-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hjn/jHPu2cHXAH4CEoFsdz4BKR6frhqiajPYkSauLVGjzYm4C39aFRVOQMg4V+eH QzJcOzNpnNKLOhlB3tNxpQ== 0000002648-94-000027.txt : 19940816 0000002648-94-000027.hdr.sgml : 19940816 ACCESSION NUMBER: 0000002648-94-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE & CASUALTY CO CENTRAL INDEX KEY: 0000002648 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 060843808 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05704 FILM NUMBER: 94544369 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 2Q 1994 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, 1994 _______________ Commission file number 1-5704 ________ Aetna Life and Casualty Company _______________________________________________________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 _______________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 _______________________________________________________________________ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (203) 273-0123 __________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 31, 1994 ________________ __________________ Common Capital Stock 112,631,669 without par value 2 TABLE OF CONTENTS _________________ Page ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Condensed Notes to Financial Statements 8 Independent Auditors' Review Report 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 54 Item 4. Submission of Matters to a Vote of Security Holders. 54 Item 5. Other Information. 55 Item 6. Exhibits and Reports on Form 8-K. 58 Signatures 59 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
3 Months Ended 6 Months Ended June 30 June 30 ____________________________ ____________________________ (Millions, except share data) 1994 1993 1994 1993 ____ ____ ____ ____ Revenue: Premiums................................. $ 2,839.0 $ 2,688.8 $ 5,581.3 $ 5,311.1 Net investment income.................... 1,121.0 1,252.6 2,247.5 2,502.5 Fees and other income.................... 458.4 411.9 909.1 823.4 Net realized capital gains (losses)...... (13.4) (3.4) (19.3) 32.8 ___________ ___________ ___________ ___________ Total revenue........................ 4,405.0 4,349.9 8,718.6 8,669.8 ___________ ___________ ___________ ___________ Benefits and expenses: Current and future benefits.............. 3,114.5 3,088.7 6,232.1 6,133.8 Operating expenses....................... 924.4 917.4 1,879.4 1,815.6 Amortization of deferred policy acquisition costs....................... 177.9 192.7 362.5 378.0 ___________ ___________ ___________ ___________ Total benefits and expenses.......... 4,216.8 4,198.8 8,474.0 8,327.4 ___________ ___________ ___________ ___________ Income from continuing operations before income taxes, extraordinary item and cumulative effect adjustments............. 188.2 151.1 244.6 342.4 Federal and foreign income taxes (benefits): Current.................................. (27.9) 16.7 (25.6) 86.9 Deferred................................. 83.7 (16.4) 92.1 (34.6) ___________ ___________ ___________ ___________ Total federal and foreign income taxes........................ 55.8 .3 66.5 52.3 ___________ ___________ ___________ __________ Income from continuing operations before extraordinary item and cumulative effect adjustments............................... 132.4 150.8 178.1 290.1 Discontinued operations, net of tax........ - - - 27.0 ___________ ___________ ___________ ___________ Income before extraordinary item and cumulative effect adjustments... 132.4 150.8 178.1 317.1 Extraordinary loss on debenture redemption, net of tax................................ - (4.7) - (4.7) Cumulative effect adjustments, net of tax.. - - - 227.8 ___________ ___________ ___________ ___________ Net income........................... $ 132.4 $ 146.1 $ 178.1 $ 540.2 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Results per common share: Income from continuing operations before extraordinary item and cumulative effect adjustments...................... $ 1.17 $ 1.36 $ 1.58 $ 2.62 Discontinued operations, net of tax...... - - - .25 ___________ ___________ ___________ ___________ Income before extraordinary item and cumulative effect adjustments... 1.17 1.36 1.58 2.87 Extraordinary loss on debenture redemption, net of tax.................. - (.04) - (.04) Cumulative effect adjustments, net of tax - - - 2.06 ___________ ___________ ___________ ___________ Net income........................... $ 1.17 $ 1.32 $ 1.58 $ 4.89 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Dividends declared....................... $ .69 $ .69 $ 1.38 $ 1.38 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Weighted average common shares outstanding. 112,904,466 110,500,118 112,956,551 110,405,425 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ See Condensed Notes to Financial Statements.
4 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, (Millions) 1994 1993 ____________ ____________ Assets: Investments: Debt securities: Held for investment, at amortized cost (fair value $2,307.1 and $2,704.2)....................... $ 2,237.6 $ 2,557.8 Available for sale, at fair value (amortized cost $37,368.3 and $36,933.6)...................... 36,353.7 38,868.9 Trading securities, at fair value (1993 amortized cost $119.0)..... - 117.8 Equity securities, at fair value (cost $1,361.1 and $1,238.1)....... 1,677.7 1,658.9 Short-term investments.............. 753.0 669.9 Mortgage loans...................... 13,591.7 14,839.2 Real estate......................... 1,191.0 1,315.8 Policy loans........................ 507.9 490.7 Other............................... 1,193.2 936.8 __________ __________ Total investments............... 57,505.8 61,455.8 Cash and cash equivalents............. 1,812.2 1,557.8 Reinsurance recoverables and receivables.......................... 5,108.6 4,840.7 Accrued investment income............. 780.7 782.6 Premiums due and other receivables.... 1,551.2 1,664.9 Federal and foreign income taxes: Current............................. 170.0 124.0 Deferred............................ 1,565.9 1,282.9 Deferred policy acquisition costs..... 1,936.0 1,867.0 Other assets.......................... 2,297.4 1,756.3 Separate Accounts assets.............. 23,249.5 24,704.7 __________ __________ Total assets.................... $ 95,977.3 $100,036.7 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
5 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31, (Millions, except share data) 1994 1993 ____________ ____________ Liabilities: Future policy benefits.................. $ 17,666.2 $ 17,597.6 Unpaid claims and claim expenses........ 17,807.3 17,112.2 Unearned premiums....................... 1,536.9 1,502.2 Policyholders' funds left with the company................................ 25,220.1 27,592.2 __________ __________ Total insurance reserve liabilities. 62,230.5 63,804.2 Dividends payable to shareholders....... 77.7 77.4 Short-term debt......................... 174.9 35.7 Long-term debt.......................... 1,128.8 1,160.0 Other liabilities....................... 3,040.9 3,162.1 Minority and participating policyholders' interests............... 143.9 172.5 Separate Accounts liabilities........... 23,131.2 24,581.7 __________ __________ Total liabilities................... 89,927.9 92,993.6 __________ __________ Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding)....... - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)....... - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)....... - - Common Capital Stock (no par value; 250,000,000 shares authorized; 114,939,275 issued, and 112,618,169 and 112,200,567 outstanding)........... 1,417.8 1,422.0 Net unrealized capital gains (losses)... (387.5) 648.2 Retained earnings....................... 5,125.7 5,103.3 Treasury stock, at cost (2,321,106 and 2,738,708 shares)...................... (106.6) (130.4) __________ __________ Total shareholders' equity.......... 6,049.4 7,043.1 __________ __________ Total liabilities and shareholders' equity............... $ 95,977.3 $100,036.7 __________ __________ __________ __________ Shareholders' equity per common share... $ 53.72 $ 62.77 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
6 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions, except share data) Net Common Unrealized Capital Capital Retained Treasury Six Months Ended June 30, 1994 Total Stock Gains (Losses) Earnings Stock ___________________________________________________________________________________________________________ Balances at December 31, 1993 $7,043.1 $1,422.0 $ 648.2 $5,103.3 $ (130.4) ___________________________________________________________________________________________________________ Net income............................ 178.1 178.1 Net change in unrealized capital gains and losses.......................... (1,035.7) (1,035.7) Common stock issued for benefit plans (417,602 shares).................... 23.8 23.8 Loss on issuance of treasury stock.... (4.2) (4.2) Common stock dividends declared....... (155.7) (155.7) _____________________________________________________________________ Balances at June 30, 1994 $6,049.4 $1,417.8 $ (387.5) $5,125.7 $ (106.6) ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Six Months Ended June 30, 1993 ___________________________________________________________________________________________________________ Balances at December 31, 1992 $7,238.3 $1,417.7 $ 259.6 $5,777.9 $ (216.9) ___________________________________________________________________________________________________________ Net income............................ 540.2 540.2 Net change in unrealized capital gains and losses.......................... 224.3 224.3 Common stock issued for benefit plans (362,623 shares).................... 17.6 17.6 Loss on issuance of treasury stock.... (2.8) (2.8) Common stock dividends declared....... (152.7) (152.7) _____________________________________________________________________ Balances at June 30, 1993 $7,864.9 $1,414.9 $ 483.9 $6,165.4 $ (199.3) ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
6 Months Ended June 30, ___________________ (Millions) 1994 1993 ____ ____ Cash Flows from Operating Activities: Net income....................................................... $ 178.1 $ 540.2 Adjustments to reconcile net income to net cash used for operating activities: Cumulative effect adjustments.................................. - (227.8) Extraordinary loss on debenture redemption..................... - 4.7 Increase in accrued investment income.......................... (0.5) (75.6) Decrease (increase) in premiums due and other receivables...... 153.1 (525.4) Increase in reinsurance recoverables and receivables........... (254.3) (165.4) Increase in deferred policy acquisition costs.................. (93.0) (66.6) Depreciation and amortization.................................. 94.3 102.8 (Increase) decrease in federal and foreign income taxes........ (326.6) 72.9 Net (decrease) increase in other assets and other liabilities.. (692.3) 492.3 Increase in insurance reserve liabilities...................... 755.9 560.8 Net sales (purchases) of debt trading securities............... 52.3 (1,619.0) Increase in minority interest.................................. (22.7) (7.4) Gain on sale of subsidiary..................................... - (15.0) Net realized capital losses (gains)............................ 19.3 (32.8) Amortization of net investment discount........................ (51.8) (55.9) Other, net..................................................... 18.2 (158.4) _________ _________ Net cash used for operating activities....................... (170.0) (1,175.6) _________ _________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 12,258.8 1,941.3 Debt securities held for investment............................ 5.6 - Equity securities.............................................. 398.9 405.8 Mortgage loans................................................. 67.4 6.3 Real estate.................................................... 316.6 141.2 Short-term investments......................................... 30,322.7 33,025.6 Investment repayments of: Debt securities available for sale............................. 2,125.8 2,817.2 Debt securities held for investment............................ 330.7 - Mortgage loans................................................. 1,107.8 1,035.2 Cost of investments in: Debt securities available for sale............................. (14,799.0) (5,635.5) Debt securities held for investment............................ (46.3) - Equity securities.............................................. (493.6) (236.9) Mortgage loans................................................. (159.7) (88.1) Real estate.................................................... (20.1) (46.5) Short-term investments......................................... (30,444.4) (32,557.7) Proceeds from disposal of subsidiary.............................. - 93.1 Increase in property, plant & equipment........................... (65.5) (75.2) Net decrease in Separate Accounts................................. 4.7 5.2 Other, net........................................................ 127.5 20.1 _________ _________ Net cash provided by investing activities....................... 1,037.9 851.1 _________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 1,757.9 1,971.4 Withdrawals of investment contracts............................... (2,342.6) (2,182.0) Issuance of long-term debt........................................ 65.5 12.5 Stock issued under benefit plans.................................. 19.6 14.8 Repayment of long-term debt....................................... (93.0) (266.8) Net increase in short-term debt................................... 138.4 333.5 Dividends paid to shareholders.................................... (155.7) (152.5) _________ _________ Net cash used for financing activities.......................... (609.9) (269.1) _________ _________ Effect of exchange rate changes on cash and cash equivalents....................................................... (3.6) (6.3) _________ _________ Net increase (decrease) in cash and cash equivalents................. 254.4 (599.9) Cash and cash equivalents, beginning of period....................... 1,557.8 2,415.0 _________ _________ Cash and cash equivalents, end of period............................. $ 1,812.2 $ 1,815.1 _________ _________ _________ _________ Supplemental Cash Flow Information: Interest paid..................................................... $ 37.7 $ 30.9 _________ _________ _________ _________ Income taxes paid................................................. $ 18.0 $ 97.7 _________ _________ _________ _________ See Condensed Notes to Financial Statements.
8 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1993 financial information to conform to 1994 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) Revenue Recognition Property-casualty premiums are generally recognized as revenue on a pro rata basis over the policy term. Certain policies allow the company to charge additional premiums as a result of recognizing additional claim and expense costs under the policies. Such premiums are recognized when the related losses are provided. For universal life and certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in fees and other income. Other amounts received for these contracts are reflected as deposits and are not recorded as revenue. Life insurance premiums, other than premiums for universal life and certain annuity contracts, are recorded as premium revenue when due. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. Group Health and Life premiums are generally recorded as premium revenue over the term of coverage. Some group contracts allow for premiums to be adjusted to reflect emerging experience. Such premiums are recognized as the related experience emerges. Fees for contracts providing claim processing services only are recorded over the period the service is provided and are reflected in fees and other income. (3) Accounting Changes Under certain insurance contracts with deductible features, the company is obligated to pay the claimant for the full amount of a claim. The company is subsequently reimbursed from the policyholder for the deductible. Prior to March 31, 1994, unpaid claim reserves were reported net of such deductibles. On March 31, 1994, the company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, which requires that unpaid claims under certain insurance contracts be reported on a gross basis. Deductible amounts recoverable from policyholders of $432.0 million are included in other assets at June 30, 1994. 9 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (3) Accounting Changes (Continued) In 1993, the company adopted, retroactive to January 1, 1993, Financial Accounting Standard ("FAS") No. 112, Employers' Accounting for Postemployment Benefits, which requires that employers accrue the cost and recognize the liability for providing certain benefits (primarily long-term disability) to former or inactive employees after employment but before retirement. A cumulative effect charge of $48.5 million ($.44 per common share), net of taxes of $26.1 million, related to the adoption of this standard is reflected in the Consolidated Statement of Income for the six months ended June 30, 1993. Adoption of FAS No. 112 had no impact on income from continuing operations before extraordinary item and cumulative effect adjustments for the three and six months ended June 30, 1993. During 1993, the company elected to change its accounting policy for reporting reserves for current and expected workers' compensation life table indemnity claims to a discounted basis. These reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality and morbidity assumptions that reflect current company and industry experience. Management believes that this change better reflects the economic value of its obligations and improves the matching of revenues and expenses (i.e., investment earnings from underlying assets are matched with the accretion of the liability as those amounts occur over time). Additionally, it is consistent with the practice of the company's principal competitors and is permitted by state regulatory authorities. The company implemented discounting of reserves for workers' compensation life table indemnity claims retroactive to January 1, 1993, and reported a cumulative effect benefit of $250.0 million ($2.26 per common share), net of taxes of $134.7 million, in the Consolidated Statement of Income for the six months ended June 30, 1993. The change in accounting for workers' compensation life table indemnity reserves had no impact on income from continuing operations before extraordinary item and cumulative effect adjustments for the three and six months ended June 30, 1993. The company's reserves for workers' compensation life table indemnity claims at June 30, 1994 were 20.2% of its total workers' compensation reserves for unpaid claims and claim adjustment expenses. During 1993, the Emerging Issues Task Force of the FASB reached a consensus on a recommended method of accounting for retrospectively rated reinsurance contracts. The company changed its method of accounting for such contracts to conform to the consensus. Accordingly, the company reported a cumulative effect adjustment, retroactive to January 1, 1993, to recognize an asset for the amounts due from reinsurers related to the experience through January 1, 1993 under retrospectively rated reinsurance contracts. These contracts provided for amounts to be returned to the company based on favorable cumulative loss experience. The company reported a cumulative effect benefit related to the change in accounting for retrospectively rated reinsurance contracts of $26.3 million ($.24 per common share), net of taxes of $8.6 million, in the Consolidated Statement of Income for the six months ended June 30, 1993. The effect of the change for the three and six months ended June 30, 1993 was an increase to income from continuing operations before extraordinary item and cumulative effect adjustments of $3.3 million ($.03 per share). 10 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Future Application of Accounting Standards In May 1993, the FASB issued FAS No. 114, Accounting by Creditors for Impairment of a Loan. This statement requires that loans be impaired when it is probable that a creditor will be unable to collect all amounts (i.e., principal and interest) contractually due, and the impairment be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. The statement also allows impairments to be measured based on the loan's market price or the fair value of the collateral if the loan is collateral dependent. This statement will be effective for 1995 financial statements, although early adoption is permissible. The company has not yet determined the timing or impact of adoption of this statement. (5) Discontinued Products In January 1994, the company announced its decision to discontinue the sale of its fully guaranteed large case pension products, which include guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs") sold to large case pension customers. A reserve representing management's best estimate of anticipated future losses was established at December 31, 1993. Accordingly, results of discontinued products for the three and six months ended June 30, 1994 were charged against the reserve for discontinued products and did not impact the net income of the company. 11 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) Results of discontinued products included in the Consolidated Statement of Income were as follows (in millions):
Charged to Guaranteed Single- Reserve for Investment Premium Future Three months ended June 30, 1994 Contracts Annuities Total Losses Net* ______________________________________________________________________________________________________ Premiums $ - $ 5.5 $ 5.5 $ - $ 5.5 Net investment income 156.5 106.9 263.4 - 263.4 Net realized capital losses (31.6) (10.9) (42.5) 42.5 - Interest earned on receivable from continuing business 4.9 6.9 11.8 - 11.8 Other income 3.6 3.6 7.2 - 7.2 __________________________________________________________________ Total revenue 133.4 112.0 245.4 42.5 287.9 __________________________________________________________________ Current and future benefits 190.1 112.6 302.7 (15.8) 286.9 Operating expenses 0.3 0.7 1.0 - 1.0 __________________________________________________________________ Total benefits and expenses 190.4 113.3 303.7 (15.8) 287.9 __________________________________________________________________ Results of discontinued products $ (57.0) $ (1.3) $ (58.3) $ 58.3 $ - ______________________________________________________________________________________________________ __________________________________________________________________ Charged to Guaranteed Single- Reserve for Investment Premium Future Six months ended June 30, 1994 Contracts Annuities Total Losses Net* ______________________________________________________________________________________________________ Premiums $ - $ 44.7 $ 44.7 $ - $ 44.7 Net investment income 327.5 215.8 543.3 - 543.3 Net realized capital losses (57.1) (26.4) (83.5) 83.5 - Interest earned on receivable from continuing business 9.6 13.8 23.4 - 23.4 Other income 6.5 6.4 12.9 - 12.9 __________________________________________________________________ Total revenue 286.5 254.3 540.8 83.5 624.3 __________________________________________________________________ Current and future benefits 392.7 263.9 656.6 (36.4) 620.2 Operating expenses 2.2 1.9 4.1 - 4.1 __________________________________________________________________ Total benefits and expenses 394.9 265.8 660.7 (36.4) 624.3 __________________________________________________________________ Results of discontinued products $ (108.4) $ (11.5) $ (119.9) $ 119.9 $ - ______________________________________________________________________________________________________ __________________________________________________________________ * Amounts are reflected in the Consolidated Statement of Income, except for interest of $11.8 million and $23.4 million for the three and six months ended June 30, 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
Deposits of $34.3 million and $168.5 million were received under pre-existing GIC contracts for the three and six months ended June 30, 1994, respectively. In accordance with FAS No. 97, such deposits are not included in premiums or revenue. 12 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) Assets and liabilities of discontinued products included in the Consolidated Balance Sheets were as follows (in millions):
June 30, 1994 December 31, 1993 ______________________________ ______________________________ Guaranteed Single- Guaranteed Single- Investment Premium Investment Premium Contracts Annuities Total Contracts Annuities Total ______________________________ ______________________________ Debt securities available for sale $ 4,126.1 $ 3,238.7 $ 7,364.8 $ 4,690.9 $ 3,578.1 $ 8,269.0 Mortgage loans 3,152.2 1,771.7 4,923.9 3,468.2 1,950.9 5,419.1 Real estate 489.4 25.1 514.5 534.5 - 534.5 Short-term and other investments 347.8 173.9 521.7 399.7 72.8 472.5 ______________________________________________________________________ Total investments 8,115.5 5,209.4 13,324.9 9,093.3 5,601.8 14,695.1 Current and deferred income taxes 305.3 131.1 436.4 253.7 26.2 279.9 Receivable from continuing business 399.6 448.8 848.4 390.0 435.0 825.0 Other 12.4 2.1 14.5 7.6 1.3 8.9 ______________________________________________________________________ Total assets $ 8,832.8 $ 5,791.4 $14,624.2 $ 9,744.6 $ 6,064.3 $15,808.9 __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Future policy benefits $ - $ 5,077.0 $ 5,077.0 $ - $ 5,079.1 $ 5,079.1 Policyholders' funds left with the company 8,326.9 - 8,326.9 8,976.6 - 8,976.6 Reserve for future losses on discontinued products 491.6 658.5 1,150.1 600.0 670.0 1,270.0 Other 14.3 55.9 70.2 168.0 315.2 483.2 ______________________________________________________________________ Total liabilities $ 8,832.8 $ 5,791.4 $14,624.2 $ 9,744.6 $ 6,064.3 $15,808.9 __________________________________________________________________________________________________________ __________________________________________________________________________________________________________
Net unrealized capital gains and losses on available for sale debt securities of discontinued products are included in other liabilities of discontinued products and are not reflected in consolidated shareholders' equity. The reserve for future losses on GICs is included in policyholders' funds left with the company and the reserve for future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheets. The reserve for anticipated future losses on discontinued products represents the present value of the difference between (a) the expected cash flows from the assets supporting discontinued products, and (b) the cash flows expected to be required to meet the obligations of the outstanding contracts. Calculation of the reserve for future losses on discontinued products required projection of both the amount and the timing of cash flows over approximately the next 30 years, including consideration of, among other things, future investment results, participant withdrawal and mortality rates and cost of asset management and customer service. The amounts of cash flows on the assets of the discontinued products projected to occur in each period are risk- adjusted such that the present value (at the risk free rate at December 31, 1993, consistent with the duration of the liabilities) of those cash flows approximates the current fair value of the assets. 13 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) At June 30, 1994 and December 31, 1993, estimated future after-tax capital losses of approximately $153 million and $190 million ($235 million and $292 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs and $53 million and $70 million ($82 million and $108 million, pretax), respectively, attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Projections of future investment results took into account both industry and company data and were based on recent performance of mortgage loan and real estate assets, projections regarding certain levels of future defaults and prepayments, and assumptions regarding future real estate market conditions, which assumptions management believes are reasonable. The activity in the reserve for future losses on discontinued products for the six months ended June 30, 1994 was as follows (in millions):
Guaranteed Single- Investment Premium Contracts Annuities Total _____________________________________________________________________________________ Reserve at December 31, 1993 $ 600.0 $ 670.0 $ 1,270.0 Loss on discontinued products (108.4) (11.5) (119.9) ______________________________________________ Reserve at June 30, 1994 $ 491.6 $ 658.5 $ 1,150.1 _____________________________________________________________________________________ ______________________________________________
The average contractual yields guaranteed on the contracts relating to the discontinued products exceed the average historical and expected future yields on assets supporting the products. The resulting anticipated negative cash flows will be funded from the cash flows of the company's continuing business. Receivables of $848.4 million and $825.0 million to fund these negative cash flows (which accrue interest at the rates used to measure the loss for the two products) are included in the discontinued products' assets at June 30, 1994 and December 31, 1993, respectively. These receivables are fully offset by payables from the company's continuing business. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheets. The activity in the receivable from continuing business for the six months ended June 30, 1994 was as follows (in millions):
Guaranteed Single- Investment Premium Contracts Annuities Total _____________________________________________________________________________________ Receivable at December 31, 1993 $ 390.0 $ 435.0 $ 825.0 Interest earned 9.6 13.8 23.4 ______________________________________________ Receivable at June 30, 1994 $ 399.6 $ 448.8 $ 848.4 _____________________________________________________________________________________ ______________________________________________
14 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) Pursuant to a segmentation plan approved in 1983 by the New York Insurance Department, the combined assets supporting discontinued products were segregated coincident with the receipt of premiums and deposits on the discontinued products. Assets of the discontinued products were distinguished, physically, operationally and for financial reporting purposes, from the remaining assets of the company. Management believes the timing and amount of cash flows with respect to the discontinued products have been estimated with reasonable accuracy, and the financial statements reflect management's best estimate of the most likely cash flows that will occur. However, future periods may include a charge or benefit equal to the present value of the differences, if any, between future projected cash flows and current estimates. (6) Severance and Facilities Charges In recent years, management has placed a strong focus on reducing costs in order to improve the competitive position of the company's businesses. Among the steps taken to reduce costs was the elimination of approximately 4,800 positions in the latter half of 1992 and through 1993. The decision to undertake these actions resulted in an after-tax charge of $96 million ($145 million pretax) to second quarter 1992 earnings. The 1992 severance and facilities charge included the following (pretax, millions):
Vacated Pension Severance Leased Curtailment Related Property Gain Total _________ ________ ___________ _______ Health and Life Insurance and Services. $ 65.3 $ - $ (11.2) $ 54.1 Financial Services..................... 7.0 - (1.4) 5.6 Commercial Property-Casualty Insurance and Services............... 39.9 7.1 (8.2) 38.8 Personal Property-Casualty............. 38.8 13.8 (6.6) 46.0 International.......................... .6 - (.1) 0.5 _______ ________ _______ _______ Total Company (1)...................... $ 151.6 $ 20.9 $ (27.5) $ 145.0 _______ ________ _______ _______ _______ ________ _______ _______ (1) The pension curtailment gain is a non-cash item. All other items shown above required cash outlays.
Standard severance benefit arrangements that would be available to employees whose positions were eliminated were communicated through company newsletters to all employees when the restructuring action was adopted and announced in June 1992. By the end of the second quarter of 1993, all affected individuals had been notified that their positions were being eliminated. The excess leased office space resulting from the elimination of these positions was substantially vacated by year-end 1993. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next three years. By year-end 1993, all expected actions under the 1992 restructuring had been completed and after-tax savings of approximately $100 million ($130 million annualized) had been achieved. 15 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Severance and Facilities Charges (Continued) In late 1993, management decided upon a plan under which it would take additional restructuring actions as part of its strategic and financial assessment of the company's businesses. That assessment was formally concluded and announced to the marketplace on January 28, 1994. As a result of these planned actions, the company announced in January 1994, a $200 million after tax ($308 million pretax) severance and facilities charge to fourth quarter 1993 earnings. The planned actions include the elimination of approximately 4,000 positions. As a result of the planned elimination of these positions, the company determined that it would have excess office space. Accordingly, the severance and facilities charge also included costs related to vacating the excess leased office space, and costs related to abandoning and preparing for sale an owned property in Hartford, Connecticut. The 1993 severance and facilities charge included the following (pretax, millions):
Facility and Vacated Severance Asset Write- Leased Related Off Related Property Other Total _________ ____________ ________ _______ _______ Health and Life Insurance and Services. $ 49.7 $ 23.8 $ 11.8 $ 3.2 $ 88.5 Financial Services..................... 22.9 12.5 2.4 14.4 (1) 52.2 Commercial Property-Casualty Insurance and Services............... 70.6 20.5 12.7 3.8 107.6 Personal Property-Casualty............. 31.7 5.9 8.0 1.8 47.4 International.......................... 5.5 3.3 2.0 1.5 12.3 _______ _______ _______ _______ _______ Total Company (3)...................... $ 180.4 $ 66.0 (2) $ 36.9 $ 24.7 $ 308.0 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ (1) Includes a charge of $13.0 million related to the cessation of a business providing administrative services to defined contribution pension plans. The charge includes broker buyout, direct losses on run-off of the existing contracts and other related costs. (2) Facility and asset write-off related charges include the write-down to realizable value of a company property that will be abandoned. Realizable value was determined to be the estimated selling price of the property (based on an internally prepared appraisal). The charge does not include operating costs expected to be incurred prior to the date of abandonment of the property. Facility and asset write-off related charges also include costs to retire personal computers and printers used by employees whose positions were, or are expected to be, eliminated and other related costs. (3) Facility and asset write-off related charges are non-cash costs. All other items shown above required, or will require, cash outlays.
