-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LUYFxyhPVOPMB0roPc5DJnK7ENmf9PHV1HavFgoS/S6Ep1glR0gQt+5F0up6mWIK Xem+NxO9JS79qbMTaimYVQ== 0000002648-96-000037.txt : 19960729 0000002648-96-000037.hdr.sgml : 19960729 ACCESSION NUMBER: 0000002648-96-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960726 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA SERVICES INC CENTRAL INDEX KEY: 0000002648 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 060843808 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21053 FILM NUMBER: 96599483 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 8602730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 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 June 30, 1996 _______________ Commission file number 1-5704 ________ Aetna Services, Inc. _____________________________________________________________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 ___________________________________________________________________________ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (860) 273-0123 ______________________ Aetna Life and Casualty Company ______________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class at July 18, 1996 ________________ _________________ Common Capital Stock without par value 115,721,039 2 TABLE OF CONTENTS _________________ Page ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Condensed Notes to Financial Statements 8 Independent Auditors' Review Report 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 50 Item 2. Changes in Securities. 50 Item 4. Submission of Matters to a Vote of Security Holders. 50 Item 5. Other Information. 51 Item 6. Exhibits and Reports on Form 8-K. 51 Signatures 55 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, _________________________ __________________________ (Millions, except share and per share data) 1996 1995 1996 1995 ____ ____ ____ ____ Revenue: Premiums..................................... $ 1,710.8 $ 1,822.5 $ 3,554.7 $ 3,704.6 Net investment income........................ 893.8 919.5 1,780.1 1,789.5 Fees and other income........................ 548.1 486.3 1,066.3 939.7 Net realized capital gains................... 4.4 15.9 66.4 2.7 ____________ ____________ ____________ ____________ Total revenue............................ 3,157.1 3,244.2 6,467.5 6,436.5 ____________ ____________ ____________ ____________ Benefits and expenses: Current and future benefits.................. 2,059.4 2,256.2 4,296.3 4,531.9 Operating expenses........................... 801.0 769.8 1,591.2 1,510.5 Amortization of deferred policy acquisition costs....................................... 38.1 36.6 75.1 69.1 Reduction of loss on discontinued products... (170.0) - (170.0) - Facilities and severance charges............. 392.7 - 392.7 - ____________ ____________ ____________ ____________ Total benefits and expenses.............. 3,121.2 3,062.6 6,185.3 6,111.5 ____________ ____________ ____________ ____________ Income from continuing operations before income taxes........................................ 35.9 181.6 282.2 325.0 Federal and foreign income taxes (benefits): Current...................................... 62.0 115.2 124.8 93.0 Deferred..................................... (50.4) (54.7) (32.4) 18.5 ____________ ____________ ____________ ___________ Total federal and foreign income taxes... 11.6 60.5 92.4 111.5 ____________ ____________ ____________ ___________ Income from continuing operations.............. 24.3 121.1 189.8 213.5 Discontinued operations, net of tax: Income (Loss) from operations................ - (418.0) 182.2 (349.6) Gain on sale................................. 263.7 - 263.7 - ____________ ____________ ____________ ___________ Net income (loss)........................ $ 288.0 $ (296.9) $ 635.7 $ (136.1) ____________ ____________ ____________ ___________ ____________ ____________ ____________ ___________ Results per common share: Income from continuing operations.............. $ .21 $ 1.07 $ 1.63 $ 1.89 Discontinued operations, net of tax: Income (Loss) from operations................ - (3.69) 1.57 (3.09) Gain on sale................................. 2.26 - 2.27 - ____________ ____________ ____________ ____________ Net income (loss) ........................... $ 2.47 $ (2.62) $ 5.47 $ (1.20) _ ____________ ____________ ____________ ____________ _ ____________ ____________ ____________ ____________ Dividends declared........................... $ - $ .69 $ .69 $ 1.38 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ Weighted average common shares and common stock equivalents outstanding.............. 116,490,454 113,033,255 116,297,376 112,871,537 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ See Condensed Notes to Financial Statements.
4 AETNA SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, (Millions) 1996 1995 _____________ ____________ Assets: Investments: Debt securities available for sale, at fair value (amortized cost $29,484.1 and $29,962.5)......... $ 29,827.8 $ 31,860.3 Equity securities, at fair value (cost $985.8 and $597.8)........... 1,224.7 659.7 Short-term investments................ 1,729.5 607.8 Mortgage loans........................ 7,493.0 8,327.2 Real estate........................... 1,210.7 1,277.3 Policy loans.......................... 651.7 629.4 Other................................. 707.5 688.6 ___________ ___________ Total investments............... 42,844.9 44,050.3 Cash and cash equivalents............. 4,253.5 1,712.7 Accrued investment income............. 557.2 618.3 Premiums due and other receivables.... 1,111.7 1,080.9 Deferred federal and foreign income taxes................................ 538.9 271.5 Deferred policy acquisition costs..... 2,078.4 1,953.1 Other assets.......................... 1,051.8 1,004.4 Separate Accounts assets.............. 32,281.0 29,699.7 Net assets of Discontinued Operations........................... - 3,932.8 ____________ ___________ Total assets.................... $ 84,717.4 $ 84,323.7 ____________ ___________ ____________ ___________ See Condensed Notes to Financial Statements.
5 AETNA SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31, (Millions, except share and per share data) 1996 1995 _____________ ____________ Liabilities: Future policy benefits........................ $ 18,322.2 $ 18,372.9 Unpaid claims and claim expenses.............. 1,413.0 1,563.1 Unearned premiums............................. 244.8 142.4 Policyholders' funds left with the company.... 20,711.4 22,898.7 ___________ ___________ Total insurance liabilities............... 40,691.4 42,977.1 Dividends payable to shareholders............. - 79.2 Short-term debt............................... 34.1 389.6 Long-term debt................................ 986.7 989.1 Current federal and foreign income taxes...... 71.0 154.0 Other liabilities............................. 2,903.7 2,344.2 Participating policyholders' interests........ 194.8 204.8 Separate Accounts liabilities................. 32,218.4 29,637.9 ___________ ___________ Total liabilities......................... 77,100.1 76,775.9 ___________ ___________ Minority interest in preferred securities of subsidiary..................... 275.0 275.0 ___________ ___________ Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding)............. - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Common Capital Stock (no par value; 250,000,000 shares authorized; 115,989,660 and 115,013,675 issued, and 115,704,114 and 114,727,093 outstanding)..... 1,499.6 1,448.2 Net unrealized capital gains.................. 103.2 641.1 Retained earnings............................. 5,751.6 5,195.6 Treasury stock, at cost (285,546 and 286,582 shares).............................. (12.1) (12.1) ___________ ___________ Total shareholders' equity................ 7,342.3 7,272.8 ___________ ___________ Total liabilities, minority interest and shareholders' equity..................... $ 84,717.4 $ 84,323.7 ___________ ___________ ___________ ___________ Shareholders' equity per common share......... $ 63.46 $ 63.39 ___________ ___________ ___________ ___________ See Condensed Notes to Financial Statements.
6 AETNA SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions, except share data) Net Common Unrealized Capital Capital Retained Treasury Six Months Ended June 30, 1996 Total Stock Gains (Losses) Earnings Stock __________________________________________________________________________________________________________ Balances at December 31, 1995 $7,272.8 $1,448.2 $ 641.1 $5,195.6 $ (12.1) __________________________________________________________________________________________________________ Net income............................ 635.7 635.7 Change in net unrealized capital gains or losses........................... (537.9) (537.9) Common stock issued for benefit plans (977,021 shares).................... 51.4 51.4 Common stock dividends declared....... (79.7) (79.7) __________________________________________________________________ Balances at June 30, 1996 $7,342.3 $1,499.6 $ 103.2 $5,751.6 $ (12.1) ___________________________________________________________________________________________________________ ___________________________________________________________________ Six Months Ended June 30, 1995 __________________________________________________________________________________________________________ Balances at December 31, 1994 $5,503.0 $1,419.2 $(1,071.5) $5,259.6 $ (104.3) __________________________________________________________________________________________________________ Net loss.............................. (136.1) (136.1) Change in net unrealized capital gains or losses........................... 1,416.1 1,416.1 Common stock issued for benefit plans (562,240 shares).................... 29.7 29.7 Loss on issuance of treasury stock.... (3.3) (3.3) Common stock dividends declared....... (156.4) (156.4) __________________________________________________________________ Balances at June 30, 1995 $6,653.0 $1,415.9 $ 344.6 $4,967.1 $ (74.6) __________________________________________________________________________________________________________ __________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ________________________ (Millions) 1996 1995 ____ ____ Cash Flows from Operating Activities: Net income (loss)................................................. $ 635.7 $ (136.1) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Income from Discontinued Operations............................ (182.2) 349.6 Decrease in accrued investment income.......................... 61.3 20.1 Decrease (Increase) in premiums due and other receivables...... 13.9 4.4 Increase in deferred policy acquisition costs.................. (123.4) (100.8) Depreciation and amortization.................................. 90.3 70.1 (Decrease) Increase in federal and foreign income taxes........ (270.6) 19.7 Net increase (decrease) in other assets and other liabilities.. 655.9 (222.3) (Decrease) Increase in insurance reserve liabilities........... (1,345.1) 170.6 Decrease in Minority interest.................................. - 4.1 Net realized capital gains..................................... (66.4) (2.7) Net realized capital gains on sale of Discontinued Operations.. (263.7) - Amortization of net investment discounts....................... (60.4) (66.5) Other, net..................................................... .2 (61.8) _________ _________ Net cash (used for) provided by operating activities......... (854.5) 48.4 _________ __________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 7,681.8 6,594.3 Equity securities.............................................. 282.9 260.2 Mortgage loans................................................. 80.4 74.3 Real estate.................................................... 74.8 136.1 Short-term investments......................................... 17,489.7 24,842.6 Sale of Discontinued Operations................................ 4,134.1 - Investment maturities and repayments of: Debt securities available for sale............................. 1,730.0 722.8 Debt securities held for investment............................ - 176.2 Mortgage loans................................................. 691.7 823.5 Cost of investments in: Debt securities available for sale............................. (8,026.7) (7,680.3) Debt securities held for investment............................ - (7.2) Equity securities.............................................. (643.1) (64.7) Mortgage loans................................................. (98.3) (95.6) Real estate.................................................... (23.9) (63.0) Short-term investments......................................... (18,601.1) (24,963.6) Decrease in property and equipment................................ (18.0) (82.6) Net decrease in Separate Accounts................................. (1.0) (24.8) Other, net........................................................ (47.3) (113.1) _________ _________ Net cash provided by (used for) investing activities......... 4,706.0 535.1 _________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 1,001.2 373.2 Withdrawals of investment contracts............................... (1,846.2) (1,367.9) Issuance of long-term debt........................................ 4.6 3.8 Stock issued under benefit plans.................................. 51.4 26.4 Repayment of long-term debt....................................... (6.9) (1.6) Net (decrease) increase in short-term debt........................ (356.1) 44.7 Dividends paid to shareholders.................................... (158.8) (156.4) _________ _________ Net cash used for financing activities....................... (1,310.8) (1,077.8) _________ _________ Effect of exchange rate changes on cash and cash equivalents....................................................... .1 43.8 _________ _________ Net increase (decrease) in cash and cash equivalents................. 2,540.8 (450.5) Cash and cash equivalents, beginning of period....................... 1,712.7 2,277.2 _________ _________ Cash and cash equivalents, end of period............................. $ 4,253.5 $ 1,826.7 _________ _________ _________ _________ Supplemental Cash Flow Information: Interest paid..................................................... $ 56.1 $ 53.6 _________ _________ _________ _________ Income taxes paid ................................................ $ 202.5 $ 80.4 _________ _________ _________ _________ See Condensed Notes to Financial Statements.
