-----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, XlYOd9RwFxWCRofajAg7ALKY7LjsgZJC17WBqBuzf4FDrVzbZsyJ3a/n7U7G8iEV UmCK1XqPz5xdjP4HNLRfMg== 0000002648-94-000030.txt : 19941031 0000002648-94-000030.hdr.sgml : 19941031 ACCESSION NUMBER: 0000002648-94-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941028 SROS: NONE 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: 94555716 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 3Q 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 September 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 September 30, 1994 ________________ _____________________ Common Capital Stock 112,641,905 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. 51 Item 5. Other Information. 52 Item 6. Exhibits and Reports on Form 8-K. 53 Signatures 54 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
3 Months Ended 9 Months Ended September 30 September 30 ____________________________ ____________________________ (Millions, except share data) 1994 1993 1994 1993 ____ ____ ____ ____ Revenue: Premiums................................. $ 2,858.7 $ 2,699.3 $ 8,440.0 $ 8,010.4 Net investment income.................... 1,111.2 1,212.9 3,358.7 3,715.4 Fees and other income.................... 446.9 375.4 1,356.0 1,198.8 Net realized capital gains (losses)...... (31.7) 40.5 (51.0) 73.3 ___________ ___________ ___________ ___________ Total revenue........................ 4,385.1 4,328.1 13,103.7 12,997.9 ___________ ___________ ___________ ___________ Benefits and expenses: Current and future benefits.............. 3,136.9 2,956.6 9,369.0 9,090.4 Operating expenses....................... 870.4 892.8 2,749.8 2,708.4 Amortization of deferred policy acquisition costs....................... 199.9 193.5 562.4 571.5 ___________ ___________ ___________ ___________ Total benefits and expenses.......... 4,207.2 4,042.9 12,681.2 12,370.3 ___________ ___________ ___________ ___________ Income from continuing operations before income taxes, extraordinary item and cumulative effect adjustments............. 177.9 285.2 422.5 627.6 Federal and foreign income taxes (benefits): Current.................................. (27.6) 74.9 (53.2) 161.8 Deferred................................. 76.1 (15.3) 168.2 (49.9) ___________ ___________ ___________ ___________ Total federal and foreign income taxes........................ 48.5 59.6 115.0 111.9 ___________ ___________ ___________ ___________ Income from continuing operations before extraordinary item and cumulative effect adjustments............................... 129.4 225.6 307.5 515.7 Discontinued operations, net of tax........ - - - 27.0 ___________ ___________ ___________ ___________ Income before extraordinary item and cumulative effect adjustments... 129.4 225.6 307.5 542.7 Extraordinary loss on debenture redemption, net of tax................................ - - - (4.7) Cumulative effect adjustments, net of tax.. - - - 227.8 ___________ ___________ ___________ ___________ Net income........................... $ 129.4 $ 225.6 $ 307.5 $ 765.8 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Results per common share: Income from continuing operations before extraordinary item and cumulative effect adjustments...................... $ 1.15 $ 2.03 $ 2.73 $ 4.65 Discontinued operations, net of tax...... - - - .25 ___________ ___________ ___________ ___________ Income before extraordinary item and cumulative effect adjustments... 1.15 2.03 2.73 4.90 Extraordinary loss on debenture redemption, net of tax.................. - - - (.04) Cumulative effect adjustments, net of tax - - - 2.06 ___________ ___________ ___________ ___________ Net income........................... $ 1.15 $ 2.03 $ 2.73 $ 6.92 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Dividends declared....................... $ .69 $ .69 $ 2.07 $ 2.07 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ Weighted average common shares outstanding. 112,854,480 111,345,929 112,899,393 110,720,400 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ See Condensed Notes to Financial Statements.
4 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, (Millions) 1994 1993 _____________ ____________ Assets: Investments: Debt securities: Held for investment, at amortized cost (fair value $2,090.6 and $2,704.2)....................... $ 2,059.3 $ 2,557.8 Available for sale, at fair value (amortized cost $37,063.2 and $36,933.6)...................... 35,723.0 38,868.9 Trading securities, at fair value (1993 amortized cost $119.0)..... - 117.8 Equity securities, at fair value (cost $1,319.3 and $1,238.1)....... 1,688.6 1,658.9 Short-term investments.............. 599.4 669.9 Mortgage loans...................... 12,716.0 14,839.2 Real estate......................... 1,390.6 1,315.8 Policy loans........................ 517.3 490.7 Other............................... 1,089.8 936.8 __________ __________ Total investments............... 55,784.0 61,455.8 Cash and cash equivalents............. 2,664.9 1,557.8 Reinsurance recoverables and receivables.......................... 4,953.5 4,840.7 Accrued investment income............. 735.5 782.6 Premiums due and other receivables.... 1,872.1 1,664.9 Federal and foreign income taxes: Current............................. 66.3 124.0 Deferred............................ 1,350.8 1,282.9 Deferred policy acquisition costs..... 1,963.1 1,867.0 Other assets.......................... 2,188.7 1,756.3 Separate Accounts assets.............. 23,827.9 24,704.7 __________ __________ Total assets.................... $ 95,406.8 $100,036.7 __________ __________ __________ __________ See Condensed Notes to Financial Statements.
5 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
September 30, December 31, (Millions, except share data) 1994 1993 _____________ ____________ Liabilities: Future policy benefits.................. $ 17,820.0 $ 17,597.6 Unpaid claims and claim expenses........ 17,541.1 17,112.2 Unearned premiums....................... 1,613.5 1,502.2 Policyholders' funds left with the company................................ 24,399.5 27,592.2 __________ __________ Total insurance reserve liabilities. 61,374.1 63,804.2 Dividends payable to shareholders....... 77.7 77.4 Short-term debt......................... 147.1 35.7 Long-term debt.......................... 1,132.3 1,160.0 Other liabilities....................... 2,941.3 3,162.1 Minority and participating policyholders' interests............... 168.0 172.5 Separate Accounts liabilities........... 23,708.6 24,581.7 __________ __________ Total liabilities................... 89,549.1 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 112,641,905 and 112,200,567 outstanding)........... 1,417.5 1,422.0 Net unrealized capital gains (losses)... (632.1) 648.2 Retained earnings....................... 5,177.5 5,103.3 Treasury stock, at cost (2,297,370 and 2,738,708 shares)...................... (105.2) (130.4) __________ __________ Total shareholders' equity.......... 5,857.7 7,043.1 __________ __________ Total liabilities and shareholders' equity............... $ 95,406.8 $100,036.7 __________ __________ __________ __________ Shareholders' equity per common share... $ 52.00 $ 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 Nine Months Ended September 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............................ 307.5 307.5 Net change in unrealized capital gains and losses.......................... (1,280.3) (1,280.3) Common stock issued for benefit plans (441,338 shares).................... 25.2 25.2 Loss on issuance of treasury stock.... (4.5) (4.5) Common stock dividends declared....... (233.3) (233.3) _____________________________________________________________________ Balances at September 30, 1994 $5,857.7 $1,417.5 $ (632.1) $5,177.5 $ (105.2) ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Nine Months Ended September 30, 1993 ___________________________________________________________________________________________________________ Balances at December 31, 1992 $7,238.3 $1,417.7 $ 259.6 $5,777.9 $ (216.9) ___________________________________________________________________________________________________________ Net income............................ 765.8 765.8 Net change in unrealized capital gains and losses.......................... 389.2 389.2 Common stock issued for benefit plans (1,365,950 shares).................. 59.2 59.2 Loss on issuance of treasury stock.... (.5) (.5) Common stock dividends declared....... (230.6) (230.6) _____________________________________________________________________ Balances at September 30, 1993 $8,221.4 $1,417.2 $ 648.8 $6,313.1 $ (157.7) ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
9 Months Ended September 30, ___________________ (Millions) 1994 1993 ____ ____ Cash Flows from Operating Activities: Net income....................................................... $ 307.5 $ 765.8 Adjustments to reconcile net income to net cash used for operating activities: Cumulative effect adjustments.................................. - (227.8) Extraordinary loss on debenture redemption..................... - 4.7 Decrease (increase) in accrued investment income............... 42.4 (66.0) Increase in premiums due and other receivables................. (190.4) (556.1) Increase in reinsurance recoverables and receivables........... (94.4) (15.4) Increase in deferred policy acquisition costs.................. (132.9) (102.7) Depreciation and amortization.................................. 142.9 152.0 (Decrease) increase in federal and foreign income taxes........ (7.2) 233.0 Net (decrease) increase in other assets and other liabilities.. (558.5) 124.8 Increase in insurance reserve liabilities...................... 465.9 553.8 Net sales (purchases) of debt trading securities............... 52.3 (2,165.4) Increase in minority interest.................................. (18.6) (2.8) Gain on sale of subsidiary..................................... - (15.0) Net realized capital losses (gains)............................ 51.0 (73.3) Amortization of net investment discount........................ (66.3) (108.1) Other, net..................................................... (1.3) (140.7) _________ __________ Net cash used for operating activities....................... (7.6) (1,639.2) _________ _________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 16,659.5 3,862.0 Debt securities held for investment............................ 5.6 - Equity securities.............................................. 496.7 655.1 Mortgage loans................................................. 123.2 205.7 Real estate.................................................... 449.7 234.8 Short-term investments......................................... 45,409.7 49,966.3 Investment repayments of: Debt securities available for sale............................. 2,804.6 4,268.9 Debt securities held for investment............................ 498.2 - Mortgage loans................................................. 1,662.6 1,711.3 Cost of investments in: Debt securities available for sale............................. (19,657.4) (10,334.3) Debt securities held for investment............................ (5.3) - Equity securities.............................................. (595.4) (550.8) Mortgage loans................................................. (211.9) (164.4) Real estate.................................................... (31.4) (64.5) Short-term investments......................................... (45,386.9) (49,144.6) Proceeds from disposal of subsidiary.............................. - 93.1 Increase in property, plant & equipment........................... (97.2) (104.2) Net decrease in Separate Accounts................................. 