-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vcma7GXqyBjubhTEUwYLkSfNiGT4Ld1h+MmeTcXTLTn/LedNsl9WvtukC6zA2DLe 4Zt+nezowwd3197H4aToYQ== 0000002648-96-000013.txt : 19960228 0000002648-96-000013.hdr.sgml : 19960228 ACCESSION NUMBER: 0000002648-96-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960226 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE & CASUALTY CO CENTRAL INDEX KEY: 0000002648 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 060843808 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05704 FILM NUMBER: 96525428 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 8602730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-K 1 1995 LIVE 10-K FILING 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 1-5704 Aetna Life and Casualty Company _______________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 _______________________________ _____________________ (State or other jurisdiction of (I.R.S. Employer incorporation) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 _______________________________ _____________________ (Address of principal (ZIP Code) executive offices) Registrant's telephone number, including area code: (860) 273-0123 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ___________________ _________________________ Common Capital Stock without par value New York Stock Exchange Pacific Stock Exchange Various Swiss Exchanges 9 1/2% Cumulative Monthly Income New York Stock Exchange Preferred Securities, Series A (issued by a subsidiary) Securities registered pursuant to Section 12(g) of the Act: None _____________________________________________________________________ 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 1996 was $8,553,764,659. As of January 31, 1996, 114,869,153 shares of the registrant's Common Capital Stock without par value were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1995 annual report to shareholders (the "Annual Report"). (Parts I, II and IV) Portions of the registrant's proxy statement to be filed on or about March 20, 1996 (the "Proxy Statement"). (Parts III and IV) 2 TABLE OF CONTENTS Page ____ PART I Item 1. Business. A. Organization of Business 3 B. Financial Information about Industry Segments 4 C. Description of Business Segments 1. Aetna Health Plans 5 2. Aetna Life Insurance & Annuity 9 3. International 13 4. Large Case Pensions 14 5. Corporate 15 6. Discontinued Operations - Property-Casualty Operations 16 7. Reserves Related to Discontinued Operations 21 8. General Account Investments 25 a. Investments Related to Continuing Operations 25 b. Investments Related to Discontinued Operations 27 9. Other Matters a. Regulation 29 b. NAIC IRIS Ratios 32 c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends 33 d. Miscellaneous 33 Item 2. Properties. 34 Item 3. Legal Proceedings. 34 Item 4. Submission of Matters to a Vote of Security Holders. 34 Executive Officers of Aetna Life and Casualty Company 35 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 37 Item 6. Selected Financial Data. 37 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 37 Item 8. Financial Statements and Supplementary Data. 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 37 PART III Item 10. Directors and Executive Officers of the Registrant. 38 Item 11. Executive Compensation. 38 Item 12. Security Ownership of Certain Beneficial Owners and Management. 38 Item 13. Certain Relationships and Related Transactions. 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 38 Index to Financial Statement Schedules 42 Signatures 59 3 PART I Item 1. Business. A. Organization of Business Aetna Life and Casualty Company was organized in 1967 as a Connecticut insurance corporation. Aetna Life and Casualty Company and its subsidiaries (collectively, "Aetna" or the "company") constitute one of the nation's largest insurance/financial services organizations based on its assets at December 31, 1994. Based on 1994 premium rankings, the company also is one of the nation's largest stock insurers of property- casualty lines and one of the largest writers of health care products, and group life, annuity and pension products. Although the company offers insurance and financial services products in foreign countries, 90% of its total revenue (including Discontinued Operations - see below) in 1995 was derived from domestic sources. The company entered into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc. for $4.0 billion in cash, subject to various closing adjustments. The sale is subject to state regulatory approval and other customary conditions and is expected to be completed no later than midyear 1996. In light of the sale agreement, the company's property-casualty operations have been classified as Discontinued Operations. (For additional information regarding Discontinued Operations, see MD&A - Overview - - Sale of Property-Casualty Operations in the 1995 Annual Report.) The agreement to sell the company's property-casualty business reflects the company's strategic decision to focus its resources on pursuing growth opportunities in its managed care business and other remaining businesses. The company is considering a variety of strategic options, and is looking for opportunities to make managed care investments or acquisitions to further strengthen the company's overall market position. The company also expects to evaluate opportunities for growth of its financial services businesses and strengthen their competitive position, and opportunities to develop its current international operations and enter selected new markets where suitable opportunities exist. 4 The company's reportable segments are Aetna Health Plans, Aetna Life Insurance & Annuity, International, Large Case Pensions, Corporate and Discontinued Operations - Property-Casualty Operations. The principal products included in such segments (other than Corporate) are: Aetna Health Plans: Health Specialty health Group insurance Aetna Life Insurance & Annuity: Retirement and investment products (including individual and group annuities) Financial and administrative services Life insurance (including universal life, variable universal life, interest-sensitive whole life and term products) International: Life insurance and financial services Large Case Pensions: Group retirement and other savings products Investment management and advisory services Discontinued Operations - Property-Casualty Operations: Automobile Fidelity and surety Fire and allied lines General liability Homeowners Marine Multiple peril Workers' compensation B. Financial Information about Industry Segments Revenue, income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments, income from Discontinued Operations, net of tax, net income (loss), and assets, by industry segment are set forth in Note 15 to the Financial Statements, which is incorporated herein by reference to the Annual Report. Revenue, income (loss) from continuing operations before extraordinary item and cumulative effect adjustments and income (loss) from Discontinued Operations, attributable to each industry segment are incorporated herein by reference to the Selected Financial Data in the Annual Report. Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation. 5 C. Description of Business Segments 1. Aetna Health Plans Principal Products __________________ The Aetna Health Plans ("AHP") segment consists of Health, Specialty Health and Group Insurance businesses. The Health business provides a full spectrum of managed care and traditional indemnity plans. Specialty Health products include behavioral health, pharmacy and dental plans, which provide managed care or indemnity features. The Group Insurance business provides life insurance, disability, including managed disability, and long-term care plans. Group life insurance consists principally of renewable term coverage, the amounts of which frequently are linked to individual employee wage levels. The company also offers group universal life and whole life products. Group disability insurance includes coverage for disabled employees' income replacement benefits. AHP products and services are marketed primarily to employers for the benefit of employees and their dependents. Plans may be insured (risk plans), whereby Aetna assumes all or a portion of health care cost and utilization risk, or self-funded (nonrisk plans), whereby employers assume all or a significant portion of such risks. AHP also provides administrative and claim services and, in many cases, partial insurance protection, for an appropriate fee or premium charge. Continuing concern over the rising costs of health care and the need for quality assurance have resulted in a continuation of a market shift away from traditional forms of health benefit coverage to a variety of managed care products. The company offers the following Health products: Health Maintenance Organization (HMO) plans offer the most comprehensive form of managed care. Health care for the member is coordinated by a personally selected primary care physician in AHP's HMO network, with minimal out-of-pocket costs for the member and an emphasis on preventative care. Typically, no benefits are provided if the member chooses to seek nonemergency care without referral from the primary care physician. Preferred Provider Organization (PPO) plans offer the member a choice of any health care provider, but benefits are paid at a higher level when care is received from an AHP PPO network provider. Point-of-Service (POS) plans blend PPO and HMO advantages. The member selects a primary care physician from AHP's POS network to provide or coordinate all necessary health care, including routine and preventative services. The member may also choose to seek care from any other provider, without referral from the primary care physician, at a reduced level of benefits. Traditional indemnity plans allow freedom of provider choice for covered services with no in-network discounts available. These plans are not considered managed care, although they may include some medical management features, such as inpatient certification, reasonable and customary charges and benefits for preventative services (e.g. cancer screening). 6 At year end 1995, the company operated various types of managed care networks in approximately 241 Standard Metropolitan Statistical Areas with aggregate enrollment of approximately 8 million members. AHP contracts with approximately 200,000 physicians and more than 2,200 hospitals in all 50 states. As described above, managed care products differ from traditional indemnity products primarily through the use of health care networks (physicians, hospitals and other health care professionals and facilities) and the implementation of medical management procedures designed to enhance the quality and affordability of medical services. Such procedures, including negotiated contracts with health care providers, development and implementation of guidelines for appropriate utilization of health care resources and working with health care providers to review treatment patterns in order to improve consistency and quality, are designed to enable managed care companies and their customers to control medical costs more effectively. With an emphasis on promoting high quality, as well as affordable health care, the company is seeking accreditation for its HMO plans from the National Committee for Quality Assurance (NCQA), a national organization established to review the quality and medical management systems of its HMOs and other managed care plans. Accreditation by NCQA is a nationally recognized standard. As of the end of 1995, eight of AHP's HMOs have received accreditation. The company's health care network physicians and hospitals have traditionally been independent contractors. Beginning in 1993, the company, in an effort to further contain health care costs and to improve quality and network access, initiated a program to acquire or develop ownership or management interests in primary care physician practices. At the end of 1995, the company owned and managed 62 physician practices in eight cities. AHP expects to continue to invest in the acquisition or development of physician practices and in other programs which the company believes will improve its ability to control health care costs and enhance quality. AHP continues to develop a wide range of products and services tailored to provide its members with choices to meet their individual needs and to help plan sponsors manage their benefit plan costs effectively. The number of AHP members covered under all managed and traditional indemnity health care plans was approximately 12.0 million at December 31, 1995. These members were distributed throughout all 50 states, with 3.8 million members in the northeast region of the country, 2.4 million in the southeast, 3.1 million in the central region and 2.7 million in the west. For additional information regarding products offered by AHP, see Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Aetna Health Plans in the Annual Report. 7 The following table summarizes group Health and Specialty Health, and Group Insurance premiums for the years indicated:
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Health and Specialty Health $4,835.4 $4,423.1 $3,507.5 $3,349.8 $3,223.4 Group Insurance (1) 1,114.3 1,188.4 1,193.1 1,236.9 1,243.9 ________ ________ ________ ________ ________ Total $5,949.7 $5,611.5 $4,700.6 $4,586.7 $4,467.3 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) The decreases in 1995 and 1994 premiums reflect the runoff of mortgage and credit-related life and disability coverages which are no longer offered. The decrease in 1993 premiums reflects increased refunds on retrospectively rated policies due to favorable experience.
Competition ___________ The markets in which AHP's products are sold are highly competitive. In addition to other insurance companies, AHP competes with local and regional HMOs and other types of medical and dental provider organizations, various specialty service providers, integrated health care delivery organizations and, in certain coverages, with programs sponsored by the federal or state governments. Additionally, in recent years, some large employers have moved to totally self-funded and self-administered benefit plans. Competition largely is based upon product features and prices and, in the case of managed health care plans, upon the quality of services provided, the geographic scope of the provider networks and the medical specialties available in such networks. Based on 1994 membership, Aetna is the third largest health care company in the United States and the fourth largest underwriter of group life insurance. In addition, Aetna is the largest commercial administrator of Medicare benefits, processing claims for over 7,300 hospitals, skilled nursing facilities and home health agencies, and for physicians in nine states. Method of Distribution ______________________ Products are sold principally through salaried field representatives and home office marketing personnel who often work with independent consultants and brokers who assist in the production and servicing of business. 8 Reserves ________ For Group Insurance products, policy reserve liabilities are established as premiums are received to reflect the present value of expected future obligations net of the present value of expected future premiums. Policy reserves for group paid-up life insurance generally reflect long-term fixed obligations and are computed on the basis of assumed or guaranteed yield and benefit payments. Assumptions are based on Aetna's experience, which is periodically reviewed against published industry data. For long term disability products, reserves are established for (i) lives currently in payment status (using standard industry morbidity and interest rate assumptions), (ii) lives who have not satisfied the waiting period (using a percentage of premiums based on Aetna's experience) and (iii) claims that have been incurred but not reported. For Health and Specialty Health risk products, reserves reflect estimates of the ultimate cost of claims including (i) claims that have been reported but not settled, and (ii) claims that have been incurred but have not yet been reported. AHP claim reserves are based on factors derived from past experience. Reserves for most of these products reflect retrospective experience rating, except for smaller group insurance cases and HMOs, which generally are not retrospectively experience rated. Reinsurance ___________ Aetna utilizes a variety of reinsurance agreements with nonaffiliated insurers to share insurance risks on Health, Specialty Health and Group Insurance businesses as directed by the insured and to control its exposure to large losses. Generally, these agreements are established on a case-by-case basis to reflect the circumstances of specific group insurance risks. 9 Group Life Insurance In Force and Other Statistical Data ________________________________________________________ The following table summarizes changes in group life insurance in force before deductions for reinsurance ceded to other companies for the years indicated:
(Amounts in millions except number of policies and contracts in force) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ In force, end of year $274,429 $288,546 $299,996 $307,070 $305,261 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Terminations (lapses and all other) (1) $ 14,119 $ 24,946 $ 29,855 $ 28,322 $ 20,558 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Number of policies and contracts in force, end of year: (2) Group life contracts 19,175 23,268 24,440 24,496 25,737 Group conversion policies (3) 33,358 37,513 38,431 39,567 40,370 (1) The increases in 1993 and 1992 terminations resulted primarily from the nonrenewal and termination of certain large contracts in each year. (2) Due to the diversity of coverages and size of covered groups, statistics are not provided for average size of policies in force. (3) Reflects conversion privileges exercised by insureds under group life policies to replace those policies with individual life policies.
2. Aetna Life Insurance & Annuity Principal Products __________________ Aetna Life Insurance & Annuity ("ALIAC") markets and services two principal types of products: (1) financial services and (2) life insurance. The financial services products include individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under IRC Sections 401, 403, 408 and 457, and individual and group nonqualified annuity contracts. These contracts may be immediate or deferred and are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, education (collectively "not-for-profit" organizations) and corporate markets. Financial services also include pension plan administrative services. The life insurance products include universal life, variable universal life, interest-sensitive whole life and term insurance. These products are offered primarily to individuals, small businesses, employer-sponsored groups and executives of Fortune 2000 companies. ALIAC's universal life product accounted for approximately 92% of individual life sales in 1995. Annuity products typically offer fixed (fully guaranteed and experience rated) investment options and variable investment options (discussed below). For fully guaranteed and experience rated options ALIAC earns a spread representing the difference between income on investments and interest credited to customer reserves. 10 The company's variable products (variable annuity and variable life contracts) utilize Separate Accounts to provide contractholders with a vehicle for investments under which the contractholders assume the investment risks as well as the benefit of favorable performance. Assets held under these products are invested, as designated by the contractholder or participant under a contract, in Separate Accounts which in turn invest in shares of mutual funds that are managed by ALIAC, where ALIAC receives fees for acting as investment advisor, or other selected mutual funds that are not managed by ALIAC. ALIAC is compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable life and annuity contracts. ALIAC also receives fees for serving as investment advisor and providing administrative services, as well as sales charges on certain products. Various investment advisory services also are offered through a number of affiliates that are registered investment advisors. Product retention is a key driver of profitability for annuity products. To encourage product retention, annuity contracts typically impose a surrender charge on policyholder balances withdrawn for a period of time after the contract's inception. The period of time and level of the charge vary by product. In addition, a new approach being incorporated into recent variable contracts with fixed interest account investment options allows contractholders to receive an incremental interest rate if withdrawals from the fixed account are spread over a period of five years. Further, more favorable credited rates may be offered after policies have been in force for a period of time. Existing tax penalties on annuity distributions prior to age 59-1/2 provide an additional disincentive to premature surrenders of annuity balances, but do not impede transfers of those balances to products of other competitors. Universal life products include a cash value component that is credited with interest at competitive rates. ALIAC earns the spread between investment income and interest credited on customer cash values. Universal life cash values are charged for cost of insurance coverage and for administrative expenses. Life insurance products typically require high costs to acquire business. Retention, an important driver of profitability, is encouraged through product features. For example, the company's universal and interest-sensitive whole life insurance contracts typically impose a surrender charge on policyholder balances withdrawn within 7 to 20 years of the contract's inception or for variable life within 10 years. The period of time and level of the charge vary by product. In addition, more favorable credited rates and policy loan terms may be offered after policies have been in force for a period of time. To further encourage retention, life insurance agents are typically paid renewal commissions or service fees. Certain of the ALIAC life insurance and annuity products allow customers to borrow against their policies. At December 31, 1995, approximately 25% of outstanding policy loans were on individual annuity policies and had fixed interest rates ranging from 1% to 3%. Approximately 63% of outstanding policy loans at December 31, 1995 were on individual life policies and had fixed interest rates ranging from 5% to 9%. The remaining 12% of outstanding policy loans had variable interest rates averaging 8% at December 31, 1995. Investment income from policy loans was $25 million for the year ended December 31, 1995. 11 At December 31, assets under management, including Separate Accounts and assets held and managed by unaffiliated mutual funds, were $25.9 billion in 1995, $20.0 billion in 1994, $18.8 billion in 1993, $15.0 billion in 1992 and $13.2 billion in 1991. Under Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115), assets under management at December 31, 1995, 1994 and 1993 included net unrealized gains (losses) of approximately $800 million, $(390) million and $750 million, respectively. The following table summarizes premiums and deposits for the years indicated:
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Premiums $ 178.3 $ 168.3 $ 125.7 $ 111.9 $ 174.5 Deposits 3,902.8 2,966.3 2,543.0 1,937.3 1,871.0 _________ _________ _________ _________ _________ $ 4,081.1 $ 3,134.6 $ 2,668.7 $ 2,049.2 $ 2,045.5 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________
Competition ___________ In the financial services products markets, competition arises from other insurance companies, banks, mutual funds and other investment managers. Principal competitive factors are cost, service, level of investment performance and the perceived financial strength of the investment manager or sponsor. The markets for life insurance products are highly competitive among insurance companies. Competition largely is based upon product features and prices. Competition in financial services and life insurance markets may affect, among other matters, both business growth and the pricing of the company's products and services. Method of Distribution ______________________ Financial services products generally are sold through pension professionals, brokers, third party administrators, banks and dedicated career agents. Life insurance products are marketed by independent agents and brokers and career agents. Reserves ________ Reserves for limited payment contracts (immediate annuities with life contingent payout) are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation), which generally vary by plan, year of issue and policy duration. Reserves for investment contracts (deferred annuities and immediate annuities without life contingent payouts) are equal to cumulative deposits plus credited interest less charges thereon. Reserves for experience rated contracts reflect cumulative deposits, less withdrawals and charges, plus credited interest thereon, plus/less net realized capital gains/losses (which ALIAC reflects through credited rates on an amortized basis). These reserves also reflect unrealized capital gains/losses related to FAS No. 115. 12 Reserves for universal life and interest-sensitive whole life products (which are all experience rated) are equal to cumulative deposits less withdrawals and charges plus credited interest thereon, plus/less net realized capital gains/losses (which ALIAC reflects through credited rates on an amortized basis). These reserves also reflect unrealized capital gains/losses related to FAS No. 115. Reserves for all other fixed individual life contracts are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation), which generally vary by plan, year of issue and policy duration. The above-indicated reserves are computed amounts that, with additions from premiums and deposits to be received, and with interest on such reserves compounded annually at assumed rates, are expected to be sufficient to meet the company's policy obligations at their maturities or to pay expected death or retirement benefits or other withdrawal requests. Reinsurance ___________ ALIAC retains no more than $10 million of risk per individual life insured. Amounts in excess of the retention limit are reinsured with unaffiliated companies. Life Insurance In Force and Other Statistical Data __________________________________________________ The following table summarizes changes in life insurance in force before deductions for reinsurance ceded to other companies for the years indicated:
(Amounts in millions, except number of policies and average size of policies in force) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Sales and additions: Permanent: Nonparticipating $ 5,212 $ 3,348 $ 2,656 $ 3,107 $ 2,930 Participating 12 13 13 14 13 Term: Nonparticipating 2,602 595 247 92 114 Participating 390 1,787 1,838 747 1,209 ________ ________ ________ ________ ________ Total $ 8,216 $ 5,743 $ 4,754 $ 3,960 $ 4,266 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Terminations: Surrenders and conversions $ 1,620 $ 1,494 $ 1,692 $ 2,004 $ 1,976 Lapses 1,874 1,973 2,151 2,372 2,752 Other 281 306 321 371 358 ________ ________ ________ ________ ________ Total $ 3,775 $ 3,773 $ 4,164 $ 4,747 $ 5,086 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ In force, end of year: Permanent $ 34,614 $ 31,879 $ 31,139 $ 31,270 $ 31,263 Term 12,559 10,853 9,623 8,902 9,696 ________ ________ ________ ________ ________ Total $ 47,173 $ 42,732 $ 40,762 $ 40,172 $ 40,959 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Number of policies in force, end of year: Nonparticipating 546,007 551,381 569,322 580,846 605,233 Participating 113,045 120,967 127,319 135,440 146,308 ________ ________ ________ ________ ________ Total 659,052 672,348 696,641 716,286 751,541 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Average size of policies in force, end of year: Nonparticipating $ 71,138 $ 61,121 $ 56,639 $ 55,281 $ 52,983 Participating 73,433 74,658 66,887 59,528 60,775
13 3. International The International segment ("International"), through subsidiaries and joint venture operations, sells primarily life insurance and financial services products in non-U.S. markets including Canada, Mexico, Taiwan, Chile, Malaysia, Hong Kong, New Zealand, Peru, Argentina and Indonesia. International operations are subject to regulation in the various jurisdictions in which they do business. In most of the geographic areas and markets in which International has operations, the competition is extensive. Methods of distribution vary by country and by product, and include direct sales, sales through agents and brokers, and sales through joint venture-related enterprises. On June 30, 1993, the company completed the sale of its U.K. life and investment management operations. The company realized an after-tax capital loss of $12 million on the sale, as well as $37 million of tax benefits from prior year operating losses of the subsidiary not previously available for tax benefits. The company completed the sale of its 43% interest in La Estrella S.A. de Seguros, a Spanish insurance company, to Banco Hispano Americano in May 1991. The company realized a net capital gain of $33 million (after tax) on the sale. Conducting business and investing in international markets pose unique risks which vary from country to country. Such risks include, but are not limited to, political developments, including tax changes, nationalization and changes in regulatory policy, currency restrictions, currency fluctuations, as well as the consequences of hostilities and unrest. Management believes that its continued focus on entering new markets where suitable opportunities exist and development of existing operations will help to reduce the exposure to these risks through further diversification of its operations. The following table sets forth International's premium revenue, net investment income, other income and net realized capital gains/losses and life insurance in force, before deductions for reinsurance ceded to other companies:
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Premiums $1,038.5 $ 887.1 $ 909.5 $ 814.8 $ 500.0 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net investment income, other income and net realized capital gains/losses $ 421.3 $ 409.9 $ 369.8 $ 387.6 $ 390.2 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Life insurance in force, end of year $ 59,384 $ 45,126 $ 44,186 $ 37,172 $ 30,083 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
Premium growth in 1995 resulted primarily from increases in the volume of business sold in the Pacific Rim and Latin American markets. 14 Premium reduction in 1994 resulted from the company's 1994 change in its accounting for an affiliate from the consolidated basis of accounting to the equity basis of accounting (recorded premiums were $79 million and $136 million in 1994 and 1993, respectively) which was substantially offset by growth in the Pacific Rim operations. Premium growth in 1992 included $128 million from the second quarter consolidation of a previously unconsolidated subsidiary as a result of an increase in the company's ownership percentage. 4. Large Case Pensions Principal Products __________________ The Large Case Pensions segment manages a variety of retirement and other savings products (including pension and annuity products), and offers investment management and advisory services to nonpension customers. Certain of these products provide a variety of investment guarantees, funding and benefit payment distribution options and other services. (For additional information regarding the products offered by Large Case Pensions, see MD&A - Large Case Pensions in the Annual Report.) The majority of Large Case Pensions' products that utilize Separate Accounts provide contractholders with a vehicle for investments under which the contractholders assume the investment risks as well as the benefit of favorable performance. Large Case Pensions earns a management fee on these Separate Accounts. Various investment advisory services also are offered through a number of wholly owned subsidiaries that are registered investment advisors. In January 1994, the company announced its decision to discontinue the sale of its fully guaranteed large case pension products. (For additional information, see MD&A - Large Case Pensions in the Annual Report.) At December 31, assets under management, including Separate Accounts, were $46.4 billion in 1995, $46.3 billion in 1994, $52.8 billion in 1993, $53.4 billion in 1992 and $52.8 billion in 1991. Under FAS 115, assets under management at December 31, 1995, 1994 and 1993 included net unrealized gains (losses) of approximately $790 million, $(540) million and $750 million, respectively. The following table summarizes premiums and deposits for the years indicated:
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Premiums $ 264.9 $ 234.4 $ 185.9 $ 204.2 $ 292.4 Deposits 1,623.7 1,915.6 2,791.6 2,925.1 3,531.2 _________ _________ _________ _________ _________ Total $ 1,888.6 $ 2,150.0 $ 2,977.5 $ 3,129.3 $ 3,823.6 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________
15 Competition ___________ In the pension and annuity markets, competition arises from other insurance companies, banks, bank trust departments, mutual funds and other investment managers. Principal competitive factors are cost, service, level of investment performance and the perceived financial strength of the investment manager. Method of Distribution ______________________ Group pension products are sold principally through salaried field representatives and home office marketing personnel, who often work with independent consultants and brokers who assist in the production and servicing of business. Reserves ________ As a result of discontinuing fully guaranteed large case pension products, the company established a reserve that represents the present value of anticipated net cash flow shortfalls as the liabilities from such products are run off. Such net cash flow shortfalls include anticipated losses from negative interest margins (i.e., the amount by which interest credited to holders of such contracts exceeds interest earned on investment assets supporting the contracts), future capital losses, and operating expenses and other costs expected to be incurred as the liabilities are run off. For additional information on this reserve, see Note 3 of Notes to Financial Statements in the Annual Report. In addition to the reserve described above, the company maintains reserves for guaranteed investment contracts equal to the amount on deposit for such contracts plus credited interest thereon. Reserves for annuity contracts reflect the present value of benefits based on actuarial assumptions established at the time of contract purchase. Such assumptions are based on Aetna's experience, which is periodically reviewed against published industry data. Reserves for experience rated contracts reflect cumulative deposits, less withdrawals and charges, plus credited interest thereon, plus/less net realized capital gains/losses (which the company seeks to recover through credited rates) and net unrealized capital gains/losses. 5. Corporate The Corporate segment includes interest expense and other net corporate expenses which are not directly related to the company's business segments. "Other net corporate expense" includes items such as corporate staff areas, advertising and contributions, partially offset by net investment income. 16 6. Discontinued Operations - Property-Casualty Operations Principal Products __________________ For additional information regarding Discontinued Operations, see Organization of Business on page 3 and MD&A - Overview - Sale of Property-Casualty Operations in the Annual Report. Discontinued Operations provides most types of commercial and personal property-casualty insurance, bonds, and insurance-related services for businesses, government units and associations and individuals. Commercial and personal coverages accounted for 70% and 30%, respectively, of Aetna's 1995 property-casualty net written premiums. Commercial coverages are sold for risks of all sizes and include fire and allied lines, multiple peril, marine, workers' compensation, general liability (including product liability), commercial automobile, certain professional liability, and fidelity and surety bonds. In addition, Aetna offers various services to businesses that choose to self-insure certain exposures. Aetna also reinsures various property and liability risks, primarily through agreements with nonaffiliated insurers, on both a treaty and facultative basis. Personal coverages include auto and homeowners insurance. Approximately 94% of Aetna's 1995 net property-casualty business written was voluntary. The remainder was written by various assigned risk plans, facilities and pools of which Aetna is a member. These organizations are formed to meet statutory requirements relating to the writing of certain types of property-casualty risks or to spread particularly large loss exposures among insurers pursuant to a prearranged allocation formula. Participation is mandatory, and underwriting decisions are made by such facilities independent of their membership. For a significant portion of the commercial lines, Aetna uses advisory or compulsory rate structures and, in some instances, forms that were developed by agencies and bureaus in which insurance companies are authorized to participate through state regulation. However, in recent years, Aetna has emphasized the development of independent coverages designed for sale to specific market segments. 17 The following table sets forth the premium revenue, underwriting results and net investment income, fees and other income and net realized capital gains of Discontinued Operations for the years indicated:
(Dollar amounts in millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Statutory: Net written premiums $ 4,081.3 $ 4,400.5 $ 4,517.0 $ 4,916.3 $ 5,810.6 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Premiums earned $ 4,111.6 $ 4,321.9 $ 4,656.2 $ 5,046.9 $ 5,973.0 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Loss ratios 102.8% 87.5% 90.1% 92.5% 83.7% Expense ratios 33.5 35.2 34.4 32.9 30.7 _________ _________ _________ _________ _________ Combined ratios: Before policyholder dividends 136.3% 122.7% 124.5% 125.4% 114.4% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends 136.7% 123.3% 125.2% 126.1% 115.4% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends, adjusted for discounting 136.7% 123.3% 116.4% (1) 126.1% 115.4% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends, adjusted for discounting and additions to environmental and asbestos- related claims reserves(2) 108.1% 117.1% 113.6% 117.3% 113.2% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ GAAP: (3) Net written premiums $ 4,081.3 $ 4,431.2 $ 4,465.2 $ 4,916.3 $ 5,810.6 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Premiums earned $ 4,118.9 $ 4,390.8 $ 4,653.2 $ 5,076.3 $ 6,010.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Adjusted underwriting loss (pretax)(4) $(1,434.4) $ (795.0) $ (989.8) $(1,291.6) $ (933.9) _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Net investment income, fees and other income and net realized capital gains $ 1,139.3 $ 948.1 $ 1,274.7 $ 1,437.2 $ 1,323.3 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Loss ratios 102.3% 84.9% 89.6% 93.0% 83.7% Expense ratios 32.3 32.2 32.3 32.7 30.4 _________ _________ _________ _________ _________ Combined ratios: Before policyholder dividends 134.6% 117.1% 121.9% 125.7% 114.1% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends 135.1% 117.7% 122.5% 126.4% 115.0% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends, adjusted for discounting 135.1% 117.7% 113.6% (1) 126.4% 115.0% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends, adjusted for discounting and additions to environmental and asbestos- related claims reserves(2) 106.6% 111.5% 110.8% 117.6% 112.8% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Has been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after tax). (2) Excludes the effect of additions to environmental and asbestos-related claims reserves in all years, and in 1993, has also been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after tax). (3) Generally Accepted Accounting Principles. (4) Includes a charge of $83.6 million in 1991 related to the company's withdrawal from the Massachusetts personal automobile insurance market pursuant to an agreement with the Massachusetts Division of Insurance.