Severance benefit arrangements that would be available to employees whose positions were eliminated were communicated to all employees prior to the announcement of the restructuring actions through an employee handbook and company newsletters. The composition of the positions expected to be eliminated (e.g., business unit, location and levels of affected employees) was generally known at the time the restructuring actions were approved by senior management. Vacating the resulting excess leased office space is expected to be substantially completed by year-end 1994. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next six years. The owned property that is being vacated and prepared for sale is expected to be fully vacated by the end of the first quarter of 1995 and has been written down ($37 million, pretax) to its estimated net realizable value. 16 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Severance and Facilities Charges (Continued) During the three and six months ended June 30, 1994, the company charged costs of $31 million and $51 million, respectively, related to the cost reduction actions to the severance and facilities reserve established in 1993. Of the approximately 4,000 positions expected to be eliminated, approximately 700 had been eliminated by June 30, 1994 and the related severance benefits charged against the reserve. The remaining actions are expected to be substantially completed in 1994 and are expected to produce annual after-tax savings of approximately $200 million by 1995, including savings resulting from a modification of the company's postretirement health care plan. The total estimated savings of approximately $200 million are expected to benefit individual segments by 1995 as follows:
Health and Life Insurance and Services................ $ 80 Financial Services.................................... 5 Commercial Property-Casualty Insurance and Services... 90 Personal Property-Casualty............................ 25 International......................................... - _____ Total estimated savings............................... $ 200 _____ _____
(7) Investments Net investment income includes amounts allocable to experience rated contractholders of $198 million and $249 million for the three months ended June 30, 1994 and 1993, respectively, and $388 million and $479 million for the six months ended June 30, 1994 and 1993, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains and losses include a loss of $58 million and a gain of $2 million for the three months ended June 30, 1994 and 1993, respectively, and losses of $110 million and $28 million for the six months ended June 30, 1994 and 1993, respectively, allocable to experience rated contractholders. Realized capital gains and losses allocable to experience rated contractholders are deducted from net realized capital gains and losses reflected in the income statement and an offsetting amount is reflected on the balance sheet in policyholders' funds left with the company. During 1994, the company sold a held for investment debt security with a carrying value of $7 million due to significant deterioration in the issuer's creditworthiness. The sale resulted in an after-tax loss of $1 million. 17 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (8) Federal and Foreign Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. At June 30, 1994, $350 million of net unrealized capital losses on available for sale debt and equity securities were reflected in shareholders' equity without deferred tax benefits. For federal tax reporting purposes, capital losses are deductible only against capital gains in the period of sale or during the carryback and carryforward periods (three and five years, respectively). Due to the expected full utilization of capital gains in the carryback period and the uncertainty of future capital gains, deferred tax benefits related to the $350 million of net unrealized losses were not reflected in shareholders' equity. This had no impact on net income for the three and six months ended June 30, 1994. In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted which resulted in an increase in the federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. Three and six month 1993 results were not restated for the effects of this change. (9) Reinsurance Ceded earned premiums were $.3 billion for both the three months ended June 30, 1994 and 1993, and $.6 billion for both the six months ended June 30, 1994 and 1993. Ceded current and future benefits were $.3 billion and $.2 billion for the three months ended June 30, 1994 and 1993, respectively, and $.7 billion and $.8 billion for the six months ended June 30, 1994 and 1993, respectively. (10) Debt The company's $800 million committed long-term credit facility established with a group of worldwide banks was due to expire on July 31, 1994. Effective July 27, 1994, the company terminated this credit facility and entered into new credit facilities aggregating $1 billion with a group of worldwide banks. One $500 million facility terminates in July 1995 and the other $500 million facility terminates in July 1999. Various interest rate options are available under each facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .08% to .375% per annum under the short-term credit agreement and from .1% to .5% per annum under the medium-term credit agreement, depending upon the company's long-term senior unsecured debt rating. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5.0 billion. These facilities also support the company's commercial paper borrowing program. On June 15, 1993, the company redeemed $200 million principal amount of its 8 1/8% Debentures whose scheduled maturity was 2007. The company recognized an extraordinary loss on the debenture redemption of $4.7 million (after taxes of $2.4 million). 18 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (11) Sale of Subsidiaries On June 30, 1993, the company completed the sale of its U.K. life and investment management operations. The company realized an after-tax loss of $12.0 million on the sale as well as $37.4 million of tax benefits from cumulative operating losses of the subsidiary not previously tax benefited. As part of the 1992 sale of American Re-Insurance Company, formerly a wholly-owned subsidiary, the company received 70,000 shares of American Re Corporation's (the new holding company) Junior Cumulative Redeemable Exchangeable Preferred Stock which were redeemed in the first quarter of 1993 resulting in an after- tax gain of $27 million. (12) Supplemental Cash Flow Information Significant non-cash investing and financing activities include acquisition of real estate through foreclosures of mortgage loans amounting to $149 million and $201 million for the six months ended June 30, 1994 and 1993, respectively. (13) Earnings Per Share Earnings per share are computed using net income divided by the weighted average number of common shares outstanding. There is not a significant difference between primary and fully diluted earnings per share. (14) Commitments and Contingent Liabilities Asbestos and Environmental-Related Claims Reserving for asbestos and environmental-related claims is subject to significant uncertainties. Because of these significant uncertainties and the likelihood that they will not be resolved in the near future, management is unable to make a reasonable estimate as to the ultimate amount of losses for all asbestos and environmental-related claims and related litigation expenses and as such is unable to determine whether or not the adverse effect of such losses will be material to the company's future results, liquidity and/or capital resources. Reserves for asbestos and environmental-related liabilities are evaluated by management regularly, and, subject to the significant uncertainties mentioned above, adjustments are made to such reserves as developing loss patterns and other information appear to warrant. Reserves for asbestos and environmental-related claims, as reflected on the Consolidated Balance Sheets, were as follows (pretax and before reinsurance; in millions):
June 30, December 31, 1994 1993 ______________________________________________________________________ Environmental Liability $ 387 $ 234 Asbestos Bodily Injury 290 248 Asbestos Property Damage 33 29 _______________________________ Total Asbestos and Environmental-Related Reserves $ 710 $ 511 ______________________________________________________________________ _______________________________
19 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (14) Commitments and Contingent Liabilities (Continued) Commercial General Liability The company has noted evidence of adverse loss developments in its commercial general liability line of business. The company believes that such developments largely are attributable to the unusual frequency and size of claims in this line of business. The company also believes that the unusual frequency and size of construction defect claims brought against contractor policyholders (observed by the company in 1994) and the increasing size of other types of claims brought against contractor policyholders (observed by the company to be continuing in 1994) are contributing to these loss developments. The company believes that it is reasonably possible that these adverse loss developments will continue. If they do, they would adversely affect the company's future results of operations, although the company is unable at this time to estimate the extent to which results would be affected. Management has and continues to review the factors contributing to these developments (by, for example, segregating and examining data on a policyholder by policyholder basis) and to adjust its reserves as more current data becomes available. (15) Litigation Beginning in 1988, the attorneys general of 20 states each filed separate antitrust suits against The Aetna Casualty and Surety Company ("Aetna") and over 30 other insurers, reinsurers, trade associations and brokers. The suits are on behalf of the states themselves and, in most cases, alleged classes of their political subdivisions. Additionally, 20 class actions were filed in various courts on behalf of private plaintiffs. The attorneys general suits and the private plaintiff actions all were consolidated for pretrial proceedings in the United States District Court for the Northern District of California ("U.S. District Court"). All of the suits allege that the defendants violated various federal or state antitrust laws (or laws related to business trade practices) by, among other things, conspiring to restrict the terms and coverages of commercial general liability insurance and also reinsurance. The state suits seek civil penalties, unspecified damages and extensive injunctive relief. The private suits seek unspecified treble damages and broad injunctive relief. In September 1989, the U.S. District Court entered an order granting the motions of the defendants (including Aetna), dismissing with prejudice all federal antitrust claims in all of the complaints before it. The U.S. District Court declined to exercise jurisdiction over the state claims in the attorneys general complaints. 20 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (15) Litigation (Continued) After unsuccessfully attempting to have the federal claims reinstated before the U.S. District Court, the 20 states and most of the private plaintiffs then appealed the U.S. District Court's decision dismissing the federal claims to the United States Court of Appeals for the Ninth Circuit ("Court of Appeals"). In June 1991, the Court of Appeals reversed the U.S. District Court's decision dismissing the federal antitrust claims and remanded those claims to the U.S. District Court for trial. The defendants subsequently filed a motion for rehearing; in October 1991, the Court of Appeals denied this motion. In January 1992, Aetna and several other defendants filed a petition for a writ of certiorari with the Supreme Court of the United States ("Supreme Court"), seeking review of the Court of Appeals' decision. On October 5, 1992, the Supreme Court granted the defendants' petition. On June 28, 1993, the Supreme Court issued its decision returning the suit to the Court of Appeals for further proceedings consistent with the standards articulated by the Supreme Court. The Supreme Court held unanimously that Aetna and the other defendant insurers did not forfeit their otherwise available McCarran-Ferguson Act immunity when they acted with reinsurers to produce acceptable policy terms. The Supreme Court also held that Aetna and the other defendant insurers could lose their immunity under the "boycott" exception to the McCarran exemption only if the plaintiffs could prove that the defendant insurers attempted to coerce acceptance of insurance policy terms by means of refusals to deal in separate and unrelated transactions. On October 7, 1993, the Court of Appeals remanded the case to the U.S. District Court for further proceedings. On March 23, 1994, the Court issued an order directing the parties to commence discovery on the remaining issues in the case. Aetna is continuously involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for asbestos and environmental-related claims. These lawsuits and other factors make reserving for asbestos and environmental- related claims subject to significant uncertainties. While the ultimate outcome of the litigation described herein cannot be determined at this time, such litigation (other than that related to asbestos and environmental-related claims, which is subject to significant uncertainties), net of reserves established therefor and giving effect to reinsurance, 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. Future results are expected to be adversely affected by losses for asbestos and environmental-related claims and litigation expense. Due to significant uncertainties, management is unable to determine whether or not such effects on operations in future periods will be material. 21 Independent Auditors' Review Report The Board of Directors Aetna Life and Casualty Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of June 30, 1994, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1994 and 1993, and the related condensed consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 1994 and 1993. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1993, 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 8, 1994, we expressed an unqualified opinion on those consolidated financial statements. Our report referred to changes in 1993 in the company's accounting for certain investments in debt and equity securities, reinsurance of short-duration and long-duration contracts, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1993, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG PEAT MARWICK LLP Hartford, Connecticut July 28, 1994 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 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................. $ 2,839.0 $ 2,688.8 5.6% $ 5,581.3 $ 5,311.1 5.1% Net investment income................ 1,121.0 1,252.6 (10.5) 2,247.5 2,502.5 (10.2) Fees and other income................ 458.4 411.9 11.3 909.1 823.4 10.4 Net realized capital gains (losses).. (13.4) (3.4) - (19.3) 32.8 - _________ _________ _________ _________ Total revenue.................... 4,405.0 4,349.9 1.3 8,718.6 8,669.8 .6 Current and future benefits.......... 3,114.5 3,088.7 .8 6,232.1 6,133.8 1.6 Operating expenses................... 924.4 917.4 .8 1,879.4 1,815.6 3.5 Amortization of deferred policy acquisition costs................... 177.9 192.7 (7.7) 362.5 378.0 (4.1) _________ _________ _________ _________ Total benefits and expenses...... 4,216.8 4,198.8 .4 8,474.0 8,327.4 1.8 _________ _________ _________ _________ Income from continuing operations before income taxes, extraordinary item and cumulative effect adjustments......................... 188.2 151.1 24.6 244.6 342.4 (28.6) Income taxes......................... 55.8 .3 - 66.5 52.3 27.2 _________ _________ _________ _________ Income from continuing operations before extraordinary item and cumulative effect adjustments....... 132.4 150.8 (12.2) 178.1 290.1 (38.6) Discontinued operations, net of tax.. - - - - 27.0 (100.0) _________ _________ _________ _________ Income before extraordinary item and cumulative effect adjustments....... 132.4 150.8 (12.2) 178.1 317.1 (43.8) Extraordinary loss on debenture redemption, net of tax.............. - (4.7) 100.0 - (4.7) 100.0 Cumulative effect adjustments, net of tax.......................... - - - - 227.8 (100.0) _________ _________ _________ _________ Net income....................... $ 132.4 $ 146.1 (9.4) $ 178.1 540.2 (67.0) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)......... $ (8.0) $ (2.5) - $ (15.5) $ 19.8 - _________ _________ _________ _________ _________ _________ _________ _________ Results per common share: Income from continuing operations before extraordinary item and cumulative effect adjustments....... $ 1.17 $ 1.36 (14.0) $ 1.58 $ 2.62 (39.7) Discontinued operations, net of tax.. - - - - .25 (100.0) _________ _________ _________ _________ Income before extraordinary item and cumulative effect adjustments....... 1.17 1.36 (14.0) 1.58 2.87 (44.9) Extraordinary loss on debenture redemption, net of tax.............. - (.04) 100.0 - (.04) 100.0 Cumulative effect adjustments, net of tax.......................... - - - - 2.06 (100.0) _________ _________ _________ _________ Net income....................... $ 1.17 $ 1.32 (11.4) $ 1.58 $ 4.89 (67.7) _________ _________ _________ _________ _________ _________ _________ _________
Overview ________ Net income was $132 million and $178 million for the three and six months ended June 30, 1994, respectively, compared with $146 million and $540 million for the same periods a year ago. Year- to-date net income in 1993 reflected a net cumulative effect benefit of $228 million relating to changes in accounting for (i) discounting workers' compensation life table indemnity reserves ($250 million after-tax benefit), (ii) postemployment benefits ($48 million after-tax charge) and (iii) retrospectively rated reinsurance contracts ($26 million after-tax benefit). Year-to- date net income in 1993 also included a gain from discontinued operations of $27 million realized on the redemption of preferred stock received in connection with the 1992 sale of American Re- Insurance Company. Net income for the three and six months ended June 30, 1993 included a $5 million extraordinary loss on redemption of debentures. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Income from continuing operations before extraordinary item and cumulative effect adjustments for the three and six months ended June 30, 1994 decreased by $18 million and $112 million, respectively, compared with the same periods a year ago. Results for the three and six months ended June 30, 1994 included after- tax catastrophe losses of $29 million and $153 million, respectively, related primarily to the Los Angeles earthquake and the severe winter weather occurring in January and February. Catastrophe losses for the three and six months ended June 30, 1993 were $16 million and $48 million (after-tax), respectively. Second quarter and year-to-date results in 1994 also reflected increased charges for additions to loss and loss expense reserves for prior accident years in the Commercial Property-Casualty segment. Such reserve additions primarily reflected additions to reserves for environmental-related claims and were $82 million and $117 million (after tax and net of reinsurance) for the three and six months ended June 30, 1994, respectively, compared with $17 million and $36 million, respectively, in the same periods of 1993. (Please see "Commercial Property-Casualty" on page 31.) Results for the three and six months ended June 30, 1994 included after-tax reductions of prior year loss reserves in the personal auto business of $54 million and $59 million, respectively, compared with $2 million and $8 million, respectively, for the same periods a year ago. (Please see "Personal Property-Casualty" on page 33.) Net realized capital losses were $8 million and $16 million (after-tax) for the three and six months ended June 30, 1994, respectively, compared with net realized capital losses of $3 million and net realized capital gains of $20 million for the same periods a year ago. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Net Realized Capital Gains and Losses Net realized after-tax capital gains and losses included in the results of continuing operations, allocable to experience rated pension contractholders, and supporting discontinued products for the three and six months ended June 30 were as follows (in millions):
Three Months Ended June 30 Six Months Ended June 30 __________________________ ________________________ 1994 1993 1994 1993 ____ ____ ____ ____ Net realized capital gains from sales........ $ 12.2 $ 94.3 $ 27.4 $ 188.0 Realized capital losses from additions to reserves for mortgage loans and real estate (19.8) (94.8) (42.0) (165.1) Realized capital losses from additions to reserves for debt and equity securities.... (.4) (2.0) (.9) (3.1) _______ _______ _______ _______ Net realized capital gains (losses) from continuing operations...................... $ (8.0) $ (2.5) $ (15.5) $ 19.8 _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital gains (losses) allocable to experience rated pension contractholders (excluded above)........................... $ (37.7) $ (1.5) $ (71.6) $ 18.3 _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital losses on assets supporting discontinued products (excluded above)........................... $ (27.6)* ** $ (54.3)* ** _______ _______ _______ _______ _______ _______ _______ _______ * Net realized capital losses of $27.6 million and $54.3 million for the three and six months ended June 30, 1994, respectively, on assets supporting discontinued products were charged to the reserve for future losses on discontinued products. (Please see "Financial Services - Discontinued Products" on page 28.) ** Net realized capital gains of $9.3 million and $28.7 million for the three and six months ended June 30, 1993, respectively, on assets supporting discontinued products are included in the $2.5 million of capital losses and $19.8 million of capital gains, respectively, shown above.
Net realized capital gains from sales for the six months ended June 30, 1994, as presented above, include a $14 million gain resulting from the sale of a portion of an unconsolidated subsidiary. Net realized capital gains from sales for the three and six months ended June 30, 1993 were primarily attributable to bond sales and also included a $12 million loss on the sale of the U.K. life and investment management operations. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Health and Life Insurance and Services ______________________________________ Operating Summary (Millions) Three Months Ended June 30 Six Months Ended June 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,453.5 $ 1,232.1 18.0% $ 2,803.6 $ 2,418.2 15.9% Net investment income............... 141.4 143.8 (1.7) 285.1 294.7 (3.3) Fees and other income............... 337.2 299.7 12.5 672.5 588.0 14.4 Net realized capital losses......... (.5) (8.8) 94.3 (21.1) (8.0) (163.8) _________ _________ _________ _________ Total revenue.................... 1,931.6 1,666.8 15.9 3,740.1 3,292.9 13.6 Current and future benefits......... 1,273.9 1,100.2 15.8 2,447.4 2,190.0 11.8 Operating expenses.................. 502.1 443.6 13.2 1,000.0 859.4 16.4 Amortization of deferred policy acquisition costs.................. 1.4 5.2 (73.1) 9.2 8.0 15.0 _________ _________ _________ _________ Total benefits and expenses...... 1,777.4 1,549.0 14.7 3,456.6 3,057.4 13.1 _________ _________ _________ _________ Income before income taxes.......... 154.2 117.8 30.9 283.5 235.5 20.4 Income taxes........................ 57.0 40.3 41.4 105.5 82.1 28.5 _________ _________ _________ _________ Income before cumulative effect adjustments................. $ 97.2 $ 77.5 25.4 $ 178.0 $ 153.4 16.0 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax (included above)........ $ (.1) $ (6.1) 98.4 $ (14.1) $ (8.3) (69.9) _________ _________ _________ _________ _________ _________ _________ _________
Health and Life Insurance and Services income before cumulative effect adjustments for the three and six months ended June 30, 1994 increased by $20 million and $25 million, respectively, compared with the same periods a year ago. Excluding net realized capital losses, results for the three and six months increased $14 million and $30 million, respectively, from the prior year. Second quarter and year-to-date 1994 results reflected increased premium and fee revenue due to growth in managed care members and favorable medical claim experience, partially offset by an increase in managed care-related operating expenses to meet both current and future needs. Six month results in 1994 also included an aggregate of $8 million of non-recurring revenue from the settlement of a lawsuit and the termination of an HMO management contract. Second quarter and year-to-date results in 1993 reflected favorable medical experience on several contracts. The number of members covered under health care arrangements was 15.7 million and 15.0 million at June 30, 1994 and December 31, 1993, respectively. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Services __________________ Operating Summary (Millions) Three Months Ended June 30 Six Months Ended June 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums........................... $ 58.2 $ 58.5 (.5)% $ 127.9 $ 107.9 18.5% Net investment income.............. 687.6 771.9 (10.9) 1,376.7 1,550.1 (11.2) Fees and other income.............. 64.6 52.4 23.3 128.5 104.7 22.7 Net realized capital gains (losses) 1.2 7.6 (84.2) (2.1) 29.0 - _________ _________ _________ _________ Total revenue................... 811.6 890.4 (8.8) 1,631.0 1,791.7 (9.0) Current and future benefits........ 699.6 777.3 (10.0) 1,409.6 1,535.5 (8.2) Operating expenses................. 80.7 94.1 (14.2) 163.2 191.4 (14.7) Amortization of deferred policy acquisition costs................ 5.0 3.3 51.5 11.3 6.9 63.8 _________ _________ _________ _________ Total benefits and expenses..... 785.3 874.7 (10.2) 1,584.1 1,733.8 (8.6) _________ _________ _________ _________ Income before income taxes......... 26.3 15.7 67.5 46.9 57.9 (19.0) Income tax (benefits) expenses..... 6.0 (1.6) - 9.8 9.6 2.1 _________ _________ _________ _________ Income before cumulative effect adjustments................ $ 20.3 $ 17.3 17.3 $ 37.1 $ 48.3 (23.2) _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above (a)........................ $ 1,251.5 $ 1,400.1 (10.6) $ 2,682.6 $ 2,651.7 1.2 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)...... $ .9 $ 6.6 (86.4) $ (2.6) $ 19.3 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax, allocable to experience rated pension contractholders (excluded above)................. $ (31.1) $ .4 - $ (65.1) $ 17.2 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax, on assets supporting discontinued products (excluded above)................. $ (27.6)(b) (c) - $ (54.3)(b) (c) - _________ _________ _________ _________ _________ _________ _________ _________ (a) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue. (b) Net realized capital losses of $27.6 million and $54.3 million for the three and six months ended June 30, 1994, respectively, on assets supporting discontinued products were charged to the reserve for future losses on discontinued products. (c) Net realized capital gains of $9.3 million and $28.7 million for the three and six months ended June 30, 1993, respectively, on assets supporting discontinued products are included in the $6.6 million and $19.3 million of capital gains shown above.
Total Segment Results Financial Services income before cumulative effect adjustments for the three and six months ended June 30, 1994 increased by $3 million and decreased by $11 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months increased $9 million and $11 million, respectively, from the prior year. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Second quarter and year-to-date 1993 results included losses (excluding net realized capital gains and losses) on discontinued products of $9 million and $2 million, respectively. Second quarter and year-to-date results of discontinued products in 1993 included $5 million and $19 million, respectively, of gains on futures contracts which are not expected to recur. Results of discontinued products for the three and six months ended June 30, 1994 were charged against the reserve for future losses and did not impact the net income of the segment. (Please see page 28 for a discussion of the results of discontinued products.) Excluding the effects of net realized capital gains and losses, total segment results for the quarter reflected relatively flat earnings in the continuing large case pension businesses and in the annuity and small case pension businesses. Results in these businesses improved for the six months ended June 30, 1994 as compared with the same period a year ago. Second quarter and year-to-date results in 1994 reflected decreases in net investment income, partially offset by reductions in interest rates credited to contractholders and by lower operating expenses. The decline in net investment income was driven principally by lower yields on the bond portfolio, and is expected to continue. Pension and annuity assets under management were $66 billion at June 30, 1994 and 1993. Assets under management attributable to non-guaranteed lines of business increased, while assets attributable to fully guaranteed and experience rated lines of business decreased, from June 30, 1993 to June 30, 1994. Experience Rated Product Lines Pursuant to the terms of the company's experience rated pension contracts, realized capital gains and losses related to assets supporting such contracts are passed through to contractholders, subject, among other things, to certain minimum guarantees, and the effect of such realized capital gains and losses does not impact the company's results. A number of factors, such as customer withdrawal activity, future losses on investments, including mortgage loans, experience rated contract modifications, if any, and significant changes in interest rates could reduce the company's capacity to pass through future investment losses to contractholders (or investment losses currently considered allocable to contractholders) either as a result of triggering minimum guarantee provisions or through exercise of management judgment, thereby adversely affecting the company's future results. 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large case experience rated pension contractholder and participant directed withdrawals were as follows (excluding transfers to other company products) for the three and six month periods ended June 30 (in millions):
Three Months Ended June 30 Six Months Ended June 30 __________________________ ________________________ 1994 1993 1994 1993 ____ ____ ____ ____ Scheduled contract maturities and benefit payments: (1)......... $ 261.6 $ 256.7 $ 501.9 $ 538.5 ________ ________ ________ ________ ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments (2).......... $ 152.3 $ 92.5 $ 312.0 $ 490.2 (3) ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 46.9 $ 69.3 $ 108.6 $ 122.6 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules. (2) Contractholder withdrawals were higher in the second quarter of 1994 than in the second quarter of 1993. Management currently expects full year contractholder withdrawals to be lower in 1994 than they were in 1993. (3) Contractholder withdrawals in 1993 included withdrawals made in connection with the fourth quarter 1992 conversion offer.
The level of contractholder withdrawals is affected by such factors as returns available from other comparable investments, declines in contractholder confidence resulting from, among other things, ratings downgrades or perceived financial difficulties in the industry, and contractholder diversification among investment managers. Discontinued Products In January 1994, the company announced its decision to discontinue the sale of its fully guaranteed large case pension products which include guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs"). As a result of the decision to discontinue the sale of GICs and SPAs to large case pension customers, the company established a reserve of $1,270 million at December 31, 1993 for anticipated future losses on these products. Losses on discontinued products for the three and six months ended June 30, 1994, as shown below, were charged to the reserve and did not affect the company's results of operations. Results of discontinued products for the three and six months ended June 30 were as follows (in millions):
Three Months Ended June 30 __________________________________________ 1994 1993 __________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Negative interest margin (a)............. $ (21.9) $ (.1) $ (22.0) $ (22.9) Net realized capital gains (losses)...... (20.5) (7.1) (27.6) 9.3 Interest earned on receivable from continuing operations.................. 3.1 4.5 7.6 - Non-recurring gains on futures contracts. - - - 4.9 Other, net............................... 2.8 4.0 6.8 8.6 ________ ________ ________ ________ Results of discontinued products, after-tax.............................. $ (36.5) $ 1.3 $ (35.2) $ (.1) ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax. $ (57.0) $ (1.3) $ (58.3) $ (.2) ________ ________ ________ ________ ________ ________ ________ ________
29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Six Months Ended June 30 __________________________________________ 1994 1993 _________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Negative interest margin (a)............. $ (42.4) $ (2.2) $ (44.6) $ (40.6) Net realized capital gains (losses)...... (37.1) (17.2) (54.3) 28.7 Interest earned on receivable from continuing operations.................. 6.2 9.0 15.2 - Non-recurring gains on futures contracts. - - - 18.8 Other, net............................... 3.4 5.1 8.5 19.7 ________ ________ ________ ________ Results of discontinued products, after-tax.............................. $ (69.9) (5.3) $ (75.2) $ 26.6 ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax. $ (108.4) $ (11.5) $ (119.9) $ 40.9 ________ ________ ________ ________ ________ ________ ________ ________ (a) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts exceeds interest earned on invested assets supporting such contracts.
