-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, cRcEu3tl3GFZCyS/AoKKGyj4ejMIDuTIw0TlJyCOSp+lf7ATvm59Em49cfUwFq20 OMTV/KXkbbRvmGGE95ci/w== 0000002648-95-000025.txt : 19950501 0000002648-95-000025.hdr.sgml : 19950501 ACCESSION NUMBER: 0000002648-95-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE & CASUALTY CO CENTRAL INDEX KEY: 0000002648 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 060843808 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05704 FILM NUMBER: 95532470 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 1Q 1995 LIVE FILING 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1995 ________________ Commission file number 1-5704 ________ Aetna Life and Casualty Company ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 ___________________________________________________________________________ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (203) 273-0123 ______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class at March 31, 1995 ________________ __________________ Common Capital Stock 112,759,811 without par value 2 TABLE OF CONTENTS _________________ Page ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Condensed Notes to Financial Statements 8 Independent Auditors' Review Report 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 45 Item 5. Other Information. 45 Item 6. Exhibits and Reports on Form 8-K. 47 Signatures 48 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
3 Months Ended March 31, ______________________________ (Millions, except share and per share data) 1995 1994 ____ ____ Revenue: Premiums............................................. $ 2,929.0 $ 2,742.3 Net investment income................................ 1,085.9 1,126.5 Fees and other income................................ 476.0 460.6 Net realized capital losses.......................... (6.4) (5.9) ____________ ____________ Total revenue.................................... 4,484.5 4,323.5 ____________ ____________ Benefits and expenses: Current and future benefits.......................... 3,122.4 3,117.6 Operating expenses................................... 935.0 957.5 Amortization of deferred policy acquisition costs.... 187.2 192.0 ____________ ____________ Total benefits and expenses...................... 4,244.6 4,267.1 ____________ ____________ Income before income taxes............................. 239.9 56.4 Federal and foreign income taxes (benefits): Current.............................................. (19.2) 2.3 Deferred............................................. 98.3 8.4 ____________ ____________ Total federal and foreign income taxes........... 79.1 10.7 ____________ ____________ Net income....................................... $ 160.8 $ 45.7 ____________ ____________ ____________ ____________ Results per common share: Net income............................................. $ 1.42 $ .40 ____________ ____________ ____________ ____________ Dividends declared..................................... $ .69 $ .69 ____________ ____________ ____________ ____________ Weighted average common shares outstanding............. 112,949,522 113,129,560 ____________ ____________ ____________ ____________ See Condensed Notes to Financial Statements.
4 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, (Millions) 1995 1994 _____________ ____________ Assets: Investments: Debt securities: Held for investment, at amortized cost (fair value $1,884.9 and $1,991.2)....................... $ 1,871.9 $ 2,000.8 Available for sale, at fair value (amortized cost $37,495.5 and $36,984.2)...................... 36,715.8 35,110.7 Equity securities, at fair value (cost $1,135.8 and $1,326.9)....... 1,489.7 1,655.6 Short-term investments.............. 434.0 450.4 Mortgage loans...................... 11,321.3 11,843.6 Real estate......................... 1,545.7 1,545.7 Policy loans........................ 558.8 533.8 Other............................... 1,099.4 1,152.7 _________ __________ Total investments............... 55,036.6 54,293.3 Cash and cash equivalents............. 3,144.0 2,953.6 Reinsurance recoverables and receivables.......................... 5,019.1 5,011.0 Accrued investment income............. 737.7 777.2 Premiums due and other receivables.... 1,968.5 1,722.9 Federal and foreign income taxes: Current............................. 68.1 18.3 Deferred............................ 1,248.2 1,266.7 Deferred policy acquisition costs..... 2,054.4 2,014.7 Other assets.......................... 2,041.0 1,992.2 Separate Accounts assets.............. 25,152.8 24,122.6 __________ __________ Total assets.................... $ 96,470.4 $ 94,172.5 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
5 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
March 31, December 31, (Millions, except share and per share data) 1995 1994 _____________ ____________ Liabilities: Future policy benefits........................ $ 17,471.6 $ 17,979.2 Unpaid claims and claim expenses.............. 17,501.9 17,478.3 Unearned premiums............................. 1,659.0 1,604.9 Policyholders' funds left with the company.... 23,561.4 23,223.1 __________ __________ Total insurance reserve liabilities....... 60,193.9 60,285.5 Dividends payable to shareholders............. 77.8 77.7 Short-term debt............................... 106.7 23.9 Long-term debt................................ 1,113.7 1,114.7 Other liabilities............................. 3,305.8 2,718.6 Participating policyholders' interests........ 154.8 170.5 Separate Accounts liabilities................. 25,019.4 24,003.6 __________ __________ Total liabilities......................... 89,972.1 88,394.5 __________ __________ Minority interest in preferred securities of subsidiary..................... 275.0 275.0 __________ __________ Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding)............. - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Common Capital Stock (no par value; 250,000,000 shares authorized; 114,939,275 issued, and 112,759,811 and 112,657,758 outstanding)................. 1,418.1 1,419.2 Net unrealized capital losses................. (438.2) (1,071.5) Retained earnings............................. 5,342.6 5,259.6 Treasury stock, at cost 2,179,464 and 2,281,517 shares)............................ (99.2) (104.3) __________ __________ Total shareholders' equity................ 6,223.3 5,503.0 __________ __________ Total liabilities and shareholders' equity..................... $ 96,470.4 $ 94,172.5 __________ __________ __________ __________ Shareholders' equity per common share......... $ 55.19 $ 48.85 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
6 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions, except share data) Net Common Unrealized Capital Capital Retained Treasury Three Months Ended March 31, 1995 Total Stock Gains (Losses) Earnings Stock __________________________________________________________________________________________________________ Balances at December 31, 1994 $5,503.0 $1,419.2 $(1,071.5) $5,259.6 $ (104.3) __________________________________________________________________________________________________________ Net income............................ 160.8 160.8 Net change in unrealized capital gains and losses.......................... 633.3 633.3 Common stock issued for benefit plans 102,053 shares)..................... 5.1 5.1 Loss on issuance of treasury stock.... (1.1) (1.1) Common stock dividends declared....... (77.8) (77.8) __________________________________________________________________ Balances at March 31, 1995 $6,223.3 $1,418.1 $ (438.2) $5,342.6 $ (99.2) __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Three Months Ended March 31, 1994 __________________________________________________________________________________________________________ Balances at December 31, 1993 $7,043.1 $1,422.0 $ 648.2 $5,103.3 $ (130.4) __________________________________________________________________________________________________________ Net income............................ 45.7 45.7 Net change in unrealized capital gains and losses.......................... (588.7) (588.7) Common stock issued for benefit plans (335,477 shares).................... 18.1 18.1 Loss on issuance of treasury stock.... (2.0) (2.0) Common stock dividends declared....... (77.9) (77.9) ____________________________________________________________________ Balances at March 31, 1994 $6,438.3 $1,420.0 $ 59.5 $5,071.1 $ (112.3) __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
3 Months Ended March 31, ________________________ (Millions) 1995 1994 ____ ____ Cash Flows from Operating Activities: Net income....................................................... $ 160.8 $ 45.7 Adjustments to reconcile net income to net cash used for operating activities: Decrease in accrued investment income.......................... 39.8 36.8 (Increase) decrease in premiums due and other receivables...... (232.9) 98.3 Decrease (increase) in reinsurance recoverables and receivables .7 (61.3) Increase in deferred policy acquisition costs.................. (21.8) (36.1) Depreciation and amortization.................................. 46.9 46.9 Decrease in federal and foreign income taxes................... (39.1) (177.6) Net increase (decrease) in other assets and other liabilities.. 130.5 (524.6) Decrease in insurance reserve liabilities...................... (18.3) (583.8) Net sales of debt trading securities........................... - 52.3 Increase in minority interest.................................. (24.0) (13.5) Net realized capital losses.................................... 6.4 5.9 Amortization of net investment discount........................ (23.8) (27.7) Other, net..................................................... (26.5) 16.1 _________ _________ Net cash used for operating activities....................... (1.3) (1,122.6) _________ _________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 3,089.9 6,945.0 Debt securities held for investment............................ - 5.6 Equity securities.............................................. 376.2 270.7 Mortgage loans................................................. 4.3 36.4 Real estate.................................................... 41.8 99.4 Short-term investments......................................... 14,515.4 15,972.4 Investment repayments of: Debt securities available for sale............................. 566.2 1,285.4 Debt securities held for investment............................ 128.5 214.4 Mortgage loans................................................. 552.2 525.7 Cost of investments in: Debt securities available for sale............................. (4,151.7) (7,649.5) Debt securities held for investment............................ (8.2) (.1) Equity securities.............................................. (143.0) (316.5) Mortgage loans................................................. (45.9) (91.3) Real estate.................................................... (41.0) (10.7) Short-term investments......................................... (14,507.6) (15,862.2) Increase in property, plant & equipment........................... (37.4) (25.9) Net (increase) decrease in Separate Accounts...................... (14.5) 3.7 Other, net........................................................ 355.3 (2.6) _________ _________ Net cash provided by investing activities....................... 680.5 1,399.9 _________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 209.6 985.7 Withdrawals of investment contracts............................... (706.2) (1,257.1) Issuance of long-term debt........................................ - 68.2 Stock issued under benefit plans.................................. 4.0 16.1 Repayment of long-term debt....................................... (1.5) (91.3) Net increase in short-term debt................................... 83.0 64.6 Dividends paid to shareholders.................................... (77.6) (77.9) _________ _________ Net cash used for financing activities.......................... (488.7) (291.7) _________ _________ Effect of exchange rate changes on cash and cash equivalents....................................................... (.1) (2.4) _________ _________ Net increase (decrease) in cash and cash equivalents................. 190.4 (16.8) Cash and cash equivalents, beginning of period....................... 2,953.6 1,557.8 _________ _________ Cash and cash equivalents, end of period............................. $ 3,144.0 $ 1,541.0 _________ _________ _________ _________ Supplemental Cash Flow Information: Interest paid..................................................... $ 42.8 $ 35.9 _________ _________ _________ _________ Income taxes paid (received)...................................... $ 6.6 $ (71.1) _________ _________ _________ _________ See Condensed Notes to Financial Statements.
