underlying net assets, as follows:
Increase (decrease)
in income before
federal income taxes
Interest and dividends:
Amortization of premium allocated to
investments on a level yield basis
over the life of the investments $(35)
=====
Insurance underwriting, acquisition and operating:
Amortization of liability for loss based
assessments for second injury funds $26
Amortization of excess of purchase
price over the fair value of net assets
acquired, over 40 years (21)
Other 5
---
$ 10
====
See Note B of Notes to the Unaudited Pro Forma Condensed Combined Statement
of Financial Position for additional information.
(b) No pro forma adjustment has been made to net investment income to reflect
the net investment income resulting from the capital contribution of $710
to TAP. If these proceeds were assumed to be invested in fixed maturities
at a rate of 6.5%, net investment income would increase by $46 ($30 after
tax). A 1/8% change in the assumed investment rate would change this amount
by approximately $1 ($1 after tax).
<PAGE>
(c) Pro forma adjustments to reflect interest expense relating to the
acquisition as follows:
Interest expense at 5.75% on bridge
financing including amortization of
issuance costs (a 1/8% change in the
assumed interest rate for these
borrowings would change interest
expense by approximately $3 ($2 after
tax)) $153
Interest expense at 7% on other long-term
debt including amortization of
issuance costs (a 1/8% change in the
assumed interest rate for these borrowings
would change interest expense by approximately
$1 ($1 after tax)) 64
Interest expense at 5.75% on short-term
borrowings (a 1/8% change in the
assumed interest rate for these borrowings
would change interest expense by $1 ($1
after tax)) 44
---
$261
====
(d) Pro forma adjustment to reflect minority interest resulting from the sale
of approximately 8% of TAP's common stock to private investors.
(e) Pro forma adjustments to reflect the change in interest expense resulting
from the Offerings:
Interest expense at 7% on long-term debt
including amortization of issuance costs
(a 1/8% change in the assumed interest
rate for these borrowings would change
interest expense by $1 ($1 after tax)) (1) $67
Reduction of interest expense at 5.75% for
repayment of bridge financing (153)
---
$(86)
====
(1) The Company may, subject to market conditions and other factors, issue
commercial paper or other short-term instruments in lieu of up to $600 of
long-term debt securities. At an assumed interest rate of 5.6%, pro forma
net income would be increased by $1 for each $100 of long-term debt
securities replaced by commercial paper.
<PAGE>
(f) Pro forma adjustment to reflect minority interest resulting from the sale
of an additional 9% of TAP's common stock in an initial public offering and
after tax preferred dividends of the TAP-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts holding solely Junior
Subordinated Debt Securities.
(g) Adjustment to reflect the income tax effects of (a), (b), (c) and (e)
above.
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 year ended December 31,
1995 are charges of $750 ($488 after tax) representing an addition to
environmental-related claims reserves in the second quarter of 1995 and $335
($218 after tax) representing an addition to asbestos reserves in the fourth
quarter of 1995.
As the Aetna P&C operations are integrated with the existing property and
casualty insurance operations of the Company, management of the Company expects
to realize, over a two-year period, $300 ($195 after tax) in annual cost savings
from reduction of overhead expenses, changes in the corporate infrastructure of
Aetna P&C and elimination of redundant expenses. There can be no assurance that
the Company will achieve its projected cost savings. These future cost savings
are not reflected in the Unaudited Pro Forma Financial Information.
The allocation of the purchase price to the assets and liabilities of Aetna P&C
is 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 differ from the amounts reflected herein. Adjustments of
insurance policy and claims reserves and certain other insurance accounts
resulting from the valuation of these accounts will be recorded in operations in
the period or periods determined. The Company is continuing to review the
insurance reserves of Aetna P&C, including the effect of applying the Company's
strategies, policies and practices in determining such reserves. Upon completion
of the reviews at this stage, it is possible that additional reserves of up to
approximately $750 in the aggregate may be recorded upon completion of these
reviews, which would result in after-tax charges to income of up to
approximately $488 in the aggregate, primarily relating to reserves for
cumulative injury claims, insurance products involving financial guarantees
based on the fair value of underlying collateral and certain insurance
receivables. Stockholders' equity would be correspondingly reduced by an
equivalent after-tax amount as a result of these charges. The Company believes
that its reviews are likely to be completed in 1996, although there can be no
assurance as to the ultimate timing thereof.
</TABLE>