The activity in the reserve for anticipated future losses on discontinued products for the three and six months ended June 30, 1994 was as follows (pretax, in millions):
Six Months Ended June 30, 1994 ________________________________ GICs SPAs Total ____ ____ _____ Reserve at December 31, 1993..... $ 600.0 $ 670.0 $1,270.0 Loss on discontinued products.... (108.4) (11.5) (119.9) ________ ________ ________ Reserve at June 30, 1994......... $ 491.6 $ 658.5 $1,150.1 ________ ________ ________ ________ ________ ________
The reserve for anticipated future losses on discontinued products represents the present value of anticipated net cash flow shortfalls as the liabilities on these products are run off. Such net cash flow shortfalls include losses from anticipated negative interest margins, future capital losses, and operating expenses and other costs expected to be incurred as the liabilities are run off. At June 30, 1994 and December 31, 1993, estimated future after-tax capital losses of $153 million and $190 million ($235 million and $292 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs and $53 million and $70 million ($82 million and $108 million, pretax), respectively, attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Calculation of the losses on discontinuance required projection of both the amount and the timing of cash flows over approximately the next 30 years, including projections of, among other things, future investment results, participant withdrawal and mortality rates, and cost of asset management and customer service. Projections of future investment results took into account both industry and company data and were based on recent performance of mortgage loan and real estate assets, assumptions regarding levels of future defaults and prepayments, and assumptions regarding future real estate market conditions, which assumptions management believes reasonable. At June 30, 1994 and December 31, 1993, assets under management supporting GICs were $8.1 billion and $9.1 billion, respectively. Assets under management supporting SPAs at June 30, 1994 and December 31, 1993 were $5.2 billion and $5.6 billion, respectively. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Scheduled contract maturities and benefit payments and participant directed withdrawals on GICs and SPAs for the three months ended June 30 were as follows (in millions):
Three Months Ended June 30 _______________________________________________ 1994 1993 ____________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Scheduled contract maturities and benefit payments (1).......... $ 520.7 $ 132.4 $ 653.1 $ 570.0 ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 52.1 $ - $ 52.1 $ 68.6 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
Scheduled contract maturities and benefit payments and participant directed withdrawals on GICs and SPAs for the six months ended June 30 were as follows (in millions):
Six Months Ended June 30 _______________________________________________ 1994 1993 ____________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Scheduled contract maturities and benefit payments: (1)......... $1,083.7 $ 264.0 $1,347.7 $1,182.7 ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 126.1 $ - $ 126.1 $ 137.9 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on invested assets. (Please see "General Account Investments" on page 35 for a discussion of investments supporting discontinued products.) 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Commercial Property-Casualty Insurance and Services ___________________________________________________ Operating Summary (Millions) Three Months Ended June 30 Six Months Ended June 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 755.3 $ 779.9 (3.2) $ 1,528.8 $ 1,583.8 (3.5)% Net investment income............... 173.5 195.2 (11.1) 347.8 389.7 (10.8) Fees and other income............... 29.6 34.3 (13.7) 59.0 76.5 (22.9) Net realized capital gains (losses). (12.4) 17.0 - 3.3 35.8 (90.8) _________ _________ _________ _________ Total revenue.................... 946.0 1,026.4 (7.8) 1,938.9 2,085.8 (7.0) Current and future benefits......... 724.7 653.1 11.0 1,471.4 1,341.7 9.7 Operating expenses.................. 209.0 247.5 (15.6) 442.4 478.3 (7.5) Amortization of deferred policy acquisition costs.................. 84.1 84.1 - 172.1 178.0 (3.3) _________ _________ _________ _________ Total benefits and expenses...... 1,017.8 984.7 3.4 2,085.9 1,998.0 4.4 _________ _________ _________ _________ Income (loss) before income taxes... (71.8) 41.7 - (147.0) 87.8 - Income tax (benefits) expenses...... (31.3) 6.9 - (67.1) 12.7 - _________ _________ _________ _________ Income (loss) before cumulative effect adjustments.................. $ (40.5) $ 34.8 - $ (79.9) $ 75.1 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)......... $ (8.1) $ 9.4 - $ 2.1 $ 23.5 (91.1) _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio...................... 130.5% 118.5% - 131.6% 117.5% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio 129.9% 117.5% - 131.4% 116.8% - _________ _________ _________ _________ _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 1.0% 1.6% - 9.1% 2.0% - _________ _________ _________ _________ _________ _________ _________ _________
Commercial Property-Casualty Insurance and Services income before cumulative effect adjustments for the three and six months ended June 30, 1994 decreased $75 million and $155 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and six months decreased $58 million and $134 million, respectively, from the prior year. Catastrophe losses for the three and six months ended June 30, 1994 were $5 million and $89 million, respectively, compared with $8 million and $21 million for the same periods a year ago. Catastrophe losses in 1994 included $88 million ($275 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather occurring in January and February of 1994. Second quarter and year-to-date results in 1994 reflected increased charges for additions to loss and loss expense reserves for prior accident years. Additions (after-tax and net of reinsurance) to prior year loss reserves during the three and six months ended June 30, 1994 were $65 million and $81 million higher, respectively, than in the same periods of 1993 and were primarily for environmental-related claims reserves. During the second quarter of 1994, $77 million ($141 million pretax and before reinsurance) was added to environmental claims reserves. Of the amount added to environmental-related claims reserves in the second quarter of 1994, $64 million ($121 million pretax and before reinsurance) related to estimated indemnity-related liabilities and $13 million ($20 million pretax and before reinsurance) related to litigation expenses. The increase for indemnity-related liabilities related to certain of the environmental claim sites involving some of the policyholders which appear to present the largest risk of liability to the company and to settlements effected with certain policyholders during the period. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Commercial Property-Casualty Insurance and Services (Continued) _______________________________________________________________ The company continues to gather and analyze developing legal and factual information on known environmental-related claims and to reassess its reserving techniques in order to determine whether it can reasonably estimate the likelihood and amount of its liability for such claims. For instance, as claims in litigation mature and approach the trial stage, the company obtains information that may allow it to estimate exposure on certain of the claims involved in the litigation and policyholders may seek to settle their claims with the company. As a result of these reserving and information gathering processes, which are on-going, the company increased its environmental-liability reserves in the first and second quarters of 1994. The estimation of reserves for reported environmental claims is difficult and likely to change as additional information emerges. Because of significant legal and factual uncertainties and the likelihood that these uncertainties will not be resolved in the near future, management is unable to make a reasonable estimate as to the ultimate amount or reasonable range of losses for environmental-related claims. Future results of the company are expected to be affected adversely by losses for environmental- related claims and related litigation expenses. Management is unable to determine whether or not such effect will be material to the company's future results, liquidity and/or capital resources. Three and six month results in 1994 also reflected reduced operating expenses, lower net investment income (driven by lower interest rates) and lower workers' compensation servicing carrier fees than in the same periods a year ago. Premium revenue for the three and six months ended June 30, 1994 was approximately 3 percent lower than in the same periods a year ago, due to stricter general liability underwriting, reduced workers' compensation exposure (in certain states where that business does not offer the potential to achieve acceptable financial returns) and the current competitive marketplace. The company has noted evidence of adverse loss developments in its commercial general liability line of business. The company believes that such developments largely are attributable to the unusual frequency and size of claims in this line of business. The company also believes that the unusual frequency and size of construction defect claims brought against contractor policyholders (observed by the company in 1994) and the increasing size of other types of claims brought against contractor policyholders (observed by the company to be continuing in 1994) are contributing to these loss developments. The company believes that it is reasonably possible that these adverse loss developments will continue. If they do, they would adversely affect the company's future results of operations, although the company is unable at this time to estimate the extent to which results would be affected. Management has and continues to review the factors contributing to these developments (by, for example, segregating and examining data on a policyholder by policyholder basis) and to adjust its reserves as more current data becomes available. The company renewed its principal property catastrophe reinsurance program in May 1994. It provides approximately 90% coverage of losses between $150 million and $400 million. (The company's prior property catastrophe reinsurance program provided approximately 81% coverage of losses between $150 million and $325 million.) Under this program, catastrophe losses below the level specified are retained by the company. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Personal Property-Casualty __________________________ Operating Summary (Millions) Three Months Ended June 30 Six Months Ended June 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 338.2 $ 384.0 (11.9)% $ 682.6 $ 756.0 (9.7)% Net investment income............... 39.2 48.1 (18.5) 81.3 100.2 (18.9) Fees and other income............... 3.4 3.1 9.7 4.0 4.6 (13.0) Net realized capital losses......... (.9) (2.7) 66.7 (5.3) (5.2) (1.9) _________ _________ _________ _________ Total revenue.................... 379.9 432.5 (12.2) 762.6 855.6 (10.9) Current and future benefits......... 207.1 288.3 (28.2) 505.1 600.2 (15.8) Operating expenses.................. 40.2 43.8 (8.2) 92.2 100.6 (8.3) Amortization of deferred policy acquisition costs.................. 72.9 85.9 (15.1) 143.8 156.5 (8.1) _________ _________ _________ _________ Total benefits and expenses...... 320.2 418.0 (23.4) 741.1 857.3 (13.6) _________ _________ _________ _________ Income (loss) before income taxes... 59.7 14.5 - 21.5 (1.7) - Income tax (benefits) expenses...... 19.6 2.7 - 5.2 (5.4) - _________ _________ _________ _________ Income before cumulative effect adjustments................. $ 40.1 $ 11.8 - $ 16.3 $ 3.7 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax (included above)........ $ (.5) $ (2.0) 75.0 $ (3.7) $ (3.4) (8.8) _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio...................... 96.3% 110.4% - 111.0% 116.3% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio 94.3% 108.3% - 110.1% 114.8% - _________ _________ _________ _________ _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 11.2% 3.3% - 12.6% 5.4% - _________ _________ _________ _________ _________ _________ _________ _________
Personal Property-Casualty results before cumulative effect adjustments for the three and six months ended June 30, 1994 increased $28 million and $13 million, respectively, from the same periods a year ago. Excluding net realized capital losses, results for the three and six months ended June 30, 1994 increased $27 million and $13 million, respectively, over the same periods a year ago. Catastrophe losses for the three and six months ended June 30, 1994 were $24 million and $64 million, respectively, compared with $8 million and $27 million for the same periods a year ago. Second quarter and year-to-date catastrophe losses in 1994 included $18 million and $61 million ($27 million and $108 million pretax and before reinsurance), respectively, from the Los Angeles earthquake and the severe winter weather occurring in January and February of 1994. Three and six month results in 1994 included after-tax reductions of prior year loss reserves of $54 million and $59 million, respectively, compared with reductions of prior year loss reserves of $2 million and $8 million, respectively, for the same periods a year ago. These reductions in prior year loss reserves reflected favorable loss trends experienced in the personal auto business. Reserve releases also included $10 million related to the New Jersey Market Transition Facility. The company released these reserves because its potential liability to fund this residual automobile insurance market mechanism has been significantly limited as a result of the settlement of litigation between the insurance industry and the State of New Jersey. The company renewed its principal property catastrophe reinsurance program in May 1994. It provides approximately 90% coverage of losses between $150 million and $400 million. (The company's prior property catastrophe reinsurance program provided approximately 81% coverage of losses between $150 million and $325 million.) Under this program, catastrophe losses below the level specified are retained by the company. 34 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 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 233.8 $ 234.3 (.2)% $ 438.4 $ 445.2 (1.5)% Net investment income............... 79.3 93.6 (15.3) 156.6 167.8 (6.7) Fees and other income............... 23.6 22.4 5.4 45.1 49.6 (9.1) Net realized capital gains (losses). (.8) (16.5) 95.2 5.9 (18.8) - _________ _________ _________ _________ Total revenue.................... 335.9 333.8 .6 646.0 643.8 .3 Current and future benefits......... 209.2 269.8 (22.5) 398.6 466.4 (14.5) Operating expenses.................. 92.4 88.4 4.5 181.6 185.9 (2.3) Amortization of deferred policy acquisition costs.................. 14.5 14.2 2.1 26.1 28.6 (8.7) _________ _________ _________ _________ Total benefits and expenses...... 316.1 372.4 (15.1) 606.3 680.9 (11.0) _________ _________ _________ _________ Income (loss) before income taxes... 19.8 (38.6) - 39.7 (37.1) - Income tax expenses (benefits)...... 4.5 (48.0) - 13.1 (46.7) - _________ _________ _________ _________ Income before cumulative effect adjustments................. $ 15.3 $ 9.4 62.8 $ 26.6 $ 9.6 177.1 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ (.2) $ (10.4) 98.1 $ 2.8 $ (11.3) - _________ _________ _________ _________ _________ _________ _________ _________
International income before cumulative effect adjustments for the three and six months ended June 30, 1994 increased $6 million and $17 million, respectively, compared with the same periods a year ago. Net realized capital losses for the three and six months ended June 30, 1993 included an after-tax capital loss of $12 million realized on the sale of the U.K. life and investment management operations. Excluding net realized capital gains and losses, results for the three and six months ended June 30, 1994 decreased $4 million and increased $3 million, respectively, compared with the same periods a year ago. Second quarter and year-to-date results in 1994 reflect increased earnings in the Pacific Rim, Canada and Chile and from the company's increased investment in a Mexican insurance operation. Three and six month results in 1993 reflected losses from the U.K. life and investment management operations and a $37 million tax benefit from prior year operating losses on those operations. Second quarter and year-to-date results in 1993 were adversely affected by additions to loss and loss expense reserves for prior accident years of $17 million and $20 million, respectively. These reserve additions reflected emerging losses in casualty, property and marine excess of loss coverage written by the company's U.K. reinsurance operation. The losses arose principally from prior year catastrophes in the discontinued marine line of business and from various non-U.S. property business exposures. The reserve additions also resulted from the refinement of the methodology used to establish and evaluate loss reserves for this business and from the availability of better information. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments ___________________________ General account invested assets, net of related impairment reserves, at June 30, 1994 and December 31, 1993 were as follows (in millions):
June 30, December 31, 1994 1993 ___________________________ Debt securities....................... $ 38,591.3 $ 41,544.5 Mortgage loans........................ 13,591.7 14,839.2 Real estate........................... 1,191.0 1,315.8 Equity securities..................... 1,677.7 1,658.9 Short term and other.................. 2,454.1 2,097.4 ___________________________ Total invested assets.............. $ 57,505.8 $ 61,455.8 ___________________________ ___________________________
The decline in invested assets from December 31, 1993 to June 30, 1994 related principally to debt securities and mortgage loans. The decrease in debt securities was due principally to changes in market values of such securities. Debt securities included unrealized capital gains of $1.9 billion at December 31, 1993, compared with unrealized capital losses of $1.0 billion at June 30, 1994. Interest rates rose from December 31, 1993 to June 30, 1994, causing a decrease in the value of debt securities and resulting in the change from unrealized gains to unrealized losses during the period. The decrease in mortgage loans principally reflected prepayments and payments at maturity on mortgage loans. Aetna's investment objective is to fund policyholder and certain corporate liabilities in a manner which enhances shareholder value, subject to appropriate risk constraints. It is the company's intention that this investment objective will be met by a mix of investments which matches the characteristics (e.g., duration and cash flow) of the liabilities they support; diversifies the types of investment risks in its portfolios by interest rate, liquidity, credit and equity price risk; and achieves asset diversification by investment type, industry, issuer and geographic location. Interest rate risk is managed within a tight duration band and credit risk is managed by maintaining high average bond ratings and broad sector exposure. Within the $38.6 billion debt securities portfolio, the company maintains several classes of securities whose market value is partially determined by, among other things, levels or changes in: domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, or credit ratings/spreads. The book and market value of these securities as of June 30, 1994 was as follows (in millions):
Amortized Fair Cost Value _________ _______ Collateralized mortgage obligations (including interest-only and principal-only strips)...... $ 4,437 $ 4,396 Treasury and agency strips: Principal..................................... 728 493 Interest...................................... 537 628 Foreign yield curve notes (Sweden, France and Spain).................... 135 111 LIBOR notes..................................... 30 25 Yen notes....................................... 23 20 Warrants to purchase debt securities............ 12 12
36 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, 1994 and December 31, 1993, the company's investments in debt securities represented 67% and 68%, respectively, of total general account invested assets and were as follows (in millions):
June 30, December 31, 1994 1993 ___________________________ Supporting discontinued products $ 7,364.8 $ 8,269.0 Supporting experience rated products 11,570.3 11,763.8 Supporting remaining products 19,656.2 21,511.7 ___________________________ Total $38,591.3 $41,544.5 ___________________________ ___________________________
Included in the company's total debt security balances at June 30, 1994 and December 31, 1993 were the following categories of debt securities (in millions):
June 30, 1994 December 31, 1993 __________________________________ ___________________________________ Supporting Experience Rated Supporting Experience Rated Pension and Annuity Contracts Pension and Annuity Contracts _____________________________ _____________________________ Total Amount % of Total Total Amount % of Total _____ ______ __________ _____ ______ __________ "Below investment grade" debt securities $ 1,949.7 $ 449.2 22.8% $ 1,970.1 $ 449.6 22.8% Problem debt securities 219.2 21.4 9.8 196.1 26.6 13.6 Potential problem debt securities 122.9 47.6 38.7 191.0 65.1 34.1
Individual debt securities are written down for other than temporary declines in value. Impairment reserves on debt securities are established to provide for losses that management believes have occurred related to securities in the portfolio excluding that portion of the portfolio supporting experience rated pension and annuity contracts. Impairment reserves related to debt securities were as follows (in millions):
June 30, December 31, 1994 1993 __________________________ Allocable to discontinued products $ 34.6 $ 37.9 Allocable to contractholders 10.5 15.0 Allocable to remaining products 43.1 49.9 __________________________ Total $ 88.2 $ 102.8 __________________________ __________________________
37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ After-tax impairment expense related to debt securities was as follows (in millions):
Three Months Ended Six Months Ended June 30, June 30, ___________________ ___________________ 1994 1993 1994 1993 _______ _______ ______ _______ Allocable to discontinued products $ 1.9* $ 1.6 $ 3.6* $ 1.2 Allocable to contractholders** $ .6 $ - $ 2.3 $ .1 Allocable to remaining products $ .4 $ .4 $ .9 $ 1.8 * Impairment expense allocable to discontinued products for the three and six months ended June 30, 1994 does not affect the company's results of operations. ** Impairment expense allocable to contractholders does not affect the company's results of operations.
Management defines problem debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. "Potential problem debt securities" are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing major financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. Provision for losses that are likely to arise from potential problem debt securities, excluding those potential problem debt securities supporting experience rated pension and annuity contracts, is included in the general reserve. 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 for the three and six months ended June 30 was as follows (in millions):
Three Months Ended Six Months Ended June 30, June 30, ___________________ ___________________ 1994 1993 1994 1993 _______ _______ ______ _______ Allocable to discontinued products $ 1.1 $ 1.4 $ 1.9 $ 2.6 Allocable to contractholders $ .8 $ .1 $ 1.3 $ 1.0 Allocable to remaining products $ .8 $ .4 $ 1.7 $ 1.5
At June 30, 1994 and December 31, 1993, the carrying value (fair value) of collateralized mortgage obligations ("CMOs") was $4.4 billion and $6.3 billion, respectively. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the CMOs would be subject to repayment of principal earlier or later than originally anticipated. At June 30, 1994 and December 31, 1993, approximately 90% and 91%, respectively, of the company's CMO holdings consisted of sequential and planned amortization class bonds that are subject to less prepayment and extension risk than other CMO instruments. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Mortgage Loan Investments As of June 30, 1994 and December 31, 1993, the company's mortgage loan investments, net of impairment reserves, supported the following types of business (in millions):
June 30, December 31, 1994 1993 __________________________ Supporting discontinued products $ 4,923.9 $ 5,419.1 Supporting experience rated products 4,356.1 4,732.7 Supporting remaining products 4,311.7 4,687.4 __________________________ Total $13,591.7 $14,839.2 __________________________ __________________________
The mortgage loan portfolio is monitored closely through the review of loan and property information such as debt service coverage, annual operating statements and property inspection reports. This information is evaluated in light of current economic conditions and other factors such as geographic and property-type loan concentrations. Evaluation of individual mortgage loans, including identification of currently performing loans that, for a variety of reasons, management believes warrant closer monitoring, is part of the company's regular review process designed, among other things, to help determine whether adjustments to mortgage loan impairment reserves appear warranted. Mortgage loan impairment reserves are established to provide for 1) probable estimated losses on specific loans (i.e., "specific reserves") and 2) losses that management believes are likely to arise from the overall portfolio excluding that portion of the portfolio supporting experience rated pension contracts (i.e., "general reserve"). As of the dates shown below, the mortgage loan impairment reserves were as follows (in millions):
Balances at June 30, 1994 Balances at December 31, 1993 ______________________________ _______________________________ Specific General Specific General Reserves Reserve Total Reserves Reserve Total ________ _______ _____ ________ _______ _____ Allocable to the company*... $ 598.0 $ 375.0 $ 973.0 $ 639.8 $ 400.0 $1,039.8 Allocable to contractholders 253.1 ** 253.1 268.5 ** 268.5 ________ ________ ________ ________ ________ ________ Total..................... $ 851.1 $ 375.0 $1,226.1 $ 908.3 $ 400.0 $1,308.3 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ * Includes total reserves of $591.5 million ($361.4 million of specific reserves and $230.1 million of general reserves) allocated to discontinued products at June 30, 1994 and total reserves of $647.2 million ($406.0 million of specific reserves and $241.2 million of general reserves) allocated to discontinued products at December 31, 1993. (Please see "Financial Services" on page 29 for a discussion of anticipated future capital losses on assets supporting discontinued products.) ** The general reserve at June 30, 1994 and December 31, 1993 excluded reserves for losses of $207.1 million and $217.0 million, respectively, that management believes are likely to arise from that portion of the overall portfolio supporting experience rated pension contracts.
39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ For the periods shown below, after-tax mortgage loan impairment expense was as follows (in millions):
Three Months Ended Six Months Ended June 30, June 30, ___________________ ___________________ 1994 1993 1994 1993 ____ ____ ____ ____ Allocable to discontinued products $ 8.7* $ 35.2 $ 30.3* $ 59.5 Allocable to contractholders** $ 2.6 $ 20.4 $ 39.3 $ 44.7 Allocable to remaining products $ 18.6 $ 45.3 $ 42.4 $ 75.4 * Impairment expense allocable to discontinued products for the three and six months ended June 30, 1994 does not affect the company's results of operations. ** Impairment expense allocable to contractholders does not affect the company's results of operations.
Included in the company's total mortgage loan balances at June 30, 1994 and December 31, 1993 were the following categories of mortgage loans (in millions):
Balances at June 30, 1994 _____________________________________________________________ Supporting Experience Supporting Rated Pension Contracts Discontinued Products _______________________ ______________________ Total Amount % of Total Amount % of Total _____ ______ __________ ______ __________ Problem loans........... $1,378.9 $ 388.1 28.1% $ 610.1 44.2% Restructured loans (1).. 1,383.0 402.9 29.1 616.3 44.6 Potential problem and restructured loans..... 1,319.6 501.2 38.0 452.6 34.3 ________ Total................ $4,081.5 ________ ________ Impairment reserves..... $1,226.1 ________ ________ Impairment reserves as a percentage of total.. 30.0% ________ ________ Balances at December 31, 1993 _____________________________________________________________ Supporting Experience Supporting Rated Pension Contracts Discontinued Products _______________________ ______________________ Total Amount % of Total Amount % of Total _____ ______ __________ ______ __________ Problem loans........... $1,116.0 $ 387.8 34.7% $ 410.8 36.8% Restructured loans (1).. 1,858.8 481.1 25.9 957.4 51.5 Potential problem and restructured loans..... 1,575.6 602.0 38.2 523.8 33.2 ________ Total................ $4,550.4 ________ ________ Impairment reserves..... $1,308.3 ________ ________ Impairment reserves as a percentage of total.. 28.8% _________ _________ (1) During the six month period ended June 30, 1994, $110.6 million of loans which had been restructured, after write-offs of $44.1 million, were classified as performing. Of these loans, $17.8 million, after write-offs of $6.4 million, supported experience rated pension contracts and $62.4 million, after write-offs of $27.0 million, supported discontinued products. Please see page 40 for further discussion of such transfers.
Problem mortgage 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 $759 million at June 30, 1994 from $399 million at December 31, 1993, due primarily to the company's move to foreclose upon a $220 million loan secured by an office building. A specific reserve of approximately $80 million relating to this loan was provided for in prior years. This reserve will be written off and the asset will be reflected at its estimated fair value at the time of foreclosure (approximately $140 million). The foreclosure is not expected to affect results of operations in 1994. 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Restructured loans are loans whose original contract terms have been modified to grant concessions to the borrower and are currently performing pursuant to such modified terms. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post- restructuring payment performance in accordance with the restructured terms), may be returned to performing status. Candidates for such treatment must be underwritten and meet specific guidelines which are intended to provide reasonable assurance that the loan will perform in accordance with its contract terms. These guidelines require (i) adequate debt service coverage throughout the term of the loan, (ii) appropriate loan-to-value ratios based upon collateral value currently and at projected maturity of the loan, and (iii) reasonable protection against capital expenditure risk associated with lease rollovers. In addition, such restructured loans are designed to enhance the company's security position in the collateral, maximize borrower commitment to the property, and in many cases, ensure the company's participation in any appreciation of the property as market conditions improve. Prior to restructuring, such loans are generally classified and accounted for as problem loans. However, in certain cases, loans may be classified as potential problem loans if they are performing pursuant to their existing loan terms at the time. Upon closing of the restructure, any uncollectible portion of the loan is written off against the impairment reserve and the remaining recorded investment in the loan is classified as restructured until it is returned to performing status. In the second quarter of 1994, loans which had been restructured, with a carrying value of $111 million (net of write-offs of $44 million) and with an average current yield of 8% were classified as performing. The amount the write-off approximated the reserves related to these loans; therefore, there was an immaterial effect on the Consolidated Statement of Income in 1994. Of the aforementioned loans, $18 million (net of write-offs of $6 million) supported experience rated pension contracts and $62 million (net of write-offs of $27 million) supported discontinued products. No such transfers occurred in 1993 or in the first quarter of 1994. The company anticipates that additional loans will be reclassified to performing in future quarters if such loans demonstrate sustainable performance (as described above). 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Currently performing loans which management believes are likely to become classified as problem or restructured loans in the next twelve months or so are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan repayment terms. Identifying such "potential problem and restructured loans" requires significant judgment as to likely future market conditions, developments specific to individual properties and borrowers, and the timing of potential defaults. Provision for losses that are likely to arise from such potential problem and restructured loans, excluding those potential problem and restructured loans supporting experience rated pension contracts, is included in the general reserve. 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 non-accruing problem and restructured loans outstanding at June 30 and the portion thereof actually recorded as income for the three and six months ended June 30 were as follows (in millions):
Three Months Ended Six Months Ended June 30 June 30 __________________ ________________ 1994 1993 1994 1993 ____ ____ ____ ____ Income which would have been recorded under original terms of loans.......... $ 65.7 $ 74.5 $139.6 $146.0 Income recorded......................... 28.0 37.8 62.1 66.9 ______ ______ ______ ______ Lost investment income.................. $ 37.7 $ 36.7 $ 77.5 $ 79.1 ______ ______ ______ ______ ______ ______ ______ ______ Lost investment income allocated to investments supporting discontinued products (included above).............. $ 20.7 $ 19.3 $ 37.4 $ 40.4 ______ ______ ______ ______ ______ ______ ______ ______ Lost investment income allocated to investments supporting experience rated pension contracts (included above)..... $ 6.6 $ 9.4 $ 19.4 $ 21.7 ______ ______ ______ ______ ______ ______ ______ ______
Real Estate Investments At June 30, 1994 and December 31, 1993, Aetna's equity real estate balances, net of write-downs and reserves, were as follows:
Balances at June 30, 1994 _____________________________________________________________ Supporting Experience Supporting Rated Pension Contracts Discontinued Products _______________________ ______________________ Total Amount % of Total Amount % of Total _____ ______ __________ ______ __________ Investment real estate.... $ 389.1 $ 30.6 7.9% $ 95.7 24.6% Properties held for sale.. 801.9 210.9 26.3 418.8 52.2 ________ ________ ________ Total equity real estate.. $1,191.0 $ 241.5 20.3 $ 514.5 43.2 ________ ________ ________ ________ ________ ________ Balances at December 31, 1993 _____________________________________________________________ Supporting Experience Supporting Rated Pension Contracts Discontinued Products _______________________ ______________________ Total Amount % of Total Amount % of Total _____ ______ __________ ______ __________ Investment real estate.... $ 434.9 $ 36.7 8.4% $ 98.5 22.6% Properties held for sale.. 880.9 243.7 27.7 436.0 49.5 ________ ________ ________ Total equity real estate.. $1,315.8 $ 280.4 21.3 $ 534.5 40.6 ________ ________ ________ ________ ________ ________
42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The company's investment real estate is held for the production of income and is generally carried at depreciated cost. Property valuations are reviewed regularly by investment management. The carrying value is based upon various factors, including a review of market conditions and the company's long-range strategy for the property. The carrying value of investment real estate is reduced through a valuation reserve to reflect other than temporary declines in market value. The fair value of assets acquired through foreclosure is established as the cost basis at the time of foreclosure. Subsequent to foreclosure, properties held for sale are carried at the lower of cost or fair value less selling costs. Beginning in 1992, adjustments to the carrying value, as a result of changes in fair value subsequent to foreclosure, are recorded in a valuation reserve. Prior to 1992, such changes in carrying value of both investment real estate and properties held for sale were recorded as write-downs. Capital additions and asset improvements increase the carrying value and depreciation reduces the carrying value of both properties held for sale and investment real estate. Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances were as follows (in millions):
June 30, December 31, 1994 1993 __________________________ Allocable to discontinued products $286.3 $298.3 Allocable to contractholders 198.1 228.3 Allocable to remaining products 188.8 242.9 __________________________ Total $673.2 $769.5 __________________________ __________________________
For the periods shown below, total after-tax net realized capital losses from real estate write-downs and increases (decreases) in the valuation reserves were as follows (in millions):
Three Months Ended Six Months Ended June 30 June 30 __________________ __________________ 1994 1993 1994 1993 ____ ____ ____ ____ Allocable to discontinued products $ 1.2* $ 10.1 $ 13.8* $ 24.3 Allocable to contractholders** $ 4.5 $ .9 $ 4.6 $ 4.9 Allocable to remaining products $ 1.2 $ 4.2 $ (.4) $ 5.9 * Write-downs and impairment expense allocable to discontinued products for the three and six months ended June 30, 1994 do not affect the company's results of operations. ** Write-downs and impairment expense allocable to contractholders do not affect the company's results of operations.
43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Outlook Management intends that general account investments in new mortgage loans for the foreseeable future will be restricted largely to extending and refinancing existing mortgages as they mature. The company has reduced the mortgage loan and equity real estate portfolios, after reserves and write-downs, by $7.4 billion since the end of 1991, bringing mortgage loans and real estate as a percentage of general account invested assets from 38% in 1991 to 26% at June 30, 1994. It is management's continuing objective, real estate and capital market conditions permitting, to reduce over the next several years the size of the mortgage loan and real estate portfolios relative to total invested general account assets. Although extensions and refinancings of existing mortgage loans may delay achieving this objective, management intends to pursue plans to maximize returns and reduce portfolio levels through loan restructurings and sales of foreclosed real estate. Although the pace of recovery in the commercial real estate market is open to debate, management is beginning to see improvement in this market. While additional losses may emerge in the company's mortgage loan and real estate portfolios, and may increase to the extent any recovery in this market is delayed, management believes that the improvement in this market will favorably impact real estate values. The reserve for discontinued products reflects all anticipated future losses on discontinued products, including capital losses related to the $5.4 billion of mortgage loans and real estate supporting such products. Therefore, additional losses on the portion of the portfolio supporting discontinued products are not expected to impact the company's results of operations, although there can be no assurances that such losses will not be greater than anticipated and thus materially impact such results. Liquidity and Capital Resources _______________________________ Cash and cash equivalents at June 30, 1994 and December 31, 1993 were $1.8 billion and $1.6 billion, respectively. For the six months ended June 30, 1994, net cash used for operating activities was $170 million. Net cash used for operating activities of $1.2 billion during the first six months of 1993 included $1.6 billion of cash used for net purchases of debt trading securities. For the first six months of 1994, net cash provided by investing activities was $1.0 billion and included an increase of $122 million in short-term investments. Net cash provided by investing activities of $851 million for the six months ended June 30, 1993 included $468 million provided by a decrease in short-term investments. Short-term borrowings are used from time to time to provide for timing differences between receipts and disbursements in various portfolios. The maximum amount of domestic short-term borrowings outstanding during the first six months of 1994 was $256 million. 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ As a result of adverse conditions in real estate markets and tight lending practices by banks and other financial institutions over the past several years, the company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere. Of the $979 million of mortgage loans scheduled to mature during the first six months of 1994, $690 million were not paid as scheduled, a substantial portion of which supported large case pension liabilities. Of the loans not paid as scheduled, $152 million were extended at interest rates at least equal to current market (average rate of 8% over an average extension period of 6 years), $132 million were under forbearance (continuing to make payments under original loan terms), $5 million were foreclosed upon and $401 million were under discussion with borrowers at June 30, 1994. Of the $401 million of loans under discussion with borrowers, $114 million were classified as problem or restructured loans at June 30, 1994. Absent significant improvement in commercial real estate markets or in the availability of refinancing by other financial institutions, there will continue to be a similar need to extend or refinance maturing loans. Please refer to "Financial Services" on pages 28 through 30 for a discussion of the liquidity requirements specific to the large case pension business. The company engages in limited hedging activity. Such hedging activity has principally consisted of using futures and forward contracts and interest rate swaps to hedge translation risk and interest rate risk. All of these instruments are subject to market and credit risk. Market risk is the risk that future changes in market prices may make a financial instrument less valuable. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. In July 1994, the company entered into two committed bank lines of $500 million each with a group of worldwide banks. One facility terminates in July 1995 and the other terminates in July 1999. These facilities replace the company's $800 million revolving credit facility which expired in July 1994. (Please see Note 10 of Notes to Financial Statements.) On March 25, 1994, the company filed a shelf registration statement with the Securities and Exchange Commission ("the Commission") for the registration of $500 million of preferred securities to be issued by a finance subsidiary and guaranteed by the company. If and when the registration statement is declared effective by the Commission, these securities may be offered from time to time pursuant to the Commission's shelf registration rules. The proceeds from any sale of these securities would be loaned from the subsidiary to the company and, except as may otherwise be noted in any offering documents related to such securities, used for general corporate purposes. 45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ Pursuant to shelf registration statements declared effective by the Commission during 1993, the company may offer and sell up to an additional $550 million of securities. On June 15, 1993, the company redeemed $200 million principal amount of its 8 1/8 % Debentures whose scheduled maturity was 2007. The company recognized an after-tax extraordinary loss of $5 million on the early redemption. Rating Agencies During 1994, the senior debt and commercial paper ratings of Aetna Life and Casualty Company were lowered by certain of the rating agencies. Aetna's ratings at February 8, 1994, as detailed in the 1993 Form 10-K, and at August 15, 1994, follow:
Rating Agencies ____________________________________________________________ Moody's Investors Standard A.M. Best Duff & Phelps Service & Poor's ____________________________________________________________ Aetna Life and Casualty Company (senior debt) February 8, 1994 * AA- A1 AA- August 15, 1994 * A+ A1 AA- Aetna Life and Casualty Company (commercial paper) February 8, 1994 * Duff 1+ P-1 A-1+ August 15, 1994 * Duff 1 P-1 A-1+ Aetna Life Insurance Company (claims paying) February 8, 1994 A AA Aa3 A+ August 15, 1994 A AA Aa3 A+ The Aetna Casualty and Surety Company (claims paying) February 8, 1994 A AA Aa2 AA- August 15, 1994 A AA (on rating Aa2 AA- watch-down) Aetna Life Insurance and Annuity Company (claims paying) February 8, 1994 A++ AAA Aa2 AAA August 15, 1994 A++ AAA Aa2 AAA * Not rated by the agency.
