-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ie2hWKCYw99OIYBW9IQ3c3nWXIB/YH86+595iTW38hfU5VNGox1A2znhayVauPJk 5TuaeAuSf4rhjwbhJScx4Q== 0000950123-99-006956.txt : 19990730 0000950123-99-006956.hdr.sgml : 19990730 ACCESSION NUMBER: 0000950123-99-006956 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA INC CENTRAL INDEX KEY: 0001013761 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 020488491 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11913 FILM NUMBER: 99673347 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 8602738642 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the quarter ended June 30, 1999. or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-11913 Aetna Inc. (Exact name of registrant as specified in its charter) Connecticut 02-0488491 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue 06156 Hartford, Connecticut (ZIP Code) (Address of principal executive offices) (860) 273-0123 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Capital Stock (par value $.01) 140,963,577 (Class) Shares Outstanding at June 30, 1999
2 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Condensed Notes to Consolidated Financial Statements 7 Independent Auditors' Review Report 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 40 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 40 Item 4. Submission of Matters to a Vote of Security Holders. 41 Item 5. Other Information. 42 Item 6. Exhibits and Reports on Form 8-K. 43 Signatures 44
Page 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Millions, except per common share data) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Revenue: Premiums $4,580.5 $3,279.1 $ 8,961.9 $6,517.7 Net investment income 725.0 822.8 1,465.7 1,635.5 Fees and other income 634.1 553.6 1,191.0 1,104.1 Net realized capital gains 9.8 172.6 26.9 204.3 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenue 5,949.4 4,828.1 11,645.5 9,461.6 - ---------------------------------------------------------------------------------------------------------------------------------- Benefits and expenses: Current and future benefits 4,352.9 3,270.7 8,487.9 6,541.3 Operating expenses 1,080.6 908.4 2,119.4 1,786.6 Interest expense 64.1 56.5 128.7 113.4 Amortization of goodwill and other acquired intangible assets 105.7 96.9 213.4 193.1 Amortization of deferred policy acquisition costs 51.7 62.8 101.7 115.2 Reduction of reserve for loss on discontinued products (77.2) -- (77.2) -- - ---------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 5,577.8 4,395.3 10,973.9 8,749.6 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 371.6 432.8 671.6 712.0 Income taxes (benefits): Current 52.6 174.5 163.1 306.0 Deferred 91.8 (7.4) 101.9 (27.2) - ---------------------------------------------------------------------------------------------------------------------------------- Total income taxes 144.4 167.1 265.0 278.8 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 227.2 $ 265.7 $ 406.6 $ 433.2 ================================================================================================================================== Net income applicable to common ownership $ 213.4 $ 251.8 $ 379.0 $ 405.4 ================================================================================================================================== Results per common share: Basic $ 1.51 $ 1.74 $ 2.69 $ 2.79 Diluted 1.50 1.69 2.66 2.75 Dividends declared $ .20 $ .20 $ .40 $ .40 - ----------------------------------------------------------------------------------------------------------------------------------
See Condensed Notes to Consolidated Financial Statements. Page 3 4 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, (Millions) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Assets: Investments: Debt securities available for sale, at fair value (amortized cost $29,830.0 and $30,730.1) $ 29,826.8 $ 32,180.8 Equity securities, at fair value (cost $824.4 and $762.6) 879.6 800.5 Short-term investments 803.8 942.2 Mortgage loans 3,440.1 3,553.0 Real estate 311.1 270.3 Policy loans 498.7 458.7 Other 1,373.5 1,264.5 - ---------------------------------------------------------------------------------------------------------------------------- Total investments 37,133.6 39,470.0 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 2,086.1 1,951.5 Short-term investments under securities loan agreement 1,139.4 753.6 Accrued investment income 476.9 537.1 Premiums due and other receivables 1,724.3 1,478.1 Reinsurance recoverables 4,006.2 3,897.2 Deferred income taxes 337.4 53.0 Deferred policy acquisition costs 1,975.5 1,768.6 Goodwill and other acquired intangible assets 9,189.7 9,155.3 Other assets 946.0 1,111.9 Separate Accounts assets 48,690.2 44,971.8 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 107,705.3 $ 105,148.1 ============================================================================================================================ Liabilities: Future policy benefits $ 18,716.5 $ 18,541.1 Unpaid claims 3,888.5 3,953.9 Unearned premiums 217.9 428.9 Policyholders' funds left with the Company 16,609.6 17,632.5 - ---------------------------------------------------------------------------------------------------------------------------- Total insurance liabilities 39,432.5 40,556.4 - ---------------------------------------------------------------------------------------------------------------------------- Dividends payable to shareholders 35.1 35.2 Short-term debt 867.5 1,063.4 Long-term debt 2,487.7 2,521.2 Payables under securities loan agreement 1,139.4 753.6 Current income taxes 234.0 444.8 Other liabilities 3,119.6 3,025.2 Minority and participating policyholders' interests 162.9 148.4 Separate Accounts liabilities 48,675.5 44,936.0 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 96,154.2 93,484.2 - ---------------------------------------------------------------------------------------------------------------------------- Aetna-obligated mandatorily redeemable preferred securities of subsidiary limited liability company holding primarily debentures guaranteed by Aetna 275.0 275.0 - ---------------------------------------------------------------------------------------------------------------------------- Commitments and Contingent Liabilities (Notes 3 and 11) Shareholders' Equity: Class C voting mandatorily convertible preferred stock ($.01 par value; 15,000,000 shares authorized; 11,613,040 in 1999 and 11,614,816 in 1998 issued and outstanding) 862.0 862.1 Common stock ($.01 par value; 500,000,000 shares authorized; 140,963,577 in 1999 and 141,272,628 in 1998 issued and outstanding) 3,263.0 3,292.4 Accumulated other comprehensive income (loss) (228.2) 177.8 Retained earnings 7,379.3 7,056.6 - ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 11,276.1 11,388.9 ============================================================================================================================ Total liabilities, redeemable preferred securities and shareholders' equity $ 107,705.3 $ 105,148.1 ============================================================================================================================ Shareholders' equity per common share $ 73.88 $ 74.51 ============================================================================================================================
See Condensed Notes to Consolidated Financial Statements. Page 4 5 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive Income (Loss) Class C Voting ------------------------------ Mandatorily Unrealized (Millions, except share data) Convertible Common Gains (Losses) Foreign Retained Six Months Ended June 30, 1999 Total Preferred Stock Stock on Securities Currency Earnings - ------------------------------------------------------------------------------------------------------------------------- ------- Balances at December 31, 1998 $11,388.9 $862.1 $3,292.4 $387.2 $(209.4) $7,056.6 Comprehensive income: Net income 406.6 406.6 Other comprehensive loss, net of tax: Unrealized losses on securities ($(503.4) pretax) (1) (327.2) (327.2) Foreign currency ($(121.0) pretax) (78.8) (78.8) ---------- Other comprehensive loss (406.0) ---------- Total comprehensive income .6 ========== Common stock issued for benefit plans (569,495 shares) 42.5 42.5 Repurchase of common shares (880,000 shares) (72.0) (72.0) Conversion of preferred securities (1,776 preferred shares converted to 1,454 common shares) - (.1) .1 Common stock dividends (56.3) (56.3) Preferred stock dividends (27.6) (27.6) - --------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 1999 $11,276.1 $862.0 $3,263.0 $ 60.0 $(288.2) $7,379.3 ================================================================================================================================= Six Months Ended June 30, 1998 - --------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 $11,195.4 $865.4 $3,644.4 $504.1 $(197.0 $6,378.5 Comprehensive income: Net income 433.2 433.2 Other comprehensive loss, net of tax: Unrealized losses on securities ($(52.6) pretax) (1) (34.2) (34.2) Foreign currency ($(37.0) pretax) (24.1) (24.1) ---------- Other comprehensive loss (58.3) ---------- Total comprehensive income 374.9 ========== Common stock issued for benefit plans (432,469 shares) 26.2 26.2 Repurchase of common shares (1,891,700 shares) (150.5) (150.5) Conversion of preferred securities (40,211 preferred shares converted to 32,952 common shares) - (3.3) 3.3 Common stock dividends (57.7) (57.7) Preferred stock dividends (27.8) (27.8) - --------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 1998 $11,360.5 $862.1 $3,523.4 $469.9 $(221.1) $6,726.2 =================================================================================================================================
(1) Net of reclassification adjustments. See Condensed Notes to Consolidated Financial Statements. Page 5 6 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (Millions) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 406.6 $ 433.2 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization (including investment discounts and premiums) 217.7 245.1 --------- --------- Cash flows provided by operating activities before net realized capital gains and changes in assets and liabilities 624.3 678.3 Net realized capital gains (26.9) (204.3) --------- --------- Cash flows provided by operating activities before changes in assets and liabilities 597.4 474.0 Changes in assets and liabilities: Decrease in accrued investment income 61.1 9.9 Increase in premiums due and other receivables (98.2) (162.6) Increase in deferred policy acquisition costs (202.8) (135.0) Decrease in income taxes (274.1) (162.7) Net decrease (increase) in other assets and other liabilities 119.7 (90.8) Increase (decrease) in insurance liabilities (including run-off liabilities funded by investing activities below) 73.6 (6.7) Other, net 28.4 (17.4) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 305.1 (91.3) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sales of: Debt securities available for sale 8,324.2 10,093.3 Equity securities 213.9 480.2 Mortgage loans 36.6 59.5 Real estate 40.9 125.0 Other investments 260.0 220.4 Short-term investments 8,231.9 10,886.8 Investment maturities and repayments of: Debt securities available for sale 1,525.5 2,202.1 Mortgage loans 191.8 569.0 Cost of investments in: Debt securities available for sale (9,095.6) (11,457.4) Equity securities (216.6) (291.7) Mortgage loans (134.7) (110.9) Real estate (41.7) (20.2) Other investments (663.0) (470.6) Short-term investments (8,060.7) (10,705.8) Increase in property and equipment (11.3) (82.7) Net decrease in Separate Accounts 17.8 2.8 Other, net (28.1) 84.0 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 590.9 1,583.8 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Deposits and interest credited for investment contracts 1,386.9 869.6 Withdrawals of investment contracts (1,744.8) (1,758.2) Repayment of long-term debt (30.0) (140.8) Net decrease in short-term debt (194.6) (21.3) Common stock issued under benefit plans 42.5 26.2 Common stock acquired (72.0) (150.5) Dividends paid to shareholders (84.1) (85.8) Other, net (64.5) -- - ------------------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (760.6) (1,260.8) - ------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (.8) (6.1) - ------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 134.6 225.6 Cash and cash equivalents, beginning of period 1,951.5 1,805.8 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,086.1 $ 2,031.4 =============================================================================================================================== Supplemental cash flow information: Interest paid $ 117.7 $ 99.6 Income taxes paid 374.5 392.6 - -------------------------------------------------------------------------------------------------------------------------------
See Condensed Notes to Consolidated Financial Statements. Page 6 7 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include Aetna Inc. and its majority-owned subsidiaries (collectively, the "Company"), including Aetna Services, Inc. ("Aetna Services") and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare"). Less than majority-owned entities, in which the Company has at least a 20% interest, are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to the 1998 financial information to conform to the 1999 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as presented in Aetna Inc.'s 1998 Annual Report on Form 10-K. Certain financial information that is normally included in annual financial statements prepared in accordance with generally accepted accounting principles, but that is not required for interim reporting purposes, has been condensed or omitted. New Accounting Standard On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, issued by the American Institute of Certified Public Accountants ("AICPA"). This statement provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund and other insurance-related assessments and guidance for measuring the liability. The adoption of this standard did not have a material effect on the Company's financial position or results of operations, as the Company had previously accounted for guaranty-fund and other insurance-related assessments in a manner consistent with this standard. Future Accounting Standards In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which provides guidance on how to account for all insurance and reinsurance contracts that do not transfer insurance risk, except for long-duration life and health insurance contracts. This statement is effective for the Company's financial statements beginning January 1, 2000, with early adoption permitted. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations. In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. As amended by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, this standard is effective for the Company's financial statements beginning January 1, 2001, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard and the potential effect on its financial position and results of operations. Page 7 8 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) EARNINGS PER COMMON SHARE A reconciliation of the numerator and denominator of the basic and diluted earnings per common share ("EPS") for the three and six months ended June 30, was as follows:
Three Months Ended June 30, Income Shares Per Common (Millions, except per common share data) (Numerator) (Denominator) Share Amount - ----------------------------------------------------------------------------------------------------------------------- 1999 Net income $ 227.2 Less: preferred stock dividends 13.8 -------- Basic EPS Income applicable to common ownership 213.4 140.9 $ 1.51 -------- Effect of dilutive securities: Stock options and other (1) 1.3 Convertible preferred stock 13.8 9.5 -------- -------- Diluted EPS Income applicable to common ownership and assumed conversions $227.2 151.7 $ 1.50 - ----------------------------------------------------------------------------------------------------------------------- 1998 Net income $ 265.7 Less: preferred stock dividends 13.9 -------- Basic EPS Income applicable to common ownership 251.8 145.1 $ 1.74 -------- Effect of dilutive securities: Stock options and other (1) 1.2 Convertible preferred stock 13.9 11.1 -------- -------- Diluted EPS Income applicable to common ownership and assumed conversions $ 265.7 157.4 $ 1.69 =======================================================================================================================
Six Months Ended June 30 Income Shares Per Common (Millions, except per common share data) (Numerator) (Denominator) Share Amount - ----------------------------------------------------------------------------------------------------------------------- 1999 (2) Net income $ 406.6 Less: preferred stock dividends 27.6 ------ Basic EPS Income applicable to common ownership $ 379.0 141.1 $ 2.69 -------- -------- Effect of dilutive securities: Stock options and other (3) 1.2 ----- Diluted EPS Income applicable to common ownership and assumed conversions $ 379.0 142.3 $ 2.66 - ----------------------------------------------------------------------------------------------------------------------- 1998 Net income $433.2 Less: preferred stock dividends 27.8 ------ Basic EPS Income applicable to common ownership 405.4 145.3 $ 2.79 -------- Effect of dilutive securities: Stock options and other (3) 1.2 Convertible preferred stock 27.8 11.2 ------ ----- Diluted EPS Income applicable to common ownership and assumed conversions $ 433.2 157.7 $ 2.75 =======================================================================================================================
(1) Options to purchase shares of common stock for the three months ended June 30, 1999 and 1998 of 2.2 million and 3.6 million, respectively (with exercise prices ranging from $80.25 - $112.63), were not included in the calculation of diluted earnings per common share because the options' exercise price was greater than the average market price of common shares. (2) The issuable common stock related to Class C voting mandatorily convertible preferred stock (9.5 million weighted average shares) was not included in the computation of diluted earnings per common share for the six months ended June 30, 1999 because to do so would be antidilutive. (3) Options to purchase shares of common stock for the six months ended June 30, 1999 and 1998 of 5.4 million and 2.6 million, respectively (with exercise prices ranging from $80.25 - $112.63), were not included in the calculation of diluted earnings per common share because the options' exercise price was greater than the average market price of common shares. Page 8 9 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) ACQUISITIONS AND DISPOSITIONS Aetna U.S. Healthcare On December 9, 1998, the Company entered into definitive agreements with The Prudential Insurance Company of America ("Prudential") to acquire the Prudential health care business ("PHC") for approximately $1 billion. The Company expects to secure remaining regulatory approval and close the transaction during the third quarter. The Company expects to finance the transaction by issuing $500 million of three-year senior notes to Prudential and by using funds made available from the issuance of commercial paper. The Company may ultimately replace this commercial paper with medium- or long-term fixed income securities. As part of the transaction, the Company has agreed to service Prudential's administrative services only contracts following the closing. In connection with the transaction, the Company reached an agreement with the U.S. Department of Justice and the State of Texas that will result in the divestiture of certain Texas HMO/POS and other related business acquired by Aetna as part of the 1998 acquisition of New York Life Insurance Company's ("NYL") health care business ("NYLCare"). The agreement primarily affects approximately 260,000 NYLCare commercial HMO/POS members in the Houston market and approximately 167,000 NYLCare commercial HMO/POS members in the Dallas/Ft. Worth market, as well as related management, operating systems and other assets. The Company has begun this divestiture process. The financial impact of the divestiture will depend on the ultimate sales price relative to the book value of the businesses to be sold and will be assessed as the process is completed. As part of the transaction, the Company and Prudential have entered into a reinsurance agreement for which the Company will pay a premium. Under the agreement, Prudential will indemnify the Company from insurance risk which may arise following the closing and reimburse the Company for a large portion of medical costs of PHC in excess of certain threshold medical loss ratio levels through the year 2000. Prudential will also pay the Company certain supplemental fees related to the administrative service contracts to be serviced by the Company following the closing. These fees are fixed in amount and decline over a period ending 18 months following the closing. On July 15, 1998, the Company acquired NYLCare for a purchase price of $1.05 billion in cash, subject to adjustment as provided in the transaction agreements. The acquisition was accounted for as a purchase. Originally, in addition to the cash purchase price, payments totaling up to $300 million (up to $150 million in each of two years) were potentially payable to the extent that predetermined earnings and membership targets in future periods were achieved (the "Earnout"). On January 29, 1999, the Company and NYL agreed to resolve all purchase price adjustments and obligations under the Earnout. Under this agreement, the Company paid NYL an additional $50 million to resolve such matters. As a result, the total purchase price is approximately $1.1 billion. The excess of the purchase price over the fair value of the net assets acquired resulted in approximately $1.15 billion, net of related deferred taxes, being allocated to goodwill and other acquired intangible assets, which is being amortized over a 40-year period for goodwill and over a range of three to 20 years for other acquired intangible assets. The Company's consolidated results of operations include the NYLCare health business from July 15, 1998. Aetna Retirement Services On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln National Corporation ("Lincoln") for $1 billion in cash, subject to adjustment as provided by the related agreements. The transaction was generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. Assets related to and supporting the life policies were transferred to Lincoln and the Company recorded a reinsurance receivable from Lincoln. The transaction resulted in an after-tax gain on the sale of approximately $152 million, of which $88 million was deferred and is being recognized over approximately 15 years. Premiums ceded and reinsurance recoveries made during 1999 totaled $284.7 million and $216.0 million, respectively. Page 9 10 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) ACQUISITIONS AND DISPOSITIONS (CONTINUED) Aetna International On April 18, 1999, Aetna International, Inc. entered into a definitive agreement to sell its Canadian operations to John Hancock Canadian Holdings Limited, the parent of The Maritime Life Assurance Company, for approximately $300 million in cash. The sale will result in a capital loss which is not expected to be material. The revenue and earnings of its Canadian operations are not material to the Company. Completion of the sale, which is anticipated to occur in the fall of 1999, is subject to the Canadian federal and other regulatory approvals and other customary conditions. On February 16, 1999, the Company entered into a joint venture with Poland's sixth-largest bank for a 40% ownership interest in a company that sells pension products throughout Poland following the reform and privatization of Poland's pension sector, effective March 1, 1999. On January 13, 1999, the Company acquired Asistencia Medica Social Argentina, Argentina's largest HMO, for approximately $100 million. (4) REDEMPTION OF CONVERTIBLE PREFERRED STOCK On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of the Preferred Stock received .8197 shares of Aetna common stock for each share of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna common stock were issued as part of the redemption. Also, on May 25, 1999, the Company's Board of Directors declared a cash dividend of $.84583 per share of 6.25% Class C Voting Mandatorily Convertible Preferred Stock to shareholders of record at the close of business on July 8, 1999, payable July 19, 1999. (5) INVESTMENTS Net investment income includes amounts allocable to experience-rated contractholders of $257 million and $306 million for the three months ended June 30, 1999 and 1998, respectively, and $513 million and $621 million for the six months ended June 30, 1999 and 1998, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains allocable to experience-rated contractholders of $3 million and $64 million for the three months ended June 30, 1999 and 1998, respectively, and $9 million and $72 million for the six months ended June 30, 1999 and 1998, respectively, were deducted from net realized capital gains as reflected on the Consolidated Statements of Income, and an offsetting amount is reflected on the Consolidated Balance Sheets in policyholders' funds left with the Company. The total recorded investment in mortgage loans that are considered to be impaired (including problem loans, restructured loans and potential problem loans) and related specific reserves are presented in the table below.