8 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation The consolidated financial statements include Aetna Services, Inc. (formerly Aetna Life and Casualty Company) and its majority-owned subsidiaries (collectively, the "company"). Less than majority- owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1995 financial information to conform to the 1996 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. (2) Merger with U.S. Healthcare The company's merger transaction with U.S. Healthcare, Inc. ("U.S. Healthcare") was consummated on July 19, 1996. As a result of the merger, the company and U.S. Healthcare are each direct, wholly-owned subsidiaries of Aetna Inc. Pursuant to the merger, each outstanding share of the company's common stock became a share of common stock of Aetna Inc. and each outstanding share of U.S. Healthcare common stock and Class B Stock became a right to receive $34.20 in cash, 0.2246 shares of Aetna Inc. common stock and 0.0749 shares of Aetna Inc. 6.25% Class C Voting Preferred Stock ("mandatorily convertible preferred stock"). Aetna Inc. common stock and mandatorily convertible preferred stock are traded on the New York Stock Exchange. The aggregate cash consideration paid to U.S. Healthcare shareholders as a result of the merger was financed with $3.9 billion from the net proceeds received from the sale of the company's property-casualty operations (see Note 4) and funds made available from the issuance of $1.4 billion of commercial paper by the company. 9 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (3) Accounting Changes Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based Compensation, is effective for 1996 reporting. This statement addresses the accounting for the cost of stock-based compensation, such as stock options. FAS No. 123 permits either expensing the cost of stock-based compensation over the vesting period or disclosing in the financial statement footnotes what this expense would have been. This cost would be measured at the grant date based upon estimated fair values, using option pricing models. The company has selected the disclosure alternative which requires that such disclosures be included in full year financial statements only. (4) Sales of Subsidiaries On April 2, 1996, the company completed the sale of its property- casualty operations to an affiliate of the Travelers Insurance Group Inc. ("Travelers") for approximately $4.1 billion in cash. The sale resulted in a gain of approximately $263.7 million ($218.3 million pretax). The operating results of the property-casualty operations were presented as discontinued operations through the sale date. Operating results for the period from January 1 to April 2 were:
Millions) 1996 ______________________________________________________________ Total revenue $1,539.3 ____________________________________________________________ ________ Income before taxes $ 262.7 Income taxes 80.5 ________ Income from Discontinued Operations $ 182.2 ____________________________________________________________ ________
As a result of the sale, the company retained no property- casualty liabilities other than those associated with indemnifying Travelers for a portion of certain potential liability exposures. While there can be no assurances, management currently does not believe that the aggregate ultimate loss arising from these indemnifications, if any, will be material to the annual net income, liquidity or financial condition of the company, although it is reasonably possible. 10 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Facilities and Severance Charges The company recorded a $235.5 million after tax ($362.7 million pretax) facilities and severance charge in the corporate segment in the second quarter of 1996. The severance portion of the charge, which is a result of the actions taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations, includes the elimination of 475 positions. In conjunction with the sale of the company's property-casualty operations, Travelers subleased the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. Included in the above charge is $190 million (after tax) which represents the present value of the difference between rent required to be paid by the company under the lease and future rentals expected to be received by the company. Facilities and severance charges of $19.5 million after tax ($30.0 million pretax) were taken by Aetna Health Plans in the second quarter of 1996 primarily related to actions taken or expected to be taken to reduce information technology costs and are not related to the U.S. Healthcare merger. The severance portion of the charge is based on a plan that includes the elimination of 675 positions from the Aetna Health Plans segment. These facilities and severance charges included the following (pretax):
Vacated Asset Leased (Millions) Severance Write-Off Property Other Total ________________________________________________________________________________________ Aetna Health Plans $ 20.8 $ .9 $ 3.5 $ 4.8 $ 30.0 Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7 __________________________________________________________ Total Company $ 49.3 $ 18.9 $316.7 $ 7.8 $392.7 _________________________________________________________________________________________ __________________________________________________________ (1) Includes $292.2 million related to the CityPlace lease.
Charges against the reserve in the second quarter of 1996 included $14.4 million (pretax) primarily for severance from the Aetna Health Plans segment and $12.0 million (pretax) for severance and vacated leased property from the Corporate segment. In conjunction with these charges, positions eliminated included 384 positions from the Aetna Health Plans segment and 180 positions from the Corporate segment. These severance actions and the vacating of the leased office space (excluding the CityPlace lease) are expected to be substantially completed by December 31, 1997. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next 3 years. 11 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Products Under the company's accounting for its discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single-premium annuities ("SPAs")), the respective reserves for anticipated future losses are reviewed by management quarterly. Accordingly, as long as the reserves represent management's then best estimates of expected future losses, results of operations of the discontinued products, including net realized capital gains and losses, are credited/charged to the respective reserve and do not affect the company's results of operations. Management's review of the reserves in the second quarter of 1996 included a re-evaluation of assumptions relating to future real estate market conditions (e.g., rental rate growth and vacancy rates) and considered the continuing and recent favorable developments (compared to what had been anticipated) which had been experienced in such markets. As a result of this review, management released $170 million (pretax) of the reserve related to GICs. The resulting reserves reflect management's best estimate of the anticipated future net losses for GICs and SPAs. To the extent that actual future losses are greater than anticipated future net losses, the company's results of operations would be adversely affected. Conversely, if actual future losses are less than anticipated future losses, the company's results of operations would be favorably affected. (Please refer to the company's 1995 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) 12 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Products (Continued) Results of discontinued products were as follows (pretax, in millions):
Charged (Credited) to Guaranteed Single- Reserve for Investment Premium Future Three months ended June 30, 1996 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 92.8 $ 108.0 $ 200.8 $ - $ 200.8 Net realized capital gains (losses) 14.9 (12.8) 2.1 (2.1) - Interest earned on receivable from continuing business 5.3 7.8 13.1 - 13.1 Other income 3.1 3.8 6.9 - 6.9 _____________________________________________________________ Total revenue 116.1 106.8 222.9 (2.1) 220.8 _____________________________________________________________ Current and future benefits 100.2 98.7 198.9 12.9 211.8 Operating expenses 4.5 4.5 9.0 - 9.0 _____________________________________________________________ Total benefits and expenses 104.7 103.2 207.9 12.9 220.8 _____________________________________________________________ Results of discontinued products $ 11.4 $ 3.6 $ 15.0 $(15.0) $ - _____________________________________________________________________________________________________ _____________________________________________________________ Charged (Credited) to Guaranteed Single- Reserve for Investment Premium Future Three months ended June 30, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 138.3 $ 112.2 $ 250.5 $ - $ 250.5 Net realized capital gains (losses) (12.6) 14.4 1.8 (1.8) - Interest earned on receivable from continuing business 5.1 7.6 12.7 - 12.7 Other income 2.4 3.0 5.4 - 5.4 _____________________________________________________________ Total revenue 133.2 137.2 270.4 (1.8) 268.6 _____________________________________________________________ Current and future benefits 145.1 113.2 258.3 4.4 262.7 Operating expenses 1.9 4.0 5.9 - 5.9 _____________________________________________________________ Total benefits and expenses 147.0 117.2 264.2 4.4 268.6 _____________________________________________________________ Results of discontinued products $ (13.8) $ 20.0 $ 6.2 $ (6.2) $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1996 and 1995 Consolidated Statements of Income, except for interest of $13.1 million and $12.7 million for the three months ended June 30, 1996 and 1995, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
13 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Products (Continued)
Charged (Credited) to Guaranteed Single- Reserve for Investment Premium Future Six months ended June 30, 1996 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 198.9 $ 224.9 $ 423.8 $ - $ 423.8 Net realized capital gains (losses) 25.7 (1.7) 24.0 (24.0) - Interest earned on receivable from continuing business 10.6 15.6 26.2 - 26.2 Change in Accounting Policy - FAS 121 5.4 2.9 8.3 - 8.3 Other income 4.9 6.9 11.8 - 11.8 _____________________________________________________________ Total revenue 245.5 248.6 494.1 (24.0) 470.1 _____________________________________________________________ Current and future benefits 202.6 206.0 408.6 50.1 458.7 Operating expenses 6.2 5.2 11.4 - 11.4 _____________________________________________________________ Total benefits and expenses 208.8 211.2 420.0 50.1 470.1 _____________________________________________________________ Results of discontinued products $ 36.7 $ 37.4 $ 74.1 $ (74.1) $ - _____________________________________________________________________________________________________ _____________________________________________________________ Charged (Credited) to Guaranteed Single- Reserve for Investment Premium Future Six months ended June 30, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 270.6 $ 222.3 $ 492.9 $ - $ 492.9 Net realized capital gains (losses) (31.1) 22.4 (8.7) 8.7 - Interest earned on receivable from continuing business 10.2 15.2 25.4 - 25.4 Other income 4.9 6.0 10.9 - 10.9 _____________________________________________________________ Total revenue 254.6 265.9 520.5 8.7 529.2 _____________________________________________________________ Current and future benefits 300.3 227.6 527.9 (5.8) 522.1 Operating expenses 1.6 5.5 7.1 - 7.1 _____________________________________________________________ Total benefits and expenses 301.9 233.1 535.0 (5.8) 529.2 _____________________________________________________________ Results of discontinued products $ (47.3) $ 32.8 $(14.5) $ 14.5 $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1996 and 1995 Consolidated Statements of Income, except for interest of $26.2 million and $25.4 million for the six months ended June 30, 1996 and 1995, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
14 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Products (Continued) Assets and liabilities of discontinued products were as follows (in millions):
June 30, 1996 _______________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _______________________________________ Debt securities available for sale $ 1,829.5 $ 3,290.2 $ 5,119.7 Mortgage loans 1,692.0 1,444.1 3,136.1 Real estate 453.2 193.7 646.9 Short-term and other investments 104.8 214.4 319.2 _______________________________________ Total investments 4,079.5 5,142.4 9,221.9 Current and deferred income taxes 82.2 123.1 205.3 Receivable from continuing business 329.8 509.2 839.0 _______________________________________ Total assets $ 4,491.5 $ 5,774.7 $10,266.2 ______________________________________________________________________________ _______________________________________ Future policy benefits $ - $ 4,852.4 $ 4,852.4 Policyholders' funds left with the company 4,135.1 - 4,135.1 Reserve for future losses on discontinued products 88.1 774.8 862.9 Other 268.3 147.5 415.8 _______________________________________ Total liabilities $ 4,491.5 $ 5,774.7 $10,266.2 ______________________________________________________________________________ _______________________________________
Net unrealized capital gains as of June 30, 1996 on available for sale debt securities are included above in other liabilities and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses on GICs is included in policyholders' funds left with the company and the reserve for anticipated future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheets. The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Six Months Ended June 30, 1996 ________________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _______________________________________________________________________________ Reserve at beginning of period $ 221.4 $ 737.4 $ 958.8 Results of discontinued products 36.7 37.4 74.1 Reserve release (170.0) - (170.0) ______________________________________ Reserve at end of period $ 88.1 $ 774.8 $ 862.9 ____________________________________________________________________________ ______________________________________
15 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Discontinued Products (Continued) At the time of discontinuance, a receivable from Large Case Pensions' continuing business was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in the continuing business. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At June 30, 1996, for GICs and SPAs, the receivables from continuing business, net of the related deferred taxes payable of $17.6 million and $26.0 million, respectively, on the accrued interest income, were $312.2 million and $483.2 million, respectively. As of June 30, 1996, no funding had taken place. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheets. (7) Investments Net investment income includes amounts allocable to experience rated contractholders of $343.6 million and $367.9 million for the three months ended June 30, 1996 and 1995, respectively, and $696.7 million and $728.7 million for the six months ended June 30, 1996 and 1995, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains allocable to experience rated contractholders of $45.6 million and $46.3 million for the three months ended June 30, 1996 and 1995, respectively, and $83.7 million and $11.3 million for the six months ended June 30, 1996 and 1995, respectively, were deducted from net realized capital gains as reflected on the Consolidated Statements of Income, and an offsetting amount is reflected on the Consolidated Balance Sheets in policyholders' funds left with the company. The company applies the provisions of FAS No. 114, Accounting by Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, individually to all loans in the portfolio and does not aggregate smaller balance, homogeneous loans for separate evaluation nor does it aggregate loans by major risk classifications for the purpose of applying such provisions. In accordance with these standards, a loan is considered impaired when it is probable that the company will be unable to collect amounts due according to the contractual terms of the loan agreement (minimum delays (i.e., up to 60 days) will not result in a loan being considered impaired). For impaired loans, the measurement method used is to establish a specific impairment reserve for the difference between the recorded investment in the mortgage loan and the fair value of the collateral. The company records full or partial charge-offs of loans at the time an event occurs with the borrower affecting the legal status of the loan. This typically occurs at the time of foreclosure (actual or in-substance) or upon a loan modification giving rise to forgiveness of debt. 16 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (7) Investments (Continued) General reserves are established for losses management believes are likely to arise from loans in the portfolio other than those which have been specifically reserved for, but cannot be attributed to specific loans. At June 30, 1996, the total recorded investment in loans that are considered to be impaired (which include problem loans, restructured loans and potential problem loans) under FAS No. 114 and related specific reserves are presented in the table below. Included in the total recorded investment are impaired loans of $455 million for which no specific reserves are considered necessary. This includes $191 million related to one mortgage loan where the borrower has declared bankruptcy. No specific reserve has been established for this loan because the loan is well secured and the company does not anticipate any future losses.