8 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1994 financial information to conform to 1995 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal recurring nature. (2) Future Application of Accounting Standards In March 1995, the Financial Accounting Standards Board issued Financial Accounting Standard ("FAS") No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires write down to fair value when long-lived assets to be held and used are impaired. The statement also requires long-lived assets to be disposed of (e.g., real estate held for sale) to be carried at the lower of cost or fair value less cost to sell and does not allow such assets to be depreciated. This statement will be effective for 1996 financial statements, although earlier adoption is permissible. The company has not yet determined the timing of adoption of this statement, however the impact is not expected to be material. (3) Insurance Liabilities Workers' compensation life table indemnity reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality assumptions that reflect current company and industry experience. Workers' compensation life table indemnity reserves totaled $725 million and $768 million at March 31, 1995 and December 31, 1994, respectively, which were 21% and 22%, respectively, of the total workers' compensation reserves for unpaid claims and claim adjustment expenses. Certain other property-casualty reserves with fixed and determinable payment patterns have been discounted at risk free rates. The aggregate amount of such discount was approximately $21 million at March 31, 1995. (4) Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three months ended March 31, 1995 and 1994 were charged to the reserve for anticipated future losses and did not affect the company's results of operations. 9 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) Future losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at March 31, 1995 is adequate to provide for future losses associated with the guaranteed product liabilities. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. (Please refer to the company's 1994 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) Results of discontinued products were as follows (pretax, in millions):
Charged to Guaranteed Single- Reserve for Investment Premium Future Three months ended March 31, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 132.3 $ 110.1 $ 242.4 $ - $ 242.4 Net realized capital gains (losses) (18.5) 8.0 (10.5) 10.5 - Interest earned on receivable from continuing business 5.1 7.6 12.7 - 12.7 Other income 2.5 3.0 5.5 - 5.5 _____________________________________________________________ Total revenue 121.4 128.7 250.1 10.5 260.6 _____________________________________________________________ Current and future benefits 155.2 114.4 269.6 (10.2) 259.4 Operating expenses (.3) 1.5 1.2 - 1.2 _____________________________________________________________ Total benefits and expenses 154.9 115.9 270.8 (10.2) 260.6 _____________________________________________________________ Results of discontinued products $ (33.5) $ 12.8 $ (20.7) $ 20.7 $ - _____________________________________________________________________________________________________ _____________________________________________________________ Charged to Guaranteed Single- Reserve for Investment Premium Future Three months ended March 31, 1994 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Premiums $ - $ 39.2 $ 39.2 $ - $ 39.2 Net investment income 171.0 108.9 279.9 - 279.9 Net realized capital losses (25.5) (15.5) (41.0) 41.0 - Interest earned on receivable from continuing business 4.7 6.9 11.6 - 11.6 Other income 2.9 2.8 5.7 - 5.7 _____________________________________________________________ Total revenue 153.1 142.3 295.4 41.0 336.4 _____________________________________________________________ Current and future benefits 202.6 151.3 353.9 (20.6) 333.3 Operating expenses 1.9 1.2 3.1 - 3.1 _____________________________________________________________ Total benefits and expenses 204.5 152.5 357.0 (20.6) 336.4 _____________________________________________________________ Results of discontinued products $ (51.4) $ (10.2) $ (61.6) $ 61.6 $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of $12.7 million and $11.6 million for the three months ended March 31, 1995 and 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
Deposits of $9.8 million and $134.2 million were received for the three months ended March 31, 1995 and 1994, respectively, under pre-existing GIC contracts. In accordance with FAS No. 97, such deposits are not included in premiums or revenue. 10 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) Assets and liabilities of discontinued products were as follows (in millions):
March 31, 1995 _______________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _______________________________________ Debt securities available for sale $ 2,905.3 $ 3,276.5 $ 6,181.8 Mortgage loans 2,692.5 1,513.2 4,205.7 Real estate 547.7 171.7 719.4 Short-term and other investments 232.3 167.4 399.7 _______________________________________ Total investments 6,377.8 5,128.8 11,506.6 Current and deferred income taxes 263.7 128.7 392.4 Receivable from continuing business 414.5 470.7 885.2 Other 10.6 2.1 12.7 ________________________________________ Total assets $ 7,066.6 $ 5,730.3 $12,796.9 ______________________________________________________________________________ ______________________________________________________________________________ Future policy benefits $ - $ 5,007.7 $ 5,007.7 Policyholders' funds left with the company 6,717.5 - 6,717.5 Reserve for future losses on discontinued products 312.1 664.2 976.3 Other 37.0 58.4 95.4 ________________________________________ Total liabilities $ 7,066.6 $ 5,730.3 $12,796.9 ______________________________________________________________________________ ______________________________________________________________________________
Net unrealized capital gains as of March 31, 1995 on available for sale debt securities are included above in other assets and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses on GICs is included in policyholders' funds left with the company and the reserve for anticipated future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheet. At March 31, 1995 and December 31, 1994, estimated future after- tax realized capital losses of approximately $122 million and $127 million ($187 million and $196 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs, and $44 million and $47 million ($67 million and $73 million, pretax), respectively, attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Included in the ($18.5) million and $8.0 million of net realized capital (losses) gains (pretax) on GICs and SPAs, respectively, for the three months ended March 31, 1995, are (losses) gains from the sale of bonds of ($8.8) million and $14.5 million, respectively. Included in the $25.5 million and $15.5 million of net realized capital losses (pretax) on GICs and SPAs, respectively, for the three months ended March 31, 1994, are gains (losses) from the sale of bonds of $15.5 million and ($5.8) million, respectively. As a result of selling bonds and realizing losses and reinvesting the proceeds at higher interest rates, and settling GIC liabilities at favorable pricing, the related anticipated future losses associated with the negative interest margin are expected to be reduced in the future. 11 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
3 Months Ended March 31, 1995 ___________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _________________________________________________________________________ Reserve at beginning of period $ 345.6 $ 651.4 $ 997.0 Loss on discontinued products (33.5) 12.8 (20.7) ___________________________________ Reserve at end of period $ 312.1 $ 664.2 $ 976.3 _________________________________________________________________________ ___________________________________
At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables will be funded from invested assets supporting Large Case Pensions and accrue interest at the discount rates used to calculate the loss on discontinuance until the receivable is funded. The offsetting payable established in continuing products will similarly accrue interest, generally offsetting the investment income on the assets available to fund the shortfalls. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheet. At March 31, 1995 no funding had taken place. The activity in the receivable from continuing business was as follows (pretax, in millions):
3 Months Ended March 31, 1995 ___________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total ____________________________________________________________________________ Receivable at beginning of period $ 409.4 $ 463.1 $ 872.5 Interest earned 5.1 7.6 12.7 ___________________________________ Receivable at end of period $ 414.5 $ 470.7 $ 885.2 ____________________________________________________________________________ ___________________________________
Pursuant to a segmentation plan approved in 1983 by the New York Insurance Department, the combined assets supporting discontinued products were segregated coincident with the receipt of premiums and deposits on the discontinued products. Assets of the discontinued products were distinguished physically, operationally and for financial reporting purposes, from the remaining assets of the company. Management believes the timing and amount of cash flows with respect to the discontinued products have been estimated with reasonable accuracy, and the financial statements reflect management's best estimate of the most likely cash flows that will occur. However, future periods may include a charge or benefit equal to the present value of the differences, if any, between future projected cash flows and current estimates. 12 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Investments Net investment income includes amounts allocable to experience rated contractholders of $361 million for both the three months ended March 31, 1995 and 1994. Interest credited to contractholders is included in current and future benefits. Net realized capital losses allocable to experience rated contractholders of $35 million and $52 million for the three months ended March 31, 1995 and 1994, respectively, were deducted from net realized capital losses 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. As of January 1, 1995, the company adopted FAS No. 114, Accounting by Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. In accordance with these standards, a loan is considered impaired when it is probable that the company will be unable to collect amounts due according to the contractual terms of the loan agreement. When the company determines that a loan is impaired, a specific impairment reserve is established for the difference between the recorded investment (i.e., cost less valuation reserves) in the mortgage loan and the fair value of the collateral. General reserves are established for losses management believes are likely to arise from the overall portfolio but cannot be attributed to specific loans. Prior to the adoption of FAS Nos. 114 and 118, the company included the impairment provision for potential problem loans (other than those allocable to experience rated products) which management believed were likely to become classified as problem or restructured in the next 12 months or so in the general reserve. At March 31, 1995, the total recorded investment in loans that are considered to be impaired (which include problem loans, restructured loans and potential problem loans) under FAS No. 114 and related specific reserves are presented in the table below. Included in the total recorded investment are impaired loans of $444 million for which no specific reserves are considered necessary.