3.7 1.8 Other, net........................................................ (189.1) 146.8 _________ _________ Net cash provided by investing activities....................... 1,938.9 783.0 _________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 2,526.3 2,953.4 Withdrawals of investment contracts............................... (3,220.9) (3,136.8) Issuance of long-term debt........................................ 66.5 665.7 Stock issued under benefit plans.................................. 20.7 58.7 Repayment of long-term debt....................................... (91.9) (456.7) Net increase in short-term debt................................... 110.4 20.6 Dividends paid to shareholders.................................... (233.3) (229.8) _________ _________ Net cash used for financing activities.......................... (822.2) (124.9) _________ _________ Effect of exchange rate changes on cash and cash equivalents....................................................... (2.0) (14.3) _________ _________ Net increase (decrease) in cash and cash equivalents................. 1,107.1 (995.4) Cash and cash equivalents, beginning of period....................... 1,557.8 2,415.0 _________ _________ Cash and cash equivalents, end of period............................. $ 2,664.9 $ 1,419.6 _________ _________ Supplemental Cash Flow Information: Interest paid..................................................... $ 81.4 $ 62.9 _________ _________ _________ _________ Income taxes received (paid)...................................... $ 117.4 $ (69.7) _________ _________ _________ _________ 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 attributable to FASB Interpretation No. 39 of $377 million are included in other assets at September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 1993. The company's reserves for workers' compensation life table indemnity claims at September 30, 1994 were 22.5% 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 nine months ended September 30, 1993. The effect of the change for the nine months ended September 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. In October 1994, the FASB issued FAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, which amends FAS No. 114 to allow a creditor to use existing methods for recognizing income on impaired loans. Both statements 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 these statements. In October 1994, the FASB issued FAS No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. This statement requires disclosure of amounts, nature and terms of derivative financial instruments that are not subject to existing accounting standards. This statement is effective for 1994 financial statements. (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"). As a result of this decision, 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 nine months ended September 30, 1994 were charged to the reserve and did not affect the company's results of operations. 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 September 30, 1994 Contracts Annuities Total Losses Net* __________________________________________________________________________________________________________ Premiums $ - $ 2.5 $ 2.5 $ - $ 2.5 Net investment income 155.9 107.7 263.6 - 263.6 Net realized capital losses (73.7) (19.5) (93.2) 93.2 - Interest earned on receivable from continuing business 4.8 7.1 11.9 - 11.9 Other income 2.8 6.0 8.8 - 8.8 __________________________________________________________________ Total revenue 89.8 103.8 193.6 93.2 286.8 __________________________________________________________________ Current and future benefits 190.0 110.3 300.3 (17.2) 283.1 Operating expenses 2.9 0.8 3.7 - 3.7 __________________________________________________________________ Total benefits and expenses 192.9 111.1 304.0 (17.2) 286.8 __________________________________________________________________ Results of discontinued products $ (103.1) $ (7.3) $ (110.4) $ 110.4 $ - __________________________________________________________________ __________________________________________________________________________________________________________ Charged to Guaranteed Single- Reserve for Investment Premium Future Nine months ended September 30, 1994 Contracts Annuities Total Losses Net* __________________________________________________________________________________________________________ Premiums $ - $ 47.2 $ 47.2 $ - $ 47.2 Net investment income 483.4 323.5 806.9 - 806.9 Net realized capital losses (130.8) (45.9) (176.7) 176.7 - Interest earned on receivable from continuing business 14.4 20.9 35.3 - 35.3 Other income 9.3 12.4 21.7 - 21.7 __________________________________________________________________ Total revenue 376.3 358.1 734.4 176.7 911.1 __________________________________________________________________ Current and future benefits 582.7 374.2 956.9 (53.6) 903.3 Operating expenses 5.1 2.7 7.8 - 7.8 __________________________________________________________________ Total benefits and expenses 587.8 376.9 964.7 (53.6) 911.1 __________________________________________________________________ Results of discontinued products $ (211.5) $ (18.8) $ (230.3) $ 230.3 $ - __________________________________________________________________ __________________________________________________________________________________________________________ * Amounts are reflected in the Consolidated Statement of Income, except for interest of $11.9 million and $35.3 million for the three and nine months ended September 30, 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
Deposits of $30.9 million and $199.4 million were received under pre-existing GIC contracts for the three and nine months ended September 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):
September 30, 1994 December 31, 1993 ______________________________ ______________________________ Guaranteed Single- Guaranteed Single- Investment Premium Investment Premium Contracts Annuities Total Contracts Annuities Total ______________________________ ______________________________ Debt securities available for sale $ 3,806.5 $ 3,244.6 $ 7,051.1 $ 4,690.9 $ 3,578.1 $ 8,269.0 Mortgage loans 2,909.8 1,635.4 4,545.2 3,468.2 1,950.9 5,419.1 Real estate 555.2 108.2 663.4 534.5 - 534.5 Short-term and other investments 635.3 114.3 749.6 399.7 72.8 472.5 ______________________________________________________________________ Total investments 7,906.8 5,102.5 13,009.3 9,093.3 5,601.8 14,695.1 Current and deferred income taxes 272.1 138.0 410.1 253.7 26.2 279.9 Receivable from continuing business 404.4 455.9 860.3 390.0 435.0 825.0 Other 23.1 23.9 47.0 7.6 1.3 8.9 ______________________________________________________________________ Total assets $ 8,606.4 $ 5,720.3 $14,326.7 $ 9,744.6 $ 6,064.3 $15,808.9 __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Future policy benefits $ - $ 5,052.0 $ 5,052.0 $ - $ 5,079.1 $ 5,079.1 Policyholders' funds left with the company 8,110.8 - 8,110.8 8,976.6 - 8,976.6 Reserve for future losses on discontinued products 388.5 651.2 1,039.7 600.0 670.0 1,270.0 Other 107.1 17.1 124.2 168.0 315.2 483.2 ______________________________________________________________________ Total liabilities $ 8,606.4 $ 5,720.3 $14,326.7 $ 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 September 30, 1994 and December 31, 1993, estimated future after-tax capital losses of approximately $131 million and $190 million ($201 million and $292 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs, and $51 million and $70 million ($79 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. Included in the $130.8 million and $45.9 million of net realized capital losses (pretax) on GICs and SPAs, respectively, for the nine months ended September 30, 1994, are losses from the sales of bonds of $40 million and $17 million, respectively. As a result of selling bonds and realizing losses, the anticipated future losses associated with negative interest margins is expected to be reduced in the future. 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. Management continues to believe that the reserve for anticipated future losses will be adequate to provide for the future losses associated with the run-off of the liabilities. The activity in the reserve for anticipated future losses on discontinued products for the nine months ended September 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 (211.5) (18.8) (230.3) ______________________________________________ Reserve at September 30, 1994 $ 388.5 $ 651.2 $ 1,039.7 ______________________________________________ _____________________________________________________________________________________
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. 14 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Discontinued Products (Continued) Receivables of $860.3 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 September 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 nine months ended September 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 14.4 20.9 35.3 ______________________________________________ Receivable at September 30, 1994 $ 404.4 $ 455.9 $ 860.3 ______________________________________________ _____________________________________________________________________________________
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. 15 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Severance and Facilities Charges During the three and nine months ended September 30, 1994, the company charged costs of $80 million and $131 million, respectively, to the severance and facilities reserve established in 1993 related to its cost reduction actions. Of the approximately 4,000 positions expected to be eliminated, approximately 2,600 had been eliminated by September 30, 1994 and the related severance benefits charged against the reserve. The remaining headcount reductions are expected to be completed by the first half of 1995. The annual after-tax savings of approximately $200 million related to these and other cost reduction actions are expected by 1995. 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 $186.2 million and $228.9 million for the three months ended September 30, 1994 and 1993, respectively, and $574.3 million and $707.5 million for the nine months ended September 30, 1994 and 1993, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains and losses include losses of $26.1 million and $43.3 million for the three months ended September 30, 1994 and 1993, respectively, and losses of $136.2 million and $71.1 million for the nine months ended September 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 the nine months ended September 30, 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. 16 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 September 30, 1994, $431 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 $431 million of net unrealized losses were not reflected in shareholders' equity. This had no impact on net income for the three and nine months ended September 30, 1994. In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted which resulted in an increase in the federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. Federal income tax expense for the three and nine months ended September 30, 1993, included a deferred tax benefit of $27.4 million, offset by an increase in current taxes of $5.6 million, resulting from the enactment of OBRA. (9) Reinsurance Ceded earned premiums were $.3 billion and $.2 billion for the three months ended September 30, 1994 and 1993, respectively and $.9 billion and $.8 billion for the nine months ended September 30, 1994 and 1993, respectively. Ceded current and future benefits were $.2 billion and $.1 billion for the three months ended September 30, 1994 and 1993, respectively, and $.9 billion for both the nine months ended September 30, 1994 and 1993. (10) Debt Effective July 27, 1994, the company 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). 