June 30, 1999 December 31, 1998 --------------------------- ---------------------------- Total Total Recorded Specific Recorded Specific (Millions) Investment Reserves Investment Reserves - ------------------------------------------------------------------------------------------------------------------------- Supporting discontinued products $157.8 $22.3 $161.9 $22.9 Supporting experience-rated products 93.4 19.1 95.7 21.7 Supporting remaining products 42.1 2.4 43.6 3.2 - ------------------------------------------------------------------------------------------------------------------------- Total impaired loans $293.3(1) $43.8 $301.2(1) $47.8 =========================================================================================================================
(1) Includes impaired loans of $100.0 million and $96.0 million at June 30, 1999 and December 31, 1998, respectively, for which no specific reserves are considered necessary. Page 10 11 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) INVESTMENTS (CONTINUED) The activity in the specific and general reserves for the six months ended June 30, 1999 and 1998 is summarized below:
Supporting Supporting Experience- Supporting Discontinued Rated Remaining (Millions) Products Products Products Total - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $29.5 $29.6 $ 7.8 $ 66.9 Charged to other accounts - - 1.4 1.4 Principal write-offs (.6) (4.4) (.2) (5.2) - ------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1999 $28.9 $25.2 $ 9.0 $ 63.1(1) ========================================================================================================================= Balance at December 31, 1997 $68.7 $31.6 $14.2 $114.5 Credited to net realized capital losses - - (2.0) (2.0) Charged (credited) to other accounts (30.0) (2.0) 5.3 (26.7) Principal write-offs (.4) (2.0) (.6) (3.0) - ------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 $38.3 $27.6 $16.9 $ 82.8(1) =========================================================================================================================
(1) Total reserves at June 30, 1999 and 1998 include $43.8 million and $47.5 million of specific reserves, respectively, and $19.3 million and $35.3 million of general reserves, respectively. Income earned (pretax) and cash received on the average recorded investment in impaired loans was as follows:
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999 --------------------------------- ----------------------------------- Average Average Impaired Income Cash Impaired Income Cash (Millions) Loans Earned Received Loans Earned Received - ---------------------------------------------------------------------------------------------------------------------- Supporting discontinued products $158.2 $3.3 $3.3 $159.4 $ 6.0 $ 6.0 Supporting experience-rated products 95.5 2.4 2.4 93.9 4.3 4.2 Supporting remaining products 28.6 2.4 2.3 34.8 3.1 2.8 - ---------------------------------------------------------------------------------------------------------------------- Total $282.3 $8.1 $8.0 $288.1 $13.4 $13.0 ======================================================================================================================
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998 --------------------------------- ----------------------------------- Average Average Impaired Income Cash Impaired Income Cash (Millions) Loans Earned Received Loans Earned Received - ---------------------------------------------------------------------------------------------------------------------- Supporting discontinued products $167.0 $3.3 $3.3 $180.2 $ 6.5 $ 6.8 Supporting experience-rated products 107.7 1.6 1.7 108.7 4.1 4.1 Supporting remaining products 51.4 .8 .6 56.6 1.7 1.6 - ---------------------------------------------------------------------------------------------------------------------- Total $326.1 $5.7 $5.6 $345.5 $ 12.3 $ 12.5 ======================================================================================================================
Page 11 12 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) SUPPLEMENTAL CASH FLOW INFORMATION Significant noncash investing and financing activities included acquisition of real estate through foreclosures of mortgage loans amounting to $8 million and $4 million for the six months ended June 30, 1999 and 1998, respectively. (7) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Changes in accumulated other comprehensive income (loss) related to changes in unrealized gains (losses) on securities (excluding those related to experience-rated contractholders and discontinued products) were as follows:
Six Months Ended June 30, (Millions) 1999 1998 - --------------------------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the period (1) $(270.1) $167.4 Less: reclassification adjustment for gains and other items included in net income (2) 57.1 201.6 - --------------------------------------------------------------------------------------------------------------- Net unrealized losses on securities $(327.2) $(34.2) ===============================================================================================================
(1) Pretax unrealized holding gains (losses) arising during the period were $(415.6) million and $257.6 million for 1999 and 1998, respectively. (2) Pretax reclassification adjustments for gains and other items included in net income were $87.8 million and $310.2 million for 1999 and 1998, respectively. (8) DISCONTINUED PRODUCTS The Company discontinued the sale of its fully guaranteed large case pension products (single-premium annuities ("SPAs") and guaranteed investment contracts ("GICs")) in 1993. Under the Company's accounting for these discontinued products, a reserve for anticipated future losses from these products was established and the reserve is reviewed by management quarterly. As long as the reserve continues to represent management's then best estimate of expected future losses, results of operations of the discontinued products, including net realized capital gains and losses, are credited/charged to the reserve and do not affect the Company's results of operations. As a result of management's review in the second quarter of 1999, $77 million (pretax) of the reserve was released primarily due to favorable investment performance. The current reserve reflects management's best estimate of anticipated future losses. The Company's results of operations would be adversely affected to the extent that future losses on the products are greater than anticipated and positively affected to the extent that future losses are less than anticipated. (Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K for a more complete discussion of the reserve for anticipated future losses on discontinued products.) At the time of discontinuance, a receivable from Large Case Pensions' continuing products equivalent to the net present value of the anticipated cash flow shortfalls was established for the discontinued products. Interest on the receivable is accrued at the discount rate which was used to calculate the loss on discontinuance. The offsetting payable, on which interest is similarly accrued, is reflected in continuing products. Interest on the payable generally offsets the investment income on the assets available to fund the shortfall. At June 30, 1999, the receivable from continuing products, net of related deferred taxes payable of $61 million on the accrued interest income, was $454 million. The receivable is eliminated in consolidation. Page 12 13 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) DISCONTINUED PRODUCTS (CONTINUED) Results of discontinued products were as follows (pretax, in millions):
Charged (Credited) to Reserve for Three months ended June 30, 1999 Results Future Losses Net (1) - ------------------------------------------------------------------------------------------------------------ Net investment income $121.7 $ -- $121.7 Net realized capital gains 8.1 (8.1) -- Interest earned on receivable from continuing products 8.5 -- 8.5 Other income 4.9 -- 4.9 - ------------------------------------------------------------------------------------------------------------ Total revenue 143.2 (8.1) 135.1 - ------------------------------------------------------------------------------------------------------------ Current and future benefits 126.9 5.1 132.0 Operating expenses 3.1 -- 3.1 - ------------------------------------------------------------------------------------------------------------ Total benefits and expenses 130.0 5.1 135.1 - ------------------------------------------------------------------------------------------------------------ Results of discontinued products $ 13.2 $(13.2) $ -- ============================================================================================================ Three months ended June 30, 1998 - ------------------------------------------------------------------------------------------------------------ Net investment income $134.9 $ -- $134.9 Net realized capital gains 9.9 (9.9) -- Interest earned on receivable from continuing products 8.7 -- 8.7 Other income 10.5 -- 10.5 - ------------------------------------------------------------------------------------------------------------ Total revenue 164.0 (9.9) 154.1 - ------------------------------------------------------------------------------------------------------------ Current and future benefits 143.0 6.9 149.9 Operating expenses 4.2 -- 4.2 - ------------------------------------------------------------------------------------------------------------ Total benefits and expenses 147.2 6.9 154.1 - ------------------------------------------------------------------------------------------------------------ Results of discontinued products $ 16.8 $(16.8) $ -- ============================================================================================================
Charged (Credited) to Reserve for Six months ended June 30, 1999 Results Future Losses Net (1) - ------------------------------------------------------------------------------------------------------------ Net investment income $243.8 $ -- $243.8 Net realized capital gains 18.3 (18.3) -- Interest earned on receivable from continuing products 16.9 -- 16.9 Other income 15.3 -- 15.3 - ------------------------------------------------------------------------------------------------------------ Total revenue 294.3 (18.3) 276.0 - ------------------------------------------------------------------------------------------------------------ Current and future benefits 257.1 12.4 269.5 Operating expenses 6.5 -- 6.5 - ------------------------------------------------------------------------------------------------------------ Total benefits and expenses 263.6 12.4 276.0 - ------------------------------------------------------------------------------------------------------------ Results of discontinued products $ 30.7 $(30.7) $ -- ============================================================================================================ Six months ended June 30, 1998 - ------------------------------------------------------------------------------------------------------------ Net investment income $272.6 $ -- $272.6 Net realized capital gains 75.0 (75.0) -- Interest earned on receivable from continuing products 17.3 -- 17.3 Other income 16.4 -- 16.4 - ------------------------------------------------------------------------------------------------------------ Total revenue 381.3 (75.0) 306.3 - ------------------------------------------------------------------------------------------------------------ Current and future benefits 290.5 8.5 299.0 Operating expenses 7.3 -- 7.3 - ------------------------------------------------------------------------------------------------------------ Total benefits and expenses 297.8 8.5 306.3 - ------------------------------------------------------------------------------------------------------------ Results of discontinued products $ 83.5 $(83.5) $ -- ============================================================================================================
(1) Amounts are reflected in the June 30, 1999 and 1998 Consolidated Statements of Income, except for interest earned on the receivable from continuing products, which is eliminated in consolidation. Page 13 14 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) DISCONTINUED PRODUCTS (CONTINUED) Assets and liabilities of discontinued products at June 30, 1999 were as follows (1):
(Millions) - --------------------------------------------------------------------------- Debt securities available for sale $5,104.2 Mortgage loans 756.7 Real estate 103.6 Short-term and other investments 561.5 - --------------------------------------------------------------------------- Total investments 6,526.0 Current and deferred income taxes 167.0 Receivable from continuing products (2) 514.7 - --------------------------------------------------------------------------- Total assets $7,207.7 =========================================================================== Future policy benefits $4,605.9 Policyholders' funds left with the Company 1,186.7 Reserve for anticipated future losses on discontinued products 1,167.6 Other 247.5 - --------------------------------------------------------------------------- Total liabilities $7,207.7 ===========================================================================
(1) Assets supporting the discontinued products are distinguished from other continuing operations assets. (2) The receivable from continuing products is eliminated in consolidation. Net unrealized capital gains on available-for-sale debt securities are included above in other liabilities and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses is included in future policy benefits on the Consolidated Balance Sheets. The activity in the reserve for anticipated future losses on discontinued products for the six months ended June 30, 1999 was as follows (pretax):
(Millions) - ----------------------------------------------------------------------- Reserve at December 31, 1998 $1,214.1 Results of discontinued products 30.7 Reserve reduction (77.2) - ----------------------------------------------------------------------- Reserve at June 30, 1999 $1,167.6 =======================================================================
(9) DEBT AND GUARANTEE OF DEBT SECURITIES Aetna Inc. has fully and unconditionally guaranteed the payment of all principal, premium, if any, and interest on all outstanding debt securities of Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024 (the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a wholly owned subsidiary of Aetna Services (collectively the "Aetna Services Debt"). ACLLC has issued $275 million of redeemable preferred stock, and the Subordinated Debentures represent substantially all of the assets of ACLLC. Aetna Services has a revolving credit facility in an aggregate amount of $1.5 billion with a worldwide group of banks. This credit facility terminates in June 2001. Various interest rate options are available under the facility and any borrowings mature on the expiration date of the applicable credit commitment. Aetna Services pays facility fees ranging from .065% to .2% per annum, depending upon its long-term senior unsecured debt rating. The facility fee at June 30, 1999 is at an annual rate of .08%. The facility also supports Aetna Services' commercial paper borrowing program. As a guarantor of any amounts outstanding under the credit facility, Aetna Inc. is required to maintain shareholders' equity, excluding net unrealized capital gains and losses (accumulated other comprehensive income), of at least $7.5 billion. Page 14 15 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) DEBT AND GUARANTEE OF DEBT SECURITIES (CONTINUED) On April 1, 1999 Aetna Services entered into an additional revolving credit facility in an aggregate amount of $500 million with a worldwide group of banks. This credit facility terminates on March 26, 2000. Various interest rate options are available under the facility and any borrowings mature on the expiration date of the applicable credit commitment. Aetna Services pays facility fees ranging from .065% to .25% per annum, depending upon its long-term senior unsecured debt rating. The facility fee at June 30, 1999 is at an annual rate of .08%. The facility also supports Aetna Services' commercial paper borrowing program. As a guarantor of any amounts outstanding under this credit facility, Aetna Inc. is required to maintain shareholders' equity, excluding net unrealized capital gains and losses (accumulated other comprehensive income), of at least $7.5 billion. Consolidated financial statements of Aetna Services have not been presented herein or in any separate reports filed with the Securities and Exchange Commission because management has determined that such financial statements would not be material to holders of the Aetna Services Debt. Summarized consolidated financial information for Aetna Services is as follows (in millions): Balance Sheets Information:
June 30, December 31, 1999 1998 - ---------------------------------------------------------------------------------------------------- Total investments (excluding Separate Accounts) $35,371.7 $38,313.9 Total assets 95,445.9 93,190.9 Total insurance liabilities 37,670.1 38,566.9 Total liabilities 93,176.5 90,770.3 Total redeemable preferred stock 275.0 275.0 Total shareholder's equity 1,994.4 2,145.6 - ----------------------------------------------------------------------------------------------------
Statements of Income Information: Three Months Ended Six Months Ended June 30, 1999 June 30, 1999 - ---------------------------------------------------------------------------------------------------- Total revenue $2,797.1 $5,450.3 Total benefits and expenses 2,512.1 4,977.3 Income before income taxes 285.1 473.0 Net income 187.7 316.2 - ----------------------------------------------------------------------------------------------------
The amount of dividends which may be paid to Aetna Services or Aetna U.S. Healthcare by their domestic insurance and HMO subsidiaries at June 30, 1999 without prior approval by state regulatory authorities is limited to approximately $332 million in the aggregate. There are no such restrictions on distributions from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on distributions from Aetna Inc. to its shareholders. Page 15 16 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) SEGMENT INFORMATION Summarized financial information for the Company's principal operations for the three and six months ended June 30, was as follows:
Aetna Three months ended June 30, Aetna U.S. Retirement Aetna Large Case Corporate Total (Millions) Healthcare Services International Pensions and Other(1) Company - ------------------------------------------------------------------------------------------------------------------------------- 1999 Revenues from external customers $4,344.0 $163.0 $674.2 $ 33.3 $ .1 $5,214.6 Net investment income 138.5 213.8 97.1 258.3 1.3 709.0 Equity in subsidiaries -- -- 16.0 -- -- 16.0 - ------------------------------------------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains (losses) $4,482.5 $376.8 $787.3 $291.6 $ 1.4 $5,939.6 =============================================================================================================================== Operating earnings (2) $ 134.5 $ 56.3 $ 50.0 $ 21.7 $ (60.2) $ 202.3 Unusual items (3) (20.7) (5.4) (4.6) 50.1 (.9) 18.5 Realized capital gains (losses), net (8.4) .6 3.5 13.2 (2.5) 6.4 of tax - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 105.4 $ 51.5 $ 48.9 $ 85.0 $ (63.6) $ 227.2 =============================================================================================================================== 998 Revenues from external customers $3,199.1 $204.8 $394.3 $ 34.1 $ .4 $3,832.7 Net investment income 131.6 268.8 94.9 301.7 1.4 798.4 Equity in subsidiaries -- -- 24.4 -- -- 24.4 - ------------------------------------------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains (losses) $3,330.7 $473.6 $513.6 $335.8 $ 1.8 $4,655.5 =============================================================================================================================== Operating earnings (losses) (2) $ 104.6 $ 72.0 $ 40.7 $ 22.2 $ (62.0) $ 177.5 Unusual item (3) (15.6) (5.1) (1.1) (.3) (2.4) (24.5) Realized capital gains, net of tax 21.5 6.5 5.4 9.1 70.2 112.7 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 110.5 $ 73.4 $ 45.0 $ 31.0 $ 5.8 $ 265.7 ===============================================================================================================================
(1) Corporate and Other includes interest, staff area expenses, advertising, contributions, net investment income and other general expenses, as well as consolidating adjustments. (2) Operating earnings are comprised of net income (loss) excluding net realized capital gains and losses and unusual items. (3) Unusual items include Year 2000 costs for all segments in 1998 and 1999 and an after-tax benefit of $50.2 million from reductions of the reserve for anticipated future losses on discontinued products in the Large Case Pensions segment in 1999. Page 16 17 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) SEGMENT INFORMATION (CONTINUED)
Aetna Six months ended June 30, Aetna U.S. Retirement Aetna Large Case Corporate Total (Millions) Healthcare Services International Pensions and Other(1) Company - --------------------------------------------------------------------------------------------------------------------------------- 1999 Revenues from external customers $8,648.4 $318.3 $1,119.4 $ 66.4 $ .4 $10,152.9 Net investment income 279.2 429.2 191.6 514.9 4.3 1,419.2 Equity in subsidiaries -- -- 46.5 -- -- 46.5 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains (losses) $8,927.6 $747.5 $1,357.5 $ 581.3 $ 4.7 $11,618.6 ================================================================================================================================= Operating earnings (2) $ 268.0 $109.3 $ 95.6 $ 44.2 $ (119.7) $ 397.4 Unusual items (3) (38.2) (11.1) (7.2) 49.9 (1.8) (8.4) Realized capital gains (losses), net of tax (3.7) 2.5 2.1 19.2 (2.5) 17.6 - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 226.1 $100.7 $ 90.5 $113.3 $ (124.0) $ 406.6 ================================================================================================================================= 1998 Revenues from external customers $6,389.1 $407.8 $ 745.5 $ 78.7 $ .7 $ 7,621.8 Net investment income 253.3 536.4 182.7 605.4 2.8 1,580.6 Equity in subsidiaries -- -- 54.9 -- -- 54.9 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains (losses) $6,642.4 $944.2 $ 983.1 $684.1 $ 3.5 $ 9,257.3 ================================================================================================================================= Operating earnings (losses) (2) $ 205.1 $135.8 $ 78.2 $ 44.8 $ (123.5) $ 340.4 Unusual item (3) (24.4) (9.2) (2.8) (.4) (4.0) (40.8) Realized capital gains (losses), net of tax 28.6 5.1 (2.4) 33.8 68.5 133.6 - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 209.3 $131.7 $ 73.0 $ 78.2 $ (59.0) $ 433.2 =================================================================================================================================