Dividends Declared On June 24, 1994, the Board of Directors declared a quarterly dividend of $.69 per share of common capital stock for shareholders of record at the close of business on July 29, 1994, payable August 15, 1994. 46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters _____________ For additional discussion of income taxes, severance and facilities charges and property-casualty reserves, please see the company's 1993 Annual Report to Shareholders, 1993 Form 10-K and March 31, 1994 Form 10-Q. The following is intended to supplement those discussions. Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. At June 30, 1994, $350 million of net unrealized capital losses on available for sale debt and equity securities were reflected in shareholders' equity without deferred tax benefits. For federal tax reporting purposes, capital losses are deductible only against capital gains in the period of sale or during the carryback and carryforward periods (three and five years, respectively). Due to the expected full utilization of capital gains in the carryback period and the uncertainty of future capital gains, deferred tax benefits related to the $350 million of net unrealized losses were not reflected in shareholders' equity. This had no impact on net income for the three and six months ended June 30, 1994. Severance and Facilities Charges In recent years, management has placed a strong focus on reducing costs in order to improve the competitive position of the company's businesses. Among the steps taken to reduce costs was the elimination of approximately 4,800 positions in the latter half of 1992 and through 1993. The decision to undertake these actions resulted in an after-tax charge of $96 million ($145 million pretax) to second quarter 1992 earnings. The 1992 severance and facilities charge included the following (pretax, millions):
Vacated Pension Severance Leased Curtailment Related Property Gain Total _________ ________ ___________ _______ Health and Life Insurance and Services. $ 65.3 $ - $ (11.2) $ 54.1 Financial Services..................... 7.0 - (1.4) 5.6 Commercial Property-Casualty Insurance and Services............... 39.9 7.1 (8.2) 38.8 Personal Property-Casualty............. 38.8 13.8 (6.6) 46.0 International.......................... .6 - (.1) 0.5 _______ ________ _______ _______ Total Company (1)...................... $ 151.6 $ 20.9 $ (27.5) $ 145.0 _______ ________ _______ _______ _______ ________ _______ _______ (1) The pension curtailment gain is a non-cash item. All other items shown above required cash outlays.
47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ Standard severance benefit arrangements that would be available to employees whose positions were eliminated were communicated through company newsletters to all employees when the restructuring action was adopted and announced in June 1992. By the end of the second quarter of 1993, all affected individuals had been notified that their positions were being eliminated. The excess leased office space resulting from the elimination of these positions was substantially vacated by year-end 1993. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next three years. By year-end 1993, all expected actions under the 1992 restructuring had been completed and after-tax savings of approximately $100 million ($130 million annualized) had been achieved. In late 1993, management decided upon a plan under which it would take additional restructuring actions as part of its strategic and financial assessment of the company's businesses. That assessment was formally concluded and announced to the marketplace on January 28, 1994. As a result of these planned actions, the company announced in January 1994, a $200 million after tax ($308 million pretax) severance and facilities charge to fourth quarter 1993 earnings. The planned actions include the elimination of approximately 4,000 positions. As a result of the elimination of these positions, the company determined that it would have excess office space. Accordingly, the severance and facilities charge also included costs related to vacating the excess leased office space, and costs related to abandoning and preparing for sale an owned property in Hartford, Connecticut. The 1993 severance and facilities charge included the following (pretax, millions):
Facility and Vacated Severance Asset Write- Leased Related Off Related Property Other Total _________ ____________ ________ _______ _______ Health and Life Insurance and Services. $ 49.7 $ 23.8 $ 11.8 $ 3.2 $ 88.5 Financial Services..................... 22.9 12.5 2.4 14.4 (1) 52.2 Commercial Property-Casualty Insurance and Services............... 70.6 20.5 12.7 3.8 107.6 Personal Property-Casualty............. 31.7 5.9 8.0 1.8 47.4 International.......................... 5.5 3.3 2.0 1.5 12.3 _______ _______ _______ _______ _______ Total Company (3)...................... $ 180.4 $ 66.0 (2) $ 36.9 $ 24.7 $ 308.0 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ (1) Includes a charge of $13.0 million related to the cessation of a business providing administrative services to defined contribution pension plans. The charge includes broker buyout, direct losses on run-off of the existing contracts and other related costs. (2) Facility and asset write-off related charges include the write-down to realizable value of a company property that will be abandoned. Realizable value was determined to be the estimated selling price of the property (based on an internally prepared appraisal). The charge does not include operating costs expected to be incurred prior to the date of abandonment of the property. Facility and asset write-off related charges also include costs to retire personal computers and printers used by employees whose positions were, or are expected to be, eliminated and other related costs. (3) Facility and asset write-off related charges are non-cash costs. All other items shown above required, or will require, cash outlays.
48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ Severance benefit arrangements that would be available to employees whose positions were eliminated were communicated to all employees prior to the announcement of the restructuring actions through an employee handbook and company newsletters. The composition of the positions expected to be eliminated (e.g., business unit, location and levels of affected employees) was generally known at the time the restructuring actions were approved by senior management. Vacating the resulting excess leased office space is expected to be substantially completed by year-end 1994. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next six years. The owned property that is being vacated and prepared for sale is expected to be fully vacated by the end of the first quarter of 1995 and has been written down ($37 million, pretax) to its estimated net realizable value. During the three and six months ended June 30, 1994, the company charged costs of $31 million and $51 million, respectively, related to the cost reduction actions to the severance and facilities reserve established in 1993. Of the approximately 4,000 positions expected to be eliminated, approximately 700 had been eliminated by June 30, 1994 and the related severance benefits charged against the reserve. The remaining actions are expected to be substantially completed in 1994 and are expected to produce annual after-tax savings of approximately $200 million by 1995, including savings resulting from a modification of the company's postretirement health care plan. The total estimated savings of approximately $200 million are expected to benefit individual segments by 1995 as follows:
Health and Life Insurance and Services................ $ 80 Financial Services.................................... 5 Commercial Property-Casualty Insurance and Services... 90 Personal Property-Casualty............................ 25 International......................................... - _____ Total estimated savings............................... $ 200 _____ _____
Workers' Compensation Reserves During 1993, the company elected to change its accounting policy for reporting reserves for current and expected workers' compensation life table indemnity claims to a discounted basis. These reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality and morbidity assumptions that reflect current company and industry experience. Management believes that this change better reflects the economic value of its obligations and improves the matching of revenues and expenses (i.e., investment earnings from underlying assets are matched with the accretion of the liability as those amounts occur over time). Additionally, it is consistent with the practice of the company's principal competitors and is permitted by state regulatory authorities. This discounting resulted in a pretax reduction of $634 million to loss reserves for workers' compensation claims. The current year effect of the change to discounting in 1993 was a $78 million after-tax benefit in the Consolidated Statement of Income. (Please see Note 3 of Notes to Financial Statements.) The company's reserves for workers' compensation life table indemnity claims at December 31, 1993 were 17% of its total workers' compensation reserves for unpaid claims and claim adjustment expenses. 49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ During the fourth quarter of 1993, the company added $574 million (pretax, before discount) to prior accident year loss reserves for workers' compensation claims. (Please see "Property-Casualty Reserves: Loss Development" on pages 56 and 57.) Of the $574 million of additions to workers' compensation reserves in the fourth quarter of 1993, approximately $250 million, or 44%, were additions to the company's reserves for workers' compensation life table indemnity claims, resulting from the use of a longer "tail" (as described below) in estimating these claims. The remaining approximately $325 million, or 56%, were additions to the company's reserves for workers' compensation medical claims, reflecting an increase of approximately $560 million attributable to the use of a longer "tail" in estimating these claims, partially offset by a decrease of approximately $235 million reflecting the company's judgment (discussed later) that recent claims will benefit from a slowing in the growth of medical costs from that being experienced by the company on older claims. Factors leading to the fourth quarter increase in workers' compensation reserves are described below. During 1992, the company noted further adverse development in its workers' compensation claims and, based upon information then available to it, added $149 million (pretax) to workers' compensation reserves for claims occurring in prior accident years. (Please see "Property-Casualty Reserves: Loss Development" on pages 56 and 57.) The company noted that uncertainty existed with respect to such adverse development, and the extent to which it was attributable to the following factors: (i) the length of the "tail" (i.e., pay-out period) for workers' compensation claims; (ii) differences in development patterns of claim-types (i.e., medical, indemnity and life table) comprising the tail; and (iii) the potential effects of inflation and other socioeconomic phenomena (e.g., long-term development of medical costs) upon long-tail liabilities. However, at that time management was uncertain as to whether, and to what extent, each factor was contributing to the adverse development noted. In February 1993, the company's internal actuarial staff (with assistance and advice from internal accounting and legal staff) decided to undertake a study to clarify the uncertainties regarding these factors and their potential effects on workers' compensation reserves. As part of the study process, claim-types were examined separately, rather than in the aggregate as had generally been the company's practice in prior years, in order to understand differences in development patterns of claim-types. During the course of the study, the company consulted with external accounting and actuarial advisors, and reviewed publicly available competitor claim data, in order to determine whether the study's preliminary and ultimate findings appeared consistent with competitors' claims experience and reserving practices. In May 1993, senior management was advised that the study of workers' compensation reserves was underway and that the study could result in recommendations that, if adopted, might lead to an increase in workers' compensation reserves. 50 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ In August 1993, an analysis of year-end 1992 claims data assuming a 60-year tail (rather than the 40-year tail then used by the company in its workers' compensation reserve projections) was performed. Senior management then directed that the study be continued in order to incorporate the most current 1993 data. Additionally, the study's scope was expanded to include a review of the results of a survey conducted by the National Council on Compensation Insurance ("NCCI"), a national workers' compensation pool, which was released in June 1993 to the company and other NCCI members. In October 1993, an analysis similar to that described in the preceding paragraph but utilizing claims data gathered through the third quarter of 1993 was performed. Both the August and October analyses suggested the possible need to increase workers' compensation reserves, subject to the considerations noted below. After review of the results of the October analysis, project staff was directed: (i) to review the study's methodology with the company's external auditors; and (ii) to perform final analyses of reserve balances using full-year 1993 results and to verify certain key underlying assumptions. In early December 1993, these final analyses were completed based upon actual eleven-month results extrapolated to the full year. Among other things, the study confirmed that: (i) indemnity and medical losses developed in different patterns; (ii) the "tail" on these losses was longer than that previously considered in establishing reserves (reflecting increased longevity of injured workers); and (iii) the portion of total loss costs attributable to medical loss costs had increased significantly in recent years. As a result of the study, management concluded that the information developed supported adjustment of workers' compensation reserve balances to reflect (i) a 60-year tail; and (ii) a judgment that, because of application of costly medical technologies sooner after injury and medical advancements in the early treatment of injuries, recent claims would benefit from a slowing in the growth of medical costs from that being experienced by the company on older claims. At year-end 1992 and during the time that the studies were being conducted, the company continued its practice of evaluating reserve adequacy on a quarterly basis. At year-end 1992 and at the first two quarter-ends in 1993, management had not estimated an amount or a range of reasonably possible additional loss exposure in the workers' compensation line directly attributable to the specifically identified uncertainties noted above because, during these periods, management was still in the process of analyzing data and evaluating assumptions. Subsequent analyses indicated a reasonably possible loss exposure in the workers' compensation line on a stand-alone basis as of the end of the third quarter of 1993 of approximately $600 million, subject to verification of certain key factors as noted above. However, based upon the internal actuarial opinions and notwithstanding the uncertainties described above relating to workers' compensation reserves (including, specifically, the $600 million reasonably possible loss exposure described in the preceding sentence), at year-end 1992 and at the first three quarter-ends in 1993, the company determined that aggregate Commercial Property-Casualty segment reserves were actuarially reasonable and stated in accordance with generally accepted accounting principles. 51 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ While the company was conducting the study described above, it also studied whether to discount workers' compensation life table indemnity reserves. The two studies were linked because the length of the workers' compensation claim "tail" was a key issue in each study. Specifically, it was noted that as the claim tail lengthened, discounting would more accurately reflect the economic value of the company's obligations and improve the matching of revenues and expenses. Further, the company noted that state insurance regulators permitted discounting of such claims, and that virtually all of the company's principal competitors discounted these reserves. In conducting both studies, the company recognized that discounting would tend to mitigate any reserve addition deemed necessary. The results of the review of workers' compensation reserves and reserve discounting were analyzed in conjunction with the company's strategic and financial assessment of its businesses. On January 28, 1994, senior management formally concluded that assessment and: (i) accepted the recommendation of the workers' compensation reserve study to increase workers' compensation reserve balances to an amount equal to that indicated in the final projection which applied a 60-year tail to full-year 1993 data; and (ii) chose to discount life table indemnity reserves. The net effect of these two actions regarding workers' compensation reserves was immaterial to the company's net income. The workers' compensation reserve actions, along with the decisions resulting from the company's strategic and financial assessment of its businesses, were disclosed to the marketplace on January 28, 1994. The company's Commercial Property-Casualty reserves (including workers' compensation reserves) represent the estimated liability for the cost of claims (including claim adjustment expenses) that have been reported but not settled and claims that have been incurred but not yet reported. These estimates become more difficult to make (and are therefore more subject to change) as the length of time between the occurrence, reporting and settlement of claims increases. Actual claim costs are dependent upon a number of complex factors including social and economic trends and changes in doctrines of legal liability and damage awards. Workers' compensation reserves remain subject to these uncertainties, particularly because of the length of the "tail" associated with workers' compensation claims. Estimated liabilities for property-casualty coverages are recomputed periodically using a variety of actuarial and statistical techniques. 52 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ Environmental-Related Claims While environmental-related claim activity increased in 1993, the company did not add significantly to reserves in 1993. There were two reasons for this development. First, in 1993 the company did not proportionately increase the portion of the reserve relating to legal and other costs associated with these claims because: (i) in 1993 the company changed its relationships with outside counsel in an attempt to lower costs per case; (ii) certain new claims in 1993 related to new sites for policyholders already involved in coverage disputes with the company and the addition of new sites to existing lawsuits was not expected to add proportionately to legal fees; (iii) a considerable number of new claims relate to time periods when, based on policy language, it is expected that the legal costs of disposing of these claims should be relatively small; and (iv) the company took note that legal fees paid in each of the last three years remained constant at approximately $31 - $35 million despite net increases in claims opened during 1993 and 1992. Second, in 1993 the company did not proportionately increase the indemnity portion of the reserve for these claims because the company has generally disputed that there is any insurance coverage for environmental claims and, because of significant factual and legal uncertainties, the company generally has not been able to reasonably estimate the amount or a reasonable range of losses for environmental-related claims. In summary, management believes that there is not a meaningful correlation between the number of outstanding environmental claims and the recorded environmental reserve. The company continues, however, to gather and analyze developing legal and factual information on known environmental-related claims and to reassess its reserving techniques in order to determine whether it can reasonably estimate the likelihood and amount of its liability for such claims. (Please see "Commercial Property-Casualty" on pages 31 and 32.) Asbestos Bodily Injury and Property Damage Claims The company had approximately 1,300 open asbestos bodily injury claims (involving approximately 287 policyholders) at December 31, 1993 and approximately 1,900 such claims (involving approximately 239 policyholders) at December 31, 1992. In 1993, the company opened 248 new claims and closed 829 claims. In 1992, the company opened 172 new claims and closed 638 claims. In 1993, the number of open claims decreased while the number of policyholders increased. This reflects the closing of numerous claims related to a small number of large policyholders pertaining to the Center for Claims Resolution settlement and the opening of claims related to other policyholders having a smaller number of claims individually. The company had approximately 400 open asbestos property damage claims (involving approximately 73 policyholders) at December 31, 1993 and approximately 300 such claims (involving approximately 24 policyholders) at December 31, 1992. In 1993, the company opened 122 new claims and closed 27 claims. In 1992, the company opened 55 new claims and closed 227 claims. While the number of open asbestos property damage claims increased from December 31, 1992 to December 31, 1993, the reserve balance for such claims decreased by $6 million. This resulted because reserve additions for incurred losses in 1993 were less than net payments for claims and claim adjustment expenses during 1993. Reserve additions for the period reflect the company's belief that new claims arising during the period were primarily small or incidental claims. 53 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ In some circumstances, the company counts asbestos claims individually by the number of underlying claimants. However, in other circumstances (when, for example, the policyholder is an asbestos producer and numerous bodily injury claims against that policyholder, and in turn against the company, are expected) the company counts asbestos claims in the aggregate by policyholder. Also, reserving for asbestos claims is subject to significant uncertainties. Therefore, management believes that there is not a meaningful correlation between the number of outstanding asbestos claims and the recorded reserves for such claims. The "claims" numbers above reflect cases where policyholders have notified the company of a claim under primary insurance policies issued by the company. In addition, they reflect cases where policyholders have placed the company on notice of possible claims that may potentially involve excess general liability policies written by the company, in those instances where the company believes its excess policies are likely to be accessed. 54 PART II. OTHER INFORMATION Item 1. Legal Proceedings. In Re: Attorneys General Antitrust Litigation ______________________________________________ The description of this litigation is contained in Note 15 of Notes to Financial Statements on page 19. Other Litigation ________________ Aetna is continuously involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for asbestos and environmental-related claims. These lawsuits and other factors make reserving for asbestos and environmental- related claims subject to significant uncertainties. While the ultimate outcome of the litigation described herein cannot be determined at this time, such litigation (other than that related to asbestos and environmental-related claims, which is subject to significant uncertainties), net of reserves established therefor and giving effect to reinsurance, 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. Future results are expected to be adversely affected by losses for asbestos and environmental-related claims and litigation expense. Due to significant uncertainties, management is unable to determine whether or not such effects on operations in future periods will be material. Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Shareholders of Aetna Life and Casualty Company was held on Friday, April 29, 1994. (b) Directors elected at the Meeting:
Votes Votes Broker For Withheld Non-Votes __________ _________ _________ Wallace Barnes 98,418,523 1,440,885 0 Ronald E. Compton 98,148,827 1,710,581 0 John F. Donahue 98,670,612 1,188,796 0 William H. Donaldson 98,622,212 1,237,196 0 Barbara H. Franklin 98,700,268 1,159,140 0 Earl G. Graves 98,655,046 1,204,362 0 Gerald Greenwald 98,701,300 1,158,108 0 Michael H. Jordan 98,701,040 1,158,368 0 Jack D. Kuehler 98,609,437 1,249,971 0 Frank R. O'Keefe, Jr. 98,660,943 1,198,465 0 David M. Roderick 98,543,349 1,316,059 0
55 Item 4. Submission of Matters to a Vote of Security Holders. (Continued) (c) Other matters voted upon:
Votes Votes Broker For Against Abstain Non-Votes __________ __________ _________ _________ (1) Appointment of Independent Auditors 98,652,397 815,814 391,197 0 (2) Approval of 1994 Stock Incentive Plan 67,735,414 25,646,266 1,305,347 5,172,381 (3) Approval of 1994 Non-Employee Director Deferred Stock Plan 83,127,491 10,146,426 1,413,110 5,172,381
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 Aetna's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
6 Months Ended Years ended December 31 June 30, 1994 1993 1992 1991 1990 1989 _____________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges.... 3.88 (a) .42(b) 2.13 3.03 4.13 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 3.88 (a) .42(b) 2.13 3.03 4.05 (a) Aetna reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.1 billion. (b) Earnings were inadequate to cover fixed charges by $112.8 million in 1992.
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). Preferred stock dividends, which are not deductible for income tax purposes, have been increased to a taxable equivalent basis. This adjustment has been calculated by using the effective tax rate of the applicable year. All shares of Aetna's preferred stock were redeemed in 1989 and, as a result, for the six months ended June 30, 1994 and for the years ended December 31, 1993, 1992, 1991 and 1990 the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. 56 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Item 5. Other Information. (Continued) (b) Property-Casualty Reserves: Loss Development The following represents changes in aggregate reserves for the years ended December 31, 1993, 1992 and 1991, net of reinsurance, for the combined property-casualty experience (in millions) (1,2):
1993 1992 1991 ____ ____ ____ Unpaid claims and claim adjustment expenses at beginning of year........ $11,747 $11,407 $11,064 Incurred claims and claim adjustment expenses: Provision for insured events of the current year................... 3,744 4,407 5,019 Increases in provision for insured events of prior years.............. 674 466 45 Current year effect of discounting.. (120) - - Cumulative effect of discounting.... (514) - - _______ _______ _______ Total incurred claims and claim adjustment expenses.................. 3,784 4,873 5,064 _______ _______ _______ Payments: Claims and claim adjustment expenses attributable to insured events of the current year................... 1,204 1,560 1,641 Claims and claim adjustment expenses attributable to insured events of prior years........................ 2,889 2,973 3,080 _______ _______ _______ Total payments........................ 4,093 4,533 4,721 _______ _______ _______ Total unpaid claims and claim adjustment expenses at end of the year............................. $11,438 $11,747 $11,407 _______ _______ _______ _______ _______ _______ (1) Accident and health business is excluded. (2) Includes International
The following reserve runoff table represents Aetna's combined property-casualty loss and loss expense experience. Each column shows, for the year indicated: - - the reserve held at year end; - - cumulative data for payments made in each subsequent year for that reserve year; - - liability reestimates made in each subsequent year for that reserve year; - - the redundancy (deficiency) represented by the difference between the original reserve held at the end of that year and the reestimated liability as of the end of 1993; and - - the change in redundancy (deficiency) between the end of each reserve year shown and the end of the prior reserve year. The majority of increases to prior accident year reserves were for losses and related expenses for asbestos and other product liability risks and environmental liability risks attributable to policies written prior to 1978 and for workers' compensation claims. 57 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Item 5. Other Information. (Continued) The table represents historical data; it would not be appropriate to use such data to project the company's future reserving activity or its future performance generally.
Year Ended 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ (Millions) Liability for unpaid claims and claim adjustment expenses......$5,650 $5,948 $6,560 $7,503 $8,708 $9,843 $10,557 $11,064 $11,407 $11,747 $11,438 Paid (cumulative) as of: End of year.............. 0 0 0 0 0 0 0 0 0 0 0 One year later........... 1,741 1,844 2,067 2,180 2,552 3,134 3,069 3,080 2,973 2,889 Two years later.......... 2,806 3,055 3,372 3,727 4,547 4,955 4,994 5,133 5,116 Three years later........ 3,634 3,936 4,436 5,179 5,797 6,250 6,404 6,735 Four years later......... 4,221 4,669 5,504 6,065 6,682 7,212 7,578 Five years later......... 4,730 5,493 6,118 6,692 7,354 8,048 Six years later.......... 5,386 5,942 6,571 7,197 7,991 Seven years later........ 5,747 6,290 6,955 7,705 Eight years later........ 6,012 6,597 7,375 Nine years later......... 6,264 6,959 Ten years later.......... 6,581 Liability reestimated as of (1): End of year.............. 5,650 5,948 6,560 7,503 8,708 9,843 10,557 11,064 11,407 11,747 12,072 One year later........... 5,659 6,013 6,778 7,746 9,022 10,015 10,644 11,109 11,873 12,421 Two years later.......... 5,730 6,272 7,056 8,188 9,312 10,203 10,791 11,737 12,677 Three years later........ 5,943 6,531 7,536 8,539 9,547 10,457 11,376 12,578 Four years later......... 6,130 6,926 7,910 8,813 9,808 10,985 12,090 Five years later......... 6,461 7,291 8,156 9,084 10,319 11,624 Six years later.......... 6,791 7,515 8,422 9,577 10,860 Seven years later........ 6,985 7,778 8,907 10,089 Eight years later........ 7,235 8,250 9,398 Nine years later......... 7,691 8,707 Ten years later.......... 8,118 Effect of discounting...... (200) (235) (274) (317) (362) (417) (473) (528) (577) (614) (634) Liability reestimated, adjusted for discounting(1) 7,918 8,472 9,124 9,772 10,498 11,207 11,617 12,050 12,100 11,807 11,438 Redundancy (Deficiency)....(2,268)(2,524)(2,564)(2,269)(1,790) (1,364) (1,060) (986) (693) (60) 0 Change in redundancy (deficiency)............. N/A (256) (40) 295 479 426 304 74 293 633 60 Gross liability, end of year (2).......... $15,979 $15,846 Reinsurance recoverable.... 4,232 4,408 Net liability, end of year.............. $11,747 $11,438 Gross reestimated liability-latest (2)..... $16,358 Reestimated recoverable-latest....... 4,551 Net reestimated liability-latest......... $11,807 Gross cumulative deficiency $ (379) (1) The reestimated liability at December 31, 1993 includes $574 million related to development in workers' compensation reserves in the fourth quarter of 1993. This affected the reestimated liability by reserve year as follows: $574 million in 1992; $565 million in 1991; $534 million in 1990; $484 million in 1989; $433 million in 1988; $396 million in 1987; $372 million in 1986; $346 million in 1985; $308 million in 1984; and $265 million in 1983. (2) Information presented gross in 1993 and 1992 due to the adoption of FAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, retroactive to December 31, 1992. Adoption of FAS No. 113 had no impact on the 1993 net loss.