17 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (10) Debt (Continued) During the third quarter of 1993, the company issued $200 million of 6 3/8% Notes due in 2003, $200 million of 6 3/4% Debentures due in 2013 and $200 million of 7 1/4% Debentures due in 2023. The proceeds were primarily used to repay commercial paper borrowings, a significant portion of which was incurred in connection with the retirement of debt discussed above. The remaining proceeds were used for general corporate purposes. A total of $550 million of securities remains available for sale under two effective shelf registration statements. Pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission ("the Commission") a finance subsidiary may offer and sell up to $500 million of preferred securities, guaranteed by the company. 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. (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 $462 million and $254 million for the nine months ended September 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, including common share equivalents. There is not a significant difference between primary and fully diluted earnings per share. 18 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (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. Asbestos and environmental-related loss and loss adjustment expense reserves, as reflected on the Consolidated Balance Sheets, were as follows (pretax and before reinsurance; in millions):
September 30, December 31, 1994 1993 ______________________________________________________________________ Environmental Liability $ 409 $ 234 Asbestos Bodily Injury 278 248 Asbestos Property Damage 29 29 _______________________________ Total Asbestos and Environmental-Related Reserves $ 716 $ 511 _______________________________ ______________________________________________________________________
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. While the company believes that it is reasonably possible that these adverse loss developments will continue, the company did not note additional evidence of such adverse loss development in the third quarter. If these adverse loss developments continue, 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. 19 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (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 alleged 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 sought 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. 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. 20 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (15) Litigation (Continued) 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. On October 5, 1994, all of the plaintiffs signed a letter evidencing a settlement in principle of the litigation with all the defendants, including Aetna. The agreement provides that the defendants will pay plaintiffs an aggregate of $36 million plus the costs of class notice (currently estimated at $2 million). Aetna's share of the settlement is not material. The settlement is subject to court approval and notice to the class members. 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 September 30, 1994, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1994 and 1993, and the related condensed consolidated statements of shareholders' equity and cash flows for the nine-month periods ended September 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 October 26, 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 September 30 Nine Months Ended September 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................. $ 2,858.7 $ 2,699.3 5.9% $ 8,440.0 $ 8,010.4 5.4% Net investment income................ 1,111.2 1,212.9 (8.4) 3,358.7 3,715.4 (9.6) Fees and other income................ 446.9 375.4 19.0 1,356.0 1,198.8 13.1 Net realized capital gains (losses).. (31.7) 40.5 - (51.0) 73.3 - _________ _________ _________ _________ Total revenue.................... 4,385.1 4,328.1 1.3 13,103.7 12,997.9 .8 Current and future benefits.......... 3,136.9 2,956.6 6.1 9,369.0 9,090.4 3.1 Operating expenses................... 870.4 892.8 (2.5) 2,749.8 2,708.4 1.5 Amortization of deferred policy acquisition costs................... 199.9 193.5 3.3 562.4 571.5 (1.6) _________ _________ _________ _________ Total benefits and expenses...... 4,207.2 4,042.9 4.1 12,681.2 12,370.3 2.5 _________ _________ _________ _________ Income from continuing operations before income taxes, extraordinary item and cumulative effect adjustments......................... 177.9 285.2 (37.6) 422.5 627.6 (32.7) Income taxes......................... 48.5 59.6 (18.6) 115.0 111.9 2.8 _________ _________ _________ _________ Income from continuing operations before extraordinary item and cumulative effect adjustments....... 129.4 225.6 (42.6) 307.5 515.7 (40.4) Discontinued operations, net of tax.. - - - - 27.0 (100.0) _________ _________ _________ _________ Income before extraordinary item and cumulative effect adjustments....... 129.4 225.6 (42.6) 307.5 542.7 (43.3) Extraordinary loss on debenture redemption, net of tax.............. - - - - (4.7) 100.0 Cumulative effect adjustments, net of tax.......................... - - - - 227.8 (100.0) _________ _________ _________ _________ Net income....................... $ 129.4 $ 225.6 (42.6) $ 307.5 $ 765.8 (59.8) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)......... $ (20.2) $ 29.1 - $ (35.7) $ 48.9 - _________ _________ _________ _________ _________ _________ _________ _________ Results per common share: Income from continuing operations before extraordinary item and cumulative effect adjustments....... $ 1.15 $ 2.03 (43.3) $ 2.73 $ 4.65 (41.3) Discontinued operations, net of tax.. - - - - .25 (100.0) _________ _________ _________ _________ Income before extraordinary item and cumulative effect adjustments....... 1.15 2.03 (43.3) 2.73 4.90 (44.3) Extraordinary loss on debenture redemption, net of tax.............. - - - - (.04) 100.0 Cumulative effect adjustments, net of tax.......................... - - - - 2.06 (100.0) _________ _________ _________ _________ Net income....................... $ 1.15 $ 2.03 (43.3) $ 2.73 $ 6.92 (60.5) _________ _________ _________ _________ _________ _________ _________ _________
Overview ________ Net income was $129 million and $308 million for the three and nine months ended September 30, 1994, respectively, compared with $226 million and $766 million for the same periods a year ago. There are a number of factors impacting the comparison of third quarter and year-to-date 1994 and 1993 results. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Results for the three and nine months ended September 30, 1994 included after-tax catastrophe losses of $28 million and $181 million, respectively. Year-to-date 1994 catastrophe losses related primarily to the Los Angeles earthquake and the severe winter weather occurring in January and February. Catastrophe losses in the third quarter of 1994 resulted primarily from the company's revised estimate of such losses. Catastrophe losses for the three and nine months ended September 30, 1993 were $18 million and $65 million (after-tax), respectively. Third quarter and year-to-date results in 1994 also reflected losses related to prior year reserve development in the Commercial Property-Casualty segment. Such losses were largely environmental-related and were $68 million and $185 million (after tax and net of reinsurance) for the three and nine months ended September 30, 1994, respectively, compared with $34 million and $70 million, respectively, in the same periods of 1993. (Please see "Commercial Property-Casualty" on pages 31 through 34.) Results for the nine months ended September 30, 1994 included after-tax reductions of prior year loss reserves in the personal auto business of $61 million compared with $9 million for the same period a year ago. (Please see "Personal Property-Casualty" on pages 35 and 36.) Third quarter and year-to-date results in 1993 included losses on discontinued products of $38 million and $11 million ($13 million and $15 million excluding net realized capital gains and losses), respectively. Results of discontinued products for the three and nine months ended September 30, 1994 were charged against the reserve for anticipated future losses and did not impact the net income of the company. (Please see pages 28 through 30 for a discussion of discontinued products.) In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted, increasing the federal corporate tax rate from 34% to 35% retroactive to January 1, 1993. Federal income tax expense for the three and nine months ended September 30, 1993 included a deferred benefit of $27 million, offset by an increase in current taxes of $6 million, resulting from the enactment of OBRA. 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 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 and a $5 million extraordinary loss on redemption of debentures. 24 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 nine months ended September 30, 1994 decreased by $96 million and $208 million, respectively, compared with the same periods a year ago. Net realized capital losses were $20 million and $36 million (after-tax) for the three and nine months ended September 30, 1994, respectively, compared with net realized capital gains of $29 million and $49 million, respectively, for the same periods a year ago. 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 nine months ended September 30 were as follows (in millions):
Three Months Ended September 30 Nine Months Ended September 30 _______________________________ ______________________________ 1994 1993 1994 1993 ____ ____ ____ ____ Net realized capital gains (losses) from sales................................. $ (1.4) $ 110.4 $ 26.0 $ 298.4 Realized capital losses from additions to reserves for mortgage loans and real estate (17.9) (79.2) (59.9) (244.3) Realized capital losses from write-downs of debt and equity securities.............. (.9) (2.1) (1.8) (5.2) _______ _______ _______ _______ Net realized capital gains (losses) from continuing operations...................... $ (20.2) $ 29.1 $ (35.7) $ 48.9 _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital losses allocable to experience rated pension contractholders (excluded above)........................... $ (16.9) $ (28.1) $ (88.5) $ (46.4) _______ _______ _______ _______ _______ _______ _______ _______ Net realized capital losses on assets supporting discontinued products (excluded above)........................... $ (60.5)* ** $(114.8)* ** _______ _______ _______ _______ _______ _______ _______ _______ * Net realized capital losses of $60.5 million and $114.8 million for the three and nine months ended September 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 losses of $24.6 million and gains of $4.1 million for the three and nine months ended September 30, 1993, respectively, on assets supporting discontinued products are included in the $29.1 million and $48.9 million of capital gains, respectively, shown above.