(1) Corporate and Other includes interest, staff area expenses, advertising, contributions, net investment income and other general expenses, as well as consolidating adjustments. (2) Operating earnings are comprised of net income (loss) excluding net realized capital gains and losses and unusual items. (3) Unusual items include Year 2000 costs for all segments in 1998 and 1999 and an after-tax benefit of $50.2 million from reductions of the reserve for anticipated future losses on discontinued products in the Large Case Pensions segment in 1999. (11) COMMITMENTS AND CONTINGENT LIABILITIES Commitments In connection with the sale of its property-casualty operations in 1996, the Company vacated, and the purchaser subleased, at market rates for a period of eight years, the space that the Company occupied in the CityPlace office facility in Hartford. In 1996, the Company recorded a charge of $292 million pretax ($190 million after tax) which represented the present value of the difference between rent required to be paid by the Company under the lease and future rentals expected to be received by the Company. At June 30, 1999 and December 31, 1998, the balance in this facilities reserve was $279 million and $288 million, respectively. Page 17 18 Item 1. Financial Statements. AETNA INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) Litigation Purported Class Action Complaints were filed in the United States District Court for the Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J. Oring. Other purported Class Action Complaints were filed in the United States District Court for the District of Connecticut on November 25, 1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to the United States District Court for the Eastern District of Pennsylvania (the "Court") for consolidated pretrial proceedings with the cases pending there. The plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking, among other remedies, unspecified damages resulting from defendants' alleged violations of federal securities laws. The Complaint alleged that the Company and three of its current or former officers or directors, Ronald E. Compton, Richard L. Huber, and Leonard Abramson, are liable for certain misrepresentations and omissions regarding, among other matters, the integration of the merger with U.S. Healthcare and the Company's medical claim reserves. The Company and the individual defendants filed a motion to dismiss the Complaint on July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but granted the plaintiffs leave to file a second amended complaint. On February 22, 1999, the plaintiffs filed a second amended complaint against the Company, Ronald E. Compton and Richard L. Huber. The Company and the remaining individual defendants filed a motion to dismiss the second amended complaint, and the Court denied that motion in March, 1999. Discovery proceedings have commenced and trial currently is scheduled to begin in early 2000. The Company is defending the actions vigorously. The Company is also involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations, including bad faith, medical malpractice, marketing and other litigation in its health business. Some of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary of the Company, is currently a party to a bad faith and medical malpractice action brought by Teresa Goodrich, individually and as successor in interest of David Goodrich. The action was originally filed in March, 1996 in Superior Court for the state of California, county of San Bernardino. The action alleges damages for unpaid medical bills, punitive damages and compensatory damages for wrongful death based upon, among other things, alleged denial of claims for services provided to David Goodrich by out of network providers without prior authorization. On January 20, 1999 a jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid medical bills, $3.7 million for wrongful death and $116 million for punitive damages. On April 12, 1999 the trial court amended the judgment to include Aetna Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27, 1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed appeals with the California Court of Appeal and will continue to defend this matter vigorously. While the ultimate outcome of the lawsuits referred to in this paragraph cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, and after consultation with counsel, the lawsuits referred to in this paragraph are not expected to result in liability for amounts material to the financial condition of the Company, although they may adversely affect results of operations in future periods. Page 18 19 Item 1. Financial Statements. INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors Aetna Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Inc. and Subsidiaries as of June 30, 1999, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1999 and 1998, and the related condensed consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 1999 and 1998. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Inc. and Subsidiaries as of December 31, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 3, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP Hartford, Connecticut July 29, 1999 Page 19 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis presents a review of Aetna Inc. and its subsidiaries (collectively, the "Company") for the three and six months ended June 30, 1999 and 1998. This review should be read in conjunction with the consolidated financial statements and other data presented herein as well as the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Aetna Inc.'s 1998 Annual Report on Form 10-K. OVERVIEW General The Company's current operations include three core businesses - Aetna U.S. Healthcare, Aetna Retirement Services and Aetna International. Aetna U.S. Healthcare provides a full spectrum of managed care, indemnity, and group life and disability insurance products. Aetna Retirement Services offers a range of financial services products including annuity contracts, investment advisory services, financial planning and pension plan administration services. Aetna International, through subsidiaries and joint venture operations, sells primarily life insurance, health insurance and financial services products in markets outside the United States. The Company also has a Large Case Pensions business that manages a variety of retirement products for defined benefit and defined contribution plans. Consolidated Results The Company reported net income of $227 million for the three months ended June 30, 1999 compared to $266 million for the same period in 1998. Net income per diluted common share for the three months ended June 30, 1999 was $1.50, compared with $1.69 a year ago. Net income reflects Year 2000 costs of $32 million for the three months ended June 30, 1999 and $25 million for the same period in 1998. Results for the three months ended June 30, 1999 include a reduction of the reserve for loss on discontinued products for Large Case Pensions of $50 million. Net realized capital gains were $6 million for the three months ended June 30, 1999 and $113 million for the same period in 1998. Excluding these items, earnings were $202 million for the three months ended June 30, 1999 compared to $178 million for the same period in 1998. The Company reported net income of $407 million for the six months ended June 30, 1999 compared to $433 million for the same period in 1998. Net income per diluted common share for the six months ended June 30, 1999 was $2.66, compared with $2.75 a year ago. Net income reflects Year 2000 costs of $59 million for the six months ended June 30, 1999 and $41 million for the same period in 1998. Results for the six months ended June 30, 1999 include a reduction of the reserve for loss on discontinued products for Large Case Pensions of $50 million. Net realized capital gains were $18 million for the six months ended June 30, 1999 and $134 million for the same period in 1998. Excluding these items, earnings were $397 million for the six months ended June 30, 1999 compared to $340 million for the same period in 1998. Page 20 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) OVERVIEW (CONTINUED) Acquisitions and Dispositions Aetna U.S. Healthcare Prudential Health Care Business On December 9, 1998, the Company entered into definitive agreements with The Prudential Insurance Company of America ("Prudential") to acquire the Prudential health care business ("PHC") for approximately $1 billion. The Company expects to secure remaining regulatory approval and close the transaction during the third quarter. The Company expects to finance the transaction by issuing $500 million of three-year senior notes to Prudential and by using funds made available from issuing commercial paper. The Company may ultimately replace this commercial paper with medium- or long-term fixed income securities. As part of the transaction, the Company also agreed to service Prudential's administrative services only contracts following the acquisition. In connection with the transaction, the Company reached an agreement with the U.S. Department of Justice and the State of Texas that will result in the divestiture of certain Texas HMO/POS and other related businesses acquired by Aetna as part of the 1998 NYLCare acquisition ("NYLCare Texas"). The agreement primarily affects approximately 260,000 NYLCare commercial HMO/POS members in the Houston market and approximately 167,000 NYLCare commercial HMO/POS members in the Dallas/Ft. Worth market, as well as related management, operating systems and other assets. The Company has begun this divestiture process. The financial impact of the divestiture will depend on the ultimate sales price relative to the book value of the businesses to be sold and will be assessed as the process is completed. Following the closing, the Company's results will be affected by, among other things, the operating results of PHC, the costs of financing the transaction and the amortization of intangible assets (primarily goodwill) to be created as a result of the transaction and by the loss of the operating results of the NYLCare Texas operations to be sold. Refer to "Aetna U.S. Healthcare", "Corporate" and "Liquidity and Capital Resources" as well as Note 3 of Condensed Notes to Consolidated Financial Statements, for further discussion. NYLCare Health Business In July 1998, the Company acquired NYLCare. The total purchase price was approximately $1.1 billion. Since the closing, the Company's results have been affected by, among other things, the operating results of NYLCare, the costs of financing the transaction and the amortization of intangible assets (primarily goodwill) created by the transaction. The operations, and related amortization of intangible assets, of NYLCare are reflected in the Aetna U.S. Healthcare segment while the financing costs of the acquisition are reflected in the Corporate segment. Refer to "Aetna U.S. Healthcare", "Corporate" and "Liquidity and Capital Resources" as well as Note 3 of Condensed Notes to Consolidated Financial Statements, for further discussion. Aetna Retirement Services In October 1998, the Company sold its domestic individual life insurance business to Lincoln National Corporation for approximately $1 billion. The principal agreement to sell this business was generally in the form of an indemnity reinsurance arrangement. For more details about the transaction and the indemnity reinsurance arrangement, refer to "Aetna Retirement Services" and Note 3 of Condensed Notes to Consolidated Financial Statements. Page 21 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) OVERVIEW (CONTINUED) Acquisitions and Dispositions (Continued) Aetna International On April 18, 1999, Aetna International, Inc. entered into a definitive agreement to sell its Canadian operations to John Hancock Canadian Holdings Limited, the parent of The Maritime Life Assurance Company, for approximately $300 million in cash. The sale will result in a capital loss which is not expected to be material. The revenue and earnings of the Canadian operations are not material to the Company. Completion of the sale, which is anticipated to occur in the fall of 1999, is subject to Canadian federal and other regulatory approvals and other customary conditions. Proceeds from the sale are expected to be used for general corporate purposes, including repayment of debt, internal growth, acquisitions and share repurchases. Other On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of the Preferred Stock received .8197 shares of Aetna common stock for each share of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna common stock were issued to effect the redemption. Refer to "Liquidity and Capital Resources" and Note 4 of the Condensed Notes to Consolidated Financial Statements for further discussion. Page 22 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA U.S. HEALTHCARE Operating Summary
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- -------------------------------------- (Millions) 1999(1) 1998 % Change 1999(1) 1998 % Change - ----------------------------------------------------------------------------------------------------------------------------- Premiums $3,949.1 $2,847.0 38.7% $7,861.7 $5,686.0 38.3% Net investment income 138.5 131.6 5.2 279.2 253.3 10.2 Fees and other income 394.9 352.1 12.2 786.7 703.1 11.9 Net realized capital gains (losses) (12.9) 33.2 - (5.5) 44.2 - - ----------------------------------------------------------------------------------------------------------------------------- Total revenue 4,469.6 3,363.9 32.9 8,922.1 6,686.6 33.4 - ----------------------------------------------------------------------------------------------------------------------------- Current and future benefits 3,375.9 2,436.2 38.6 6,734.2 4,872.8 38.2 Operating expenses 799.1 633.5 26.1 1,570.0 1,244.2 26.2 Amortization of goodwill and other acquired intangible assets 101.9 90.7 12.3 203.8 181.4 12.3 - ----------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 4,276.9 3,160.4 35.3 8,508.0 6,298.4 35.1 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 192.7 203.5 (5.3) 414.1 388.2 6.7 Income taxes 87.3 93.0 (6.1) 188.0 178.9 5.1 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 105.4 $ 110.5 (4.6)% $ 226.1 $ 209.3 8.0% ============================================================================================================================= Net realized capital gains (losses), net of tax (included above) $ (8.4) $ 21.5 - % $ (3.7) $ 28.6 -% =============================================================================================================================
(1) Results include the acquired NYLCare health business, including the portion that the Company must divest. Aetna U.S. Healthcare's net income for the three months ended June 30, 1999 decreased $5 million compared to the same period in 1998, driven by net realized capital losses. Net income includes Year 2000 costs of $21 million for the three months ended June 30, 1999 and $16 million for the same period in 1998. Excluding Year 2000 costs and net realized capital gains or losses, results for the three months ended June 30, 1999 increased $30 million, or 29%, compared to the same period in 1998. Net income for the six months ended June 30, 1999 increased by $17 million compared to the same period in 1998. Net income includes Year 2000 costs of $38 million for the six months ended June 30, 1999 and $24 million for the same period in 1998. Excluding Year 2000 costs and net realized capital gains or losses, results for the six months ended June 30, 1999 increased $63 million, or 31%, compared to the same period in 1998. Business Results In order to provide a comparison that management believes better reflects the underlying performance of Aetna U.S. Healthcare, the operating earnings discussion that follows excludes the amortization of goodwill and other acquired intangible assets (including the goodwill associated with the U.S. Healthcare and NYLCare acquisitions), Year 2000 costs and net realized capital gains or losses in both periods.
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (Millions) 1999(1) 1998 1999(1) 1998 - ----------------------------------------------------------------------------------------------------------- Operating earnings: Health Risk $ 137.7 $ 95.0 $ 273.6 $ 188.7 Group Insurance and Other Health 79.4 84.3 159.5 165.9 - ----------------------------------------------------------------------------------------------------------- Total Aetna U.S. Healthcare $ 217.1 $ 179.3 $ 433.1 $ 354.6 =========================================================================================================== Commercial HMO Premium PMPM $139.68 $134.98 $139.19 $135.02 - ----------------------------------------------------------------------------------------------------------- Commercial HMO Medical Cost PMPM $114.80 $109.60 $114.27 $110.58 - ----------------------------------------------------------------------------------------------------------- Commercial HMO Medical Loss Ratio 82.2% 81.2% 82.1% 81.9% - ----------------------------------------------------------------------------------------------------------- Medicare HMO Premium PMPM $488.93 $472.19 $487.16 $470.66 - ----------------------------------------------------------------------------------------------------------- Medicare HMO Medical Cost PMPM $442.01 $450.95 $439.69 $443.36 - ----------------------------------------------------------------------------------------------------------- Medicare HMO Medical Loss Ratio 90.4% 95.5% 90.3% 94.2% - -----------------------------------------------------------------------------------------------------------
(1) Includes the acquired NYLCare health business, including the portion that the Company must divest. Page 23 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA U.S. HEALTHCARE (CONTINUED) Health Risk Health Risk (which includes all health products for which Aetna U.S. Healthcare assumes all or a majority of health care cost and utilization risk) earnings increased $43 million for the three months ended June 30, 1999 and $85 million for the six months ended June 30, 1999 compared to the corresponding periods of 1998. The increase in 1999 earnings reflects membership increases from enrollment growth and the acquisition of NYLCare as well as improved Medicare HMO results due to the exiting of several Medicare markets as of January 1, 1999. For the Health Risk business, the liability for medical claims payable reflects estimates of the ultimate cost of claims that have been incurred but not yet reported or paid. Medical claims payable are based on a number of factors, including those derived from historical claim experience. Medical claims payable are estimated periodically, and any resulting adjustments are reflected in current period operating results within current and future benefits. Commercial HMO Commercial HMO premium per member per month ("PMPM") increased 3% for the three and six months ended June 30, 1999 compared to the corresponding periods of 1998. This increase was primarily due to premium rate increases, partially offset by customers selecting lower premium plans, a shift in the geographic mix of membership and the addition of NYLCare members. Commercial HMO medical cost PMPM increased by 5% for the three months ended June 30, 1999 and 3% for the six months ended June 30, 1999 compared to the corresponding periods of 1998. The 1999 increase reflects medical trend, particularly pharmacy benefits (both higher cost and utilization), as well as the addition of NYLCare members. These increases were partially offset by medical cost initiatives. The Commercial HMO medical loss ratio increased 1.0 percentage points for the three months ended June 30, 1999 and .2 percentage points for the six months ended June 30, 1999 compared to the corresponding periods of 1998. The higher medical loss ratio reflects medical trend, particularly pharmacy benefits, as well as the addition of NYLCare members. Medicare HMO Medicare HMO premiums PMPM increased 4% for the three and six months ended June 30, 1999 compared to the corresponding periods of 1998. This increase was primarily due to Health Care Financing Administration rate increases and increases in supplemental premiums, partially offset by a shift in the geographic mix of membership. Medicare HMO medical costs PMPM decreased by 2% for the three months ended June 30, 1999 and .8% for the six months ended June 30, 1999 compared to the corresponding periods of 1998. The lower medical costs in 1999 reflect the favorable impact of exiting several markets as of January 1, 1999, partially offset by medical trend, particularly pharmacy benefits. The Medicare HMO medical loss ratio decreased 5.1 percentage points for the three months ended June 30, 1999 and 3.9 percentage points for the six months ended June 30, 1999 compared to the corresponding periods of 1998. This improvement primarily reflects the favorable impact of exiting several markets. Page 24 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA U.S. HEALTHCARE (CONTINUED) Group Insurance and Other Health Group Insurance and Other Health includes group life and disability insurance and long-term care insurance, offered on both an insured and employer-funded basis, and all health products offered on an employer-funded basis. Group Insurance and Other Health results decreased $5 million for the three months ended June 30, 1999 and $6 million for the six months ended June 30, 1999 compared to the corresponding periods of 1998. This decrease reflects less favorable developments in claim benefit reserve estimates, partially offset by higher investment income. Results for the Group Insurance and Other Health businesses are expected to be level or to decrease slightly in 1999. Membership Aetna U.S. Healthcare's membership was as follows:
June 30, 1999 (1) June 30, 1998 -------------------------------- -------------------------------- (Thousands) Risk Nonrisk Total Risk Nonrisk Total - --------------------------------------------------------------------------------------------------------------------------- HMO Commercial (2) 5,434 716 6,150 3,905 399 4,304 Medicare 566 - 566 405 - 405 Medicaid 141 39 180 69 - 69 - --------------------------------------------------------------------------------------------------------------------------- Total HMO 6,141 755 6,896 4,379 399 4,778 POS 212 2,451 2,663 266 2,515 2,781 PPO 884 2,945 3,829 572 2,771 3,343 Indemnity 162 2,058 2,220 253 2,301 2,554 - --------------------------------------------------------------------------------------------------------------------------- Total Health Membership 7,399 8,209 15,608 5,470 7,986 13,456 =========================================================================================================================== Group Insurance: Group Life 9,732 9,507 Disability 2,522 2,737 Long-Term Care 107 92 - ---------------------------------------------------------------------------------------------------------------------------
(1) Health membership for NYLCare at the date of acquisition (July 15, 1998) in thousands was 2,117 members, including 1,186 Commercial HMO risk, 111 Medicare HMO risk, 56 Medicaid HMO risk, 135 HMO nonrisk, 452 PPO risk and 177 PPO nonrisk. Group Insurance NYLCare membership at the date of acquisition was 791 thousand members. (2) Includes 1,507 thousand POS members who access primary care physicians and referred care through an HMO network at June 30, 1999 and 1,007 thousand at June 30, 1998. Total Health membership as of June 30, 1999 increased by 2 million members, or 16%, when compared to June 30, 1998 primarily due to the acquisition of NYLCare. Excluding the impact of the NYLCare members at the date of acquisition, HMO membership increases were substantially offset by declines in point-of-service ("POS"), preferred provider organization ("PPO") and Indemnity enrollment. Total Revenue and Expense Revenue for Aetna U.S. Healthcare, excluding net realized capital gains, increased by $1.2 billion, or 35%, for the three months ended June 30, 1999 and $2.3 billion, or 34%, for the six months ended June 30, 1999 when compared to the same periods in 1998. This growth was primarily due to the acquisition of NYLCare, as well as to premium rate increases and Commercial HMO membership growth. Operating expenses for Aetna U.S. Healthcare increased by $166 million, or 26%, for the three months ended June 30, 1999 and $326 million, or 26%, for the six months ended June 30, 1999 when compared to the same periods in 1998. The increase in 1999 reflects the acquisition of NYLCare, as well as costs to support HMO membership increases. However, operating expenses as a percentage of revenue decreased to 18% for the three and six months ended June 30, 1999 from 19% for the corresponding periods of 1998. Page 25 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA U.S. HEALTHCARE (CONTINUED) Acquisition of the NYLCare Health Business On July 15, 1998, the Company acquired NYLCare for a purchase price of approximately $1.1 billion. Refer to "Overview" and Note 3 of the Condensed Notes to Consolidated Financial Statements for a further discussion of the acquisition. Agreement to Acquire Prudential Health Care Business On December 9, 1998, the Company entered into definitive agreements to acquire PHC. As part of the transaction, the Company also agreed to service Prudential's administrative services only ("ASO") contracts following the acquisition. Included in the acquisition are PHC's HMO, POS, PPO and Indemnity health lines, as well as its dental business. At June 30, 1999, PHC had approximately 5.5 million health members and 8 million dental members. Following the acquisition, Aetna U.S. Healthcare's results will be affected by, among other things, the operating results of PHC and the amortization of intangible assets (primarily goodwill) created as a result of the transaction. As part of the transaction, the Company and Prudential have entered into a reinsurance agreement for which the Company will pay a premium. Under the agreement, Prudential will indemnify the Company from insurance risk which may arise following the closing by reimbursing the Company for a large portion of medical costs of PHC in excess of certain threshold medical loss ratio levels through the year 2000. Prudential will also pay the Company certain supplemental fees related to the administrative service contracts to be serviced by the Company following the closing. These fees are fixed in amount and decline over a period ending 18 months following the closing. PHC and Prudential's ASO business have incurred significant operating losses in recent periods. Following the closing, the Company will seek to improve profitability of PHC by reducing administrative costs, improving underwriting and pricing discipline and otherwise improving its operations. Refer to "Overview" and Note 3 of the Condensed Notes to Consolidated Financial Statements for a further discussion of the acquisition and agreement to divest NYLCare Texas. Page 26 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA RETIREMENT SERVICES Operating Summary