58 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (10) Material Contracts. (10.1) $500,000,000 Short-Term Credit Agreement dated as of July 27, 1994 among Aetna Life and Casualty Company, the banks listed on the signature pages thereof, Morgan Guaranty Trust Company of New York, as Managing Agent, Deutsche Bank AG, as Co-Arranger, and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co-Agents. (10.2) $500,000,000 Medium-Term Credit Agreement dated as of July 27, 1994 among Aetna Life and Casualty Company, the banks listed on the signature pages thereof, Morgan Guaranty Trust Company of New York, as Managing Agent, Deutsche Bank AG, as Co-Arranger, and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co-Agents. (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, 1994 and for the years ended December 31, 1993, 1992, 1991, 1990 and 1989. (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 August 15,1994. (b) Reports on Form 8-K None. 59 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aetna Life and Casualty Company _______________________________ (Registrant) Date August 15, 1994 By ROBERT E. BROATCH _________________________________ (Signature) Robert E. Broatch Senior Vice President, Finance and Corporate Controller EX-10.1 2 1 =============================================================================== $500,000,000 SHORT-TERM CREDIT AGREEMENT dated as of July 27, 1994 among Aetna Life and Casualty Company, The Banks Listed Herein, Morgan Guaranty Trust Company of New York, as Managing Agent Deutsche Bank AG, as Co-Arranger and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co-Agents ================================================================================ 2 TABLE OF CONTENTS*/
Page ---- ARTICLE I DEFINITIONS SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . 13 1.03 Classifications of Borrowings . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE II THE CREDITS SECTION 2.01 Commitments to Lend . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.02 Notice of Committed Borrowings . . . . . . . . . . . . . . . . . . . . . . 14 2.03 Money Market Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.04 Notice to Banks; Funding of Loans . . . . . . . . . . . . . . . . . . . . 20 2.05 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.06 Maturity of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.07 Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.08 Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.09 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.10 Method of Electing Interest Rates . . . . . . . . . . . . . . . . . . . . 26 2.11 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.12 General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . 29 2.13 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.14 Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . . 30 2.15 Regulation D Compensation . . . . . . . . . . . . . . . . . . . . . . . . 31 2.16 Extension of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE III CONDITIONS SECTION 3.01 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.02 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
- ---------------------------------- */ The Table of Contents is not a part of this Agreement. 3 ARTICLE IV REPRESENTATIONS AND WARRANTIES
Page ---- SECTION 4.01 Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . 35 4.02 Corporate and Governmental Authorization; No Contravention . . . . . . . . . . . . . . . . . . . . 35 4.03 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.04 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.05 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.06 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.07 Principal Insurance Subsidiaries . . . . . . . . . . . . . . . . . . . . . 37 4.08 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE V COVENANTS SECTION 5.01 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5.02 Conduct of Business and Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . 39 5.03 Minimum Adjusted Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 5.04 Equal and Ratable Lien Protection . . . . . . . . . . . . . . . . . . . . 39 5.05 Consolidations, Mergers and Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 5.06 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 5.07 Cross Default Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 40 5.08 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE VI DEFAULTS SECTION 6.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.02 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE VII THE AGENT SECTION 7.01 Appointment and Authorization . . . . . . . . . . . . . . . . . . . . . . 43 7.02 Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.03 Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.04 Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . 43 7.05 Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.06 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.07 Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.08 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
-2- 4 ARTICLE VIII CHANGE IN CIRCUMSTANCES
Page ---- SECTION 8.01 Basis for Determining Interest Rate Inadequate or Unfair . . . . . . . . . . . . . . . . . . . . . . . 45 8.02 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 8.03 Increased Cost and Reduced Return . . . . . . . . . . . . . . . . . . . . 46 8.04 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8.05 Base Rate Loans Substituted for Affected Euro-Dollar Loans . . . . . . . . . . . . . . . . . . . . . . 51 8.06 Substitution of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 8.07 Election to Terminate . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE IX MISCELLANEOUS SECTION 9.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.02 No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 9.03 Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 53 9.04 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . 54 9.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 54 9.06 New York Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 9.07 Counterparts; Integration . . . . . . . . . . . . . . . . . . . . . . . . 56 9.08 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Exhibit A - Note Exhibit B - Form of Money Market Quote Request Exhibit C - Form of Invitation for Money Market Quotes Exhibit D - Form of Money Market Quote Exhibit E - Opinions of Counsel for the Borrower Exhibit F - Opinion of Special Counsel for the Agent Exhibit G - Form of Extension Notice
-3- 5 CREDIT AGREEMENT AGREEMENT dated as of July 27, 1994 among AETNA LIFE AND CASUALTY COMPANY, the BANKS listed on the signature pages hereof, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Managing Agent, DEUTSCHE BANK AG, as Co-Arranger, and THE CHASE MANHATTAN BANK, N.A., CITIBANK, N.A., and CREDIT SUISSE, as Co-Agents. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.08(b). "Adjusted Consolidated Net Worth" means at any date the total shareholders' equity of the Borrower and its Consolidated Subsidiaries determined as of such date, adjusted to exclude net unrealized capital gains and losses. "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means, (1) any bank which, directly or indirectly, wholly owns, is wholly owned by or shares common one hundred percent ownership with the transferor Bank and, (ii) is of credit rating better than or equal to that of the transferor Bank on the Effective Date, as determined by Moody's Investors Service and Standard & Poor's Corporation. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as Managing Agent for the Banks hereunder, and its successors in such capacity. 6 2 "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Base Rate Loans and CD Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.08(b). "Assignee" has the meaning set forth in Section 9.05(c). "Bank" means each bank listed on the signature pages hereof and its successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or the provisions of Article VIII or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Borrower" means Aetna Life and Casualty Company, a Connecticut insurance corporation and, except for purposes of Section 6.01(i), its successors. "Borrower's 1993 Form 10-K" means the Borrower's annual report on Form 10-K for 1993, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrower's 1994 First Quarter Form 10-Q" means the Borrower's quarterly report for the fiscal quarter ended March 31, 1994 as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" means a borrowing hereunder consisting of Loans made to the Borrower at the same time by the Banks pursuant to Article II. A Borrowing is a "Base Rate Borrowing" if such Loans are Base Rate Loans, a "CD Borrowing" if such Loans are CD Loans, a "Euro-Dollar Borrowing" if such 7 3 Loans are Euro-Dollar Loans and a "Money Market Borrowing" if such Loans are Money Market Loans. "CD Base Rate" has the meaning set forth in Section 2.08(b). "CD Loan" means (i) a Committed Loan which bears interest at the Fixed CD Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or (ii) an overdue amount which was a CD Loan immediately before it became overdue. "CD Margin" has the meaning set forth in Section 2.08(b). "CD Reference Banks" means The Chase Manhattan Bank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.07 or terminated pursuant to Section 8.07. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Continuing Director" means, at any time, a director who (i) was a director of Aetna Life and Casualty Company 24 months prior to such time or (ii) was nominated or elected as a director by vote of a majority of the persons who were Continuing Directors at the time of such nomination or election. 8 4 "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.08(b). "Duff" means Duff & Phelps Inc. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. 9 5 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or (ii) an overdue amount which was a Euro-Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" has the meaning set forth in Section 2.08(c). "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.08(c) on the basis of the London Interbank Offered Rate. "Euro-Dollar Reference Banks" means The Chase Manhattan Bank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference 10 6 to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as calculated by the Agent, such calculation to be supplied to the Borrower upon the Borrower's request. "Fixed CD Rate" has the meaning set forth in Section 2.08(b). "Fixed Rate Borrowing" means a CD Borrowing, a Euro-Dollar Borrowing or a Money Market Borrowing. "Fixed Rate Loans" means Euro-Dollar Loans, CD Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate for the reason stated in Section 8.01) or any combination of the foregoing. "Group of Loans" means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time, (ii) all Committed Loans which are CD Loans having the same Interest Period at such time or (iii) all Committed Loans which are Euro-Dollar Loans having the same Interest Period at such time; provided that, if Committed Loans of any particular Bank are converted to or made as Base Rate Loans pursuant to Article VIII, such Loans shall be included in the same Group or Groups of Loans from time to time as they would have been in if they had not been so converted or made. 11 7 "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substances having any constituent elements displaying any of the foregoing characteristics. "Interest Period" means: (1) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 90 days thereafter; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing or such longer period as mutually agreed to by the Borrower and all of the Banks; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and 12 8 (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (3) with respect to each Euro-Dollar Loan, a period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice or such longer period as mutually agreed to by the Borrower and all of the Banks; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (4) with respect to each Money Market LIBOR Loan, the period commencing on the date of Borrowing and ending such whole number of months thereafter, as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and 13 9 (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (5) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Level I Period" means any period during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) AA+ by S&P and/or (ii) Aa1 by Moody's and/or (iii) AA+ by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level II Period" means any period (other than a Level I Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) AA- by S&P and/or (ii) Aa3 by Moody's and/or (iii) AA- by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level III Period" means any period (other than a Level I Period or a Level II Period) during which any long- term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) A- by S&P and/or (ii) A3 by Moody's 14 10 and/or (iii) A- by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level IV Period" means any period (other than a Level I Period, Level II Period or Level III Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB by S&P and/or (ii) Baa2 by Moody's and/or (iii) BBB by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level V Period" means any period other than a Level I Period, Level II Period, Level III Period or Level IV Period. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Loan" means a Base Rate Loan, a Euro-Dollar Loan, a CD Loan or a Money Market Loan and "Loans" means any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.08(c). "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan made or to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references 15 11 herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan made or to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate for the reason stated in Section 8.01). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Money Market Quote Request" means a request by the Borrower to the Banks to make Money Market Loans in accordance with Section 2.03(b). "Moody's" means Moody's Investors Service, Inc. "Non-Recourse Indebtedness" means indebtedness for borrowed money as to which the liability of the Borrower or its Principal Insurance Subsidiaries, as the case may be, is limited solely to specific assets. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Notice of Interest Rate Election" has the meaning set forth in Section 2.10. "Other Taxes" has the meaning set forth in Section 8.04(a). "Participant" has the meaning set forth in Section 9.05(d). 16 12 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Principal Insurance Subsidiary" means Aetna Life Insurance Company, The Aetna Casualty and Surety Company, or any other Subsidiary of the Borrower, including Subsidiaries of Subsidiaries, which shall succeed by merger or otherwise to a major part of the business of one or more of the Principal Insurance Subsidiaries. For the purposes of this definition the decision as to whether a Subsidiary shall have succeeded to a major part of the business of one or more Principal Insurance Subsidiaries shall be made in good faith by the Borrower's Board of Directors by the adoption of a resolution so stating. "Quarterly Date" means the last Domestic Business Day of each January, April, July and October. "Reference Banks" means The Chase Manhattan Bank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York, and "Reference Bank" means any one of such Reference Banks. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. 17 13 "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Required Capital" has the meaning set forth in Section 8.03(b). "Responsible Financial Officer" means chief financial officer, treasurer, chief accounting officer or senior corporate finance officer. "Revolving Credit Period" means the period from the date hereof to and including the Termination Date. "S&P" means Standard & Poor's Corporation. "Senior Unsecured Debt" means indebtedness for borrowed money that is not subordinated to any other indebtedness for borrowed money and is not secured or supported by a guarantee, letter of credit or other form of credit enhancement. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. "Taxes" has the meaning set forth in Section 8.04(a). "Termination Date" means July 26, 1995 or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day, subject to extension in accordance with Section 2.16. "Trigger Event" has the meaning set forth in Section 8.03(c). SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with United States generally accepted accounting principles as in effect from time to 18 14 time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks. SECTION 1.03. Classifications of Borrowings. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro- Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids). ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. On the terms and conditions set forth in this Agreement, each Bank severally agrees to lend to the Borrower, from time to time during the Revolving Credit Period amounts not to exceed in the aggregate at any one time outstanding the amount of such Bank's Commitment. Each Borrowing under this Section 2.01 shall be in an aggregate principal amount of $25,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount of the unused Commitments) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. Failure by any Bank to make Loans as required under the terms of this Agreement will not relieve any other Bank of its obligations hereunder. SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing 19 15 and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a CD Borrowing and a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a CD Borrowing or Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks from time to time during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks 20 16 not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $25,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or following notice to each of the Banks, such other number of days as the Borrower and the Agent may agree upon) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 9:30 A.M. (New 21 17 York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 9:15 A.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (x) may be greater than or less than the Commitment of the quoting Bank, (y) must be $25,000,000 or a larger multiple of $1,000,000 and (z) may not exceed the principal amount of Money Market Loans for which offers were requested, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (rounded to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (rounded to the 22 18 nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered (including the names of the Banks) and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote for any Interest Period may be accepted. 23 19 (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro- Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote for any Interest Period in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $25,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of such number, not greater than $1,000,000 as the Agent may deem appropriate) in proportion 24 20 to the aggregate principal amounts of such offers. Determinations by the Agent of the pro rata amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.08 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of 25 21 such Bank in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and prior to any transfer of its Note shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. (d) Each Bank agrees that it will cancel and return to the Borrower all Notes then held by it upon the earlier of (i) the Termination Date provided no Default shall have then occurred and be continuing or (ii) the date such Bank's Commitment has been terminated and there are no Loans outstanding to or accrued interest owing to such Bank. SECTION 2.06. Maturity of Loans. (a) The Committed Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date. (b) Each Money Market Loan shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable to such Money Market Loan. 26 22 SECTION 2.07. Termination or Reduction of Commitments. (a) The Commitments of each Bank shall terminate at the end of the Revolving Credit Period. (b) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days' notice to the Agent, terminate the Commitments at any time, if no Loans are outstanding at such time. (c) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days' notice to the Agent, ratably reduce the Commitments from time to time by an aggregate amount of $25,000,000 or any larger multiple of $1,000,000, but only to the extent that the aggregate amount of the Commitments exceeds the aggregate outstanding principal amount of the Loans. SECTION 2.08. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the earlier of (i) the last day of the Interest Period applicable thereto or (ii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the applicable Fixed CD Rate. Such interest shall be payable for each Interest Period on the earlier of (i) the last day of the Interest Period applicable thereto, (ii) 90 days after the initial date thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days thereafter or (iii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the higher of (i) the Fixed CD Rate applicable to such Loan and (ii) the rate applicable to Base Rate Loans for such day. 27 23 The "Fixed CD Rate" applicable to any CD Loan for any Interest Period means a rate per annum equal to the sum of the CD Margin plus the applicable Adjusted CD Rate. "CD Margin" means (i) 0.395% during each Level I Period, (ii) 0.435% during each Level II Period, (iii) 0.465% during each Level III Period, (iv) 0.575% during each Level IV Period, and (v) 0.575% during each Level V Period. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate * The amount in brackets being rounded upwards, if necessary, to the next higher 1/100 of 1%. The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the arithmetic average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each Reference Bank of its certificates of deposit in an amount comparable to the unpaid principal amount of the CD Loan of such Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect 28 24 of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Fixed CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any Interest Period the net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) actually incurred by Morgan Guaranty Trust Company of New York to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of Morgan Guaranty Trust Company of New York in the United States during the most recent period for which such rate has been determined prior to the commencement of such Interest Period. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable London Interbank Offered Rate. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof, (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date. "Euro-Dollar Margin" means (i) 0.270% during each Level I Period, (ii) 0.310% during each Level II Period, (iii) 0.340% during each Level III Period, (iv) 0.450% during each Level IV Period, and (v) 0.500% during each Level V Period. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. 29 25 (d) Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 1% plus the Euro-Dollar Margin plus the higher of (i) the London Interbank Offered Rate applicable to such Loan and (ii) the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Reference Banks are offered to such Reference Bank in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in Section 8.01 shall exist, at a rate per annum equal to the sum of 1% plus the Base Rate for such day). (e) Subject to clause (y) of Section 8.01, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.08(c) as if each Reference Bank were to participate in the related Money Market LIBOR Borrowing ratably in proportion to its Commitment) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give 30 26 prompt notice to the Borrower by telecopy and the participating Banks by telex, cable or telecopy of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.09. Fees. (a) Facility Fee. The Borrower shall pay to the Agent for the account of the Banks ratably in proportion to their commitments, a facility fee at the rate of (i) 0.080% per annum during each Level I Period, (ii) 0.090% per annum during each Level II Period, (iii) 0.110% per annum during each Level III Period, (iv) 0.150% per annum during each Level IV Period, and (v) 0.375% per annum during each Level V Period. Such facility fee shall accrue (i) from and including the date on which the conditions set forth in Section 3.01(a) and (e) have been satisfied to but excluding the last day of the Revolving Credit Period, in each case, on the daily average aggregate amount of the Commitments (whether used or unused) and (ii) if any Loans remain outstanding after the Revolving Credit Period, from and including the last day of the Revolving Credit Period to but excluding the date such Loans shall be repaid in full, on the daily average aggregate outstanding principal amount of such Loans. (b) Payments. Except as otherwise indicated, accrued fees under this Section shall be payable quarterly in arrears on the earlier of (i) each Quarterly Date, (ii) the Termination Date or (iii) if any Loans remain outstanding after the Revolving Credit Period, on the date such Loans shall be repaid in full. SECTION 2.10. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each 31 27 Group of Loans (subject in each case to the provisions of Article VIII), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may (x) elect to convert such Loans to Base Rate Loans as of any Domestic Business Day, (y) elect to convert such Loans to Euro-Dollar Loans or to CD Loans with an Interest Period different from the then current Interest Period applicable to such Loans, as of any Euro-Dollar Business Day or Domestic Business Day, respectively or (z) elect to continue such Loans as CD Loans for an additional Interest Period beginning on the last day of the then current Interest Period applicable to such Loans; and (iii) if such Loans are Euro-Dollar Loans, the Borrower may (x) elect to convert such Loans to Base Rate Loans or CD Loans as of any Domestic Business Day, (y) elect to convert such Loans to CD Loans or Euro-Dollar Loans with an Interest Period different from the then current Interest Period applicable to such Loans, as of any Domestic Business Day or Euro-Dollar Business Day, respectively or (z) elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period beginning on the last day of the then current Interest Period applicable to such Loans; provided that, if the Borrower elects to convert any CD Loans or Euro-Dollar Loans, as the case may be, to Base Rate Loans or to CD Loans or Euro-Dollar Loans, as the case may be, with a different Interest Period, as of any day other than the last day of the then current Interest Period applicable to such Loans, the Borrower shall reimburse each Bank in accordance with Section 2.13. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent (i) at least one Domestic Business Day before such notice is to be effective if the relevant Loans are to be converted into Base Rate Loans, (ii) at least two Domestic Business Days before such conversion or continuation is to be effective if such Loans 32 28 are to be converted into, or continued as, CD Rate Loans or (iii) at least three Euro-Dollar Business Days before such conversion or continuation is to be effective if such Loans are to be converted into, or continued as, Euro-Dollar Loans. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $25,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) whether such Group of Loans (or portion thereof) is to be converted to Base Rate Loans, CD Loans or Euro-Dollar Loans or continued as CD Loans or Euro-Dollar Loans for an additional Interest Period; and (iv) if such Loans (or portions thereof) are to be converted to or continued as CD Loans or Euro-Dollar Loans, as the case may be, the duration of the Interest Period to be applicable thereto immediately after such conversion or continuation. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group 33 29 of Fixed Rate Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at least one Domestic Business Day's notice to the Agent, prepay the Base Rate Loans (or any Money Market LIBOR Loans which bear interest at the Base Rate at such time for the reason stated in Section 8.01), in whole or in part, on any Domestic Business Day and (ii) upon at least two Euro-Dollar Business Days' notice to the Agent, prepay any Fixed Rate Loan, in whole or in part, on the last day of any Interest Period applicable thereto, in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the relevant Loans of the several Banks. (b) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in the Notes. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, any Base Rate Loans, CD Loans or fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans and Money Market LIBOR Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Absolute Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for 34 30 payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to another Loan (pursuant to Section 2.10, Article VI or Article VIII) on any day other than the last day of an Interest Period applicable thereto or the end of an applicable period fixed pursuant to Section 2.08(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loan after notice has been given to any Bank in accordance with Section 2.04(a) or Section 2.11, the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss reasonably incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after such payment or conversion or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense with an explanation of the calculation of such loss or expense, which certificate shall be conclusive if made reasonably and in good faith. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and facility fees hereunder shall be computed 35 31 on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Regulation D Compensation. For each day for which a Bank is required to maintain reserves in respect of either (x) "Eurocurrency Liabilities" (as defined in all regulations of the Board of Governors of the Federal Reserve System) or (y) any other category of liabilities which includes deposits by reference to which the interest rate in Euro-dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents, such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least five Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due to such Bank under this Section. Such Bank's notice to the Borrower shall set forth its calculation of such additional interest and such calculation shall be conclusive if made reasonably and in good faith. SECTION 2.16. Extension of Commitments. Not later than the date 90 days prior to the Termination Date, the Borrower may deliver to the Agent (which shall promptly transmit to each Bank) a notice in the form of Exhibit G hereto (an "Extension Notice") requesting that the Commitments be extended, effective on a Domestic Business Day specified in such notice (the "Extension Date") which Extension Date shall not be earlier than the date 60 days prior to the Termination Date at the time in effect nor later than the Termination Date at the time in effect, to a Euro-Dollar Business Day specified in such notice (the "Extended Maturity Date") which Extended Maturity Date shall not be later than 364 days after the Extension Date so 36 32 specified. Promptly after its receipt of any such Extension Notice, and in any event not later than the Extension Date, each Bank shall notify the Agent of its willingness or unwillingness so to extend its Commitment. Any Bank that is willing to so extend its Commitment shall countersign and return the Extension Notice to the Borrower, with a copy to the Agent. Any Bank which shall fail so to notify the Agent by the Extension Date shall be deemed to have declined to extend its Commitment. If all the Banks shall notify the Agent on or prior to the Extension Date of their willingness so to extend their respective Commitments (and no Bank shall have revoked such notice on or prior to the Extension Date), then, without further act, effective on the Extension Date (i) the Commitments shall be extended to the Extended Maturity Date, and (ii) the "Termination Date" shall be extended to the Extended Maturity Date (subject to further extension in accordance with this Section). Notwithstanding any other provision in this Agreement, any notice by any Bank of its willingness to extend its Commitment shall be revocable by such Bank in its sole discretion at any time on or prior to the Extension Date. It is acknowledged by the parties hereto that each Bank shall engage in a full credit assessment of the Borrower in determining whether to extend its Commitment and that each Bank may in its sole discretion elect to decline to extend its Commitment. If the conditions set forth herein to extension of the Commitments shall not be satisfied as of the close of business on the Extension Date, then the Commitments shall continue in effect, subject to the terms and conditions hereof, until the Termination Date at the time in effect. The Agent shall notify the Borrower and the Banks promptly following the Extension Date whether the requested extension was approved, which notice shall be conclusive absent manifest error. ARTICLE III CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective on the date that all of the following conditions shall have been satisfied (or waived in accordance with Section 9.04): (a) receipt by the Agent from each of the parties hereto of either (i) a counterpart hereof signed by such party or (ii) telegraphic, telex or other written confirmation, in form satisfactory to the Agent, 37 33 confirming that a counterpart hereof has been signed by such party; (b) receipt by the Agent for the account of each Bank of a duly executed Note dated on or before the Effective Date complying with the provisions of Section 2.05; (c) receipt by the Agent of a certificate signed by the Vice President-Finance and Treasurer or Senior Vice President, Finance of the Borrower, dated the Effective Date, to the effect that (i) no Default has occurred and is continuing as of the Effective Date, (ii) the representations and warranties of the Borrower set forth in Article IV hereof are true in all material respects on, and as of, the Effective Date and (iii) the Borrower has terminated, effective on or prior to the Effective Date, all commitments under the Credit Agreement dated as of August 1, 1989, among the Borrower, the banks party thereto and Morgan Guaranty Trust Company of New York, as agent for such banks, and has repaid all loans outstanding thereunder; (d) receipt by the Agent of an opinion of John W. Campbell, Esq., counsel to the Borrower and given upon the Borrower's express instructions, and of Davis Polk & Wardwell, special counsel to the Borrower, and given upon the Borrower's express instructions substantially in the forms of Exhibits E-1 and E-2 hereto, respectively; (e) receipt by the Agent of an opinion of Cravath, Swaine & Moore, special counsel to the Agent, substantially in the form of Exhibit F hereto; and (f) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than July 31, 1994. The Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. 38 34 SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (b) the fact that, immediately before and immediately after such Borrowing, no Default shall have occurred and be continuing; (c) the fact that immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (d) the fact that the representations and warranties of the Borrower set forth in Sections 4.01(i), 4.02 and 4.07(i) shall be true on and as of the date of such Borrowing; (e) the fact that the most recent financial statements provided by Borrower in compliance with Section 5.01, as supplemented prior to such Borrowing, shall be, to the best of Borrower's knowledge, accurate and complete in all material respects; and (f) the fact that the Borrowing shall have been approved in writing by (i) the Chairman of the Borrower, or (ii) the President of the Borrower, or (iii) the Group Executive, Finance and Administration, acting jointly with either the Senior Vice President, Finance, or the Vice President-Finance and Treasurer. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c), (d), (e) and (f) of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: 39 35 SECTION 4.01. Corporate Existence and Power. The Borrower (i) is a Connecticut insurance corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut, (ii) has all corporate powers required to carry on its business as now conducted and (iii) has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, the failure to obtain which would, individually or in the aggregate, have a material adverse effect on the ability of the Borrower to perform its obligations hereunder or on the financial condition of the Borrower and its Consolidated Subsidiaries taken as a whole. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or advance filing with, any governmental body, agency or official and do not contravene, or constitute a default under, (i) any provision of the certificate of incorporation or by-laws of the Borrower, (ii) any applicable law or regulation or any judgment, injunction, order or decree binding upon the Borrower, or (iii) any material financial agreement or instrument (excluding insurance obligations) of the Borrower. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1993, the related consolidated statements of cash flows for the year then ended and consolidated statement of income and retained earnings for the year then ended, reported on by KPMG Peat Marwick and set forth in the Borrower's 1993 Annual Report, copies of which have been delivered to the Agent for distribution to each of the Banks, fairly present, in conformity with United States generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their 40 36 consolidated results of operations and cash flows for such year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of March 31, 1994 and the related unaudited consolidated statements of income and retained earnings and cash flows for the three months then ended, set forth in the Borrower's 1994 First Quarter Form 10-Q, copies of which have been delivered to the Agent for distribution to each of the Banks, fairly present, in conformity with United States generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such three month period (subject to normal year-end adjustments). (c) Since March 31, 1994, there has been no material adverse change in the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, taken as a whole. SECTION 4.05. Litigation. Except as disclosed in the Borrower's 1993 Form 10-K or 1994 First Quarter Form 10-Q, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower, its Consolidated Subsidiaries or its Principal Insurance Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is not in violation of the presently applicable provisions of ERISA and the Internal Revenue Code where such violation would have a material adverse effect on the financial condition of the 41 37 Borrower and its Consolidated Subsidiaries taken as a whole, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA; provided that this Section 4.06 applies to the members of the ERISA Group only in their capacity as employers and not in any other capacity (such as fiduciaries or service providers to Plans for the benefit of employers of others). SECTION 4.07. Principal Insurance Subsidiaries. Each of the Borrower's Principal Insurance Subsidiaries (i) is a Connecticut insurance corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut, (ii) has all corporate powers required to carry on its business as now conducted and (iii) has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, the failure to obtain which would, individually or in the aggregate, have a material adverse effect on the ability of the Borrower to perform its obligations hereunder or on the financial condition of such Principal Insurance Subsidiary and its consolidated subsidiaries taken as a whole. SECTION 4.08. Compliance with Laws. To the best of the Borrower's knowledge, the Borrower has complied in all material respects with all applicable laws, except where any single failure to comply therewith would not individually have a material adverse effect on its ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that the sole representation and warranty with respect to compliance with ERISA is limited to Section 4.06; and provided further that the reference to applicable laws in this Section 4.08 shall not include Environmental Laws. ARTICLE V COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Borrower will deliver to the Agent, for delivery by the Agent to each of the Banks: 42 38 (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of earnings and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by KPMG Peat Marwick or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, the Borrower's Form 10-Q as of the end of such quarter; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of a Responsible Financial Officer of the Borrower (i) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto, and (ii) setting forth calculations demonstrating compliance, as of the date of the most recent balance sheet included in the financial statements being furnished at such time, with the covenant set forth in Section 5.03; (d) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Responsible Financial Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements and reports, and proxy statements so mailed; and (f) from time to time such additional publicly available information regarding the financial position or business of the Borrower and its Principal Insurance 43 39 Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. Conduct of Business and Maintenance of Existence. The Borrower will preserve, renew and keep in full force and effect, and will cause each Principal Insurance Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence. SECTION 5.03. Minimum Adjusted Consolidated Net Worth. Adjusted Consolidated Net Worth will at no time be less than $5,000,000,000. SECTION 5.04. Equal and Ratable Lien Protection. The Borrower will not, and will not permit any Principal Insurance Subsidiary to, issue, assume, incur or guarantee any indebtedness for borrowed money secured by a mortgage, pledge, lien or other encumbrance, directly or indirectly on any of the common stock of a Principal Insurance Subsidiary, which common stock is owned by the Borrower or any Principal Insurance Subsidiary, unless the obligations of the Borrower under this Agreement and the Notes and, if the Borrower so elects, any other indebtedness of the Borrower ranking on a parity with the Notes shall be secured equally and ratably with, or prior to, such secured indebtedness for borrowed money so long as it is outstanding and is so secured. SECTION 5.05. Consolidations, Mergers and Sales of Assets. The Borrower will not consolidate or merge with or into any other corporation or convey or transfer its properties and assets substantially as an entirety to any other Person unless (i) the surviving or acquiring entity is a corporation organized under the laws of one of the United States, (ii) the surviving or acquiring corporation, if other than the Borrower, expressly assumes the performance of the obligations of the Borrower under this Agreement and the Notes, and (iii) immediately after giving effect to such transaction, no Default shall exist. SECTION 5.06. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. 44 40 SECTION 5.07. Cross Default Provisions. If a cross default provision is included in any future instrument or agreement of the Borrower evidencing or relating to indebtedness for borrowed money in a principal amount in excess of $50,000,000, the Borrower will promptly notify the Banks thereof and will, if requested to do so by the Required Banks, sign an amendment to this Agreement to include a similar cross default provision herein. SECTION 5.08. Compliance with Laws. The Borrower will comply in all material respects with all applicable laws, except where any single failure to comply therewith would not individually have a material adverse effect on its ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that with respect to its compliance with ERISA, this Section 5.08 applies to the Borrower only in its capacity as an employer and not in any other capacity (such as a fiduciary or service provider to Plans for the benefit of employers of others); and provided further that the reference to applicable laws in this Section 5.08 shall not include Environmental Laws. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal on any Loan; (b) the Borrower shall fail to pay within five Domestic Business Days of when due any fees or interest on any Loan; (c) the Borrower shall fail to observe or perform any covenant contained in Sections 5.03 and 5.05; (d) the Borrower shall fail to observe or perform, in any material respect, any covenant or agreement contained in this Agreement (other than those covered by clause (a), (b) or (c) above) and such failure shall have continued for a period of 45 days after written 45 41 notice thereof has been given to the Borrower by the Agent at the request of any Bank; (e) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (f) an event of default, as defined in any indenture or instrument evidencing or under which the Borrower or any Principal Insurance Subsidiary has at the date of this Agreement or shall hereafter have outstanding indebtedness for borrowed money in a principal amount in excess of $50,000,000, shall occur and be continuing and such indebtedness shall have been accelerated so that the same shall be or become due and payable prior to the date on which the same would otherwise have become due and payable (other than acceleration of Non-Recourse Indebtedness which does not exceed in the aggregate 4% of the Borrower's total shareholders' equity, as set forth in the most recently published audited consolidated balance sheet of the Borrower), and such acceleration shall not have been waived, rescinded or annulled; provided, however, that if such acceleration under such indenture or instrument shall be remedied or cured by the Borrower or Principal Insurance Subsidiary, or waived, rescinded or annulled by the requisite holders of such indebtedness, then the Event of Default shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of the Banks; (g) the Borrower or any Principal Insurance Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall 46 42 take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Principal Insurance Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Principal Insurance Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of more than 35% of the outstanding shares of common stock of the Borrower; or at any time Continuing Directors shall not constitute a majority of the board of directors of the Borrower; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. 47 43 SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the 48 44 Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent approved by the Borrower (which approval shall not be unreasonably withheld). If no successor Agent shall have been so appointed by the Required Banks, and approved by the Borrower and shall have accepted such appointment within 10 Domestic Business Days after the retiring Agent gives notice 49 45 of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least two billion dollars. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any CD Loan, Euro-Dollar Loan or Money Market LIBOR Loan the Agent is advised by each of the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to each of the Reference Banks in the relevant market for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding Base Rate Loans into CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding CD Loans or Euro-Dollar Loans into CD Loans or Euro-Dollar Loans, as the case may be, with a different Interest Period shall be suspended, (ii) each outstanding CD Loan, Euro-Dollar Loan or Money Market LIBOR Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto, and (iii) unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any CD Borrowing, Euro-Dollar Borrowing or Money Market LIBOR Borrowing, as the case may be, for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (x) if such Borrowing is a CD Borrowing or a Euro-Dollar Borrowing, as the case may be, such Borrowing shall instead be made as a Base Rate Borrowing and 50 46 (y) if such Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Base Rate Loans or CD Loans into Euro-Dollar Loans, or to convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different Interest Period shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, all Euro-Dollar Loans of such Bank then outstanding shall be converted to Base Rate Loans either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loans if such Bank may lawfully continue to maintain and fund such Loans to such day or (b) immediately if such Bank may not lawfully continue to maintain and fund such Loans to such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or 51 47 not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation) shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any Euro-Dollar Loan, any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15 and (ii) with respect to any CD Loan, any such requirement reflected in the applicable Domestic Reserve Percentage or Assessment Rate) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans (other than Money Market Absolute Rate Loans), its Notes (in respect of such Fixed Rate Loans) or its obligation to make such Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Notes with respect thereto, by an amount reasonably deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation), has or would have the effect of increasing the amount of capital of such Bank (or its parent) required to be maintained in respect of, or otherwise allocated to, such Bank's obligations hereunder 52 48 (its "Required Capital") by an amount reasonably deemed by such Bank to be material, then such Bank may, by notice to the Borrower and the Agent, increase the facility fee payable to such Bank hereunder to the extent required so that the ratio of (w) the sum of the increased facility fee applicable to such Bank's unused Commitment hereunder to (x) the prior facility fee applicable to such Bank's unused Commitment hereunder is the same as the ratio of (y) such Bank's increased Required Capital to (z) its prior Required Capital. Such Bank's notice to the Borrower and the Agent shall set forth its calculation of the foregoing ratios and the increased facility fee to which it is entitled under this Section. (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 8.03 (each, a "Trigger Event") and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provision of this Section, no Bank shall be entitled to any compensation pursuant to this Section in respect of any Trigger Event (i) for any period of time in excess of 120 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of the date on which such Trigger Event shall have been enacted, promulgated, adopted or issued in definitive or final form unless such Trigger Event is retroactive. A certificate of any Bank claiming compensation under Section 8.03(a) or (b) and setting forth the additional amount or amounts to be paid to it hereunder and describing the method of calculation thereof shall be conclusive if made reasonably and in good faith. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and 53 49 the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses, except to the extent attributable to the negligence or misconduct of such Bank or the Agent, as the case may be) arising therefrom or with respect thereto. This indemnification shall be made within 15 days from the date such Bank or the Agent (as the case may be) makes demand therefor. 54 50 (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, shall provide the Borrower with (i) two Internal Revenue Service ("IRS") forms 1001 or any successor form prescribed by the IRS, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Bank from United States withholding tax or reduces the rate of withtholding tax on payments of interest and eliminates withholding tax on any fees, or (ii) two IRS forms 4224 certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.04(a). Each such Bank undertakes to deliver to each of the Borrower and the Agent (A) a replacement form (or successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and (B) such amendments thereto or extensions or renewals thereof as may reasonably be required (but only so long as such Bank remains lawfully able to do so). (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(b) or Section 8.04(c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to make any claim for indemnification in respect of 55 51 Taxes or Other Taxes pursuant to this Section 8.04 (each, a "Tax Event") and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such claim or any other amounts payable by the Borrower under this Section 8.04 and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provisions of this Section, no Bank shall be entitled to any indemnification pursuant to this Section in respect of any Tax Event (i) for any period of time in excess of 180 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of the date on which such Bank became aware of such Tax Event unless such Tax Event is retroactive. SECTION 8.05. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) Euro-Dollar Loans shall instead be Base Rate Loans, and (b) after each of its outstanding Euro-Dollar Loans has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the Borrower shall elect that the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the 56 52 Borrower shall have the right to seek a substitute bank or banks (which may be one or more of the Banks) to purchase the Notes and assume the Commitment of such Bank under this Agreement. SECTION 8.07. Election to Terminate. If during any Level I Period, Level II Period or Level III Period (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower may elect to terminate this Agreement as to such Bank, and in connection therewith not to borrow any Loan hereunder from such Bank or to prepay any Base Rate Loan made pursuant to Section 8.02 or 8.05 (without altering the Commitments or Loans of the remaining Banks), provided that the Borrower (i) notifies such Bank through the Agent of such election at least two Euro-Dollar Business Days before any date fixed for such borrowing or such a prepayment, as the case may be, and (ii) repays all of such Bank's outstanding Loans concurrently with such termination. Upon receipt by the Agent of such notice, the Commitment of such Bank shall terminate. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or telex or telecopy number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, telex or telecopy number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or telecopy number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. All notices from outside the United States to the Borrower shall only be given by telecopy and all other notices to the Borrower given by telex shall also be given by telecopy or non-telex method. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the number determined pursuant to this Section and the appropriate answerback is received, (ii) if given by registered or certified mail, return receipt 57 53 requested, when such return receipt is signed by the recipient or (iii) if given by any other means, when delivered at the address specified in this Section, or, if such date is not a business day in the location where received, on the next business day in such location; provided that notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent (subject to the limitations previously agreed with such counsel, in the case of fees payable in connection with the preparation of this Agreement), in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify each Bank and hold each Bank harmless from and against any and all liabilities, claims, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by any Bank (or by the Agent in connection with its actions as Agent hereunder) in connection with any investigative, administrative or judicial proceeding (whether or not such Bank shall be designated a party thereto) relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder to acquire equity securities of any other Person or (ii) any transaction which violates the change in control provisions set forth in Section 6.01(i); provided that no Bank shall have the right to be indemnified 58 54 hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.04. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank or subject any Bank to any additional obligation, (ii) reduce or forgive the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment or (iv) amend this Section or otherwise change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.05. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign, delegate, or otherwise transfer any of its rights or obligations under this Agreement (other than as contemplated by Section 5.05) without the prior written consent of all Banks. (b) Except for (i) any assignment made with the Borrower's consent, which consent shall be at the Borrower's sole discretion unless the Assignee is an Affiliate of the transferor Bank, in which case, such consent shall not be unreasonably withheld, (ii) any grant of participating interests permitted by subsection (d) below and (iii) any designation of a different Applicable Lending Office required by Section 8.02, Section 8.03 or Section 8.04, no Bank may at any time assign or otherwise transfer any of its rights and obligations under this Agreement and the Notes. An assignment or other transfer which is not permitted by this subsection (b) shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with subsection (d) below. (c) Subject to the requirements of subsection (b) above, any Bank may assign to one or more banks or other 59 55 institutions (each an "Assignee) all, or a proportionate part of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an instrument executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Agent. Upon execution and delivery of such an instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,000. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this 60 56 Agreement described in clause (ii) or (iii) of Section 9.04 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII with respect to its participating interest. (e) No Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances. (f) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferror Bank from its obligations hereunder. SECTION 9.06. New York Law. This Agreement and each Note shall be construed in accordance with and governed by the law of the State of New York. SECTION 9.07. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. 61 57 SECTION 9.08. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. AETNA LIFE AND CASUALTY COMPANY By /S/ ROBERT E. BROATCH ------------------------------- Title: Senior Vice President, Finance Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: Assistant Treasurer, Corporate Finance, YF37 Telecopier: (203) 275-2661 Telex: 99-241 99-295 643056 With a copy to: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: General Counsel Telecopier: (203) 273-0050 Telex: 99-241 99-295 643056 62 Commitment $50,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /S/ JERRY J. FALL -------------------------------- Title: Vice President Domestic Lending Office Morgan Guaranty Trust Company of New York c/o J.P Morgan Services Inc. 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin M. McCann Associate Telecopier: (302) 992-1852/1872 Telex: 177425 MBDEL UT Euro-Dollar Lending Office Morgan Guaranty Trust Company of New York c/o J.P Morgan Services Inc. 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin M. McCann Associate Telecopier: (302) 992-1852/1872 Telex: 177425 MBDEL UT Money Market Lending Office Morgan Guaranty Trust Company of New York c/o J.P Morgan Services Inc. 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin M. McCann Associate Telecopier: (302) 992-1852/1872 Telex: 177425 MBDEL UT 63 Commitment $50,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /S/ CLINTON M. JOHNSON -------------------------------- Title: Vice President By /S/ GEORGE-ANN TOBIN-DEW -------------------------------- Title: Managing Director Domestic Lending Office Deutsche Bank AG, New York Branch 31 West 52nd Street New York, New York 10019 Attention: Cheryl Mandelbaum Telecopier: (212) 474-8108 Telex: 429 166/DEUT BK NY Euro-Dollar Lending Office Deutsche Bank AG, Cayman Islands Branch 31 West 52nd Street New York, New York 10019 Attention: Cheryl Mandelbaum Telecopier: (212) 474-8108 Telex: 429 166/DEUT BK NY Money Market Lending Office Deutsche Bank AG, New York Branch 31 West 52nd Street New York, New York 10019 Attention: Cheryl Mandelbaum Telecopier: (212) 474-8108 Telex: 429 166/DEUT BK NY 64 Commitment $37,500,000 THE CHASE MANHATTAN BANK, N.A. By /S/ DENNIS COGAN -------------------------------- Title: Vice President Domestic Lending Office The Chase manhattan Bank, N.A. One Chase Manhattan Plaza New York, NY 10081 Attention: Monique Parker Telecopier: (212) 552-1477; (212) 552-1999 Telex: N/A Euro-Dollar Lending Office The Chase Manhattan Bank, N.A. One Chase Manhattan Plaza New York, NY 10081 Attention: Monique Parker Telecopier: (212) 552-1477; (212) 552-1999 Telex: N/A Money Market Lending Office The Chase Manhattan Bank, N.A. One Chase Manhattan Plaza New York, NY 10081 Attention: Monique Parker Telecopier: (212) 552-1477; (212) 552-1999 Telex: N/A 65 Commitment $37,500,000 CITIBANK, N.A. By /S/ SCOTT F. ENGLE -------------------------------- Title: Vice President Domestic Lending Office Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Josephine Cameron, Mgr./FINA-Insurance Telecopier: (212) 935-4285 Telex: N/A Euro-Dollar Lending Office Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Josephine Cameron, Mgr./FINA-Insurance Telecopier: (212) 935-4285 Telex: N/A Money Market Lending Office Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Josephine Cameron, Mgr./FINA-Insurance Telecopier: (212) 935-4285 Telex: N/A 66 Commitment $37,500,000 CREDIT SUISSE By /S/ LYNN ALLEGAERT -------------------------------- Title: Member of Senior Management By /S/ JUERG JOHNER -------------------------------- Title: Associate Domestic Lending Office Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Rita Santelli Telecopier: (212) 238-5439 Telex: N/A Euro-Dollar Lending Office Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Rita Santelli Telecopier: (212) 238-5439 Telex: N/A Money Market Lending Office Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Rita Santelli Telecopier: (212) 238-5439 Telex: N/A 67 Commitment $22,500,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /S/ LARRY HESS -------------------------------- Title: Vice President Domestic Lending Office Bank of America National Trust and Savings Association 1850 Gateway Boulevard, GPO-AA #5693 Concord, CA 94520 Attention: Hoyt Weller Telecopier: (510) 675-7531 Telex: 34346 Euro-Dollar Lending Office Bank of America National Trust and Savings Association 1850 Gateway Boulevard, GPO-AA #5693 Concord, CA 94520 Attention: Hoyt Weller Telecopier: (510) 675-7531 Telex: 34346 Money Market Lending Office Bank of America National Trust and Savings Association 555 California Street, 10th Floor San Francisco, CA 94104 Attention: Short Term Asset Sales #5670 Telecopier: (415) 622-2235 Telex: N/A 68 Commitment $22,500,000 THE FIRST NATIONAL BANK OF CHICAGO By /S/ THOMAS J. COLLIMORE -------------------------------- Title: Vice President Domestic Lending Office The First National Bank of Chicago One First National Plaza Insurance Companies Division, Suite 0085 Chicago, IL 60670-0085 Attention: Lillian Arroyo Telecopier: (312) 732-4033 Telex: N/A Euro-Dollar Lending Office The First National Bank of Chicago One First National Plaza Insurance Companies Division, Suite 0085 Chicago, IL 60670-0085 Attention: Lillian Arroyo Telecopier: (312) 732-4033 Telex: N/A Money Market Lending Office The First National Bank of Chicago One First National Plaza Insurance Companies Division, Suite 0085 Chicago, IL 60670-0085 Attention: Lillian Arroyo Telecopier: (312) 732-4033 Telex: N/A 69 Commitment $22,500,000 FLEET BANK, NATIONAL ASSOCIATION By /S/ JAN-GEE W. MCCOLLAM -------------------------------- Title: Senior Vice President Domestic Lending Office Fleet Bank, National Association One Constitution Plaza Hartford, CT 06115 Attention: Jacqueline Steffens/ Insurance Telecopier: (203) 244-5391 Telex: N/A Euro-Dollar Lending Office Fleet Bank National Association One Constitution Plaza Hartford, CT 06115 Attention: Jacqueline Steffens/ Insurance Telecopier: (203) 244-5391 Telex: N/A Money Market Lending Office Fleet Bank National Association One Constitution Plaza Hartford, CT 06115 Attention: Jacqueline Steffens/ Insurance Telecopier: (203) 244-5391 Telex: N/A 70 Commitment $22,500,000 MELLON BANK, N.A. By /S/ W. SCOTT SANFORD -------------------------------- Title: Senior Vice President Domestic Lending Office Mellon Bank, N.A. Three Mellon Bank Center Pittsburgh, PA 15259 Attention: Sandra A. Castelli/ Loan Administration Telecopier: N/A Telex: N/A Euro-Dollar Lending Office Mellon Bank, N.A. One Mellon Bank Center Pittsburgh, PA 15258 Attention: Marilyn Wagner/ Money Markets Telecopier: N/A Telex: N/A Money Market Lending Office Mellon Bank, N.A. Three Mellon Bank Center Pittsburgh, PA 15259 Attention: Sandra A. Castelli/ Loan Administration Telecopier: N/A Telex: N/A 71 Commitment $22,500,000 NATIONS BANK OF GEORGIA, N.A. By /S/ FRANK R. CALLISON -------------------------------- Title: Vice President Domestic Lending Office Nations Bank of Georgia, N.A. One Nations Bank Plaza NC1-002-06-19/ P.O. Box 120 Charlotte, NC 28255 Attention: Chris Chaffee Telecopier: (704) 386-8694 Telex: N/A Euro-Dollar Lending Office Nations Bank of Georgia, N.A. One Nations Bank Plaza NC1-002-06-19/ P.O. Box 120 Charlotte, NC 28255 Attention: Chris Chaffee Telecopier: (704) 386-8694 Telex: N/A Money Market Lending Office Nations Bank of Georgia, N.A. One Nations Bank Plaza NC1-002-06-19/ P.O. Box 120 Charlotte, NC 28255 Attention: Chris Chaffee Telecopier: (704) 386-8694 Telex: N/A 72 Commitment $22,500,000 SHAWMUT BANK CONNECTICUT, N.A. By /S/ MARION B. HARDY -------------------------------- Title: Vice President Domestic Lending Office Shawmut Bank Connecticut, N.A. 777 Main Street Hartford, CT 06115 Attention: Leeane Hediger Insurance Industry Telecopier: (203) 240-1264 Telex: N/A Euro-Dollar Lending Office Shawmut Bank Connecticut, N.A. 777 Main Street Hartford, CT 06115 Attention: Leeane Hediger Insurance Industry Telecopier: (203) 240-1264 Telex: N/A Money Market Lending Office Shawmut Bank Connecticut, N.A. 777 Main Street Hartford, CT 06115 Attention: Leeane Hediger Insurance Industry Telecopier: (203) 240-1264 Telex: N/A 73 Commitment $22,500,000 THE TORONTO-DOMINION BANK By /S/ E. E. WALKER -------------------------------- Title: Manager - Credit Administration Domestic Lending Office The Toronto-Dominion Bank 909 Fannin Street, Suite 1700 Houston, TX 77010 Attention: E. E. Walker Manager, Credit Administration Telecopier: (713) 951-9921 Telex: N/A Euro-Dollar Lending Office The Toronto-Dominion Bank 909 Fannin Street, Suite 1700 Houston, TX 77010 Attention: E. E. Walker Manager, Credit Administration Telecopier: (713) 951-9921 Telex: N/A Money Market Lending Office The Toronto-Dominion Bank USA Treasury Group- Short Term Asset Sales 31 West 52nd Street, 21st Floor New York, NY 10019-6101 Attention: Senior Dealer Telecopier: (212) 262-1949 Telex: N/A 74 Commitment $13,000,000 CHEMICAL BANK By /S/ M. LUISA HUNNEWELL -------------------------------- Title: Vice President Domestic Lending Office Chemical Bank 270 Park Avenue, 9th Floor New York, NY 10017 Attention: Bill Castro Telecopier: (212) 370-0429 Telex: N/A Euro-Dollar Lending Office Chemical Bank 270 Park Avenue, 9th Floor New York, NY 10017 Attention: Bill Castro Telecopier: (212) 370-0429 Telex: N/A Money Market Lending Office Chemical Bank 270 Park Avenue, 9th Floor New York, NY 10017 Attention: Bill Castro Telecopier: (212) 370-0429 Telex: N/A 75 Commitment $13,000,000 CORESTATES BANK N.A. By /S/ DEIDRE LEDWITH -------------------------------- Title: Assistant Vice President Domestic Lending Office Corestates Bank N.A. Centre Square-West Tower-Loan ACCTG F.C. 1-3-81-1 1500 Market Street Philadelphia, PA 19101 Attention: Sharon Burgess/ Loan Accounting Telecopier: (215) 786-4113 Telex: N/A Euro-Dollar Lending Office Corestates Bank N.A. Centre Square-West Tower-Loan ACCTG F.C. 1-3-81-1 1500 Market Street Philadelphia, PA 19101 Attention: Sharon Burgess/ Loan Accounting Telecopier: (215) 786-4113 Telex: N/A Money Market Lending Office Corestates Bank N.A. Centre Square-West Tower-Loan ACCTG F.C. 1-3-81-1 1500 Market Street Philadelphia, PA 19101 Attention: Sharon Burgess/ Loan Accounting Telecopier: (215) 786-4113 Telex: N/A 76 Commitment $13,000,000 CREDIT LYONNAIS NEW YORK By /S/ JEAN MARK MORIANI -------------------------------- Title: Senior Vice President Domestic Lending Office Credit Lyonnais New York 1301 Avenue of the Americas New York, NY 10019 Attention: Lucie Mercado Financial Institutions Telecopier: (212) 261-3401 Telex: 62410 YLRC Euro-Dollar Lending Office Credit Lyonnais New York 1301 Avenue of the Americas New York, NY 10019 Attention: Lucie Mercado Financial Institutions Telecopier: (212) 261-3401 Telex: 62410 YLRC Money Market Lending Office Credit Lyonnais New York 1301 Avenue of the Americas New York, NY 10019 Attention: Lucie Mercado Financial Institutions Telecopier: (212) 261-3401 Telex: 62410 YLRC 77 Commitment $13,000,000 THE DAI-ICHI KANGYO BANK, LTD., NEW YORK BRANCH By /S/ KIM P. LEARY --------------------------------- Title: Vice President Domestic Lending Office The Dai-Ichi Kangyo Bank, Ltd., New York Branch One World Trade Center Suite 4911 New York, NY 10048 Attention: Anne Marie Heverin Telecopier: (212) 524-0579; (212) 432-5221 Telex: 232988 DKB UR; 422581 DKB UI; 824613 DKB NYUF Euro-Dollar Lending Office The Dai-Ichi Kangyo Bank, Ltd., New York Branch One World Trade Center Suite 4911 New York, NY 10048 Attention: Anne Marie Heverin Telecopier: (212) 524-0597; (212) 432-5221 Telex: 232988 DKB UR; 422581 DKB UI; 824613 DKB NYUF Money Market Lending Office The Dai-Ichi Kangyo Bank, Ltd., New York Branch One World Trade Center Suite 4911 New York, NY 10048 Attention: Anne Marie Heverin Telecopier: (212) 524-0597; (212) 432-5221 Telex: 232988 DKB UR; 422581 DKB UI; 824613 DKB NYUF 78 Commitment $13,000,000 FIRST INTERSTATE BANK OF CALIFORNIA By /S/ THOMAS J. HELOTES -------------------------------- Title: Vice President Domestic Lending Office First Interstate Bank of California 707 Wilshire Boulevard W16-14 Los Angeles, CA 90017 Attention: Thomas John Helotes Telecopier: (213) 614-4122 Telex: N/A Euro-Dollar Lending Office First Interstate Bank of California 1055 Wilshire Boulevard B10-6 Los Angeles, CA 90017 Attention: Claudine Stines Unit Manager Telecopier: (213) 488-9909/9959 Telex: N/A Money Market Lending Office First Interstate Bank of California 707 Wilshire Boulevard W16-20 Los Angeles, CA 90017 Attention: Matt Frey Asst. Vice President Telecopier: (213) 614-2305/2569 Telex: N/A 79 Commitment $13,000,000 THE FIRST NATIONAL BANK OF BOSTON By /S/ CHARLES A. GARRITY -------------------------------- Title: Vice President Domestic Lending Office The First National Bank of Boston 100 Federal Street Boston, MA 02110 Attention: Loretta Barraffo Commercial Loan Department Telecopier: (617) 467-2276 Telex: N/A Euro-Dollar Lending Office The First National Bank of Boston P.O. Box 1187 Boston, MA 02103 Attention: Loretta Barraffo Commercial Loan Department Telecopier: (617) 467-2276 Telex: N/A Money Market Lending Office The First National Bank of Boston 100 Federal Street Boston, MA 02110 Attention: Loretta Barraffo Commercial Loan Department Telecopier: (617) 467-2276 Telex: N/A 80 Commitment $13,000,000 NORTHERN TRUST COMPANY By /S/ DEAN V. BANICK -------------------------------- Title: Vice President Domestic Lending Office Northern Trust Company 50 South LaSalle Chicago, IL 60675 Attention: Evelyn Jackson/ Commercial Banking Telecopier: (312) 444-3432 Telex: N/A Euro-Dollar Lending Office Northern Trust Company 50 South LaSalle Chicago, IL 60675 Attention: Evelyn Jackson/ Commercial Banking Telecopier: (312) 444-3432 Telex: N/A Money Market Lending office Northern Trust Company 50 South LaSalle Chicago, IL 60675 Attention: Evelyn Jackson/ Commercial Banking Telecopier: (312) 557-8337 Telex: N/A 81 Commitment $13,000,000 STATE STREET BANK AND TRUST COMPANY By /S/ ROBERT P. ENGVALL, JR. -------------------------------- Title: Vice President Domestic Lending Office State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Attention: Sandra L. Donnellan Telecopier: (617) 985-5082 Telex: 200139/ STATE UR Euro-Dollar Lending Office State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Attention: Sandra L. Donnellan Telecopier: (617) 985-5082 Telex: 200139/ STATE UR Money Market Lending Office State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Attention: Sandra L. Donnellan Telecopier: (617) 985-5082 Telex: 200139/ STATE UR 82 Commitment $13,000,000 THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH By /S/ SHINICHI ITO -------------------------------- Title: Joint General Manager Domestic Lending Office The Sumitomo Bank, Limited, New York Branch One World Trade Center Suite 9651 New York, NY 10048 Attention: Diana Pabon Hurtzig Telecopier: (212) 323-0366 Telex: N/A Euro-Dollar Lending Office The Sumitomo Bank, Limited, New York Branch One World Trade Center Suite 9651 New York, NY 10048 Attention: Diana Pabon Hurtzig Telecopier: (212) 323-0366 Telex: N/A Money Market Lending Office The Sumitomo Bank, Limited, New York Branch One World Trade Center Suite 9651 New York, NY 10048 Attention: Diana Pabon Hurtzig Telecopier: (212) 323-0366 Telex: N/A 83 Commitment $13,000,000 WACHOVIA BANK OF GEORGIA, N.A. By /S/ DAVID L. GAINES -------------------------------- Title: Senior Vice President Domestic Lending Office Wachovia Bank of Georgia, N.A. 191 Peachtree Street NE MC-GA 370 Atlanta, GA 30303 Attention: Gwen Miles U.S. Corporate Telecopier: (404) 332-6898 Telex: 542553/WACHFEX-ATL Euro-Dollar Lending Office Wachovia Bank of Georgia, N.A. 191 Peachtree Street NE MC-GA 370 Atlanta, GA 30303 Attention: Gwen Miles U.S. Corporate Telecopier: (404) 332-6898 Telex: 542553/WACHFEX-ATL Money Market Lending Office Wachovia Bank of Georgia, N.A. 191 Peachtree Street NE MC-GA 370 Atlanta, GA 30303 Attention: Gwen Miles U.S. Corporate Telecopier: (404) 332-6898 Telex: 542553/WACHFEX-ATL 84 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /S/ JERRY J. FALL -------------------------------- Title: Vice President 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin McCann, Associate Telecopier: (212) 385-2603 Telex: 177425 MBDEL UT 85 EXHIBIT A NOTE New York, New York July , 1994 For value received, Aetna Life and Casualty Company, a Connecticut insurance corporation (the "Borrower"), promises to pay to the order of _______________ (the "Bank"), for the account of its Applicable Lending Office, the principal sum of $_________ or the aggregate unpaid principal amount of the Bank's Loans then outstanding under the Credit Agreement referred to below on the date or dates provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding shall be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Short-Term Credit Agreement dated as of July 27, 1994 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Managing Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. 86 2 Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. AETNA LIFE AND CASUALTY COMPANY By -------------------- Title: 87 3 LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- Amount of Amount of Principal Maturity Notation Date Loan Repaid Date Made By - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 88 EXHIBIT B Form of Money Market Quote Request [Date] To: Morgan Guaranty Trust Company of New York (the "Agent") From: Aetna Life and Casualty Company Re: Short-Term Credit Agreement (the "Credit Agreement") dated as of July 27, 1994 among the Borrower, the Banks listed on the signature pages thereof and the Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------------- Principal Amount */ Interest Period **/ - ------------------- ------------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - ---------------------------------- */ Amount must be $25,000,000 or a larger multiple of $1,000,000. **/ Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. 89 2 Terms used herein have the meanings assigned to them in the Credit Agreement. AETNA LIFE AND CASUALTY COMPANY By ------------------- Title: 90 EXHIBIT C Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to Aetna Life and Casualty Company (the "Borrower") Pursuant to Section 2.03 of the Short-Term Credit Agreement dated as of July 27, 1994 among the Borrower, the Banks parties thereto and the undersigned, as Managing Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------ Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than 9:30 A.M. (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ------------------------ Authorized Officer 91 EXHIBIT D Form of Money Market Quote Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Attention: Re: Money Market Quote to Aetna Life and Casualty Company (the "Borrower") In response to your invitation on behalf of the Borrower dated ____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ---------------------------- 2. Person to contact at Quoting Bank: - --------------------------------------- 3. Date of Borrowing: */ ---------------------- - ---------------------------------- */ As specified in the related Invitation. 92 2 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market [Absolute Amount **/ Period ***/ [Margin ****/ ] Rate *****/ ] - ---------- ----------- --------------- ------------- $ $
[Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $______________.] **/ We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Short-Term Credit Agreement dated as of July 27, 1994 among the Borrower, the Banks listed on - ---------------------------------- **/ Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $1,000,000 or a larger multiple thereof. ***/ Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), specified in the related Invitation. No more than five bids are permitted for each Interest Period. ****/ Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". *****/ Specify rate of interest per annum (rounded to the nearest 1/10,000 of 1%). 93 3 the signature pages thereof and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] By ------------------------- Authorized Officer 94 EXHIBIT E-1 OPINION OF COUNSEL FOR THE BORROWER July __, 1994 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, NY 10260 Ladies and Gentlemen: As counsel to Aetna Life and Casualty Company (the "Borrower"), I have been asked to provide a legal opinion to you in connection with the Short-Term Credit Agreement (the "Credit Agreement") dated as of July 27, 1994 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Managing Agent. Terms defined in the Credit Agreement are used herein as therein defined. In furnishing this opinion, I have: (1) made, or caused to be made, and relied upon such investigations of fact and law and have examined, or caused to be examined, and relied upon such documents, records, certificates, instruments or other written evidences, and upon such other factual information, as in my judgment were necessary or appropriate; and (2) assumed that all such documents, records, certificates, instruments and other written evidences: (a) when examined as copies, conform with the originals thereof; and (b) when examined in the originals or in copies, are complete, authentic and genuinely executed on behalf of all parties other than, with respect to the Credit Agreement and all 95 2 other documents executed and delivered in connection therewith, the Borrower. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is an insurance corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes (i) are within the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) under the laws of Connecticut and federal laws and, to the best of my knowledge and belief without any investigation, the laws of any other jurisdictions, require no action by or in respect of, or prior filing with, any governmental body, agency or official, (iv) do not conflict with, violate or result in a breach of or constitute a default under the Certificate of Incorporation or By-Laws of the Borrower, its 9-1/2% Eurodollar Notes due 1995, its 8-5/8% Notes due 1998, its 6-3/8% Notes due 2003, its 6-3/4% Debentures due 2013, its 7-3/4% Eurodollar Notes due 2016, its 8% Debentures due 2017 or its 7-1/4% Debentures due 2023 and (v) to the best of my knowledge and belief, will not conflict with or constitute a breach of or a default under any other financial agreement (excluding insurance obligations) binding upon the Borrower, which conflict, breach or default would have a material adverse effect on the earnings or financial condition of the Borrower and its Consolidated Subsidiaries considered as a whole. 3. To the best of my knowledge, except as disclosed in the Borrower's 1993 Form 10-K or 1994 First Quarter Form 10-Q, there is no action, suit or proceeding pending against or threatened against or affecting the Borrower or its Consolidated Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner 96 3 draws into question the validity of the Credit Agreement or the Notes. 4. Each of the Borrower's Principal Insurance Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation. I am admitted to the Bar of the State of Connecticut, and the foregoing opinion is limited to the laws of the State of Connecticut and federal laws. I am furnishing this opinion to you solely for your benefit pursuant to Section 3.01(d) of the Credit Agreement, and it is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, John W. Campbell 97 EXHIBIT E-2 OPINION OF DAVIS POLK & WARDWELL July __, 1994 The Banks and the Agent Referred to Above c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among Aetna Life and Casualty Company, a Connecticut insurance corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Managing Agent (the "Agent"), and have acted as special New York counsel for the Borrower for the purpose of rendering this opinion pursuant to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. Under the laws of New York, the execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in 98 2 respect of, or prior filing with, any governmental body, agency or official. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower, enforceable in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, by insolvency laws affecting the rights of creditors of insurance companies generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York. In giving the foregoing opinion, (i) we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect and (ii) we have relied, without independent investigation, as to all matters governed by the laws of Connecticut, upon the opinion of John W. Campbell, counsel for the Borrower, dated July __, 1994, a copy of which has been delivered to you. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 99 EXHIBIT F July __, 1994 Dear Sirs: We have participated in the preparation of the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among Aetna Life and Casualty Company, a Connecticut insurance corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Managing Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of opinion as follows: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower. In giving the foregoing opinion, (i) we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect and (ii) we have relied, without independent investigation, as to all matters governed by the 100 2 laws of Connecticut, upon the opinion of John W. Campbell, Esq., counsel for the Borrower dated July , 1994, a copy of which has been delivered to you. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, The Banks and the Agent Referred to Above In care of Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, NY 10260 101 EXHIBIT G EXTENSION NOTICE To the Banks party to the Credit Agreement referred to below: In care of Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, NY 10260 Gentlemen: Aetna Life and Casualty Company (the "Borrower") hereby requests that the Commitments under the Short-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among the Borrower, the Banks listed therein, certain Co-Agents named therein and Morgan Guaranty Trust Company of New York, as Managing Agent, pursuant to Section 2.16 of the Credit Agreement. The Extension Date is _______ and the Extended Maturity Date is _______. Each Bank that is willing to extend its Commitment as provided above is requested to countersign a copy of this notice and return it to the Borrower, with a copy to the Agent, as promptly as possible, but in any event prior to the Extension Date specified above; provided that such Bank may revoke its agreement to so extend its Commitment at any time on or prior to the Extension Date by written notice to the Borrower delivered to the Borrower on or prior to the Extension Date. Terms defined in the Credit Agreement are used herein as therein defined. This extension Notice shall be construed in accordance with and governed by the law of the State of New York. AETNA LIFE AND CASUALTY COMPANY By --------------------------- Title: 102 2 The undersigned Bank is willing to extend its Commitment as specified above: [NAME OF BANK] By --------------------------- Title: EX-10.2 3 1 ============================================================ $500,000,000 MEDIUM-TERM CREDIT AGREEMENT dated as of July 27, 1994 among Aetna Life and Casualty Company, The Banks Listed Herein, Morgan Guaranty Trust Company of New York, as Managing Agent Deutsche Bank AG, as Co-Arranger and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co-Agents ============================================================ 2 TABLE OF CONTENTS */