Total Recorded Specific (Millions) Investment Reserves ________________________________________________________________________ Supporting discontinued products $ 743.2 $ 98.4 Supporting experience rated products 523.4 97.8 Supporting remaining products 261.1 29.8 ___________________________ Total Impaired Loans $ 1,527.7 $ 226.0 _________________________________________________________________________ ___________________________
The activity in the specific and general reserves for the six months ended June 30, 1996 is summarized below:
Charged Balance Balance at to net Charged at December 31, realized to other Principal June 30, (Millions) 1995 loss (gain) accounts(1) Write-offs 1996 _______________________________________________________________________________________________ Supporting discontinued products $ 287.5 $ - $ - $ (127.5) $ 160.0 Supporting experience rated products 228.3 - (39.4) (29.1) 159.8 Supporting remaining products 89.1 (10.6) - (19.6) 58.9 ________________________________________________________________ Total - continuing operations $ 604.9 $ (10.6) $ (39.4) $ (176.2) $ 378.7 ______________________________________________________________________________________________ ________________________________________________________________ (1) Reflects adjustments of reserves related to assets supporting experience rated products and discontinued products.
17 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (7) Investments (Continued) The company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. Income earned (pretax) and received on the average recorded investment in impaired loans for the three and six months ended June 30, 1996 was as follows:
Three Months Ended Six Months Ended June 30, 1996 June 30, 1996 _________________________ ____________________________ Average Average Impaired Income Income Impaired Income Income (Millions) Loans Earned Received Loans Earned Received ________________________________________________________________ ____________________________ Supporting discontinued products $ 692.9 $ 15.0 $ 16.0 $ 694.1 $ 30.0 $ 31.6 Supporting experience rated products 506.4 10.3 9.8 503.9 19.8 19.6 Supporting remaining products 228.2 4.2 5.0 223.4 9.7 9.7 __________________________ ___________________________ Total continuing operations $1,427.5 $ 29.5 $ 30.8 $1,421.4 $ 59.5 $ 60.9 ________________________________________________________________ ___________________________ __________________________ ___________________________
As of January 1, 1996, the company adopted FAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. This statement requires long-lived assets to be held and used to be written down to fair value when they are considered impaired. Long-lived assets to be disposed of (e.g., real estate held for sale) are to be carried at the lower of cost or fair value less estimated selling costs. In addition, this statement does not allow long-lived assets to be disposed of to be depreciated. As a result of the adoption of FAS No. 121, valuation reserves at January 1, 1996 were increased by $52.9 million in connection with the reversal of previously recorded accumulated depreciation related to properties held for sale. The adoption of FAS No. 121 resulted in an immaterial impact on results of operations. 18 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (8) Debt The company has a revolving credit facility aggregating $2.5 billion with a worldwide group of banks. The facility replaces the company's price credit facilities and terminates in June 2001. Various interest rate options are available under the facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .065% to .20% per annum, depending upon the company's long-term senior unsecured debt rating. The company is currently paying a facility fee of .08%. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5.0 billion. As a result of the merger with U.S. Healthcare, the minimum shareholders' equity requirement was increased to $7.5 billion, and Aetna Inc. became a guarantor to the credit facility. These facilities also support the company's commercial paper borrowing program. (Please refer to Note 2 for discussion of additional debt incurred in connection with the merger with U.S. Healthcare.) Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission ("SEC"), the company may offer and sell up to $2.0 billion of debt securities guaranteed by Aetna Inc., and Aetna Capital L.L.C., a subsidiary of the company, may offer and sell up to an additional $225 million of preferred securities to be guaranteed by Aetna Inc. It is anticipated that the company will repay, depending upon market conditions, the commercial paper borrowings related to the U.S. Healthcare merger from funds generated internally by Aetna Inc. or its subsidiaries and/or other sources which may include the proceeds from the sale of debt securities registered pursuant to the above-indicated shelf registration statement for debt. 19 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (9) Off-Balance-Sheet Financial Instruments (including Derivative Financial Instruments) The company engages in hedging activities to manage foreign exchange and interest rate risk. Such hedging activities have principally consisted of using off-balance-sheet instruments including foreign exchange forward contracts, futures and forward contracts, and interest rate swap agreements. (Please see General Account Investments - Use of Derivatives and Other Investments on page 46 of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 16 of the company's 1995 Annual Report to Shareholders for a description of the company's hedging activities). The notional amounts, carrying values and estimated fair values of the company's off-balance- sheet financial instruments are as follows (in millions):
Carrying Value Notional Asset Fair June 30, 1996 Amount (Liability) Value ______________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 159.8 $ (.6) $ (2.8) Related to investments in nondollar denominated assets 93.2 (.4) (.4) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 6.4 .2 (.2) Related to investments in nondollar denominated assets 32.5 .2 - Interest rate swaps 43.0 - 6.7 Forward contracts to purchase investments 4.9 - 5.0 Futures contracts to purchase investments 58.0 .1 .1
At June 30, 1996, the continuing operations of the company had commitments to purchase investments for $104.8 million, the fair market value of which is $105.4 million. (10) Supplemental Cash Flow Information Significant noncash investing and financing activities of continuing operations include acquisition of real estate through foreclosures (including in-substance foreclosures) of mortgage loans amounting to $66.1 million and $136.9 million for the six months ended June 30, 1996 and 1995, respectively. 20 AETNA SERVICES, INC. AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (11) Earnings Per Share Earnings per share are computed using net income divided by the weighted average number of common shares outstanding (including common share equivalents in 1996). There is no difference between primary and fully diluted earnings per share. (12) Litigation The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefor, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. 21 Independent Auditors' Review Report The Board of Directors Aetna Services, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Services, Inc. (formerly Aetna Life and Casualty Company) and Subsidiaries as of June 30, 1996, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1996 and 1995, and the related condensed consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 1996 and 1995. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Services, Inc. and Subsidiaries as of December 31, 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 6, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG PEAT MARWICK LLP Hartford, Connecticut July 25, 1996 22 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 June 30, Six Months Ended June 30, ___________________________________ ________________________________ 1996 1995 % Change 1996 1995 % Change ____ ____ ________ ____ ____ ________ Premiums............................. $ 1,710.8 $ 1,822.5 (6.1)% $ 3,554.7 $ 3,704.6 (4.0)% Net investment income................ 893.8 919.5 (2.8) 1,780.1 1,789.5 (.5) Fees and other income................ 548.1 486.3 12.7 1,066.3 939.7 13.5 Net realized capital gains........... 4.4 15.9 (72.3) 66.4 2.7 - _________ __________ _________ __________ Total revenue.................... 3,157.1 3,244.2 (2.7) 6,467.5 6,436.5 .5 Current and future benefits.......... 2,059.4 2,256.2 (8.7) 4,296.3 4,531.9 (5.2) Operating expenses................... 801.0 769.8 4.1 1,591.2 1,510.5 5.3 Amortization of deferred policy acquisition costs................... 38.1 36.6 4.1 75.1 69.1 8.7 Reduction of loss on discontinued products............................ (170.0) - - (170.0) - - Facilities and severance charges..... 392.7 - - 392.7 - - _________ __________ _________ _________ Total benefits and expenses...... 3,121.2 3,062.6 1.9 6,185.3 6,111.5 1.2 _________ __________ _________ _________ Income from continuing operations before income taxes................. 35.9 181.6 (80.2) 282.2 325.0 (13.2) Income taxes......................... 11.6 60.5 (80.8) 92.4 111.5 (17.1) _________ __________ _________ __________ Income from continuing operations.... 24.3 121.1 (79.9) 189.8 213.5 (11.1) Discontinued operations, net of tax: Income (loss) from operations....... - (418.0) 100.0 182.2 (349.6) - Gain on sale........................ 263.7 - - 263.7 - - _________ __________ _________ __________ Net income (loss)................ $ 288.0 $ (296.9) - $ 635.7 $ (136.1) - _________ __________ _________ __________ _________ __________ _________ __________ Net realized capital gains (losses) from continuing operations, net of tax (included above)................ $ 2.6 $ 9.4 (72.3) $ 44.0 $ (1.2) - _________ __________ _________ __________ _________ __________ _________ __________ Results per common share: Income from continuing operations... $ .21 $ 1.07 (80.4) $ 1.63 $ 1.89 (13.8) Discontinued operations, net of tax: Income (loss) from operations...... - (3.69) 100.0 1.57 (3.09) - Gain on sale....................... 2.26 - - 2.27 - - _________ __________ _________ __________ Net income (loss)................... $ 2.47 $ (2.62) - $ 5.47 $ (1.20) - _________ __________ _________ __________ _________ __________ _________ __________
23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview ________ Merger with U.S. Healthcare The company's merger transaction with U.S. Healthcare, Inc. ("U.S. Healthcare") was consummated on July 19, 1996. As a result of the merger, the company and U.S. Healthcare are each direct, wholly- owned subsidiaries of Aetna Inc. Pursuant to the merger, each outstanding share of the company's common stock became a share of common stock of Aetna Inc. and each outstanding share of U.S. Healthcare common stock and Class B Stock became a right to receive $34.20 in cash, 0.2246 shares of Aetna Inc. common stock and 0.0749 shares of Aetna Inc. 6.25% Class C Voting Preferred Stock ("mandatorily convertible preferred stock").Aetna Inc. common stock and mandatorily convertible preferred stock are traded on the New York Stock Exchange. The aggregate cash consideration paid to U.S. Healthcare shareholders as a result of the merger was financed with $3.9 billion from the net proceeds received from the sale of the company's property-casualty operations (see below) and funds made available from the issuance of $1.4 billion of commercial paper by the company. As a result of the merger, Aetna Inc. will file periodic reports under the Securities Exchange Act of 1934 (the "1934 Act") commencing with the three month period ended September 30, 1996 and its consolidated results of operations will include the results of the company and the results of U.S. Healthcare for periods subsequent to July 19, 1996. The financial statements of Aetna Inc. will include summarized financial information of the company. The company and U.S. Healthcare are not expected to file separate reports under the 1934 Act. See "Income from Continuing Operations" on page 24 and "Liquidity and Capital Resources" on page 47 for a discussion of certain factors that are expected to impact the company due to the merger with U.S. Healthcare. For financial and business information regarding U.S. Healthcare, see its 1995 Form 10-K and other reports filed with the Securities and Exchange Commission ("SEC"). For unaudited pro forma condensed consolidated financial information of Aetna Inc. which gives effect to the sale of the property-casualty operations and the merger with U.S. Healthcare, as appropriate, for the six and twelve months ended June 30, 1996 and December 31, 1995, respectively, see Aetna Inc.'s Form 8-K filed with the SEC on July 26, 1996. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Sale of Property-Casualty Operations On April 2, 1996, the company completed the sale of its property- casualty operations to an affiliate of The Travelers Insurance Group Inc. ("Travelers") for approximately $4.1 billion in cash. The sale resulted in a gain of approximately $264 million (after tax). (Please see Note 4 of Condensed Notes to Financial Statements for a discussion of certain indemnifications related to the sale.) See "Facilities and Severance Charges" on page 26 for a discussion of certain charges related to the sale. Strategic Outlook The company's merger with U.S. Healthcare represents a major step in the company's previously announced strategic decision to focus its resources on pursuing growth opportunities in its health care business, and evaluating opportunities for growth and development of its financial services and international operations. Income from Continuing Operations The company reported income from continuing operations of $24 million and $190 million for the three and six months ended June 30, 1996, respectively, compared with $121 million and $214 million for the same periods a year ago. Income from continuing operations, excluding net realized capital gains and losses, for the three and six months ended June 30, 1996 decreased $90 million and $69 million, respectively, from the same periods a year ago. The following significant factors affect the comparison of results of continuing operations: Results of continuing operations for the three and six months ended June 30, 1996 included facilities and severance charges of $255 million (after tax) related to the CityPlace office facility lease, actions taken or expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations, and actions taken or expected to be taken by Aetna Health Plans primarily to reduce information technology costs. (Please see "Facilities and Severance Charges" on page 26 for further discussion.) Results of continuing operations for the three and six months ended June 30, 1996 included an $111 million benefit (after tax) related to a reduction of the reserve for anticipated future losses on discontinued products, primarily as a result of continuing and recent favorable developments in real estate markets. (Please see "Discontinued Products" on page 34 for further discussion.) Results of continuing operations for both the three and six months ended June 30, 1996 included $30 million (after tax) of interest income earned on the net proceeds received from the property-casualty sale. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Income from continuing operations, excluding net realized capital gains and losses and the items noted above, were $25 million and $46 million higher for the three and six months ended June 30, 1996, respectively, compared with the same periods a year ago. Aetna Inc.'s earnings from continuing operations for the three months ending September 30, 1996 will reflect the interest earned on the net proceeds from the property-casualty sale through July 19, 1996, the closing date of the merger with U.S. Healthcare. Earnings will then include the earnings of U.S. Healthcare and will be affected by, among other things, the costs of financing the merger and the amortization of approximately $8 billion of intangible assets (primarily goodwill) created as a result of the merger. Aetna Inc. also anticipates that the merger will yield increased operating income for the combined health businesses of the companies resulting from expense savings and increased revenues (the "estimated synergies"). The annual increase in operating income is expected to be approximately $300 million (after tax) per year, and is expected to be achieved within 18 months of the closing of the transaction. Aetna Inc. anticipates taking facilities and severance charges related to the merger (see "Facilities and Severance Charges" on page 26). The estimated synergies and the timing of their anticipated realization are forward- looking information. For discussion of factors regarding such forward-looking information, see "Forward-Looking Information" on page 49. Net Realized Capital Gains and Losses Net realized after-tax capital gains and losses from continuing operations included in net income, allocable to experience rated pension contractholders, and supporting discontinued products were as follows (in millions):
Three Months Ended June 30, Six Months Ended June 30, ___________________________ _________________________ 1996 1995 1996 1995 ____ ____ ____ ____ Net realized capital gains from sales $ 8.5 $ 11.5 $ 49.5 $ 2.9 Net realized capital losses from changes in reserves for mortgage loans and real estate (5.9) (2.1) (5.5) (4.1) _______ _______ _______ _______ Net realized capital gains (losses) from continuing operations $ 2.6 $ 9.4 $ 44.0 $ (1.2) _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital gains allocable to experience rated pension contractholders (excluded above) $ 29.6 $ 30.1 $ 54.4 $ 7.3 _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital gains (losses) on assets supporting discontinued products (excluded above) $ 1.4 $ 1.2 $ 15.6 $ (5.6) _______ _______ _______ _______ _______ _______ _______ _______
Net realized capital gains from sales for the three months ended June 30, 1996 include $25 million related to the sale of Aetna Realty Investors ("ARI") to TA Associates, which was substantially offset by net realized capital losses related to bond sales. Net realized capital gains from sales for the six months ended June 30, 1996 also include a $15 million gain from the sale of an HMO subsidiary. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Facilities and Severance Charges In conjunction with the sale of the company's property-casualty operations, Travelers subleased the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company reflected a charge of $190 million (after tax) during the second quarter of 1996 representing the present value of the difference between rent required to be paid by the company under the lease and future rentals expected to be received by the company. The company also recorded additional facilities and severance charges of $45 million (after tax) during the second quarter of 1996 due to actions taken or expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. Facilities and severance charges of $20 million (after tax) were taken by Aetna Health Plans in the second quarter of 1996 primarily related to actions taken or expected to be taken to reduce information technology costs and are not related to the U.S. Healthcare merger. These facilities and severance charges included the following (pretax):
Vacated Asset Write- Leased (Millions) Severance Off Property Other Total ______________________________________________________________________________________________________ Aetna Health Plans $ 20.8 $ .9 $ 3.5 $ 4.8 $ 30.0 Corporate: Other 28.5 18.0 313.2 (1) 3.0 362.7 ________ ________ ________ ________ ________ Total Company $ 49.3 $ 18.9 $ 316.7 $ 7.8 $ 392.7 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes $292.2 million related to the CityPlace lease.
These severance actions and the vacating of the leased office space (excluding the CityPlace lease) are expected to be substantially completed by December 31, 1997. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next 3 years. Aetna Inc. anticipates reflecting a significant charge in the third quarter of 1996 related to restructuring actions expected to be taken as a result of the integration of U.S. Healthcare. The amount of such charge cannot be reasonably estimated at this time. In addition, the company continues to conduct strategic and financial reviews of all of its continuing operations in order to make them more competitive. Such reviews may result in additional restructuring actions in 1996, although the amount of any such charges cannot be estimated at this time. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans __________________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, __________________________________ ________________________________ 1996 1995 % Change 1996 1995 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,355.7 $ 1,461.8 (7.3)% $ 2,907.8 $ 2,956.5 (1.6)% Net investment income............... 97.2 96.5 .7 191.0 181.2 5.4 Fees and other income............... 381.6 336.1 13.5 737.2 643.6 14.5 Net realized capital gains (losses). (5.9) (5.9) - 25.3 (10.1) - _________ _________ _________ _________ Total revenue.................... 1,828.6 1,888.5 (3.2) 3,861.3 3,771.2 2.4 Current and future benefits......... 1,177.9 1,273.1 (7.5) 2,522.8 2,546.4 (.9) Operating expenses.................. 529.6 498.9 6.2 1,059.5 983.9 7.7 Amortization of deferred policy acquisition costs.................. 2.3 6.4 (64.1) 5.1 13.2 (61.4) Facilities and severance charge..... 30.0 - - 30.0 - - _________ _________ _________ _________ Total benefits and expenses...... 1,739.8 1,778.4 (2.2) 3,617.4 3,543.5 2.1 _________ _________ _________ _________ Income before income taxes.......... 88.8 110.1 (19.3) 243.9 227.7 7.1 Income taxes........................ 31.2 40.6 (23.2) 84.9 84.6 .4 _________ _________ _________ _________ Net income.......................... $ 57.6 $ 69.5 (17.1) $ 159.0 $ 143.1 11.1 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ (3.9) $ (3.5) (11.4) $ 17.6 $ (6.3) - _________ _________ _________ _________ _________ _________ _________ _________
Aetna Health Plans' net income for the three and six months ended June 30, 1996 decreased by $12 million and increased by $16 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1996 decreased $12 million and $8 million, respectively, from the same periods a year ago. Such decreases reflected an after-tax facilities and severance charge of $20 million in the second quarter of 1996 related primarily to actions taken or expected to be taken to reduce information technology costs. (Please see "Facilities and Severance Charges" on page 26 for further discussion.) Excluding net realized capital gains and losses and the second quarter 1996 facilities and severance charge, earnings for the three and six months ended June 30, 1996 increased $8 million and $12 million, respectively, from the same periods a year ago. Second quarter and year-to-date earnings in the Group Insurance business increased in 1996 primarily as a result of growth in membership. Earnings in the Health and Specialty Health businesses decreased slightly, in the aggregate, for the three and six months ended June 30, 1996 when compared with the same periods a year ago. Such earnings declined principally due to both the loss of a risk contract with the Civilian Health and Medical Program for the Uniformed Services ("Champus") as of April 1, 1996 and lower HMO earnings (see discussion below), substantially offset by favorable developments in the pharmacy business. HMO earnings were $9 million and $19 million for the three and six months ended June 30, 1996 compared with $12 million and $23 million for the same periods a year ago, respectively. The decrease in HMO earnings reflects an increase in the medical loss ratio which was partially offset by growth in commercial membership. The HMO medical loss ratios were 86.5% and 86.8% for the three and six months ended June 30, 1996, respectively, as compared with 83.7% and 84.1% for the same periods a year ago. This increase in the loss ratio is primarily attributable to the impact of competitive pressures on pricing for the commercial HMO product. 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ Revenue, excluding net realized capital gains and losses, for the Health and Specialty Health businesses decreased by $88 million or 6% and $6 million or less than 1% for the three and six months ended June 30, 1996, respectively, primarily due to lower premiums resulting from the loss of the Champus contract partially offset by higher premiums and fees resulting from the shift in membership to managed care products and increased revenues from physician practices. Revenue, excluding net realized capital gains and losses, for the Group Insurance business increased from the prior year by $28 million or 9% and $61 million or 9% for the three and six months ended June 30, 1996 primarily due to increased membership. Operating expenses in the Health business increased during the three and six months ended June 30, 1996 compared with the same periods in 1995 due primarily to the continued migration of members from the indemnity to the more resource-intensive point- of-service (POS) product, as well as from increased expenses related to continued investments in physician practices. AHP is continuing to refine its systems and processes in order to slow the growth of the administrative costs associated with its managed care products as the migration to those products from indemnity products continues. Net realized capital gains for the six months ended June 30, 1996 were primarily attributable to the sale of an HMO subsidiary. The earnings of this subsidiary were not material to AHP's results. The number of Health members participating in risk versus nonrisk plans was as follows:
June 30, 1996 June 30, 1995 __________________________ ___________________________ (Millions) Risk Nonrisk Total Risk Nonrisk Total ___________________________________________________________ __________________________ Health HMO Commercial/Traditional 1.0 0.3 1.3 0.9 0.2 1.1 Commercial POS 0.2 - 0.2 0.2 - 0.2 __________________________ __________________________ Total Commercial 1.2 0.3 1.5 1.1 0.2 1.3 Medicare 0.1 - 0.1 0.1 - 0.1 Champus - - - 0.3 - 0.3 POS 0.3 2.2 2.5 0.1 1.8 1.9 __________________________ __________________________ Total HMO and POS 1.6 2.5 4.1 1.6 2.0 3.6 PPO PPO excluding Champus 0.7 2.8 3.5 0.9 2.9 3.8 Champus - - - 0.4 - 0.4 __________________________ __________________________ Total PPO 0.7 2.8 3.5 1.3 2.9 4.2 Traditional Indemnity 0.6 2.9 3.5 0.9 3.3 4.2 __________________________ __________________________ Total Health Care Enrollment 2.9 8.2 11.1 3.8 8.2 12.0 __________________________ __________________________ __________________________ __________________________
The decline in Health membership is primarily attributable to the loss of the Champus contract. 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ The number of members covered by Specialty Health products was as follows (1):
June 30, _______________ (Millions) 1996 1995 _________________________________________________ Behavioral Health 15.0 14.9 ____ ____ ____ ____ Dental (2) 7.9 8.3 ____ ____ ____ ____ Managed Pharmacy 4.5 4.0 ____ ____ ____ ____ (1) Many Specialty Health members participate in more than one type of AHP coverage and are therefore counted in each. (2) The decline in Dental membership was primarily a result of the competitive pricing of such products. Such decline was not material to AHP's earnings.
The number of members covered by Group Insurance products was as follows (1):
June 30, ________________ (Millions) 1996 1995 _________________________________________________ Group Life (2) 8.4 7.9 ____ ____ ____ ____ Disability 2.4 2.1 ____ ____ ____ ____ Long-Term Care .1 .1 ____ ____ ____ ____ (1) Many Group Insurance members participate in more than one type of AHP coverage and are therefore counted in each. (2) Group life includes members with accident coverages.