Three Months Ended June 30, Six Months Ended June 30, --------------------------------- ------------------------------------- (Millions) 1999 1998(1) % Change 1999 1998(1) % Change - -------------------------------------------------------------------------------------------------------------------------------- Premiums (2) $ 18.8 $ 34.9 (46.1)% $ 42.4 $ 75.2 (43.6)% Net investment income 213.8 268.8 (20.5) 429.2 536.4 (20.0) Fees and other income 144.2 169.9 (15.1) 275.9 332.6 (17.0) Net realized capital gains 1.0 10.1 (90.1) 3.9 7.9 (50.6) - -------------------------------------------------------------------------------------------------------------------------------- Total revenue 377.8 483.7 (21.9) 751.4 952.1 (21.1) - -------------------------------------------------------------------------------------------------------------------------------- Current and future benefits (2) 180.1 235.3 (23.5) 363.1 485.6 (25.2) Operating expenses 94.6 104.0 (9.0) 187.1 205.7 (9.0) Amortization of deferred policy acquisition costs 26.8 36.5 (26.6) 51.7 70.5 (26.7) - -------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 301.5 375.8 (19.8) 601.9 761.8 (21.0) - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 76.3 107.9 (29.3) 149.5 190.3 (21.4) Income taxes 24.8 34.5 (28.1) 48.8 58.6 (16.7) - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 51.5 $ 73.4 (29.8)% $ 100.7 $ 131.7 (23.5)% ================================================================================================================================ Net realized capital gains, net of tax (included above) $ .6 $ 6.5 (90.8)% $ 2.5 $ 5.1 (51.0)% ================================================================================================================================ Deposits not included in premiums above: Annuities -- fixed options $ 449.1 $ 275.6 63.0% $ 994.3 $ 608.7 63.3% Annuities -- variable options 1,061.0 947.5 12.0 2,545.1 1,854.6 37.2 Individual life insurance - 129.6 (100.0) - 260.7 (100.0) - -------------------------------------------------------------------------------------------------------------------------------- Total $1,510.1 $1,352.7 11.6% $3,539.4 $ 2,724.0 30.0% ================================================================================================================================ Assets under management: (3) Annuities -- fixed options $12,550.8 $11,947.1 5.1% Annuities -- variable options (4) 29,499.5 23,932.5 23.3 Other investment advisory 16,737.6 11,780.2 42.1 - -------------------------------------------------------------------------------------------------------------------------------- Financial services 58,787.9 47,659.8 23.3 Assets under administration (5) 3,729.4 2,810.9 32.7 - -------------------------------------------------------------------------------------------------------------------------------- Total financial services' assets under management and administration 62,517.3 50,470.7 23.9 - -------------------------------------------------------------------------------------------------------------------------------- Individual life insurance assets under management - 2,798.8 (100.0) - -------------------------------------------------------------------------------------------------------------------------------- Total assets under management and administration $62,517.3 $53,269.5 17.4% ================================================================================================================================
(1) 1998 operating results reflect the operations of the individual life business which was sold on October 1, 1998. (2) Includes annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies of $12.4 million for the three months ended June 30, 1999, $13.7 million for the three months ended June 30, 1998, $30.1 million for the six months ended June 30, 1999 and $28.0 million for the six months ended June 30, 1998. (3) Excludes net unrealized capital gains of approximately $2.6 million at June 30, 1999 and $599.9 million at June 30, 1998. (4) Includes $9,699.8 million at June 30, 1999 and $6,603.3 million at June 30, 1998 of assets held and managed by unaffiliated mutual funds. (5) Represents assets for which ARS provides administrative services only. Aetna Retirement Services' ("ARS") net income for the three months ended June 30, 1999 decreased $22 million compared to the same period in 1998 due to the sale of the individual life business on October 1, 1998. Net income includes Year 2000 costs of $5 million for the three months ended June 30, 1999 and 1998. Net income for the three months ended June 30, 1998 also included $24 million related to the individual life insurance business. Excluding Year 2000 costs and net realized capital gains, as well as the 1998 individual life earnings, results for the three months ended June 30, 1999 increased $9 million, or 18%, compared to the second quarter of 1998. Page 27 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA RETIREMENT SERVICES (CONTINUED) Net income for the six months ended June 30, 1999 decreased $31 million compared to the same period in 1998. Net income includes Year 2000 costs of $11 million for the six months ended June 30, 1999 and $9 million for the same period in 1998. Net income for the six months ended June 30, 1998 also included $47 million related to the individual life insurance business. Excluding Year 2000 costs and net realized capital gains, as well as the 1998 individual life earnings, results for the six months ended June 30, 1999 increased $21 million, or 23%, compared to the first six months of 1998. ARS' earnings, excluding Year 2000 costs and net realized capital gains or losses, were as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (Millions) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------- Financial services $56.3 $ 47.8 $109.3 $ 88.6 Individual life insurance (1) - 24.2 - 47.2 - --------------------------------------------------------------------------------------------------------------- Total $56.3 $ 72.0 $109.3 $135.8 ===============================================================================================================
(1) The individual life business was sold on October 1, 1998. The increase in earnings for financial services products primarily reflects increased fee income from increased assets under management. Assets under management and administration increased primarily due to appreciation in the stock market, as well as additional net deposits (deposits less surrenders). Partially offsetting the increases in fee income were increased operating expenses. However, operating expenses as a percentage of assets under management declined in both periods. Of the $12.6 billion and $11.9 billion of fixed-annuity assets under management at June 30, 1999 and 1998, respectively, 26% were fully guaranteed and 74% were experience-rated in each period. The average annualized earned rates on investments supporting fully guaranteed investment contracts were 7.4% and 7.5% and the average annualized earned rates on investments supporting experience-rated investment contracts were 7.6% and 7.9% for the six months ended June 30, 1999 and 1998, respectively. The average annualized credited rates on fully guaranteed investment contracts were 6.4% and 6.6% and the average annualized credited rates on experience-rated investment contracts were 5.6% and 5.8% for the six months ended June 30, 1999 and 1998, respectively. The resulting annualized interest margins on fully guaranteed investment contracts were 1.0% and .9% and on experience-rated investment contracts were 2.0% and 2.1% for the six months ended June 30, 1999 and 1998, respectively. Sale of Individual Life Insurance Business On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The sale resulted in an after-tax gain of approximately $152 million. Since the principal agreement to sell this business was generally in the form of an indemnity reinsurance arrangement, the Company deferred approximately $88 million of the gain and is recognizing it over approximately 15 years. Approximately $2 million of the gain was recognized during the three months ended June 30, 1999 and approximately $4 million was recognized during the first six months of 1999. Revenues from the business sold were $129 million for the three months ended June 30, 1998 and were $264 million for the first six months of 1998. For more details about the transaction and the indemnity reinsurance arrangement, refer to Note 3 of Condensed Notes to Consolidated Financial Statements. Page 28 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA INTERNATIONAL Operating Summary
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------ ---------------------------------------- (Millions) 1999 1998 % Change 1999 1998 % Change - --------------------------------------------------------------------------------------------------------------------------------- Premiums $ 583.8 $ 367.8 58.7% $1,000.4 $ 687.1 45.6% Net investment income 113.1 119.3 (5.2) 238.1 237.6 .2 Fees and other income 90.4 26.5 - 119.0 58.4 103.8 Net realized capital gains (losses) 5.4 7.2 (25.0) 2.9 (5.1) - - --------------------------------------------------------------------------------------------------------------------------------- Total revenue 792.7 520.8 52.2 1,360.4 978.0 39.1 - --------------------------------------------------------------------------------------------------------------------------------- Current and future benefits 542.9 304.8 78.1 885.1 582.5 51.9 Operating expenses 150.8 121.8 23.8 291.0 236.4 23.1 Interest expenses 2.2 3.1 (29.0) 4.5 5.8 (22.4) Amortization of goodwill and other acquired intangible assets 3.0 5.2 (42.3) 8.1 10.3 (21.4) Amortization of deferred policy acquisition costs 24.8 26.1 (5.0) 49.8 44.4 12.2 - --------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 723.7 461.0 57.0 1,238.5 879.4 40.8 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 69.0 59.8 15.4 121.9 98.6 23.6 Income taxes 20.1 14.8 35.8 31.4 25.6 22.7 - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 48.9 $ 45.0 8.7% $ 90.5 $ 73.0 24.0% ================================================================================================================================= Net realized capital gains (losses), net of tax (included above) $ 3.5 $ 5.4 (35.2)% $ 2.1 $ (2.4) -% =================================================================================================================================
Aetna International's net income for the three months ended June 30, 1999 increased by $4 million compared to the same period in 1998. Net income includes Year 2000 costs of $5 million for the three months ended June 30, 1999 and $1 million for the same period in 1998. Excluding Year 2000 costs and net realized capital gains or losses, results for the three months ended June 30, 1999 increased $9 million, or 23%, compared to the same period in 1998. Net income for the six months ended June 30, 1999 increased by $18 million compared to the same period in 1998. Net income includes Year 2000 costs of $7 million for the six months ended June 30, 1999 and $3 million for the same period in 1998. Excluding Year 2000 costs and net realized capital gains or losses, results for the six months ended June 30, 1999 increased $17 million, or 22%, compared to the same period in 1998. The increase in 1999 in both periods primarily reflects earnings growth in Canada, Chile, Malaysia, Taiwan, and the Company's Mexican insurance businesses partially offset by lower earnings in Brazil. Fluctuations in foreign currencies did not significantly impact earnings for the second quarter of 1999. The weakening of foreign currencies, however, did significantly offset growth in local currency earnings in Brazil and partially offset local currency earnings in Mexico and Chile during the six months ended June 30, 1999. Refer to "Overview" for a discussion related to the pending sale of Aetna International's Canadian operations. The Company continues to monitor Latin American economies, which are in recession, and the potential near-term impact on our businesses. Further currency devaluations in Latin America, or in other regions where the Company has established operations, could adversely affect future operating earnings when translated into U.S. dollars. Refer to "Aetna International" and "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual Report on Form 10-K for additional information. Page 29 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) AETNA INTERNATIONAL (CONTINUED) Earnings by major geographic location, excluding Year 2000 costs and net realized capital gains or losses, were as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (Millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- Asia Pacific (1) $21.3 $15.6 $30.2 $27.9 Americas (2) 32.4 28.6 76.6 57.2 Other (3) (3.7) (3.5) (11.2) (6.9) - -------------------------------------------------------------------------------------------------------------- Total $50.0 $40.7 $95.6 $78.2 ==============================================================================================================
(1) Includes China, Hong Kong, Indonesia, Malaysia, New Zealand, Philippines, Taiwan and Thailand. (2) Includes Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, Poland and Venezuela. (3) Includes general and other miscellaneous expenses. Page 30 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LARGE CASE PENSIONS Operating Summary
Three Months Ended June 30, Six Months Ended June 30, -------------------------------- --------------------------------- (Millions) 1999 1998 % Change 1999 1998 % Change - --------------------------------------------------------------------------------------------------------------------------- Premiums $ 28.8 $ 29.4 (2.0)% $ 57.4 $ 69.4 (17.3)% Net investment income 258.3 301.7 (14.4) 514.9 605.4 (14.9) Fees and other income 4.5 4.7 (4.3) 9.0 9.3 (3.2) Net realized capital gains 20.3 14.1 44.0 29.5 52.0 (43.3) - --------------------------------------------------------------------------------------------------------------------------- Total revenue 311.9 349.9 (10.9) 610.8 736.1 (17.0) - --------------------------------------------------------------------------------------------------------------------------- Current and future benefits 254.0 294.4 (13.7) 505.5 600.4 (15.8) Operating expenses 3.3 5.9 (44.1) 6.4 11.9 (46.2) Reduction of reserve for loss on discontinued products (77.2) - - (77.2) - - - --------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 180.1 300.3 (40.0) 434.7 612.3 (29.0) - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 131.8 49.6 165.7 176.1 123.8 42.2 Income taxes 46.8 18.6 151.6 62.8 45.6 37.7 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 85.0 $ 31.0 174.2% $ 113.3 $ 78.2 44.9% =========================================================================================================================== Net realized capital gains, net of tax (included above) $ 13.2 $ 9.1 45.1% $ 19.2 $ 33.8 (43.2)% =========================================================================================================================== Deposits not included in premiums above $195.9 $216.6 (9.6)% $ 461.3 $ 484.0 (4.7)% =========================================================================================================================== Assets under management (1) (2) $27,365.7 $29,707.6 (7.9)% ===========================================================================================================================
(1) Excludes net unrealized capital losses of approximately $35.5 million at June 30, 1999 and net unrealized capital gains of approximately $690.6 million at June 30, 1998. (2) Includes assets under management of $6,390.1 million at June 30, 1999 and $6,974.1 million at June 30, 1998 related to discontinued products. Large Case Pensions' net income for the three months ended June 30, 1999 increased by $54 million compared to the same period in 1998. During the three months ended June 30, 1999, the Company released $50 million of the reserve related to discontinued products primarily as a result of favorable investment performance. Net income also includes Year 2000 costs of $.1 million for the three months ended June 30, 1999 and $.3 million for the same period in 1998. Excluding the reserve release in 1999, Year 2000 costs and net realized capital gains in both periods, results for the three months ended June 30, 1999 decreased slightly compared to the same period in 1998. Net income for the six months ended June 30, 1999 increased by $35 million compared to the same period in 1998. Excluding the discontinued products reserve release in 1999, Year 2000 costs of $.3 million for the six months ended June 30, 1999 and $.4 million for the same period in 1998 and net realized capital gains in both periods, results for the six months ended June 30, 1999 decreased slightly compared to the same period in 1998. The decrease in results for the three and six months ended June 30, 1999 continues to reflect the redeployment of capital supporting this business, partially offset by lower expenses. Assets under management at June 30, 1999 were 8% lower than a year earlier. This decrease primarily resulted from the continuing runoff of underlying liabilities. Page 31 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LARGE CASE PENSIONS (CONTINUED) General account assets supporting experience-rated products (where the contractholder, not the Company, assumes investment and other risks) may be subject to participant or contractholder withdrawal. Experience-rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other Company products):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (Millions) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------- Scheduled contract maturities and benefit payments (1) $237.3 $235.9 $478.5 $473.0 Contractholder withdrawals other than scheduled contract maturities and benefit payments 125.7 99.8 201.0 172.5 Participant directed withdrawals 21.5 24.8 43.9 52.6 - ---------------------------------------------------------------------------------------------------------------
(1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules. Discontinued Products Results of operations of discontinued products, including net realized capital gains or losses, are credited or charged to the reserve for anticipated losses. The Company's results of operations would be adversely affected to the extent that aggregate future losses on the products are greater than anticipated and positively affected to the extent future losses are less than anticipated. The results of discontinued products were as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (Millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- Interest margin (1) $ (3.3) $(5.2) $(8.6) $(11.6) Net realized capital gains (2) 5.3 6.5 11.9 48.8 Interest earned on receivable from continuing products 5.5 5.6 11.0 11.2 Other, net 1.3 1.9 5.9 1.6 - -------------------------------------------------------------------------------------------------------------- Results of discontinued products, after tax $ 8.8 $ 8.8 $20.2 $ 50.0 ============================================================================================================== Results of discontinued products, pretax $ 13.2 $16.8 $30.7 $ 83.5 ============================================================================================================== Net realized capital gains from sales of bonds, after tax (included above) $ 2.3 $ 6.0 $ 7.8 $ 29.1 ==============================================================================================================
(1) The interest margin is the difference between earnings on invested assets and interest credited to contractholders. (2) Includes realized capital gains of $1.5 million for the three months ended June 30, 1998 and $22.7 million for the six months ended June 30, 1998 related to continued favorable developments in real estate markets. Total assets supporting discontinued products and the reserve include a receivable from continuing products of $454 million, net of related deferred taxes payable, at June 30, 1999. Interest income accrues on this receivable at the discount rate used to calculate the reserve. Page 32 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LARGE CASE PENSIONS (CONTINUED) The activity in the reserve for anticipated future losses on discontinued products for the six months ended June 30, 1999 was as follows (pretax):
(Millions) - ------------------------------------------------------------ Reserve at December 31, 1998 $1,214.1 Results of discontinued products 30.7 Reserve reduction (77.2) - ------------------------------------------------------------ Reserve at June 30, 1999 $1,167.6 ============================================================
Management reviews the adequacy of the discontinued products reserve quarterly and, as a result, $50 million ($77 million pretax) of the reserve was released in the second quarter of 1999 primarily due to favorable investment performance. The current reserve reflects management's best estimate of anticipated future losses. Distributions on discontinued products were as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (Millions) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Scheduled contract maturities, settlements and benefit payments $356.2 $392.6 $ 666.7 $860.1 Participant directed withdrawals 4.3 6.5 8.6 12.9 - -------------------------------------------------------------------------------------------------------------------------
Refer to Note 8 of Condensed Notes to Consolidated Financial Statements for additional information. CORPORATE Operating Summary
Three Months Ended June 30, Six Months Ended June 30, -------------------------------- ----------------------------------- (Millions, after tax) 1999 1998 % Change 1999 1998 % Change - --------------------------------------------------------------------------------------------------------------------------- Interest expense $40.1 $ 34.7 15.6% $80.7 $ 69.9 15.5% =========================================================================================================================== Other operating expenses, net $21.0 $ 29.7 (29.3)% $40.8 $ 57.6 (29.2)% Net realized capital losses (gains) (1) 2.5 (70.2) - 2.5 (68.5) - - --------------------------------------------------------------------------------------------------------------------------- Total other expense (income) $23.5 $(40.5) -% $43.3 $(10.9) -% ===========================================================================================================================
(1) After-tax net realized capital gains in 1998 include gains of $74.4 million during the three and six months ended June 30, 1998 related to the sale of the Company's remaining investment in Travelers Property Casualty Corporation. The Corporate segment includes interest expense and other expenses that are not directly related to the Company's business segments. "Other Operating Expenses" include corporate expenses such as staff area expenses, advertising and contributions, which are partially offset by net investment income. The 1999 increase in interest expense primarily results from additional debt incurred in connection with the NYLCare acquisition. Following the acquisition of PHC, interest expense will increase due to the issuance of debt to fund the acquisition. Included in other operating expenses are Year 2000 costs of $1 million for the three months ended June 30, 1999, $2 million for the same period in 1998, $2 million for the six months ended June 30, 1999 and $4 million for the same period in 1998. Excluding Year 2000 costs, other operating expenses decreased due to continued cost reduction initiatives, as well as system implementation costs during the first six months of 1998 not present in 1999. Page 33 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) GENERAL ACCOUNT INVESTMENTS Investments disclosed in this section relate to the Company's total general account portfolio (including assets supporting discontinued products and experience-rated products). Total Investments
(Millions) June 30, 1999 December 31, 1998 - -------------------------------------------------------------------------------------------- Debt securities $ 29,826.8 $32,180.8 Equity securities 879.6 800.5 Short-term investments 803.8 942.2 Mortgage loans 3,440.1 3,553.0 Real estate 311.1 270.3 Policy loans 498.7 458.7 Other 1,373.5 1,264.5 - -------------------------------------------------------------------------------------------- Total investments $ 37,133.6 $39,470.0 ============================================================================================
Debt Securities Debt securities represented 80% of the Company's total general account invested assets at June 30, 1999 and 82% at December 31, 1998. Debt securities were as follows:
(Millions) June 30, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------------------------------- Supporting discontinued products $ 5,104.2 $ 5,890.5 Supporting experience-rated products 12,050.8 13,197.3 Supporting remaining products 12,671.8 13,093.0 - ----------------------------------------------------------------------------------------------------------------- Total debt securities (1) $29,826.8 $32,180.8 =================================================================================================================
(1) Total debt securities include "Below Investment Grade" securities of $2.1 billion at June 30, 1999 and $2.0 billion at December 31, 1998 of which 43.6% at June 30, 1999 and 50.8% at December 31, 1998 supported discontinued and experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K for a discussion of "Below Investment Grade" securities. Debt securities reflected net unrealized capital losses of $3.2 million at June 30, 1999 compared to net unrealized capital gains of $1.5 billion at December 31, 1998. Included in net unrealized capital losses at June 30, 1999 were unrealized capital gains of $6.4 million related to assets supporting discontinued products and unrealized capital losses of $34.8 million related to assets supporting experience-rated contracts. Residential Collateralized Mortgage Obligations Included in the Company's debt securities are residential collateralized mortgage obligations ("CMOs") of $1.8 billion at June 30, 1999 and $2.0 billion at December 31, 1998. There are various categories of CMOs that are subject to different degrees of risk from changes in interest rates and, for CMOs that are not agency backed, defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the repayment of principal from the underlying mortgages either earlier or later than originally anticipated. At June 30, 1999 and December 31, 1998, approximately 2% of the Company's CMO holdings were invested in CMOs that are subject to more prepayment and extension risk than traditional CMOs (such as interest- or principal-only strips). Page 34 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) GENERAL ACCOUNT INVESTMENTS (CONTINUED) Mortgage Loans At June 30, 1999 and December 31, 1998, the Company's mortgage loan investments, net of impairment reserves, were as follows:
(Millions) June 30, 1999 December 31, 1998 - --------------------------------------------------------------------------------------------------------------------- Supporting discontinued products $ 756.7 $ 754.2 Supporting experience-rated products 1,111.8 1,183.3 Supporting remaining products 1,571.6 1,615.5 - --------------------------------------------------------------------------------------------------------------------- Total mortgage loan investments $3,440.1 $3,553.0 =====================================================================================================================
During the first six months of 1999, the Company managed its mortgage loan portfolio to maintain balance, relative to invested assets, by selectively pursuing refinance and new loan opportunities. At June 30, 1999 and December 31, 1998, the mortgage loan portfolio balance represented 9% of the Company's total general account invested assets. Problem, restructured, and potential problem loans included in mortgage loans were $293 million at June 30, 1999 and $301 million at December 31, 1998 of which 86% at June 30, 1999 and December 31, 1998 supported discontinued and experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K for a discussion of problem, restructured and potential problem loans. Specific impairment reserves on these loans were $44 million at June 30, 1999 and $48 million at December 31, 1998. (Refer to Note 5 of Condensed Notes to Consolidated Financial Statements). Risk Management and Market Sensitive Instruments Interest rate risk is managed within a tight duration band, and credit risk is managed by maintaining high average quality ratings and diversified sector exposure within the debt securities portfolio. The Company's use of derivatives is generally limited to hedging purposes and has principally consisted of using interest rate swap agreements, futures contracts, warrants, foreign exchange forward contracts, currency swap agreements and written options to hedge certain market risks such as interest rate, equity price and foreign exchange risk. The Company regularly evaluates market risk sensitive instruments by examining, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), duration, exchange rates, prepayment rates, equity markets or credit ratings/spreads. Management also reviews, on a quarterly basis, hypothetical net losses in the Company's consolidated near-term financial position, results of operations and cash flows under certain assumed market rate changes. Based on the Company's overall exposure to interest rate, equity price and foreign exchange risks, the Company believes that these hypothetical changes in market rates and prices would not materially affect the consolidated near-term financial position, results of operations or cash flows of the Company as of June 30, 1999. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K for a more complete discussion of "Risk Management and Market Sensitive Instruments". Page 35 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LIQUIDITY AND CAPITAL RESOURCES Cash Flows Generally, the Company meets its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and using overall cash flows from premiums, deposits and income received on investments. Overall cash flows are used primarily for claim and benefit payments, contract withdrawals and operating expenses. In addition, the Company uses cash to invest in core businesses, make acquisitions, repurchase common stock and pay shareholder dividends. During the first six months of 1999, the Company used net cash generated from investing, financing and operating activities to make approximately $192 million of investments in core businesses and acquisitions, pay approximately $72 million for common stock repurchases and pay approximately $84 million of dividends to shareholders. During the corresponding period of 1998, the Company used net cash generated from investing, financing and operating activities to make approximately $8 million of investments in core businesses and acquisitions, pay approximately $151 million for common stock repurchases and pay approximately $86 million of dividends to shareholders. Refer to the "Consolidated Statements of Cash Flows" for additional information. Dividends On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class C Voting Mandatorily Convertible Preferred Stock. Holders of the Preferred Stock received .8197 shares of Aetna common stock for each share of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna common stock were issued to effect the redemption. The Company expects the redemption of the Preferred Stock to result in approximately $48 million of annual cash dividend savings. Refer to Note 4 of Condensed Notes to Consolidated Financial Statements for further information. On May 25, 1999, the Company's Board of Directors also declared a cash dividend of $.84583 per share of 6.25% Class C Voting Mandatorily Convertible Preferred Stock to shareholders of record at the close of business on July 8, 1999, payable July 19, 1999. On June 24, 1999, the Company's Board of Directors declared a quarterly dividend of $.20 per share of common stock to shareholders of record at the close of business on July 30, 1999, payable August 15, 1999. Financings and Financing Capacity Substantially all of the Company's borrowings and financings are conducted through Aetna Services and are fully and unconditionally guaranteed by Aetna Inc. Refer to Note 9 of Condensed Notes to Consolidated Financial Statements for additional information. The Company has significant short-term liquidity supporting its businesses. The Company uses short-term borrowings from time to time to address timing differences between receipts and disbursements. The maximum amount of domestic short-term borrowings outstanding was $1.1 billion during the first six months of 1999 and $.7 billion during the first six months of 1998. The Company funded the acquisition of NYLCare with funds made available from issuing commercial paper. The Company issued $300 million of debt in the fourth quarter of 1998 and expects to issue additional medium- or long-term fixed income securities in 1999, subject to market conditions, to replace some of this commercial paper. Page 36 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Financings and Financing Capacity (Continued) The acquisition of PHC, which is anticipated to be completed in the third quarter of 1999, is currently expected to be financed by issuing $500 million of three-year senior notes to Prudential and issuing additional commercial paper for the remainder of the purchase price (approximately $500 million). The Company expects to issue medium- or long-term fixed income securities in 1999, subject to market conditions, to replace some of this commercial paper. Common Stock Transactions In January 1999, the Board authorized the repurchase of 5.0 million shares of common stock. As of June 30, 1999, 880,000 shares of common stock had been repurchased under this authorization at a cost of $72 million. NEW ACCOUNTING STANDARDS Refer to Note 1 of Condensed Notes to Consolidated Financial Statements for a discussion of recently issued accounting standards. YEAR 2000 The Company relies heavily on information technology ("IT") systems and other systems and facilities, such as telephones, building access control systems and heating and ventilation equipment ("embedded systems") to conduct its business. The Company also has business relationships with health care providers, financial institutions, financial intermediaries, public utilities and other critical vendors, as well as regulators and customers who are themselves reliant on IT and embedded systems to conduct their businesses. State of Readiness In 1997, the Company organized a multidisciplinary Year 2000 Project Team including outside consultants. The Year 2000 Project Team and the Company's businesses have developed and are currently executing a comprehensive plan designed to make the Company's mission-critical IT systems and embedded systems Year 2000 ready. Outside consultants have reviewed the Company's overall process, plan and progress to date. The Company's plan for IT systems consists of several phases: (i) inventory -- identifying all IT systems and risk rating each according to its potential business impact; (ii) assessment -- identifying IT systems that use date functions and assessing them for Year 2000 functionality; (iii) remediation -- reprogramming, or replacing where necessary, inventoried items to make them Year 2000 ready; and (iv) testing and certification -- testing the code modifications and new inventory with other associated systems, including extensive date testing, and performing quality assurance testing to determine if they will successfully operate in the post-1999 environment. The Company completed the inventory and assessment phases for substantially all of its IT systems by year-end 1997. The Company completed the remediation, testing and certification of substantially all of its IT systems by June 30, 1999. The Company expects to complete the remainder of its remediation, testing and certification by September 30, 1999. Page 37 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) YEAR 2000 (CONTINUED) State of Readiness (Continued) The Company has inventoried and risk rated substantially all of its embedded systems. The results of these processes indicate that embedded systems should not present a material Year 2000 risk to the Company. The Company's remaining steps include testing selected embedded systems and remediating and certifying systems that exhibit Year 2000 issues. The Company is focusing its testing and remediation efforts on select embedded systems of its mission-critical facilities, such as data centers, service centers, communications centers and select office locations. The Company plans to complete the testing of these systems by September 30, 1999, and the remediation and certification of these systems by year-end 1999. The Company believes that its Year 2000 project is on schedule. External Relationships The Company also faces the risk that one or more of its critical suppliers or customers ("external relationships") will not be able to interact with the Company due to the third party's inability to resolve its own Year 2000 issues, including those associated with its own external relationships. The Company has completed its inventory of external relationships and risk rated each external relationship based upon the potential business impact, available alternatives and cost of substitution. In the case of mission-critical suppliers, such as banks, financial intermediaries, telecommunications providers and other utilities, mutual fund companies, IT vendors, financial market data providers, national pharmacy chains, electronic claims clearinghouses, major physician groups and major hospitals, the Company is engaged in discussions with the third parties and is attempting to obtain detailed information as to those parties' Year 2000 plans and state of readiness. A significant portion of the Company's critical external relationships have informed the Company that they are not aware of any Year 2000 related reason that they will not be able to perform their obligations to the Company in all material respects. Year 2000 Costs Total Year 2000 project costs are currently estimated to be at least $85 million (after tax) in 1999. A large majority of these costs are expected to be incremental expenses that will not recur in 2000 or thereafter. Year 2000 costs were $32 million (after tax) for the three months ended June 30, 1999 and $25 million (after tax) for the corresponding period in 1998. Year 2000 costs were $59 million for the six months ended June 30, 1999 and $41 million for the corresponding period in 1998. The Company expects that Year 2000 costs in 2000 will be immaterial. The Company expenses these costs as incurred and funds these costs through operating cash flows. Year 2000 readiness is critical to the Company. The Company has redeployed some resources from noncritical system enhancements to address Year 2000 issues. Due to the importance of IT systems to the Company's business, management has not deferred mission-critical systems enhancements to become Year 2000 ready. The Company does not expect these redeployments to have a material impact on the Company's financial condition or results of operations. Page 38 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) YEAR 2000 (CONTINUED) Risks and Contingency/Recovery Planning If the Company's Year 2000 issues were unresolved, potential consequences would include, among other possibilities, the inability to accurately and timely process benefits claims; update customers' accounts; process financial transactions; bill customers; assess exposure to risks; determine liquidity requirements or report accurate data to management, shareholders, customers, regulators and others; as well as business interruptions or shutdowns; financial losses; reputational harm; increased scrutiny by regulators; and litigation related to Year 2000 issues. The Company's international affiliates face additional Year 2000 risk due to the diverse environments in which they operate. The Company is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its critical external relationships and by developing contingency/recovery plans. The Company cannot guarantee that it will be able to resolve all of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company or its external relationships, however, could have a material adverse effect on the Company's results of operations, liquidity or financial condition. The Company is developing contingency/recovery plans aimed at sustaining the continuity of critical business functions before and after December 31, 1999. As part of its contingency planning process, the Company has identified reasonably possible Year 2000 failure scenarios and is developing contingency plans for those failure scenarios it believes could have a significant impact on the Company's operations. These scenarios include, but are not limited to, limitations on providers', suppliers' and customers' ability to interact electronically with the Company, Year 2000 related failures at key external relationships, limitations on the Company's suppliers' or customers' ability to move funds electronically, failures in pricing securities and increased call volumes. The Company's planned responses to these scenarios include, but are not limited to, use of alternative suppliers, use of outside providers to supplement internal capabilities and reallocation of existing resources. The Company has completed its high level contingency plans and is continuing to review and refine the detailed plans it has developed. The Company expects contingency/recovery planning to be substantially complete by September 1999. FORWARD-LOOKING INFORMATION/RISK FACTORS Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 1998 Annual Report on Form 10-K for factors that could cause actual Year 2000 results to differ from the Company's expectations. The "Forward-Looking Information/Risk Factors" and "Regulatory Environment" portions of that Annual Report also contain a general discussion of other important risks related to the Company's businesses. As described in the Annual Report, additional legislation or regulation related to managed care has been enacted or is being considered by the federal government and many states and this could adversely impact our business. Recently, these matters have included legislation exempting physicians from the antitrust laws that prohibit price fixing, group boycotts, and other horizontal restraints on competition. It is uncertain whether we can recoup, through higher premiums or other measures, any increased costs caused by this type of legislation. Page 39 40 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Refer to the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations - General Account Investments". PART II. OTHER INFORMATION Item 1. Legal Proceedings. Purported Class Action Complaints were filed in the United States District Court for the Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J. Oring. Other purported Class Action Complaints were filed in the United States District Court for the District of Connecticut on November 25, 1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on December 24, 1997 by Terry B. Cohen. The Connecticut actions were transferred to the United States District Court for the Eastern District of Pennsylvania (the "Court") for consolidated pretrial proceedings with the cases pending there. The plaintiffs filed a Consolidated and Amended Complaint (the "Complaint") seeking, among other remedies, unspecified damages resulting from defendants' alleged violations of federal securities laws. The Complaint alleged that the Company and three of its current or former officers or directors, Ronald E. Compton, Richard L. Huber, and Leonard Abramson, are liable for certain misrepresentations and omissions regarding, among other matters, the integration of the merger with U.S. Healthcare and the Company's medical claim reserves. The Company and the individual defendants filed a motion to dismiss the Complaint on July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but granted the plaintiffs leave to file a second amended complaint. On February 22, 1999, the plaintiffs filed a second amended complaint against the Company, Ronald E. Compton and Richard L. Huber. The Company and the remaining individual defendants filed a motion to dismiss the second amended complaint, and the Court denied that motion in March, 1999. Discovery proceedings have commenced and trial currently is scheduled to begin in early 2000. The Company is defending the actions vigorously. The Company is also involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations, including bad faith, medical malpractice, marketing and other litigation in its health business. Some of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary of the Company, is currently a party to a bad faith and medical malpractice action brought by Teresa Goodrich, individually and as successor in interest of David Goodrich. The action was originally filed in March, 1996 in Superior Court for the state of California, county of San Bernardino. The action alleges damages for unpaid medical bills, punitive damages and compensatory damages for wrongful death based upon, among other things, alleged denial of claims for services provided to David Goodrich by out of network providers without prior authorization. On January 20, 1999 a jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid medical bills, $3.7 million for wrongful death and $116 million for punitive damages. On April 12, 1999 the trial court amended the judgment to include Aetna Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27, 1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed appeals with the California Court of Appeal and will continue to defend this matter vigorously. While the ultimate outcome of the lawsuits referred to in this paragraph cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, and after consultation with counsel, the lawsuits referred to in this paragraph are not expected to result in liability for amounts material to the financial condition of the Company, although they may adversely affect results of operations in future periods. Page 40 41 Item 4. Submission of Matters to a Vote of Security Holders. At the Annual Meeting of Shareholders, held April 30, 1999, five matters were submitted to a vote: the election of directors for the coming year; the ratification of the appointment of KPMG LLP as independent public accountants for the current calendar year; a proposal to implement cumulative voting in the election of directors; a proposal to link executive compensation to health care quality; and a proposal relating to the endorsement of the Coalition for Environmentally Responsible Economies "CERES" principles. The results of the voting on these matters follow: Election of Directors:
Votes Votes For Withheld --- -------- Leonard Abramson 125,698,277 1,691,910 Betzy Z. Cohen 125,950,932 1,439,255 William H. Donaldson 125,989,009 1,401,178 Barbara Hackman Franklin 126,010,826 1,379,361 Jerome S. Goodman 125,957,029 1,433,158 Earl G. Graves 125,979,819 1,410,368 Gerald Greenwald 126,044,330 1,345,857 Ellen M. Hancock 126,061,871 1,328,316 Richard L. Huber 125,931,935 1,458,252 Michael H. Jordan 126,045,347 1,344,840 Jack D. Kuehler 126,043,415 1,346,772 Frank R. O'Keefe, Jr. 126,017,167 1,373,020 Judith Rodin 125,986,690 1,403,497
Other matters voted upon:
Votes Votes Broker For Against Abstentions Non-Votes --- ------- ----------- --------- Ratification of Independent Public Accountants 126,685,487 326,796 377,904 - Proposal to Implement Cumulative Voting in Election of Directors 33,959,421 76,601,452 3,053,406 13,775,908 Proposal to Link Executive Compensation to Health Care Quality 4,929,406 104,354,449 4,330,424 13,775,908 Proposal Relating to Endorsement of the CERES Principles 9,437,578 97,645,955 6,530,746 13,775,908
Page 41 42 Item 5. Other Information. (a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends The following table sets forth the Company's and Aetna Services' ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Six Months Ended June 30, Years Ended December 31, ------------------ ------------------------------------------------------- Aetna Inc. 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- Ratio of Earnings to Fixed Charges 4.60 4.96 5.74 2.45 4.97 4.74 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 3.71 3.94 4.46 2.10 4.97 4.74 - -------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, Years Ended December 31, ------------------- ------------------------------- Aetna Services, Inc. 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Ratio of Earnings to Fixed Charges 3.57 4.31 5.78 2.44 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 3.57 4.31 5.78 2.44 - ----------------------------------------------------------------------------------------------------------------------------
For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and include the dividends paid to preferred shareholders of a subsidiary. (Refer to Note 15 of Notes to Consolidated Financial Statements in Aetna Inc.'s 1998 Annual Report on Form 10-K.) During 1995 and 1994 there was no preferred stock outstanding, and as a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. (b) Ratings The ratings of certain Aetna Inc. subsidiaries follow:
Rating Agencies ------------------------------------------------------ Moody's Duff & Investors Standard A.M. Best Phelps Service & Poor's - -------------------------------------------------------------------------------------------------------------------------- Aetna Services, Inc. (senior debt)** April 27, 1999 * A A3 A July 28, 1999 (1) * A A3 A Aetna Services, Inc. (commercial paper)** April 27, 1999 * D-1 P-2 A-1 July 28, 1999 (1) * D-1 P-2 A-1 Aetna Life Insurance Company (claims paying/financial strength) April 27, 1999 A AA- A1 A+ July 28, 1999 (1) A AA- A1 A+ Aetna Life Insurance and Annuity Company (claims paying/financial strength) April 27, 1999 A AA Aa3 AA- July 28, 1999 (1) A AA Aa3 AA- - --------------------------------------------------------------------------------------------------------------------------
* Nonrated by the agency. ** Fully and unconditionally guaranteed by Aetna Inc. (1) Moody's Investors Service and Standard & Poor's have the debt and financial strength ratings on outlook negative. Page 42 43 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits
(10) Material Contracts. 10.1 The Aetna Services, Inc. Supplemental Pension Benefit Plan Amended and Restated as of January 1, 1999.* 10.2 The Aetna Services, Inc. Supplemental Incentive Savings Plan Amended and Restated as of January 1, 1999.* 10.3 Pension Credit Agreement, dated as of September 26, 1997, by and between the Company and Frederick C. Copeland, Jr.* 10.4 Employment Agreement, dated as of April 6, 1999, by and between the Company and Thomas J. McInerney.* 10.5 Employment Agreement, dated as of May 4, 1999, by and between the Company and Frederick C. Copeland, Jr.* (12) Statement Re: Computation of Ratios. Statement re: computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 for Aetna Inc. and for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996 for Aetna Services, Inc. (15) Letter Re: Unaudited Interim Financial Information. Letter from KPMG LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated July 28, 1999. (27) Financial Data Schedule. * Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. None. Page 43 44 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aetna Inc. ------------------------------ Registrant Date July 29, 1999 By /s/ ALAN M. BENNETT ------------------------------ Alan M. Bennett Vice President and Corporate Controller (Chief Accounting Officer) Page 44 45 AETNA INC. EXHIBIT INDEX =========================================
EXHIBIT NUMBER DESCRIPTION ------ ----------- (10) Material Contracts. 10.1 The Aetna Services, Inc. Supplemental Pension Benefit Plan Amended and Restated as of January 1, 1999.* 10.2 The Aetna Services, Inc. Supplemental Incentive Savings Plan Amended and Restated as of January 1, 1999.* 10.3 Pension Credit Agreement, dated as of September 26, 1997, by and between the Company and Frederick C. Copeland, Jr.* 10.4 Employment Agreement, dated as of April 6, 1999, by and between the Company and Thomas J. McInerney.* 10.5 Employment Agreement, dated as of May 4, 1999, by and between the Company and Frederick C. Copeland, Jr.* (12) Statement Re: Computation of Ratios. Statement re: computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 for Aetna Inc. and for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996 for Aetna Services, Inc. (15) Letter Re: Unaudited Interim Financial Information. Letter from KPMG LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated July 28, 1999. (27) Financial Data Schedule. * Management contract or compensatory plan or arrangement.