(Millions) Total Recorded Specific Investment Reserves _________________________________________________________________________ Supporting discontinued products $ 1,039.4 $ 287.4 Supporting experience rated products 715.8 224.4 Supporting remaining products 731.6 191.0 ___________________________ Total Impaired Loans $ 2,486.8 $ 702.8 _________________________________________________________________________ ___________________________
13 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Investments (Continued) The activity in the specific and general reserves as of March 31, 1995 is summarized below:
General Reserve Allocated to Charged Balance Balance at Experience Balance at to net Charged at December 31, 1994 Rated December 31, 1994, realized to other Principal March 31, (Millions) as reported Products (1) as adjusted loss accounts Write-offs 1995 _________________ ____________ __________________ ________ ________ __________ _________ Supporting discontinued products $ 372.1 $ - $ 372.1 $ - $ 18.4(2)$ - $ 390.5 Supporting experienced rated products 156.1 208.5 364.6 - 7.3(2) (16.4) 355.5 Supporting remaining products 255.9 - 255.9 4.4 - (2.7) 257.6 _____________________________________________________________________________________________ Total $ 784.1 $ 208.5 $ 992.6 $ 4.4 $ 25.7 $ (19.1) $ 1,003.6 __________________________________________________________________________________________________________ _____________________________________________________________________________________________ Specific Reserves $ 434.1 $ - $ 434.1 $ 0.6 $ 287.2(3)$ (19.1) $ 702.8 General Reserve 350.0 208.5 558.5 3.8 (261.5)(3) - 300.8 _____________________________________________________________________________________________ Total $ 784.1 $ 208.5 $ 992.6 $ 4.4 $ 25.7 $ (19.1) $ 1,003.6 __________________________________________________________________________________________________________ _____________________________________________________________________________________________ (1) The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. (2) Reflects additions to reserves related to assets supporting experience rated products and discontinued products which do not affect the company's results of operations. (3) $261.5 million of general reserve related to performing loans at December 31, 1994 were reclassified to specific reserves at March 31, 1995.
14 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Investments (Continued) The company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. Income earned (pretax) and received on the average recorded investment in impaired loans for the three months ended March 31, 1995, was as follows:
Average Impaired Income Income (Millions) Loans Earned Received ________ ______ ________ Supporting discontinued products $ 1,056.1 $ 18.4 $ 17.5 Supporting experience rated products 855.9 13.0 12.9 Supporting remaining products 628.2 8.3 8.8 _____________________________ Total $ 2,540.2 $ 39.7 $ 39.2 _______________________________________________________________________ _____________________________
(6) Federal and Foreign Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. At March 31, 1995, $238 million of net unrealized capital losses primarily on available for sale debt and equity securities were reflected in shareholders' equity without deferred tax benefits. For federal income tax purposes, capital losses are deductible only against capital gains in the year of sale or during the carryback and carryforward periods (three and five years, respectively). Due to the expected full utilization of capital gains in the carryback period and the uncertainty of future capital gains, a valuation allowance of $83 million related to the net unrealized capital losses has been reflected in shareholder's equity at March 31, 1995. In addition, at March 31, 1995, $201 million of unrealized capital losses related to experience rated contracts are not reflected in shareholders' equity since such losses, if realized, will be charged to contractholders. However, the potential loss of tax benefits on such losses is the risk of the company and therefore would adversely affect the company rather than the contractholder. Accordingly, an additional valuation allowance of $71 million has been reflected in shareholders' equity as of March 31, 1995. Any reversals of the valuation allowance are contingent upon the recognition of future capital gains in the company's federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. Non-recognition of the deferred tax benefits on net unrealized losses described above had no impact on net income for the three months ended March 31, 1995, but has the potential to adversely affect future results if such losses are realized. Potential losses of tax benefits related to net unrealized losses on assets supporting the discontinued products are not expected to adversely affect the company's future results. 15 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (7) Reinsurance Ceded earned premiums were $.3 billion for both the three months ended March 31, 1995 and 1994. Ceded current and future benefits were $.3 billion and $.4 billion for the three months ended March 31, 1995 and 1994, respectively. (8) Debt The company has credit facilities aggregating $1 billion with a group of worldwide banks. One $500 million facility terminates in July 1995 and the other $500 million facility terminates in July 1999. Various interest rate options are available under each facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .08% to .375% per annum under the short-term credit agreement and from .1% to .5% per annum under the medium-term credit agreement, depending upon the company's long-term senior unsecured debt rating. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5.0 billion. These facilities also support the company's commercial paper borrowing program. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission ("SEC") the company may offer and sell up to an additional $550 million of various types of securities. A subsidiary of the company may offer and sell up to an additional $225 million of preferred securities under a shelf registration statement declared effective by the SEC. 16 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (9) Off-Balance-Sheet Financial Instruments (including Derivative Financial Instruments) The company engages in hedging activities to manage foreign exchange and interest rate risk. Such hedging activities have principally consisted of using off-balance-sheet instruments including foreign exchange forward contracts, futures and forward contracts, and interest rate swap agreements. (Please see General Account Investments - Use of Derivatives and Other Investments on pages 41 and 42 of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18 of the company's 1994 Annual Report to Shareholders for a description of the company's hedging activities). The notional amounts, carrying values and estimated fair values of the company's off-balance- sheet financial instruments are as follows (in millions):
Carrying Value Notional Asset Fair March 31, 1995 Amount (Liability) Value ______________ ________ ___________ ________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 458.7 $ (11.3) $ (12.9) Related to investments in non-dollar denominated assets 247.9 (5.8) (6.1) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 32.7 7.7 5.6 Related to investments in non-dollar denominated assets 89.2 2.3 2.4 Futures contracts to purchase investments 87.0 (.4) .4 Futures contracts to sell investments 74.6 3.3 (3.3) Forward contracts to purchase investments 152.6 - .1 Forward contracts to sell investments 54.6 - - Interest rate swaps: Unrecognized gains 569.4 - 21.6 Unrecognized losses 526.4 - (15.9) Written covered call options 30.0 (.3) (.3) Carrying Value Notional Asset Fair December 31, 1994 Amount (Liability) Value _________________ ________ ___________ ________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 497.8 $ (2.5) $ (4.7) Related to investments in non-dollar denominated assets 266.9 (.8) (1.6) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 48.5 5.2 4.8 Related to investments in non-dollar denominated assets 40.9 .1 .2 Futures contracts to purchase investments 122.5 (.1) .1 Forward contracts to purchase investments 5.6 - - Interest rate swaps: Unrecognized gains 429.4 - 20.7 Unrecognized losses 386.4 - (18.3)
17 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (10) Supplemental Cash Flow Information Significant non-cash investing and financing activities include acquisition of real estate through foreclosures (including in- substance foreclosures) of mortgage loans amounting to $13 million and $102 million for the three months ended March 31, 1995 and 1994, respectively. (11) Earnings Per Share Earnings per share are computed using net income divided by the weighted average number of common shares outstanding, including common share equivalents. There is not a significant difference between primary and fully diluted earnings per share. (12) Commitments and Contingent Liabilities Environmental and Asbestos-Related Claims Reserving for environmental and asbestos-related claims is subject to significant uncertainties. Because of these significant uncertainties, management is unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all environmental and asbestos-related claims and related litigation expenses. To the extent that such liabilities are not reasonably estimable, no reserve has been provided. However, reserves for these liabilities are evaluated by management regularly, and, subject to the significant uncertainties, adjustments have been and are expected to be made to such reserves as developing loss patterns and other information appear to warrant. Environmental and asbestos-related loss and loss adjustment expense reserves, as reflected on the Consolidated Balance Sheet, were as follows (before reinsurance and net of discount on environmental settlements, in millions):
March 31, 1995 __________________________________________________ Environmental Liability $ 497 Asbestos Bodily Injury 298 Asbestos Property Damage 29 ______ Total Environmental and Asbestos-Related Reserves $ 824 _______________________________________________ ______