Net realized capital gains from sales for the nine months ended September 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 nine months ended September 30, 1993 were primarily attributable to bond sales. Net realized capital gains from sales for the nine months ended September 30, 1993 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 September 30 Nine Months Ended September 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,499.1 $ 1,243.2 20.6% $ 4,302.7 $ 3,661.4 17.5% Net investment income............... 145.3 148.2 (2.0) 430.4 442.9 (2.8) Fees and other income............... 335.6 279.2 20.2 1,008.1 867.2 16.2 Net realized capital gains (losses). (8.6) 33.6 - (29.7) 25.6 - _________ _________ _________ _________ Total revenue.................... 1,971.4 1,704.2 15.7 5,711.5 4,997.1 14.3 Current and future benefits......... 1,323.7 1,065.8 24.2 3,771.1 3,255.8 15.8 Operating expenses.................. 501.7 453.8 10.6 1,501.7 1,313.2 14.4 Amortization of deferred policy acquisition costs.................. 6.2 6.1 1.6 15.4 14.1 9.2 _________ _________ _________ _________ Total benefits and expenses...... 1,831.6 1,525.7 20.0 5,288.2 4,583.1 15.4 _________ _________ _________ _________ Income before income taxes.......... 139.8 178.5 (21.7) 423.3 414.0 2.2 Income taxes........................ 52.2 65.6 (20.4) 157.7 147.7 6.8 _________ _________ _________ _________ Income before cumulative effect adjustments................. $ 87.6 $ 112.9 (22.4) $ 265.6 $ 266.3 (.3) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ (5.9) $ 21.0 - $ (20.0) $ 12.7 - _________ _________ _________ _________ _________ _________ _________ _________
Health and Life Insurance and Services income before cumulative effect adjustments for the three and nine months ended September 30, 1994 decreased by $25 million and $1 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months increased $2 million and $32 million, respectively, from the prior year. Third quarter and year-to-date 1994 results (excluding net realized capital gains and losses) reflected favorable medical claim experience and increased premium and fee revenue due to growth in the number of managed care members, partially offset by an increase in managed care-related operating expenses to meet both current and future needs. The number of members covered under health care arrangements was 15.7 million and 15.0 million at September 30, 1994 and December 31, 1993, respectively. The number of managed care-related members was 6.9 million and 5.4 million at September 30, 1994 and December 31, 1993, respectively. Although enactment of comprehensive health care reform legislation at the federal level was a key priority of both the Clinton Administration ("the Administration") and many members of Congress in 1994, Congress adjourned without passing new legislation. The company anticipates that the Administration and others will re- introduce health care reform legislation in 1995. The company also expects that health care reform efforts will continue at the state level. Since the company's managed care business is centered around local markets where state regulation plays a significant role, the company continues to monitor these efforts closely. At this time management is unable to predict the nature of any such legislation, the outcome of any such initiatives, or what effect any resulting legislation would have on the company's health business. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Services __________________ Operating Summary (Millions) Three Months Ended September 30 Nine Months Ended September 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums........................... $ 61.4 $ 62.1 (1.1)% $ 189.3 $ 170.0 11.4% Net investment income.............. 679.8 755.9 (10.1) 2,056.5 2,306.0 (10.8) Fees and other income.............. 60.4 52.6 14.8 188.9 157.3 20.1 Net realized capital gains (losses) (7.3) (23.5) 68.9 (9.4) 5.5 - _________ _________ _________ _________ Total revenue................... 794.3 847.1 (6.2) 2,425.3 2,638.8 (8.1) Current and future benefits........ 692.0 767.1 (9.8) 2,101.6 2,302.6 (8.7) Operating expenses................. 79.4 91.9 (13.6) 242.6 283.3 (14.4) Amortization of deferred policy acquisition costs................ 5.8 4.5 28.9 17.1 11.4 50.0 _________ _________ _________ _________ Total benefits and expenses..... 777.2 863.5 (10.0) 2,361.3 2,597.3 (9.1) _________ _________ _________ _________ Income (loss) before income taxes.. 17.1 (16.4) - 64.0 41.5 54.2 Income tax (benefits) expenses..... (3.1) (8.1) 61.7 6.7 1.5 - _________ _________ _________ _________ Income (loss) before cumulative effect adjustments................ $ 20.2 $ (8.3) - $ 57.3 $ 40.0 43.3 _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above (a)........................ $ 1,215.6 $ 1,456.0 (16.5) $ 3,898.2 $ 4,107.7 (5.1) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)...... $ (4.7) $ (12.5) 62.4 $ (7.3) $ 6.8 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax, allocable to experience rated pension contractholders (excluded above)................. $ (19.5) $ (26.6) 26.7 $ (84.6) $ (43.8) (93.2) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax, on assets supporting discontinued products (excluded above)................. $ (60.5)(b) (c) - $ (114.8)(b) (c) - _________ _________ _________ _________ _________ _________ _________ _________ (a) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue. (b) Net realized capital losses of $60.5 million and $114.8 million for the three and nine months ended September 30, 1994, respectively, on assets supporting discontinued products were charged to the reserve for anticipated future losses on discontinued products. (c) Net realized capital losses of $24.6 million and gains of $4.1 million for the three and nine months ended September 30, 1993, respectively, on assets supporting discontinued products are included in the $12.5 million capital loss and $6.8 million capital gain shown above.
Total Segment Results Financial Services income before cumulative effect adjustments for the three and nine months ended September 30, 1994 increased by $29 million and $17 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months increased $21 million and $31 million, respectively, from the prior year. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Third quarter and year-to-date 1993 results included losses (excluding net realized capital gains and losses) on discontinued products of $13 million and $15 million, respectively. Year-to- date results of discontinued products in 1993 included $28 million of gains on futures contracts and other one-time adjustments. Results of discontinued products for the three and nine months ended September 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 three and nine months ended September 30, 1994 reflected increased earnings in both the continuing large case pension businesses and in the annuity and small case pension businesses, as compared with the same periods a year ago. Third quarter and year-to-date results in 1994 benefited from lower operating expenses. Third quarter and year- to-date results in 1994 also reflected decreases in net investment income, partially offset by reductions in interest credited to contractholders. The decline in net investment income was driven principally by lower yields on the bond portfolio, and is expected to continue. Year-to-date results in 1993 reflected $10 million of non-recurring charges. Pension and annuity assets under management were $65.9 billion and $66.6 billion, at September 30, 1994 and 1993, respectively. Assets under management attributable to fully guaranteed and experience rated lines of business decreased, while assets attributable to non-guaranteed lines of business increased, from September 30, 1993 to September 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 nine month periods ended September 30 (in millions):
Three Months Ended September 30 Nine Months Ended September 30 _______________________________ _______________________________ 1994 1993 1994 1993 ____ ____ ____ ____ Scheduled contract maturities and benefit payments: (1)......... $ 274.6 $ 263.5 $ 776.5 $ 802.0 ________ ________ ________ ________ ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments (2).......... $ 70.0 $ 248.2 $ 382.0 $ 738.4 ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 96.6 $ 50.1 $ 205.2 $ 172.7 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules. (2) 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 efforts by contractholders to diversify 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 this decision, 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 nine months ended September 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 nine months ended September 30 were as follows (in millions):
Three Months Ended September 30 __________________________________________ 1994 1993 _________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Negative interest margin (a)............. $ (22.2) $ (.1) $ (22.3) $ (24.6) Net realized capital losses.............. (47.8) (12.7) (60.5) (24.6) Interest earned on receivable from continuing operations.................. 3.1 4.6 7.7 - Other, net............................... (.6) 1.2 .6 11.6 ________ ________ ________ ________ Results of discontinued products, after-tax.............................. $ (67.5) $ (7.0) $ (74.5) $ (37.6) ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax. $ (103.1) $ (7.3) $ (110.4) $ (63.3) ________ ________ ________ ________ ________ ________ ________ ________
29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Nine Months Ended September 30 __________________________________________ 1994 1993 _________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Negative interest margin (a)............. $ (64.6) $ (2.3) $ (66.9) $ (65.2) Net realized capital gains (losses)...... (85.0) (29.8) (114.8) 4.1 Interest earned on receivable from continuing operations.................. 9.3 13.6 22.9 - Non-recurring gains on futures contracts. - - - 18.8 Other, net............................... 2.9 6.2 9.1 31.3 ________ ________ ________ ________ Results of discontinued products, after-tax.............................. $ (137.4) (12.3) $ (149.7) $ (11.0) ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax. $ (211.5) $ (18.8) $ (230.3) $ (22.4) ________ ________ ________ ________ ________ ________ ________ ________ (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 nine months ended September 30, 1994 was as follows (pretax, in millions):
Nine Months Ended September 30, 1994 ____________________________________ GICs SPAs Total ____ ____ _____ Reserve at December 31, 1993..... $ 600.0 $ 670.0 $1,270.0 Loss on discontinued products.... (211.5) (18.8) (230.3) ________ ________ ________ Reserve at September 30, 1994.... $ 388.5 $ 651.2 $1,039.7 ________ ________ ________ ________ ________ ________
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 September 30, 1994 and December 31, 1993, estimated future after-tax capital losses of $131 million and $190 million ($201 million and $292 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs, and $51 million and $70 million ($79 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. Included in the $85 million and $30 million of net realized capital losses on GICs and SPAs, respectively, for the nine months ended September 30, 1994, are losses from the sales of bonds of $26 million and $11 million, respectively. As a result of selling bonds and realizing losses, the anticipated future losses associated with negative interest margin is expected to be reduced in the future. 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. Management continues to believe that the reserve for anticipated future losses will be adequate to provide for the future losses associated with the run-off of the liabilities. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) At September 30, 1994 and December 31, 1993, assets under management supporting GICs were $7.9 billion and $9.1 billion, respectively. Assets under management supporting SPAs at September 30, 1994 and December 31, 1993 were $5.1 billion and $5.6 billion, respectively. Scheduled contract maturities and benefit payments and participant directed withdrawals on GICs and SPAs for the three months ended September 30 were as follows (in millions):
Three Months Ended September 30 _______________________________________________ 1994 1993 ____________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Scheduled contract maturities and benefit payments (1).......... $ 424.0 $ 135.6 $ 559.6 $ 584.5 ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 29.8 $ - $ 29.8 $ 49.4 ________ ________ ________ ________ ________ ________ ________ ________ (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 nine months ended September 30 were as follows (in millions):
Nine Months Ended September 30 _______________________________________________ 1994 1993 ____________________________________ _____ GICs SPAs Total Total ____ ____ _____ _____ Scheduled contract maturities and benefit payments: (1)......... $1,507.7 $ 399.5 $1,907.2 $1,767.2 ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 155.9 $ - $ 155.9 $ 187.3 ________ ________ ________ ________ ________ ________ ________ ________ (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 38 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 September 30 Nine Months Ended September 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 753.2 $ 751.9 .2 $ 2,282.0 $ 2,335.7 (2.3)% Net investment income............... 176.6 188.2 (6.2) 524.4 577.9 (9.3) Fees and other income............... 25.8 29.8 (13.4) 84.8 106.3 (20.2) Net realized capital gains (losses). (17.1) 21.1 - (13.8) 56.9 - _________ _________ _________ _________ Total revenue.................... 938.5 991.0 (5.3) 2,877.4 3,076.8 (6.5) Current and future benefits......... 665.7 617.7 7.8 2,137.1 1,959.4 9.1 Operating expenses.................. 188.5 199.7 (5.6) 630.9 678.0 (6.9) Amortization of deferred policy acquisition costs.................. 95.0 92.1 3.1 267.1 270.1 (1.1) _________ _________ _________ _________ Total benefits and expenses...... 949.2 909.5 4.4 3,035.1 2,907.5 4.4 _________ _________ _________ _________ Income (loss) before income taxes... (10.7) 81.5 - (157.7) 169.3 - Income tax (benefits) expenses...... (8.5) (1.3) - (75.6) 11.4 - _________ _________ _________ _________ Income (loss) before cumulative effect adjustments.................. $ (2.2) $ 82.8 - $ (82.1) $ 157.9 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)......... $ (11.3) $ 12.9 - $ (9.2) $ 36.4 - _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio (1).................. 125.6% 111.9% - 129.6% 115.7% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio (1).......................... 118.8% 111.9% - 127.2% 115.2% - _________ _________ _________ _________ _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 3.3% 2.8% - 7.2% 2.2% - _________ _________ _________ _________ _________ _________ _________ _________ (1) The difference between the statutory and GAAP combined loss and expense ratios for the three and nine months of 1994 primarily reflects the establishment of a reserve for statutory purposes for severance and facilities charges which were previously reserved for on a GAAP basis.