Page 45 EX-10.1 2 SUPPLEMENTAL PENSION BENEFIT PLAN 1 THE AETNA SERVICES, INC. SUPPLEMENTAL PENSION BENEFIT PLAN AMENDED AND RESTATED AS OF JANUARY 1, 1999 2 TABLE OF CONTENTS
Article Page - ------- ---- 1. DEFINITIONS AND CONSTRUCTION........................................................ 3 2. BENEFITS ........................................................................... 6 3. MANAGEMENT OF THE PLAN ............................................................. 14 4. AMENDMENT AND TERMINATION .......................................................... 15 5. ADOPTION BY AFFILIATE .............................................................. 16 6. MISCELLANEOUS ...................................................................... 17 Appendix A. LIST OF PARTICIPATING COMPANIES .................................................... 19
3 Aetna Inc. (the "Company") hereby amends and restates, effective January 1, 1999, The Aetna Services, Inc. Supplemental Pension Benefit Plan (the "Plan"). The benefits payable to any Participant (or a Beneficiary on behalf of the Participant) who retired, otherwise terminated employment, or died prior to January 1, 1999 shall be calculated and paid under the terms and provisions of the Plan as in effect on the date the Participant retired, otherwise terminated employment or died; and no such Participant shall have a Supplemental Account Balance, the right to any form of benefit provided in this Plan, or any other rights or features in this Plan. This Plan is intended to provide benefits which supplement the benefits provided under The Retirement Plan for Employees of Aetna Services, Inc. (the "Retirement Plan"): (1) benefits in excess of those permitted to be provided after application of one or more limits applicable to the Retirement Plan under the Internal Revenue Code of 1986, as amended (the "Code"); (2) benefits attributable to certain elements of the employee's compensation not taken into account in determining the employee's pension under the Retirement Plan; and (3) benefits provided at the direction of the Board of Directors of the Company, the Board of Directors of the Employer, or other authorized officers of the Company or the Employer, but which are not provided under the Retirement Plan. That portion of the Plan that provides benefits that are attributable solely to the benefits that would be provided under the Retirement Plan but for the application of the limitations of Section 415 of the Code shall be treated as a separate plan which is an excess benefit plan within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended. 2 4 ARTICLE 1 DEFINITIONS AND CONSTRUCTION 1.1 "AFFILIATE" means any entity which, with the Company, constitutes a group of trades or businesses under common control, a controlled group of corporations, an affiliated service group, or a group of corporations otherwise required to be aggregated, as provided in Sections 414(b), (c), (m), and (o) of the Code, respectively. 1.2 "CODE" means the Internal Revenue Code of 1986, as amended. 1.3 "COMPANY" means Aetna Inc. or any successor by merger, consolidation, purchase or otherwise. 1.4 "EARNINGS" shall be as defined in the Retirement Plan, except without regard to the cap imposed therein pursuant to Section 401(a)(17) of the Code, and provided further that: (a) With respect to any awards made to a Participant under the Company's Management Incentive Plan, the following shall apply: (1) an award paid in cash and not deferred by the Participant shall be included in Earnings when paid; (2) an award deferred by the Participant shall never be included in Earnings (either when earned or when paid), unless the Participant's Earnings for the year in which the award would have been paid if not deferred, without regard to such award, exceed the limit established by Section 401(a)(17) of the Code, in which case: for performance years 1998 and earlier, the award shall be allocated to the Participant's Earnings over the twelve month performance year prior to the earliest date on which the award would have been payable if the Participant had so elected; and for performance years 1999 and later, the 3 5 award shall be allocated to the Participant's Earnings in a lump sum within a reasonable time after the date on which the award would have been paid if not deferred; and (3) an award paid in the form of a grant of a Company stock option pursuant to the Company's Executive Bonus Exchange for Stock Options Program shall be excluded from Earnings; provided, however, that if the Participant's Earnings for the year in which the award would have been paid if not deferred, without regard to such award, exceed the limit established by Section 401(a)(17) of the Code: (i) the dollar amount of such bonus exchanged for Company stock under the 1998 program shall be included in Earnings; and (ii) if such grant of a Company stock option under the 1999 and subsequent programs is subsequently converted into a deferred bonus pursuant to an opt-out election permitted by the Company, the dollar amount of such bonus exchanged for Company stock shall be included in Earnings; in each such case in a lump sum within a reasonable time after the date on which the award would have been paid if cash had been elected. (b) With respect to Highly Leveraged Employees, for 1999 and subsequent Plan Years, the Earnings of any Participant taken into account under the Plan shall not exceed $500,000. For prior years, certain other limits apply as set forth in the plan document in effect prior to January 1, 1999. (c) Consistent with the Retirement Plan, Earnings shall be determined as if no elective salary reduction had been made pursuant to Sections 125 and 401(k) of the Code, or pursuant to the Supplemental Incentive Savings Plan. 4 6 (d) Earnings shall not include certain cash Merger Awards made to recognize individual employee efforts in connection with the U.S. Healthcare Merger and related integration efforts and certain other payments which are determined by the Company, from time to time, to be excluded from Earnings. 1.5 "Effective Date" means, unless otherwise stated, the effective date of this amended and restated Plan, January 1, 1999. 1.6 "Eligible Employee" means, for any Plan Year commencing on or after the Effective Date, an individual who is actively employed by the Employer or a Participating Company and an Eligible Employee under the Retirement Plan, and: (1) whose benefit under the Retirement Plan is limited by the application of Section 401(a)(17) or 415 of the Code, (2) who earns or has earned awards under the Employer's Management Incentive Plan or plans of similar nature providing for performance bonuses to employees at mid-level management and above which are not taken into account in determining the Employee's benefit under the Retirement Plan and which are included in the definition of Earnings in this Plan, or (3) who has entered into an agreement with the Employer or a Participating Company that is ratified by the Employer prior to July 19, 1996 or by the Company thereafter and that provides for an award to the Employee of additional years of service, compensation or other amounts for the purpose of determining a pension benefit but which is not taken into account in determining that benefit under the Retirement Plan. With respect to (1) and (2) above, an individual shall become an Eligible Employee on the date the individual receives written notice thereof. 1.7 "EMPLOYER" means Aetna Services, Inc. 5 7 1.8 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.9 "EXCESS BENEFIT PLAN" means an excess benefit plan within the meaning of Section 3(36) of ERISA. 1.10 "HIGHLY LEVERAGED EMPLOYEE" means an employee who is so designated by the Employer or a Participating Company, in the sole discretion of such Employer or Participating Company, by virtue of the material emphasis by the Employer or a Participating Company, as the case may be, on variable or incentive pay. 1.11 "PARTICIPANT" means an Eligible Employee or former Eligible Employee. 1.12 "PARTICIPATING COMPANY" means any Affiliate which either (a) is listed in Appendix A on the Effective Date, or (b) after the Effective Date, adopts the Plan in accordance with the provisions of Article 5 hereof. A Participating Company may adopt this Plan with respect to less than all of its otherwise eligible employees. On the date that a Participating Company ceases to be an Affiliate, it shall also cease to be a Participating Company, pursuant to Section 5.2 hereof. 1.13 "PLAN" means The Aetna Services, Inc. Supplemental Pension Benefit Plan, as set forth herein and as amended from time to time. To the extent that Supplemental Benefits are provided to Participants solely as a result of the application of the limitations of Section 415 of the Code in the determination of such Participants' benefits under the Retirement Plan, the Plan shall be an Excess Benefit Plan which shall be a separate plan hereunder but shall be included in the definition of "Plan." 1.14 "PLAN YEAR" means the calendar year. 6 8 1.15 "RETIREMENT PLAN" means The Retirement Plan for Employees of Aetna Services, Inc., as amended and restated effective January 1, 1999, and as amended thereafter from time to time. 1.16 "SUPPLEMENTAL ACCOUNT BALANCE" means the amount calculated in accordance with Section 2.1. 1.17 "SUPPLEMENTAL BENEFIT" means the benefit provided under this Plan. 1.18 CONSTRUCTION. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. Where appropriate, words used in the singular include the plural and words used in the plural include the singular. The words "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to this entire Plan, not to any particular provision or Section. Capitalized terms used herein and not defined above shall have the meanings set forth in the Retirement Plan. ARTICLE 2 BENEFITS 2.1 AMOUNT OF BENEFITS. (a) CALCULATION OF BENEFITS. Commencing January 1, 1999, the amount of a Participant's Supplemental Account Balance shall equal the difference between: (1) the amount that would have constituted the Participant's Account Balance in the Retirement Plan calculated as of the Participant's Termination from Service Date if: 7 9 (A) Sections 401(a)(17) and 415 of the Code did not apply to the calculation, (B) Earnings as defined herein were used in the calculation, and (C) any awards of additional years of service, compensation or other amounts that were made to the Participant for the purpose of determining a pension benefit were taken into account, provided, however, that any such award must be made in a written contract or plan between the Participant and the Participant's employer and ratified by the Employer prior to July 19, 1996 or by the Company thereafter; and (2) the Participant's actual Account Balance in the Retirement Plan calculated as of the Participant's Termination from Service Date. After the Termination from Service Date, any changes in the Supplemental Account Balance shall be calculated independently of the Account Balance under the Retirement Plan, applying the annual Interest Credit rules set forth in the Retirement Plan. (b) SPECIAL RULE FOR PARTICIPANTS ON LONG-TERM SEVERANCE. Notwithstanding Section 2.1(a) above, the benefit hereunder for Participants who were on specially negotiated long-term severance or departure arrangements as of January 1, 1999, shall be calculated without giving credit for an "Opening Balance" under the Retirement Plan for purposes of Section 2.1(a)(1) above. 8 10 (c) SPECIAL RULE FOR REHIRED PARTICIPANTS. Notwithstanding Section 2.1(a) above, in the case of a rehired Participant, the calculation of a Supplemental Account Balance shall take into consideration the balances that existed in this Plan and in the Retirement Plan as of the Participant's previous Termination from Service Date and any distributions made therefrom. In addition, notwithstanding a Participant's subsequent reemployment, benefits in pay status shall not thereafter be suspended. (d) EXCESS BENEFIT PLAN AMOUNT. The amount of any Supplemental Benefit payable to a Participant under the portion of the Plan that is an Excess Benefit Plan shall be determined taking into account any actuarial adjustments to the limits applicable under Section 415 of the Code and the terms of the Retirement Plan on the basis of the form and time of payment of the Participant's benefit under the Retirement Plan. (e) OCCURRENCE OF DISTRIBUTION. The Supplemental Account Balance shall be reduced as follows to reflect distributions: (1) In the case of a lump sum distribution, on the first day of the month in which the distribution is actually made; (2) In the case of an annuity, on the first day of the month in which the Annuity Starting Date occurs, at which time the Supplemental Account Balance shall be reduced to zero. (f) PRESERVATION OF TRANSITION PARTICIPANT'S ACCRUED FINAL AVERAGE PAY BENEFIT. In addition to the foregoing, if a benefit in excess of the Cash Balance Account Balance is payable in accordance with Section 6.4 or 7.4 of the Retirement Plan pursuant to Code Section 411(d)(6), a 9 11 coordinated benefit in excess of the Supplemental Account Balance shall be payable under this Plan. 2.2 OPTIONAL FORMS. The Participant may elect to receive his or her vested Supplemental Benefit in one of the following forms: (a) Lump Sum. A lump sum payment to the Participant, with the remaining Supplemental Account Balance, if any, used to provide an annuity form of benefit, either immediately or with a deferred commencement date. The lump sum shall be 50% of the Supplemental Account Balance; provided, however, that if a Participant's Supplemental Account Balance is $25,000 or less, the Participant shall receive a lump sum of 100% of the Supplemental Account Balance; (b) Life Annuity. A single life annuity providing a monthly annuity to the Participant during the Participant's life with all payments stopping on the Participant's death; (c) Full Cash Refund Annuity. A single life annuity providing a monthly annuity to the Participant during the Participant's life and a final payment after the Participant's death to the Beneficiary equal to the difference, if any, between the Participant's Supplemental Account Balance on the Annuity Starting Date with respect to such annuity less the sum of all annuity payments made prior to the Participant's death; (d) Ten Year Certain and Life Annuity. A single life annuity providing a monthly annuity to the Participant during the Participant's life, and, if the Participant dies prior to the end of the 10 year period commencing on the Annuity Starting Date 10 12 with respect to such annuity, payments to the Participant's Beneficiary for the remainder of such 10 year period; (e) 50% Joint and Survivor Annuity. A joint and survivor annuity providing a monthly annuity to the Participant during the Participant's life, with a continuing annuity for the life of the joint annuitant, whom the Participant designates prior to the commencement of annuity payments, which shall be 50% of the annuity payable to the Participant during the Participant's life; and (f) 100% Joint and Survivor Annuity. A joint and survivor annuity providing a monthly annuity to the Participant during the Participant's life, with a continuing annuity for the life of the joint annuitant, whom the Participant designates prior to the commencement of annuity payments, which shall be 100% of the annuity payable to the Participant during the Participant's life. None of the annuity options shall include the Social Security supplement until age 62 or cost of living adjustments (collectively "COLA Features"); provided, however, a Participant (i) whose benefit under the Retirement Plan is limited by Section 415 of the Code and (ii) who elects solely an annuity, commencing at the same time under both the Retirement Plan and this Plan, may elect under this Plan the same annuity option with COLA Features which is elected under the Retirement Plan. Once an annuity is in payment status no further election as to type of annuity may be made. 2.3 ELECTION AS TO TIME, FORM OF PAYMENT AND BENEFICIARY. Each Participant shall make an election, on a form and in the manner 11 13 prescribed by the Company for this purpose, specifying the time at which and the form (lump sum and annuity or annuity only) in which his or her vested Supplemental Account Balance is to be paid and the Participant's designated Beneficiary. Such election shall be made by the later of: December 31, 1998 or not more than 90 days after the date on which the individual becomes a Participant. Any election which does not comply with these time limits will be deemed an election pursuant to Section 2.4 and will be effective only if it complies with the rules set forth therein. Except as otherwise provided in Section 2.4 and Section 2.5, payment of a Participant's vested Supplemental Account Balance shall be made to the Participant at the time and in the form (lump sum and annuity or annuity only) specified for payment in the election made by the Participant described above. In the absence of an election which complies with either this Section 2.3 or Section 2.4, a Participant's vested Supplemental Account Balance shall be paid in accordance with Section 2.2 (a) above, with the annuity portion, if any, being paid as a full cash refund single life annuity as set forth in Section 2.2 (c), and with the lump sum to be paid, and annuity payments to commence, immediately upon the Participant's Termination from Service. 2.4 ABILITY TO CHANGE ELECTION. Notwithstanding any election that may have been made by a Participant pursuant to Section 2.3, a Participant who has not yet had a Termination from Service may elect to receive payment of the vested Supplemental Account Balance at a time and in a form (lump sum and annuity or annuity only) other than that specified by the Participant in the election made pursuant to Section 2.3; provided however that: 12 14 (a) an election made under this Section 2.4 shall apply to Participant's entire vested Supplemental Account Balance notwithstanding any prior elections; and (b) if the Participant's Termination from Service Date occurs within one year and a day after the date on which the election to change is made, the election (other than a change in Beneficiary) shall not be honored and the Participant's vested Supplemental Account Balance shall be distributed in accordance with Section 2.3. 2.5 PAYMENT IN THE EVENT OF PARTICIPANT'S DEATH. Notwithstanding any election that may have been made by a Participant pursuant to Section 2.3 or 2.4, any vested Supplemental Account Balance remaining pursuant to Section 2.1(d) above as of the date of the Participant's death shall be paid to the Participant's Beneficiary in a lump sum as soon as practicable after the Company receives notification of the Participant's death. 2.6 ACCELERATION OF PAYMENT. Notwithstanding any other provision of this Plan to the contrary, the Company in its sole discretion may accelerate the payment of vested Supplemental Account Balances to all or any group of similarly situated Participants, whether before or after the Participants' Termination from Service, in response to changes in the tax laws or accounting principles. 2.7 SMALL PAYMENTS; LUMP SUM CASH-OUT. Notwithstanding any other provision of this Plan, if upon a Participant's Termination from Service Date the Supplemental Account Balance is not in excess of ten thousand dollars ($10,000), or such higher amount as may be determined by the Company from time to time, the Plan shall make a single lump sum payment of the entire vested Supplemental Account Balance to the 13 15 Participant or Beneficiary entitled to such benefit. Such lump sum payment shall be paid as soon as practicable after the Participant's Termination from Service Date. If the Participant has no vested interest in a benefit, the Participant shall be deemed to have a distribution of zero dollars on the Participant's Termination from Service Date. In the event the Supplemental Account Balance is not in excess of the dollar limitation at the time the Plan Administrator initially determines to pay the benefit, but the benefit is not immediately paid because the Participant (or Beneficiary) cannot be located or there is an administrative delay in making payment, distribution of the entire vested Supplemental Account Balance shall be made to the Participant (or Beneficiary) in a lump sum at such time as the Plan Administrator locates the Participant (or Beneficiary) or the issue causing the administrative delay is resolved. 2.8 VESTING. An amount will only be payable pursuant to this Article 2 if the Participant is vested. A Participant will be vested in his or her Supplemental Account Balance if (i) he or she is vested in the benefit under the Retirement Plan, or (ii) in accordance with an agreement with the Employer or a Participating Company that is ratified by the Employer prior to July 19, 1996 or by the Company thereafter and that provides for an alternative vesting rule; subject however to Sections 2.11 and 2.12. 2.9 PAYMENT OF FICA AND OTHER TAXES. (a) If, under applicable law and regulations, FICA and other taxes are required to be withheld by the Employer or the applicable Participating Company with respect to a Supplemental Benefit earned by a Participant during any period that Supplemental Benefits are not currently being paid to the Participant, then the compensation otherwise currently payable to a Participant from the Employer or the applicable Participating Company 14 16 during such period shall be reduced by an amount equal to such FICA and other taxes. To the extent that the compensation currently payable to a Participant during any such period is insufficient to permit an amount equal to the FICA and other taxes required to be withheld by the Employer or the applicable Participating Company during that period to be withheld from such current compensation, the amount shall be taken by distribution from the Supplemental Account Balance. (b) If, under applicable law and regulations, FICA and other taxes are required to be withheld by the Employer for any period with respect to a Supplemental Benefit earned by the Participant during any period that Supplemental Benefits are currently being paid to the Participant, then, in the Employer's discretion, either the Supplemental Benefit or any other compensation otherwise currently payable to a Participant during such period shall be reduced by an amount equal to such FICA and other taxes, or such taxes shall be paid by distribution from the Supplemental Account Balance, if any. 2.10 EXCESS BENEFIT PLAN. All Supplemental Benefits payable solely by reason of the application of the limitations of Section 415 of the Code to a Participant's benefit under the Retirement Plan shall be provided from the separate plan created herein that is an Excess Benefit Plan. 2.11 UNFUNDED NATURE OF BENEFIT. No assets shall be segregated or earmarked with respect to any Participant and no Participant or Beneficiary shall have any right to assign, transfer, pledge or hypothecate an interest or any portion thereof in any benefit payable hereunder. The Plan shall not constitute a trust or a funded arrangement of any sort and shall be merely for the purpose of recording an unsecured contractual 15 17 obligation of each obligated party; provided, however, that the Employer and the Company reserve the right to meet the obligations created under the Plan through one or more trusts or other agreements. 