Please see "Merger with U.S. Healthcare" on page 23 for a discussion related to the merger of the company and U.S. Healthcare. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Retirement Services (formerly named Aetna Life Insurance & _________________________ Annuity)
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, ___________________________________ ________________________________ 1996 1995 % Change 1996 1995 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 29.5 $ 49.6 (40.5)% $ 55.5 $ 92.0 (39.7)% Net investment income............... 264.6 258.1 2.5 531.9 503.6 5.6 Fees and other income............... 110.8 87.1 27.2 214.1 171.1 25.1 Net realized capital gains.......... 1.6 6.2 (74.2) 17.3 9.2 88.0 _________ _________ _________ _________ Total revenue.................... 406.5 401.0 1.4 818.8 775.9 5.5 Current and future benefits......... 241.8 244.5 (1.1) 473.9 469.0 1.0 Operating expenses.................. 84.8 77.6 9.3 167.6 151.9 10.3 Amortization of deferred policy acquisition costs.................. 14.2 9.9 43.4 31.5 21.8 44.5 _________ _________ _________ _________ Total benefits and expenses...... 340.8 332.0 2.7 673.0 642.7 4.7 _________ _________ _________ _________ Income before income taxes.......... 65.7 69.0 (4.8) 145.8 133.2 9.5 Income taxes........................ 17.9 22.5 (20.4) 41.5 43.2 (3.9) _________ _________ _________ _________ Net income.......................... $ 47.8 $ 46.5 2.8 $ 104.3 $ 90.0 15.9 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains, net of tax (included above)............ $ 1.1 $ 4.1 (73.2) $ 11.3 $ 6.0 88.3 _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above.............................. $ 1,203.2 $ 792.4 51.8 $ 2,272.6 $ 1,569.3 44.8 _________ _________ _________ _________ _________ _________ _________ _________ Assets under management (1)(2)...... $27,631.5 $22,479.0 22.9 _________ _________ _________ _________ (1) Excludes net unrealized capital gains of approximately $155 million and $574 million at June 30, 1996 and 1995, respectively. (2) Includes $3.8 billion and $1.4 billion at June 30, 1996 and 1995, respectively, of assets held and managed by unaffiliated mutual funds.
Aetna Retirement Services' net income for the three and six months ended June 30, 1996 increased $1 million and $14 million, respectively, from the same periods a year ago. Excluding net realized capital gains, results for the three and six months ended June 30, 1996 increased $4 million and $9 million, respectively, from the same periods a year ago. Second quarter and year-to-date results in 1996 benefited from increased fee income primarily due to the growth in assets under management resulting from continued business growth and overall improvement in the stock market, as well as overall increased interest margins. Partially offsetting such favorable increases in fee income were increased operating expenses. The increase in operating expenses primarily reflects continued business growth and investments in nontraditional distribution channels (e.g., broker/dealers and banks). The average earned rate on investments supporting fully guaranteed contracts was 7.9% and 8.0% and the average earned rate on investments supporting experience rated contracts was 8.1% and 8.2% for the six months ended June 30, 1996 and 1995, respectively. The average credited rate on fully guaranteed contracts was 5.3% and 5.3% and the average credited rate on experience rated contracts was 6.1% and 6.3% for the six months ended June 30, 1996 and 1995, respectively. The resulting interest margins on fully guaranteed contracts was 2.6% and 2.7% and on experience rated contracts was 2.0% and 1.9% for the six months ended June 30, 1996 and 1995, respectively. 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Retirement Services (Continued) _____________________________________ The duration of the investment portfolios supporting Aetna Retirement Services' liabilities is regularly monitored and adjusted in order to maintain an aggregate duration that is within 0.5 years of the estimated duration of the underlying liabilities. For a complete discussion of the company's asset/liability management practices please see the company's 1995 Annual Report to Shareholders. Premiums decreased 41% and 40% during the three and six months ended June 30, 1996, respectively, compared to the same periods in 1995 primarily because Aetna Retirement Services ceased writing structured settlement annuities in the fourth quarter of 1995. The cessation of writing this product did not and is not expected to have a material effect on results of the segment. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International _____________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, ___________________________________ ________________________________ 1996 1995 % Change 1996 1995 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 278.0 $ 252.3 10.2% $ 517.6 $ 472.9 9.5% Net investment income............... 82.8 87.1 (4.9) 165.8 155.4 6.7 Fees and other income............... 32.5 29.4 10.5 61.9 55.7 11.1 Net realized capital gains (losses). .2 2.1 (90.5) 1.3 (1.7) - _________ _________ _________ ________ Total revenue.................... 393.5 370.9 6.1 746.6 682.3 9.4 Current and future benefits......... 237.0 219.4 8.0 450.2 416.2 8.2 Operating expenses.................. 90.5 97.1 (6.8) 176.8 180.4 (2.0) Amortization of deferred policy acquisition costs.................. 21.6 20.3 6.4 38.5 34.1 12.9 _________ _________ _________ ________ Total benefits and expenses...... 349.1 336.8 3.7 665.5 630.7 5.5 _________ _________ _________ ________ Income before income taxes.......... 44.4 34.1 30.2 81.1 51.6 57.2 Income taxes ....................... 17.1 10.5 62.9 29.1 13.9 109.4 _________ _________ _________ ________ Net income.......................... $ 27.3 $ 23.6 15.7 $ 52.0 $ 37.7 37.9 _________ _________ _________ ________ _________ _________ _________ ________ Net realized capital gains (losses), net of tax (included above)........ $ .2 $ .3 (33.3) $ .8 $ (2.5) - _________ _________ _________ ________ _________ _________ _________ ________
International's net income for the three and six months ended June 30, 1996 increased by $4 million and $14 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1996 increased $4 million and $11 million, respectively, from the same periods a year ago. The improvement in results reflected increased earnings in Chile primarily resulting from lower operating expenses due to tighter controls over such costs and lower interest expense and from continued revenue growth in the Pacific Rim. Partially offsetting the improvement in second quarter results was lower net investment income resulting from a decline in Mexico's interest rate environment. The company continues to explore opportunities for additional investments in emerging growth markets. In July, the company reached an agreement in principle with its Mexican partner to acquire a 49.0% stake in a joint venture that will offer insurance products through the partner's bank subsidiary. The company has agreed to invest $115 million in the joint venture initially and up to an additional $63 million based on the performance of the new company over the first five years of operations. The company has also agreed to increase its ownership in its current Mexican insurance joint venture from 44.5% to 49.0% for an additional $20 million. Completion of these transactions is subject to receipt of regulatory approvals. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions ___________________
Operating Summary (Millions) Three Months Ended June 30, Six Months Ended June 30, ___________________________________ ________________________________ 1996 1995 % Change 1996 1995 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 47.6 $ 58.8 (19.0)% $ 73.8 $ 183.2 (59.7)% Net investment income............... 395.5 477.3 (17.1) 838.4 945.5 (11.3) Fees and other income............... 23.2 33.0 (29.7) 52.5 68.1 (22.9) Net realized capital gains.......... 2.5 13.6 (81.6) 12.7 5.9 115.3 _________ _________ __________ _________ Total revenue.................... 468.8 582.7 (19.5) 977.4 1,202.7 (18.7) Current and future benefits......... 402.7 519.2 (22.4) 849.4 1,100.3 (22.8) Operating expenses.................. 22.9 22.5 1.8 43.2 43.1 .2 Reduction of loss on discontinued products........................... (170.0) - - (170.0) - - _________ _________ ________ _________ Total benefits and expenses...... 255.6 541.7 (52.8) 722.6 1,143.4 (36.8) _________ _________ __________ _________ Income before income taxes.......... 213.2 41.0 - 254.8 59.3 - Income taxes........................ 75.3 12.3 - 90.1 19.3 - _________ _________ __________ _________ Net income.......................... $ 137.9 $ 28.7 - $ 164.7 $ 40.0 - _________ _________ __________ _________ _________ _________ __________ _________ Net realized capital gains, net of tax (included above)....... $ 1.7 $ 8.8 (80.7) $ 8.3 $ 3.8 118.4 _________ _________ __________ _________ _________ _________ __________ _________ Deposits not included in premiums above............................. $ 528.0 $ 471.5 12.0 $ 922.4 $ 894.3 3.1 _________ _________ __________ _________ _________ _________ __________ _________ Assets under management (1)(2)...... $ 36,884.9 $46,492.9 (20.7) __________ _________ __________ _________ (1) Excludes net unrealized capital gains of approximately $150 million and $391 million at June 30, 1996 and 1995, respectively. (2) Includes assets related to discontinued products.
Large Case Pensions' net income for the three and six months ended June 30, 1996 increased by $109 million and $125 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and a benefit of $111 million (after tax) attributable to a reduction of the reserve for anticipated future losses on discontinued products, results for the three and six months ended June 30, 1996 increased $6 million and $10 million, respectively, from the same periods a year ago reflecting increases in net interest margins and in net investment income from the assets supporting the capital in Large Case Pensions. (Please see "Discontinued Products" on page 34 for a discussion of the reserve reduction.) After-tax net realized capital gains for the quarter ended June 30, 1996 include a gain of $25 million related to the sale of ARI to TA Associates, which was partially offset by net realized capital losses related to bond sales. ARI contributed $1 million and $3 million for the three and six months ended June 30, 1996, respectively, and $2 million and $4 million for the same periods a year ago to Large Case Pensions' net income. Year-to-date 1995 premiums reflected additional premiums from existing contractholders which did not have a material effect on earnings. 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Assets under management at June 30, 1996 were 21% lower than a year earlier, primarily as a result of the sale of Insurance Company Investment Management ("ICIM"), a specialized asset manager conducting business through the company's Aeltus Investment Management subsidiary ("Aeltus"), in the first quarter of 1996. ICIM was not a significant contributor to Large Case Pensions' earnings in 1995 or in the first quarter of 1996. Experience rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other company products) (in millions):
Three Months Ended June 30, Six Months Ended June 30, ___________________________ _________________________ 1996 1995 1996 1995 ____ ____ ____ ____ Scheduled contract maturities and benefit payments (1) $ 289.8 $ 235.7 $ 607.9 $ 506.0 ________ ________ ________ ________ ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments $ 47.1 $ 91.0 $ 362.3 (2) $ 188.6 ________ ________ ________ ________ ________ ________ ________ ________ Participant withdrawals $ 44.7 $ 43.1 $ 101.1 $ 97.6 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules. (2) Increase primarily relates to an unscheduled withdrawal by one contractholder in the first quarter of 1996.
Discontinued Products Under the company's accounting for its discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single-premium annuities ("SPAs")), the respective reserves for anticipated future losses are reviewed by management quarterly. Accordingly, as long as the reserves represent management's then best estimates of expected future losses, results of operations of the discontinued products, including net realized capital gains and losses, are credited/charged to the respective reserve and do not affect the company's results of operations. Management's review of the reserves in the second quarter of 1996 included a re-evaluation of assumptions relating to future real estate market conditions (e.g., rental rate growth and vacancy rates) and considered the continuing and recent favorable developments (compared to what had been anticipated) which had been experienced in such markets. As a result of this review, management released $170 million (pretax) of the reserve related to GICs. The resulting reserves reflect management's best estimate of the anticipated future net losses for GICs and SPAs. To the extent that actual future losses are greater than anticipated future net losses, the company's results of operations would be adversely affected. Conversely, if actual future losses are less than anticipated future losses, the company's results of operations would be favorably affected. (Please refer to the company's 1995 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ At the time of discontinuance, a receivable from Large Case Pensions' continuing business was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in the continuing business. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At June 30, 1996, for GICs and SPAs, the receivables from continuing business, net of the related deferred taxes payable of $18 million and $26 million, respectively, on the accrued interest income, were $312 million and $483 million, respectively. As of June 30, 1996, no funding had taken place. Results of discontinued products were as follows (in millions):
Three Months Ended June 30, 1996 Six Months Ended June 30, 1996 ________________________________ ______________________________ GICs SPAs Total GICs SPAs Total ____ ____ _____ ____ ____ _____ Interest margin (a) $ (4.8) $ 6.0 $ 1.2 $ (2.4) $ 12.3 $ 9.9 Net realized capital gains (losses) 9.7 (8.3) 1.4 16.7 (1.1) 15.6 Interest earned on receivable from continuing business 3.5 5.1 8.6 6.9 10.1 17.0 Other, net (1.9) .1 (1.8) .8 4.2 5.0 ________ ________ ________ ________ ________ _______ Results of discontinued products, after-tax $ 6.5 $ 2.9 $ 9.4 $ 22.0 $ 25.5 $ 47.5 ________ ________ ________ ________ ________ _______ ________ ________ ________ ________ ________ _______ Results of discontinued products, pretax $ 11.4 $ 3.6 $ 15.0 $ 36.7 $ 37.4 $ 74.1 ________ ________ ________ ________ ________ _______ ________ ________ ________ ________ ________ _______ Net realized capital gains (losses) from sales of bonds, after tax, included above $ (.7) $ (8.4) $ (9.1) $ 1.4 $ (4.0) $ (2.6) ________ ________ ________ ________ ________ _______ ________ ________ ________ ________ ________ _______ Three Months Ended June 30, 1995 Six Months Ended June 30, 1995 _________________________________ ______________________________ GICs SPAs Total GICs SPAs Total ____ ____ _____ ____ ____ ______ Negative interest margin (a) $ (4.4) $ (.6) $ (5.0) $ (19.3) $ (3.4) $ (22.7) Net realized capital gains (losses) (8.2) 9.4 1.2 (20.2) 14.6 (5.6) Interest earned on receivable from continuing business 3.3 4.9 8.2 6.6 9.9 16.5 Other, net (.4) .1 (.3) .7 1.7 2.4 ________ ________ ________ _______ _______ _______ Results of discontinued products, after-tax $ (9.7) $ 13.8 $ 4.1 $ (32.2) $ 22.8 $ (9.4) ________ ________ ________ _______ _______ _______ ________ ________ ________ _______ _______ _______ Results of discontinued products, pretax $ (13.8) $ 20.0 $ 6.2 $ (47.3) $ 32.8 $ (14.5) ________ ________ ________ _______ _______ _______ ________ ________ ________ _______ _______ _______ Net realized capital gains (losses) from sales of bonds, after tax, included above $ (3.3) $ 13.7 $ 10.4 $ (9.0) $ 23.1 $ 14.1 ________ ________ ________ _______ _______ _______ ________ ________ ________ _______ _______ _______ (a) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts (exceeds) or is less than interest earned on invested assets supporting such contracts.