Commercial Property-Casualty Insurance and Services results before cumulative effect adjustments for the three and nine months ended September 30, 1994 decreased $85 million and $240 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months decreased $61 million and $194 million, respectively, from the prior year. Catastrophe losses for the three and nine months ended September 30, 1994 were $16 million and $105 million, respectively, compared with $14 million and $34 million for the same periods a year ago. Third quarter catastrophe losses in 1994 included $12 million ($32 million pretax and before reinsurance) resulting from the company's revised estimate of its losses incurred from the Los Angeles earthquake. Year-to-date catastrophe losses in 1994 included $100 million ($309 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather occurring in January and February of 1994. Three and nine month results in 1994 also reflected reduced operating expenses and lower net investment income (driven by lower interest rates) than in the same periods a year ago. Premium revenue for the nine months ended September 30, 1994 was approximately 2 percent lower than in the same period 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. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Commercial Property-Casualty Insurance and Services (Continued) _______________________________________________________________ Third quarter and year-to-date results in 1993 benefited from a net tax benefit of $22 million related to the enactment of OBRA in August 1993 (primarily from revaluing the deferred tax asset). Third quarter and year to-date results in 1994 reflected losses related to prior year reserve development which were $34 million and $115 million higher (after-tax and net of reinsurance) than in the same periods of 1993. Such losses during the three and nine months ended September 30, 1994 were primarily for environmental- related, general and product liability claims. During the third quarter of 1994, $30 million ($49 million pretax and before reinsurance) was added to environmental claims reserves. Of the amount added to environmental-related claims reserves in the third quarter of 1994, $23 million ($37 million pretax and before reinsurance) related to estimated indemnity-related liabilities and $7 million ($12 million pretax and before reinsurance) related to litigation expenses. 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 the company's reserving and information gathering processes, which are on-going, the company has increased its environmental-liability reserves in 1994. The estimation of reserves for reported environmental claims is difficult and likely to change as additional information emerges. The company is continuously involved in lawsuits regarding policy coverage and judicial interpretation of legal liability for environmental pollution, asbestos-related and other long-term exposure claims. The lack of developed case law, as evidenced by the coverage lawsuits, is one of the significant uncertainties that affects the company's ability to estimate future losses for these types of claims. The company and the insurance industry are litigating issues that will ultimately determine, in many cases, whether and to what extent insurance coverage exists. Certain insureds have presented the company with particularly large claims for coverage in coverage dispute cases due primarily to the number of sites alleged to be covered, the nature of the business conducted and the alleged scope of coverage. Two cases involving such insureds are scheduled to begin trial before juries in early 1995 with respect to a portion of the sites alleged to be subject to coverage. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Commercial Property-Casualty Insurance and Services (Continued) _______________________________________________________________ Numerous liability claims for bodily injury have been asserted against major producers of asbestos and asbestos products, some of which are insureds of the company. Also, over the last few years, asbestos bodily injury claims have been filed by plaintiffs against entities that installed products that contained asbestos and/or produced products that contained asbestos, and some producers have attempted to recharacterize asbestos bodily injury product liability claims in an effort to avoid applicable policy coverage limits. The company is currently involved in binding arbitration with one such major producer that had exhausted applicable policy limits on asbestos products claims and is awaiting the arbitrator's decision, which is appealable to a panel of arbitrators. In addition to bodily injury claims, property- damage claims have been brought against the company's insureds seeking reimbursement for the expense of replacing insulation material and other building components made of asbestos. 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 and asbestos-related claims. Future results of the company are expected to be affected adversely by losses for environmental and asbestos-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. Congress was scheduled to reauthorize the Superfund law in 1994, but adjourned before voting on it, so the reauthorization will now be scheduled for the 1995-1996 Congress. There continues to be substantial dissatisfaction among insurance and business groups and others with the current law, particularly with respect to the law's cleanup requirements and liability provisions, and there is general recognition that major reforms are needed. If legislation comparable to the 1994 bills were enacted, it could reduce the insurance industry's and the company's potential environmental liability exposure related to Superfund, in return for new federal taxes on the insurance industry. However, Superfund reform would not directly affect the numerous environmental liability claims against the company resulting from state and other federal environmental cleanup programs. At this time, it is too early to determine whether the law will be reauthorized and reformed in 1995-1996, what the substance of the enacted legislation will be, or what the effect of any such reforms will be on the company. 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Commercial Property-Casualty Insurance and Services (Continued) _______________________________________________________________ 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. While the company believes that it is reasonably possible that these adverse loss developments will continue, the company did not note additional evidence of such adverse loss development in the third quarter. If these adverse loss developments continue, 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. For additional discussion of property-casualty reserves, please see the company's 1993 Annual Report to Shareholders, 1993 Form 10-K, March 31, 1994 Form 10-Q and June 30, 1994 Form 10-Q. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Personal Property-Casualty __________________________ Operating Summary (Millions) Three Months Ended September 30 Nine Months Ended September 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 325.1 $ 371.1 (12.4)% $ 1,007.7 $ 1,127.1 (10.6)% Net investment income............... 40.8 46.3 (11.9) 122.1 146.5 (16.7) Fees and other income............... 1.0 2.7 (63.0) 5.0 7.3 (31.5) Net realized capital gains (losses). 1.3 6.3 (79.4) (4.0) 1.1 - _________ _________ _________ _________ Total revenue.................... 368.2 426.4 (13.6) 1,130.8 1,282.0 (11.8) Current and future benefits......... 254.7 270.7 (5.9) 759.8 870.9 (12.8) Operating expenses.................. 25.8 46.0 (43.9) 118.0 146.6 (19.5) Amortization of deferred policy acquisition costs.................. 78.0 77.2 1.0 221.8 233.7 (5.1) _________ _________ _________ _________ Total benefits and expenses...... 358.5 393.9 (9.0) 1,099.6 1,251.2 (12.1) _________ _________ _________ _________ Income before income taxes.......... 9.7 32.5 (70.2) 31.2 30.8 1.3 Income taxes........................ 1.6 6.1 (73.8) 6.8 .7 - _________ _________ _________ _________ Income before cumulative effect adjustments................. $ 8.1 $ 26.4 (69.3) $ 24.4 $ 30.1 (18.9) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ 1.0 $ 3.6 (72.2) $ (2.7) $ .2 - _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio (1).................. 126.8% 106.7% - 115.8% 112.8% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio (1).......................... 108.6% 105.5% - 109.5% 111.7% - _________ _________ _________ _________ _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 5.9% 1.7% - 10.6% 4.1% - _________ _________ _________ _________ _________ _________ _________ _________ (1) The difference between the statutory and GAAP combined loss and expense ratios for the three and nine months of 1994 primarily reflects the settlement of Proposition 103 claims for statutory purposes which had previously been reserved for on a GAAP basis.