2.12 REDUCTION OF BENEFIT. If a Participant breaches an obligation to the Company, the Employer or a Participating Company with respect to the payment of a specific sum of money, the Company, the Employer or the applicable Participating Company may reduce any benefits payable to such Participant under this Plan, in the manner of setoff or otherwise, to the extent of such obligation and any costs incurred with respect thereto. In addition, the Company, the Employer and the Participating Companies do not waive any rights to reduce benefits, including but not limited to setoff rights, which such entities may have under applicable law or a prior written agreement between all or any of them and an Employee, all of which rights are enforceable independent of the terms of this Plan. ARTICLE 3 MANAGEMENT OF THE PLAN 3.1 ADMINISTRATOR. The Employer shall be the Administrator with the sole responsibility for the administration of the Plan. The Administrator may delegate to any person or entity any powers or duties of the Administrator under the Plan. To the extent of any such delegation, the delegatee shall become responsible for administration of the Plan, and references to the Administrator shall apply instead to the delegatee. Any action by the Employer assigning any of its responsibilities as Administrator to specific persons who are all directors, officers, or employees of the Employer, the Company, or the Participating Companies shall not constitute delegation of the Administrator's responsibilities but 16 18 rather shall be treated as the manner in which the Employer has determined internally to discharge such responsibility. The Administrator shall not be a fiduciary (within the meaning of Section 3(21) of ERISA) with respect to the portion of the Plan that is an Excess Benefit Plan. 3.2 POWERS AND DUTIES OF THE ADMINISTRATOR. The Administrator shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to construe and interpret the Plan, decide all questions of eligibility, determine the status and rights of Participants, and determine the amount, manner and time of payment of any benefits hereunder; (b) to receive from the Participating Companies and from Participants such information as shall be necessary for the proper administration of the Plan; (c) to furnish the Participating Companies, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (d) to appoint or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal and actuarial counsel; (e) to defend and initiate any lawsuit on behalf of the Plan or the Eligible Employees if the Administrator deems it reasonably necessary to protect the Plan or the Participants. If there shall arise any misunderstanding or ambiguity concerning the meaning of any of the provisions of the Plan arising out of the administration thereof, the Administrator shall have the sole right to construe such provisions. Subject to the limitations of the Plan and 17 19 applicable law, the Administrator may make such rules and regulations as it deems necessary or proper for the administration of the Plan and the transaction of business thereunder. The decisions of the Administrator with respect to any matter it is empowered to act on shall be made by it in its sole discretion based on the Plan documents and shall be final, conclusive and binding on all persons. ARTICLE 4 AMENDMENT AND TERMINATION 4.1 AMENDMENT. The Company reserves the right to amend this Plan from time to time in any respect, including without limitation a prospective reduction in accrual of benefits. See Section 4.4 regarding prohibition of retroactive reduction of benefits accrued under this Plan. 4.2 ACTION BY COMPANY. Any amendments to this Plan by the Company shall be made in writing and executed by the Senior Vice President, Corporate Human Resources or other Company officer holding such position, or by the President or Chief Executive Officer of the Company. Neither the consent of any Employee nor that of any payee is required for any amendment to the Plan. 4.3 TERMINATION BY COMPANY. The Plan may be terminated in whole or in part by the Company at any time. The Plan as a whole shall be terminated only pursuant to a resolution of the Board of Directors of the Company. The Plan may be terminated in part in the same manner as is prescribed for the adoption of amendments. Neither the consent of any Employee nor that of any payee is required for any termination of the Plan. 4.4 EFFECT OF AMENDMENT OR TERMINATION BY COMPANY. Any amendment or termination of this Plan by the Company shall be effective 18 20 prospectively and shall not serve to retroactively reduce any right to a benefit accrued under this Plan up to the date of such amendment or termination; provided, however, that in the event of any termination or partial termination of the Plan (including a Participating Company's ceasing to be a Participating Company pursuant to Section 5.2), the Company shall have the right to immediately cash out each affected Participant's benefit, notwithstanding any elections that have been made. ARTICLE 5 ADOPTION BY AFFILIATE 5.1 ADOPTION BY AFFILIATE. Any Affiliate may, with the consent of the Company, become a Participating Company under the Plan by a resolution of the Board of Directors of the Affiliate under which: (a) The Affiliate shall agree to be bound by all the provisions of the Plan in the manner set forth herein and any amendments hereto; and (b) The Affiliate shall agree to pay its share of expenses of the Plan as they may be determined by the Company from time to time. 5.2 TERMINATION BY A PARTICIPATING COMPANY. Any Participating Company may at any time elect to terminate its participation under the Plan with respect to all or any group of the Participating Company's Employees. A Participating Company shall terminate its participation under the Plan by resolution of the Board of Directors of the Participating Company. Notwithstanding the above, a Participating Company shall cease to be a Participating Company, without any further action, upon ceasing to be an Affiliate of the Company. The termination of participation by a Participating Company shall not relieve the 19 21 Participating Company of its liabilities under this Plan, including but not limited to those liabilities imposed under Section 6.2 hereof. ARTICLE 6 MISCELLANEOUS 6.1 EXCLUSIVE BENEFIT. The Plan is maintained for the exclusive benefit of Participants. 6.2 SOURCE OF PAYMENT. All benefits under the Plan shall be paid exclusively by the Employer or the applicable Participating Company from its general assets, provided that the Company shall be liable for all benefits under the Plan. 6.3 RIGHTS OF EMPLOYEES. Nothing contained herein shall be deemed to give any Employee the right to be retained in the service of the Employer or the applicable Participating Company or to interfere with the right of the Employer or the applicable Participating Company to discharge such Employee at any time, nor shall it be deemed to give the Employer or the applicable Participating Company the right to require the Employee to remain in its service, nor shall it interfere with the right of the Employer or the applicable Participating Company to terminate service at any time. 6.4 HEADINGS. The headings of the Plan are inserted for convenience of reference only and shall have no effect upon the meaning of the provisions hereof. 6.5 SEVERABILITY. If any provision of this Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision, and this Plan shall be construed and enforced as if such provision were omitted. 20 22 6.6 ALIENATION OF BENEFITS. Except as provided in Section 2.12, and except as otherwise provided by law, and consistent with Section 2.11 hereof, no benefit under this Plan may be voluntarily or involuntarily assigned or alienated. 6.7 LOST DISTRIBUTEES. Any benefit payable hereunder shall be deemed forfeited if the distributee to whom payment is due cannot be located, provided that such benefit shall be reinstated if a claim is made by the distributee for the forfeited benefit within two years of the date the forfeited benefit was originally payable pursuant to the provisions of Article 2. 6.8 GOVERNING LAW. This Plan shall be construed according to the laws of the State of Connecticut to the extent not pre-empted by Federal law. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer this 1st day of June, 1999. AETNA INC. By:/s/ Elease E. Wright ----------------------- Its: Senior Vice President, Corporate Human Resources Attest: - ----------------------- 21 23 APPENDIX A LIST OF PARTICIPATING COMPANIES
A. B. C. D. PARTICIPATING COMPANIES ORIGINAL DATE TAX IDENTIFICATION END OF OF INCLUSION NUMBER OF EMPLOYER FISCAL YEAR ----------------------- ------------- ------------------ ----------- Aetna Services, Inc. 9/1/72 06-0843808 12/31 Aetna Life Insurance Company 1/1/55 06-6033492 12/31 Aeltus Investment Management Inc. 1/26/73 06-0888148 12/31 Aetna Life Insurance and Annuity Company 9/1/72 71-0294708 12/31 Aetna U.S. Healthcare Dental Plan of California, Inc. 1/1/98 06-1160812 12/31 Aetna Healthcare of California, Inc. 1/1/98 95-3402799 12/31 Aetna International, Inc. 1/1/98 06-1028458 12/31
22 EX-10.2 3 SUPPLEMENTAL INCENTIVE SAVINGS PLAN 1 THE AETNA SERVICES, INC. SUPPLEMENTAL INCENTIVE SAVINGS PLAN Amended and Restated as of January 1, 1999 2 TABLE OF CONTENTS
Article Page - ------- ---- I. DEFINITIONS AND CONSTRUCTION........................................................ 3 II. DEFERRAL OF PAY AND INCENTIVE CONTRIBUTIONS......................................... 5 III. PAYMENT OF DEFERRED AMOUNTS......................................................... 9 IV. MANAGEMENT OF THE PLAN ............................................................. 10 V. AMENDMENT AND TERMINATION .......................................................... 12 VI. ADOPTION BY AFFILIATE .............................................................. 13 VII. MISCELLANEOUS ...................................................................... 13
Appendix A. LIST OF PARTICIPATING COMPANIES 3 Aetna Inc. (the "Company") hereby amends and restates, effective January 1, 1999, The Aetna Services, Inc. Supplemental Incentive Savings Plan. This Plan is intended to provide benefits to certain Employees which supplement the benefits provided under The Aetna Services, Inc. Incentive Savings Plan (the "ISP"): (1) benefits in excess of those permitted to be provided after application of one or more limits applicable to the ISP under the Internal Revenue Code of 1986, as amended (the "Code"); and (2) benefits provided at the direction of the Board of Directors of the Company, the Board of Directors of the Employer, or other authorized officers of the Company or the Employer, but which are not provided under the ISP. This document constitutes two separate plans, one of which (the "Mirror Plan") provides certain benefits, as more specifically set forth in Section 2.1(a) hereof, to certain Employees, that are attributable solely to the benefits, during the period of eligibility to participate under the ISP, that would be provided to such employees under the ISP but for the application of sections 401(a)(17) or 402(g) of the Code, and one of which (the "Supplemental Plan") provides benefits, as more specifically set forth in Sections 2.1(b) and (c) hereof, for the following purposes: to take into account certain bonuses not considered as compensation under the ISP; and to provide such additional benefits as are provided at the direction of the Board of Directors of the Company, the Board of Directors of the Employer, or other authorized officers of the Company or the Employer, but which are not provided under the ISP. The Mirror Plan and Supplemental Plan shall constitute separate plans for (without limitation) the purposes of Public Law 104-95, 4 U.S.C. Section 114, governing state taxation of deferred -2- 4 compensation. The two plans shall be referred to herein in the aggregate as the Plan. This instrument sets forth provisions which constitute the Plan as amended and restated effective January 1, 1999. ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 "ACCOUNT" means, for any Participant, the account established for the Participant under Section 2.3. Each Account will consist of two sub-accounts, the Mirror Sub-Account and the Supplemental Sub-Account. 1.2 "ACCOUNT BALANCE" means, for any Participant as of any date, the aggregate amount reflected in the Participant's Mirror Sub-Account and the Participant's Supplemental Sub-Account. 1.3 "AFFILIATE" means any entity which, with the Company, constitutes a group of trades or businesses under common control, a controlled group of corporations, an affiliated service group, or a group of corporations otherwise required to be aggregated, as provided in sections 414(b), (c), (m), and (o) of the Code, respectively. 1.4 "BOARD" means the Board of Directors of the Company. 1.5 "CODE" means the Internal Revenue Code of 1986, as amended. 1.6 "COMPANY" means Aetna Inc. or any successor by merger, consolidation, purchase or otherwise. 1.7 "EFFECTIVE DATE" means the effective date of this amended and restated Plan, January 1, 1999. 1.8 "ELIGIBLE EMPLOYEE" means, for any Plan Year, an Employee whose total compensation (as reflected on Form W-2) for the prior Plan Year, when added to all elective deferrals of compensation which would -3- 5 otherwise have been reflected on Form W-2, aggregated more than $160,000 or such other amount announced by the Company prior to the beginning of the applicable Plan Year, and whose benefit under the ISP for the Plan Year is limited by the application of section 401(a)(17) or 402(g) of the Code as set forth in Section 2.1(a) hereof. For the first Plan Year in which an Employee is an Eligible Employee, such Employee shall not be an Eligible Employee until the time as of which the benefit limitation under ISP for the Plan Year, as set forth in the previous sentence, has been reached. 1.9 "EMPLOYEE" means any person who is actively employed by the Employer or a Participating Company, other than as a general agent, a broker, an independent contractor, or a leased employee (within the meaning of Section 414(n)(2) of the Code). 1.10 "EMPLOYER" means Aetna Services, Inc. 1.11 "HIGHLY LEVERAGED EMPLOYEE" means an employee who is so designated by the Employer or a Participating Company, in the sole discretion of the Employer or Participating Company, by virtue of the material emphasis by the Employer or a Participating Company, as the case may be, on variable or incentive pay. 1.12 "ISP" means The Aetna Services, Inc. Incentive Savings Plan, as amended and restated effective January 1, 1999 and as it may be amended from time to time thereafter. 1.13 "MIRROR SUB-ACCOUNT" means that portion of a Participant's Account that is credited with benefits provided by Section 2.1(a) hereof. 1.14 "PARTICIPANT" means an Eligible Employee or former Eligible Employee who has an Account Balance. 1.15 "PARTICIPATING COMPANY" means any Affiliate which either (a) is listed in Appendix A on the Effective Date, or (b) after the Effective Date, -4- 6 adopts the Plan in accordance with the provisions of Article VI hereof. A Participating Company may adopt this Plan with respect to less than all of its otherwise eligible employees. On the date that a Participating Company ceases to be an Affiliate, it shall also cease to be a Participating Company, pursuant to section 6.2 hereof. 1.16 "PAY" means, for any Eligible Employee for any Plan Year, the amount determined using the definition of "Pay" set forth in the ISP, with the following changes: (a) the limit set forth in Section 401(a)(17) of the Code shall not apply; and (b) with respect to Highly Leveraged Employees, Pay taken into account under the Plan shall not exceed $500,000. 1.17 "PLAN" means The Aetna Services, Inc. Supplemental Incentive Savings Plan, as set forth herein and as amended from time to time. 1.18 "PLAN YEAR" means the calendar year. 1.19 "SUPPLEMENTAL SUB-ACCOUNT" means that portion of a Participant's Account that is credited with benefits provided by Sections 2.1(b), (c) and (d) hereof. 1.20 "TERMINATION FROM SERVICE" means a Termination from Service as defined in the ISP. 1.21 "VALUATION DATE" means the last business day of each calendar month. 1.22 CONSTRUCTION. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. Where appropriate, words used in the singular include the plural and words used in the plural include the singular. The words "hereof," "herein," "hereunder" and other similar -5- 7 compounds of the word "here" shall mean and refer to this entire Plan, not to any particular provision or section. Capitalized terms used herein and not defined above shall have the meanings set forth in the ISP. ARTICLE II DEFERRAL OF PAY 2.1 DEFERRAL OF PAY AND INCENTIVE CONTRIBUTIONS. (a) For each Plan Year, each individual who is an Eligible Employee for the Plan Year and who does not make an election pursuant to Subsection (e) below shall have credited to the Mirror Sub-Account of the Eligible Employee's Account the difference between: (1) the amount that would have been credited to the Eligible Employee's Deferral Account and Incentive Contribution Account pursuant to the Eligible Employee's Compensation Deferral Agreement if (i) the definition of Pay set forth in this Plan had been used instead of the ISP definition, and (ii) the cap on contributions to the Eligible Employee's Deferral Account, set forth in Section 402(g) of the Code, did not apply; and (2) the amount that actually was credited to the Eligible Employee's Deferral Account and Incentive Contribution Account during the Plan Year. The Eligible Employee's Compensation Deferral Agreement shall be a compensation deferral agreement with respect to this Plan, and the Eligible Employee's compensation shall be reduced in the same manner and to the same extent that it would have been reduced pursuant to the ISP. (b) For each Plan Year, each individual who (i) is an Eligible Employee for the Plan Year, (ii) made Deferral Contributions to the ISP for such Plan Year, and (iii) elected to defer an award under the Company's Management Incentive Plan, shall have credited to the Supplemental Sub-Account of the Eligible Employee's Account the amount that would have -6- 8 been credited as an Incentive Contribution under 2.1(a) above with respect to such deferred award if (i) such deferred award had been included in the Eligible Employee's Pay for the Plan Year in which it would otherwise have been paid (subject to the limit on Pay set forth in Section 1.16(b), if applicable); and (ii) Deferral Contributions had been made with respect to such award. A Participant shall not be treated as having elected to defer an award pursuant to clause (ii) of the preceding sentence if such Participant has elected to use the award to take part in the Company's Executive Bonus Exchange for Stock Options Program, unless the Participant subsequently opts out of the Executive Bonus Exchange for Stock Options Program and instead defers receipt of the award. (c) In addition to the amounts determined in accordance with Subsections 2.1(a) and (b) to be contributed to a Participant's Mirror Sub-Account and Supplemental Sub-Account, there shall be credited to a Participant's Supplemental Sub-Account for any Plan Year such other amount as may be determined by the Board of Directors of the Company, the Board of Directors of the Employer, or other authorized officers of the Company or the Employer, to be contributed to the Participant's Supplemental Sub-Account for such Plan Year. Any corresponding reductions to or deductions from the compensation otherwise payable to the Participant shall be made as specified by such Board or officer(s) and as agreed to by the Participant. (d) Prior to the first day of any Plan Year, or, for the Plan Year in which an Employee first becomes an Eligible Employee, no later than 30 days after the Employee becomes an Eligible Employee, an Eligible Employee may elect, on the form and in the manner established by the Employer for such purpose, not to participate in this Plan for such Plan -7- 9 Year. In such event, no amounts shall be deferred from the Eligible Employee's Pay or credited to the Eligible Employee's Account pursuant to Section 2.1(a) or (b) for such Plan year. 2.2 PAYMENT OF FICA AND OTHER TAXES. The compensation currently payable to an Eligible Employee during any period shall be reduced by an amount equal to the FICA and other taxes required to be withheld by the Employer or the applicable Participating Company during that period with respect to the amount deferred pursuant to Section 2.1. 