18 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (13) Litigation Beginning in 1988, the attorneys general of 20 states each filed separate antitrust suits against The Aetna Casualty and Surety Company ("Aetna") and over 30 other insurers, reinsurers, trade associations and brokers. A full description of this litigation is contained in Note 19 of Notes to Consolidated Financial Statements in the company's 1994 Annual Report to Shareholders. On March 29, 1995, the United States District Court for the Northern District of California approved the plaintiffs' settlement of this litigation with all defendants, including Aetna. Aetna's share of the settlement is not material. The company is continuously involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of such litigation cannot be determined at this time, such litigation (other than that related to environmental and asbestos-related claims, which is subject to significant uncertainties), net of reserves established therefor and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. The company is expected to be affected adversely in the future by losses for environmental and asbestos-related claims and related litigation expenses and such effect could be material to the company's future results, liquidity and/or capital resources. 19 Independent Auditors' Review Report The Board of Directors Aetna Life and Casualty Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of March 31, 1995, and the related condensed consolidated statements of income for the three-month periods ended March 31, 1995 and 1994, and the related condensed consolidated statements of shareholders' equity and cash flows for the three-month periods ended March 31, 1995 and 1994. 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 Life and Casualty Company and Subsidiaries as of December 31, 1994, 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 7, 1995, 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, 1994, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG PEAT MARWICK LLP Hartford, Connecticut April 27, 1995 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations __________________________________
Operating Summary (Millions, except per share data) Three Months Ended March 31 ___________________________________ 1995 1994 % Change ____ ____ ________ Premiums............................. $ 2,929.0 $ 2,742.3 6.8% Net investment income................ 1,085.9 1,126.5 (3.6) Fees and other income................ 476.0 460.6 3.3 Net realized capital losses.......... (6.4) (5.9) (8.5) _________ _________ Total revenue.................... 4,484.5 4,323.5 3.7 Current and future benefits.......... 3,122.4 3,117.6 .2 Operating expenses................... 935.0 957.5 (2.3) Amortization of deferred policy acquisition costs................... 187.2 192.0 (2.5) _________ _________ Total benefits and expenses...... 4,244.6 4,267.1 (.5) _________ _________ Income before income taxes........... 239.9 56.4 - Income taxes......................... 79.1 10.7 - _________ _________ Net income....................... $ 160.8 $ 45.7 - _________ _________ _________ _________ Net realized capital losses, net of tax (included above)......... $ (7.0) $ (7.5) 6.7 _________ _________ _________ _________ Net income per common share.......... $ 1.42 $ .40 - _________ _________ _________ _________
Overview ________ Net income was $161 million for the three months ended March 31, 1995 compared with $46 million for the same period a year ago. Results for the three months ended March 31, 1995 included after- tax catastrophe losses of $13 million. Results for the three months ended March 31, 1994 included after-tax catastrophe losses of $124 million, related primarily to the Los Angeles earthquake and the severe winter weather. Results in 1995 also reflected an overall reduction in operating expenses, primarily due to actions taken by management in prior years to lower costs. This overall reduction occurred even though operating expenses increased in the health care business, as a result of the company's increased investment in managed care, and increased in the Aetna Life Insurance & Annuity segment. 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Net Realized Capital Gains and Losses Net realized after-tax capital gains and losses included in net income, allocable to experience rated pension contractholders, and supporting discontinued products were as follows (in millions):
Three Months Ended March 31 ___________________________ 1995 1994 ____ ____ Net realized capital gains (losses) from sales................................. $ (2.9) $ 15.2 Realized capital losses from additions to reserves for mortgage loans and real estate (4.1) (22.2) Realized capital losses from write-downs of debt and equity securities.............. - (0.5) _______ _______ Net realized capital losses from continuing operations...................... $ (7.0) $ (7.5) _______ _______ _______ _______ Net realized capital losses allocable to experience rated pension contractholders (excluded above)........................... $ (22.8) $ (33.9) _______ _______ _______ _______ Net realized capital losses on assets supporting discontinued products (excluded above)........................... $ (6.8) $ (26.7) _______ _______ _______ _______
Net realized capital gains from sales in the first quarter of 1994, as presented above, include a $14 million gain resulting from the sale of a portion of an unconsolidated subsidiary. Strategic Outlook The company continues to review its Property-Casualty and other businesses and assess their potential for contribution to the company's long-term strategic and financial objectives. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans __________________
Operating Summary (Millions) Three Months Ended March 31 __________________________________ 1995 1994 % Change ____ ____ ________ Premiums............................ $ 1,494.7 $ 1,326.9 12.6% Net investment income............... 84.7 84.2 .6 Fees and other income............... 307.5 298.2 3.1 Net realized capital losses......... (4.2) (18.8) 77.7 _________ _________ Total revenue.................... 1,882.7 1,690.5 11.4 Current and future benefits......... 1,273.3 1,109.1 14.8 Operating expenses.................. 485.0 451.7 7.4 Amortization of deferred policy acquisition costs.................. 6.8 7.4 (8.1) _________ _________ Total benefits and expenses...... 1,765.1 1,568.2 12.6 _________ _________ Income before income taxes.......... 117.6 122.3 (3.8) Income taxes........................ 44.0 44.9 (2.0) _________ _________ Net income.......................... $ 73.6 $ 77.4 (4.9) _________ _________ _________ _________ Net realized capital losses, net of tax (included above)........ $ (2.8) $ (12.0) 76.7 _________ _________ _________ _________ Self-funded benefit payments administered for customers other than Medicare...................... $ 3,208.0 $ 2,991.6 7.2 _________ _________ _________ _________ Benefit payments administered for Medicare........................... $ 3,450.5 $ 3,249.7 6.2 _________ _________ _________ _________
Aetna Health Plans' net income for the three months ended March 31, 1995 decreased by $4 million compared with the same period a year ago. Excluding net realized capital losses, results for the three months ended March 31, 1995 decreased $13 million from the prior year. Results decreased in the first quarter of 1995 primarily due to increased operating expenses partially offset by an increase in premiums and fees and other income. The growth in operating expenses is primarily attributable to the migration of customers from the traditional health care business to the more resource- intensive managed care business, investments in managed care- related systems and the development of primary care physician practices. In addition, first quarter 1994 results included $8 million (after-tax) of non-recurring benefits from the settlement of a lawsuit and the termination of an HMO management contract. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ Premiums and fees and other income increased 11% in the first quarter of 1995 compared with the same period in 1994, primarily resulting from growth in covered members, modest price increases and a movement toward higher revenue products, such as point-of- service and health maintenance organizations. The increase in current and future benefits primarily resulted from growth of covered members in certain types of insured products. The number of members covered under health care arrangements was 15.7 million and 15.6 million at March 31, 1995 and December 31, 1994, respectively. The number of managed care members was 7.6 million and 7.0 million at March 31, 1995 and December 31, 1994, respectively. Included in the number of members at March 31, 1995 and December 31, 1994 were approximately .7 million members covered under a contract with the Civilian Health and Military Program of the Uniformed Services ("Champus"). Champus has awarded renewal of the contract to another provider effective October 1, 1995, and the company has filed a protest with the General Accounting Office concerning the process by which the contract was awarded. Management believes that loss of the contract, should it occur, would not have a material effect on the results of the segment for 1995. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions ___________________
Operating Summary (Millions) Three Months Ended March 31 __________________________________ 1995 1994 % Change ____ ____ ________ Premiums........................... $ 124.4 $ 56.9 118.6% Net investment income.............. 468.2 505.0 (7.3) Fees and other income.............. 35.1 32.1 9.3 Net realized capital losses........ (7.7) (9.5) 18.9 _________ _________ Total revenue................... 620.0 584.5 6.1 Current and future benefits........ 581.1 554.6 4.8 Operating expenses................. 20.6 22.8 (9.6) _________ _________ Total benefits and expenses..... 601.7 577.4 4.2 _________ _________ Income before income taxes......... 18.3 7.1 157.7 Income taxes....................... 7.0 .5 - _________ _________ Net income......................... $ 11.3 $ 6.6 71.2 _________ _________ _________ _________ Net realized capital losses, net of tax (included above)...... $ (5.0) $ (6.0) 16.7 _________ _________ _________ _________ Deposits not included in premiums above (a)........................ $ 427.0 $ 653.3 (34.6) _________ _________ _________ _________ (a) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue.