Personal Property-Casualty results before cumulative effect adjustments for the three and nine months ended September 30, 1994 decreased $18 million and $6 million, respectively, from the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months ended September 30, 1994 decreased $16 million and $3 million, respectively, over the same periods a year ago. Catastrophe losses for the three and nine months ended September 30, 1994 were $11 million and $76 million, respectively, compared with $4 million and $31 million for the same periods a year ago. Year-to-date catastrophe losses in 1994 included $71 million ($125 million pretax and before reinsurance) resulting from the Los Angeles earthquake and the severe winter weather occurring in January and February of 1994. Third quarter catastrophe losses in 1994 included $10 million ($16 million pretax and before reinsurance) from the company's revised estimate of such losses. Third quarter and year-to-date results in 1994 also reflected a reduction in operating expenses ($10 million from non-recurring items) from the same periods a year ago, primarily due to exiting of unprofitable markets and management's continuing focus on lowering costs. Partially offsetting this favorable impact to income for the same periods of 1994 is lower net investment income and higher reinsurance costs. 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Personal Property-Casualty (Continued) ______________________________________ Premiums decreased during the three and nine months ended September 30, 1994, primarily due to an 11% reduction in personal automobile policies-in-force over the same periods a year ago, reflecting the company's effort to withdraw from, or reduce exposure to, personal automobile insurance in certain states where management has concluded that it is not in the company's best interest to continue selling personal automobile insurance. Year-to-date results in 1994 included after-tax reductions of prior year loss reserves of $61 million compared with reductions of prior year loss reserves of $9 million for the same period 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. 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
International _____________ Operating Summary (Millions) Three Months Ended September 30 Nine Months Ended September 30 __________________________________ __________________________________ 1994 1993 % Change 1994 1993 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 219.9 $ 271.0 (18.9)% $ 658.3 $ 716.2 (8.1)% Net investment income............... 68.7 74.3 (7.5) 225.3 242.1 (6.9) Fees and other income............... 24.1 11.1 117.1 69.2 60.7 14.0 Net realized capital gains (losses). - 3.0 (100.0) 5.9 (15.8) - _________ _________ _________ _________ Total revenue.................... 312.7 359.4 (13.0) 958.7 1,003.2 (4.4) Current and future benefits......... 200.8 235.3 (14.7) 599.4 701.7 (14.6) Operating expenses.................. 75.0 101.4 (26.0) 256.6 287.3 (10.7) Amortization of deferred policy acquisition costs.................. 14.9 13.6 9.6 41.0 42.2 (2.8) _________ _________ _________ _________ Total benefits and expenses...... 290.7 350.3 (17.0) 897.0 1,031.2 (13.0) _________ _________ _________ _________ Income (loss) before income taxes... 22.0 9.1 141.8 61.7 (28.0) - Income tax expenses (benefits)...... 6.3 (2.7) - 19.4 (49.4) - _________ _________ _________ _________ Income before cumulative effect adjustments................. $ 15.7 $ 11.8 33.1 $ 42.3 $ 21.4 97.7 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ .7 $ 4.1 (82.9) $ 3.5 $ (7.2) - _________ _________ _________ _________ _________ _________ _________ _________
International income before cumulative effect adjustments for the three and nine months ended September 30, 1994 increased $4 million and $21 million, respectively, compared with the same periods a year ago. Net realized capital losses for the nine months ended September 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 nine months ended September 30, 1994 increased $7 million and $10 million, respectively, compared with the same periods a year ago. Third quarter and year-to-date results in 1994 reflect increased earnings in the Pacific Rim and Canada. Year-to-date results in 1994 also reflected increased earnings from the company's increased investment in a Mexican insurance operation. Nine 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. Year-to-date results in 1993 were adversely affected by additions to loss and loss expense reserves for prior accident years of $20 million. 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. Results for the three and nine months ended September 30, 1994 reflect the company's change in accounting for an affiliate from the consolidated basis of accounting to the equity basis of accounting. This change resulted in decreases in total revenue of 13% and 5% for the three and nine months ended September 30, 1994, respectively, and decreases in total benefits and expenses of 14% and 5%, respectively, compared to the same periods of 1993. This change did not impact results of the segment in 1994. 38 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 or write-downs, at September 30, 1994 and December 31, 1993 were as follows (in millions):
September 30, December 31, 1994 1993 _________________________________ Debt securities....................... $ 37,782.3 $ 41,544.5 Mortgage loans........................ 12,716.0 14,839.2 Real estate........................... 1,390.6 1,315.8 Equity securities..................... 1,688.6 1,658.9 Short term and other.................. 2,206.5 2,097.4 _________________________________ Total invested assets.............. $ 55,784.0 $ 61,455.8 _________________________________ _________________________________
The decline in invested assets from December 31, 1993 to September 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. Interest rates rose from December 31, 1993 to September 30, 1994, causing a decrease in the value of debt securities and resulting in the change from unrealized gains to unrealized losses during this period. Debt securities included unrealized capital gains of $1.9 billion at December 31, 1993, compared with unrealized capital losses of $1.3 billion at September 30, 1994. Of such unrealized capital losses at September 30, 1994, $97 million and $442 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The decrease in mortgage loans principally reflected prepayments and payments at maturity on mortgage loans. The decrease in mortgage loans also reflects the company's foreclosure of $462 million of mortgage loans (net of write-offs). Included in these foreclosures was a $220 million loan secured by an office building. The company maintained a specific reserve of $80 million relating to this loan which was provided for in prior years. The property was written down at the time of foreclosure to its estimated fair value. 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ 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 be met by a mix of investments which matches the characteristics (e.g., duration, cash flow variability) 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. The company regularly projects duration and cash flow characteristics of its liabilities and makes appropriate adjustments in the portfolios of assets which support the liabilities. Interest rate risk is managed within a tight duration band, and credit risk is managed by maintaining high average bond ratings and diversified sector exposure. In pursuing its investment and risk management objectives, the company utilizes assets whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the $37.8 billion debt securities portfolio, as of September 30, 1994 was as follows (in millions):
Amortized Fair Cost Value _________ _______ Collateralized mortgage obligations (including interest-only and principal-only strips)...... $ 3,619.1 $ 3,496.0 Treasury and agency strips: Principal..................................... 1,154.4 961.0 Interest...................................... 106.6 90.6 LIBOR notes..................................... 25.0 24.8 Yen notes....................................... 22.4 20.7 Warrants to purchase debt securities............ 20.8 4.3 Mandatorily convertible preferred stock......... 17.9 17.4
Using financial modeling and other techniques, the company regularly evaluates the appropriateness of the investments relative to the company's management-approved investment guidelines and the business objectives of the portfolios (including evaluating the interest rate, liquidity, credit and equity price risk resulting from derivative and other portfolio activities). During the three and nine months ended September 30, 1994, the company operated within such investment guidelines by maintaining a mix of investments that diversifies its assets and matches the characteristics of the liabilities which they support. (Please see a discussion of the company's hedging activities on pages 47 and 48.) 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Debt Securities As of September 30, 1994 and December 31, 1993, the company's investments in debt securities represented 68% of total general account invested assets and were as follows (in millions):
September 30, December 31, 1994 1993 ________________________________ Supporting discontinued products $ 7,051.1 $ 8,269.0 Supporting experience rated products 11,472.8 11,763.8 Supporting remaining products 19,258.4 21,511.7 ________________________________ Total $37,782.3 $41,544.5 ________________________________ ________________________________
Included in the company's total debt security balances at September 30, 1994 and December 31, 1993 were the following categories of debt securities (in millions):
September 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 $ 1,900.5 $ 438.8 23.1% $ 1,970.1 $ 449.6 22.8% Problem debt securities 198.1 21.2 10.7 196.1 26.6 13.6 Potential problem debt securities 118.4 45.7 38.6 191.0 65.1 34.1
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. Individual debt securities are written down for other than temporary declines in value. 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 nine months ended September 30 was as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ___________________ ___________________ 1994 1993 1994 1993 _______ _______ ______ _______ Allocable to discontinued products $ 1.0 $ .5 $ 2.9 $ 3.1 Allocable to contractholders $ .2 $ .4 $ .6 $ 1.5 Allocable to remaining products $ .9 $ .3 $ 3.6 $ 2.0
41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ At September 30, 1994 and December 31, 1993, the carrying value (fair value) of collateralized mortgage obligations ("CMOs") was $3.5 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 September 30, 1994 and December 31, 1993, approximately 89% 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. Mortgage Loan Investments As of September 30, 1994 and December 31, 1993, the company's mortgage loan investments, net of impairment reserves, supported the following types of business (in millions):
September 30, December 31, 1994 1993 _______________________________ Supporting discontinued products $ 4,545.2 $ 5,419.1 Supporting experience rated products 4,034.4 4,732.7 Supporting remaining products 4,136.4 4,687.4 _______________________________ Total $12,716.0 $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. 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ 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 September 30, 1994 Balances at December 31, 1993 ______________________________ ______________________________ Specific General Specific General Reserves Reserve Total Reserves Reserve Total ________ _______ _____ ________ _______ _____ Allocable to the company*... $ 418.1 $ 375.0 $ 793.1 $ 639.8 $ 400.0 $1,039.8 Allocable to contractholders 196.6 ** 196.6 268.5 ** 268.5 ________ ________ ________ ________ ________ ________ Total..................... $ 614.7 $ 375.0 $ 989.7 $ 908.3 $ 400.0 $1,308.3 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ * Includes total reserves of $464.4 million ($232.3 million of specific reserves and $232.1 million of general reserves) allocated to discontinued products at September 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 September 30, 1994 and December 31, 1993 excluded reserves for losses of $234.2 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.
For the periods shown below, after-tax mortgage loan impairment expense was as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, ___________________ ___________________ 1994 1993 1994 1993 ____ ____ ____ ____ Allocable to discontinued products $ 27.5* $ 42.3 $ 57.8* $101.8 Allocable to contractholders** $ 2.1 $ 13.5 $ 41.4 $ 58.2 Allocable to remaining products $ 17.8 $ 26.9 $ 60.2 $102.3 * Impairment expense allocable to discontinued products for the three and nine months ended September 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.
43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Included in the company's total mortgage loan balances at September 30, 1994 and December 31, 1993 were the following categories of mortgage loans (in millions):
Balances at September 30, 1994 _____________________________________________________________ Supporting Experience Supporting Rated Pension Contracts Discontinued Products _______________________ ______________________ Total Amount % of Total Amount % of Total _____ ______ __________ ______ __________ Problem loans........... $1,002.1 $ 272.3 27.2% $ 407.5 40.7% Restructured loans (1).. 1,145.8 363.5 31.7 482.7 42.1 Potential problem and restructured loans..... 907.5 380.2 41.9 298.3 32.9 ________ Total................ $3,055.4 ________ ________ Impairment reserves..... $ 989.7 ________ ________ Impairment reserves as a percentage of total.. 32.4% ________ ________ 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 nine month period ended September 30, 1994, $335.7 million of loans which had been restructured, after write-offs of $144.9 million, were classified as performing. Of these loans, $69.1 million, after write-offs of $29.8 million, supported experience rated pension contracts and $118.0 million, after write-offs of $66.8 million, supported discontinued products. Please see page 44 for further discussion of such transfers.