18 Discontinued Operations' underwriting profitability generally is expressed in terms of combined ratios. When the combined ratio is under 100%, underwriting results are considered profitable; when the ratio is over 100%, underwriting results are considered unprofitable. The combined ratio is the sum of (i) the percentage of earned premiums that is paid or reserved for losses and related loss adjustment expenses (the "loss ratio"), (ii) the percentage of earned premiums that is paid or reserved for dividends to policyholders, and (iii) the percentage of written premiums that is paid or reserved for sales commissions, premium taxes, administrative and other underwriting expenses (the "expense ratio"). The combined ratio does not reflect net investment income, fees and other income, net realized capital gains/losses or federal income taxes. The statutory combined ratio does not reflect adjustments to underwriting results in accordance with GAAP. Adjusted underwriting loss reflects GAAP adjustments (primarily the establishment of a reserve for severance and facilities charges, deferred policy acquisition costs and pre-1992 salvage and subrogation) to underwriting results. The following table sets forth for Discontinued Operations' major domestic coverages for the years indicated (a) the percentage of Discontinued Operations' statutory net written premiums (NWP) and (b) statutory combined ratios before policyholders' dividends: PERCENTAGE DISTRIBUTION OF STATUTORY NET WRITTEN PREMIUMS AND COMBINED RATIOS
1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ COMBINED COMBINED COMBINED COMBINED COMBINED NWP RATIO NWP RATIO NWP RATIO NWP RATIO NWP RATIO ___ _____ ___ _____ ___ _____ ___ _____ ___ _____ Auto liability: Bodily injury 16.9% 102.5 15.6% 111.6 17.7% 119.3 17.1% 127.7 18.3% 133.0 Property damage 5.9 104.3 5.7 95.9 6.5 70.0 6.5 81.2 7.2 101.8 Auto physical damage 8.7 87.7 8.2 99.4 9.2 91.8 9.6 94.9 11.8 90.3 Fidelity and surety 4.7 69.6 3.8 80.4 3.7 92.9 3.0 91.8 3.0 99.4 Fire and allied lines 5.4 113.7 4.7 116.5 4.3 123.7 3.2 127.0 3.2 127.0 General liability 10.6 439.5 12.4 177.9 12.4 150.5 13.2 166.8 11.0 118.7 Homeowners 7.2 112.6 9.0 136.1 9.1 124.0 7.9 132.6 8.8 112.4 Marine 3.4 91.7 3.1 97.0 3.0 94.1 2.6 90.6 2.3 105.6 Multiple peril 21.5 110.7 18.5 112.0 17.2 115.6 15.0 115.2 12.2 110.0 Workers' compensation 14.0 100.3 17.5 117.1 17.9 171.1 20.8 138.2 21.2 120.0 Other (1) 1.7 N/M* 1.5 N/M* (1.0) N/M* 1.1 N/M* 1.0 N/M* _____ _____ _____ _____ _____ Total before policyholders' dividends 100.0% 136.3 100.0% 122.7 100.0% 124.5 100.0% 125.4 100.0% 114.4 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total after policyholders' dividends 136.7 123.3 125.2 126.1 115.4 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total after policyholders' dividends, adjusted for discounting 136.7 123.3 116.4 (2) 126.1 115.4 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total after policyholder dividends, adjusted for discounting and additions to environmental and asbestos related reserves(3) 108.1 117.1 113.6 117.3 113.2 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ (1) Net written premiums in 1993 reflect a refund of $115 million related to a Texas Catastrophe Insurance Association reinsurance contract. (2) Has been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after tax). (3) Excludes the effect of additions to environmental and asbestos-related claims reserves in all years, and in 1993, has also been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after tax). * Not meaningful.
19 The following table summarizes Discontinued Operations' statutory net written premiums for the years indicated:
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Auto liability: Bodily injury $ 689.0 $ 685.9 $ 798.9 $ 841.6 $1,061.0 Property damage 239.8 251.1 295.1 322.0 420.1 Auto physical damage 355.7 359.6 414.3 472.1 686.2 Fidelity and surety 191.7 169.3 166.8 146.9 174.4 Fire and allied lines 221.1 206.0 192.6 156.4 186.2 General liability 430.9 544.2 560.6 647.4 641.7 Homeowners 295.6 394.9 412.7 389.5 509.0 Marine 138.8 137.7 134.0 125.8 135.6 Multiple peril 879.7 815.3 776.1 738.0 707.5 Workers' compensation 570.3 768.8 808.4 1,021.4 1,231.3 Other (1) 68.7 67.7 (42.5) 55.2 57.6 ________ ________ ________ ________ ________ Total $4,081.3 $4,400.5 $4,517.0 $4,916.3 $5,810.6 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ _____________________ (1) Net written premiums in 1993 reflect a refund of $115 million related to a Texas Catastrophe Insurance Association reinsurance contract.
The following table sets forth Aetna's percentage distributions of Discontinued Operations' direct written premiums in various jurisdictions for the years indicated: GEOGRAPHIC DISTRIBUTION OF DIRECT WRITTEN PREMIUMS
1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ California (1,2) 8.4% 7.8% 9.2% 9.6% 9.2% Connecticut 6.2 5.9 5.8 6.0 6.0 Florida 5.7 5.4 4.7 4.1 4.1 Georgia 1.6 1.6 1.6 1.7 2.1 Illinois 2.5 2.8 2.8 2.7 2.7 Louisiana 1.2 1.0 1.2 2.1 2.5 Massachusetts (3) 5.1 5.4 6.2 7.5 8.3 New Jersey 5.5 5.6 5.1 4.4 3.9 New York 17.7 17.9 17.7 17.4 16.8 North Carolina 3.1 3.4 3.4 3.0 3.1 Ohio 2.3 2.2 2.0 1.7 1.7 Pennsylvania 7.4 7.5 7.6 7.3 7.0 Tennessee 1.7 2.0 2.2 2.0 1.9 Texas 6.4 5.9 4.9 4.9 6.0 Virginia 2.9 2.8 2.7 2.7 2.6 All other (4) 22.3 22.8 22.9 22.9 22.1 _____ _____ _____ _____ _____ Total 100.0% 100.0% 100.0% 100.0% 100.0% _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____________________ (1) The reduction in direct written premiums in 1994 primarily reflects a $30.7 million settlement with the California Department of Insurance related to Proposition 103, which settlement did not have a material effect on earnings as a result of reserves previously established. (2) In 1993, the company withdrew from the California personal automobile insurance market and in 1994, reduced its exposure in certain commercial property-casualty lines. (3) In early 1992, the company reached an agreement with the Massachusetts Division of Insurance and the Commonwealth Automobile Reinsurers ("CAR") under which Aetna withdrew from the Massachusetts personal automobile insurance market. Beginning in 1992, all Massachusetts premium revenue is ceded to CAR. (4) All other jurisdictions, none of which accounted for more than 2% in any year.
20 Competition ___________ Property-casualty insurance is highly competitive in the areas of price, service, agent relationships and, in the case of personal lines, method of distribution (i.e., use of independent agents, captive agents and/or employees). There are approximately 3,300 property-casualty insurance companies in the United States. Of those companies, approximately 900 operate in all or most states and write the vast majority of the business, while over 2,400 offer one or more property-casualty products similar to those marketed by Aetna. In addition, an increasing amount of commercial risks are covered by purchaser self-insurance, risk- purchasing groups, risk-retention groups and captive companies. Based on 1994 written premiums, Aetna was one of the largest underwriters of commercial and personal property-casualty coverages in the United States. Method of Distribution ______________________ Aetna's property-casualty coverages are sold through approximately 4,800 independent agents and brokers supervised and serviced by 22 district offices with over 70 other points of service throughout the country. Reserves ________ See Reserves Related to Discontinued Operations on pages 21 through 24. Reinsurance ___________ Approximately one-third of the property-casualty reinsurance ceded by Aetna arises in connection with its servicing relationships with various pools (frequently involuntary pools). Aetna services or writes a portion of the pool's individual policies, handling all premium and loss transactions. These "service" premiums and losses are then 100% ceded (net of an expense reimbursement) to the pools, whose members are jointly liable to Aetna as a servicer. In addition to the above, Aetna utilizes a variety of reinsurance agreements, primarily with nonaffiliated insurers, to control its exposure to large losses. These agreements, most of which are renegotiated annually as to coverage, limits and price, are structured either on a treaty basis (where all risks meeting prescribed criteria are automatically covered) or on a facultative basis (where the circumstances of specific individual insurance risks are reflected). The amount of risk retained by Aetna depends on the underwriter's evaluation of the specific risk, subject to maximum limits based on risk characteristics and the type of coverage. The principal catastrophe reinsurance agreement currently in force covers approximately 90% of specified property losses between $150 million and $325 million. The company also has in place an aggregate excess of loss arrangement with respect to all of its property-casualty lines for accident year 1995, providing up to approximately $250 million of additional net protection. For additional information on reinsurance, see MD&A - Discontinued Operations' Reserves and Note 2 of Notes to Financial Statements in the Annual Report. 21 Aetna has internal property-casualty reinsurance arrangements under which the risks and premiums of virtually all coverages written by the company's Discontinued Operations' subsidiaries (other than fidelity and surety bonds) are redistributed among those subsidiaries on a percentage basis. The percentages are adjusted from time to time to reflect the relative underwriting capacities and other capital needs of participants in the reinsurance agreement. 7. Reserves Related to Discontinued Operations Aetna establishes liabilities designed to reflect estimates of the ultimate cost, to the extent reasonably estimable, of claims (including claim adjustment expenses). Certain of these liabilities are recorded on a discounted basis (see Note 2 of Notes to Financial Statements in the Annual Report). Estimating the ultimate cost of claims is a complex and uncertain process that relies on actuarial and statistical methods of analysis. The company's reserves include: (i) claims that have been reported but not settled ("case" reserves), and (ii) claim costs that have been incurred but have not been reported ("IBNR" reserves). The establishment of case reserves is dependent upon, among other things, the extent to which coverage was provided, the extent of injury or damage, and, in the case of a contested claim, an estimate of the likely outcome of the adjudication process (to the extent such outcome is estimable). IBNR reserves, established to reflect events and occurrences that are not known to the company but, based on actuarial and historical data (adjusted for the effects of current social, economic and legal developments, trends and factors), are likely to result in claims, also include provision for development on case reserves. As claims are reported and valued by the company, IBNR reserves are reduced by the amount of the reported claim cost. IBNR reserves also are adjusted as the estimates of losses for a given accident year develop. The length of time between occurrence and settlement of a claim varies depending on the coverage and type of claim involved. Estimates become more difficult to make (and are, therefore, more subject to change) as the length of time increases. Actual claim costs are dependent upon a number of complex factors including social and economic trends and changes in doctrines of legal liability and damage awards. Reserves for Discontinued Operations coverage are recomputed periodically using a variety of actuarial and statistical techniques for producing current estimates of actual claim costs, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claim costs is implicit since reliance is placed on both actual historical data that reflect past inflation and on other factors which are judged to be appropriate modifiers of past experience. Adjustments to reserves are reflected in the net income of the period in which such adjustments are made. Aetna also establishes unearned premium reserves that are calculated on a pro rata basis and reserves for additional premiums or refunds on retrospectively rated policies based on experience. This means that when a loss which will produce an additional premium payment is incurred on a retrospectively rated policy, the premium is recorded at the same time. Likewise when loss experience is favorable, reserves for premium refunds are established. 22 For additional information on Discontinued Operations' reserves, including reserves for environmental-related claims, asbestos- related claims, and workers' compensation claims (including discounting), see MD&A - Discontinued Operations' Reserves in the Annual Report. The following represents changes in aggregate reserves, net of reinsurance, for the combined Discontinued Operations' experience:(1)
(Millions) 1995 1994 1993 ____ ____ ____ Net unpaid claims and claim adjustment expenses, net of discount, at beginning of year $11,144 $11,412 $11,733 Incurred claims and claim adjustment expenses: Provision for insured events of the current year 3,099 3,488 3,536 Increases in provision for insured events of prior years 1,134 (2) 259 579 (3) Cumulative effect of discounting - - (514) _______ _______ _______ Total incurred claims and claim adjustment expenses 4,233 3,747 3,601 _______ _______ _______ Payments: Claims and claim adjustment expenses attributable to insured events of the current year 1,092 1,240 1,039 Claims and claim adjustment expenses attributable to insured events of prior years 2,540 2,775 2,883 _______ _______ _______ Total payments 3,632 4,015 3,922 _______ _______ _______ Net unpaid claims and claim adjustment expenses, net of discount, at end of the year 11,745 11,144 11,412 Reinsurance recoverables, end of year 4,412 4,593 4,394 Deductible amounts recoverable from policyholders, end of year (4) 412 352 - _______ _______ _______ Gross unpaid claims and claim adjustment expenses, at end of year $16,569 $16,089 $15,806 _______ _______ _______ _______ _______ _______ (1) Accident and health business is excluded. (2) Includes increases in provision for insured events of prior years of $750 million related to environmental reserves upon completion of the company's 1995 environmental study in the second quarter of 1995 and $335 million related to asbestos reserves in the fourth quarter of 1995. (3) Includes increases in provision for insured events of prior years of $679 million, offset by the current year effect of the change in accounting to report workers' compensation life table indemnity claims on a discounted basis of $(100) million related to the provision for insured events of prior years. (4) FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, was adopted in 1994.
23 The following table reconciles, as of year end, reserves determined in accordance with accounting principles and practices prescribed or permitted by insurance regulatory authorities ("statutory basis reserves") to reserves determined in accordance with generally accepted accounting principles ("GAAP basis reserves"), for the Discontinued Operations unpaid claims and claim adjustment expenses: (1)
(Millions) 1995 1994 1993 ____ ____ ____ Statutory unpaid claims and claim adjustment expenses $11,603 $11,007 $11,243 Adjustments: Subsidiary operations (2) 142 137 169 Reinsurance recoverables (3) 4,412 4,593 4,394 Deductible amounts recoverable from policyholders (4) 412 352 - _______ _______ _______ GAAP unpaid claims and claim adjustment expenses $16,569 $16,089 $15,806 _______ _______ _______ _______ _______ _______ (1) Accident and health business is excluded. (2) These operations are accounted for on an equity basis for statutory purposes. (3) FAS 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, requires reporting claim liabilities gross of reinsurance recoverables. (4) Information presented gross in 1995 and 1994 due to the adoption of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, which requires reporting claim liabilities gross of deductible amounts recoverable from policyholders.