36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ The results of the discontinued products in the first six months of 1996 were favorably affected by and the respective reserves for anticipated future losses were credited for nonrecurring items including rental income received on a foreclosed property of $6 million (after tax) related to GICs and $3 million (after tax) related to SPAs. Such rental income had previously not been recognized due to uncertainties associated with its ultimate collection. Additionally, the adoption of FAS No. 121, favorably impacted the results of GICs by $4 million (after tax) and SPAs by $2 million (after tax). The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Six Months Ended June 30, 1996 ______________________________ GICs SPAs Total ____ ____ _____ Reserve at December 31, 1995 $ 221.4 $ 737.4 $ 958.8 Results of discontinued products 36.7 37.4 74.1 Release of reserve (170.0) - (170.0) ________ ________ ________ Reserve at June 30, 1996 $ 88.1 $ 774.8 $ 862.9 ________ ________ ________ ________ ________ ________
Distributions on GICs and SPAs were as follows (in millions):
Three Months Ended June 30, 1996 Six Months Ended June 30, 1996 ________________________________ _______________________________ GICs SPAs Total GICs SPAs Total ____ ____ _____ ____ ____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1) $ 597.9 $ 135.8 $ 733.7 $1,098.1 $ 268.8 $1,366.9 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals $ 14.9 $ - $ 14.9 $ 30.4 $ - $ 30.4 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Three Months Ended June 30, 1995 Six Months Ended June 30, 1995 ________________________________ _______________________________ GICs SPAs Total GICs SPAs Total ____ ____ _____ ____ ____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1) $ 614.5 $ 128.5 $ 743.0 $1,259.3 $ 262.2 $1,521.5 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals $ 22.2 $ - $ 22.2 $ 49.3 $ - $ 49.3 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes early contractual settlements of GIC liabilities of approximately $175 million and $182 million for the three and six months ended June 30, 1996 and approximately $30 million and $87 million for the same periods a year ago.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on, invested assets. (Please see "General Account Investments" on page 38 for a discussion of investments supporting discontinued products.) 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Corporate _________
Operating Summary (Millions, after tax) Three Months Ended June 30, Six Months Ended June 30, ___________________________________ ________________________________ 1996 1995 % Change 1996 1995 % Change ____ ____ ________ ____ ____ ________ Interest expense.................... $ 17.5 $ 17.8 (1.7)% $ 36.9 $ 35.9 2.8% Other expense, net.................. 228.8 29.4 - 253.3 61.4 -
Other expense for the three and six months ended June 30, 1996 included after-tax net realized capital gains of $4 million and $6 million, respectively. Other expense for the six months ended June 30, 1995 included after-tax net realized capital losses of $2 million. Net realized capital losses were less than $1 million for the three months ended June 30, 1995. Excluding net realized capital gains and losses, the increase of $203 million and $200 million, respectively, for the three and six months ended June 30, 1996 in other expense compared with the same periods a year ago primarily resulted from the $235 million (after tax) facilities and severance charge discussed below, partially offset by interest income of $30 million (after tax) earned from the investment of the net proceeds received from the property-casualty sale. In conjunction with the sale of the company's property-casualty operations, Travelers subleased the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company reflected a charge of $190 million (after tax) during the second quarter of 1996 representing the present value of the difference between rent required to be paid by the company under the lease and future rentals expected to be received by the company. The company also recorded additional facilities and severance charges of $45 million (after tax) during the second quarter of 1996 due to actions taken or expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. (See "Facilities and Severance Charges" on page 26 for further discussion regarding the merger with U.S. Healthcare and the continuing strategic and financial reviews of the company.) 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments ___________________________ The company's invested assets were comprised of the following, net of impairment reserves:
June 30, December 31, (Millions) 1996 1995 ____________________________________________________________________________ Debt securities: Available for sale, at fair value (amortized cost $29,484.1 and $29,962.5) $ 29,827.8 $ 31,860.3 Equity securities, at fair value (cost $985.8 and $597.8) 1,224.7 659.7 Short-term investments 1,729.5 607.8 Mortgage loans 7,493.0 8,327.2 Real estate 1,210.7 1,277.3 Policy loans 651.7 629.4 Other 707.5 688.6 __________________________________________________________________________ Total invested assets $ 42,844.9 $ 44,050.3 __________________________________________________________________________ ________________________
Please refer to the company's 1995 Annual Report to Shareholders for a description of the company's investment objectives and policies. The change in the invested assets portfolio from December 31, 1995 to June 30, 1996 primarily reflected depreciation of debt securities due to an increase in interest rates and a net decrease in the aggregate mortgage loan and real estate portfolios. Debt securities reflected net unrealized capital gains of $344 million at June 30, 1996, compared with $1.9 billion at December 31, 1995. Of such net unrealized capital gains at June 30, 1996, $125 million and $162 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The net decrease in the aggregate mortgage loan and real estate portfolios of $901 million principally reflected prepayments and payments at maturity on mortgage loans and sales of foreclosed properties. The risks associated with investments supporting experience rated pension and annuity products are assumed by those customers subject to, among other things, certain minimum guarantees. The anticipated future losses associated with investments supporting discontinued fully guaranteed large case pension products are provided for in the reserve for anticipated future losses. (Please see "Discontinued Products" on page 34 for further discussion.) 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Debt Securities As of June 30, 1996 and December 31, 1995, the company's investments in debt securities represented 70% and 72%, respectively, of total general account invested assets and were as follows:
June 30, December 31, (Millions) 1996 1995 ________________________________________________________________________ Supporting discontinued products $ 5,119.7 $ 5,765.2 Supporting experience rated products 14,098.8 14,243.4 Supporting remaining products 10,609.3 11,851.7 _____________________________ Total debt securities $ 29,827.8 $ 31,860.3 _____________________________ _____________________________
Included in the company's debt security balances were the following categories of debt securities:
(Millions) June 30, 1996 _______________________________________________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Securities Securities Debt Securities _________________ ______________ ___________________ Total $1,705.8 $ 58.6 $ 73.4 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 27.3% 28.0% 31.3% Supporting experience rated products 45.4 21.7 31.3 Supporting remaining products 27.3 50.3 37.4 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ December 31, 1995 ________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Securities Securities Debt Securities _________________ ______________ ___________________ Total $1,623.8 $ 81.0 $ 90.4 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 32.7% 36.9% 57.5% Supporting experience rated products 42.6 12.5 24.1 Supporting remaining products 24.7 50.6 18.4 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________
"Below investment grade" securities (which include "problem" debt securities and "potential problem" debt securities described below) are defined to be securities that carry a rating below BBB- /Baa3. Such debt securities have been written down for other than temporary declines in value. Management defines "problem" debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Potential problem" debt securities are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. The company does not accrue interest on problem debt securities when management believes the likelihood of collection of interest is doubtful. Lost investment income on problem debt securities was as follows:
Three Months Ended Six Months Ended June 30, June 30, __________________ _________________ (Millions) 1996 1995 1996 1995 ______________________________________________________________________________________ Allocable to discontinued products $ .2 $ .4 $ .5 $ .8 Allocable to experience rated products .2 .4 .4 .6 Allocable to remaining products .5 .5 .8 1.4 __________________ _________________ Total lost investment income $ .9 $ 1.3 $ 1.7 $ 2.8 __________________ _________________ __________________ _________________
Included in the company's total collateralized mortgage obligations ("CMOs") balances were the following categories of CMOs:
(Millions) June 30, 1996 December 31, 1995 _______________________________________________________________ _______________________ Fair Amortized Fair Amortized Value Cost Value Cost _________ _________ _________ _________ Total CMOs (1) $ 2,786.5 $ 2,748.1 $ 3,191.1 $ 2,984.4 _________ _________ _________ _________ _________ _________ _________ _________ Percentage of total CMOs: Sequential and planned amortization class bonds 67.7% 73.1% Z-tranches 17.5 15.2 Interest-only strips and principal-only strips 3.7 3.2 Other 11.1 8.5 _________ _________ 100.0% 100.0% _________ _________ _________ _________ (1) At June 30, 1996 and December 31, 1995, approximately 70% and 74%, respectively, of the company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC).
41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the value of the CMOs would be subject to variability based on the repayment of principal from the underlying mortgages earlier or later than originally anticipated. The various categories of CMOs are subject to different degrees of risk from changes in interest rates and defaults (for non-agency- backed bonds). Sequential and planned amortization class bonds are subject to less prepayment and extension risk than other CMO instruments. Interest-only strips ("IOs") receive payments of interest and principal-only strips ("POs") receive payments of principal on the underlying pool of residential mortgages. The company has mitigated the risks associated with holding IOs and POs by holding positions in both types of instruments such that exposure from significant changes in interest rates is reduced. Z-tranches receive principal payments from the underlying mortgage pool only after all other priority classes have been retired. Mortgage Loans During the first six months of 1996, the mortgage loan portfolio was reduced 10% to $7.5 billion, net of impairment reserves. The company's total mortgage loan investments, net of impairment reserves, supported the following types of business:
June 30, December 31, (Millions) 1996 1995 ______________________________________________________________________ Supporting discontinued products $ 3,136.1 $ 3,388.6 Supporting experience rated products 2,736.4 3,013.4 Supporting remaining products 1,620.5 1,925.2 _____________________________ Total mortgage loan investments $ 7,493.0 $ 8,327.2 _____________________________ _____________________________
During the first six months of 1996, the company continued to manage its mortgage loan portfolio to reduce the balance in absolute terms and relative to invested assets, and to reduce its overall risk. The principal balance of mortgage loans decreased $1.1 billion since December 31, 1995 primarily reflecting the effect of repayments of maturing loans, loan prepayments and foreclosures. Loans with a principal balance of $168 million and collateral with a fair market value of $63 million were foreclosed upon in the first six months of 1996. Additional loans with a principal balance of $132 million were in the process of foreclosure at June 30, 1996. In certain cases, the company has taken substantive possession of the property supporting its loan, coupled with the borrower surrendering its interest in the future economic benefits in the property. Where this has occurred, the loans are considered in-substance foreclosures, written down to their fair market value less selling costs and classified as real estate held for sale. Activity related to in-substance foreclosures for the six months ended June 30, 1996 did not significantly impact the balance of mortgage loans. 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Included in the company's total mortgage loan balances were the following categories of mortgage loans:
(Millions) June 30, 1996 _________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans Total _____________ ____________ _____________ _____ Total $ 454.0 (1) $ 461.0 $ 612.7 $1,527.7 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 41.3% 55.0% 49.3% Supporting experience rated products 37.0 28.0 36.9 Supporting remaining products 21.7 17.0 13.8 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Specific impairment reserves on loans (2) $ 226.0 ________ ________ Specific impairment reserves as a percentage of total 14.8% ________ ________ December 31, 1995 _________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans Total _____________ ____________ _____________ _____ Total $ 160.3 $ 514.1 $ 839.1 $1,513.5 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 22.6% 50.9% 54.3% Supporting experience rated products 51.8 35.5 29.1 Supporting remaining products 25.6 13.6 16.6 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Specific impairment reserves on loans (2) $ 361.2 ________ ________ Specific impairment reserves as a percentage of total 23.9% ________ ________ (1) The increase in problem loans from December 31, 1995 to June 30, 1996 includes $191 million related to one mortgage loan where the borrower has declared bankruptcy. No specific reserve has been established for this loan because the loan is well secured and the company does not anticipate any future losses. (2) Please see Note 7 of Condensed Notes to Financial Statements for further disclosures related to mortgage loan impairment reserves.