"Problem loans" are defined to be loans with payments over 60 days past due, loans on properties in the process of foreclosure, loans on properties involved in bankruptcy proceedings and loans on properties subject to redemption. Loans on properties in the process of foreclosure increased to $599 million at September 30, 1994 from $399 million at December 31, 1993. "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 are re-underwritten and must 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 at the time of restructuring 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. 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ 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. During the three and nine months ended September 30, 1994, loans which had been restructured, with a carrying value of $225 million and $336 million, respectively, (net of write-offs of $101 million and $145 million, respectively) and with an average current yield of 8% were classified as performing. The amount of 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, $51 million and $69 million, respectively, (net of write-offs of $23 million and $30 million, respectively) supported experience rated pension contracts and $56 million and $118 million, respectively, (net of write-offs of $40 million and $67 million, respectively) 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 on page 43). 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 September 30 and the portion thereof actually recorded as income for the three and nine months ended September 30 were as follows (in millions):
Three Months Ended Nine Months Ended September 30, September 30, __________________ _________________ 1994 1993 1994 1993 ____ ____ ____ ____ Income which would have been recorded under original terms of loans.......... $ 59.2 $ 82.1 $166.5 $228.1 Income recorded......................... 22.9 41.9 83.4 108.8 ______ ______ ______ ______ Lost investment income.................. $ 36.3 $ 40.2 $ 83.1 $119.3 ______ ______ ______ ______ ______ ______ ______ ______ Lost investment income allocated to investments supporting discontinued products (included above).............. $ 12.2 $ 22.5 $ 29.7 $ 62.9 ______ ______ ______ ______ ______ ______ ______ ______ Lost investment income allocated to investments supporting experience rated pension contracts (included above)..... $ 12.4 $ 10.9 $ 25.4 $ 32.6 ______ ______ ______ ______ ______ ______ ______ ______
45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Real Estate Investments At September 30, 1994 and December 31, 1993, Aetna's equity real estate balances, net of write-downs and reserves, were as follows:
Balances at September 30, 1994 _____________________________________________________________ Supporting Experience Supporting Rated Pension Contracts Discontinued Products _______________________ ______________________ Total Amount % of Total Amount % of Total _____ ______ __________ ______ __________ Investment real estate..... $ 388.9 $ 33.2 8.5% $ 91.8 23.6% Properties held for sale... 1,001.7 241.6 24.1 571.6 57.1 ________ ________ ________ Total equity real estate... $1,390.6 $ 274.8 19.8 $ 663.4 47.7 ________ ________ ________ ________ ________ ________ 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 ________ ________ ________ ________ ________ ________
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 the company's 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. "Properties held for sale" is primarily comprised of assets acquired through foreclosure. A new cost basis is established for assets acquired through foreclosure equal to the fair value 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):
September 30, December 31, 1994 1993 _______________________________ Allocable to discontinued products $346.3 $298.3 Allocable to contractholders 192.5 228.3 Allocable to remaining products 173.8 242.9 _______________________________ Total $712.6 $769.5 _______________________________ _______________________________
46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ For the periods shown below, total after-tax net realized capital (gains) losses from real estate write-downs and increases (decreases) in the valuation reserves were as follows (in millions):
Three Months Ended Nine Months Ended September 30 September 30 __________________ __________________ 1994 1993 1994 1993 ____ ____ ____ ____ Allocable to discontinued products $ -* $ 9.4 $ 13.8* $ 33.7 Allocable to contractholders** $ (.1) $ .4 $ 4.5 $ 5.3 Allocable to remaining products $ .1 $ .6 $ (.3) $ 6.5 * Write-downs and impairment expense allocable to discontinued products for the three and nine months ended September 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.
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 $8.0 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 25% at September 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. Management is seeing improvement in certain segments of the commercial real estate market. While additional losses may emerge in the company's mortgage loan and real estate portfolios, and may increase to the extent 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 $5.2 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. 47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources _______________________________ Cash and cash equivalents at September 30, 1994 and December 31, 1993 were $2.7 billion and $1.6 billion, respectively. For the nine months ended September 30, 1994, net cash used for operating activities was $7.6 million. Net cash used for operating activities of $1.6 billion during the first nine months of 1993 included $2.2 billion of cash used for net purchases of debt trading securities. For the first nine months of 1994, net cash provided by investing activities was $1.9 billion and included a decrease of $23 million in short-term investments. Net cash provided by investing activities of $783 million for the nine months ended September 30, 1993 included $822 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 nine months of 1994 was $583 million. As a result of adverse conditions in real estate markets and tight lending practices by banks and other financial institutions over the past several years, the company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere. Of the $1,355 million of mortgage loans scheduled to mature during the first nine months of 1994, $964 million were not paid as scheduled, a substantial portion of which supported large case pension liabilities. Of the loans not paid as scheduled, $434 million were extended at interest rates at least equal to current market (average rate of 9% over an average extension period of 6 years), $132 million were under forbearance (continuing to make payments under original loan terms), $29 million were foreclosed upon and $369 million were under discussion with borrowers at September 30, 1994. Of the $369 million of loans under discussion with borrowers, $207 million were classified as problem or restructured loans at September 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 26 through 30 for a discussion of the liquidity requirements specific to the large case pension business. The company engages in hedging activity to manage foreign exchange and interest rate risk. Such hedging activity has principally consisted of using forward and futures contracts and interest rate swaps. 48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ The company utilizes foreign currency forward contracts to hedge its foreign currency exposure (primarily Canada, Great Britain and Malaysia) arising from certain investments in foreign affiliates and non-dollar denominated investment securities. As of September 30, 1994, the company had contracts to sell $455 million of foreign currencies to hedge foreign currency exposures arising from net investments in foreign affiliates. As of September 30, 1994, the company also had contracts to sell $264 million of foreign currencies to hedge foreign currency exposures arising from investments in non-dollar denominated assets. The company generally utilizes foreign currency contracts with terms of up to three months. At September 30, 1994, the company had unhedged foreign currency exposures of $407 million and $26 million related to net investments in foreign affiliates and investments in non-dollar denominated assets, respectively, for which effective markets for hedging vehicles do not currently exist. As of September 30, 1994, the company had futures contracts, acquired as hedges, to purchase $137 million of U.S. Treasury securities with unrecognized losses of $4 million (pretax). The company utilizes interest rate swaps to manage certain exposures related to changes in interest rates. This swap activity includes transactions which were entered into in prior years where the company acts as an intermediary for issuers whose debt the company has guaranteed (Please see Footnote 16 of the company's 1993 Annual Report to Shareholders for a discussion of Financial Guarantees) to allow them to convert variable rate debt to a fixed rate, with the company retaining no interest rate risk. Interest rate swap activity also includes exchanging variable rate asset returns for fixed rate returns. The notional amount of the interest rate swaps with unrecognized gains at September 30, 1994 was $386 million with an estimated fair value of $15 million. The notional amount of the interest rate swaps with unrecognized losses at September 30, 1994 was $529 million with an estimated fair value of $(21) million. Instruments used for hedging may be 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. (Please see "General Account Investments" on page 39.) Pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission ("the Commission") a finance subsidiary may offer and sell up to $500 million of preferred securities, guaranteed by the company. 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. Pursuant to other shelf registration statements declared effective by the Commission during 1993, the company may offer and sell up to an additional $550 million of securities. 49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ 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. On July 17, 1993, $137 million of the company's 7 3/4% Eurodollar Notes due 2016 were redeemed at par at the option of the holders thereof. During the third quarter of 1993, the company issued $200 million of 6 3/8% Notes due in 2003, $200 million of 6 3/4% Debentures due in 2013 and $200 million of 7 1/4% Debentures due in 2023. The proceeds were primarily used to repay commercial paper borrowings, a significant portion of which was incurred in connection with the retirement of debt discussed above. The remaining proceeds were used for general corporate purposes. Dividends Declared On September 30, 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 October 28, 1994, payable November 15, 1994. Other Matters _____________ For additional discussion of income taxes and severance and facilities charges, please see the company's 1993 Annual Report to Shareholders, 1993 Form 10-K, March 31, 1994 Form 10-Q and June 30, 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 September 30, 1994, $431 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 $431 million of net unrealized losses were not reflected in shareholders' equity. This had no impact on net income for the three and nine months ended September 30, 1994, but has the potential to adversely affect future results if and when such losses are realized. 50 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Other Matters (Continued) _________________________ Severance and Facilities Charges During the three and nine months ended September 30, 1994, the company charged costs of $80 million and $131 million, respectively, to the severance and facilities reserve established in 1993 related to its cost reduction actions. Of the approximately 4,000 positions expected to be eliminated, approximately 2,600 had been eliminated by September 30, 1994 and the related severance benefits charged against the reserve. The remaining headcount reductions are expected to be completed by the first half of 1995. The annual after-tax savings of approximately $200 million related to these and other cost reduction actions are expected by 1995. 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 _____ _____
51 PART II. OTHER INFORMATION Item 1. Legal Proceedings. In Re: Stepak v. Aetna Life and Casualty Company et al. ________________________________________________________ On October 22, 1990, a shareholder filed a lawsuit in United States District Court for the District of Connecticut ("District Court"). The suit, which was filed on behalf of a class of company shareholders, named as defendants Aetna Life and Casualty Company ("Aetna") and certain present and former Aetna officers and directors. The suit alleges that the defendants fraudulently and in violation of federal securities laws failed, among other things, to adequately disclose alleged deterioration in the value of mortgage loan and real estate investment portfolios and that the plaintiff, acting in reliance upon such allegedly misleading public statements, purchased Aetna common stock at artificially inflated prices. The suit seeks certification of the class and compensatory and punitive damages. In November 1990, the plaintiff filed an amended complaint. The defendants moved to have the amended complaint dismissed. The plaintiff subsequently filed a second amended complaint, and in August 1991 the District Court denied the defendants' motion to dismiss this complaint. In the interim, the plaintiff dropped all but two of the original individual defendants. Subsequently, a class was conditionally certified composed of purchasers of Aetna common stock during the period from February 16, 1989 through November 13, 1990, with some exceptions. Aetna answered the complaint, denying all substantive averments, and the parties engaged in substantial discovery. On September 8, 1994, the District Court entered a final judgment in favor of all defendants. The plaintiff has filed an appeal from that judgment to the United States Court of Appeals for the Second Circuit. Aetna believes that the suit is neither supported as a matter of fact nor as a matter of law and, with the other defendants, will continue to contest vigorously the litigation. 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. 52 Other Litigation (Continued) ____________________________ 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 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.