The following reserve runoff table represents Aetna's combined Discontinued Operations' loss and loss expense experience, net of reinsurance recoverables and deductible amounts recoverable from policyholders. Each column shows, for the year indicated: the reserve held at year end; cumulative data for payments made in each subsequent year for that reserve year; liability reestimates made in each subsequent year for that reserve year; the redundancy (deficiency) represented by the difference between the original reserve held at the end of that year and the reestimated liability as of the end of 1995; and the change in redundancy (deficiency) from the end of each reserve year shown to the end of each subsequent reserve year. The majority of increases to prior accident year reserves were for losses and related expenses for (i) workers' compensation claims; (ii) environmental-related liability risks; and (iii) asbestos and other product liability risks. The table represents historical data; it would not be appropriate to use such data to project the company's future reserving activity or its future performance generally. 24
Year Ended 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ (Millions) Net liability for unpaid claims and claim adjustment expenses net of discount (1) $6,555 $7,496 $8,699 $9,828 $10,542 $11,049 $11,391 $11,733 $11,412 $11,144 $11,745 Paid (cumulative) as of: End of year 0 0 0 0 0 0 0 0 0 0 0 One year later 2,063 2,175 2,549 3,131 3,058 3,076 2,966 2,883 2,775 2,540 Two years later 3,367 3,721 4,544 4,945 4,982 5,127 5,107 4,883 4,633 Three years later 4,430 5,172 5,792 6,240 6,392 6,727 6,593 6,367 Four years later 5,498 6,058 6,676 7,202 7,565 7,781 7,778 Five years later 6,112 6,685 7,348 8,038 8,327 8,698 Six years later 6,565 7,189 7,986 8,575 9,050 Seven years later 6,948 7,699 8,372 9,125 Eight years later 7,369 7,997 8,851 Nine years later 7,634 8,431 Ten years later 8,032 Net liability reestimated as of, net of discounting: (1) (2) (3) End of year 6,555 7,496 8,699 9,828 10,542 11,049 11,391 11,733 11,412 11,144 11,745 One year later 6,772 7,739 9,013 10,004 10,628 11,100 11,860 11,798 11,671 12,278 Two years later 7,050 8,180 9,307 10,191 10,777 11,727 12,090 12,136 12,832 Three years later 7,529 8,531 9,540 10,446 11,362 12,041 12,493 13,324 Four years later 7,903 8,805 9,801 10,973 11,603 12,516 13,715 Five years later 8,149 9,076 10,312 11,196 12,176 13,775 Six years later 8,416 9,568 10,492 11,762 13,445 Seven years later 8,899 9,765 11,072 13,011 Eight years later 9,117 10,348 12,338 Nine years later 9,703 11,620 Ten years later 10,979 Redundancy (Deficiency) (4,424)(4,124)(3,639)(3,183) (2,903) (2,726) (2,324) (1,591) (1,420) (1,134) 0 Change in redundancy (deficiency) N/A 300 485 456 280 177 402 733 171 286 1,134 Gross liability, end of year (4,5) $15,806 $16,089 $16,569 Reinsurance recoverables 4,394 4,593 4,412 Deductible amounts recoverable from policyholders - 352 412 _______ _______ ______ Net liability, end of year $11,412 $11,144 $11,745 _______ _______ _______ _______ _______ _______ Gross reestimated liability-latest (4) $17,393 $17,166 Deductible recoverable - 352 Reestimated recoverable-latest 4,561 4,536 _______ _______ Net reestimated liability-latest $12,832 $12,278 _______ _______ _______ _______ Gross cumulative deficiency $(1,587)$(1,077) _______ _______ _______ _______ (1) The reestimated liability at December 31, 1993 includes $574 million related to development in workers' compensation reserves in the fourth quarter of 1993. This affected the reestimated liability by reserve year as follows: $574 million in 1992; $565 million in 1991; $534 million in 1990; $484 million in 1989; $433 million in 1988; $396 million in 1987; $372 million in 1986; and $346 million in 1985. (2) The reestimated liability at December 31, 1993 includes development related to the discounting of workers' compensation life table indemnity claims. This affected the reestimated liability by reserve year as follows: $(634) million in 1993; $(614) million in 1992; $(577) million in 1991; $(528) million in 1990; $(473) million in 1989; $(417) million in 1988; $(362) million in 1987; $(317) million in 1986; and $(274) million in 1985. (3) The reestimated liability at December 31, 1995 includes increases in provision for insured events of prior years of $750 million related to environmental reserves upon completion of the company's 1995 environmental study in the second quarter of 1995 and $335 million related to asbestos reserves in the fourth quarter of 1995. (4) Information presented gross due to the adoption of FAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts in 1993. Adoption of FAS No. 113 had no impact on the 1993 net loss. (5) Information presented gross in 1995 and 1994 due to the adoption of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, which requires reporting claim liabilities gross of deductible amounts recoverable from policyholders.
25 8. General Account Investments The investment income and realized capital gains and losses from the investment portfolios of the company's insurance subsidiaries contribute to the results of the insurance operations described above. The company's investment objective for both continuing operations and Discontinued Operations is to fund policyholder and other liabilities in a manner which enhances shareholder and contractholder value, subject to appropriate risk constraints. It is the company's intention that this investment objective be met by a mix of investments which reflects the characteristics 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 asset portfolios. 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. (See Note 16 of Notes to Financial Statements in the Annual Report for a discussion of the company's hedging activities). 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 1995, the company operated within such investment guidelines by maintaining a mix of investments that diversifies its assets and reflects the characteristics of the liabilities which they support. See MD&A - General Account Investments in the Annual Report for a further discussion of investments. a. Investments Related to Continuing Operations Consistent with the nature of the contract obligations involved in the company's continuing operations which include health care, group life and disability, individual life, annuity and pension operations, the majority of the general account assets attributable to such operations have been invested in intermediate and long-term, fixed-income obligations such as Treasury obligations, mortgage-backed securities, corporate debt securities and mortgage loans. For information concerning the valuation of investments, see Notes 1, 5, and 6 of Notes to Financial Statements in the Annual Report. 26 The following table sets forth the distribution of invested assets, cash and cash equivalents and accrued investment income as of the end of the years indicated: (1)
(Millions) 1995 (2,3) 1994 (2,3) 1993 (2,3) 1992 1991 ____ ____ ____ ____ ____ Debt securities: Bonds: United States Government and government agencies and authorities $ 3,574.1 $ 4,235.4 $ 4,876.4 $ 2,340.6 $ 1,458.6 States, municipalities and political subdivisions 489.8 537.4 429.9 468.5 247.6 Foreign (4) 4,327.6 2,769.6 3,089.9 1,395.6 2,051.4 Public utilities 2,533.3 2,107.9 2,217.3 1,795.0 2,200.6 Financial 4,875.1 4,139.7 3,845.9 2,188.6 2,481.1 Transportation/Capital goods 2,170.5 2,266.9 1,987.7 1,728.6 2,285.2 Mortgage-backed securities 5,803.3 5,499.3 8,823.2 10,117.4 8,208.3 Other loan-backed securities 1,748.6 1,331.8 49.1 - - Food and fiber 681.4 622.8 733.5 652.5 752.0 Natural resources and services 1,165.1 755.8 897.3 600.4 739.0 All other corporate bonds 4,482.7 3,248.4 3,459.2 3,814.2 3,286.5 _________ _________ _________ _________ _________ Total bonds 31,851.5 27,515.0 30,409.4 25,101.4 23,710.3 Redeemable preferred stocks 8.8 10.4 26.7 31.8 27.4 _________ _________ _________ _________ _________ Total debt securities 31,860.3 27,525.4 30,436.1 25,133.2 23,737.7 _________ _________ _________ _________ _________ Equity securities: Common stocks 566.9 512.7 355.7 336.8 297.4 Non-redeemable preferred stocks 92.8 101.9 105.3 110.1 162.5 _________ _________ _________ _________ _________ Total equity securities 659.7 614.6 461.0 446.9 459.9 _________ _________ _________ _________ _________ Short-term investments 607.8 344.4 543.0 1,117.3 197.7 Mortgage loans 8,327.2 10,389.9 13,000.2 15,925.8 18,399.1 Real estate (5) 1,277.3 1,283.7 1,033.8 1,255.8 1,134.4 Policy loans 629.4 533.8 490.7 463.4 434.3 Other 688.6 838.0 697.3 587.8 369.1 _________ _________ _________ _________ _________ Total investments $44,050.3 $41,529.8 $46,662.1 $44,930.2 $44,732.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Cash and cash equivalents $ 1,712.7 $ 2,277.2 $ 1,553.6 $ 1,899.8 $ 2,550.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Accrued investment income $ 618.3 $ 596.8 $ 576.2 $ 574.6 $ 615.7 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Includes International. Excludes Separate Accounts and investments in affiliates. (2) All debt securities are carried at fair value in 1995, and a majority are carried at fair value in 1994 and 1993, due to the adoption of FAS No. 115 at December 31, 1993. (3) Includes $10.3 billion, $11.9 billion and $14.7 billion of investments supporting discontinued products in 1995, 1994 and 1993, respectively. (4) "Foreign" includes foreign governments, foreign political subdivisions, foreign public utilities and all other bonds of foreign issuers. (5) Includes acquisition of real estate through foreclosures (including in-substance foreclosures in 1995 and 1994) of mortgage loans.
27 The following table summarizes investment results of the company's continuing operations: (1)
(Dollar amounts in millions) Net Earned Net Net Realized Change in Net Investment Investment Capital Gains Unrealized Capital Income (2) Income Rate (3) (Losses) (4) Gains and Losses (5) __________ _______________ _____________ ____________________ For the year: 1995 $3,575.1 8.5% $ 47.2 $ 850.8 1994 3,631.4 8.4 (55.2) (975.7) 1993 3,966.6 9.0 (61.2) 374.7 1992 4,043.2 9.1 (98.9) (58.4) 1991 4,325.6 9.2 (302.4) 65.0 (1) Includes International. Excludes Separate Accounts and investments in affiliates. (2) Net investment income excludes net realized capital gains and losses and is after deduction of investment expenses, but before deduction of federal income taxes. (3) The Earned Net Investment Income Rate for any given year is equal to (a) net investment income divided by (b) the average of (i) cash, invested assets and investment income due and accrued less borrowed money at the beginning of the year, and (ii) cash, invested assets and investment income due and accrued less borrowed money at the end of the year, less net investment income. Debt securities are reflected primarily at amortized cost for purposes of this calculation. Investments in affiliates have been eliminated for purposes of this calculation. (4) Net realized capital gains (losses) are before federal income taxes and exclude gains and losses allocable to experience rated pension contractholders in all years and discontinued products in 1995 and 1994. Intercompany transactions have not been eliminated. (5) Net unrealized capital gains (losses) are before federal income taxes and exclude changes in unrealized capital gains (losses) related to experience rated contractholders in all years and discontinued products in 1995, 1994 and 1993.
b. Investments Related to Discontinued Operations The investment strategies for assets related to Discontinued Operations are designed to maximize yield with appropriate liquidity and preservation of principal, and to permit periodic adjustment of the portfolio mix, in order to reflect changes in underwriting results and thus maximize after-tax income. In 1995, Discontinued Operations sold common stocks primarily due to the company's efforts to reduce volatility in its statutory surplus, and increase income, and in connection with the agreement to sell the property-casualty operations. For information concerning the valuation of investments, see Notes 1, 5, and 6 of Notes to Financial Statements in the Annual Report. 28 The following table sets forth the distribution of invested assets, cash and cash equivalents and accrued investment income as of the end of the years indicated: (1)
(Millions) 1995 (2) 1994 (2) 1993 (2) 1992 1991 ____ ____ ____ ____ ____ Debt Securities: Bonds: United States Government and government agencies and authorities $ 2,970.7 $ 3,417.5 $ 3,303.9 $ 889.1 $ 820.1 States, municipalities and political subdivisions 974.3 1,404.4 2,086.9 2,210.0 2,953.1 Foreign (3) 1,133.3 609.2 757.2 533.0 597.8 Public utilities 764.1 520.3 705.7 663.1 454.4 Financial 1,289.1 536.1 1,280.0 708.6 942.5 Transportation/Capital goods 672.0 616.3 215.9 290.3 256.2 Mortgage-backed securities 1,211.9 1,273.6 1,453.5 3,029.5 2,561.7 Other loan-backed securities 1,204.0 317.5 - - - Food and fiber 188.3 116.9 193.3 213.9 168.2 Natural resources and services 441.8 282.1 279.6 334.3 268.1 All other corporate bonds 724.0 421.1 740.0 670.8 375.8 _________ _________ _________ _________ _________ Total bonds 11,573.5 9,515.0 11,016.0 9,542.6 9,397.9 Redeemable preferred stocks 132.1 71.1 92.3 162.8 140.5 _________ _________ _________ _________ _________ Total debt securities 11,705.6 9,586.1 11,108.3 9,705.4 9,538.4 _________ _________ _________ _________ _________ Equity securities: Common stocks 517.9 1,031.3 1,190.7 1,038.2 645.2 Non-redeemable preferred stocks 7.6 9.7 7.2 7.8 14.4 _________ _________ _________ _________ _________ Total equity securities 525.5 1,041.0 1,197.9 1,046.0 659.6 _________ _________ _________ _________ _________ Short-term investments 137.2 106.0 127.0 393.5 422.3 Mortgage loans 1,061.7 1,453.7 1,839.0 2,126.0 2,303.8 Real estate (4) 264.7 262.0 282.0 340.5 314.8 Other 291.8 314.7 239.5 254.9 485.7 _________ _________ _________ _________ _________ Total investments $13,986.5 $12,763.5 $14,793.7 $13,866.3 $13,724.6 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Cash and cash equivalents $ 1,153.6 $ 676.4 $ 4.2 $ 515.2 $ 390.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Accrued investment income $ 188.3 $ 180.4 $ 206.4 $ 192.8 $ 204.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Excludes investments in affiliates. (2) All debt securities are carried at fair value in 1995, and a majority are carried at fair value in 1994 and 1993, due to the adoption of FAS No. 115 at December 31, 1993. (3) "Foreign" includes foreign governments, foreign political subdivisions, foreign public utilities and all other bonds of foreign issuers. (4) Includes acquisition of real estate through foreclosures (including in-substance foreclosures in 1995 and 1994) of mortgage loans.
29 The following table summarizes investment results of the company's Discontinued Operations: (1)
(Dollar amounts in millions) Net Earned Net Net Change in Net Investment Investment Realized Unrealized Capital Income (2) Income Rate (3) Capital Gains (4) Gains and Losses (4) __________ _______________ _________________ ____________________ For the year: 1995 $ 901.7 6.4% $ 155.6 $ 1,052.9 1994 832.1 5.9 .4 (914.1) 1993 952.4 6.8 178.0 207.6 1992 1,025.8 7.4 213.8 200.6 1991 1,188.9 8.7 20.3 118.3 (1) Excludes investments in affiliates. (2) Net investment income excludes net realized capital gains and losses and is after deduction of investment expenses, but before deduction of federal income taxes. (3) The Earned Net Investment Income Rate for any given year is equal to (a) net investment income divided by (b) the average of (i) cash, invested assets and investment income due and accrued less borrowed money at the beginning of the year, and (ii) cash, invested assets and investment income due and accrued less borrowed money at the end of the year, less net investment income. Debt securities are reflected primarily at amortized cost for purposes of this calculation. Investments in affiliates have been eliminated for purposes of this calculation. (4) Net realized and unrealized capital gains (losses) are before federal income taxes. Intercompany transactions have not been eliminated.
9. Other Matters a. Regulation General Aetna's insurance businesses (including Discontinued Operations) are subject to comprehensive, detailed regulation throughout the United States and the foreign jurisdictions in which they do business. The laws of the various jurisdictions establish supervisory agencies with broad authority to regulate, among other things, the granting of licenses to transact business, premium rates for certain coverages, trade practices, agent licensing, policy forms, underwriting and claims practices, reserve adequacy, insurer solvency, the maximum interest rates that can be charged on life insurance policy loans, and the minimum rates that must be provided for accumulation of surrender value. Many agencies also regulate investment activities on the basis of quality, distribution and other quantitative criteria. Aetna's operations and accounts are subject to examination at regular intervals by insurance regulators. Although the federal government does not directly regulate the business of insurance, many federal laws do affect that business. Existing or recently proposed federal laws that may significantly affect or would affect, if passed, the insurance business cover such matters as pensions and other employee benefits (including regulation of federally qualified HMOs), controls on medical care costs, medical entitlement programs (e.g., Medicare), environmental regulation and liability, product liability, civil justice procedural reform, earthquake insurance, removal of barriers preventing banks from engaging in the insurance and mutual fund businesses, the taxation of insurance companies (see Notes 1 and 10 of Notes to Financial Statements in the Annual Report), and the tax treatment of insurance products. 30 Material changes in applicable federal and state laws and regulations could adversely affect the company's business operations, although the company is unable to predict whether any such changes will be implemented. Health Care In addition to regulations applicable to insurance companies generally (described above), Aetna's managed health care products are subject to varying levels of state insurance, HMO and/or health department regulation. Among other things, these regulations address health care network composition, new product offerings, product and benefit contracts and the extent to which insurance companies and managed care plans may provide incentives to enrollees to use services from "preferred" health care service providers or pay contractual and noncontractual health care providers unequally for equivalent services. Some jurisdictions also regulate the extent to which managed health care plans may offer their enrollees the option of receiving health care services from noncontracting providers. Additionally, these plans are subject to state, and in some cases federal, regulation concerning solvency and other operational requirements. Legislative efforts to change the health insurance system have received increased attention in recent years at both the state and national levels. (For additional discussion, see MD&A - Aetna Health Plans in the Annual Report.) Insurance and Insurance Holding Company Laws Several states, including Connecticut, regulate affiliated groups of insurers such as Aetna under insurance holding company statutes. Under such laws, intercorporate asset transfers and dividend payments from insurance subsidiaries may require prior notice to or approval of the insurance regulators, depending on the size of such transfers and payments relative to the financial position of the affiliate making the transfer. These laws also regulate changes in control, as do Connecticut corporate laws (which also apply to insurance corporations). See Note 8 of Notes to Financial Statements in the Annual Report. As a licensed Connecticut-domiciled insurer, the company is subject to Connecticut insurance laws. These laws, among other things, enable insurers to redeem their stock from any shareholder who fails, in the good faith determination of the insurer's board of directors, to (i) meet the qualifications prescribed under Connecticut law for licensure, or (ii) to secure the regulatory approvals required under Connecticut law for ownership of such stock. 31 Securities Laws The Securities and Exchange Commission ("SEC") and, to a lesser extent, the states regulate the sales and investment management activities and operations of broker-dealer and investment advisory subsidiaries of the company. The SEC also regulates certain of the company's pension, annuity, life insurance and other investment and retirement products. These products involve Separate Accounts of Aetna Life Insurance and Annuity Company and mutual funds registered under the Investment Company Act of 1940. As a stock company, Aetna also is subject to extensive reporting obligations under the Securities Exchange Act of 1934. Discontinued Operations - Property-Casualty Operations Over the past several years, the company's insurance businesses, particularly personal auto and property insurance and workers' compensation coverage, have been the target of various regulatory and legislative initiatives that management believes have limited the basis upon which the company conducts its activities. Such initiatives have, among other things, sought to (1) freeze or reduce rates that may be charged for certain insurance products, (2) force the company to issue and renew insurance in markets where the company cannot achieve an acceptable rate of return, and (3) restructure residual or involuntary markets. Many jurisdictions compel participation in, and regulate composition of, various residual market mechanisms. Residual or involuntary markets are established to provide coverage to insureds unable to obtain policies in the private marketplace. As state-mandated rates are frequently inadequate, these markets are in effect often subsidized by the insurance industry. Insurance Company Guaranty Fund Assessments Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The after-tax charges to earnings for guaranty fund obligations for the year ended December 31, 1995 was $13 million (of which $5 million related to Discontinued Operations) and for the year ended December 31, 1993 was $17 million (all of which related to Discontinued Operations). There were no such charges in 1994. The amounts ultimately assessed may differ from the amounts charged to earnings because such assessments may not be made for several years and will depend upon the final outcome of regulatory proceedings. While the company has historically recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets and policy surcharges, significant increases in assessments could jeopardize future efforts to recover such assessments. The company has actively supported improved insurer solvency regulation, including measures that would facilitate earlier identification of troubled insurers, and amendments to guaranty fund laws that would reduce the costs of such insolvencies to solvent insurers such as Aetna. See MD&A - Regulatory Environment in the Annual Report for additional discussion of regulatory matters. 32 b. NAIC IRIS Ratios The NAIC IRIS ratios cover 12 categories of financial data with defined usual ranges for each category. The ratios are intended to provide insurance regulators "early warnings" as to when a given company might warrant special attention. An insurance company may fall out of the usual range for one or more ratios and such variances may result from specific transactions that are in themselves immaterial or eliminated at the consolidated level. In 1994, two of Aetna Life and Casualty Company's significant subsidiaries had more than two IRIS ratios that were outside of the NAIC usual ranges, as discussed below. Aetna Life Insurance Company ("ALIC") fell outside the usual ranges in 1994 for: (i) the Net Gain to Total Income Ratio which is calculated by dividing the net gain from operations (including realized capital gains and losses) by total income (including realized capital gains and losses); (ii) the Adequacy of Investment Income Ratio which compares investment income to credited interest; (iii) the Total Real Estate and Total Mortgage Loans to Cash and Invested Assets Ratio which measures the relative size of the real estate and mortgage loan portfolios; (iv) the Change in Premium Ratio which is calculated by dividing the current year change in total premiums, annuity considerations and other fund deposits by total premiums, annuity considerations and other fund deposits for the prior year; and (v) the Change in Reserving Ratio which represents the number of percentage points of difference between the reserving ratio for current and prior year. The reserving ratio is equal to the aggregate increase in reserves for individual life insurance taken as a percentage of renewal and single premiums for individual life insurance. The regulators were satisfied, after analysis, that ALIC did not warrant special attention. The Aetna Casualty & Surety Company of America ("ACSCA") fell outside of the usual ranges in 1994 for: (i) the Two-year Overall Operating Ratio, which is a combination of a two-year combined ratio minus a two-year investment income ratio; (ii) the Change in Surplus which measures the improvement or deterioration in a company's financial condition during the year; and (iii) the Two-Year Reserve Development to Surplus Ratio which measures the change in prior years' estimates calculated as a percentage of policyholders' surplus two years previous. The regulators were satisfied that ACSCA did not warrant special attention. Management expects that certain of the company's significant subsidiaries will have more than two IRIS ratios outside of the NAIC usual ranges for 1995, but expects to be able to satisfy the regulators that further attention is not warranted. 33 c. 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 years ended December 31:
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges 4.97 4.74 (a) 1.90 .54 (b) Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 4.97 4.74 (a) 1.90 .54 (b) (a) Aetna reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.0 billion. (b) Earnings were inadequate to cover fixed charges by $92.0 million in 1991.
For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the Annual Report.) For the years ended December 31, 1995, 1994, 1993, 1992 and 1991 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. d. Miscellaneous Aetna had approximately 40,200 domestic employees (approximately 11,300 of whom support Discontinued Operations) at December 31, 1995. Management believes that the company's computer facilities, systems and related procedures are adequate to meet its business needs. The company's data processing systems and backup and security policies, practices and procedures are regularly evaluated by the company's management and its internal auditors and are modified as considered necessary. Portions of Aetna's insurance business are seasonal in nature. Reported claims under group health and certain property-casualty products are generally higher in the first quarter. Sales, particularly of individual life products, are generally lowest in the first quarter and highest in the fourth quarter. No customer accounted for 10% or more of Aetna's consolidated revenues in 1995. In addition, no segment of Aetna's business is dependent upon a single customer or a few customers, the loss of which would have a significant effect on the segment. See Note 15 of Notes to Financial Statements regarding segment information in the Annual Report. 34 The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the company or any of its segments. In general, the company is not contractually obligated or committed to accept a fixed portion of business submitted by any of its property-casualty agents or brokers. The company generally reviews all of its policy applications, both new and renewal, for approval and acceptance. There are cases where the company has delegated limited underwriting authority to select agents generally for smaller business for specific classes of risks. The risks accepted by the company under these conditions are reviewed by company underwriters. This authority generally can be rescinded at any time at the discretion of the company and without prior notice to the agents. Item 2. Properties. The home office of Aetna, owned by Aetna Life Insurance Company, is a building complex located at 151 Farmington Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The company also owns or leases other space in the greater Hartford area as well as various field locations throughout the country. (Please see MD&A - Overview in the Annual Report.) The foregoing does not include numerous investment properties held by Aetna in its general and separate accounts. Item 3. Legal Proceedings. The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. See MD&A - Discontinued Operations' Reserves in the Annual Report. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefore and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. Item 4. Submission of Matters to a Vote of Security Holders. None. 35 EXECUTIVE OFFICERS OF AETNA LIFE AND CASUALTY COMPANY* The Chairman of Aetna Life and Casualty Company is elected and all other executive officers listed below are appointed by the Board of Directors of the company at its Annual Meeting each year to hold office until the next Annual Meeting of the Board or until their successors are elected or appointed. None of these officers have family relationships with any other executive officer or Director.
Business Experience Name of Officer Principal Position Age * During Past Five Years _______________ __________________ ___ ______________________ Ronald E. Compton Chairman and President 63 (1) Richard L. Huber Vice Chairman for Strategy and Finance 59 (2) Zoe Baird Senior Vice President and General Counsel 43 (3) Gary G. Benanav Executive Vice President, Property/Casualty** 50 (4) J. Roger Bolton Senior Vice President, Corporate Communications 45 (5) Mary Ann Champlin Senior Vice President, Aetna Human Resources 48 (6) Daniel P. Kearney Executive Vice President, Investments/Financial Services** 56 (7) James W. McLane Executive Vice President, Health/Group Life** 57 (8) Vanda B. McMurtry Senior Vice President, Federal Government Relations 46 (9) Robert E. Broatch Senior Vice President, Finance 47 (10) Robert J. Price Vice President and Corporate Controller 45 (11) * As of February 26, 1996. ** Executive Vice Presidents, in conjunction with certain other senior officers, are responsible for assisting the Chairman and Vice Chairman in setting policy and overall direction for the company.