"Problem loans" are defined to be loans with payments over 60 days past due, loans on properties in the process of foreclosure, loans on properties involved in bankruptcy proceedings and loans on properties subject to redemption. Loans on properties in the process of foreclosure increased to $132 million at June 30, 1996 from $101 million at December 31, 1995. "Restructured loans" are loans whose original contract terms have been modified to grant concessions to the borrower and are currently performing pursuant to such modified terms. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post-restructuring payment performance in accordance with the restructured terms) may be returned to performing status. (Please see the company's 1995 Annual Report to Shareholders for a complete description of the company's restructuring program.) No such restructures and transfers to performing status occurred during the six months ended June 30, 1996. 43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Potential problem loans" include all loans which are performing pursuant to existing terms and are considered likely to become classified as problem or restructured loans. Such loans are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem loans requires significant judgment as to likely future market conditions and developments specific to individual properties and borrowers. Provision for losses that management believes are likely to arise from such potential problem loans is included in the specific impairment reserves. (Please see Note 7 of Condensed Notes to Financial Statements for a discussion of mortgage loan impairment reserves.) The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such problem and restructured loans outstanding at June 30 and the portion thereof actually recorded as income were as follows:
Three Months Ended Six Months Ended June 30, June 30, __________________ _________________ (Millions) 1996 1995 1996 1995 _________________________________________________________ _________________ Income which would have been recorded under original terms of loans $ 30.8 $ 25.5 $ 48.8 $ 48.1 Income recorded 23.9 14.9 35.3 24.8 _______ _______ _______ _______ Lost investment income $ 6.9 $ 10.6 $ 13.5 $ 23.3 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 2.9 $ 2.6 $ 5.5 $ 8.7 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension products (included above) $ 2.1 $ 5.3 $ 5.1 $ 8.5 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ 1.9 $ 2.7 $ 2.9 $ 6.1 _______ _______ _______ _______ _______ _______ _______ _______
44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Real Estate The company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) June 30, 1996 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total equity real estate $ 166.7 $1,044.0 (1) $1,210.7 ________ ________ ________ ________ ________ ________ Percentage of total equity real estate: Supporting discontinued products 23.1% 58.3% Supporting experience rated products 7.9 26.8 Supporting remaining products 69.0 14.9 ________ ________ 100.0% 100.0% ________ ________ ________ ________ December 31, 1995 _________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total equity real estate $ 153.0 $1,124.3 (1) $1,277.3 ________ ________ ________ ________ ________ ________ Percentage of total equity real estate: Supporting discontinued products 7.5% 55.5% Supporting experience rated products 7.8 29.2 Supporting remaining products 84.7 15.3 ________ ________ 100.0% 100.0% ________ ________ ________ ________ (1) Includes $142.1 million and $190.4 million of in-substance foreclosures at June 30, 1996 and December 31, 1995, respectively. (Please see "Mortgage Loans" on page 41 for discussion of in-substance foreclosures.)
Real estate which the company has the intent to hold for the production of income is classified as investment real estate. Investment real estate is carried at depreciated cost plus capital additions, net of impairment write downs. All real estate acquired through foreclosure, including in- substance foreclosures, is classified as properties held for sale. The fair value at foreclosure is established as the new cost basis for these assets, which are carried at the lower of cost or fair value less estimated selling costs. As a result of adopting FAS No. 121 on January 1, 1996 (please see Note 7 of Condensed Notes to Financial Statements), the company no longer depreciates properties held for sale. Adjustments to the carrying value of properties held for sale are recorded in a valuation reserve when the fair value less estimated selling costs is below cost. Fair value is generally determined using a discounted future cash flow analysis in conjunction with comparable sales information. Property valuations are reviewed regularly by investment management. The company intends to sell a significant amount of the properties held for sale over the next one to two years, real estate and capital market conditions permitting. 45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Foreclosed real estate classified as properties held for sale was carried at 60% and 61% of the company's cash investment (unpaid mortgage balance plus capital additions) at June 30, 1996 and December 31, 1995, respectively. Net investment income included $30 million and $80 million (pretax) from the net operations of properties held for sale for the three and six months ended June 30, 1996, respectively. Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances were as follows:
June 30, December 31, (Millions) 1996 1995 ______________________________________________________________________ Allocable to discontinued products $ 414.8 $ 381.0 Allocable to experience rated products 184.0 208.2 Allocable to remaining products 116.5 96.8 ________ ________ Total real estate write-downs and valuation reserves $ 715.3 (*) $ 686.0 ________ ________ ________ ________ (*) As a result of the adoption of FAS No. 121, valuation reserves at January 1, 1996 were increased by $52.9 million in connection with the reversal of previously recorded accumulated depreciation related to properties held for sale. The adoption of FAS No. 121 resulted in an immaterial impact on results of operations.
For the periods shown below, total after-tax net realized capital (gains) losses from real estate write-downs and changes in the valuation reserves were as follows:
Three Months Ended Six Months Ended June 30, June 30, ___________________ _________________ (Millions) 1996 1995 1996 1995 ___________________________________________________________________________________________ Allocable to discontinued products (1) $ .1 $ - $ (3.0) $ - Allocable to experience rated products (2) - - .1 - Allocable to remaining products 16.2 - 16.2 - (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.
46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Use of Derivatives and Other Investments The company's use of derivatives is limited to hedging activity and has principally consisted of using foreign exchange forward contracts, futures and forward contracts and interest rate swap agreements to hedge interest rate risk and currency risk. These instruments, viewed separately, subject the company to varying degrees of market and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall market risk. Market risk is the possibility that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that its current hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 9 of Condensed Notes to Financial Statements for a discussion of the company's hedging activities.) The company also had investments in certain debt instruments with derivative characteristics, including those where market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities included in the debt securities portfolio as of June 30, 1996 was as follows:
Amortized Fair (Millions) Cost Value _____________________________________________________________________________ Collateralized mortgage obligations: $ 2,748.1 $ 2,786.5 Interest-only strips (included above) 37.5 47.0 Principal-only strips (included above) 46.5 54.8 Structured notes (1) 114.2 116.9 Warrants to purchase debt securities (2) 2.8 3.0 (1) Represents nonleveraged instruments whose fair values and credit risk are based on underlying securities, including fixed-income securities and interest rate swap agreements. (2) Represents the right to purchase specific debt securities and is accounted for as a hedge. Upon exercise, the cost of the warrants will be added to the basis of the debt securities purchased and amortized over their lives.
47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources _______________________________ Cash and cash equivalents at June 30, 1996 and December 31, 1995 were $4.3 billion and $1.7 billion, respectively. The net proceeds from the property-casualty sale of $3.9 billion were primarily invested in cash and cash equivalents at June 30, 1996 and were subsequently used in financing a portion of the cash consideration paid in connection with the U.S. Healthcare merger. Short-term borrowings are used from time to time to provide for timing differences between receipts and disbursements in various portfolios. The maximum amount of domestic short-term borrowings outstanding during the first six months of 1996 was $491 million. In order to fund a portion of the cash consideration paid in connection with the U.S. Healthcare merger, the company issued $1.4 billion of commercial paper subsequent to June 30, 1996. The company has a revolving credit facility in an aggregate amount of $2.5 billion with a worldwide group of banks. The facility replaces the company's prior credit facilities and terminates in June 2001. (Please see Note 8 of Condensed Notes to Financial Statements.) Pursuant to shelf registration statements declared effective by the SEC, the company may offer and sell up to $2.0 billion of debt securities guaranteed by Aetna Inc., and Aetna Capital L.L.C., a subsidiary of the company, may offer and sell up to an additional $225 million of preferred securities to be guaranteed by Aetna Inc. It is anticipated that the company will repay, depending upon market conditions, the commercial paper borrowings related to the U.S. Healthcare merger from funds generated internally by Aetna Inc. or its subsidiaries and/or other sources which may include the proceeds from the sale of debt securities registered pursuant to the above-indicated shelf registration statement for debt. The company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere due to tight lending practices by banks and other financial institutions over the past several years. For the six months ended June 30, 1996, the mortgage loan portfolio generated $732 million in cash which included $208 million of payoffs or 34% of scheduled maturities, $419 million of prepayments, $41 million of loan sales and $64 million of amortization. Despite various indications that liquidity has returned to certain real estate markets, the company expects it will continue to extend or refinance certain maturing loans. 48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ Rating Agencies The ratings of Aetna Services, Inc. (formerly Aetna Life and Casualty Company) and certain of its subsidiaries at February 6, 1996, as set forth in the 1995 Form 10-K, and at July 26, 1996 follow:
Rating Agencies ____________________________________________________________ Moody's Investors Standard A.M. Best Duff & Phelps Service & Poor's ____________________________________________________________ Aetna Services, Inc. (1) (senior debt) February 6, 1996 * A ** A2 A- ** July 26, 1996 * A ** A2 A- Aetna Services, Inc. (1) (commercial paper) February 6, 1996 * D-1 ** P-1 A-2 ** July 26, 1996 * D-1 ** P-1 A-2 Aetna Life Insurance Company (claims paying) February 6, 1996 A AA- ** Aa3 A+ ** July 26, 1996 A AA- ** Aa3 A Aetna Life Insurance and Annuity Company (claims paying) February 6, 1996 A+ AA+ Aa2 AA ** July 26, 1996 A+ AA+ Aa2 AA- * Not rated by the agency. ** On credit watch with positive implications. (1) Beginning on July 19, 1996, all debt issued or issuable under the shelf registration statements of Aetna Services, Inc is/will be guaranteed by Aetna Inc.