Large Case Pensions' net income for the three months ended March 31, 1995 increased by $5 million compared with the same period a year ago. Excluding net realized capital losses, results for the three months ended March 31, 1995 increased $4 million from the prior year. Results for the three months ended March 31, 1995 primarily reflected an increase in fees and other income, and a reduction in operating expenses due to expense reduction measures. The increase in premiums related to additional premiums from existing contractholders and did not have a material effect on results. Assets under management were $46.1 billion and $50.1 billion, at March 31, 1995 and 1994, respectively. Included in assets under management are net unrealized capital losses of $170 million and net unrealized capital gains of $22 million at March 31, 1995 and 1994, respectively. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Experience rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other company products) (in millions):
Three Months Ended March 31 ____________________________ 1995 1994 ____ ____ Scheduled contract maturities and benefit payments: (1)......... $ 270.3 $ 240.3 ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments.............. $ 97.6 $ 159.7 ________ ________ ________ ________ Participant withdrawals............ $ 54.5 $ 61.7 ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
The company is exploring strategic partnership or similar opportunities for its Large Case Pension investment management and advisory business conducted through its Aeltus Investment Management subsidiary, including disposition of the business. Such business contributed $15 million and $4 million to Large Case Pension's net income for the year ended December 31, 1994 and the three months ended March 31, 1995, respectively. Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three month periods ended March 31, 1995 and 1994 were charged to the reserve for anticipated future losses and did not affect the company's results of operations. Future losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at March 31, 1995 is adequate to provide for future losses associated with the guaranteed product liabilities. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. (Please refer to the company's 1994 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables will be funded from invested assets supporting Large Case Pensions and accrue interest at the discount rates used to calculate the loss on discontinuance until the receivable is funded. The offsetting payable established in continuing products will similarly accrue interest, generally offsetting the investment income on the assets available to fund the shortfalls. At March 31, 1995, the receivables from continuing operations were $414 million and $471 million for GICs and SPAs, respectively, and no funding had taken place. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Results of discontinued products were as follows (in millions):
Three Months Ended March 31 ________________________________ 1995 ________________________________ GICs SPAs Total ____ ____ _____ Negative interest margin (a)............. $ (14.9) $ (2.8) $ (17.7) Net realized capital gains (losses)...... (12.0) 5.2 (6.8) Interest earned on receivable from continuing operations.................. 3.3 5.0 8.3 Other, net............................... 1.1 1.6 2.7 ________ ________ ________ Results of discontinued products, after-tax.............................. $ (22.5) $ 9.0 $ (13.5) ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax.................................. $ (33.5) $ 12.8 $ (20.7) ________ ________ ________ ________ ________ ________
Three Months Ended March 31 ________________________________ 1994 ________________________________ GICs SPAs Total ____ ____ _____ Negative interest margin (a)............. $ (20.5) $ (2.1) $ (22.6) Net realized capital losses.............. (16.6) (10.1) (26.7) Interest earned on receivable from continuing operations.................. 3.1 4.5 7.6 Other, net............................... 0.6 1.1 1.7 ________ ________ ________ Results of discontinued products, after-tax.............................. $ (33.4) (6.6) $ (40.0) ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax. $ (51.4) $ (10.2) $ (61.6) ________ ________ ________ ________ ________ ________ (a) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts exceeds interest earned on invested assets supporting such contracts.
The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Three Months Ended March 31, 1995 _________________________________ GICs SPAs Total ____ ____ _____ Reserve at December 31, 1994..... $ 345.6 $ 651.4 $ 997.0 Results of discontinued products.. (33.5) 12.8 (20.7) ________ ________ ________ Reserve at March 31, 1995........ $ 312.1 $ 664.2 $ 976.3 ________ ________ ________ ________ ________ ________
27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ The results of discontinued products for the three month period ended March 31, 1995 included net realized capital losses of $12 million and net realized capital gains of $5 million (after-tax) on GICs and SPAs, respectively, which included net losses of $6 million and gains of $9 million, respectively, from the sale of bonds. The loss on discontinued products for the three month period ended March 31, 1994 included $17 million and $10 million of net realized capital losses (after-tax) on GICs and SPAs, respectively, which included net gains of $10 million and losses of $4 million, respectively, from the sale of bonds. As a result of selling bonds and realizing losses and reinvesting the proceeds at higher interest rates, and settling GIC liabilities at favorable pricing, the related anticipated future losses associated with the negative interest margin are expected to be reduced in the future. At March 31, 1995 and December 31, 1994, estimated future after- tax capital losses of $122 million and $127 million ($187 million and $196 million, pretax), respectively, attributable primarily to mortgage loans and real estate supporting GICs, and $44 million and $47 million ($67 million and $73 million, pretax), respectively, attributable primarily to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Distributions on GICs and SPAs were as follows (in millions):
Three Months Ended March 31 ____________________________________ 1995 ____________________________________ GICs SPAs Total ____ ____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1)...................... $ 644.8 $ 133.7 $ 778.5 ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 27.1 $ - $ 27.1 ________ ________ ________ ________ ________ ________ Three Months Ended March 31 ____________________________________ 1994 ____________________________________ GICs SPAs Total ____ ____ _____ Scheduled contract maturities and benefit payments (1).......... $ 563.0 $ 131.6 $ 694.6 ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 74.0 $ - $ 74.0 ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity, early settlement of GIC liabilities and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on, invested assets. (Please see "General Account Investments" on page 33 for a discussion of investments supporting discontinued products.) 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Life Insurance & Annuity ______________________________
Operating Summary (Millions) Three Months Ended March 31 __________________________________ 1995 1994 % Change ____ ____ ________ Premiums............................ $ 42.4 $ 36.0 17.8% Net investment income............... 245.5 240.4 2.1 Fees and other income............... 84.0 78.4 7.1 Net realized capital gains (losses). 3.0 (3.0) - _________ _________ Total revenue.................... 374.9 351.8 6.6 Current and future benefits......... 229.1 219.5 4.4 Operating expenses.................. 70.1 59.5 17.8 Amortization of deferred policy acquisition costs.................. 11.5 14.1 (18.4) _________ _________ Total benefits and expenses...... 310.7 293.1 6.0 _________ _________ Income before income taxes.......... 64.2 58.7 9.4 Income taxes........................ 20.7 19.2 7.8 _________ _________ Net income.......................... $ 43.5 $ 39.5 10.1 _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ 1.9 $ (2.0) - _________ _________ _________ _________ Deposits not included in premiums above (a).......................... $ 921.1 $ 841.8 9.4 _________ _________ _________ _________ (a) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue.
Aetna Life Insurance & Annuity's net income for the three months ended March 31, 1995 increased $4 million from the same period a year ago. Excluding net realized capital gains and losses, results for the three months ended March 31, 1995 remained level with the same period a year ago. Results in the first quarter of 1995 benefited from increased fees assessed against policyholders and increased net investment income related to the growth in assets under management offset by an increase in operating expenses. The increase in operating expenses primarily reflects continued business growth and costs associated with the implementation of a new contract administration system. Assets under management were $21.2 billion and $18.7 billion, at March 31, 1995 and 1994, respectively. Included in assets under management are net unrealized capital losses of $70 million and net unrealized capital gains of $220 million at March 31, 1995 and 1994, respectively. 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty _________________
Operating Summary (Millions) Three Months Ended March 31 __________________________________ 1995 1994 % Change ____ ____ ________ Premiums............................ $ 1,046.9 $ 1,117.9 (6.4) Net investment income............... 215.9 216.6 (.3) Fees and other income............... 22.6 29.8 (24.2) Net realized capital gains.......... 6.8 23.7 (71.3) _________ _________ Total revenue.................... 1,292.2 1,388.0 (6.9) Current and future benefits......... 842.1 1,038.8 (18.9) Operating expenses.................. 198.5 253.0 (21.5) Amortization of deferred policy acquisition costs.................. 155.1 158.9 (2.4) _________ _________ Total benefits and expenses...... 1,195.7 1,450.7 (17.6) _________ _________ Income (loss) before income taxes... 96.5 (62.7) - Income tax (benefits) expenses...... 28.1 (36.5) - _________ _________ Net income (loss)................... $ 68.4 $ (26.2) - _________ _________ _________ _________ Net realized capital gains, net of tax (included above)......... $ 3.6 $ 16.4 (78.0) _________ _________ _________ _________ Statutory combined loss and expense ratio...................... 111.1% 130.1% - _________ _________ _________ _________ GAAP combined loss and expense ratio 112.7% 128.4% - _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 1.9% 16.0% - _________ _________ _________ _________
Property-Casualty's results for the three months ended March 31, 1995 increased $95 million compared with the same period a year ago. Excluding net realized capital gains, results for the three months ended March 31, 1995 increased $107 million from the prior year. Catastrophe losses (after-tax) for the three months ended March 31, 1995 were $13 million compared with $124 million for the same period a year ago. Catastrophe losses in the first quarter of 1994 included $120 million ($285 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather. Results in 1995 benefited from a reduction in operating expenses, primarily due to actions taken by management in prior years to lower costs. Premium revenue for the first quarter of 1995 was approximately 6 percent lower than in the same period a year ago, due primarily to the transferring of additional risk through restructured and expanded reinsurance programs, and reductions in residual market business assumed as a result of exiting certain markets. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Property-Casualty Reserves For a full discussion of property-casualty reserves, including environmental and asbestos-related reserves, please see the company's 1994 Annual Report to Shareholders. During the first quarter of 1995, $18 million (after-tax and net of reinsurance and discounting, as discussed below) ($77 million pretax, before reinsurance and net of discounting) was added to environmental-related claims reserves compared to $21 million (after-tax and net of reinsurance) ($60 million pretax and before reinsurance) in the first quarter of 1994. These reserve additions related to indemnity-related liabilities and litigation expenses. The company is involved in certain coverage dispute cases where insureds have presented the company with particularly large claims for coverage. The case described in the company's 1994 Annual Report to Shareholders involving such an insured that was scheduled to begin trial this year has been settled, and the company has obtained a release from liability from the insured for any and all current and future environmental sites/claims involving the insured in exchange for fixed, scheduled cash payments to be made over time. The settlement was recorded on a discounted basis and had been substantially reserved for in prior periods. The company is in the process of reviewing its methodologies for reserving environmental-related claims and reviewing additional data obtained from an outside actuarial firm in an effort to improve the company's ability to estimate all or a further portion of its environmental-related liability. The review under way is expected to be completed in the second or third quarter of this year. The estimation of reserves for reported environmental claims is likely to change as additional information emerges and reserving techniques continue to develop. The company is expected to be affected adversely in 1995 by losses for environmental and asbestos claims and related litigation expenses, and such effect could be material to the company's future results, liquidity and/or capital resources. 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International _____________