Page ---- ARTICLE I DEFINITIONS SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . 13 1.03 Classifications of Borrowings . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE II THE CREDITS SECTION 2.01 Commitments to Lend . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.02 Notice of Committed Borrowings . . . . . . . . . . . . . . . . . . . . . 14 2.03 Money Market Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.04 Notice to Banks; Funding of Loans . . . . . . . . . . . . . . . . . . . . 20 2.05 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.06 Maturity of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.07 Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.08 Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.09 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.10 Method of Electing Interest Rates . . . . . . . . . . . . . . . . . . . . 26 2.11 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.12 General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . 29 2.13 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.14 Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . 30 2.15 Regulation D Compensation . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE III CONDITIONS SECTION 3.01 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.02 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
- ---------------------------------- */ The Table of Contents is not a part of this Agreement. 3
Page ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01 Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . 34 4.02 Corporate and Governmental Authorization; No Contravention . . . . . . . . . . . . . . . . . . . . 34 4.03 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.04 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.05 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.06 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.07 Principal Insurance Subsidiaries . . . . . . . . . . . . . . . . . . . . 36 4.08 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE V COVENANTS SECTION 5.01 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5.02 Conduct of Business and Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . 38 5.03 Minimum Adjusted Consolidated Net 38 Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04 Equal and Ratable Lien Protection . . . . . . . . . . . . . . . . . . . . 38 5.05 Consolidations, Mergers and Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 5.06 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 5.07 Cross Default Provisions . . . . . . . . . . . . . . . . . . . . . . . . 39 5.08 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE VI DEFAULTS SECTION 6.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6.02 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 ARTICLE VII THE AGENT SECTION 7.01 Appointment and Authorization . . . . . . . . . . . . . . . . . . . . . . 42 7.02 Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.03 Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.04 Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . 42 7.05 Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.06 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.07 Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.08 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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Page ---- ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01 Basis for Determining Interest Rate Inadequate or Unfair . . . . . . . . . . . . . . . . . . . . . . . 44 8.02 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.03 Increased Cost and Reduced Return . . . . . . . . . . . . . . . . . . . . 46 8.04 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8.05 Base Rate Loans Substituted for Affected Euro-Dollar Loans . . . . . . . . . . . . . . . . . . . . . . 50 8.06 Substitution of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 51 8.07 Election to Terminate . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE IX MISCELLANEOUS SECTION 9.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 9.02 No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.03 Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 52 9.04 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . 53 9.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . 53 9.06 New York Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 9.07 Counterparts; Integration . . . . . . . . . . . . . . . . . . . . . . . . 55 9.08 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Exhibit A - Note Exhibit B - Form of Money Market Quote Request Exhibit C - Form of Invitation for Money Market Quotes Exhibit D - Form of Money Market Quote Exhibit E - Opinions of Counsel for the Borrower Exhibit F - Opinion of Special Counsel for the Agent
-3- 5 CREDIT AGREEMENT AGREEMENT dated as of July 27, 1994 among AETNA LIFE AND CASUALTY COMPANY, the BANKS listed on the signature pages hereof, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Managing Agent, DEUTSCHE BANK AG, as Co-Arranger, and THE CHASE MANHATTAN BANK, N.A., CITIBANK, N.A., and CREDIT SUISSE, as Co-Agents. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.08(b). "Adjusted Consolidated Net Worth" means at any date the total shareholders' equity of the Borrower and its Consolidated Subsidiaries determined as of such date, adjusted to exclude net unrealized capital gains and losses. "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means, (1) any bank which, directly or indirectly, wholly owns, is wholly owned by or shares common one hundred percent ownership with the transferor Bank and, (ii) is of credit rating better than or equal to that of the transferor Bank on the Effective Date, as determined by Moody's Investors Service and Standard & Poor's Corporation. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as Managing Agent for the Banks hereunder, and its successors in such capacity. 6 2 "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Base Rate Loans and CD Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.08(b). "Assignee" has the meaning set forth in Section 9.05(c). "Bank" means each bank listed on the signature pages hereof and its successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or the provisions of Article VIII or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Borrower" means Aetna Life and Casualty Company, a Connecticut insurance corporation and, except for purposes of Section 6.01(i), its successors. "Borrower's 1993 Form 10-K" means the Borrower's annual report on Form 10-K for 1993, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrower's 1994 First Quarter Form 10-Q" means the Borrower's quarterly report for the fiscal quarter ended March 31, 1994 as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" means a borrowing hereunder consisting of Loans made to the Borrower at the same time by the Banks pursuant to Article II. A Borrowing is a "Base Rate Borrowing" if such Loans are Base Rate Loans, a "CD Borrowing" if such Loans are CD Loans, a "Euro-Dollar Borrowing" if such 7 3 Loans are Euro-Dollar Loans and a "Money Market Borrowing" if such Loans are Money Market Loans. "CD Base Rate" has the meaning set forth in Section 2.08(b). "CD Loan" means (i) a Committed Loan which bears interest at the Fixed CD Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or (ii) an overdue amount which was a CD Loan immediately before it became overdue. "CD Margin" has the meaning set forth in Section 2.08(b). "CD Reference Banks" means The Chase Manhattan Bank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.07 or terminated pursuant to Section 8.07. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Continuing Director" means, at any time, a director who (i) was a director of Aetna Life and Casualty Company 24 months prior to such time or (ii) was nominated or elected as a director by vote of a majority of the persons who were Continuing Directors at the time of such nomination or election. 8 4 "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.08(b). "Duff" means Duff & Phelps Inc. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. 9 5 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or (ii) an overdue amount which was a Euro-Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" has the meaning set forth in Section 2.08(c). "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.08(c) on the basis of the London Interbank Offered Rate. "Euro-Dollar Reference Banks" means The Chase Manhattan Bank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference 10 6 to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as calculated by the Agent, such calculation to be supplied to the Borrower upon the Borrower's request. "Fixed CD Rate" has the meaning set forth in Section 2.08(b). "Fixed Rate Borrowing" means a CD Borrowing, a Euro-Dollar Borrowing or a Money Market Borrowing. "Fixed Rate Loans" means Euro-Dollar Loans, CD Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate for the reason stated in Section 8.01) or any combination of the foregoing. "Group of Loans" means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time, (ii) all Committed Loans which are CD Loans having the same Interest Period at such time or (iii) all Committed Loans which are Euro-Dollar Loans having the same Interest Period at such time; provided that, if Committed Loans of any particular Bank are converted to or made as Base Rate Loans pursuant to Article VIII, such Loans shall be included in the same Group or Groups of Loans from time to time as they would have been in if they had not been so converted or made. 11 7 "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substances having any constituent elements displaying any of the foregoing characteristics. "Interest Period" means: (1) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 90 days thereafter; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing or such longer period as mutually agreed to by the Borrower and all of the Banks; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and 12 8 (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (3) with respect to each Euro-Dollar Loan, a period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice or such longer period as mutually agreed to by the Borrower and all of the Banks; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (4) with respect to each Money Market LIBOR Loan, the period commencing on the date of Borrowing and ending such whole number of months thereafter, as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and 13 9 (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (5) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Level I Period" means any period during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) AA+ by S&P and/or (ii) Aa1 by Moody's and/or (iii) AA+ by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level II Period" means any period (other than a Level I Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) AA- by S&P and/or (ii) Aa3 by Moody's and/or (iii) AA- by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level III Period" means any period (other than a Level I Period or a Level II Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) A- by S&P and/or (ii) A3 by Moody's 14 10 and/or (iii) A- by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level IV Period" means any period (other than a Level I Period, Level II Period or Level III Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB by S&P and/or (ii) Baa2 by Moody's and/or (iii) BBB by Duff; provided that if S&P or Moody's or Duff changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level. "Level V Period" means any period other than a Level I Period, Level II Period, Level III Period or Level IV Period. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Loan" means a Base Rate Loan, a Euro-Dollar Loan, a CD Loan or a Money Market Loan and "Loans" means any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.08(c). "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan made or to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references 15 11 herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan made or to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate for the reason stated in Section 8.01). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Money Market Quote Request" means a request by the Borrower to the Banks to make Money Market Loans in accordance with Section 2.03(b). "Moody's" means Moody's Investors Service, Inc. "Non-Recourse Indebtedness" means indebtedness for borrowed money as to which the liability of the Borrower or its Principal Insurance Subsidiaries, as the case may be, is limited solely to specific assets. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Notice of Interest Rate Election" has the meaning set forth in Section 2.10. "Other Taxes" has the meaning set forth in Section 8.04(a). "Participant" has the meaning set forth in Section 9.05(d). 16 12 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Principal Insurance Subsidiary" means Aetna Life Insurance Company, The Aetna Casualty and Surety Company, or any other Subsidiary of the Borrower, including Subsidiaries of Subsidiaries, which shall succeed by merger or otherwise to a major part of the business of one or more of the Principal Insurance Subsidiaries. For the purposes of this definition the decision as to whether a Subsidiary shall have succeeded to a major part of the business of one or more Principal Insurance Subsidiaries shall be made in good faith by the Borrower's Board of Directors by the adoption of a resolution so stating. "Quarterly Date" means the last Domestic Business Day of each January, April, July and October. "Reference Banks" means The Chase Manhattan Bank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York, and "Reference Bank" means any one of such Reference Banks. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. 17 13 "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Required Capital" has the meaning set forth in Section 8.03(b). "Responsible Financial Officer" means chief financial officer, treasurer, chief accounting officer or senior corporate finance officer. "Revolving Credit Period" means the period from the date hereof to and including the Termination Date. "S&P" means Standard & Poor's Corporation. "Senior Unsecured Debt" means indebtedness for borrowed money that is not subordinated to any other indebtedness for borrowed money and is not secured or supported by a guarantee, letter of credit or other form of credit enhancement. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. "Taxes" has the meaning set forth in Section 8.04(a). "Termination Date" means July 27, 1999 or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Trigger Event" has the meaning set forth in Section 8.03(c). SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes 18 14 concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks. SECTION 1.03. Classifications of Borrowings. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids). ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. On the terms and conditions set forth in this Agreement, each Bank severally agrees to lend to the Borrower, from time to time during the Revolving Credit Period amounts not to exceed in the aggregate at any one time outstanding the amount of such Bank's Commitment. Each Borrowing under this Section 2.01 shall be in an aggregate principal amount of $25,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount of the unused Commitments) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. Failure by any Bank to make Loans as required under the terms of this Agreement will not relieve any other Bank of its obligations hereunder. SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing 19 15 and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a CD Borrowing and a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a CD Borrowing or Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks from time to time during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks 20 16 not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $25,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or following notice to each of the Banks, such other number of days as the Borrower and the Agent may agree upon) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 9:30 A.M. (New 21 17 York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 9:15 A.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (x) may be greater than or less than the Commitment of the quoting Bank, (y) must be $25,000,000 or a larger multiple of $1,000,000 and (z) may not exceed the principal amount of Money Market Loans for which offers were requested, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (rounded to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (rounded to the 22 18 nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered (including the names of the Banks) and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote for any Interest Period may be accepted. 23 19 (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote for any Interest Period in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $25,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of such number, not greater than $1,000,000 as the Agent may deem appropriate) in proportion 24 20 to the aggregate principal amounts of such offers. Determinations by the Agent of the pro rata amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.08 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of 25 21 such Bank in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and prior to any transfer of its Note shall endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. (d) Each Bank agrees that it will cancel and return to the Borrower all Notes then held by it upon the earlier of (i) the Termination Date provided no Default shall have then occurred and be continuing or (ii) the date such Bank's Commitment has been terminated and there are no Loans outstanding to or accrued interest owing to such Bank. SECTION 2.06. Maturity of Loans. (a) The Committed Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date. (b) Each Money Market Loan shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable to such Money Market Loan. 26 22 SECTION 2.07. Termination or Reduction of Commitments. (a) The Commitments of each Bank shall terminate at the end of the Revolving Credit Period. (b) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days' notice to the Agent, terminate the Commitments at any time, if no Loans are outstanding at such time. (c) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days' notice to the Agent, ratably reduce the Commitments from time to time by an aggregate amount of $25,000,000 or any larger multiple of $1,000,000, but only to the extent that the aggregate amount of the Commitments exceeds the aggregate outstanding principal amount of the Loans. SECTION 2.08. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the earlier of (i) the last day of the Interest Period applicable thereto or (ii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the applicable Fixed CD Rate. Such interest shall be payable for each Interest Period on the earlier of (i) the last day of the Interest Period applicable thereto, (ii) 90 days after the initial date thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days thereafter or (iii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the higher of (i) the Fixed CD Rate applicable to such Loan and (ii) the rate applicable to Base Rate Loans for such day. 27 23 The "Fixed CD Rate" applicable to any CD Loan for any Interest Period means a rate per annum equal to the sum of the CD Margin plus the applicable Adjusted CD Rate. "CD Margin" means (i) 0.375% during each Level I Period, (ii) 0.400% during each Level II Period, (iii) 0.425% during each Level III Period, (iv) 0.500% during each Level IV Period, and (v) 0.625% during each Level V Period. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate * The amount in brackets being rounded upwards, if necessary, to the next higher 1/100 of 1%. The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the arithmetic average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each Reference Bank of its certificates of deposit in an amount comparable to the unpaid principal amount of the CD Loan of such Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect 28 24 of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Fixed CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any Interest Period the net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) actually incurred by Morgan Guaranty Trust Company of New York to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of Morgan Guaranty Trust Company of New York in the United States during the most recent period for which such rate has been determined prior to the commencement of such Interest Period. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable London Interbank Offered Rate. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof, (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date. "Euro-Dollar Margin" means (i) 0.250% during each Level I Period, (ii) 0.275% during each Level II Period, (iii) 0.300% during each Level III Period, (iv) 0.375% during each Level IV Period, and (v) 0.500% during each Level V Period. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. 29 25 (d) Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 1% plus the Euro-Dollar Margin plus the higher of (i) the London Interbank Offered Rate applicable to such Loan and (ii) the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Reference Banks are offered to such Reference Bank in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in Section 8.01 shall exist, at a rate per annum equal to the sum of 1% plus the Base Rate for such day). (e) Subject to clause (y) of Section 8.01, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.08(c) as if each Reference Bank were to participate in the related Money Market LIBOR Borrowing ratably in proportion to its Commitment) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give 30 26 prompt notice to the Borrower by telecopy and the participating Banks by telex, cable or telecopy of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.09. Fees. (a) Facility Fee. The Borrower shall pay to the Agent for the account of the Banks ratably in proportion to their commitments, a facility fee at the rate of (i) 0.100% per annum during each Level I Period, (ii) 0.125% per annum during each Level II Period, (iii) 0.150% per annum during each Level III Period, (iv) 0.225% per annum during each Level IV Period, and (v) 0.500% per annum during each Level V Period. Such facility fee shall accrue (i) from and including the date on which the conditions set forth in Section 3.01(a) and (e) have been satisfied to but excluding the last day of the Revolving Credit Period, in each case, on the daily average aggregate amount of the Commitments (whether used or unused) and (ii) if any Loans remain outstanding after the Revolving Credit Period, from and including the last day of the Revolving Credit Period to but excluding the date such Loans shall be repaid in full, on the daily average aggregate outstanding principal amount of such Loans. (b) Payments. Except as otherwise indicated, accrued fees under this Section shall be payable quarterly in arrears on the earlier of (i) each Quarterly Date, (ii) the Termination Date or (iii) if any Loans remain outstanding after the Revolving Credit Period, on the date such Loans shall be repaid in full. SECTION 2.10. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each 31 27 Group of Loans (subject in each case to the provisions of Article VIII), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may (x) elect to convert such Loans to Base Rate Loans as of any Domestic Business Day, (y) elect to convert such Loans to Euro-Dollar Loans or to CD Loans with an Interest Period different from the then current Interest Period applicable to such Loans, as of any Euro-Dollar Business Day or Domestic Business Day, respectively or (z) elect to continue such Loans as CD Loans for an additional Interest Period beginning on the last day of the then current Interest Period applicable to such Loans; and (iii) if such Loans are Euro-Dollar Loans, the Borrower may (x) elect to convert such Loans to Base Rate Loans or CD Loans as of any Domestic Business Day, (y) elect to convert such Loans to CD Loans or Euro-Dollar Loans with an Interest Period different from the then current Interest Period applicable to such Loans, as of any Domestic Business Day or Euro-Dollar Business Day, respectively or (z) elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period beginning on the last day of the then current Interest Period applicable to such Loans; provided that, if the Borrower elects to convert any CD Loans or Euro-Dollar Loans, as the case may be, to Base Rate Loans or to CD Loans or Euro-Dollar Loans, as the case may be, with a different Interest Period, as of any day other than the last day of the then current Interest Period applicable to such Loans, the Borrower shall reimburse each Bank in accordance with Section 2.13. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent (i) at least one Domestic Business Day before such notice is to be effective if the relevant Loans are to be converted into Base Rate Loans, (ii) at least two Domestic Business Days before such conversion or continuation is to be effective if such Loans 32 28 are to be converted into, or continued as, CD Rate Loans or (iii) at least three Euro-Dollar Business Days before such conversion or continuation is to be effective if such Loans are to be converted into, or continued as, Euro-Dollar Loans. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $25,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) whether such Group of Loans (or portion thereof) is to be converted to Base Rate Loans, CD Loans or Euro-Dollar Loans or continued as CD Loans or Euro-Dollar Loans for an additional Interest Period; and (iv) if such Loans (or portions thereof) are to be converted to or continued as CD Loans or Euro-Dollar Loans, as the case may be, the duration of the Interest Period to be applicable thereto immediately after such conversion or continuation. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group 33 29 of Fixed Rate Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at least one Domestic Business Day's notice to the Agent, prepay the Base Rate Loans (or any Money Market LIBOR Loans which bear interest at the Base Rate at such time for the reason stated in Section 8.01), in whole or in part, on any Domestic Business Day and (ii) upon at least two Euro-Dollar Business Days' notice to the Agent, prepay any Fixed Rate Loan, in whole or in part, on the last day of any Interest Period applicable thereto, in amounts aggregating $25,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the relevant Loans of the several Banks. (b) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in the Notes. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, any Base Rate Loans, CD Loans or fees shall be due on a day which is not a Domestic Business Day, the date for 34 30 payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans and Money Market LIBOR Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Absolute Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to another Loan (pursuant to Section 2.10, Article VI or Article VIII) on any day other than the last day of an Interest Period applicable thereto or the end of an applicable period fixed pursuant to Section 2.08(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loan after notice has been given to any Bank in accordance with Section 2.04(a) or Section 2.11, the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss reasonably incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after such payment or conversion or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense with an explanation of the calculation of such loss or expense, which certificate shall be conclusive if made reasonably and in good faith. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and facility fees hereunder shall be computed 35 31 on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Regulation D Compensation. For each day for which a Bank is required to maintain reserves in respect of either (x) "Eurocurrency Liabilities" (as defined in all regulations of the Board of Governors of the Federal Reserve System) or (y) any other category of liabilities which includes deposits by reference to which the interest rate in Euro-dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents, such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least five Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due to such Bank under this Section. Such Bank's notice to the Borrower shall set forth its calculation of such additional interest and such calculation shall be conclusive if made reasonably and in good faith. ARTICLE III CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective on the date that all of the following conditions shall have been satisfied (or waived in accordance with Section 9.04): (a) receipt by the Agent from each of the parties hereto of either (i) a counterpart hereof signed by such party or (ii) telegraphic, telex or other written 36 32 confirmation, in form satisfactory to the Agent, confirming that a counterpart hereof has been signed by such party; (b) receipt by the Agent for the account of each Bank of a duly executed Note dated on or before the Effective Date complying with the provisions of Section 2.05; (c) receipt by the Agent of a certificate signed by the Vice President-Finance and Treasurer or Senior Vice President, Finance of the Borrower, dated the Effective Date, to the effect that (i) no Default has occurred and is continuing as of the Effective Date, (ii) the representations and warranties of the Borrower set forth in Article IV hereof are true in all material respects on, and as of, the Effective Date and (iii) the Borrower has terminated, effective on or prior to the Effective Date, all commitments under the Credit Agreement dated as of August 1, 1989, among the Borrower, the banks party thereto and Morgan Guaranty Trust Company of New York, as agent for such banks, and has repaid all loans outstanding thereunder; (d) receipt by the Agent of an opinion of John W. Campbell, Esq., counsel to the Borrower and given upon the Borrower's express instructions, and of Davis Polk & Wardwell, special counsel to the Borrower, and given upon the Borrower's express instructions substantially in the forms of Exhibits E-1 and E-2 hereto, respectively; (e) receipt by the Agent of an opinion of Cravath, Swaine & Moore, special counsel to the Agent, substantially in the form of Exhibit F hereto; and (f) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than July 31, 1994. The Agent shall promptly notify the Borrower and the Banks of 37 33 the Effective Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (b) the fact that, immediately before and immediately after such Borrowing, no Default shall have occurred and be continuing; (c) the fact that immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (d) the fact that the representations and warranties of the Borrower set forth in Sections 4.01(i), 4.02 and 4.07(i) shall be true on and as of the date of such Borrowing; (e) the fact that the most recent financial statements provided by Borrower in compliance with Section 5.01, as supplemented prior to such Borrowing, shall be, to the best of Borrower's knowledge, accurate and complete in all material respects; and (f) the fact that the Borrowing shall have been approved in writing by (i) the Chairman of the Borrower, or (ii) the President of the Borrower, or (iii) the Group Executive, Finance and Administration, acting jointly with either the Senior Vice President, Finance, or the Vice President-Finance and Treasurer. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c), (d), (e) and (f) of this Section. 38 34 ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.01. Corporate Existence and Power. The Borrower (i) is a Connecticut insurance corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut, (ii) has all corporate powers required to carry on its business as now conducted and (iii) has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, the failure to obtain which would, individually or in the aggregate, have a material adverse effect on the ability of the Borrower to perform its obligations hereunder or on the financial condition of the Borrower and its Consolidated Subsidiaries taken as a whole. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or advance filing with, any governmental body, agency or official and do not contravene, or constitute a default under, (i) any provision of the certificate of incorporation or by-laws of the Borrower, (ii) any applicable law or regulation or any judgment, injunction, order or decree binding upon the Borrower, or (iii) any material financial agreement or instrument (excluding insurance obligations) of the Borrower. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1993, the related consolidated statements of cash flows for the year then ended and consolidated statement of income and retained earnings for the year then ended, reported on by KPMG Peat Marwick and set forth in the Borrower's 1993 Annual Report, copies of which have 39 35 been delivered to the Agent for distribution to each of the Banks, fairly present, in conformity with United States generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of March 31, 1994 and the related unaudited consolidated statements of income and retained earnings and cash flows for the three months then ended, set forth in the Borrower's 1994 First Quarter Form 10-Q, copies of which have been delivered to the Agent for distribution to each of the Banks, fairly present, in conformity with United States generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such three month period (subject to normal year-end adjustments). (c) Since March 31, 1994, there has been no material adverse change in the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, taken as a whole. SECTION 4.05. Litigation. Except as disclosed in the Borrower's 1993 Form 10-K or 1994 First Quarter Form 10-Q, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower, its Consolidated Subsidiaries or its Principal Insurance Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the 40 36 minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is not in violation of the presently applicable provisions of ERISA and the Internal Revenue Code where such violation would have a material adverse effect on the financial condition of the Borrower and its Consolidated Subsidiaries taken as a whole, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA; provided that this Section 4.06 applies to the members of the ERISA Group only in their capacity as employers and not in any other capacity (such as fiduciaries or service providers to Plans for the benefit of employers of others). SECTION 4.07. Principal Insurance Subsidiaries. Each of the Borrower's Principal Insurance Subsidiaries (i) is a Connecticut insurance corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut, (ii) has all corporate powers required to carry on its business as now conducted and (iii) has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, the failure to obtain which would, individually or in the aggregate, have a material adverse effect on the ability of the Borrower to perform its obligations hereunder or on the financial condition of such Principal Insurance Subsidiary and its consolidated subsidiaries taken as a whole. SECTION 4.08. Compliance with Laws. To the best of the Borrower's knowledge, the Borrower has complied in all material respects with all applicable laws, except where any single failure to comply therewith would not individually have a material adverse effect on its ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that the sole representation and warranty with respect to compliance with ERISA is limited to Section 4.06; and provided further that the reference to applicable laws in this Section 4.08 shall not include Environmental Laws. 41 37 ARTICLE V COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Borrower will deliver to the Agent, for delivery by the Agent to each of the Banks: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of earnings and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by KPMG Peat Marwick or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, the Borrower's Form 10-Q as of the end of such quarter; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of a Responsible Financial Officer of the Borrower (i) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto, and (ii) setting forth calculations demonstrating compliance, as of the date of the most recent balance sheet included in the financial statements being furnished at such time, with the covenant set forth in Section 5.03; (d) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Responsible Financial Officer of the Borrower setting forth the details thereof and the action which the 42 38 Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements and reports, and proxy statements so mailed; and (f) from time to time such additional publicly available information regarding the financial position or business of the Borrower and its Principal Insurance Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. Conduct of Business and Maintenance of Existence. The Borrower will preserve, renew and keep in full force and effect, and will cause each Principal Insurance Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence. SECTION 5.03. Minimum Adjusted Consolidated Net Worth. Adjusted Consolidated Net Worth will at no time be less than $5,000,000,000. SECTION 5.04. Equal and Ratable Lien Protection. The Borrower will not, and will not permit any Principal Insurance Subsidiary to, issue, assume, incur or guarantee any indebtedness for borrowed money secured by a mortgage, pledge, lien or other encumbrance, directly or indirectly on any of the common stock of a Principal Insurance Subsidiary, which common stock is owned by the Borrower or any Principal Insurance Subsidiary, unless the obligations of the Borrower under this Agreement and the Notes and, if the Borrower so elects, any other indebtedness of the Borrower ranking on a parity with the Notes shall be secured equally and ratably with, or prior to, such secured indebtedness for borrowed money so long as it is outstanding and is so secured. SECTION 5.05. Consolidations, Mergers and Sales of Assets. The Borrower will not consolidate or merge with or into any other corporation or convey or transfer its properties and assets substantially as an entirety to any other Person unless (i) the surviving or acquiring entity is a corporation organized under the laws of one of the United States, (ii) the surviving or acquiring corporation, if other than the Borrower, expressly assumes the performance of the obligations of the Borrower under this Agreement and 43 39 the Notes, and (iii) immediately after giving effect to such transaction, no Default shall exist. SECTION 5.06. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. SECTION 5.07. Cross Default Provisions. If a cross default provision is included in any future instrument or agreement of the Borrower evidencing or relating to indebtedness for borrowed money in a principal amount in excess of $50,000,000, the Borrower will promptly notify the Banks thereof and will, if requested to do so by the Required Banks, sign an amendment to this Agreement to include a similar cross default provision herein. SECTION 5.08. Compliance with Laws. The Borrower will comply in all material respects with all applicable laws, except where any single failure to comply therewith would not individually have a material adverse effect on its ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that with respect to its compliance with ERISA, this Section 5.08 applies to the Borrower only in its capacity as an employer and not in any other capacity (such as a fiduciary or service provider to Plans for the benefit of employers of others); and provided further that the reference to applicable laws in this Section 5.08 shall not include Environmental Laws. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal on any Loan; 44 40 (b) the Borrower shall fail to pay within five Domestic Business Days of when due any fees or interest on any Loan; (c) the Borrower shall fail to observe or perform any covenant contained in Sections 5.03 and 5.05; (d) the Borrower shall fail to observe or perform, in any material respect, any covenant or agreement contained in this Agreement (other than those covered by clause (a), (b) or (c) above) and such failure shall have continued for a period of 45 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank; (e) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (f) an event of default, as defined in any indenture or instrument evidencing or under which the Borrower or any Principal Insurance Subsidiary has at the date of this Agreement or shall hereafter have outstanding indebtedness for borrowed money in a principal amount in excess of $50,000,000, shall occur and be continuing and such indebtedness shall have been accelerated so that the same shall be or become due and payable prior to the date on which the same would otherwise have become due and payable (other than acceleration of Non-Recourse Indebtedness which does not exceed in the aggregate 4% of the Borrower's total shareholders' equity, as set forth in the most recently published audited consolidated balance sheet of the Borrower), and such acceleration shall not have been waived, rescinded or annulled;provided, however, that if such acceleration under such indenture or instrument shall be remedied or cured by the Borrower or Principal Insurance Subsidiary, or waived, rescinded or annulled by the requisite holders of such indebtedness, then the Event of Default shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of the Banks; (g) the Borrower or any Principal Insurance Subsidiary shall commence a voluntary case or other 45 41 proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Principal Insurance Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Principal Insurance Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of more than 35% of the outstanding shares of common stock of the Borrower; or at any time Continuing Directors shall not constitute a majority of the board of directors of the Borrower; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, 46 42 immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for 47 43 the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its 48 44 own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent approved by the Borrower (which approval shall not be unreasonably withheld). If no successor Agent shall have been so appointed by the Required Banks, and approved by the Borrower and shall have accepted such appointment within 10 Domestic Business Days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least two billion dollars. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any CD Loan, Euro-Dollar Loan or Money Market LIBOR Loan the Agent is advised by each of the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to each of the Reference Banks in the relevant market for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding Base Rate Loans into CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding CD Loans or Euro- Dollar Loans into CD Loans or Euro-Dollar Loans, as the case may be, with a different 49 45 Interest Period shall be suspended, (ii) each outstanding CD Loan, Euro-Dollar Loan or Money Market LIBOR Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto, and (iii) unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any CD Borrowing, Euro-Dollar Borrowing or Money Market LIBOR Borrowing, as the case may be, for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (x) if such Borrowing is a CD Borrowing or a Euro-Dollar Borrowing, as the case may be, such Borrowing shall instead be made as a Base Rate Borrowing and (y) if such Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro- Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Base Rate Loans or CD Loans into Euro-Dollar Loans, or to convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different Interest Period shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, all Euro- Dollar Loans of such Bank then outstanding shall be converted to Base Rate Loans either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loans if such Bank may lawfully continue to maintain 50 46 and fund such Loans to such day or (b) immediately if such Bank may not lawfully continue to maintain and fund such Loans to such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation) shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any Euro-Dollar Loan, any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15 and (ii) with respect to any CD Loan, any such requirement reflected in the applicable Domestic Reserve Percentage or Assessment Rate) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans (other than Money Market Absolute Rate Loans), its Notes (in respect of such Fixed Rate Loans) or its obligation to make such Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Notes with respect thereto, by an amount reasonably deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, 51 47 or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation), has or would have the effect of increasing the amount of capital of such Bank (or its parent) required to be maintained in respect of, or otherwise allocated to, such Bank's obligations hereunder (its "Required Capital") by an amount reasonably deemed by such Bank to be material, then such Bank may, by notice to the Borrower and the Agent, increase the facility fee payable to such Bank hereunder to the extent required so that the ratio of (w) the sum of the increased facility fee applicable to such Bank's unused Commitment hereunder to (x) the prior facility fee applicable to such Bank's unused Commitment hereunder is the same as the ratio of (y) such Bank's increased Required Capital to (z) its prior Required Capital. Such Bank's notice to the Borrower and the Agent shall set forth its calculation of the foregoing ratios and the increased facility fee to which it is entitled under this Section. (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 8.03 (each, a "Trigger Event") and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provision of this Section, no Bank shall be entitled to any compensation pursuant to this Section in respect of any Trigger Event (i) for any period of time in excess of 120 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of the date on which such Trigger Event shall have been enacted, promulgated, adopted or issued in definitive or final form unless such Trigger Event is retroactive. A certificate of any Bank claiming compensation under Section 8.03(a) or (b) and setting forth the additional amount or amounts to be paid to it hereunder and describing the method of calculation thereof shall be conclusive if made reasonably and in good faith. In determining such 52 48 amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. 53 49 (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses, except to the extent attributable to the negligence or misconduct of such Bank or the Agent, as the case may be) arising therefrom or with respect thereto. This indemnification shall be made within 15 days from the date such Bank or the Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, shall provide the Borrower with (i) two Internal Revenue Service ("IRS") forms 1001 or any successor form prescribed by the IRS, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Bank from United States withholding tax or reduces the rate of withtholding tax on payments of interest and eliminates withholding tax on any fees, or (ii) two IRS forms 4224 certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.04(a). Each such Bank undertakes to deliver to each of the Borrower and the Agent (A) a replacement form (or successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and (B) such amendments thereto or extensions or renewals thereof as may reasonably be required (but only so long as such Bank remains lawfully able to do so). (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to 54 50 indemnification under Section 8.04(b) or Section 8.04(c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to make any claim for indemnification in respect of Taxes or Other Taxes pursuant to this Section 8.04 (each, a "Tax Event") and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such claim or any other amounts payable by the Borrower under this Section 8.04 and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provisions of this Section, no Bank shall be entitled to any indemnification pursuant to this Section in respect of any Tax Event (i) for any period of time in excess of 180 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of the date on which such Bank became aware of such Tax Event unless such Tax Event is retroactive. SECTION 8.05. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) Euro-Dollar Loans shall instead be Base Rate Loans, and (b) after each of its outstanding Euro-Dollar Loans has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise 55 51 be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the Borrower shall elect that the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right to seek a substitute bank or banks (which may be one or more of the Banks) to purchase the Notes and assume the Commitment of such Bank under this Agreement. SECTION 8.07. Election to Terminate. If during any Level I Period, Level II Period or Level III Period (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower may elect to terminate this Agreement as to such Bank, and in connection therewith not to borrow any Loan hereunder from such Bank or to prepay any Base Rate Loan made pursuant to Section 8.02 or 8.05 (without altering the Commitments or Loans of the remaining Banks), provided that the Borrower (i) notifies such Bank through the Agent of such election at least two Euro-Dollar Business Days before any date fixed for such borrowing or such a prepayment, as the case may be, and (ii) repays all of such Bank's outstanding Loans concurrently with such termination. Upon receipt by the Agent of such notice, the Commitment of such Bank shall terminate. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or telex or telecopy number set forth on the signature pages 56 52 hereof, (y) in the case of any Bank, at its address, telex or telecopy number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or telecopy number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. All notices from outside the United States to the Borrower shall only be given by telecopy and all other notices to the Borrower given by telex shall also be given by telecopy or non-telex method. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the number determined pursuant to this Section and the appropriate answerback is received, (ii) if given by registered or certified mail, return receipt requested, when such return receipt is signed by the recipient or (iii) if given by any other means, when delivered at the address specified in this Section, or, if such date is not a business day in the location where received, on the next business day in such location; provided that notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent (subject to the limitations previously agreed with such counsel, in the case of fees payable in connection with the preparation of this Agreement), in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. 57 53 (b) The Borrower agrees to indemnify each Bank and hold each Bank harmless from and against any and all liabilities, claims, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by any Bank (or by the Agent in connection with its actions as Agent hereunder) in connection with any investigative, administrative or judicial proceeding (whether or not such Bank shall be designated a party thereto) relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder to acquire equity securities of any other Person or (ii) any transaction which violates the change in control provisions set forth in Section 6.01(i); provided that no Bank shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.04. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank or subject any Bank to any additional obligation, (ii) reduce or forgive the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment or (iv) amend this Section or otherwise change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.05. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign, delegate, or otherwise transfer any of its rights or obligations under this Agreement (other than as contemplated by Section 5.05) without the prior written consent of all Banks. (b) Except for (i) any assignment made with the Borrower's consent, which consent shall be at the Borrower's sole discretion unless the Assignee is an Affiliate of the 58 54 transferor Bank, in which case, such consent shall not be unreasonably withheld, (ii) any grant of participating interests permitted by subsection (d) below and (iii) any designation of a different Applicable Lending Office required by Section 8.02, Section 8.03 or Section 8.04, no Bank may at any time assign or otherwise transfer any of its rights and obligations under this Agreement and the Notes. An assignment or other transfer which is not permitted by this subsection (b) shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with subsection (d) below. (c) Subject to the requirements of subsection (b) above, any Bank may assign to one or more banks or other institutions (each an "Assignee) all, or a proportionate part of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an instrument executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Agent. Upon execution and delivery of such an instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,000. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in any or all of its Loans. In the event of any such grant by a Bank of a participating 59 55 interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (ii) or (iii) of Section 9.04 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII with respect to its participating interest. (e) No Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances. (f) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferror Bank from its obligations hereunder. SECTION 9.06. New York Law. This Agreement and each Note shall be construed in accordance with and governed by the law of the State of New York. SECTION 9.07. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. 60 SECTION 9.08. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. AETNA LIFE AND CASUALTY COMPANY By /S/ ROBERT E. BROATCH ----------------------- Title: Senior Vice President, Finance Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: Assistant Treasurer, Corporate Finance, YF37 Telecopier: (203) 275-2661 Telex: 99-241 99-295 643056 With a copy to: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: General Counsel Telecopier: (203) 273-0050 Telex: 99-241 99-295 643056 61 Commitment $50,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /S/ JERRY J. FALL -------------------------- Title: Vice President Domestic Lending Office Morgan Guaranty Trust Company of New York c/o J.P Morgan Services Inc. 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin M. McCann Associate Telecopier: (302) 992-1852/1872 Telex: 177425 MBDEL UT Euro-Dollar Lending Office Morgan Guaranty Trust Company of New York c/o J.P Morgan Services Inc. 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin M. McCann Associate Telecopier: (302) 992-1852/1872 Telex: 177425 MBDEL UT Money Market Lending Office Morgan Guaranty Trust Company of New York c/o J.P Morgan Services Inc. 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin M. McCann Associate Telecopier: (302) 992-1852/1872 Telex: 177425 MBDEL UT 62 Commitment $50,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By /S/ CLINTON M. JOHNSON ------------------------------ Title: Vice President By /S/ GEORGE-ANN TOBIN-DEW ------------------------------ Title: Managing Director Domestic Lending Office Deutsche Bank AG, New York Branch 31 West 52nd Street New York, New York 10019 Attention: Cheryl Mandelbaum Telecopier: (212) 474-8108 Telex: 429 166/DEUT BK NY Euro-Dollar Lending Office Deutsche Bank AG, Cayman Islands Branch 31 West 52nd Street New York, New York 10019 Attention: Cheryl Mandelbaum Telecopier: (212) 474-8108 Telex: 429 166/DEUT BK NY Money Market Lending Office Deutsche Bank AG, New York Branch 31 West 52nd Street New York, New York 10019 Attention: Cheryl Mandelbaum Telecopier: (212) 474-8108 Telex: 429 166/DEUT BK NY 63 Commitment $37,500,000 THE CHASE MANHATTAN BANK, N.A. By /S/ DENNIS COGAN ----------------------------- Title: Vice President Domestic Lending Office The Chase manhattan Bank, N.A. One Chase Manhattan Plaza New York, NY 10081 Attention: Monique Parker Telecopier: (212) 552-1477; (212) 552-1999 Telex: N/A Euro-Dollar Lending Office The Chase Manhattan Bank, N.A. One Chase Manhattan Plaza New York, NY 10081 Attention: Monique Parker Telecopier: (212) 552-1477; (212) 552-1999 Telex: N/A Money Market Lending Office The Chase Manhattan Bank, N.A. One Chase Manhattan Plaza New York, NY 10081 Attention: Monique Parker Telecopier: (212) 552-1477; (212) 552-1999 Telex: N/A 64 Commitment $37,500,000 CITIBANK, N.A. By /S/ SCOTT F. ENGLE ------------------------------ Title: Vice President Domestic Lending Office Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Josephine Cameron, Mgr./ FINA-Insurance Telecopier: (212) 935-4285 Telex: N/A Euro-Dollar Lending Office Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Josephine Cameron, Mgr./ FINA-Insurance Telecopier: (212) 935-4285 Telex: N/A Money Market Lending Office Citibank, N.A. 399 Park Avenue New York, New York 10043 Attention: Josephine Cameron, Mgr./ FINA-Insurance Telecopier: (212) 935-4285 Telex: N/A 65 Commitment $37,500,000 CREDIT SUISSE By /S/ LYNN ALLEGAERT ------------------------------ Title: Member of Senior Management By /S/ JUERG JOHNER ------------------------------ Title: Associate Domestic Lending Office Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Rita Santelli Telecopier: (212) 238-5439 Telex: N/A Euro-Dollar Lending Office Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Rita Santelli Telecopier: (212) 238-5439 Telex: N/A Money Market Lending Office Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Rita Santelli Telecopier: (212) 238-5439 Telex: N/A 66 Commitment $22,500,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /S/ LARRY HESS ------------------------------ Title: Vice President Domestic Lending Office Bank of America National Trust and Savings Association 1850 Gateway Boulevard, GPO-AA #5693 Concord, CA 94520 Attention: Hoyt Weller Telecopier: (510) 675-7531 Telex: 34346 Euro-Dollar Lending Office Bank of America National Trust and Savings Association 1850 Gateway Boulevard, GPO-AA #5693 Concord, CA 94520 Attention: Hoyt Weller Telecopier: (510) 675-7531 Telex: 34346 Money Market Lending Office Bank of America National Trust and Savings Association 555 California Street, 10th Floor San Francisco, CA 94104 Attention: Short Term Asset Sales #5670 Telecopier: (415) 622-2235 Telex: N/A 67 Commitment $22,500,000 THE FIRST NATIONAL BANK OF CHICAGO By /S/ THOMAS J. COLLIMORE ------------------------------ Title: Vice President Domestic Lending Office The First National Bank of Chicago One First National Plaza Insurance Companies Division, Suite 0085 Chicago, IL 60670-0085 Attention: Lillian Arroyo Telecopier: (312) 732-4033 Telex: N/A Euro-Dollar Lending Office The First National Bank of Chicago One First National Plaza Insurance Companies Division, Suite 0085 Chicago, IL 60670-0085 Attention: Lillian Arroyo Telecopier: (312) 732-4033 Telex: N/A Money Market Lending Office The First National Bank of Chicago One First National Plaza Insurance Companies Division, Suite 0085 Chicago, IL 60670-0085 Attention: Lillian Arroyo Telecopier: (312) 732-4033 Telex: N/A 68 Commitment $22,500,000 FLEET BANK, NATIONAL ASSOCIATION By /S/ JAN-GEE W. MCCOLLAM ------------------------------ Title: Senior Vice President Domestic Lending Office Fleet Bank, National Association One Constitution Plaza Hartford, CT 06115 Attention: Jacqueline Steffens/ Insurance Telecopier: (203) 244-5391 Telex: N/A Euro-Dollar Lending Office Fleet Bank National Association One Constitution Plaza Hartford, CT 06115 Attention: Jacqueline Steffens/ Insurance Telecopier: (203) 244-5391 Telex: N/A Money Market Lending Office Fleet Bank National Association One Constitution Plaza Hartford, CT 06115 Attention: Jacqueline Steffens/ Insurance Telecopier: (203) 244-5391 Telex: N/A 69 Commitment $22,500,000 MELLON BANK, N.A. By /S/ W. SCOTT SANFORD ------------------------------ Title: Senior Vice President Domestic Lending Office Mellon Bank, N.A. Three Mellon Bank Center Pittsburgh, PA 15259 Attention: Sandra A. Castelli/ Loan Administration Telecopier: N/A Telex: N/A Euro-Dollar Lending Office Mellon Bank, N.A. One Mellon Bank Center Pittsburgh, PA 15258 Attention: Marilyn Wagner/ Money Markets Telecopier: N/A Telex: N/A Money Market Lending Office Mellon Bank, N.A. Three Mellon Bank Center Pittsburgh, PA 15259 Attention: Sandra A. Castelli/ Loan Administration Telecopier: N/A Telex: N/A 70 Commitment $22,500,000 NATIONS BANK OF GEORGIA, N.A. By /S/ FRANK R. CALLISON ------------------------------ Title: Vice President Domestic Lending Office Nations Bank of Georgia, N.A. One Nations Bank Plaza NC1-002-06-19/ P.O. Box 120 Charlotte, NC 28255 Attention: Chris Chaffee Telecopier: (704) 386-8694 Telex: N/A Euro-Dollar Lending Office Nations Bank of Georgia, N.A. One Nations Bank Plaza NC1-002-06-19/ P.O. Box 120 Charlotte, NC 28255 Attention: Chris Chaffee Telecopier: (704) 386-8694 Telex: N/A Money Market Lending Office Nations Bank of Georgia, N.A. One Nations Bank Plaza NC1-002-06-19/ P.O. Box 120 Charlotte, NC 28255 Attention: Chris Chaffee Telecopier: (704) 386-8694 Telex: N/A 71 Commitment $22,500,000 SHAWMUT BANK CONNECTICUT, N.A. By /S/ MARION B. HARDY ------------------------------ Title: Vice President Domestic Lending Office Shawmut Bank Connecticut, N.A. 777 Main Street Hartford, CT 06115 Attention: Leeane Hediger Insurance Industry Telecopier: (203) 240-1264 Telex: N/A Euro-Dollar Lending Office Shawmut Bank Connecticut, N.A. 777 Main Street Hartford, CT 06115 Attention: Leeane Hediger Insurance Industry Telecopier: (203) 240-1264 Telex: N/A Money Market Lending Office Shawmut Bank Connecticut, N.A. 777 Main Street Hartford, CT 06115 Attention: Leeane Hediger Insurance Industry Telecopier: (203) 240-1264 Telex: N/A 72 Commitment $22,500,000 THE TORONTO-DOMINION BANK By /S/ E. E. WALKER -------------------------------------- Title: Manager - Credit Administration Domestic Lending Office The Toronto-Dominion Bank 909 Fannin Street, Suite 1700 Houston, TX 77010 Attention: E. E. Walker Manager, Credit Administration Telecopier: (713) 951-9921 Telex: N/A Euro-Dollar Lending Office The Toronto-Dominion Bank 909 Fannin Street, Suite 1700 Houston, TX 77010 Attention: E. E. Walker Manager, Credit Administration Telecopier: (713) 951-9921 Telex: N/A Money Market Lending Office The Toronto-Dominion Bank USA Treasury Group- Short Term Asset Sales 31 West 52nd Street, 21st Floor New York, NY 10019-6101 Attention: Senior Dealer Telecopier: (212) 262-1949 Telex: N/A 73 Commitment $13,000,000 CHEMICAL BANK By /S/ M. LUISA HUNNEWELL ------------------------------ Title: Vice President Domestic Lending Office Chemical Bank 270 Park Avenue, 9th Floor New York, NY 10017 Attention: Bill Castro Telecopier: (212) 370-0429 Telex: N/A Euro-Dollar Lending Office Chemical Bank 270 Park Avenue, 9th Floor New York, NY 10017 Attention: Bill Castro Telecopier: (212) 370-0429 Telex: N/A Money Market Lending Office Chemical Bank 270 Park Avenue, 9th Floor New York, NY 10017 Attention: Bill Castro Telecopier: (212) 370-0429 Telex: N/A 74 Commitment $13,000,000 CORESTATES BANK N.A. By /S/ DEIDRE LEDWITH ------------------------------ Title: Assistant Vice President Domestic Lending Office Corestates Bank N.A. Centre Square-West Tower-Loan ACCTG F.C. 1-3-81-1 1500 Market Street Philadelphia, PA 19101 Attention: Sharon Burgess/ Loan Accounting Telecopier: (215) 786-4113 Telex: N/A Euro-Dollar Lending Office Corestates Bank N.A. Centre Square-West Tower-Loan ACCTG F.C. 1-3-81-1 1500 Market Street Philadelphia, PA 19101 Attention: Sharon Burgess/ Loan Accounting Telecopier: (215) 786-4113 Telex: N/A Money Market Lending Office Corestates Bank N.A. Centre Square-West Tower-Loan ACCTG F.C. 1-3-81-1 1500 Market Street Philadelphia, PA 19101 Attention: Sharon Burgess/ Loan Accounting Telecopier: (215) 786-4113 Telex: N/A 75 Commitment $13,000,000 CREDIT LYONNAIS NEW YORK By /S/ JEAN MARK MORIANI ------------------------------ Title: Senior Vice President Domestic Lending Office Credit Lyonnais New York 1301 Avenue of the Americas New York, NY 10019 Attention: Lucie Mercado Financial Institutions Telecopier: (212) 261-3401 Telex: 62410 YLRC Euro-Dollar Lending Office Credit Lyonnais New York 1301 Avenue of the Americas New York, NY 10019 Attention: Lucie Mercado Financial Institutions Telecopier: (212) 261-3401 Telex: 62410 YLRC Money Market Lending Office Credit Lyonnais New York 1301 Avenue of the Americas New York, NY 10019 Attention: Lucie Mercado Financial Institutions Telecopier: (212) 261-3401 Telex: 62410 YLRC 76 Commitment $13,000,000 THE DAI-ICHI KANGYO BANK, LTD., NEW YORK BRANCH By /S/ KIM P. LEARY ------------------------------ Title: Vice President Domestic Lending Office The Dai-Ichi Kangyo Bank, Ltd., New York Branch One World Trade Center Suite 4911 New York, NY 10048 Attention: Anne Marie Heverin Telecopier: (212) 524-0579; (212) 432-5221 Telex: 232988 DKB UR; 422581 DKB UI; 824613 DKB NYUF Euro-Dollar Lending Office The Dai-Ichi Kangyo Bank, Ltd., New York Branch One World Trade Center Suite 4911 New York, NY 10048 Attention: Anne Marie Heverin Telecopier: (212) 524-0597; (212) 432-5221 Telex: 232988 DKB UR; 422581 DKB UI; 824613 DKB NYUF Money Market Lending Office The Dai-Ichi Kangyo Bank, Ltd., New York Branch One World Trade Center Suite 4911 New York, NY 10048 Attention: Anne Marie Heverin Telecopier: (212) 524-0597; (212) 432-5221 Telex: 232988 DKB UR; 422581 DKB UI; 824613 DKB NYUF 77 Commitment $13,000,000 FIRST INTERSTATE BANK OF CALIFORNIA By /S/ THOMAS J. HELOTES ------------------------------ Title: Vice President Domestic Lending Office First Interstate Bank of California 707 Wilshire Boulevard W16-14 Los Angeles, CA 90017 Attention: Thomas John Helotes Telecopier: (213) 614-4122 Telex: N/A Euro-Dollar Lending Office First Interstate Bank of California 1055 Wilshire Boulevard B10-6 Los Angeles, CA 90017 Attention: Claudine Stines Unit Manager Telecopier: (213) 488-9909/9959 Telex: N/A Money Market Lending Office First Interstate Bank of California 707 Wilshire Boulevard W16-20 Los Angeles, CA 90017 Attention: Matt Frey Asst. Vice President Telecopier: (213) 614-2305/2569 Telex: N/A 78 Commitment $13,000,000 THE FIRST NATIONAL BANK OF BOSTON By /S/ CHARLES A. GARRITY ------------------------------ Title: Vice President Domestic Lending Office The First National Bank of Boston 100 Federal Street Boston, MA 02110 Attention: Loretta Barraffo Commercial Loan Department Telecopier: (617) 467-2276 Telex: N/A Euro-Dollar Lending Office The First National Bank of Boston P.O. Box 1187 Boston, MA 02103 Attention: Loretta Barraffo Commercial Loan Department Telecopier: (617) 467-2276 Telex: N/A Money Market Lending Office The First National Bank of Boston 100 Federal Street Boston, MA 02110 Attention: Loretta Barraffo Commercial Loan Department Telecopier: (617) 467-2276 Telex: N/A 79 Commitment $13,000,000 NORTHERN TRUST COMPANY By /S/ DEAN V. BANICK ---------------------------- Title: Vice President Domestic Lending Office Northern Trust Company 50 South LaSalle Chicago, IL 60675 Attention: Evelyn Jackson/ Commercial Banking Telecopier: (312) 444-3432 Telex: N/A Euro-Dollar Lending Office Northern Trust Company 50 South LaSalle Chicago, IL 60675 Attention: Evelyn Jackson/ Commercial Banking Telecopier: (312) 444-3432 Telex: N/A Money Market Lending office Northern Trust Company 50 South LaSalle Chicago, IL 60675 Attention: Evelyn Jackson/ Commercial Banking Telecopier: (312) 557-8337 Telex: N/A 80 Commitment $13,000,000 STATE STREET BANK AND TRUST COMPANY By /S/ ROBERT P. ENGVALL, JR. ------------------------------ Title: Vice President Domestic Lending Office State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Attention: Sandra L. Donnellan Telecopier: (617) 985-5082 Telex: 200139/ STATE UR Euro-Dollar Lending Office State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Attention: Sandra L. Donnellan Telecopier: (617) 985-5082 Telex: 200139/ STATE UR Money Market Lending Office State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Attention: Sandra L. Donnellan Telecopier: (617) 985-5082 Telex: 200139/ STATE UR 81 Commitment $13,000,000 THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH By /S/ SHINICHI ITO ------------------------------ Title: Joint General Manager Domestic Lending Office The Sumitomo Bank, Limited, New York Branch One World Trade Center Suite 9651 New York, NY 10048 Attention: Diana Pabon Hurtzig Telecopier: (212) 323-0366 Telex: N/A Euro-Dollar Lending Office The Sumitomo Bank, Limited, New York Branch One World Trade Center Suite 9651 New York, NY 10048 Attention: Diana Pabon Hurtzig Telecopier: (212) 323-0366 Telex: N/A Money Market Lending Office The Sumitomo Bank, Limited, New York Branch One World Trade Center Suite 9651 New York, NY 10048 Attention: Diana Pabon Hurtzig Telecopier: (212) 323-0366 Telex: N/A 82 Commitment $13,000,000 WACHOVIA BANK OF GEORGIA, N.A. By /S/ DAVID L. GAINES ------------------------------ Title: Senior Vice President Domestic Lending Office Wachovia Bank of Georgia, N.A. 191 Peachtree Street NE MC-GA 370 Atlanta, GA 30303 Attention: Gwen Miles U.S. Corporate Telecopier: (404) 332-6898 Telex: 542553/WACHFEX-ATL Euro-Dollar Lending Office Wachovia Bank of Georgia, N.A. 191 Peachtree Street NE MC-GA 370 Atlanta, GA 30303 Attention: Gwen Miles U.S. Corporate Telecopier: (404) 332-6898 Telex: 542553/WACHFEX-ATL Money Market Lending Office Wachovia Bank of Georgia, N.A. 191 Peachtree Street NE MC-GA 370 Atlanta, GA 30303 Attention: Gwen Miles U.S. Corporate Telecopier: (404) 332-6898 Telex: 542553/WACHFEX-ATL 83 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /S/ JERRY J. FALL ------------------------------ Title: Vice President 500 Stanton Christiana Road P.O. Box 6070 Newark, DE 19713-2107 Attention: Kevin McCann, Associate Telecopier: (212) 385-2603 Telex: 177425 MBDEL UT 84 EXHIBIT A NOTE New York, New York July , 1994 For value received, Aetna Life and Casualty Company, a Connecticut insurance corporation (the "Borrower"), promises to pay to the order of ______________ (the "Bank"), for the account of its Applicable Lending Office, the principal sum of $_________ or the aggregate unpaid principal amount of the Bank's Loans then outstanding under the Credit Agreement referred to below on the date or dates provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding shall be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Medium-Term Credit Agreement dated as of July 27, 1994 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Managing Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. 85 2 Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. AETNA LIFE AND CASUALTY COMPANY By -------------------- Title: 86 3 LOANS AND PAYMENTS OF PRINCIPAL
- ------------------------------------------------------------------------------------------------- Amount of Amount of Principal Maturity Notation Date Loan Repaid Date Made By - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
87 EXHIBIT B Form of Money Market Quote Request [Date] To: Morgan Guaranty Trust Company of New York (the "Agent") From: Aetna Life and Casualty Company Re: Medium-Term Credit Agreement (the "Credit Agreement") dated as of July 27, 1994 among the Borrower, the Banks listed on the signature pages thereof and the Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------------- Principal Amount */ Interest Period **/ - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - ---------------------------------- */ Amount must be $25,000,000 or a larger multiple of $1,000,000. **/ Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. 88 2 Terms used herein have the meanings assigned to them in the Credit Agreement. AETNA LIFE AND CASUALTY COMPANY By ------------------- Title: 89 EXHIBIT C Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to Aetna Life and Casualty Company (the "Borrower") Pursuant to Section 2.03 of the Medium-Term Credit Agreement dated as of July 27, 1994 among the Borrower, the Banks parties thereto and the undersigned, as Managing Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------ Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than 9:30 A.M. (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ------------------------------- Authorized Officer 90 EXHIBIT D Form of Money Market Quote Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Attention: Re: Money Market Quote to Aetna Life and Casualty Company (the "Borrower") In response to your invitation on behalf of the Borrower dated ____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ____________________________ 2. Person to contact at Quoting Bank: ____________________________ 3. Date of Borrowing: ______________________ */ - ---------------------------------- */ As specified in the related Invitation. 91 2 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market [Absolute Amount **/ Period ***/ [Margin ****/ ] Rate *****/] - ------ -- ------ --- ------------ ---------- - $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $______________.] **/ We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Medium-Term Credit Agreement dated as of July 27, 1994 among the Borrower, the Banks listed on - ---------------------------------- **/ Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $1,000,000 or a larger multiple thereof. ***/ Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), specified in the related Invitation. No more than five bids are permitted for each Interest Period. ****/ Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". *****/ Specify rate of interest per annum (rounded to the nearest 1/10,000 of 1%). 92 3 the signature pages thereof and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] By ----------------------- Authorized Officer 93 EXHIBIT E-1 OPINION OF COUNSEL FOR THE BORROWER July __, 1994 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, NY 10260 Ladies and Gentlemen: As counsel to Aetna Life and Casualty Company (the "Borrower"), I have been asked to provide a legal opinion to you in connection with the Medium-Term Credit Agreement (the "Credit Agreement") dated as of July 27, 1994 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Managing Agent. Terms defined in the Credit Agreement are used herein as therein defined. In furnishing this opinion, I have: (1) made, or caused to be made, and relied upon such investigations of fact and law and have examined, or caused to be examined, and relied upon such documents, records, certificates, instruments or other written evidences, and upon such other factual information, as in my judgment were necessary or appropriate; and (2) assumed that all such documents, records, certificates, instruments and other written evidences: (a) when examined as copies, conform with the originals thereof; and (b) when examined in the originals or in copies, are complete, authentic and genuinely executed on behalf of all parties other than, with respect to the Credit Agreement and all 94 2 other documents executed and delivered in connection therewith, the Borrower. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is an insurance corporation duly incorporated, validly existing and in good standing under the laws of the State of Connecticut. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes (i) are within the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) under the laws of Connecticut and federal laws and, to the best of my knowledge and belief without any investigation, the laws of any other jurisdictions, require no action by or in respect of, or prior filing with, any governmental body, agency or official, (iv) do not conflict with, violate or result in a breach of or constitute a default under the Certificate of Incorporation or By-Laws of the Borrower, its 9-1/2% Eurodollar Notes due 1995, its 8-5/8% Notes due 1998, its 6-3/8% Notes due 2003, its 6-3/4% Debentures due 2013, its 7-3/4% Eurodollar Notes due 2016, its 8% Debentures due 2017 or its 7-1/4% Debentures due 2023 and (v) to the best of my knowledge and belief will not conflict with or constitute a breach of or a default under any other financial agreement (excluding insurance obligations) binding upon the Borrower, which conflict, breach or default would have a material adverse effect on the earnings or financial condition of the Borrower and its Consolidated Subsidiaries considered as a whole. 3. To the best of my knowledge, except as disclosed in the Borrower's 1993 Form 10-K or 1994 First Quarter Form 10-Q, there is no action, suit or proceeding pending against or threatened against or affecting the Borrower or its Consolidated Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner 95 3 draws into question the validity of the Credit Agreement or the Notes. 4. Each of the Borrower's Principal Insurance Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation. I am admitted to the Bar of the State of Connecticut, and the foregoing opinion is limited to the laws of the State of Connecticut and federal laws. I am furnishing this opinion to you solely for your benefit pursuant to Section 3.01(d) of the Credit Agreement, and it is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, John W. Campbell 96 EXHIBIT E-2 OPINION OF DAVIS POLK & WARDWELL July __, 1994 The Banks and the Agent Referred to Above c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the Medium-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among Aetna Life and Casualty Company, a Connecticut insurance corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Managing Agent (the "Agent"), and have acted as special New York counsel for the Borrower for the purpose of rendering this opinion pursuant to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. Under the laws of New York, the execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or prior filing with, any governmental body, agency or official. 97 2 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower, enforceable in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, by insolvency laws affecting the rights of creditors of insurance companies generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York. In giving the foregoing opinion, (i) we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect and (ii) we have relied, without independent investigation, as to all matters governed by the laws of Connecticut, upon the opinion of John W. Campbell, counsel for the Borrower, dated July __, 1994, a copy of which has been delivered to you. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 98 EXHIBIT F July __, 1994 Dear Sirs: We have participated in the preparation of the Medium-Term Credit Agreement dated as of July 27, 1994 (the "Credit Agreement") among Aetna Life and Casualty Company, a Connecticut insurance corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Managing Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of opinion as follows: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower. In giving the foregoing opinion, (i) we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect and (ii) we have relied, without independent investigation, as to all matters governed by the 99 2 laws of Connecticut, upon the opinion of John W. Campbell, Esq., counsel for the Borrower dated July __, 1994, a copy of which has been delivered to you. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, The Banks and the Agent Referred to Above c/o Morgan Guaranty Trust Company of New York, as Managing Agent 60 Wall Street New York, NY 10260 EX-12 4 STATEMENT RE COMPUTATION OF RATIOS 1 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
6 Months Ended (Millions) June 30, 1994 1993 1992 1991 1990 1989 ______________ ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 244.6 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 $ 663.8 Add back fixed charges............ 85.8 171.0 194.3 221.5 229.0 211.6 Minority interest................ 2.9 7.0 8.6 5.9 4.9 (1.9) ________ _________ ________ ________ ________ ________ Income (loss) as adjusted..... $ 333.3 (969.4) $ 81.5 $ 470.9 $ 693.5 $ 873.5 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Fixed charges: Interest on indebtedness....... $ 45.0 77.4 $ 81.4 $ 110.9 $ 119.9 $ 113.2 Portion of rents representative of interest factor............ 40.8 93.6 112.9 110.6 109.1 98.4 ________ _________ ________ ________ ________ ________ Total fixed charges........... $ 85.8 171.0 194.3 221.5 229.0 211.6 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Preferred stock dividend requirements.................... - - - - - $ 3.9 ________ _________ ________ ________ ________ ________ Total combined fixed charges and preferred stock dividend requirements.................... $ 85.8 171.0 $ 194.3 $ 221.5 $ 229.0 $ 215.5 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Ratio of earnings to fixed charges......................... 3.88 (5.67) 0.42 2.13 3.03 4.13 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Ratio of earnings to combined fixed charges and preferred stock dividends................. 3.88 (5.67) 0.42 2.13 3.03 4.05 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________
EX-15 5 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Life and Casualty Company Hartford, Connecticut Gentlemen: Re: Registration Statements No. 2-73911, 2-91514, 33-12993, 33-49543, 33-50427, 33-52819 and 33-52819-01 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 28, 1994 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 KPMG PEAT MARWICK LLP _____________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut August 15, 1994 -----END PRIVACY-ENHANCED MESSAGE-----