Dividends On July 19, 1996, the Board of Directors of Aetna Inc. (the "Board") declared a quarterly dividend of $.20 per share of common stock to shareholders of record at the close of business on July 26, 1996, payable August 15, 1996. On July 19, 1996, the Board also declared a dividend of $0.3701 per share of mandatorily convertible preferred stock to shareholders of record of such preferred stock at the close of business on July 26, 1996. Such preferred stock dividend represents that portion of the dividend accrued and payable from the date of the U.S. Healthcare merger, July 19, 1996, to the payment date for such preferred stock dividend, August 15, 1996. 49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) New Accounting Pronouncements _____________________________ Please see Note 3 of Condensed Notes to Financial Statements for a discussion of recently issued accounting pronouncements. Forward-Looking Information ___________________________ The Private Securities Litigation Reform Act of 1995 (the "Act") provides a new "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward- looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The company desires to take advantage of the new "safe harbor" provisions of the Act. Certain information contained herein, particularly the information relating to the estimated synergies and the timing of their anticipated realization anticipated from the merger with U.S. Healthcare appearing under the heading "Overview" herein, is forward-looking. The estimate of synergies is based upon a variety of assumptions relating to the business of the company and U.S. Healthcare which may not be realized and are subject to significant uncertainties and contingencies, many of which are beyond the control of the company and, U.S. Healthcare and Aetna Inc. For example, the achievement of such synergies depends upon, among other things, (i) the successful offering of U.S. Healthcare managed care products to existing company corporate customers and cross-selling of company group life, specialty health and other products through U.S. Healthcare's existing network; (ii) timely integration of U.S. Healthcare management and information systems with those of the company; (iii) timely elimination of redundant administrative expenses; and (iv) achievement of revenue enhancements and medical cost reductions. See also prior SEC filings of the company and U.S. Healthcare, including their 1995 Form 10-Ks and Annual Reports to Shareholders, for additional factors that may affect the company's health and other businesses. 50 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefor, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. Item 2. Changes in Securities. See Part I Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview," for information regarding the effect of the company's merger with U.S. Healthcare upon the shares of the company's common stock. (Aetna Inc. common stock is substantially identical to the company's common stock). Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Shareholders of the company was held on Friday, April 26, 1996. (b) Directors elected at the Meeting:
Votes Votes Broker For Withheld Non-Votes ___ ________ _________ Ronald E. Compton 102,465,035 1,244,755 0 William H. Donaldson 102,647,579 1,062,211 0 Barbara Hackman Franklin 102,616,326 1,093,464 0 Earl G. Graves 102,658,117 1,051,673 0 Gerald Greenwald 102,722,312 987,478 0 Ellen M. Hancock 102,694,234 1,015,556 0 Michael H. Jordan 102,706,099 1,003,691 0 Jack D. Kuehler 102,678,221 1,031,569 0 Frank R. O'Keefe, Jr. 102,683,683 1,026,107 0 Judith Rodin 102,671,050 1,038,740 0
(c) Other matters voted upon:
Votes Votes Broker For Against Abstain Non-Votes _____ _______ _______ _________ (1) Appointment of Independent Auditors 102,674,221 746,595 288,974 0 (2) Approval of Certain Terms of Annual Incentive Plan 98,121,824 4,633,243 954,723 0 (3) Approval of the Amendment and Restatement of the 1994 Non-Employee Director Deferred Stock Plan 94,290,523 8,302,598 1,116,669 0
51 Item 5. Other Information. (a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends The following table sets forth the company's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Six Months Ended Years ended December 31, ____________________________________ June 30, 1996 1995 1994 1993 1992 1991 _________________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges 4.04 4.97 4.74 (a) 1.90 .54(b) Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 4.04 4.97 4.74 (a) 1.90 .54(b) (a) The company reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.0 billion. (b) Earnings were inadequate to cover fixed charges by $92.0 million in 1991.
For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1995 Annual Report to Shareholders.) For the six months ended June 30, 1996 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (3) Articles of Incorporation and By-Laws. (3.1) Aetna Inc. Amended and Restated Certificate of Incorporation, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (3.2) Aetna Inc. Bylaws, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (3.3) Amended and Restated Certificate of Incorporation of Aetna Services, Inc., incorporated by reference to Appendix M to the Proxy Statement/Prospectus included in Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. 52 Item 6. Exhibits and Reports on Form 8-K (Continued). (a) Exhibits (Continued) (4) Instruments defining the rights of security holders, including indentures. (4.1) Form of Senior Indenture between Aetna Services, Inc., Aetna Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (including the forms of the Senior Debt Securities and Senior Debt Guarantees), incorporated herein by reference to Aetna Inc.'s and Aetna Services, Inc.'s (formerly Aetna Life and Casualty Company) Registration Statement on Form S-3 filed on June 28, 1996. (4.2) Form of Subordinated Indenture between Aetna Services, Inc., Aetna Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (including the forms of the Subordinated Debt Securities and Subordinated Debt Guarantees), incorporated herein by reference to Aetna Inc.'s and Aetna Services, Inc.'s (formerly Aetna Life and Casualty Company) Registration Statement on Form S-3 filed on June 28, 1996. (10) Material Contracts. (10.1) Amendment No. 1, dated as of May 30, 1996, to the Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Services, Inc. (formerly Aetna Life and Casualty Company), U.S. Healthcare, Inc., Aetna Inc., (formerly known as Butterfly, Inc.), Antelope Sub. Inc. and New Merger Corporation, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.2) Amendment No. 1, dated as of May 30, 1996, to the Voting Agreement, dated as of March 30, 1996, among Leonard Abramson, Aetna Life Insurance Company and Aetna Life Insurance and Annuity Company, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.3) Aetna Life and Casualty Company $2.5 billion Credit Facility, incorporated herein by reference to Aetna Life and Casualty Company's Current Report on Form 8-K filed on July 16, 1996. (10.4) Amendment No. 1, dated as of May 30, 1996, to the Registration Rights Agreement, dated as of March 30, 1996 between Aetna Inc. (formerly known as Butterfly, Inc.) and Leonard Abramson, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.5) Amended and Restated Agreement dated as of May 30, 1996 between Aetna Inc. (formerly Butterfly, Inc.) and Leonard Abramson, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. 53 Item 6. Exhibits and Reports on Form 8-K (Continued). (a) Exhibits (Continued) (10.6) The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.7) The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.8) The Aetna Inc. Non-Employee Director Deferred Stock and Deferred Compensation Plan, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.9) Amendment No. 1 dated March 1, 1996 to Letter Agreement dated January 19, 1995 between Aetna Life and Casualty Company and Richard L. Huber, incorporated herein by reference to Aetna Inc.'s Registration Statement on Form S-4 filed on June 12, 1996. (10.10) Amended and Restated U.S. Healthcare, Inc. Savings Plan, incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996. (10.11) Amended and Restated Pension Plan for Employees of U.S. Healthcare, Inc., incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996. (10.12) Split Dollar Insurance Agreement, dated as of February 1, 1990, among Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson and David B. Soll, and U.S. Healthcare, Inc., and the related Collateral Assignment Agreement, dated as of February 1, 1990, among Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson and David B. Soll, and U.S. Healthcare, Inc., incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996. (10.13) Split Dollar Insurance Agreement, dated as of January 21, 1991, among Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., and the related Collateral Assignment Agreement, dated as of January 21, 1991, among Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996. (10.14) Description of Deferred Compensation Plan, incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996. 54 Item 6. Exhibits and Reports on Form 8-K. (Continued) (a) Exhibits (Continued) (12) Statement Re Computation of Ratios. (12.1) Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the six months ended June 30, 1996 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991. (15) Letter Re Unaudited Interim Financial Information. (15.1) Letter from KPMG Peat Marwick LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated July 25, 1996. (27) Financial Data Schedule. (b) Reports on Form 8-K The company filed a report on Form 8-K on April 1, 1996, relating to the company entering into a definitive agreement, dated March 30, 1996, to merge with U.S. Healthcare, Inc. The company filed a report on Form 8-K on April 15, 1996 relating to the completion of the sale of its property- casualty operations to Travelers/Aetna Property Casualty Corp. The company filed a report on Form 8-K on June 28, 1996 relating to certain unaudited condensed consolidated pro forma financial statements for the three and twelve months ended March 31, 1996 and December 31, 1995, respectively, an audited consolidated balance sheet of Aetna Inc., and the deferral by the company's Board of Directors of the declaration of the quarterly dividend pending the closing of the proposed merger with U.S. Healthcare, Inc. 55 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ______Aetna Services, Inc.___ ________________________ (Registrant) Date July 26, 1996 By /s/ Robert J. Price ______________________________ (Signature) Robert J. Price Vice President and Corporate Controller (Chief Accounting Officer) 1 AETNA SERVICES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Six Months Ended Years Ended December 31,_ _________ ___________________________________________________ (Millions) __June 30, 1996__ 1995 1994 1993 1992 1991 _______________ ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 282.2 $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9) Add back fixed charges........... 95.5 187.0 170.8 154.7 171.5 200.5 Minority interest................ 8.1 16.1 11.4 7.0 8.6 5.9 ________ _______ _______ ________ _______ _______ Income (loss) as adjusted..... $ 385.8 $ 929.3 809.7 $ (853.0) $ 325.6 $ 108.5 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Fixed charges: Interest on indebtedness....... $ 60.4(1) $ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9 Portion of rents representative of interest factor............ 35.1 71.1 72.2 77.3 90.1 89.6 ________ _______ _______ _________ _______ _______ Total fixed charges........... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Preferred stock dividend requirements.................... - - - - - - ________ _______ _______ _________ _______ _______ Total combined fixed charges and preferred stock dividend requirements.................... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Ratio of earnings to fixed charges......................... 4.04 4.97 4.74 (5.51) 1.90 .54 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Ratio of earnings to combined fixed charges and preferred stock dividends................. 4.04 4.97 4.74 (5.51) 1.90 .54 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1995 Annual Report to Shareholders.)
1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Services, Inc. Hartford, Connecticut Gentlemen: Re: Registration Statements No. 33-52819, 33-52819-01, 333-05791, 333-07167, 333-07169, 333-08427, 333-08429 and 333-08431 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 25, 1996 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. By /s/ KPMG PEAT MARWICK LLP _____________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut July 25, 1996 1 July 26, 1996 Securities and Exchange Commission Room 1004 450 Fifth Street, N.W. Washington, DC 20549 RE: AETNA SERVICES, INC. (FORMERLY AETNA LIFE AND CASUALTY COMPANY SECOND QUARTER 1996 FORM 10-Q: FILE NO. 1-5704 Gentlemen: This submits for Aetna Services, Inc. (formerly Aetna Life and Casualty Company via direct electronic transmission the Form 10-Q Report for the quarter ended June 30, 1996. Please acknowledge receipt of the transmission of this document via MCI mail at 309-3926. Very truly yours, /s/ ROBERT W. GRANOW ___________________________________ Robert W. Granow Vice President, Financial Reporting cc: and one manually signed copy of Form 10-Q to: New York Stock Exchange Department of Stock List 20 Broad Street New York, New York 10005 Pacific Stock Exchange 301 Pine Street San Francisco, CA 94104 EX-12 2 STATEMENT RE COMPUTATION OF RATIOS 1 AETNA SERVICES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Six Months Ended Years Ended December 31,_ _________ ___________________________________________________ (Millions) __June 30, 1996__ 1995 1994 1993 1992 1991 _______________ ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 282.2 $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9) Add back fixed charges........... 95.5 187.0 170.8 154.7 171.5 200.5 Minority interest................ 8.1 16.1 11.4 7.0 8.6 5.9 ________ _______ _______ ________ _______ _______ Income (loss) as adjusted..... $ 385.8 $ 929.3 809.7 $ (853.0) $ 325.6 $ 108.5 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Fixed charges: Interest on indebtedness....... $ 60.4(1) $ 115.9(1) $ 98.6(1) $ 77.4 $ 81.4 $ 110.9 Portion of rents representative of interest factor............ 35.1 71.1 72.2 77.3 90.1 89.6 ________ _______ _______ _________ _______ _______ Total fixed charges........... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Preferred stock dividend requirements.................... - - - - - - ________ _______ _______ _________ _______ _______ Total combined fixed charges and preferred stock dividend requirements.................... $ 95.5 $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Ratio of earnings to fixed charges......................... 4.04 4.97 4.74 (5.51) 1.90 .54 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ Ratio of earnings to combined fixed charges and preferred stock dividends................. 4.04 4.97 4.74 (5.51) 1.90 .54 ________ _______ _______ _________ _______ _______ ________ _______ _______ _________ _______ _______ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1995 Annual Report to Shareholders.)
EX-15 3 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Services, Inc. Hartford, Connecticut Gentlemen: Re: Registration Statements No. 33-52819, 33-52819-01, 333-05791, 333-07167, 333-07169, 333-08427, 333-08429 and 333-08431. With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 25, 1996 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. By /s/ KPMG PEAT MARWICK LLP _____________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut July 25, 1996 EX-27 4 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 June 30, 1996 for Aetna Services, Inc. (formerly Aetna Life and Casualty Company) and is qualified in its entirety by reference to such statements. 1,000,000 6-MOS DEC-31-1996 JUN-30-1996 29,828 0 0 1,225 7,493 1,211 42,845 4,254 0 2,078 84,717 18,322 245 1,413 20,711 987 0 0 1,500 5,842 84,717 3,555 1,780 66 1,066 4,296 75 0 282 92 190 446 0 0 636 5.47 0 0 0 0 0 0 0 0 There is no difference between primary and fully diluted earnings per share.
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