Operating Summary (Millions) Three Months Ended March 31 __________________________________ 1995 1994 % Change ____ ____ ________ Premiums............................ $ 220.6 $ 204.6 7.8% Net investment income............... 68.3 77.3 (11.6) Fees and other income............... 26.3 21.5 22.3 Net realized capital gains (losses). (3.8) 6.7 - _________ _________ Total revenue.................... 311.4 310.1 .4 Current and future benefits......... 196.8 189.4 3.9 Operating expenses.................. 83.3 85.7 (2.8) Amortization of deferred policy acquisition costs.................. 13.8 11.6 19.0 _________ _________ Total benefits and expenses...... 293.9 286.7 2.5 _________ _________ Income before income taxes.......... 17.5 23.4 (25.2) Income tax expenses................. 3.4 9.8 (65.3) _________ _________ Net income.......................... $ 14.1 $ 13.6 3.7 _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ (2.8) $ 3.0 - _________ _________ _________ _________
International's net income for the three months ended March 31, 1995 was relatively level with the same period a year ago. Excluding net realized capital gains and losses, results for the three months ended March 31, 1995 increased $6 million from the same period a year ago. The improvement in first quarter results primarily reflected increased earnings in the Pacific Rim and Chile. Results in Mexico for the first quarter of 1995 were flat compared to the same period in 1994. Such results reflected higher investment income of, and the company's increased investment in, a Mexican insurance operation, which were offset by the effect of the devaluation of the Mexican peso. During the third quarter of 1994, the company changed its accounting for its Korean affiliate from the consolidated basis of accounting to the equity basis of accounting. In the first quarter of 1994, the company recognized revenue of $50 million and benefits and expenses of $50 million from the affiliate. During the first quarter of 1995, the company sold its interest in the affiliate at book value. During the first quarter of 1995, the company increased its ownership in several of its Chilean operating subsidiaries. The effects of this increased ownership are not expected to materially impact the results of the segment. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Corporate _________
Operating Summary (Millions, after-tax) Three Months Ended March 31 __________________________________ 1995 1994 % Change ____ ____ ________ Interest expense.................... $ 18.1 $ 13.4 35.1% Other expense....................... 32.0 51.8 (38.2)
The increase in interest expense of $5 million in the first quarter of 1995 compared to the same period a year ago resulted from the issuance by a subsidiary of $275 million of 9 1/2 % cumulative monthly income preferred securities in November 1994. Other expense for the three months ended March 31, 1995 and 1994 included after-tax capital losses of $2 million and $7 million, respectively. Excluding realized capital losses, the decrease in other expenses in 1995 resulted from a reduction of corporate staff area expenses associated with the company's 1994 restructuring. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments ___________________________ The company's invested assets were comprised of the following, net of impairment reserves:
March 31, December 31, (Millions) 1995 1994 ____________________________________________________________________________ Debt securities: Held for investment, at amortized cost (fair value $1,884.9 and $1,991.2) $ 1,871.9 $ 2,000.8 Available for sale, at fair value (amortized cost $37,495.5 and $36,984.2) 36,715.8 35,110.7 Equity securities, at fair value (cost $1,135.8 and $1,326.9) 1,489.7 1,655.6 Short-term investments 434.0 450.4 Mortgage loans 11,321.3 11,843.6 Real estate 1,545.7 1,545.7 Policy loans 558.8 533.8 Other 1,099.4 1,152.7 __________________________________________________________________________ Total invested assets $ 55,036.6 $ 54,293.3 __________________________________________________________________________ ________________________
Please refer to the 1994 Annual Report to Shareholders for a description of the company's investment objectives and policies. The change in invested assets from December 31, 1994 to March 31, 1995 primarily reflected appreciation of debt securities due to a decrease in interest rates, partially offset by a decrease in mortgage loans. Unrealized capital losses on debt securities decreased from $1.9 billion at December 31, 1994 to $780 million at March 31, 1995. Of such net unrealized capital losses at March 31, 1995, gains of $15 million and losses of $202 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The decrease in mortgage loans principally reflected prepayments, payments at maturity on mortgage loans and the company's adoption of FAS Nos. 114 and 118 on January 1, 1995. The risks associated with investments supporting experience rated pension and annuity products are assumed by those customers subject to, among other things, certain minimum guarantees. The anticipated future losses associated with investments supporting discontinued products were provided for in the loss on discontinuance of products. 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Debt Securities As of March 31, 1995 and December 31, 1994, the company's investments in debt securities represented 70% and 68%, respectively, of total general account invested assets and were as follows:
March 31, December 31, (Millions) 1995 1994 __________________________________________________________________________ Supporting discontinued products $ 6,181.8 $ 6,155.0 Supporting experience rated products 12,228.7 11,770.5 Supporting remaining products 20,177.2 19,186.0 ____________________________ Total $38,587.7 $37,111.5 ____________________________ ____________________________
Included in the company's total debt security balances were the following categories of debt securities:
(Millions) March 31, 1995 _______________________________________________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Debt Securities Securities Debt Securities ______________________ ______________ ___________________ Total $1,683.6 $ 169.2 $ 156.5 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 30.3% 35.6% 35.2% Supporting experience rated products 25.9 13.5 27.2 Supporting remaining products 43.8 50.9 37.6 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ December 31, 1994 ________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Debt Securities Securities Debt Securities ______________________ ______________ ___________________ Total $1,873.0 $ 146.4 $ 170.0 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 27.8% 35.6% 27.9% Supporting experience rated products 25.8 14.3 29.6 Supporting remaining products 46.4 50.1 42.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________
"Below investment grade" debt securities (which include "problem" debt securities and "potential problem" debt securities described below) are defined to be securities that carry a rating below BBB- /Baa3. Such debt securities have been written down for other than temporary declines in value. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Management defines "problem" debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. "Potential problem" debt securities are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. The company does not accrue interest on problem debt securities when management believes the likelihood of collection of interest is doubtful. Lost investment income on problem debt securities was as follows:
Three Months Ended March 31, __________________ (Millions) 1995 1994 ___________________________________________________________ Allocable to discontinued products $ .4 $ .8 Allocable to experience rated products .2 .5 Allocable to remaining products 1.1 1.2
At March 31, 1995 and December 31, 1994, the carrying value (fair value) of collateralized mortgage obligations ("CMOs") was $3.6 billion and $3.4 billion, respectively. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the value of the CMOs would be subject to variability on the repayment of principal from the underlying mortgages earlier or later than originally anticipated. At March 31, 1995 and December 31, 1994, approximately 77% and 82%, respectively, of the company's CMO holdings consisted of sequential and planned amortization class ("PAC") bonds that are subject to less prepayment and extension risk than other CMO instruments. At March 31, 1995 and December 31, 1994, approximately 71% and 74%, respectively, of the company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC). 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Mortgage Loans During the first quarter of 1995, the mortgage loan portfolio was reduced 4% to $11.3 billion, net of impairment reserves. The company's mortgage loan investments, net of impairment reserves, supported the following types of business:
March 31, December 31, (Millions) 1995 1994 ______________________________________________________________________ Supporting discontinued products $ 4,205.7 $ 4,294.9 Supporting experience rated products 3,309.8 3,652.1 Supporting remaining products 3,805.8 3,896.6 _____________________________ Total $11,321.3 $11,843.6 _____________________________ _____________________________
During the first quarter of 1995, the company continued to manage its mortgage loan portfolio to reduce the balance in absolute terms and relative to invested assets, and to reduce its overall risk. Mortgage loans, net of impairment reserves, now represent 21% of total general account invested assets, down from 38% in 1990. During this period, the principal balance of the mortgage portfolio was reduced by 47%. The principal balance of mortgage loans decreased $303 million since December 31, 1994 primarily reflecting the effect of repayments of maturing loans and loan prepayments. During 1994, the company implemented a troubled debt restructuring program. The primary objective of this program is to restructure eligible loans in a manner which creates a market rate transaction which will perform in accordance with its restructured terms. The program is applied to those loans which have sound property and borrower fundamentals but possess excess debt. An important feature of these loans is that in exchange for principal forgiveness on a portion of the loan, the company typically retains the right to participate in property appreciation to the extent market conditions improve in the future. In those situations where the property fundamentals do not support a restructuring of the loan, the company generally acquires the collateral through foreclosure. Loans with a principal balance of $21 million and collateral with a fair market value of $10 million were foreclosed upon in the first quarter of 1995. In certain cases, the company has taken substantive possession of the property supporting its loan, coupled with the borrower surrendering its interest in the future economic benefits in the property. Where this has occurred, the loans are considered in- substance foreclosures, written down to their fair market value less selling costs and classified as real estate held for sale. At March 31, 1995 and December 31, 1994, there were $153 million and $193 million, respectively, of in-substance foreclosures (net of write-offs of $94 million and $136 million, respectively). 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Included in the company's total mortgage loan balances were the following categories of mortgage loans:
(Millions) March 31, 1995 __________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ ______________ _____ Total $ 764.9 $ 693.6 $1,028.3 $2,486.8 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 37.6% 39.4% 46.6% Supporting experience rated products 26.6 31.9 28.3 Supporting remaining products 35.8 28.7 25.1 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves (1) $1,003.6** ________ ________ Impairment reserves as a percentage of total 40.4% ________ ________ December 31, 1994 __________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ ______________ _____ Total $ 673.1 $ 706.1 $ 918.7 $2,297.9 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 36.9% 39.1% 48.8% Supporting experience rated products 30.8 31.1 25.5 Supporting remaining products 32.3 29.8 25.7 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves (1) $ 784.1** ________ ________ Impairment reserves as a percentage of total 34.1% ________ ________ (1) Please see Note 5 of Condensed Notes to Financial Statements for composition of impairment reserves between specific and general impairment reserves. * In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (Please see Note 5 of Condensed Notes to Financial Statements), management has revised the definition of "potential problem loans". (Please see "potential problem loans" on page 38.) ** The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. Had such reserves been included, total reserves would have been $992.6 million. In connection with the company's adoption of FAS No. 114 and 118, the general reserve at March 31, 1995 included such reserve, related to experience rated products. The inclusion of these reserves did not impact earnings or shareholders' equity.