36 (1) Mr. Compton has served as Chairman since March 1, 1992. He is also President, a position he has held since July 1988. (2) Mr. Huber has served in his current position since February 1995. From September 1994 to February 1995, he served as President and Chief Operating Officer of Grupo Wasserstein Perella. From 1990 to September 1994, he served as Vice Chairman of Continental Bank. From 1988 to 1990, he served as Executive Vice President and Head of Capital Markets and Foreign Exchange Sector, Chase Manhattan Bank. (3) Ms. Baird has served in her current position since April 1992. From July 1990 to April 1992 she served as Vice President and General Counsel. (4) Mr. Benanav has served in his current position since December 1993. From April 1992 to December 1993 he served as Group Executive responsible for International, individual life insurance, annuities, mutual funds, and small case pensions. From April 1990 through April 1992, he served as Senior Vice President, International Insurance. (5) Mr. Bolton has served in his current position since July 1995. He was with International Business Machines Corporation from March 1991 to June 1995, serving as Director of Communications, IBM Software Group, from March 1994 to June 1995, and as Director of Corporate Media Relations from March 1991 to March 1994. From February 1989 to March 1991, he served as Assistant Secretary for Public Affairs and Public Liaison, U.S. Department of Treasury. (6) Mrs. Champlin has served in her current position since November 1992. From February 1991 through November 1992 she served as Vice President, Aetna Human Resources. From June 1989 through January 1991 she served as Assistant Vice President, Corporate Management, Office of the Chairman. (7) Mr. Kearney has served in his current position since December 1993. From February 1991 to December 1993 he served as Group Executive responsible for investments and large case pensions. From 1990 to February 1991 he served as the principal of Daniel P. Kearney, Inc. (8) Mr. McLane has served in his current position since December 1993. From April 1992 to December 1993, he served as Group Executive responsible for group health and life insurance including managed care operations. From February 1991 through April 1992 he served as Chief Executive Officer, Aetna Health Plans; from 1985 through 1991 he served as Senior Vice President, Global Insurance Division, Citicorp. (9) Mr. McMurtry has served in his current position since November 1992. From February 1989 through November 1992 he served as Staff Director and Chief Counsel, Committee on Finance, United States Senate. (10) Mr. Broatch has served in his current position since December 1993. He also served as Corporate Controller from May 1988 to July 1995 and was a Vice President from May 1988 to December 1993. (11) Mr. Price was appointed to his current position on July 3, 1995, having served as Vice President and Deputy Controller since May 1989. 37 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Aetna Life and Casualty Company's common stock is listed on the New York and Pacific Stock Exchanges, with unlisted trading privileges on other regional exchanges. Its symbol is AET. The common stock also is listed on the Swiss Stock Exchanges at Basel, Geneva and Zurich. Call and put options on the common stock are traded on the American Stock Exchange. As of January 31, 1996, there were 22,939 record holders of the common stock. The dividends declared and the high and low sales prices with respect to Aetna Life and Casualty Company's common stock for each quarterly period for the past two years are incorporated herein by reference from "Quarterly Data" in the Annual Report. Information regarding restrictions on the company's present and future ability to pay dividends is incorporated herein by reference from Note 8 of Notes to Financial Statements in the Annual Report. Item 6. Selected Financial Data. The information contained in "Selected Financial Data" in the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The 1995 Consolidated Financial Statements and the report of the registrant's independent auditors and the unaudited information set forth under the caption "Quarterly Data" is incorporated herein by reference to the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 38 PART III Item 10. Directors and Executive Officers of the Registrant. Information concerning Executive Officers is included in Part I pursuant to General Instruction G to Form 10-K. Information concerning Directors and concerning compliance with Section 16 (a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Proxy Statement. Item 11. Executive Compensation. The information under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information under the caption "Security Ownership of Certain Beneficial Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information under the caption "Certain Transactions and Relationships" in the Proxy Statement is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial statements: The Consolidated Financial Statements and the report of the registrant's independent auditors are incorporated herein by reference to the Annual Report. 2. Financial statement schedules: The supporting schedules of the consolidated entity are included in this Item 14. See Index to Financial Statement Schedules on page 42. 39 3. Exhibits: * (3) Articles of Incorporation and By-Laws. Certificate of Incorporation of Aetna Life and Casualty Company, incorporated herein by reference to the company's 1992 Form 10- K, filed on March 17, 1993 (the "1992 Form 10-K"). By-Laws of Aetna Life and Casualty Company, incorporated by reference to the company's 1993 Form 10-K filed on March 18, 1994 (the "1993 Form 10-K"). (4) Instruments defining the rights of security holders, including indentures. Conformed copy of Indenture, dated as of October 15, 1977, between Aetna Life and Casualty Company and Morgan Guaranty Trust Company of New York, Trustee, incorporated herein by reference to the 1992 Form 10-K. Conformed copy of Indenture, dated as of October 15, 1986, between Aetna Life and Casualty Company and The First National Bank of Boston, Trustee, incorporated herein by reference to the 1992 Form 10-K. Conformed copy of Indenture, dated as of August 1, 1993, between Aetna Life and Casualty Company and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, incorporated herein by reference to the company's Registration Statement on Form S-3 (File No. 33-50427). Conformed copy of Rights Agreement dated as of October 27, 1989, between Aetna Life and Casualty Company and First Chicago Trust Company of New York, incorporated herein by reference to the 1992 Form 10-K. Conformed copy of Summary of Rights to Purchase Preferred Stock, incorporated herein by reference to the 1992 Form 10-K. Conformed copy of Written Action dated as of November 15, 1994, establishing the terms of Series A Preferred Securities of Aetna Capital L.L.C., incorporated herein by reference to the company's Form 8-K filed on November 22, 1994. Conformed copy of Subordinated Indenture dated as of November 1, 1994, between the company and The First National Bank of Chicago, as Trustee, incorporated herein by reference to the company's Form 8-K filed on November 22, 1994. Conformed copy of Payment and Guarantee Agreement dated November 22, 1994, of the company with respect to Aetna Capital L.L.C., incorporated herein by reference to the company's Form 8-K filed on November 22, 1994. (10) Material contracts. Stock Purchase Agreement dated as of November 28, 1995 between The Travelers Insurance Group Inc. and Aetna Life and Casualty Company relating to the purchase and sale of 100% of the Common Stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance Company. Letter Agreement, dated January 19, 1995, between Aetna Life and Casualty Company and Richard L. Huber. ** 40 Employment Agreement, dated as of October 27, 1995, between Aetna Life and Casualty Company and Gary G. Benanav. ** Employment Agreement, dated as of January 29, 1996, between Aetna Life and Casualty Company and Ronald E. Compton. ** Employment Agreement, dated as of December 19, 1995, between Aetna Life and Casualty Company and Daniel P. Kearney. ** Employment Agreement, dated as of January 19, 1996, between Aetna Life and Casualty Company and James W. McLane. ** The 1984 Stock Option Plan of Aetna Life and Casualty Company and amendments thereto, incorporated herein by reference to the 1992 Form 10-K. ** Aetna Life and Casualty Company's Supplemental Incentive Savings Plan, incorporated herein by reference to the 1992 Form 10-K. ** Aetna Life and Casualty Company's Supplemental Pension Benefit Plan, incorporated herein by reference to the 1992 Form 10-K. ** Aetna Life and Casualty Company's 1986 Management Incentive Plan, as amended effective February 25, 1994, incorporated herein by reference to the 1993 Form 10-K. ** Aetna Life and Casualty Company Directors' Deferred Compensation Plan, incorporated herein by reference to the 1992 Form 10-K. ** Aetna Life and Casualty Company 1994 Non-Employee Director Deferred Stock Plan, incorporated herein by reference to the company's 1994 proxy statement, filed on March 18, 1994 (the "1994 Proxy Statement"). ** Aetna Life and Casualty Company 1994 Stock Incentive Plan, incorporated herein by reference to the 1994 Proxy Statement. ** Letter Agreement, dated December 18, 1993, between Aetna Life and Casualty Company and David A. Kocher, incorporated herein by reference to the 1993 Form 10-K. ** Letter Agreement, dated September 20, 1994, between Aetna Life and Casualty Company and Patrick W. Kenny, incorporated by reference to the company's Form 10-Q filed on October 28, 1994. ** The Aetna Life and Casualty Company 1990 Non-Employee Director Deferred Stock Plan, incorporated herein by reference to the 1992 Form 10-K. ** Extension Notice, dated July 17, 1995 of $500,000,000 Short-Term Credit Agreement dated July 27, 1994 among Aetna Life and Casualty Company, the banks listed therein, Deutsche Bank AG, as Co- Arranger, and Morgan Guaranty Trust Company of New York, incorporated by reference to the company's Form 10-Q filed on July 28, 1995. $500,000,000 Medium-Term Credit Agreement dated as of July 27, 1994 among Aetna Life and Casualty Company, the banks listed on the signature pages thereof, Morgan Guaranty Trust Company of New York, as Managing Agent, Deutsche Bank AG, as Co-Arranger, and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co- Agents, incorporated by reference to the company's Form 10-Q filed on August 15, 1994. 41 Description of certain arrangements not embodied in formal documents, as described with respect to Directors' fees and benefits, and under the caption "Executive Compensation," are incorporated herein by reference to the Proxy Statement. (11) Statement re computation of per share earnings. Incorporated herein by reference to Note 1 of Notes to Financial Statements in the Annual Report. (12) Statement re computation of ratios. Statement re: computation of ratio of earnings to fixed charges. Statement re: computation of ratio of earnings to combined fixed charges and preferred stock dividends. (13) Annual Report to security holders. Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements and the report of the company's independent auditors, and unaudited Quarterly Data from the Annual Report. (21) Subsidiaries of the registrant. A listing of subsidiaries of Aetna Life and Casualty Company. (23) Consents of experts and counsel. Consent of Independent Auditors to Incorporation by Reference in the Registration Statements on Form S-3 and Form S-8. (24) Powers of attorney. (27) Financial data schedule. (28) Information from reports furnished to state insurance regulatory authorities. 1995 Consolidated Schedule P of Annual Statements provided to state regulatory authorities. *** (b) Reports on Form 8-K The company filed a report on Form 8-K filed on November 29, 1995, relating to the company entering into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc. * Exhibits other than those listed are omitted because they are not required or are not applicable. Copies of exhibits are available without charge by writing to the Office of the Corporate Secretary, Aetna Life and Casualty Company, 151 Farmington Avenue, Hartford, Connecticut 06156. ** Management contract or compensatory plan or arrangement. *** Filed under cover of Form SE. 42 INDEX TO FINANCIAL STATEMENT SCHEDULES AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES Independent Auditors' Report Page ____ I Summary of Investments - Other than 44 Investments in Affiliates as of December 31, 1995 II Condensed Financial Information of the 45 Registrant as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 III Supplementary Insurance Information as of 51 and for the years ended December 31, 1995, 1994 and 1993 IV Reinsurance 54 V Valuation and Qualifying Accounts and Reserves 55 for the years ended December 31, 1995, 1994 and 1993 VI Supplemental Information Concerning 58 Property-Casualty Operations for the years ended December 31, 1995, 1994 and 1993 Certain of the required information is shown in the Financial Statements or Notes thereto in the Annual Report. Certain information has been omitted from the schedules filed because the information is not applicable. Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation. 43 INDEPENDENT AUDITORS' REPORT ____________________________ The Shareholders and Board of Directors Aetna Life and Casualty Company: Under date of February 6, 1996, we reported on the consolidated balance sheets of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Notes 1 and 2 to the consolidated financial statements, in 1993 the company changed its methods of accounting for certain investments in debt and equity securities, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts. By /s/ KPMG Peat Marwick LLP _________________________ (Signature) KPMG PEAT MARWICK LLP Hartford, Connecticut February 6, 1996 44 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE I Summary of Investments - Other than Investments in Affiliates As of December 31, 1995
Amount at which shown in the Type of Investment Cost Value* balance sheet __________ __________ _____________ (Millions) Debt securities: Bonds: United States Government and government agencies and authorities $ 3,396.7 $ 3,574.1 $ 3,574.1 States, municipalities and political subdivisions 445.4 489.8 489.8 Foreign (1) 4,074.7 4,327.6 4,327.6 Public utilities 2,372.6 2,533.3 2,533.3 Financial 4,685.4 4,875.1 4,875.1 Transportation/Capital goods 1,966.5 2,170.5 2,170.5 Mortgage-backed securities 5,431.1 5,803.3 5,803.3 Other loan-backed securities 1,704.5 1,748.6 1,748.6 Food and fiber 625.5 681.4 681.4 Natural resources and services 1,078.5 1,165.1 1,165.1 All other corporate bonds 4,197.4 4,482.7 4,482.7 _________ _________ _________ Total bonds 29,978.3 31,851.5 31,851.5 Redeemable preferred stocks 8.8 8.8 8.8 _________ _________ _________ Total debt securities 29,987.1 $31,860.3 31,860.3 _________ _________ _________ _________ Equity securities: Common stocks: Public utilities 22.6 $ 25.7 25.7 Banks, trust and insurance companies 27.1 31.3 31.3 Industrial, miscellaneous and all other 465.4 509.9 509.9 _________ _________ _________ Total common stocks 515.1 566.9 566.9 Non-redeemable preferred stocks 82.8 92.8 92.8 _________ _________ _________ Total equity securities 597.9 $ 659.7 659.7 _________ _________ _________ _________ Short-term investments 607.7 607.8 Mortgage loans 8,327.2 8,327.2 Real estate 1,277.3 1,277.3 Policy loans 629.4 629.4 Other 574.1 (2) 688.6 (3) _________ _________ Total investments $42,000.7 $44,050.3 _________ _________ _________ _________ ________________________ * See Notes 1 and 5 of Notes to Financial Statements in the company's 1995 Annual Report. (1) The term "foreign" includes foreign governments, foreign political subdivisions, foreign public utilities and all other bonds of foreign issuers. (2) Excludes investments in affiliates of $114.5 million. (3) Includes investments in affiliates of $114.5 million.
45 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE II Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Statements of Income
For the years ended December 31, 1995 1994 1993 ____ ____ ____ (Millions) Premiums $ 1.2 $ 1.5 $ 1.3 Net investment income (expense) 1.0 (7.9) (7.9) Net realized capital losses (.2) (7.9) (22.1) _______ _______ ________ Total revenue 2.0 (14.3) (28.7) Current and future benefits .4 .9 .8 Operating expenses 39.2 32.1 43.1 Severance and facilities charge - - 50.3 Interest expense 108.3 92.5 70.1 _______ _______ ________ Total benefits and expenses 147.9 125.5 164.3 _______ _______ ________ Losses before federal income taxes (benefits) and equity in earnings (losses) of affiliates (145.9) (139.8) (193.0) Federal income taxes (benefits): Current (57.2) (23.2) (53.4) Deferred 3.1 (19.4) (45.6) Equity in earnings (losses) of affiliates 565.7 506.6 (508.3) _______ _______ ________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 473.9 409.4 (602.3) Income (Loss) from Discontinued Operations, net of tax (222.2) 58.1 290.3 _______ _______ ________ Income (Loss) before extraordinary item and cumulative effect adjustments for continuing operations 251.7 467.5 (312.0) Extraordinary loss on debenture redemption, net of tax - - (4.7) Cumulative effect adjustments for continuing operations - - (49.2) _______ _______ ________ Net income (loss) $ 251.7 $ 467.5 $ (365.9) _______ _______ ________ _______ _______ ________ ________________________ See Notes to Condensed Financial Statements.
46 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE II Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Balance Sheets
As of December 31, 1995 1994 ____ ____ (Millions, except share data) ASSETS Investments: Debt securities, available for sale at fair value (cost of $3.9 and $3.8) $ 3.9 $ 3.8 Equity securities, at market (cost $18.4 and $18.3) 14.9 14.8 Short-term investments 10.2 22.5 Other 8.7 10.9 Investments in affiliates: Insurance and financial services companies 4,830.4 3,648.5 International insurance and financial services companies 780.2 644.6 Discontinued Operations 3,932.8 3,167.3 _________ _________ Total investments 9,581.1 7,512.4 Cash and cash equivalents 23.7 - Premiums due and other receivables 5.6 2.5 Due from affiliates 61.3 179.3 Accrued investment income 3.2 1.6 Deferred federal income taxes 304.8 306.6 Other assets 43.2 32.8 _________ _________ Total assets $10,022.9 $ 8,035.2 _________ _________ _________ _________ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance reserve liabilities $ 45.8 $ .6 Dividends payable to shareholders 79.2 77.7 Long-term debt 958.0 1,058.2 Short-term debt 329.9 - Other liabilities 238.7 127.2 Liability for postretirement benefits other than pensions 609.5 624.1 Due to affiliates 356.0 513.1 Current federal income taxes 133.0 131.3 _________ _________ Total liabilities 2,750.1 2,532.2 _________ _________ 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 stock (No par value; 250,000,000 shares authorized; 115,013,675 and 114,939,275 issued; and 114,727,093 and 112,657,758 outstanding) 1,448.2 1,419.2 Net unrealized capital gains (losses) 641.1 (1,071.5) Retained earnings 5,195.6 5,259.6 Treasury stock, at cost (12.1) (104.3) _________ _________ Total shareholders' equity 7,272.8 5,503.0 _________ _________ Total $10,022.9 $ 8,035.2 _________ _________ _________ _________ ________________________ See Notes to Condensed Financial Statements.
47 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE II Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Statements of Shareholders' Equity
Net Unrealized Three years ended December 31, 1995 Common Capital Retained Treasury (Millions, except share data) Total Stock Gains (Losses) Earnings Stock ___________________________________________________________________________________________________________ Balances at December 31, 1992 $ 7,238.3 $ 1,417.7 $ 259.6 $ 5,777.9 $ (216.9) ___________________________________________________________________________________________________________ Net loss (365.9) (365.9) Net change in unrealized capital gains and losses 388.6 388.6 Common stock issued for benefit plans (1,930,085 shares) 86.5 86.5 Gain on issuance of treasury stock 4.3 4.3 Common stock dividends declared (308.7) (308.7) ______________________________________________________________ Balances at December 31, 1993 $ 7,043.1 $ 1,422.0 $ 648.2 (1) $ 5,103.3 $ (130.4) ___________________________________________________________________________________________________________ Net income 467.5 467.5 Net change in unrealized capital gains and losses (1,719.7) (1,719.7) Common stock issued for benefit plans (457,191 shares) 26.1 26.1 Loss on issuance of treasury stock (2.8) (2.8) Common stock dividends declared (311.2) (311.2) ______________________________________________________________ Balances at December 31, 1994 $ 5,503.0 $ 1,419.2 $(1,071.5) (1) $ 5,259.6 $ (104.3) ___________________________________________________________________________________________________________ Net income 251.7 251.7 Net change in unrealized capital gains and losses 1,712.6 1,712.6 Common stock issued for benefit plans (2,069,335 shares) 97.4 5.2 92.2 Gain on issuance of treasury stock 23.8 23.8 Common stock dividends declared (315.7) (315.7) ______________________________________________________________ Balances at December 31, 1995 $ 7,272.8 $ 1,448.2 $ 641.1 (1) $ 5,195.6 $ (12.1) ___________________________________________________________________________________________________________ See Notes to Condensed Financial Statements. (1) Excludes unrealized capital gains and losses attributable to assets supporting discontinued products and to assets supporting experience rated contracts.
48 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE II Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Statements of Cash Flows
For the years ended December 31, 1995 1994 1993 ____ ____ ____ (Millions) Cash Flows from Operating Activities: Net income (loss) $ 251.7 $ 467.5 $(365.9) Adjustments to reconcile net income (loss) to net cash used for operating activities: Cumulative effect adjustments - - 49.2 Extraordinary loss on debenture redemption - - 4.7 Loss (Income) from Discontinued Operations 222.2 (58.1) (290.3) Decrease (Increase) in premiums due and other receivables 116.4 (12.3) 5.0 (Increase) Decrease in accrued investment income (1.6) (0.3) 0.3 Depreciation and amortization 0.1 0.1 - Increase (Decrease) in federal income taxes 0.5 93.1 (58.6) Net (decrease) increase in other assets and other liabilities (70.3) (19.7) 38.3 Increase in insurance reserve liabilities 45.2 0.1 0.1 Equity in (earnings) losses of affiliates (565.7) (506.6) 508.3 Net realized capital losses 0.2 7.9 22.1 Amortization of net investment discounts (0.2) (0.2) (0.2) Other, net (36.0) (90.6) (133.2) _______ ________ ______ Net cash used for operating activities (37.5) (119.1) (220.2) _______ ________ ______ Cash Flows from Investing Activities: Proceeds from sales of: Equity securities - 1.1 - Short-term investments 1,289.3 1,200.3 1,591.3 Cost of investments in: Debt securities available for sale (0.1) (3.8) - Equity securities (0.1) (21.8) (26.3) Short-term investments (1,272.2) (1,139.6) (1,591.5) Real estate - ( 1.0) (0.5) Capital contributions to affiliates (303.0) - (300.0) Dividends received from affiliates 451.7 - 302.1 Other, net (139.6) 17.2 127.8 _______ _______ _______ Net cash provided by investing activities 26.0 52.4 102.9 _______ _______ _______ Cash Flows from Financing Activities: Issuance of long-term debt .6 .6 600.0 Issuance of subordinated debentures to affiliates - 348.1 - Stock issued under benefit plans 121.2 23.3 90.8 Repayment of long-term debt (100.8) - (347.2) Net increase in short-term debt 329.9 - - Dividends paid to shareholders (315.7) (311.2) (308.7) _______ _______ _______ Net cash provided by financing activities 35.2 60.8 34.9 _______ _______ ________ Effect of exchange rate on cash and cash equivalents - 0.1 - _______ _______ _______ Net increase (decrease) in cash and cash equivalents 23.7 (5.8) (82.4) Cash and cash equivalents, beginning of year - 5.8 88.2 _______ _______ _______ Cash and cash equivalents, end of year $ 23.7 $ - $ 5.8 _______ _______ _______ _______ _______ _______ Supplemental disclosure of cash flow information: Interest paid $ 117.8 $ 90.6 $ 64.2 _______ _______ _______ _______ _______ _______ Income taxes received, net $ 70.2 $ 150.3 $ 56.7 _______ _______ _______ _______ _______ _______ ________________________ See Notes to Condensed Financial Statements.