Nine Months Ended Years ended December 31 ____________________________________ September 30, 1994 1993 1992 1991 1990 1989 __________________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges.... 4.26 (a) .42(b) 2.13 3.03 4.13 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 4.26 (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 nine months ended September 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. 53 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (10) Material Contracts. (10.1) Letter Agreement, dated September 20, 1994, between Aetna Life and Casualty Company and Patrick W. Kenny. (10.2) Aetna Life and Casualty Company 1994 Non-Employee Director Deferred Stock Plan, incorporated herein by reference to the company's proxy statement, filed on March 18, 1994 (the "1994 Proxy Statement"). (10.3) Aetna Life and Casualty Company 1994 Stock Incentive Plan, incorporated herein by reference to the company's 1994 Proxy Statement. (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 nine months ended September 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 October 28,1994. (27) Financial Data Schedule. (b) Reports on Form 8-K None. 54 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 October 28, 1994 By ROBERT E. BROATCH (Signature) Robert E. Broatch Senior Vice President, Finance and Corporate Controller EX-10.1 2 LETTER AGREEMENT BETWEEN AETNA LIFE AND CASUALTY COMPANY AND PATRICK W. KENNY 1 September 20, 1994 Patrick W. Kenny 33 Fulton Place West Hartford, CT 06107 Dear Pat: The purpose of this letter is to set out the agreement that we have reached as a result of our discussions regarding the cessation of your full-time, active service as Group Executive and Chief Financial Officer of Aetna Life and Casualty Company and its affiliates (collectively, the "Company"). This agreement is subject to the approval of the Company's Board of Directors. We have agreed that the last day of active service will be December 30, 1994, or such earlier date as the Company shall designate (in which case, your employment status will be changed to a paid leave of absence until December 30, 1994 and your last day of active service will be considered as December 30, 1994 notwithstanding any such paid leave of absence.) On January 2, 1995 you will begin a period of salary continuation at the rate of $425,000 per year (your current annual base compensation). Your benefits will be as described in Attachment A of this letter (which is a part of this agreement). On May 3, 1996 your period of salary continuation payments (i.e., 70 weeks) will cease. After May 3, 1996 your status will be that of a retired employee, eligible to participate in all benefits then generally made available by the Company to similarly situated retired executives. During the first 13 weeks of the salary continuation period, you will be eligible to participate in all normal Company benefit programs. For the remaining period of salary continuation, you will be eligible to continue in such programs other than sick pay, long-term disability, ISP and vacation day accrual on the same basis as active employees. We agree that in the event of your death prior to May 3, 1996, any and all obligations under this agreement shall continue and any remaining payments shall be made to your spouse. You also agree that in exchange for the extension of salary continuation payments equivalent in value to a period of 28 weeks of your regular rate of compensation beyond the period for which you would otherwise be eligible under current Company plans and policies (i.e., 42 weeks) and for certain supplementary pension benefits and other consideration described in Attachment A: 2 you (for yourself and any other person claiming or deriving a right from you) forever release and discharge Aetna Life and Casualty Company and its affiliates (and the directors, employees and agents of Aetna Life and Casualty Company and its affiliates) from any and all liability, claims, demands and causes of action (by whatever name called and whether known or unknown) which you had, have, or may have, arising out of: (i) your employment with the Company; (ii) the cessation of such employment; or (iii) any act, omission, occurrence or other matter related to such employment or cessation of employment, up to and including the effective date of this agreement. This release includes, but is not limited to, claims under the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, any other claims under federal, state or local law, and claims for attorney's fees, costs and the like. You promise that you will not institute a claim or charge of employment discrimination with any agency or sue the Company, or its directors, employees or agents, concerning any claim you have released pursuant to this agreement. You agree that if you violate this promise, you will be liable for, and will pay, all costs and expenses of defending against the claim or suit, including reasonable attorney's fees, incurred by the Company and those associated with the Company. Further, you agree to sign an additional release on or about December 30, 1994, substantially the same as the release contained herein, for the period from the date upon which you sign this letter to December 30, 1994. In consideration of the payments and other benefits provided by the Company under this agreement, you promise that: a) you will cooperate with all reasonable requests made by the Company, its subsidiaries or counsel, for assistance, including making yourself available for interviews with Company counsel regarding matters within the scope of or related to your duties while at the Company; b) you will not, for yourself or any other person or entity, directly or indirectly, divulge, communicate or in any way make use of any confidential, or proprietary information acquired in the performance of your service for the Company without the prior written consent of an appropriate Company officer; c) you will not, without the prior written consent of an appropriate Company officer (which shall not be unreasonably withheld) for a period of two years following the date of this agreement, enter the employ of, work with, or perform service for any person or entity which is in direct competition with the Company; 3 d) you will not disclose to any person or entity the terms and conditions of, or any information acquired in connection with, this agreement, without the prior written consent of an appropriate Company officer, other than your legal, financial or career advisors and the members of your immediate family, if they agree to maintain confidentiality; and e) you will not, for a period of one year after December 30, 1994, directly or indirectly induce any employee, insurance agent, insurance broker, or broker-dealer of the Company to be employed by another organization or perform services elsewhere or solicit the trade of any customers of the Company. You acknowledge that you: a) have been advised to consult an attorney before signing this agreement and that you have had the opportunity to consult with an attorney of your choice; b) have had the opportunity to consider, for at least 45 days, this agreement and the information provided by the Company as to the group of employees to whom it has offered and with whom it has individually negotiated similar agreements (as of the date indicated on such information), any eligibility factors and time limits that were applied, the job titles, and ages of such employees and the ages of employees in your job class with whom the Company has not negotiated; and c) have read this agreement in its entirety, understand its terms and knowingly and voluntarily consent to its terms and conditions. The agreement will become effective on the eighth day following the date you sign it and will supersede the letter agreement between you and the Company dated December 1, 1987. You may revoke this agreement at any time prior to its effective date by giving written notice of revocation to me. AETNA LIFE AND CASUALTY COMPANY Date: September 29, 1994 By /s/ Ronald E. Compton __________________ _____________________________ Ronald E. Compton Title: Chairman Date: September 28, 1994 /s/ Patrick W. Kenny __________________ _____________________________ Patrick W. Kenny 4 Attachment A Salary Continuation As per second and third paragraphs of letter. Stock Options Ineligible for additional awards. During salary continuation: exercises governed by rules for active employees. Exercises governed by rules for early retirees thereafter. Bonus Eligible for consideration for the 1994 performance year; ineligible thereafter. ACEShares Subject to the approval of the Committee on Compensation and Organization, unvested award (upon signing of the ACEShares Agreement) will vest based on active service with the Company on a prorated basis according to schedule provided performance requirements are met. Executive Life Continues during salary continuation provided that the Split Dollar Agreement is not terminated. It should be noted that this arrangement is under current review. One of the options under consideration is termination. In the event of such termination, no further premium will be paid by the Company. At the earlier of the end of salary continuation or the termination of the Split dollar Agreement, Aetna may withdraw its contribution and the policy may be continued thereafter upon payment of full premium, if any, without Company contribution. Nothing contained herein shall limit the Company's rights as outlined in the Split Dollar Agreement. Medical/Dental Eligible to continue group medical/dental and life insurance coverage, if any, through May 3, 1996. Eligible for retiree benefits, as then in effect, thereafter. Retirement Plan Accruals under retirement plans continue during salary continuation. Pension benefit will be calculated on the basis of 25 years of service and attainment of age 55. ISP Active participation may continue during initial 90 day (13 weeks) salary continuation period. 5 Attachment A (Continued) Outplacement To be provided by the Company. In addition, reimbursement of reasonable job search activities (e.g., travel, lodging, and meals) pursuant to Company expense reimbursement guidelines not to exceed $15,000.00; provided, however, that reimbursement will end upon the earlier of the acceptance of a position or May 3, 1996. Sick Pay and Long-Term Disability Ineligible after expiration of first 13 weeks of salary continuation. Vacation Lump sum payment for accrued but unused vacation days (up to a maximum of 25 days) no later than December 30, 1994. EX-12 3 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
9 Months Ended (Millions) September 30, 1994 1993 1992 1991 1990 1989 __________________ ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 422.5 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 $ 663.8 Add back fixed charges............ 131.9 171.0 194.3 221.5 229.0 211.6 Minority interest................ 7.8 7.0 8.6 5.9 4.9 (1.9) ________ _________ ________ ________ ________ ________ Income (loss) as adjusted..... $ 562.2 (969.4) $ 81.5 $ 470.9 $ 693.5 $ 873.5 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Fixed charges: Interest on indebtedness....... $ 71.1 77.4 $ 81.4 $ 110.9 $ 119.9 $ 113.2 Portion of rents representative of interest factor............ 60.8 93.6 112.9 110.6 109.1 98.4 ________ _________ ________ ________ ________ ________ Total fixed charges........... $ 131.9 171.0 194.3 221.5 229.0 211.6 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Preferred stock dividend requirements.................... - - - - - $ 3.9 ________ _________ ________ ________ ________ ________ Total combined fixed charges and preferred stock dividend requirements.................... $ 131.9 171.0 $ 194.3 $ 221.5 $ 229.0 $ 215.5 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Ratio of earnings to fixed charges......................... 4.26 (5.67) 0.42 2.13 3.03 4.13 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________ Ratio of earnings to combined fixed charges and preferred stock dividends................. 4.26 (5.67) 0.42 2.13 3.03 4.05 ________ _________ ________ ________ ________ ________ ________ _________ ________ ________ ________ ________
EX-15 4 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 October 26, 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 October 28, 1994 EX-27 5 ARTICLE 7 - FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended September 30, 1994 for Aetna Life & Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 9-MOS DEC-31-1994 SEP-30-1994 35,723 2,059 2,091 1,689 12,716 1,391 55,784 2,665 4,954 1,963 95,407 17,820 1,614 17,541 24,400 1,132 1,418 0 0 4,440 95,407 8,440 3,559 (51) 1,356 9,369 562 0 423 115 308 0 0 0 308 2.73 0 0 0 0 0 0 0 0 There is not a significant difference between primary and fully diluted earnings per share.
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