2.3 ACCOUNT; CREDITS AND DEBITS; EARNINGS. The Company shall establish on its books an Account for each Participant. Each Account shall consist of a Mirror Sub-Account and a Supplemental Sub-Account. Within each Sub-Account, those credited amounts that would have been Incentive Contributions, and the earnings thereon, shall be accounted for separately (all such amounts to be hereinafter referred to as the "Incentive Portion.") Amounts deferred on behalf of a Participant, or allocated to a Participant, pursuant to Section 2.1 shall be credited to the Participant's appropriate sub-account on the date on which such amounts would have been credited to the Participant's Deferral Account and Incentive Contribution Account under the ISP had such amounts been payable under the ISP. In addition, as of each Valuation Date, each Participant's Account shall be credited with an incremental amount equal to the amount that would have been earned had the amounts credited to the Participant's Account been invested in an investment option offered by the Company. The sole investment option offered by the Company for this Plan is the Stable Value Option. The Company reserves the right to amend the investment options in the future. Any payments made to or on behalf of the Participant and/or a Beneficiary shall be debited from the Participant's Account. -8- 10 2.4 VESTING. Each Participant shall have a nonforfeitable right to the Account other than the Incentive Portion, subject however to Sections 2.5 and 2.6. A Participant shall have a nonforfeitable right to the Incentive Portion only if the Participant is vested in the Incentive Contribution Account under the ISP. 2.5 UNFUNDED NATURE OF ACCOUNT. No assets shall be segregated or earmarked with respect to any Account, and no Participant or Beneficiary shall have any right to assign, transfer, pledge or hypothecate an interest or any portion thereof in the Participant's Account. The Plan and the crediting of Accounts hereunder shall not constitute a trust or a funded arrangement of any sort and shall be merely for the purpose of recording an unsecured contractual obligation of each obligated party; provided, however, that the Employer and the Company reserve the right to meet the obligations created under the Plan through one or more trusts or other agreements. 2.6 REDUCTION OF BENEFIT. If a Participant breaches an obligation to the Company, the Employer or a Participating Company with respect to the payment of a specific sum of money, the Company, the Employer or the applicable Participating Company may reduce any benefits payable to such Participant under this Plan, in the manner of setoff or otherwise, to the extent of such obligation and any costs incurred with respect thereto. In addition, the Company, the Employer and the Participating Companies do not waive any rights to reduce benefits, including but not limited to setoff rights, which such entities may have under applicable law or a prior written agreement between all or any of them and an Employee, all of which rights are enforceable independent of the terms of this Plan. -9- 11 ARTICLE III PAYMENT OF DEFERRED AMOUNTS 3.1 ELECTION AS TO TIME OF PAYMENT. Each Eligible Employee shall make an election, on a form and in the manner prescribed by the Company for this purpose, specifying the time at which his or her vested Account Balance is to be paid. Such election shall be made not more than 90 days after the date on which the individual becomes an Eligible Employee. Any election which does not comply with these time limits will be deemed an election pursuant to Section 3.2 and will be effective only if it complies with the rules set forth therein. Except as otherwise provided in Section 3.2 and Section 3.3, payment of a Participant's vested Account Balance shall be made to the Participant or the Participant's Beneficiary in a lump sum as soon as practicable after the Valuation Date on or next following the time specified for payment in the election made by the Participant under this Section 3.1. In the absence of an election which complies with either Section 3.1 or Section 3.2, a Participant's vested Account Balance shall be paid in a lump sum as soon as practicable after the Valuation Date on or next following the Participant's Termination from Service. 3.2 ABILITY TO CHANGE ELECTION. Notwithstanding any election that may have been made by a Participant pursuant to Section 3.1, a Participant who has not yet had a Termination from Service may elect to receive payment of the vested Account Balance at a date other than that specified by the Participant in the election made pursuant to Section 3.1; provided however that: (a) an election made under this Section 3.2 shall apply to Participant's entire vested Account Balance notwithstanding any prior elections; and -10- 12 (b) if the Participant's Termination from Service occurs within one year and a day after the date on which the election to change the time of payment is made, the election shall not be honored and the Participant's vested Account Balance shall be distributed in accordance with Section 3.1. 3.3 PAYMENT IN THE EVENT OF PARTICIPANT'S DEATH. Notwithstanding any election that may have been made by a Participant pursuant to Section 3.1 or 3.2, any vested Account Balance that has not been paid to the Participant as of the date of the Participant's death shall be paid to the Participant's Beneficiary in a lump sum as soon as practicable after the Valuation Date on or next following the date on which the Company receives notification of the Participant's death. 3.4 ACCELERATION OF PAYMENT. Notwithstanding any other provision of this Plan to the contrary, the Company in its sole discretion may accelerate the payment of vested Account Balances: (a) to all or any group of similarly situated Participants, whether before or after the Participants' Termination from Service, in response to changes in the tax laws or accounting principles; (b) to any Participant in the event of an extreme hardship of such Participant that cannot be relieved from any other financial resources of such Participant; or (c) to any Participant in the event of other compelling circumstances. ARTICLE IV MANAGEMENT OF THE PLAN 4.1 ADMINISTRATOR. The Employer shall be the Administrator with the sole responsibility for the administration of the Plan. The Administrator may delegate to any person or entity any powers or duties of the Administrator under the Plan. To the extent of any such delegation, the delegatee shall become responsible for administration of the Plan, and -11- 13 references to the Administrator shall apply instead to the delegatee. Any action by the Employer assigning any of its responsibilities as Administrator to specific persons who are directors, officers, or employees of the Employer, the Company, or the Participating Companies shall not constitute delegation of the Administrator's responsibilities but rather shall be treated as the manner in which the Employer has determined internally to discharge such responsibility. 4.2 POWERS AND DUTIES OF THE ADMINISTRATOR. The Administrator shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to construe and interpret the Plan, decide all questions of eligibility, determine the status and rights of Participants, and determine the amount, manner and time of payment of any benefits hereunder; (b) to receive from the Participating Companies and from Participants such information as shall be necessary for the proper administration of the Plan; (c) to furnish the Participating Companies, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (d) to appoint or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal and actuarial counsel; (e) to defend and initiate any lawsuit on behalf of the Plan or the Eligible Employees if the Administrator deems it reasonably necessary to protect the Plan or the Participants. If there shall arise any misunderstanding or ambiguity concerning the meaning of any of the provisions of the Plan arising out of the -12- 14 administration thereof, the Administrator shall have the sole right to construe such provisions. Subject to the limitations of the Plan and applicable law, the Administrator may make such rules and regulations as it deems necessary or proper for the administration of the Plan and the transaction of business thereunder. The decisions of the Administrator with respect to any matter it is empowered to act on shall be made by it in its sole discretion based on the Plan documents and shall be final, conclusive and binding on all persons. -13- 15 ARTICLE V AMENDMENT AND TERMINATION 5.1 AMENDMENTS. The Company reserves the right to amend this Plan from time to time in any respect, including without limitation a prospective reduction in accrual of benefits. See Section 5.4 regarding prohibition of retroactive reduction of benefits accrued under this Plan. 5.2 ACTION BY COMPANY. Any amendments to this Plan by the Company shall be made in writing and executed by the Senior Vice President, Corporate Human Resources or other officer holding such position, or by the President or Chief Executive Officer of the Company. Neither the consent of any Employee nor that of any payee is required for any amendment to the Plan. 5.3 TERMINATION BY COMPANY. The Plan may be terminated in whole or in part by the Company at any time. The Plan as a whole shall be terminated only pursuant to a resolution of the Board of Directors of the Company. The Plan may be terminated in part in the same manner as is prescribed for the adoption of amendments. Neither the consent of any Employee nor that of any payee is required for any termination of the Plan. 5.4 EFFECT OF AMENDMENT OR TERMINATION BY COMPANY. Any amendment or termination of this Plan by the Company shall be effective prospectively and shall not serve to retroactively reduce any right to a benefit accrued under this Plan up to the date of such amendment or termination; provided, however, that in the event of any termination or partial termination of the Plan (including a Participating Company's ceasing to be a Participating Company pursuant to Section 6.2), the Company shall have the right to immediately cash out each affected Participant's benefit, notwithstanding any elections that have been made. -14- 16 ARTICLE VI ADOPTION BY AFFILIATE 6.1 ADOPTION BY AFFILIATE. Any Affiliate may, with the consent of the Company, become a Participating Company under the Plan by a resolution of the Board of Directors of the Affiliate under which: (a) The Affiliate shall agree to be bound by all the provisions of the Plan in the manner set forth herein and any amendments hereto; and (b) The Affiliate shall agree to pay its share of expenses of the Plan as they may be determined by the Company from time to time. 6.2 TERMINATION BY A PARTICIPATING COMPANY. Any Participating Company may at any time elect to terminate its participation under the Plan with respect to all or any group of the Participating Company's Employees. A Participating Company shall terminate its participation under the Plan by resolution of the Board of Directors of the Participating Company. Notwithstanding the above, a Participating Company shall cease to be a Participating Company, without any further action, upon ceasing to be an Affiliate of the Company. The termination of participation by a Participating Company shall not relieve the Participating Company of its liabilities under this Plan, including but not limited to those liabilities imposed under Section 7.2 hereof. ARTICLE VII MISCELLANEOUS 7.1 EXCLUSIVE BENEFIT. The Plan is maintained for the exclusive benefit of Participants. 7.2 SOURCE OF PAYMENT. All benefits under the Plan shall be paid exclusively by the Employer or the applicable Participating Company from -15- 17 its general assets, provided that the Company shall be liable for all benefits under the Plan. 7.3 RIGHTS OF EMPLOYEES. Nothing contained herein shall be deemed to give any Employee the right to be retained in the service of the Employer or the applicable Participating Company or to interfere with the right of the Employer or the applicable Participating Company to discharge such Employee at any time, nor shall it be deemed to give the Employer or the applicable Participating Company the right to require the Employee to remain in its service, nor shall it interfere with the right of the Employer or the applicable Participating Company to terminate service at any time. 7.4 HEADINGS. The headings of the Plan are inserted for convenience of reference only and shall have no effect upon the meaning of the provisions hereof. 7.5 SEVERABILITY. If any provision of this Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision, and this Plan shall be construed and enforced as if such provision were omitted. 7.6 ALIENATION OF BENEFITS. Except as provided in Section 2.6, and except as otherwise provided by law, and consistent with Section 2.5 hereof, no benefit under this Plan may be voluntarily or involuntarily assigned or alienated. 7.7 LOST DISTRIBUTEES. Any benefit payable hereunder shall be deemed forfeited if the distributee to whom payment is due cannot be located, provided that such benefit shall be reinstated if a claim is made by the distributee for the forfeited benefit within two years of the date the forfeited benefit was payable pursuant to Sections 3.1, 3.2 and 3.3. -16- 18 7.8 GOVERNING LAW. This Plan shall be construed according to the laws of the State of Connecticut to the extent not pre-empted by Federal law. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer this 1st day of June, 1999. AETNA INC. By: /s/ Elease E. Wright ------------------------ Its: Senior Vice President, Corporate Human Resources -17- 19 Appendix A LIST OF PARTICIPATING COMPANIES
A. B. C. PARTICIPATING COMPANIES TAX IDENTIFICATION END OF NUMBER OF EMPLOYER FISCAL YEAR ----------------------- ------------------ ----------- Aetna Services, Inc. 06-0843808 12/31 Aetna Life Insurance Company 06-6033492 12/31 Aeltus Investment Management Inc. 06-0888148 12/31 Aetna Life Insurance and 71-0294708 Annuity Company 12/31 Aetna U.S. Healthcare Dental Plan 06-1160812 12/31 of California, Inc. Aetna Healthcare of California, Inc. 95-3402799 12/31 Aetna International, Inc. 06-1028458 12/31
-18- EX-10.3 4 PENSION CREDIT AGREEMENT 1 [AETNA Logo] INTEROFFICE COMMUNICATION RICHARD L. HUBER PRESIDENT AND CHIEF EXECUTIVE OFFICER A801 (860) 273-7851 FAX: (860) 273-6872 To Frederick C. Copeland Date September 26, 1997 Subject Pension Credit This memorandum is to confirm that paragraph 7 of my letter to you dated June 6, 1995 regarding your pension benefits in amended in its entirety and replaced with the following: Your participation in the pension plan will begin after you have completed one year of service with Aetna. Under the terms of the plan currently in effect, you will receive credit for your actual years of service from your date of employment and your benefit will vest after five years of such service. We also will credit you under a supplemental plan with an additional eight years of service as follows: the first after two years of active service; the second after three years of active service; the third and fourth after four years of active service; the fifth after five years of active service; the sixth after six years of active service; the seventh after seven years of active service; and the eighth after eight years of active service. Under the regular plan, you will accumulate one year for each year you remain in the employ of the Company (but no more than 35 years of actual and credited service combined will accumulate under both plans) as long as the plans remain in effect. Your Employment Agreement with the Company dated as of December 21, 1995 remains in full force and effect. Please sign and return one copy of this memorandum to evidence your agreement. Aetna Inc. By: /s/ Richard L. Huber ------------------------------- Richard L. Huber Agreed and Accepted: By: /s/ Frederick C. Copeland, Jr. ------------------------------- Frederick C. Copeland, Jr. Date: 9/30/97 ------------------------------- EX-10.4 5 EMPLOYMENT AGREEMENT 1 [AETNA Logo] INTEROFFICE COMMUNICATION RICHARD L. HUBER To Thomas J. McInerney Date April 6, 1999 Subject Employment Agreement This memo is to confirm that your employment agreement with Aetna Inc. (the "Company") dated as of December 19, 1995, as amended as of May 2, 1996 is not being renewed, but instead shall terminate as of December 31, 1999 with your employment continuing as an executive of the Company on an at-will basis. As we discussed, this also confirms our agreement that Section 6(f) shall be of no further force or effect. In lieu of benefits under the Company's severance plan and upon receipt of a customary release, we have agreed that the Company shall guarantee you a minimum of 52 weeks salary continuation in the event your employment is ever terminated under circumstances which call for the payment of benefits under the Company's severance plan, and for a period of 156 weeks if your employment is terminated by the Company for any reason other than misconduct following a "change in control" as defined in the Company's severance plan. However, as long as any chief executive officer successor candidate (as identified to you by the Company from time to time) hired by the Company subsequent to June 30, 1998 is entitled to severance protection which includes more than the formula used herein, then in such event the 52 weeks and 156 weeks of salary continuation referred to in the prior sentence shall instead be calculated using both base salary and your annual target bonus then in effect. Please acknowledge the foregoing by signing and returning a copy of this memo to Elease Wright at your convenience. Aetna Inc. By: /s/ Richard L. Huber ------------------------- Richard L. Huber Agreed: /s/ Thomas J. McInerney ------------------------- Thomas J. McInerney Date: April 8, 1999 EX-10.5 6 EMPLOYMENT AGREEMENT 1 [AETNA LOGO] INTEROFFICE COMMUNICATION RICHARD L. HUBER To Frederick C. Copeland, Jr. Date May 4, 1999 Subject Employment Agreement This memo is to confirm that in lieu of benefits under the Company's severance and salary continuation benefits plan and upon receipt from you of a customary release of employment-related claims and covenants in form and substance satisfactory to the Company, we have agreed that the Company shall guarantee you a minimum of 52 weeks salary continuation in the event your employment is ever terminated under circumstances which call for the payment of benefits under the Company's severance and salary continuation benefits plan, and for a period of 156 weeks if your employment is terminated by the Company for any reason other than misconduct following a "change in control" as defined in the Company's severance plan. Aetna Inc. By: /s/Richard L. Huber ------------------- Richard L. Huber EX-12 7 STATEMENT RE COMPUTATION OF RATIOS 1 Exhibit 12 AETNA INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Six Months Ended Years Ended June 30, December 31, ---------------- -------------------------------------------------------------------- (Million) 1999 1998 1997 1996 1995 1994 - --------- ---- ---- ---- ---- ---- ---- Pretax income from continuing operations $ 671.4 $ 1,408.3 $ 1,511.2 $ 338.7 $ 726.2 $ 627.5 Add back fixed charges 189.4 358.5 321.9 245.1 187.0 170.8 Minority interest 10.6 10.7 14.7 16.4 16.1 11.4 --------- --------- --------- --------- --------- --------- Income as adjusted $ 871.4 $ 1,777.5 $ 1,847.8 $ 600.2 $ 929.3 $ 809.7 ========= ========= ========= ========= ========= ========= Fixed charges: Interest on indebtedness (1) $ 128.7 $ 250.9 $ 235.8 $ 168.3 $ 115.9 $ 98.6 Portion of rents representative of interest factor 60.7 107.6 86.1 76.8 71.1 72.2 --------- --------- --------- --------- --------- --------- Total fixed charges $ 189.4 $ 358.5 $ 321.9 $ 245.1 $ 187.0 $ 170.8 ========= ========= ========= ========= ========= ========= Preferred stock dividend requirements 45.6 92.2 92.4 41.1 -- -- --------- --------- --------- --------- --------- --------- Total combined fixed charges and preferred stock dividend requirements $ 235.0 $ 450.7 $ 414.3 $ 286.2 $ 187.0 $ 170.8 ========= ========= ========= ========= ========= ========= Ratio of earnings to fixed charges 4.60 4.96 5.74 2.45 4.97 4.74 ========= ========= ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends 3.71 3.94 4.46 2.10 4.97 4.74 ========= ========= ========= ========= ========= =========
(1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 15 of Notes to Consolidated Financial Statements in the Company's 1998 Annual Report.) Page 1 2 Exhibit 12 (Continued) AETNA SERVICES, INC. (1) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Six Months Ended Years Ended June 30, December 31, ---------------- ------------------------------------------------- (Millions) 1999 1998 1997 1996 ---------- ---- ---- ---- ---- Pretax income from continuing operations $ 473.0 $ 1,162.7 $ 1,505.2 $ 335.0 Add back fixed charges 187.9 354.3 318.1 243.8 Minority interest 9.7 10.8 15.7 16.4 --------- --------- --------- --------- Income as adjusted $ 670.6 $ 1,527.8 $ 1,839.0 $ 595.2 ========= ========= ========= ========= Fixed charges: Interest on indebtedness (2) $ 128.7 $ 250.9 $ 234.0 $ 168.3 Portion of rents representative of interest factor 59.2 103.4 84.1 75.5 --------- --------- --------- --------- Total fixed charges $ 187.9 $ 354.3 $ 318.1 $ 243.8 ========= ========= ========= ========= Preferred stock dividend requirements -- -- -- -- Total combined fixed charges and preferred stock dividend requirements $ 187.9 $ 354.3 $ 318.1 $ 243.8 ========= ========= ========= ========= Ratio of earnings to fixed charges 3.57 4.31 5.78 2.44 ========= ========= ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends 3.57 4.31 5.78 2.44 ========= ========= ========= =========
(1) Aetna Inc. has fully and unconditionally guaranteed the payment of all principal, premium, if any, and interest on all outstanding debt securities of Aetna Services, Inc. (See Note 14 of Notes to Financial Statements in the Company's 1998 Annual Report.) (2) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 15 of Notes to Consolidated Financial Statements in the Company's 1998 Annual Report.) Page 2 EX-15 8 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Exhibit 15 Letter Re: Unaudited Interim Financial Information - --------------------------------------------------- Aetna Inc. Hartford, Connecticut Ladies and Gentlemen: Re: Registration Statements No. 333-07169, 333-08427, 333-08429, 333-08431, 333-52321, 333-68881, 333-52321-01, 333-52321-02, 333-52321-03, 333-52321-04, and 333-52321-05. With respect to the subject Registration Statements filed by Aetna Inc. or its Subsidiaries, we acknowledge our awareness of the use therein of our report dated July 28, 1999 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. /s/ KPMG LLP Hartford, Connecticut July 28, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the six months ended June 30, 1999 for Aetna Inc. and is qualified in its entirety by reference to such statements. 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 29,827 0 0 880 3,440 311 37,134 2,086 0 1,976 107,705 18,717 218 3,889 16,610 2,488 862 0 3,263 7,151 107,705 8,962 1,466 27 1,191 8,488 102 0 672 265 407 0 0 0 407 2.69 2.66 0 0 0 0 0 0 0
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