49 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE II Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Notes to Condensed Financial Statements The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Annual Report. Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation. 1. Long-Term Debt
(Millions) 1995 1994 ____ ____ Long-term debt: Eurodollar Notes, 9 1/2% due 1995 $ - $ 100.2 Notes, 8 5/8% due 1998 99.8 99.8 Notes, 6 3/8% due 2003 198.9 198.9 Debentures, 6 3/4% due 2013 198.4 198.4 Eurodollar Notes, 7 3/4% due 2016 63.5 63.5 Debentures, 8% due 2017 199.1 199.1 Debentures, 7 1/4% due 2023 198.3 198.3 ________ ________ $ 958.0 $1,058.2 ________ ________ ________ ________
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 1996 to 2000 and thereafter. 2. Dividends The amounts of cash dividends paid to Aetna Life and Casualty Company by insurance affiliates for the years ended December 31, 1995, 1994 and 1993 were as follows:
(Millions) 1995 1994 1993 ____ ____ ____ Consolidated subsidiaries $451.7 $ - $302.1 ______ ____ ______ ______ ____ ______
See Note 8 to the Consolidated Financial Statements in the Annual Report for a description of dividend restrictions from the consolidated insurance subsidiaries to the company. 3. Due to Affiliates See Note 11 to the Consolidated Financial Statements in the Annual Report for a description of amounts due to Aetna Capital L.L.C., a subsidiary of the company. 50 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE II Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Notes to Condensed Financial Statements (Continued) 4. Accounting Changes See Notes 1 and 2 to the Consolidated Financial Statements in the Annual Report for a description of accounting changes. 5. Discontinued Products See Note 3 to the Consolidated Financial Statements in the Annual Report for a description of discontinued products. 6. Sales of Subsidiaries See Note 2 to the Consolidated Financial Statements in the Annual Report for a description of the sales of subsidiaries. 7. Severance and Facilities Charge See Note 4 to the Consolidated Financial Statements in the Annual Report for a description of the severance and facilities charges. 8. Federal and Foreign Income Taxes See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of federal and foreign income taxes. 51 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Supplementary Insurance Information As of and for the year ended December 31, 1995
Deferred Unpaid Policyholders' policy Future claims funds left acquisition policy and claim Unearned with the Premium Segment costs benefits expenses premiums company revenue _______ ___________ _________ _________ _________ ___________ _________ (Millions) Aetna Health Plans $ 50.5 $ 2,485.2 $ 1,285.3 (1) $ 86.8 $ 634.4 $ 5,949.7 Aetna Life Insurance & Annuity 1,320.8 3,917.4 30.2 - 10,704.4 178.3 International 581.8 2,691.9 82.8 55.3 851.7 1,038.5 Large Case Pensions - 9,278.4 1.5 - 10,708.2 264.9 Corporate - - 163.3 .3 - - _________ _________ _________ _________ _________ _________ Total continuing operations $ 1,953.1 $18,372.9 $ 1,563.1 $ 142.4 $22,898.7 $ 7,431.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Discontinued Operations $ 305.8 $ - $16,569.3 $ 1,400.3 $ 39.1 $ 4,118.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Other income (including Amortization of Net realized Current deferred policy Other investment capital gains and future acquisition operating Premiums Segment income (2) and losses) benefits costs expenses written (3) _______ ___________ _____________ __________ ____________ __________ _________ (Millions) Aetna Health Plans $ 364.0 $ 1,301.7 $ 5,100.4 $ 22.2 $ 2,038.4 $ 5,016.5 Aetna Life Insurance & Annuity 1,044.1 401.8 979.5 44.1 305.8 - International 308.7 112.6 911.2 70.8 350.5 234.8 Large Case Pensions 1,850.6 153.4 2,036.1 - 100.1 - Corporate 7.7 2.0 - - 292.7 - _________ _________ _________ _________ __________ _________ Total continuing operations $ 3,575.1 $ 1,971.5 $ 9,027.2 $ 137.1 $ 3,087.5 $ 5,251.3 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Discontinued Operations $ 901.7 $ 237.6 $ 4,232.5 $ 622.7 $ 787.3 $ 4,085.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Includes minimal property-casualty business. (2) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (3) Excludes life insurance business pursuant to Regulation S-X.
52 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Supplementary Insurance Information As of and for the year ended December 31, 1994
Deferred Unpaid Policyholders' policy Future claims funds left acquisition policy and claim Unearned with the Premium Segment costs benefits expenses premiums company revenue _______ ___________ _________ _________ _________ ___________ _________ (Millions) Aetna Health Plans $ 74.2 $ 2,487.4 $ 1,204.5 (1) $ 137.5 $ 682.1 $ 5,611.5 Aetna Life Insurance & Annuity 1,139.6 3,274.1 25.3 - 9,106.2 168.3 International 477.2 2,293.1 54.1 41.5 839.4 887.1 Large Case Pensions - 9,916.9 1.5 - 12,548.7 234.4 Corporate - - 104.0 .4 - - _________ _________ _________ _________ __________ __________ Total continuing operations $ 1,691.0 $17,971.5 $ 1,389.4 $ 179.4 $ 23,176.4 $ 6,901.3 _________ _________ _________ _________ __________ __________ _________ _________ _________ _________ __________ __________ Discontinued Operations $ 316.0 $ - $16,088.9 $ 1,425.5 $ 46.7 $ 4,390.8 _________ _________ _________ _________ __________ __________ _________ _________ _________ _________ __________ __________ Other income (including Amortization of Net realized Current deferred policy Other investment capital gains and future acquisition operating Premiums Segment income (2) and losses) benefits costs expenses written (3) _______ ___________ _____________ __________ ____________ __________ _________ (Millions) Aetna Health Plans $ 351.6 $ 1,176.0 $ 4,755.1 $ 40.5 $ 1,805.4 $ 4,669.8 Aetna Life Insurance & Annuity 958.7 310.4 916.1 27.4 258.9 - International 308.4 101.5 782.7 65.7 349.8 199.0 Large Case Pensions 2,017.4 103.4 2,175.9 - 98.2 - Corporate (4.7) (5.0) 22.2 - 293.6 - _________ _________ _________ _________ _________ _________ Total continuing operations $ 3,631.4 $ 1,686.3 $ 8,652.0 $ 133.6 $ 2,805.9 $ 4,868.8 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Discontinued Operations $ 832.1 $ 116.0 $ 3,746.8 $ 647.2 $ 914.1 $ 4,467.1 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Includes minimal property-casualty business. (2) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (3) Excludes life insurance business pursuant to Regulation S-X.
53 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Supplementary Insurance Information As of and for the year ended December 31, 1993
Deferred Unpaid Policyholders' policy Future claims funds left acquisition policy and claim Unearned with the Premium Segment costs benefits expenses premiums company revenue _______ ___________ _________ _________ _________ ___________ _________ (Millions) Aetna Health Plans $ 73.5 $ 2,513.8 $ 1,228.0 (1)$ 129.7 $ 697.2 $ 4,700.6 Aetna Life Insurance & Annuity 1,033.0 3,066.2 15.4 - 9,207.2 125.7 International 421.5 1,964.3 78.0 25.6 1,318.1 909.5 Large Case Pensions - 10,027.0 1.2 - 16,318.5 185.9 Corporate - 16.9 - - - - _________ _________ _________ _________ _________ _________ Total continuing operations $ 1,528.0 $17,588.2 $ 1,322.6 $ 155.3 $27,541.0 $ 5,921.7 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Discontinued Operations $ 329.6 $ - $15,789.6 $ 1,346.9 $ 51.2 $ 4,653.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Other income (including Amortization of Net realized Current deferred policy Other investment capital gains and future acquisition operating Premiums Segment income (2) and losses) benefits costs expenses written (3) _______ ___________ _____________ __________ ____________ __________ _________ (Millions) Aetna Health Plans $ 376.3 $ 1,029.1 $ 3,989.3 $ 29.4 $ 1,672.4 $ 3,751.9 Aetna Life Insurance & Annuity 962.4 307.2 882.9 20.6 318.5 - International 311.6 58.2 860.1 51.7 365.3 195.0 Large Case Pensions 2,327.7 52.4 2,428.1 - 142.1 - Corporate (11.4) 4.5 28.8 - 295.2 - __________ _________ _________ _________ _________ _________ Total continuing operations $ 3,966.6 $ 1,451.4 $ 8,189.2 $ 101.7 $ 2,793.5 $ 3,946.9 __________ _________ _________ _________ _________ _________ __________ _________ _________ _________ _________ _________ Discontinued Operations $ 952.4 $ 322.3 $ 4,214.7 $ 646.2 $ 1,172.7 $ 4,464.7 __________ _________ _________ _________ _________ _________ __________ _________ _________ _________ _________ _________ (1) Includes minimal property-casualty business. (2) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (3) Excludes life insurance business pursuant to Regulation S-X.
54 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE IV Reinsurance*
For the years ended December 31, (Millions) Percentage Ceded to Assumed of amount Gross other from other Net assumed amount companies companies amount__ to net___ ______ _________ _________ ________ _________ 1995** ____ Premiums: Life insurance $ 2,171.5 $ 72.1 $ 43.9 $ 2,143.3 2.0% Accident and health insurance 5,286.4 48.3 9.4 5,247.5 .2 Property-casualty insurance 98.2 57.6 - 40.6 - _________ _________ _________ _________ Total premiums $ 7,556.1 $ 178.0 $ 53.3 $ 7,431.4 .7% _________ _________ _________ _________ _________ _________ _________ _________ 1994** ____ Premiums: Life insurance $ 2,082.9 $ 64.6 $ 37.8 $ 2,056.1 1.8% Accident and health insurance 4,852.3 63.0 17.1 4,806.4 .4 Property-casualty insurance 98.1 60.5 1.2 38.8 3.1 _________ _________ _________ _________ Total premiums $ 7,033.3 $ 188.1 $ 56.1 $ 6,901.3 .8% _________ _________ _________ _________ _________ _________ _________ _________ 1993** ____ Premiums: Life insurance $ 1,966.1 $ 78.0 $ 63.9 $ 1,952.0 3.3% Accident and health insurance 3,885.2 47.5 28.0 3,865.7 .7 Property-casualty insurance 100.0 80.2 84.2 104.0 81.0 _________ _________ _________ _________ Total premiums $ 5,951.3 $ 205.7 $ 176.1 $ 5,921.7 3.0% _________ _________ _________ _________ _________ _________ _________ _________ ________________________ * Excludes intercompany transactions. ** Net life insurance in force was $381.0 million, $376.4 million and $384.9 million at December 31, 1995, 1994 and 1993, respectively.
55 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE V Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 1995 (Millions) Additions _________________________ General Reserve Balance allocated at Balance to December Charged Charged Balance at Experience 31, 1994 to cost to other at end beginning Rated as and accounts- Deductions- of of period products (1) adjusted expenses (2) describe (3) describe (4) period _____________ ____________ ________ ___________ ___________ ___________ ______ Asset valuation reserves - continuing operations Mortgage loans $ 647.5 $ 208.5 $ 856.0 $ 10.4 $ (5.0) $ (256.5) $ 604.9 Real estate 111.4 - 111.4 3.3 55.5 (39.6) 130.6 Other 6.0 - 6.0 - - (3.2) 2.8 ____________ _________ __________ ___________ ___________ ___________ _______ $ 764.9 $ 208.5 $ 973.4 $ 13.7 $ 50.5 $ (299.3) $ 738.3 _____________ __________ __________ ___________ ___________ ___________ _______ _____________ __________ __________ ___________ ___________ ___________ _______ Asset valuation reserves - Discontinued Operations Mortgage loans $ 136.6 $ - $ 136.6 $ 6.4 $ - $ (77.3) $ 65.7 Real estate 34.3 - 34.3 (16.4) - (2.8) 15.1 _____________ __________ __________ ____________ ___________ ___________ _______ $ 170.9 $ - $ 170.9 $ (10.0) $ - $ (80.1) $ 80.8 _____________ __________ __________ ___________ ___________ __________ _______ _____________ __________ __________ ___________ ___________ __________ _______ ________________________ (1) The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. (2) Charged to net realized capital gains (losses) in the Consolidated Statements of Income. (3) Reflects additions to reserves related to assets supporting experience rated contracts and discontinued products for which a corresponding reduction was included in Policyholders' Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future losses, respectively. (4) Reduction in reserves is primarily a result of related asset write-downs (including foreclosures of real estate) and sales.
56 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE V Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 1994 (Millions) Additions _________________________ Charged Balance at Charged to to other Balance beginning costs and accounts- Deductions- at end of of period expenses (1) describe (2) describe (3) period___ _________ ___________ ____________ ___________ _________ Asset valuation reserves - continuing operations Debt securities $ 79.0 $ 3.8 $ 14.7 $ (97.5) $ - Mortgage loans 1,122.4 47.2 197.9 (720.0) 647.5 Equity securities 3.3 - - (3.3) - Real estate 214.4 (4.5) 24.2 (122.7) 111.4 Other 6.0 - - - 6.0 _________ _________ _________ _________ _________ $ 1,425.1 $ 46.5 $ 236.8 $ (943.5) $ 764.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Asset valuation reserves - Discontinued Operations Debt securities $ 23.8 $ (1.1) $ - $ (22.7) $ - Mortgage loans 185.9 56.1 - (105.4) 136.6 Equity securities 7.3 - - (7.3) - Real estate 53.3 3.3 - (22.3) 34.3 _________ _________ _________ _________ _________ $ 270.3 $ 58.3 $ - $ (157.7) $ 170.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ ________________________ (1) Charged to net realized capital gains (losses) in the Consolidated Statements of Income. (2) Reflects additions to reserves related to assets supporting experience rated contracts and discontinued products for which a corresponding reduction was included in Policyholders' Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future losses, respectively. (3) Reduction in reserves is primarily a result of related asset write-downs (including foreclosures of real estate) and sales.
57 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE V Valuation and Qualifying Accounts and Reserves
For the year ended December 31, 1993 (Millions) Additions _________________________ Charged Balance at Charged to to other Balance beginning costs and accounts- Deductions- at end of of period expenses (1) describe (2) describe (3) period___ _________ ___________ ____________ ___________ _________ Asset valuation reserves - continuing operations Debt securities $ 65.6 $ 18.6 $ 12.5 $ (17.7) $ 79.0 Mortgage loans 944.8 324.1 176.5 (323.0) 1,122.4 Equity securities 2.5 .8 - - 3.3 Real estate 65.4 125.8 79.3 (56.1) 214.4 Other 6.0 - - - 6.0 _________ _________ _________ _________ _________ $ 1,084.3 $ 469.3 $ 268.3 $ (396.8) $ 1,425.1 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Asset valuation reserves - Discontinued Operations Debt securities $ 39.6 $ (4.1) $ - $ (11.7) $ 23.8 Mortgage loans 120.8 97.6 - (32.5) 185.9 Equity securities 10.0 - - (2.7) 7.3 Real estate 3.4 50.9 - (1.0) 53.3 _________ _________ _________ _________ _________ $ 173.8 $ 144.4 $ - $ (47.9) $ 270.3 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ ________________________ (1) Charged to net realized capital gains (losses) in the Consolidated Statements of Income. (2) Reflects additions to reserves related to assets supporting experience rated contracts and discontinued products for which a corresponding reduction was included in Policyholders' Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future losses, respectively. (3) Reduction in reserves is primarily a result of related asset write-downs (including foreclosures of real estate) and sales.
58 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE VI Supplemental Information Concerning Property-Casualty Operations (1)
For the years ended December 31, (Millions) Reserves for Discount deducted Deferred unpaid claims from reserves for Affiliation policy and claim unpaid claims with acquisition adjustment and claim Unearned Earned registrant costs expenses(2) adjustment expenses(3) premiums premiums ___________ ___________ _____________ ___________________ ________ ________ 1995 Consolidated property- casualty entities $ 306 $11,745 $ 750 $ 1,400 $ 4,119 1994 Consolidated property- casualty entities $ 316 $11,144 $ 644 $ 1,426 $ 4,391 1993 Consolidated property- casualty entities $ 330 $11,412 $ 634 $ 1,347 $ 4,653 Claims and claim Paid adjustment expenses claims Affiliation Net incurred related to: Amortization of and claim ___________________ with investment Current Prior deferred policy adjustment Premiums registrant income year(4) years(4) acquisition costs expenses written ___________ __________ _______ ______ _________________ __________ ________ 1995 Consolidated property- casualty entities $ 902 $ 3,099 $ 1,134 $ 623 $ 3,632 $ 4,085 1994 Consolidated property- casualty entities $ 832 $ 3,488 $ 259 $ 647 $ 4,015 $ 4,467 1993 Consolidated property- casualty entities $ 952 $ 3,536 $ 65 $ 646 $ 3,922 $ 4,465 (1) Excludes International. (2) Net of reinsurance, deductible amounts recoverable from policyholders in 1995 and 1994 and discounting. (3) Reserves for workers' compensation life table indemnity claims are discounted at 5% for voluntary business and 3.5% for involuntary business. Certain other reserves with fixed or reasonably determinable payment patterns over periods of up to 7 years, including reserves related to a small number of environmental and asbestos-related claims settlements, have also been discounted. The rates used in discounting such reserves range from 4% to 7%. (4) Net of reinsurance and discounting.
59 SIGNATURES Pursuant to the requirements of Section 13 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. Date: February 26, 1996 AETNA LIFE AND CASUALTY COMPANY (Registrant) By /s/ Robert J. Price _______________________________ (Signature) Robert J. Price Vice President and Corporate Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 26, 1996. Signature Title * Chairman, President and Director ________________________ Ronald E. Compton (Principal Executive Officer) * ________________________ Wallace Barnes Director * ________________________ William H. Donaldson Director * ________________________ Barbara Hackman Franklin Director * ________________________ Earl G. Graves Director * ________________________ Gerald Greenwald Director * ________________________ Ellen M. Hancock Director * ________________________ Michael H. Jordan Director * ________________________ Jack D. Kuehler Director * ________________________ Frank R. O'Keefe, Jr. Director * ________________________ Judith Rodin Director * ________________________ Richard L. Huber Vice Chairman for Strategy and Finance (Principal Financial Officer) /s/ Robert J. Price ________________________ Robert J. Price Vice President and Corporate Controller (Controller) * By /s/ Robert J. Price ________________________ Robert J. Price (Attorney-in-Fact) 60 INDEX TO EXHIBITS
Exhibit Filing Number Description of Exhibit Method ______ ______________________ ______ (10) Material Contracts (10.1) Stock Purchase Agreement dated as of November 28, 1995 between Electronic The Travelers Insurance Group Inc. and Aetna Life and Casualty Company relating to the purchase and sale of 100% of the Common Stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance Company. (10.2) Letter Agreement, dated January 19, 1995, between Aetna Life Electronic and Casualty Company and Richard L. Huber. (10.3) Employment Agreement, dated as of October 27, 1995, between Aetna Electronic Life and Casualty Company and Gary G. Benanav. (10.4) Employment Agreement, dated as of January 29, 1996, between Aetna Electronic Life and Casualty Company and Ronald E. Compton. (10.5) Employment Agreement, dated as of December 19, 1995, between Aetna Electronic Life and Casualty Company and Daniel P. Kearney. (10.6) Employment Agreement, dated as of January 19, 1996, between Aetna Electronic Life and Casualty Company and James W. McLane. (12) Statement re computation of ratios. Electronic Statement re: computation of ratio of earnings to fixed charges. Statement re: computation of ratio of earnings to combined fixed charges and preferred stock dividends. (13) Annual Report to security holders. Electronic Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements and the report of the company's independent auditors, and unaudited Quarterly Data from the Annual Report. (21) Subsidiaries of the registrant. Electronic A listing of subsidiaries of Aetna Life and Casualty Company. (23) Consents of experts and counsel. Electronic Consent of Independent Auditors to Incorporation by Reference in the Registration Statements on Form S-3 and Form S-8. (24) Powers of Attorney. Electronic (27) Financial Data Schedule. Electronic (28) Information from reports furnished to state insurance regulatory Paper authorities. 1995 Consolidated Schedule P of Annual Statements provided to state regulatory authorities.