"Problem loans" are defined to be loans with payments over 60 days past due, loans on properties in the process of foreclosure, loans on properties involved in bankruptcy proceedings and loans on properties subject to redemption. Loans on properties in the process of foreclosure increased to $513 million at March 31, 1995 from $422 million at December 31, 1994. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Restructured loans" are loans whose original contract terms have been modified to grant concessions to the borrower and are currently performing pursuant to such modified terms. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post-restructuring payment performance in accordance with the restructured terms) may be returned to performing status. (Please see the company's 1994 Annual Report to Shareholders for a complete description of the company's restructuring program.) No such restructures and transfers to performing status occurred during the three month period ended March 31, 1995. In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (Please see Note 5 of Condensed Notes to Financial Statements), management has revised the definition of "potential problem loans" to include all loans which are performing pursuant to existing terms and are considered likely to become classified as problem or restructured loans. Prior to January 1, 1995, "potential problem loans" were performing loans which management believed were likely to become classified as problem or restructured loans in the next 12 months or so. As a result of the revised definition, "potential problem loans" at March 31, 1995 are approximately $215 million higher than they would have been had the definition not been changed. "Potential problem loans" are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem loans requires significant judgment as to likely future market conditions and developments specific to individual properties and borrowers. Provision for losses that management believes are likely to arise from such potential problem loans is included in the specific impairment reserves. (Please see Note 5 of Condensed Notes to Financial Statements for a discussion of mortgage loan impairment reserves.) 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such problem and restructured loans outstanding at March 31 and the portion thereof actually recorded as income were as follows:
Three Months Ended March 31, __________________ (Millions) 1995 1994 _________________________________________________________ Income which would have been recorded under original terms of loans $ 33.6 $ 73.9 Income recorded 11.9 34.1 _______ _______ Lost investment income $ 21.7 $ 39.8 _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 9.5 $ 16.7 _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension products (included above) $ 7.1 $ 12.8 _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ 5.1 $ 10.3 _______ _______ _______ _______
40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Real Estate The company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) March 31, 1995 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 387.5 $1,158.2 (1) $1,545.7 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 22.3% 54.3% Supporting experience rated products 7.3 22.1 Supporting remaining products 70.4 23.6 ________ ________ 100.0% 100.0% ________ ________ ________ ________ December 31, 1994 _________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 382.3 $1,163.4 (1) $1,545.7 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 23.8% 54.9% Supporting experience rated products 8.3 21.6 Supporting remaining products 67.9 23.5 ________ ________ 100.0% 100.0% ________ ________ ________ ________ (1) Includes $152.7 million and $193.4 million of in-substance foreclosures at March 31, 1995 and December 31, 1994, respectively. (Please see "Mortgage Loans" on page 36 for discussion of in-substance foreclosures.)
All real estate acquired through foreclosure, including in- substance foreclosures, is classified as properties held for sale. These properties were carried at 60% of the company's cash investment (unpaid mortgage balance plus capital additions) at March 31, 1995 and December 31, 1994. Investment real estate, which is generally carried at depreciated cost, is written down to fair value to reflect other than temporary declines in market value. The fair value of assets acquired through foreclosure is established as the cost basis at the time of foreclosure. Subsequent to acquisition, properties classified as held for sale are carried at the lower of cost or fair value less estimated selling costs. Adjustments to the carrying value of properties held for sale resulting from changes in fair value, are recorded in a valuation reserve. Property valuations are reviewed regularly by investment management. Capital additions and asset improvements increase the cost basis of the asset while depreciation reduces the cost basis. 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances were as follows:
March 31, December 31, (Millions) 1995 1994 ______________________________________________________________________ Allocable to discontinued products $ 372.8 $ 376.0 Allocable to experience rated products 186.2 179.6 Allocable to remaining products 201.9 206.6 ________ ________ Total $ 760.9 $ 762.2 ________ ________ ________ ________
For the periods shown below, total after-tax net realized capital losses from real estate write-downs and changes in the valuation reserves were as follows:
Three Months Ended March 31, ___________________ (Millions) 1995 1994 _______________________________________________________________ Allocable to discontinued products (1) $ - $ 12.6 Allocable to experience rated products (2) - .1 Allocable to remaining products - (1.6) (1) Write-downs and impairment expense allocable to discontinued products are charged against the reserve for future losses and do not affect the company's results of operations. (2) Write-downs and impairment expense allocable to experience rated products do not affect the company's results of operations.
Use of Derivatives and Other Investments The company's hedging activity has been limited and has principally consisted of using futures, forward contracts and interest rate swaps to hedge interest rate risk and currency risk. These instruments taken alone subject the company to varying degrees of market and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall market and interest rate risk. Market risk is the risk that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 9 of Condensed Notes to Financial Statements for a discussion of the company's hedging activities.) 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The company also had investments in certain debt instruments with derivative characteristics, including those where market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the $38.6 billion debt securities portfolio, as of March 31, 1995 was as follows:
Amortized Fair (Millions) Cost Value _____________________________________________________________________________ Collateralized mortgage obligations:............ $ 3,637.0 $ 3,560.5 Interest-only strips (included above)......... 19.1 34.5 Principal-only strips (included above)........ 54.2 61.0 Treasury and agency strips: Principal..................................... 1,158.8 1,047.2 Interest...................................... 101.2 90.7 Warrants to purchase debt securities (1)........ 9.4 7.8 Mandatorily convertible preferred stock......... 12.1 12.0 (1) Represents the right to purchase specific debt securities and is accounted for as a hedge. Upon exercise, the cost of the warrants will be added to the basis of the debt securities purchased and amortized over their lives.