EX-10 2 MATERIAL CONTRACTS 1 STOCK PURCHASE AGREEMENT Dated as of November 28, 1995 between THE TRAVELERS INSURANCE GROUP INC. and AETNA LIFE AND CASUALTY COMPANY relating to the purchase and sale of 100% of the Common Stock of THE AETNA CASUALTY AND SURETY COMPANY and THE STANDARD FIRE INSURANCE COMPANY 2 TABLE OF CONTENTS Page ____ ARTICLE 1 DEFINITIONS 1.1 Definitions..............................................2 ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale........................................9 2.2 Closing..................................................9 2.3 September Balance Sheets................................12 2.4 Certain Contributions and Adjustments...................15 2.5 Portfolio Adjustment....................................16 2.6 Post-Closing Payments...................................18 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER 3.1 Corporate Existence and Power...........................18 3.2 Corporate Authorization.................................19 3.3 Governmental Authorization..............................20 3.4 Non-Contravention.......................................20 3.5 Capitalization..........................................21 3.6 Ownership of Shares.....................................22 3.7 Subsidiaries............................................22 3.8 Financial Statements; SEC Reports.......................24 3.9 Absence of Certain Changes..............................25 3.10 No Undisclosed Material Liabilities; Investments........29 3.11 Material Contracts......................................31 3.12 Litigation..............................................34 3.13 Compliance with Laws....................................36 3.14 Properties..............................................36 3.15 Licenses and Permits; Policies; Regulatory Matters......37 3.16 ERISA Representations...................................38 3.17 Environmental Matters...................................40 3.18 Intercompany Accounts...................................44 3.19 No Representation with Respect to Reserves..............45 3.20 Intellectual Property; Software.........................45 3.21 Labor Matters...........................................47 3.22 Loans and Advances......................................47 3.23 All Assets Necessary....................................48 3.24 Certain Policies........................................48 3.25 Disclosure..............................................49 i 3 Page ____ ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER 4.1 Corporate Existence and Power...........................49 4.2 Corporate Authorization.................................49 4.3 Governmental Authorization..............................50 4.4 Non-Contravention.......................................50 4.5 Financing...............................................51 4.6 Purchase for Investment.................................51 ARTICLE 5 COVENANTS OF SELLER 5.1 Conduct of the Companies................................52 5.2 Access to Information...................................58 5.3 Notices of Certain Events...............................59 5.4 Resignations............................................60 5.5 Covenant Not to Compete.................................60 5.6 No Solicitation.........................................61 5.7 Certain Other Transactions..............................61 5.8 Confidentiality Agreements..............................63 5.9 Other Financial Statements..............................63 5.10 1992 Audit..............................................66 5.11 Use of Computer Software................................66 5.12 Aetna Casualty Company..................................68 ARTICLE 6 COVENANTS OF BUYER 6.1 Confidentiality.........................................68 6.2 Post-Closing Access.....................................68 6.3 AmRe Agreement..........................................69 ARTICLE 7 COVENANTS OF BUYER AND SELLER 7.1 Reasonable Efforts......................................70 7.2 Certain Filings.........................................71 7.3 Public Announcements....................................71 7.4 Trademarks; Trade Names.................................72 7.5 Intercompany Accounts...................................73 7.6 Non-Solicitation of Employees...........................75 7.7 Real Estate.............................................76 7.8 Transition Agreements...................................77 7.9 Post-Closing Access.....................................77 ii 4 Page ____ 7.10 Supplemental Disclosure.................................78 7.11 Investment Portfolio; Real Estate Transactions..........79 7.12 Other Agreements........................................83 7.13 Certain Insurance Policies..............................85 ARTICLE 8 TAX MATTERS 8.1 Definitions.............................................86 8.2 Tax Representations.....................................88 8.3 Tax Covenants...........................................89 8.4 Termination of Existing Tax Sharing Agreements..........92 8.5 Return Filings and Payment of Tax.......................93 8.6 Cooperation on Tax Matters..............................98 8.7 Tax Benefits...........................................100 8.8 Indemnification by Seller..............................110 8.9 Indemnification by Buyer...............................113 8.10 Survival; Exclusivity..................................116 8.11 Purchase Price Adjustment..............................116 8.12 Late Payments..........................................116 8.13 No Duplicative Payments; Offsets.......................117 8.14 Rule of Construction...................................117 8.15 Notices................................................117 8.16 Allocation of Purchase Price...........................117 ARTICLE 9 EMPLOYEES AND EMPLOYEE BENEFITS 9.1 Employees..............................................118 9.2 Pension Plan...........................................118 9.3 Individual Account Plan................................122 9.4 Certain Welfare Benefit Plans..........................123 9.5 Other Employee Benefit Plans and Benefit Arrangements..124 9.6 Plans Following the Closing............................125 9.7 Indemnification........................................131 ARTICLE 10 CONDITIONS TO CLOSING 10.1 Conditions to Obligations of Buyer and Seller.........132 10.2 Conditions to Obligation of Buyer.....................133 10.3 Conditions to Obligation of Seller....................135 iii 5 Page ____ ARTICLE 11 SURVIVAL; INDEMNIFICATION 11.1 Survival..............................................136 11.2 Indemnification.......................................136 11.3 Procedures; Exclusivity...............................137 ARTICLE 12 TERMINATION 12.1 Grounds for Termination...............................138 12.2 Effect of Termination.................................139 ARTICLE 13 MISCELLANEOUS 13.1 Notices...............................................139 13.2 Amendments and Waivers................................140 13.3 Expenses..............................................141 13.4 Successors and Assigns................................141 13.5 Governing Law.........................................141 13.6 Jurisdiction..........................................142 13.7 Counterparts; No Third Party Beneficiaries............142 13.8 Entire Agreement......................................142 13.9 Construction..........................................143 EXHIBITS Exhibit 5.11 Software License Agreement Exhibit 7.4(a) License Agreement Exhibit 7.4(b) Assignment Agreement Exhibit 7.7 Real Estate Term Sheet Exhibit 7.8 Transition Agreement Term Sheet DISCLOSURE SCHEDULES Schedule 2.3(b) Reserve Categories and Amounts Schedule 3.3 Governmental Authorization Schedule 3.4 Non-Contravention Schedule 3.7 Subsidiaries Schedule 3.9 Absence of Certain Changes Schedule 3.9(xiii) Seller's Investment Policies Schedule 3.10(a) No Undisclosed Material Liabilities iv 6 Page ____ Schedule 3.10(b) Company Investment Assets Schedule 3.11 Material Contracts Schedule 3.12 Litigation Schedule 3.13 Compliance with Laws Schedule 3.15 License and Permits; Policies; Regulatory Matters Schedule 3.16(a) Employee Plans Schedule 3.16(c) Certain Non-Multiemployer Employee Plans Schedule 3.16(d)(i) Benefit Arrangement Schedule 3.17 Environmental Matters Schedule 3.18 Intercompany Accounts Schedule 3.20 Software Licenses Schedule 3.21 Labor Matters Schedule 3.22 Loans & Advances Schedule 3.23 All Assets Necessary Schedule 3.24 Certain Policies Schedule 4.3 Governmental Authorization Schedule 4.4 Non-Contravention Schedule 5.1 Conduct of the Companies Schedule 5.5 Covenant Not to Compete Schedule 5.9 Balance Sheet Adjustments Schedule 7.5(c) Certain Liabilities Schedule 7.11(a) Equity Portfolio Schedule 7.11(aa) Securities Not in Equity Portfolio Schedule 7.11(b) Real Estate Transactions Schedule 7.11(c) Shared Mortgages; Cross Collateralized Mortgages; Shared Real Estate Schedule 8.2 Tax Representations Schedule 8.8(a) Cushion Schedule 9.1 P&C Employees Schedule 9.2(a) Reimbursement Formula Schedule 9.3(c) Supplemental Plan Schedule 9.4(a) Certain Welfare Benefit Plans Schedule 9.5(c) Other Employee Benefit Plans and Benefit Arrangements Schedule 9.5(d) ACEShares and APEX Unit Awards Schedule 9.6(c)(i) Severance Plans Schedule 9.6(c)(ii) Affected Employees Schedule 9.6(c)(iii)Certain Employment Agreements Schedule 9.6(c)(iv) Certain Retention Bonus Payments Schedule 9.6(d)(i) 1996 Vacation Days Calculation Schedule 9.6(d)(ii) 1997 Vacations Days Calculation v 7 STOCK PURCHASE AGREEMENT AGREEMENT dated as of November 28, 1995 between The Travelers Insurance Group Inc., a Connecticut stock insurance corporation ("Buyer"), and Aetna Life and Casualty Company, a Connecticut stock insurance corporation ("Seller"). W I T N E S S E T H: WHEREAS, Seller is the record and beneficial owner of all of the issued and outstanding shares of (i) common stock, par value $25,000.00 per share (the "ACSC Common Stock"), of The Aetna Casualty and Surety Company, a Connecticut insurance corporation ("ACSC"), and (ii) common stock, par value $250.00 per share (the "SFIC Common Stock"), of The Standard Fire Insurance Company, a Connecticut insurance corporation ("SFIC" and, together with ACSC, the "Companies") ; and WHEREAS, Seller desires to sell all of the issued and outstanding shares of ACSC Common Stock and SFIC Common Stock (collectively, the "Shares") to Buyer, and Buyer desires to purchase the Shares from Seller, upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: 1 8 ARTICLE 1 DEFINITIONS 1.1 Definitions. (a) The following terms, as used __________ herein, have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person; provided that neither ________ of the Companies nor any of their respective Subsidiaries shall be considered an Affiliate of Seller. "Agreement" means this agreement, including the Disclosure Schedules and Exhibits hereto. "A.M. Best" means A.M. Best Company. "Ancillary Agreements" means (i) the Transition Agreements, (ii) the License Agreement, (iii) the Assignment Agreement, (iv) the Software License Agreement and (v) the agreements referred to in Section 7.7. "Balance Sheet Date" means September 30, 1995. "Benefit Arrangement" means any employment, severance or similar contract, arrangement or policy, or any plan or arrangement (whether or not written) providing for severance benefits, insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation rights or other forms of incentive compensation or post-retirement insurance, compensation or benefits that (i) is not an Employee Plan, (ii) is entered into or maintained, as the case may be, by Seller 2 9 or any of its ERISA Affiliates and (iii) covers any employee or former employee of any of the Companies or any of their Subsidiaries. "Closing Date" means the date of the Closing. "Employee Plan" means any "employee benefit plan," as defined in Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is maintained, administered or contributed to by Seller or any of its ERISA Affiliates and (iii) covers any employee or former employee of any of the Companies or any of their Subsidiaries. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" of any entity means any other entity which, together with such entity, would be treated as a single employer under Section 414 of the Code. "GAAP" means U.S. generally accepted accounting principles. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Individual Account Plan" means the Aetna Life and Casualty Company Incentive Savings Plan. "Lien" means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, encumbrance or other adverse claim of any kind in respect of such property or asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any property or asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional 3 10 sale agreement, capital lease or other title retention agreement relating to such property or asset. "Material Adverse Effect" means, for purposes of Section 3.9 and Article 10 only, with respect to any Person or Persons, a material adverse effect on the financial condition, results of operations, business, assets or liabilities of such Person or Persons and its or their Subsidiaries, taken as whole. "Multiemployer Plan" means each Employee Plan that is a multiemployer plan, as defined in Section 3(37) of ERISA. "Pension Plan" means the Retirement Plan for Employees of the Aetna Life and Casualty Company. "Person" means an individual, corporation, partnership, association, trust, limited liability company or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "SAP" means the accounting procedures and practices prescribed or permitted from time to time by the National Association of Insurance Commissioners and adopted or promulgated by the respective states of incorporation of the Companies and employed in a consistent manner throughout the periods involved. "Subsidiary" means, with respect to any Person, any entity of which securities or other ownership interests having ordinary voting power to elect 50% or more of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Title IV Plan" means an Employee Plan, other than any Multiemployer Plan, subject to Title IV of ERISA. 4 11 "Transition Agreements" means the transition agreements to be entered into in accordance with Section 7.8. (b) Each of the following terms is defined in the Section set forth opposite such term: Term Section ____ _______ ACC 7.12 Acquisition Proposal 5.6 AC&S of Illinois 5.7 Adequate Rating 6.3 Advance Accrual Period 9.2 Aetna Casualty Company 5.12 Aetna Re U.K. Stop Loss 5.7 Affected Employees 9.6 AHP 7.12 ALOI 5.7 AL&C Business 7.12 AL&C Buyer 7.12 AmRe Agreement 6.3 Annual Statements 3.8 Assignment Agreement 7.4 Attributable Amount 8.5 Bond Portfolio 7.11 Buyer Loss 8.8 Buyer Plan 9.3 Claims Provision 3.19 Closing 2.2 Closing Date GAAP Balance Sheet 5.9 Code 8.1 Combined State Tax 8.1 Company Facilities 3.17 Company Investment Assets 3.10 Company Securities 3.5 Confidentiality Agreement 6.1 Continued Employment 9.6 Conveyance Taxes 8.3 Cross Collateralized Mortgages 7.11 Cushion 8.8 Damages 11.2 5 12 Term Section ____ _______ Deemed Closing Date 5.9 Direct Rollover 9.3 Disposal Notice 8.6 Environmental Reports 3.17 Environmental Laws 3.17 Equity Adjustment 2.2 Equity Portfolio 7.11 ERI 7.11 ERI Stock 7.11 Estimated NOL Value 2.2 Estimated Portfolio Adjustment 2.2 Event 8.7 Excluded Taxes 8.8 Federal Tax 8.1 Federal Tax Detriment 8.7 Final Determination 8.1 Final NOL Value 2.2 Final Portfolio Adjustment 2.5 Fund Balance 6.3 GAAP Equity Adjustment 2.2 Hazardous Substances 3.17 Immediate Parent 6.3 Indemnified Party 11.3 Indemnifying Party 11.3 Intellectual Property 3.20 Independent Accountants 2.3 License Agreement 7.4 Maximum Annual Contribution 9.2 MBIA 7.11 MBIA Stock 7.11 Mortgaged Properties 3.17 New Plan 9.2 NOL Value 2.2 NOLs 8.1 Notifying Party 8.6 Notified Party 8.6 Obligor 6.3 P&C Employees 9.1 Permits 3.15 Permitted Capital Contribution 2.2 Points 9.2 Policyholders' Surplus 2.2 Portfolio Adjustment 2.2 Post-Closing Special Items 8.7 Post-Closing Tax Period 8.1 Post-September 30 Special Items 8.7 6 13 Term Section ____ _______ Post-September 30 Tax Period 8.1 Pre-September 30 Tax Period 8.1 Prior Welfare Plan 9.4 Purchase Price 2.2 Reattributed NOLs 8.7 Regulators 3.8 REO 3.17 Replacement Welfare Plans 9.4 Retiree Benefit Program 9.6 Returns 8.2 SAP Equity Adjustment 2.2 SEC 3.8 SEC Reports 3.8 Seller Group 8.1 Seller Loss 8.9 Separate State Income Tax 8.1 Separate State Tax 8.1 September Adjusted Balance Sheets 5.9 September Adjusted GAAP Balance Sheet 5.9 September Adjusted SAP Balance Sheet 5.9 September Audited Balance Sheets 5.9 September Audited GAAP Balance Sheet 5.9 September Audited SAP Balance Sheet 5.9 September Unaudited GAAP Balance Sheet 2.3 September 30 NOL's 2.2 Severance Plans 9.6 Shared Mortgages 7.11 Shared Real Estate 7.11 Significant Agreements 3.11 Software 3.20 Software License Agreement 5.11 Special Item Federal Tax Detriment 8.7 Special Items 8.7 Stockholder's Equity 2.2 Stop Loss Business 7.12 Stop Loss Quota 7.12 Straddle Period 8.1 Subsidiary Securities 3.7 Supplemental Plan 9.3 Tax 8.1 Tax Benefit 8.1 Tax Claim 8.8 Tax Indemnified Party 8.3 Tax Indemnifying Party 8.3 7 14 Term Section ____ _______ Tax Sharing Agreement 8.1 Taxing Authority 8.1 Termination Account 6.3 Transferred Employees 9.1 Transition Committee 5.1 Travelers Plan 9.2 Unaudited September Balance Sheet 3.8 Welfare Transfer Date 9.4 8 15 ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale. Upon the terms and subject to _________________ the conditions of this Agreement, Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller, the Shares at the Closing. 2.2 Closing. The closing (the "Closing") of the _______ purchase and sale of the Shares hereunder shall take place at the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York as soon as possible, but in no event later than two business days, after satisfaction of the conditions set forth in Article 10, or at such other time or place as Buyer and Seller may agree. (a) At the Closing, Buyer shall deliver to Seller, in immediately available funds by wire transfer to an account of Seller designated in writing by Seller, by notice to Buyer not later than two business days prior to the Closing Date, the Purchase Price. The "Purchase Price" shall be: (i) $4,000,000,000, (ii) plus an amount equal to $602,740 per day for each day from and including October 1, 1995 to but not including the Closing Date, (iii) plus the aggregate amount of Permitted Capital Contributions, if any, made by Seller, increased by an amount equal to 0.015068493% of each such Permitted Capital Contribution for each day from and including the date such Permitted Capital Contribution is made to but not including the Closing Date, (iv) minus the Equity Adjustment, if any, if the Equity Adjustment has been determined prior to the Closing Date, increased by an amount equal to 0.015068493% of such Equity Adjustment for each day from and including 9 16 October 1, 1995 to but not including the Closing Date, (v) minus an amount equal to the Estimated NOL Value, and (vi) if the Estimated Portfolio Adjustment is an aggregate net gain, plus an amount equal to such gain, or if the Estimated Portfolio Adjustment is an aggregate net loss, minus an amount (expressed as a positive number) equal to such loss. If the Equity Adjustment has not been determined prior to the Closing Date, the Equity Adjustment, if any, shall be paid in accordance with Section 2.3(e). (b) At the Closing, Seller shall deliver to Buyer certificates for the Shares, duly endorsed or accompanied by stock powers duly endorsed in blank with all appropriate transfer tax stamps affixed. (c) For the purposes of this Agreement, the following terms shall have the following meanings: (i) "Estimated NOL Value" means Seller's good faith estimate of the NOL Value furnished to Buyer (it being understood that Seller shall deliver such estimate not less than five business days prior to the Closing Date together with a statement setting forth the relevant calculations in reasonable detail). (ii) "Estimated Portfolio Adjustment" means the Portfolio Adjustment, as estimated in good faith by Seller and delivered to Buyer not later than five business days prior to the Closing Date. (iii) "Equity Adjustment" means the greater of the GAAP Equity Adjustment and the SAP Equity Adjustment. (iv) "Final NOL Value" means the NOL Value calculated as promptly as practicable after the filing of the Seller Group tax return which includes the Tax period beginning after December 31, 1995 and ending on the Closing Date. (v) "Final Portfolio Adjustment" means the Portfolio Adjustment (i) as shown on Seller's calculation delivered pursuant to Section 2.5(a), if no notice of disagreement with respect thereto has been delivered pursuant to 10 17 Section 2.5(b) and the full period during which such notice may be delivered has elapsed; or (ii) if such a notice of disagreement has been delivered, as agreed by Buyer and Seller pursuant to Section 2.5(c), or in the absence of such agreement, as shown in the Independent Accountants' calculation delivered pursuant to Section 2.5(c). (vi) "GAAP Equity Adjustment" means the amount, if any, by which $3,800,000,000 exceeds Stockholder's Equity (i) as shown on Seller's calculation delivered pursuant to Section 2.3(a), if no notice of disagreement with respect thereto has been delivered pursuant to Section 2.3(b) and the full period during which such notice may be delivered has elapsed; or (ii) if such a notice of disagreement has been delivered, as agreed by Buyer and Seller pursuant to Section 2.3(c), or in the absence of such agreement, as shown in the Independent Accountants' calculation delivered pursuant to Section 2.3(c). (vii) "NOL Value" means the value of the NOLs as of September 30, 1995 as reflected on the September Audited GAAP Balance Sheet without regard to the actual NOLs (the "September 30 NOLs"), reduced by (i) any amounts paid to any of the Companies or any Subsidiaries in respect of such NOLs pursuant to Section 8.7(j) hereof, and (ii) 35% of any taxable income of the Companies and their Subsidiaries for the Post-September 30 Tax Period, determined in accordance with Section 8.5 and without regard to (A) the September 30 NOLs, (B) Post-September 30 Special Items or (C) any additions to reserves claimed with respect to the Post-September 30 Tax Period which satisfy the requirement for reserves relating to a Permitted Capital Contribution. (viii) "Permitted Capital Contribution" means a cash contribution made by Seller to the capital of any of the Companies or their Subsidiaries, (other than as expressly contemplated by this Agreement) with the prior written consent of Buyer. (ix) "Portfolio Adjustment" means the aggregate net after tax gain or aggregate net after tax loss (in either case whether or not realized with taxes calculated on a GAAP basis) on all securities held in the Equity Portfolio during the period from and including October 1, 1995, through the close of business on the business day prior to the Closing Date. Such gains or losses shall be calculated based on the difference between (i) the market value as of the Balance Sheet Date of the securities in the September Audited GAAP Balance Sheet or the cost of acquisition for securities acquired after the Balance Sheet Date and (ii) the proceeds, net of commissions and other direct expenses of disposition, realized in the sale or other disposition, or, in the case of securities not sold or disposed of, the market value of such securities as of the close of business on the business day prior to the Closing Date 11 18 (reduced in the case of shares of common stock of MBIA Inc. by 4.5% of the market value thereof). The Portfolio Adjustment shall be calculated using the same methodology and pricing services for purposes of determining the market value of securities in the Equity Portfolio at the relevant dates. (x) "SAP Equity Adjustment" means the amount, if any, by which $2,700,000,000 exceeds Policyholders' Surplus (i) as shown on Seller's calculation delivered pursuant to Section 2.3(a), if no notice of disagreement with respect thereto has been delivered pursuant to Section 2.3(b) and the full period during which such notice may be delivered has elapsed; or (ii) if such a notice of disagreement has been delivered, as agreed by Buyer and Seller pursuant to Section 2.3(c), or in the absence of such agreement, as shown in the Independent Accountants' calculation delivered pursuant to Section 2.3(c). (xi) "Stockholder's Equity" means the total shareholder's equity of the Companies and their Subsidiaries as shown on the September Adjusted GAAP Balance Sheet plus an amount equal to $300,000,000. (xii) "Policyholders' Surplus" means the total policyholders' surplus of the Companies and their Subsidiaries as shown on the September Adjusted SAP Balance Sheet plus an amount equal to $300,000,000. 2.3 September Balance Sheets. (a) As promptly as ________________________ practicable, but no later than 60 days after the date hereof, Seller will cause to be prepared and delivered to Buyer the September Adjusted GAAP Balance Sheet and the September Adjusted SAP Balance Sheet and the related reports of KPMG Peat Marwick LLP thereon, and the certificate of Seller based on such September Adjusted Balance Sheets setting forth Seller's calculations of the Equity Adjustment, Stockholder's Equity and Policyholders' Surplus, all in accordance with Section 5.9. (b) If Buyer disagrees with any item or amount reflected on or omitted from the September Adjusted GAAP Balance Sheet or the September Adjusted SAP Balance Sheet or with Seller's calculations of the Equity Adjustment, Stockholder's Equity or Policyholders' Surplus delivered pursuant to Section 2.3(a), Buyer may, within 30 days after delivery of the documents referred to in Section 2.3(a), deliver 12 19 a notice to Seller disagreeing with such calculation and setting forth Buyer's calculation of such amount. Any such notice of disagreement shall specify those items or amounts as to which Buyer disagrees, and Buyer shall be deemed to have agreed with all other items and amounts reflected on or omitted from the September Adjusted GAAP Balance Sheet, September Adjusted SAP Balance Sheet and the calculation of the Equity Adjustment, Stockholder's Equity or Policyholders' Surplus delivered pursuant to Section 2.3(a) not the subject of such disagreement. Notwithstanding the foregoing, (i) Buyer shall not be entitled to deliver a notice of disagreement with respect to (A) the amounts of liabilities in respect of any major category of the unpaid claims and claim expenses as shown on Schedule 2.3(b) if such amounts in respect of such major category reflected on the September Adjusted Balance Sheets are at least equal to the corresponding amounts reflected on the September Unaudited GAAP Balance Sheet or the September Unaudited SAP Balance Sheet, as the case may be, or (B) the amounts accrued for vacation liabilities reflected on the September Adjusted Balance Sheets if such amounts are accurately determined in accordance with Schedule 5.9, and (ii) Buyer shall not be entitled to deliver any notice of disagreement unless Buyer's calculation of Stockholder's Equity or Policyholders' Surplus as shown in such notice is lower by at least $5,000,000 than the amount thereof shown on the September Adjusted GAAP Balance Sheet or the September Adjusted SAP Balance Sheet, respectively. (c) If a notice of disagreement shall be delivered pursuant to Section 2.3(b), Seller and Buyer shall, during the 30 days following such delivery, use their best efforts to reach agreement on the disputed items or amounts in order to 13 20 determine, as may be required, the Stockholder's Equity or Policyholders' Surplus. If, during such period, Seller and Buyer are unable to reach such agreement, they shall promptly thereafter cause a recognized firm of independent certified accountants of national repute mutually acceptable to Seller and Buyer (the "Independent Accountants") promptly to review this Agreement and the disputed items or amounts for the purpose of calculating the Equity Adjustment, Stockholder's Equity and Policyholders' Surplus. In making such calculation, the Independent Accountants shall consider only those items or amounts reflected on or omitted from the September Adjusted Balance Sheets or Seller's calculation of Stockholder's Equity and Policyholders' Surplus as to which Buyer has disagreed. The Independent Accountants shall deliver to Seller and Buyer, as promptly as practicable, a report setting forth such calculation. Such report shall be final and binding upon Seller and Buyer. The cost of such review and report shall be borne (i) by Seller if the difference between the Equity Adjustment and the Equity Adjustment as based upon Seller's calculation delivered pursuant to Section 2.3(a) is greater than the difference between the Equity Adjustment and the Equity Adjustment based on Buyer's calculation delivered pursuant to Section 2.3(b), (ii) by Buyer if the first such difference is less than the second such difference and (iii) otherwise equally by Seller and Buyer. In no event will the Equity Adjustment, as finally determined pursuant to this Section 2.3(c), be less than the amount thereof shown in Seller's calculations delivered pursuant to Section 2.3(a) or more than the amount thereof shown in Buyer's calculations delivered pursuant to Section 2.3(b). 14 21 (d) Seller agrees that it will, and agrees to cause its independent accountants and (prior to the Closing Date) the Companies and their Subsidiaries to, cooperate with Buyer and its independent accountants and assist them in the conduct of their review of the September Adjusted Balance Sheets, including without limitation, the making available to the extent necessary of books, records, work papers and personnel. (e) If the amount of the Equity Adjustment is determined after the Closing Date, then within five business days after such determination, Seller shall pay to Buyer the amount of the Equity Adjustment, increased by an amount equal to 0.015068493% thereof for each day from and including October 1, 1995 to but not including the date of such payment. Any such amount shall be deemed to be an adjustment to the Purchase Price. 2.4 Certain Contributions and Adjustments. (a) _____________________________________ Seller agrees that it will, on or prior to December 31, 1995, make a cash capital contribution to the Companies of $300 million, increased by an amount equal to 0.015068493% thereof for each day from and including October 1, 1995 to but not including the date of such contribution. (b) In the event that the Final NOL Value is greater than the Estimated NOL Value, Seller shall pay to Buyer an amount equal to such difference. In the event that the Estimated NOL Value is greater than the Final NOL Value, Buyer shall pay to Seller an amount equal to such difference. In either event, such payment shall be made within five business days from the date of the determination of the Final NOL Value, increased by an amount equal to 0.015068493% thereof per 15 22 day for each day from and including the Closing Date to but not including the date of such payment. Any such amount shall be deemed an adjustment to the Purchase Price. 2.5 Portfolio Adjustment. (a) As promptly as ____________________ practicable following the Closing Date, Seller shall calculate the Portfolio Adjustment and deliver to Buyer a certificate setting forth such calculation in reasonable detail. (b) If Buyer disagrees with the calculation delivered pursuant to Section 2.5(a), Buyer may, within 30 days after delivery of such calculation, deliver a notice to Seller disagreeing with such calculation and setting forth Buyer's calculation of such amount. Any such notice of disagreement shall specify those items or amounts as to which Buyer disagrees, and Buyer shall be deemed to have agreed with all other items and amounts contained in the calculation delivered by Seller. (c) If a notice of disagreement shall be delivered pursuant to Section 2.5(b), Seller and Buyer shall, during the 30 days following such delivery, use their best efforts to reach agreement on the disputed items or amounts in order to determine the Portfolio Adjustment. If, during such period, Seller and Buyer are unable to reach such agreement, they shall promptly thereafter cause the Independent Accountants promptly to review this Agreement and the disputed items or amounts for the purpose of calculating the Portfolio Adjustment. In making such calculation, the Independent Accountants shall consider only those items or amounts in Seller's calculation as to which Buyer has disagreed. The Independent Accountants shall deliver to Seller and Buyer, as promptly as practicable, a report setting forth such 16 23 calculation. Such report shall be final and binding upon Seller and Buyer. In no event shall the Portfolio Adjustment determined pursuant to this paragraph (c) be determined to be a greater gain or smaller loss, as the case may be, than as shown in Seller's calculations delivered pursuant to Section 2.5(a) or a smaller gain or greater loss, as the case may be, than as shown in Buyer's calculations delivered pursuant to Section 2.5(b). The cost of such review and report shall be borne (i) by Seller if the difference between the Final Portfolio Adjustment and the Portfolio Adjustment as calculated by Seller and set forth on the certificate delivered pursuant to Section 2.5(a) is greater than the difference between the Final Portfolio Adjustment and the Portfolio Adjustment as calculated by Buyer and set forth on the notice of disagreement delivered pursuant to Section 2.5(b), (ii) by Buyer if the first such difference is less than the second such difference and (iii) otherwise equally by Seller and Buyer. (d) Seller and Buyer agree that they will, and agree to cause their respective independent accountants and the Companies and their Subsidiaries to, cooperate and assist in the calculation of the Portfolio Adjustment and in the conduct of the reviews referred to in this Section, including without limitation, the making available to the extent necessary of books, records, work papers and personnel. (e) If the Final Portfolio Adjustment differs from the Estimated Portfolio Adjustment, then Seller shall pay to Buyer or Buyer shall pay to Seller an amount equal to such difference so that Buyer has paid the Purchase Price it would have paid and Seller has received the Purchase Price it would have received had the Final Portfolio Adjustment been used to determine the Purchase Price. Such payment 17 24 shall be made within five business days from the date of the determination of the Final Portfolio Adjustment, together with an amount equal to 0.015068493% of such difference per day for each day from and including the Closing Date to but not including the date of such payment. Any such amount shall be deemed to be an adjustment of the Purchase Price. 2.6 Post-Closing Payments. All payments made to Buyer _____________________ or Seller after the Closing Date under this Agreement shall be paid in immediately available funds by wire transfer to an account of the payee designated in writing by the payee, by notice to the payor, not later than two business days prior to the date the payment is due. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as of the date hereof and as of the Closing Date (but as of no other dates unless expressly so stated) that: 3.1 Corporate Existence and Power. Seller has been _____________________________ duly incorporated and is validly existing as an insurance corporation in good standing under the laws of the State of Connecticut and has all corporate powers required to carry on its business as now conducted. Each Company (i) has been duly incorporated and is validly existing as an insurance corporation in good standing under the laws of the State of Connecticut, (ii) has all corporate powers required to carry on its business as now conducted, (iii) has all material governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted 18 25 and (iv) is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, or is duly licensed to do business as an insurer and is in good standing in each jurisdiction where such licensing is necessary, as the case may be, except for those jurisdictions where failure to be so qualified or licensed, as the case may be, would not, individually or in the aggregate, have a material adverse effect on the Companies and their Subsidiaries, taken as a whole. Seller has heretofore delivered or made available to Buyer true and complete copies of the certificate of incorporation and bylaws of Seller, each Company and the Subsidiaries of the Companies as in effect on the date hereof. Neither of the Companies nor any of their respective Subsidiaries is in violation of any of the provisions of its certificate of incorporation or by-laws. 3.2 Corporate Authorization. The execution, delivery _______________________ and, subject to the receipt of the approvals referred to in Section 3.3, performance by Seller of this Agreement and the Ancillary Agreements to which Seller is a party are within Seller's corporate powers and have been duly authorized by all necessary corporate action on the part of Seller. This Agreement constitutes, and when executed and delivered each Ancillary Agreement to which Seller is a party will constitute, a valid and legally binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and the rights of creditors of insurance companies generally and (ii) general principles of equity (regardless of whether considered in a proceeding at law or in equity). 19 26 3.3 Governmental Authorization. The execution, __________________________ delivery and performance by Seller of this Agreement and each Ancillary Agreement to which Seller is a party require no action by or in respect of, or filing with, any governmental body, agency, or official on the part of Seller or any of its Subsidiaries other than (i) compliance with any applicable requirements of the HSR Act, (ii) approvals or filings under the insurance laws of the jurisdictions set forth on Schedule 3.3, (iii) filings and notices not required to be made or given until after the Closing Date, (iv) filings, at any time, of tax returns, tax reports and tax information statements and (v) any such action or filing as to which the failure to make or obtain would not, individually or in the aggregate, materially impair the ability of the Companies and their Subsidiaries, taken as a whole, to conduct their businesses. 3.4 Non-Contravention. Except as set forth in _________________ Schedule 3.4, the execution, delivery and performance by Seller of this Agreement and each Ancillary Agreement to which Seller is a party do not and will not (i) violate the certificate of incorporation or bylaws of Seller, any Company or any Subsidiary of any Company, (ii) assuming compliance with the matters referred to in Section 3.3, violate any applicable law, rule, regulation, judgment, injunction, order or decree, (iii) require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of any Company or any Subsidiary of any Company or to a loss of any benefit to which any Company or any Subsidiary of any Company is entitled under, any material agreement or other material instrument binding upon any Company or any Subsidiary of any Company or any material license, franchise, permit or other similar 20 27 authorization held by any Company or any Subsidiary of any Company, (iv) result in the creation or imposition of any material Lien on any asset of any Company or any Subsidiary of any Company or (v) cause or constitute a "distribution date," "flip in event" or comparable event under any stockholder rights plan or comparable plan of any Person the capital stock of which is directly or indirectly beneficially owned by any Company or any Subsidiary of any Company (provided that no representation is made in this clause (v) as to the effect of any beneficial ownership of such capital stock by Buyer or any of its Affiliates). 3.5 Capitalization. (a) The authorized capital stock ______________ of ACSC consists of 1,000 shares of ACSC Common Stock. As of the date hereof, there are outstanding 1,000 shares of ACSC Common Stock. The authorized capital stock of SFIC consists of 20,000 shares of SFIC Common Stock. As of the date hereof, there are outstanding 20,000 shares of SFIC Common Stock. (b) All outstanding shares of capital stock of each Company have been duly authorized and validly issued and are fully paid and non-assessable and free of preemptive rights. Except as set forth in this Section 3.5, there are no outstanding (i) shares of capital stock or voting securities of any Company, (ii) securities of any Company convertible into or exchangeable for shares of capital stock or voting securities of any Company or (iii) options or other rights to acquire from any Company, or other obligation of any Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of any Company (the items in clauses (i), (ii) and (iii) being referred to collectively as the "Company Securities"). There are no outstanding obligations of 21 28 any Company or any of their respective Subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. 3.6 Ownership of Shares. Seller is the record and ___________________ beneficial owner of the Shares, free and clear of any Lien and any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of the Shares other than pursuant to generally applicable regulatory requirements), and will transfer and deliver to Buyer at the Closing valid title to the Shares free and clear of any Lien and any such limitation or restriction, except Liens, limitations or restrictions arising as a result of any action taken by Buyer or any of its Affiliates; provided that Seller makes no ________ representation regarding the ability of any Person other than Seller to transfer or otherwise dispose of the Shares without registration or qualification under, or in compliance with, applicable Federal securities or state securities or insurance laws. 3.7 Subsidiaries. (a) Each Subsidiary of each ____________ Company has been duly incorporated or organized and is validly existing as a corporation, partnership or association in good standing under the laws of its jurisdiction of incorporation or organization and has all powers and all material governmental licenses, authoriztions, permits, consents and approvals required to carry on its business as now conducted. Each Subsidiary of each Company is duly qualified to do business as a foreign corporation or organization and is in good standing in each jurisdiction where such qualification is necessary, or is duly licensed to do business as an insurer and is in good standing in each jurisdiction where such licensing is necessary, as the case may be, except for those jurisdictions where failure to be so qualified or licensed, as 22 29 the case may be, would not, individually or in the aggregate, have a material adverse effect on the Companies and their Subsidiaries, taken as a whole. All Subsidiaries of each Company and their respective jurisdictions of incorporation or organization are identified on Schedule 3.7. (b) All outstanding shares of capital stock of each Subsidiary of each Company have been duly authorized and validly issued and are fully paid and non-assessable and free of preemptive rights. As of the Closing Date, except as disclosed in Schedule 3.7, all of the outstanding capital stock of, and other voting securities or ownership interests in, each Subsidiary of each Company will be owned by one of the Companies, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other voting securities or ownership interests other than pursuant to generally applicable regulatory requirements). Except as set forth in Schedule 3.7, there are no outstanding (i) securities of any of the Companies or any of their respective Subsidiaries convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary of any Company or (ii) options or other rights to acquire from any of the Companies or any of their respective Subsidiaries, or other obligations of any of the Companies or any of their respective Subsidiaries to issue, any capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any capital stock or other voting securities or ownership interests in, any Subsidiary of any of the Companies (the items in clauses (i) and (ii) being referred to collectively as the "Subsidiary Securities"). There are no outstanding 23 30 obligations of any of the Companies or any of their respective Subsidiaries to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. 3.8 Financial Statements; SEC Reports. (a) The _________________________________ audited combined balance sheet of the Companies and their Subsidiaries as of December 31, 1993 and December 31, 1994 and the related combined statements of income and cash flows for each of the years ended December 31, 1993 and December 31, 1994 and the unaudited combined balance sheet of the Companies and their Subsidiaries as of September 30, 1995 (the "Unaudited September Balance Sheet") and the related combined statement of income for the nine months ended September 30, 1995, respectively, previously delivered to Buyer, present fairly, in all material respects, the combined financial position of the Companies and their Subsidiaries as of the dates thereof and the combined results of operations of the Companies and their Subsidiaries for the periods then ended in conformity with GAAP consistently applied (subject to normal year-end adjustments in the case of the unaudited interim financial statements). (b) The audited balance sheets of the Companies and their Subsidiaries as of December 31, 1994, and the related statements of operations and statements of cash flows for the year then ended, and their respective Annual Statements for the fiscal year ended December 31, 1994 (the "Annual Statements") filed with the insurance regulatory authorities in their respective jurisdictions of domicile (collectively, the "Regulators"), copies of which have been delivered to Buyer, fairly present in all material respects their respective statutory financial conditions as of such date and the results of their respective operations for the year then ended in 24 31 conformity with SAP. The other information contained in the Annual Statements fairly presents in all material respects the information required to be contained therein in conformity with SAP. The balance sheets of the Companies and their Subsidiaries in respect of any period ending after December 31, 1994, and the related statements of operations and statements of cash flows, which have been filed with Regulators, copies of which have been delivered to Buyer, fairly present in all material respects their respective statutory financial conditions as of such date and the results of their respective operations for the period then ended in conformity with SAP consistently applied. (c) As of the date of the latest filing of an SEC Report, the SEC Reports taken as a whole, including, without limitation, any financial statements or schedules included therein, did not contain with regard to Seller's property casualty business segments taken as a whole any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, it being understood that for purposes of this subparagraph (c) "material" is to be assessed in the context of Seller and all of its Subsidiaries taken as a whole. As used herein, "SEC Reports" means all forms, reports and documents filed by Seller with the Securities and Exchange Commission (the "SEC") since January 1, 1992 and prior to the date hereof to the extent they contain any information relating to Seller's property casualty business segments. 3.9 Absence of Certain Changes. Except as disclosed __________________________ in Schedule 3.9, during the period from the Balance Sheet Date to the date hereof, the business 25 32 of the Companies and their Subsidiaries has been conducted in the ordinary course consistent with past practices (including, without limitation, with regard to underwriting, pricing, actuarial and investment policies generally) and there has not been: (i) any event, occurrence, development or state of circumstances or facts which has had or would reasonably be expected to have a Material Adverse Effect on the Companies, other than those resulting from changes in general economic conditions; (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of any Company, or any repurchase, redemption or other acquisition by any Company or any Subsidiary of any Company of any outstanding shares of capital stock or other securities of, or other ownership interests in, any Company or any Subsidiary of any Company; (iii) any incurrence, assumption or guarantee by any Company or any Subsidiary of any Company of any indebtedness for borrowed money other than in the ordinary course of business and in amounts and on terms consistent with past practices; (iv) any transaction or commitment made, or any contract or agreement entered into, by any Company or any Subsidiary of any Company (including the acquisition or disposition of any assets) or any relinquishment by any Company or any Subsidiary of any 26 33 Company of any contract or other right, other than transactions and commitments in the ordinary course of business consistent with past practices, or any acquisition of assets or incurrence of liabilities by any Company or any Subsidiary of any Company which are not primarily related to the property and casualty insurance business of the Companies and their Subsidiaries; (v) any change in any method of accounting or accounting practice or policy (including, without limitation, any reserving method, practice or policy) by any Company or any Subsidiary of any Company, except for any such change as a result of a concurrent change in GAAP or SAP; (vi) to the extent payable directly or indirectly by any Company or any Subsidiary of any Company, any (A) employment, deferred compensation, severance, retirement or other similar agreement entered into with any director, officer or employee engaged in Seller's property/casualty business (or any amendment to any such existing agreement), (B) grant of any severance or termination pay to any director, officer or employee engaged in Seller's property/casualty business other than in the ordinary course of business, (C) change in compensation or other benefits payable to any director, officer or employee engaged in Seller's property/casualty business, other than (x) increases in base compensation in the ordinary course of business consistent with past practice (but in no event greater than 4 1/2% in the 27 34 aggregate on a per annum basis for all such individuals as a group), (y) with respect to directors or officers, changes in benefits required by plans and arrangements in effect as of the Balance Sheet Date and (z) with respect to employees who are not directors or officers, changes in benefits in accordance with plans or arrangements in effect as of the Balance Sheet Date in the ordinary course of business consistent with past practice or (D) loans or advances to any directors, officers or employees engaged in Seller's property/casualty business, except for ordinary travel and business expenses in the ordinary course of business consistent with past practice; (vii) any damage, theft or casualty loss by any Company or any Subsidiary of any Company in an amount exceeding $1,000,000; (viii) any transaction by any Company or any Subsidiary of any Company involving Company Investment Assets other than in the ordinary course of business consistent with past practice; (ix) any change in any material way by any Company or any Subsidiary of any Company in underwriting practices or standards; (x)(i) any entering into of any facultative reinsurance contract, other than in the ordinary course of business consistent with past practice, or (ii) any commutation of any facultative reinsurance 28 35 contract, or (iii) any entering into or any commutation of any reinsurance treaty, by any Company or any Subsidiary of any Company; (xi) any material insurance transaction by any Company or any Subsidiary of any Company other than in the ordinary course of business consistent with past practice; (xii) any significant change by the Company or any Subsidiary of any Company in the compensation structure of, or benefits available to, any significant agent or with respect to agents generally; (xii) any investment made in Company Investment Assets other than in accordance with Seller's investment policies set forth in Schedule 3.9(xiii); or (xiv) any agreement or commitment (contingent or otherwise) by any Company or any Subsidiary of any Company to do any of the foregoing. 3.10 No Undisclosed Material Liabilities; Investments. ________________________________________________ (a) There are no liabilities of any Company or any Subsidiary of any Company of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, other than: (i) liabilities provided for in the Unaudited September Balance Sheet; (ii) liabilities disclosed on Schedule 3.10(a); 29 36 (iii) liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice and in amounts and on terms consistent with past practice; and (iv) other undisclosed liabilities that are not individually or in the aggregate material to the Companies and their Subsidiaries, taken as a whole. (b) Schedule 3.10(b) describes in reasonable detail all Company Investment Assets as of the Balance Sheet Date. For purposes of this Agreement, "Company Investment Assets" means any investment assets (whether or not required by GAAP or SAP to be reflected on a balance sheet) beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by any Company or any Subsidiary of any Company, including, without limitation, bonds, notes, debentures, mortgage loans, collateral loans and all other instruments of indebtedness, stocks, partnership or joint venture interests and all other equity interests, certificates issued by or interests in trusts, derivatives and all other assets acquired for investment purposes. (c) Neither Company nor any Subsidiary of any Company is an "acquiring person" or comparable person under the terms of any stockholder rights plan or comparable plan of any Person the capital stock of which is directly or indirectly beneficially owned by any Company or any Subsidiary of any Company, and no "distribution date," "flip in event" or comparable event has occurred under any such plan as a consequence of such beneficial ownership (provided that no 30 37 representation is made in this paragraph (c) as to the effect of any beneficial ownership of such capital stock by Buyer or any of its Affiliates). 3.11 Material Contracts. (a) Except as disclosed in __________________ Schedule 3.11, as of the date hereof, neither of the Companies nor any of their Subsidiaries is a party to or bound by: (i) any lease of real property where any of the Companies or their Subsidiaries are tenants (A) providing for annual base rentals of $1,000,000 or more, (B) expiring after December 1, 2000 or (C) where the Seller or any of its Affiliates holds an equity interest in such real property; (ii) any agreement for the purchase of materials, supplies, goods, services, equipment or other assets, including any license for Software, that provides for either (A) annual payments by any Company or any Subsidiary of any Company of $1,000,000 or more or (B) aggregate payments by any Company or any Subsidiary of any Company of $5,000,000 or more; (iii) any limited partnership, joint venture or other unincorporated business organization or similar arrangement or agreement in which such Company or Subsidiary serves as a general partner or otherwise has unlimited liability, or any other material similar agreement or arrangement; 31 38 (iv) any agreement relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise); (v) any agreement relating to indebtedness for borrowed money or any guarantee or similar agreement or arrangement relating thereto, other than (A) any guarantees issued in the ordinary course of the financial guarantee business of the Companies and their Subsidiaries consistent with past practice and (B) any such agreement with, or relating to, an aggregate outstanding principal amount or guaranteed obligation not exceeding $10,000,000; (vi) any license, franchise or similar agreement material to the Companies and their Subsidiaries, taken as a whole; (vii) any agency, dealer, sales representative, marketing or other similar agreement material to the Companies and their Subsidiaries, taken as a whole; (viii) any agreement that restricts or prohibits any Company or any Subsidiary of any Company from competing with any Person in any line of business or from competing in, engaging in or entering into any line of business in any area and which would so restrict or prohibit any Company or any Subsidiary of any Company after the Closing Date; (ix) any reinsurance treaty or any material facultative reinsurance contract (in each case applicable to insurance in force); 32 39 (x) any significant agreement containing "change in control" or similar provisions relating to change in control of any of the Companies or their Subsidiaries; (xi) any powers of attorney other than those entered into in the ordinary course of business in the surety bond business; (xii) any "stop loss" agreements, other than those entered into in the ordinary course of business consistent with past practice; (xiii) any agreements (other than insurance policies or other similar agreements issued by any Company or any Subsidiary of any Company in the ordinary course of its business) material to the Companies and their Subsidiaries taken as a whole pursuant to which any Company or any Subsidiary of any Company is obligated to indemnify any other person; or (xiv) any agreement with Seller or any of its Affiliates. (b) Seller has hereto fore furnished or made available to Buyer complete and correct copies of the contracts, agreements and instruments listed on Schedule 3.11, each as amended or modified to the date hereof (including any waivers with respect thereto) (the "Significant Agreements"). Except as specifically disclosed on Schedule 3.11, and except to the extent not material to the Companies and their Subsidiaries taken as a whole: each of the Significant Agreements is in full force and effect and enforceable in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other 33 40 similar laws now or hereafter in effect relating to or affecting creditors' rights generally and the rights of creditors of insurance companies generally and (ii) general principles of equity (regardless of whether considered in a proceeding at law or in equity); neither Seller, nor any of the Companies nor any of their Subsidiaries has received any notice (written or oral) of cancellation or termination of, or any expression or indication of an intention or desire to cancel or terminate, any of the Significant Agreements; no Significant Agreement is the subject of, or, to the knowledge of Seller, has been threatened to be made the subject of, any arbitration, suit or other legal proceeding; with respect to any Significant Agreement which by its terms will terminate as of a certain date unless renewed or unless an option to extend such Significant Agreement is exercised, neither Seller, nor any of the Companies nor any of their Subsidiaries has received any notice (written or oral), or otherwise has any knowledge, that any such Significant Agreement will not be so renewed or that any such extension option will not be exercised; and there exists no material event of default or occurrence, condition or act on the part of any Company or any Subsidiary of any Company or, to the knowledge of Seller on the part of the other parties to the Significant Agreements, which constitutes or would constitute (with notice or lapse of time or both) a material breach of or material default under any of the Significant Agreements. 3.12 Litigation. Except as set forth on Schedule 3.12 __________ and, in the case of clause (i) below only, except for any action, suit, investigation or proceeding that involves a claim under any insurance, reinsurance or indemnity policy, fidelity bond, surety bond or similar contract or undertaking issued or entered into by any Company 34 41 or any Subsidiary of any Company, there is no action, suit, investigation or proceeding pending against, or, to the knowledge of Seller, any Company or any Subsidiary of any Company, threatened against, or affecting the properties of, any Company or any Subsidiary of either Company or any of their respective properties before any court or arbitrator or any governmental body, agency or official, and, to the best knowledge of Seller and the Companies, there is no reasonable basis for any such claim (i) in which the actual damages alleged or sought exceeds $1,000,000 or (ii) which alleges a course of conduct that is based on alleged facts that may give rise to a class action lawsuit or (iii) which alleges price-fixing, and in the case of (ii) and (iii), in Seller's judgment, there is a reasonable basis for the assertion of such claim or (iv) which alleges bad faith and, in the case of this clause (iv), in Seller's judgment, there is a reasonable possibility of ultimate liability in excess of $1,000,000 over any reserves which have been established as of the Balance Sheet Date in respect of such case. As of the date hereof and as of no other date, there is no action, suit, investigation or proceeding pending against, or, to the knowledge of Seller, threatened against, or affecting the property of either Company or any Subsidiary of either Company or any of their respective properties before any court or arbitrator or any governmental body, agency or official which challenges or seeks to prevent the transactions contemplated hereby. Except as disclosed in Schedule 3.12, neither Company nor any Subsidiary of any Company nor any of their respective properties is subject to any material order, writ, judgment, injunction, decree, determination or award which would prevent or delay the consummation of the transactions contemplated hereby. As used in this Section 3.12, "knowledge" of 35 42 Seller, any Company or any Subsidiary of any Company means the knowledge of the executive officers, the chief legal or compliance officers of the Seller or the Companies or the senior in-house counsel for property and casualty insurance matters of the Companies and their Subsidiaries. 