43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources _______________________________ Cash and cash equivalents at March 31, 1995 and December 31, 1994 were $3.1 billion and $3.0 billion, respectively. For the three months ended March 31, 1995, net cash used for operating activities was $1 million. Net cash used for operating activities was $1.1 billion during the first three months of 1994. For the first three months of 1995, net cash provided by investing activities was $681 million and included $552 million from maturities and repayments of mortgage loans. Net cash provided by investing activities of $1.4 billion for the three months ended March 31, 1994 included $110 million provided by a decrease in short-term investments. Short-term borrowings are used from time to time to provide for timing differences between receipts and disbursements in various portfolios. The maximum amount of domestic short-term borrowings outstanding during the first three months of 1995 was $144 million. As a result of adverse conditions in real estate markets and tight lending practices by banks and other financial institutions over the past several years, the company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere. Of the $221 million of mortgage loans scheduled to mature during the first three months of 1995, $145 million were not paid as scheduled, a substantial portion of which supported large case pension liabilities. Of the loans not paid as scheduled, $58 million were extended at interest rates at least equal to current market (average rate of 10% over an average extension period of 4 years) and $87 million were under forbearance (continuing to make payments under original loan terms) or under discussion with borrowers at March 31, 1995. Of the $87 million of loans under forbearance or under discussion with borrowers, $11 million were classified as problem or restructured loans at March 31, 1995. Despite various indications that liquidity is returning to certain real estate markets, the company expects it will continue to extend or refinance maturing loans in the portfolio. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission the company may offer and sell up to $550 million of various types of securities, and Aetna Capital L.L.C., a subsidiary of the company, may offer and sell up to an additional $225 million of preferred securities. Dividends Declared On February 24, 1995, the Board of Directors declared a quarterly dividend of $.69 per share of common capital stock for shareholders of record at the close of business on April 28, 1995, payable May 15, 1995. 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters _____________ Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. At March 31, 1995, $238 million of net unrealized capital losses primarily on available for sale debt and equity securities were reflected in shareholders' equity without deferred tax benefits. For federal income tax purposes, capital losses are deductible only against capital gains in the year of sale or during the carryback and carryforward periods (three and five years, respectively). Due to the expected full utilization of capital gains in the carryback period and the uncertainty of future capital gains, a valuation allowance of $83 million related to the net unrealized capital losses has been reflected in shareholders' equity at March 31, 1995. In addition, $201 million at March 31, 1995, of unrealized capital losses related to experience rated contracts are not reflected in shareholders' equity since such losses, if realized, will be charged to contractholders. However, the potential loss of tax benefits on such losses is the risk of the company and therefore would adversely affect the company rather than the contractholder. Accordingly, an additional valuation allowance of $71 million has been reflected in shareholders' equity as of March 31, 1995. Any reversals of the valuation allowance are contingent upon the recognition of future capital gains in the company's federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. Non-recognition of the deferred tax benefits on net unrealized losses described above had no impact on net income for the three months ended March 31, 1995, but has the potential to adversely affect future results if such losses are realized. Potential losses of tax benefits related to net unrealized losses on assets supporting the discontinued products are not expected to adversely affect the company's future results. Severance and Facilities Charges During the three months ended March 31, 1995, the company charged costs of $39 million to the severance and facilities reserve established in 1993 related to cost reduction actions. Of the approximately 4,000 positions expected to be eliminated, approximately 3,600 had been eliminated by March 31, 1995 and the related severance benefits charged against the reserve. The remaining headcount reductions are expected to be substantially completed by the first half of 1995. The annualized after-tax savings of approximately $200 million related to these and other cost reduction actions are expected in 1995. New Accounting Pronouncements _____________________________ Please see Note 2 of Condensed Notes to Financial Statements for a discussion of recently issued accounting pronouncements. 45 PART II. OTHER INFORMATION Item 1. Legal Proceedings. In Re: Stepak v. Aetna Life and Casualty Company, et al. _________________________________________________________ A full description of this litigation is contained under "Item 3. Legal Proceedings" in the company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 1995. On March 24, 1995, the United States Court of Appeals for the Second Circuit affirmed the judgment of the United States District Court for the District of Connecticut in favor of the company and all other defendants. In Re: Attorneys General Antitrust Litigation ______________________________________________ A full description of this litigation is contained in Note 19 of Notes to Financial Statements in the company's 1994 Annual Report to Shareholders. On March 29, 1995, the United States District Court for the Northern District of California approved the plaintiffs' settlement of this litigation with all defendants, including The Aetna Casualty and Surety Company ("Aetna"). Aetna's share of the settlement is not material. Other Litigation ________________ The company is continuously involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of such litigation cannot be determined at this time, such litigation (other than that related to environmental and asbestos-related claims, which is subject to significant uncertainties), net of reserves established therefor and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. The company is expected to be affected adversely in the future by losses for environmental and asbestos-related claims and related litigation expenses and such effect could be material to the company's future results, liquidity and/or capital resources. Item 5. Other Information. (a) NAIC IRIS Ratios The NAIC IRIS ratios cover 12 categories of financial data with defined usual ranges for each category. The ratios are intended to provide insurance regulators "early warnings" as to when a given company might warrant special attention. An insurance company may fall out of the usual range for one or more ratios and such variances may result from specific transactions that are in themselves immaterial or eliminated at the consolidated level. Two of Aetna Life and Casualty Company's significant subsidiaries had more than two IRIS ratios that were outside of the NAIC usual ranges for 1994. 46 Item 5. Other Information. (Continued) Aetna Life Insurance Company ("ALIC") fell outside the usual ranges in 1994 for: (i) the Net Gain to Total Income Ratio which is calculated by dividing the net gain from operations (including realized capital gains and losses) by total income (including capital gains and losses); (ii) the Adequacy of Investment Income Ratio which compares investment income to credited interest; (iii) the Total Real Estate and Total Mortgage Loans to Cash and Invested Assets Ratio which measures the relative size of the real estate and mortgage loan portfolios; (iv) the Change in Premium Ratio which is calculated by dividing the current year change in total premiums, annuity considerations and other fund deposits by total premiums, annuity considerations and other fund deposits for the prior year; and (v) the Change in Reserving Ratio which represents the number of percentage points of difference between the reserving ratio for current and prior year. The reserving ratio is equal to the aggregate increase in reserves for individual life insurance taken as a percentage of renewal and single premiums for individual life insurance. The Aetna Casualty & Surety Company of America ("ACSCA") fell outside of the usual ranges in 1994 for: (i) the Two-year Overall Operating Ratio, which is a combination of a two-year combined ratio minus a two-year investment income ratio; (ii) the Change in Surplus Ratio which measures the improvement or deterioration in a company's financial condition during the year; and (iii) the Two- Year Reserve Development to Surplus Ratio which measures the change in prior years' estimates calculated as a percentage of policyholders' surplus two years previous. Management does not believe that ALIC or ACSCA will warrant special attention by the regulators. Management also does not believe that the factors causing the ratios to fall outside of the usual ranges will have a significant impact on future operations of the company. (b) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends The following table sets forth the company's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Three Months Ended Years ended December 31 ____________________________________ March 31, 1995 1994 1993 1992 1991 1990 __________________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges.... 5.93 4.60 (a) .42(b) 2.13 3.03 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 5.93 4.60 (a) .42(b) 2.13 3.03 (a) The company reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.1 billion. (b) Earnings were inadequate to cover fixed charges by $112.8 million in 1992.
47 Item 5. Other Information. (Continued) For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1994 Annual Report to Shareholders.) For the three months ended March 31, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (12) Statement Re Computation of Ratios. (12.1) Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the three months ended March 31, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990. (15) Letter Re Unaudited Interim Financial Information. (15.1) Letter from KPMG Peat Marwick LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated April 28, 1995. (27) Financial Data Schedule. (b) Reports on Form 8-K None. 48 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 Life and Casualty Company _______________________________ (Registrant) Date April 28, 1995 By /s/ ROBERT E. BROATCH _____________________________________ (Signature) Robert E. Broatch Senior Vice President, Finance, and Corporate Controller (Chief Accounting Officer) EX-12 2 STATEMENT RE COMPUTATION OF RATIOS 1 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
3 Months Ended (Millions) March 31, 1995 1994 1993 1992 1991 1990 ______________ ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 239.9 $ 658.3 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 Add back fixed charges............ 50.0 186.1 171.0 194.3 221.5 229.0 Minority interest................ 6.4 11.4 7.0 8.6 5.9 4.9 ________ _________ _________ ________ ________ ________ Income (loss) as adjusted..... $ 296.3 $ 855.8 (969.4) $ 81.5 $ 470.9 $ 693.5 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Fixed charges: Interest on indebtedness....... $ 29.1(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9 $ 119.9 Portion of rents representative of interest factor............ 20.9 87.5 93.6 112.9 110.6 109.1 ________ _________ _________ ________ ________ ________ Total fixed charges........... $ 50.0 $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Preferred stock dividend requirements.................... - - - - - - ________ _________ _________ ________ ________ ________ Total combined fixed charges and preferred stock dividend requirements.................... $ 50.0 $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Ratio of earnings to fixed charges......................... 5.93 4.60 (5.67) 0.42 2.13 3.03 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Ratio of earnings to combined fixed charges and preferred stock dividends................. 5.93 4.60 (5.67) 0.42 2.13 3.03 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1994 Annual Report to Shareholders.)
EX-15 3 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Life and Casualty Company Hartford, Connecticut Gentlemen: Re: Registration Statements No. 2-73911, 2-91514, 33-12993, 33-49543, 33-50427, 33-52819 and 33-52819-01 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated April 27, 1995 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. By /s/ KPMG PEAT MARWICK LLP _____________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut April 28, 1995 EX-27 4 ARTICLE 7 - FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended March 31, 1995 for Aetna Life and Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 3-MOS DEC-31-1995 MAR-31-1995 36,716 1,872 1,885 1,490 11,321 1,546 55,037 3,144 5,019 2,054 96,470 17,472 1,659 17,502 23,561 1,114 1,418 0 0 4,805 96,470 2,929 1,086 (6) 476 3,122 187 0 240 79 161 0 0 0 161 1.42 0 0 0 0 0 0 0 0 There is not a significant difference between primary and fully diluted earnings per share.
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