3.13 Compliance with Laws. Except as set forth in ____________________ Schedule 3.13, the Companies and their Subsidiaries are and have at all times since January 1, 1993 been in compliance in all material respects with all applicable material laws, statutes, ordinances and regulations, whether foreign, Federal, state or local. 3.14 Properties. The Companies and their Subsidiaries __________ have good title to, or in the case of leased property have valid leasehold interests in, all of their respective property and assets (whether real or personal, tangible or intangible) except for imperfections in title or invalidities in leasehold interests that do not, individually or in the aggregate, materially detract from the value reflected on the Unaudited September Balance Sheet. None of such property or assets is subject to any Liens, except: (i) Liens reflected on the Unaudited September Balance Sheet; (ii) Liens for taxes not yet due or being contested in good faith (and for which adequate accruals or reserves have been established on the Unaudited September Balance Sheet); and (iii) Liens which do not, individually or in the aggregate, materially detract from the value reflected on the Unaudited 36 43 September Balance Sheet or materially interfere with any present or intended use of any material property or assets. 3.15 Licenses and Permits; Policies; Regulatory ___________________________________________ Matters. The Companies and their Subsidiaries and, to the _______ knowledge of Seller and the Companies and their Subsidiaries, the significant agents of the Companies and their Subsidiaries, hold all material licenses, franchises, permits or other similar authorizations (the "Permits") necessary for the ownership and conduct of the respective businesses of the Companies, their Subsidiaries and such agents in each of the jurisdictions in which the Companies, their Subsidiaries and such agents conduct or operate their respective businesses in the manner now conducted, and such Permits are in full force and effect except where any failure to hold any Permit or any failure of any Permit to be in full force and effect would not, individually or in the aggregate, materially impair the ability of the Companies and their Subsidiaries, taken as a whole, to conduct their businesses. No material violations exist in respect of any material Permit of the Companies and their Subsidiaries and no proceeding or investigation is pending or, to the knowledge of Seller, threatened, that would be reasonably likely to result in the suspension, revocation or material limitation or restriction of any material Permit and, to the knowledge of Seller, the Companies and their Subsidiaries, there is no reasonable basis for the assertion of any such violation or the institution of any such proceeding. All insurance policies issued by each Company and each Subsidiary of each Company, as now in force are, to the extent required under applicable law, in a form acceptable to applicable regulatory authorities to the knowledge of Seller and the Companies and their Subsidiaries, or have been filed and 37 44 not objected to by such authorities within the period provided for objection. Each Company and each Subsidiary of each Company has filed all material reports, statements, documents, registrations, filings or submissions required to be filed by any Company or any Subsidiary of any Company, respectively, with any applicable Federal, state or local regulatory authorities, including, without limitation, state insurance regulatory authorities. All such reports, statements, documents, registrations, filings and submissions complied in all material respects with applicable law in effect when filed and no material deficiencies have been asserted by any such regulatory authority with respect to such reports, statements, documents, registrations, filings or submissions that have not been satisfied. Except as set forth on Schedule 3.15, all premium rates, rating plans and policy forms established or used by any Company or any Subsidiary of any Company that are required to be filed with or approved by insurance regulatory authorities have been so filed or approved, the premiums charged conform in all material respects to the premiums so filed or approved and comply in all material respects with the insurance laws applicable thereto and to the Seller's knowledge, no such premiums are subject to any review or investigation by any insurance regulatory authority. As used in this Section 3.15, "knowledge" of Seller, or any Company or any Subsidiary of any Company means the knowledge of the executive officers, the chief legal or compliance officers of the Seller or the Companies or the senior in-house counsel for property and casualty insurance matters of the Companies and their Subsidiaries. 3.16 ERISA Representations. (a) Schedule 3.16(a) _____________________ identifies each Employee Plan. Seller has furnished or made available to Buyer copies of the 38 45 Employee Plans, summary plan descriptions, and, if applicable, related trust agreements, and all amendments thereto together with (i) the most recent annual report prepared in connection with any Employee Plan (Form 5500 including, if applicable, Schedule B thereto) and (ii) the most recent actuarial valuation report prepared in connection with any Employee Plan. (b) There is no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code, with respect to any pension plan of Seller or any ERISA Affiliate of Seller. Neither Seller nor any ERISA Affiliate of Seller has incurred, or reasonably expects to incur prior to the Closing Date (other than a liability for premiums under Section 4007 of ERISA), any liability under Title IV of ERISA that will not be satisfied in full as of the Closing Date. (c) Each Employee Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service and has pending a request for a determination timely filed with the Internal Revenue Service in respect of compliance with the Tax Reform Act of 1986. Except as described in Schedule 3.16(c), each Employee Plan that is not a Multiemployer Plan has been maintained in material compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code. No Employee Plan is a Multiemployer Plan or a multiple employer plan (within the meaning of Section 413(c) of the Code). 39 46 (d) Schedule 3.16(d)(i) identifies each Benefit Arrangement. Seller has furnished or made available to Buyer copies or descriptions of each Benefit Arrangement. Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations. (e) Each Employee Plan that is a "group health plan" (as defined in Section 4980B of the Code) has been operated in material compliance with Section 4980B of the Code at all times. (f) With respect to any Employee Plan that provides disability benefits, the amounts accrued on the September Adjusted Balance Sheets in accordance with FAS 112 are reasonably sufficient to pay all future obligations to the Transferred Employees who are disabled as of the Balance Sheet Date. 3.17 Environmental Matters. (a) Other than as may be _____________________ disclosed in the Environmental Reports or in Schedule 3.17, (i) there are no Hazardous Substances present on the current or former REO, the current or former Mortgaged Properties or the current or former Company Facilities requiring material remediation under Environmental Laws (provided that to the extent the foregoing representation relates to Hazardous Substances placed on former REO, former Mortgaged Properties or former Company Facilities by any third party subsequent to the date on which such properties were sold or otherwise transferred by any Company or any Subsidiary of any Company, as the case may be, to a Person other than any Company or any of its Subsidiaries, such representation is to the knowledge of Seller) and (ii) the 40 47 Companies and their Subsidiaries are in compliance in all material respects with all applicable Environmental Laws. (b) To the knowledge of Seller, other than as may be disclosed in the Environmental Reports or in Schedule 3.17, there has been (i) no written notice issued or threatened to be issued of a material claim against any Company or any Subsidiary of any Company arising under Environmental Laws concerning Hazardous Substances present on the current or former REO, the current or former Mortgaged Properties or the current or former Company Facilities; (ii) no written notice issued or threatened to be issued from a governmental authority alleging a material violation of Environmental Laws by any Company or any Subsidiary of any Company with respect to the ownership or operation of the REO or the Company Facilities; (iii) no written notice issued or threatened to be issued of a material claim against any Company or any Subsidiary of any Company alleging that it is liable under the Environmental Laws as a result of the treatment, storage, release, transportation, manufacture, installation, containment or disposal of Hazardous Substances at properties other than the current or former REO's, the current or former Mortgaged Properties, or the current or former Company Facilities; and (iv) no written notice issued or threatened to be issued of a material claim under any Environmental Law against any Company or any Subsidiary of any Company as a successor to any other Person. (c) Seller has made reasonable efforts to make available to Buyer for review and copying, all environmental reports in Seller's possession prepared for Seller, any Company or any Subsidiary of any Company by third party environmental 41 48 consultants concerning the current REO, the current Mortgaged Properties or the current Company Facilities (the "Environmental Reports"). (d) To the knowledge of Seller, other than as may be disclosed in Schedule 3.17, with respect to the current or former Mortgaged Properties, there have been no acts or omissions of any Company or any Subsidiary of any Company, in their capacity as lenders, prior to the Closing Date, on the basis of which Buyer, any Company or any Subsidiary of any Company has been found or would be found to be materially responsible or liable parties under Environmental Laws or relating to Hazardous Substances. (e) No representation in this Section 3.17 is intended to imply any representation as to any obligation or liability that the Companies or any of their Subsidiaries have or may have in connection with, as a result of or arising out of any insurance or reinsurance or indemnity policy, surety bond or similar contract or undertaking issued or entered into by any Company or any Subsidiary of any Company in the ordinary course of business. (f) To the knowledge of Seller, other than as may be disclosed in Schedule 3.17, the execution, delivery and performance by Seller of this Agreement require no action by or in respect of, or filing with, any governmental body, agency or official on the part of Seller or any of its Subsidiaries pursuant to any Environmental Law, other than any such action or filing as to which the failure to make or obtain would not, individually or in the aggregate, have material adverse effect on the Companies and their Subsidiaries, taken as a whole. 42 49 (g) Notwithstanding anything to the contrary in this Agreement, any and all representations, warranties, covenants and agreements of Seller contained in this Agreement with respect to any and all matters relating to Environmental Laws or Hazardous Substances are contained solely and exclusively in this Section 3.17. (h) As used in this Section 3.17, the term "the knowledge of Seller" means: (i) with respect to representations concerning the current or former REO, the actual current knowledge, without investigation, of any executive officer of Seller, any Company or any Subsidiary of any Company or of the regional asset manager of Seller or any Company or any Subsidiary of any Company directly responsible for the management of the REO's in such manager's region, (ii) with respect to representations concerning the current or former Mortgaged Properties, the actual current knowledge, without investigation, of any executive officer of Seller, any Company or any Subsidiary of any Company or of the regional investment manager of Seller or any Company or any Subsidiary of any Company directly responsible for the management of each loan secured by a Mortgaged Property in such manager's region, (iii) with respect to representations concerning the current or former Company Facilities, the actual current knowledge, without investigation, of any executive officer of Seller, any Company or any Subsidiary of any Company or of the environmental compliance officer of Seller or any Company or any Subsidiary of any Company responsible for overall environmental compliance matters concerning Company Facilities. (i) "Company Facilities" means any offices, buildings and other real property that are owned or leased by any 43 50 Company or any Subsidiary of any Company and that are used in the operation of the business of any Company or any Subsidiary of any Company. "REO" means the real property (including land and any buildings or other improvements thereon) owned by any Company or any Subsidiary of any Company but not used in the operation of the business of any Company or any Subsidiary of any Company. "Mortgaged Properties" means the real property (including land and any buildings or other improvements thereon) subject to a mortgage interest or other Lien held by or in favor of any Company or any Subsidiary of any Company (other than mortgages and liens associated with mortgage-backed securities or private placement bond investments made in the ordinary course of Seller's securities transactions). (j) "Environmental Laws" means any and all foreign, Federal, state or local statutes, laws, regulations, ordinances, rules or codes now in effect relating to the environment, to the effect of the environment on human health or safety or to the use, generation, manufacturing, treatment, disposal, storage, discharge or release of Hazardous Substances into the environment, including without limitation, ambient air, surface water, groundwater or land, or the remediation thereof. (k) "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum and its derivatives and by-products, or any substance having any constituent elements displaying any of the foregoing characteristics, regulated under Environmental Laws. 3.18 Intercompany Accounts. Schedule 3.18 contains a _____________________ complete list of (A) all intercompany balances and (B) all liabilities of the type referred to in Section 7.5(c), in each case as of the Balance Sheet Date between Seller or any of 44 51 its Affiliates, on the one hand, and any Company or any Subsidiary of any Company, on the other hand. Except as disclosed on Schedule 3.18, since the Balance Sheet Date, there has not been any incurrence or accrual of liability (as a result of allocations or otherwise) by any Company or any Subsidiary of any Company to Seller or any of its Affiliates or other transaction between any Company or any Subsidiary of any Company and Seller or any of its Affiliates, except (i) in the ordinary course of business in accordance with past practice or (ii) as contemplated by this Agreement. 3.19 No Representation with Respect to Reserves. __________________________________________ Notwithstanding any other Section or provision of this Article 3, except as set forth in this Section 3.19, Seller makes no representation or warranty that the liabilities for unpaid claims and claim expenses whether reported or incurred but not reported of the Companies and their Subsidiaries (the "Claims Provision") are adequate or sufficient. As of the date hereof, Seller has provided or made available to Coopers & Lybrand L.L.P., as consultant to Buyer, all material information in possession of Seller and which Seller reasonably believes is necessary in order for a reasonable evaluation of the adequacy and sufficiency of the Claims Provision relating to asbestos liabilities and environmental liabilities. 3.20 Intellectual Property; Software. (a) The _______________________________ Companies and their Subsidiaries own or otherwise have rights to use (in each case, free and clear of any material Liens or other material limitations or restrictions) all Intellectual Property used in their respective businesses as currently conducted, and the consummation of the transactions contemplated hereby will not result in the loss of any such rights (or 45 52 require the payment of any additional fees or royalties in order to maintain such rights); the use of any Intellectual Property by the Companies and their Subsidiaries does not infringe on or otherwise violate the rights of any Person; and to Seller's knowledge no person is challenging, infringing on or otherwise violating any right of any Company or any Subsidiary of any Company with respect to any Intellectual Property owned by and/or licensed to the Companies and their Subsidiaries. For purposes of this Agreement "Intellectual Property" shall mean trademarks, service marks, brand names, certification marks, trade dress, assumed names, trade names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not in any jurisdiction; patents, applications for patents (including, without limitation, divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any Person; writings and other works, whether copyrightable or not in any jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights, but shall not include Software. For purposes of this Agreement, "Software" shall mean all computer and telecommunication software including source and object code and documentation and any other media (including, without limitation, manuals, journals and reference books). 46 53 (b) Except as set forth in Schedule 3.20, the Companies and their Subsidiaries own, or have valid and enforceable licenses or other rights to use (in each case, free and clear of any material Liens or other material limitations or restrictions), all Software used in the conduct of their respective businesses as currently conducted; the use of the Software by the Companies and their Subsidiaries does not infringe on or otherwise violate the rights of any person; and to Seller's knowledge no person is challenging, infringing on or otherwise violating any right of any Company or any Subsidiary of any Company with respect to any Software used by the Companies and their Subsidiaries. 3.21 Labor Matters. Neither Company nor any _____________ Subsidiary of any Company is a party to any collective bargaining or other labor union contract and no collective bargaining agreement is being negotiated by any Company or any Subsidiary of any Company. Except as set forth in Schedule 3.21, Seller has no knowledge of any material activities or proceedings of any labor union to organize any employees of any Company or any Subsidiary of any Company. There is no material labor dispute, strike or work stoppage against any Company or any Subsidiary of any Company pending or, to Sellers's knowledge, threatened which may interfere with the respective business activities of the Companies or any of their Subsidiaries. 3.22 Loans and Advances. Except as set forth in ___________________ Schedule 3.22, neither of the Companies nor any of their Subsidiaries has any contractual commitment to make any loan, advance or capital contribution to, or investment in, any other Person in excess of $100,000. 47 54 3.23 All Assets Necessary. Except as set forth in ____________________ Schedule 3.23, the Companies and their Subsidiaries own, lease or license all property and assets necessary to carry on their businesses and operations as presently conducted, all such assets and properties (other than as Buyer and Seller may mutually agree) will be conveyed to Buyer (either indirectly by means of the transfer of the Shares or through an Ancillary Agreement or as contemplated by Sections 5.11, 7.11 and 7.12) at the Closing and will as of the Closing (assuming Buyer were to elect to obtain the services and facilities made available to Buyer pursuant to the Ancillary Agreements and consents contemplated by Section 5.11 were obtained) permit Buyer to conduct such businesses and operations in the same manner as such businesses and operations have been conducted prior to the Closing. 3.24 Certain Policies. Subject to the qualifications ________________ set forth therein, Schedule 3.24 sets forth a brief description of all insurance policies written by or ceded to either of the Companies or any of their Subsidiaries with respect to any insured currently or formerly involved in the manufacture of tobacco products, or to the knowledge of Seller in research, development or providing technical advice or information with respect to the manufacture of tobacco products, including the name of the insured, the policy period and the policy limits. No notices have been received by Seller or the Companies or their Subsidiaries or claims made by the insured under any of such policies. Except as set forth in Schedule 3.24, each such policy for each insured contains a product liability exclusion, in the form set forth on Schedule 3.24, for each policy year. As used in this Section 3.24, "knowledge" of Seller means the knowledge of the executive officers, the chief legal or compliance officers of the 48 55 Seller or the Companies or the senior in-house counsel for property and casualty insurance matters of the Companies and their Subsidiaries. 3.25 Disclosure. No representation or warranty of __________ Seller contained in this Agreement (including the Schedules referenced herein) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of circumstances under which they were made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as of the date hereof and as of the Closing Date (but as of no other dates unless expressly so stated) that: 4.1 Corporate Existence and Power. Buyer has been _____________________________ duly incorporated and is validly existing as an insurance corporation in good standing under the laws of Connecticut and has all corporate powers and all material governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted. Buyer has heretofore delivered to Seller true and complete copies of its certificate of incorporation and by-laws as in effect on the date hereof. 4.2 Corporate Authorization. The execution, delivery _______________________ and, subject to the receipt of the approvals referred to in Section 4.3, performance by Buyer of this Agreement and the Ancillary Agreements to which Buyer is a party are within the corporate powers of Buyer and have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement constitutes, and when executed and 49 56 delivered each Ancillary Agreement to which Buyer is a party will constitute, a valid and legally binding agreement of Buyer, enforceable against Buyer in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and the rights of creditors of insurance companies generally and (ii) general principles of equity (regardless of whether considered in a proceeding at law or in equity). 4.3 Governmental Authorization. The execution, __________________________ delivery and performance by Buyer of this Agreement and each Ancillary Agreement to which Buyer is a party require no action by or in respect of, or filing with, any governmental body, agency or official on the part of Buyer or any of its Subsidiaries other than (i) compliance with any applicable requirements of the HSR Act, (ii) approvals or filings under the insurance laws of the jurisdictions set forth in Schedule 4.3, (iii) filings and notices not required to be made or given until after the Closing Date, (iv) filings, at any time, of tax returns, tax reports and tax information statements and (v) any such action or filing as to which the failure to make or obtain would not individually or in the aggregate be material. 4.4 Non-Contravention. Except as set forth in _________________ Schedule 4.4, the execution, delivery and performance by Buyer of this Agreement and each Ancillary Agreement to which Buyer is a party do not and will not (i) violate the certificate of incorporation or by-laws of Buyer, (ii) assuming compliance with the matters referred to in Section 4.3, violate any applicable law, rule, regulation, judgment, injunction, order or decree, (iii) require any consent or other action by any Person under, 50 57 constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Buyer or any of its Subsidiaries or to a loss of any benefit to which Buyer or any of its Subsidiaries is entitled under, any material agreement or other instrument binding upon Buyer or any of its Subsidiaries or any material license, franchise, permit or other similar authorization held by Buyer or any of its Subsidiaries or (iv) result in the creation or imposition of any material Lien on any asset of Buyer or any of its Subsidiaries. 4.5 Financing. Buyer has, or will have prior to the _________ Closing, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to make payment of the Purchase Price and any other amounts to be paid by it hereunder. 4.6 Purchase for Investment. Buyer is purchasing the _______________________ Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof, provided, however, that at or after the Closing Buyer may issue or sell debt or equity securities of the Companies or their Subsidiaries in connection with the financing of its acquisition of the Shares. Any such issuance or sale will be effected in compliance with all applicable securities laws. Buyer (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investments in the Shares and is capable of bearing the economic risks of such investment. 51 58 ARTICLE 5 COVENANTS OF SELLER Seller agrees that: 5.1 Conduct of the Companies. Except as otherwise ________________________ expressly provided in this Agreement, during the period from the date hereof to the Closing, Seller will cause the Companies and their Subsidiaries to conduct their operations according to their ordinary course of business consistent with past practice, will cause the Companies and their Subsidiaries to use their reasonable best efforts to preserve intact their respective business organizations, generally to keep available the services of their respective officers and employees and generally to maintain existing relationships with agents, licensors, licensees, suppliers, contractors, distributors, customers and others having business relationships with them, and will cause the Companies and their Subsidiaries, to the extent permitted by applicable law, to confer with Buyer on a regular basis and confer with Buyer on significant operational matters and material decisions affecting the business of the Companies and the Subsidiaries. Without limiting the generality of the foregoing, as promptly as practicable following the date hereof, Seller shall establish an interim transition committee (the "Transition Committee") which shall meet on a regular basis to review the financial and operational affairs of the Companies and their Subsidiaries. Such review shall be conducted in accordance with applicable law and shall not cover current or future pricing of specific products, marketing or strategic plans, specific breakdowns of sales by customers, or plans to introduce new competitive products. A majority of the Transition Committee shall consist of senior officers of the Companies designated by 52 59 Seller (including their respective chief executive and chief financial officers) and one or more representatives of Seller. The Transition Committee shall also include two individuals designated by Buyer. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement or as set forth in Schedule 5.1, Seller will cause each of the Companies and each Subsidiary of any Company not to, without the prior written consent of Buyer: (a) amend its certificate of incorporation or by-laws; (b) authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including, without limitation, stock appreciation rights), or amend any of the terms of any such securities or agreements outstanding as of the date hereof; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock, or property or any combination thereof) in respect of its capital stock, or redeem, repurchase or otherwise acquire any of its securities; (d)(i) incur any indebtedness for borrowed money (except for short term indebtedness incurred in the ordinary course of business consistent with past practice pursuant to existing lines of credit or extensions or renewals thereof) or issue any debt securities or, except in the ordinary course of business consistent with past practice, assume, guarantee or endorse the obligations of any other Person; (ii) make any loans, advances or capital contributions to, or investments in, any other Person 53 60 (other than (A) to wholly owned Subsidiaries of the Companies, (B) subject to Section 7.11, investments in the ordinary course of business consistent with past practice, (C) loans to agents in the ordinary course of business consistent with past practice not exceeding $500,000 aggregate principal amount to all agents or (D) pursuant to the terms of the agreements listed in Schedule 5.1), in excess of $100,000; (iii) pledge or otherwise encumber shares of its capital stock; (iv) enter into or invest in any derivative financial instruments except in the ordinary course of business consistent with current investment and risk management policies; or (v) except in the ordinary course of business consistent with past practice, mortgage or pledge any of its assets, tangible or intangible, or create or suffer to exist any Lien thereupon; (e) to the extent payable directly or indirectly by any Company or any Subsidiary of any Company: enter into, adopt or (except as may be required by law or the terms of any such arrangement) terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund or other arrangement for the benefit or welfare of any director, officer or employee engaged in Seller's property and casualty insurance business, amend any such arrangement as it relates to such directors, officers or employees or (except for increases in base compensation in the ordinary course of business consistent with past practice, but in no event greater than 4 1/2% in the aggregate on a per annum basis for all such individuals as a group) increase in any manner the compensation 54 61 or benefits of any director, officer or employee engaged in Seller's property and casualty insurance business or, with respect to any director or officer engaged in Seller's property and casualty insurance business, pay any benefit not required by any plan or arrangement as in effect as of the date hereof or, with respect to any employee engaged in Seller's property and casualty insurance business who is not an officer or director, pay any benefit other than in the ordinary course of business consistent with past practice in accordance with plans or arrangements in effect as of the date hereof (including, without limitation, with respect to any such director, officer or employee, the granting of stock options, restricted stock, stock appreciation rights or performance units); provided that Buyer agrees it will not unreasonably withhold its consent, if requested by Seller, to transactions proposed under this paragraph (e) (other than increases in base compensation); (f) acquire, sell, lease or dispose of any assets outside the ordinary course of business (including, without limitation, any assets which are not primarily related to the property and casualty insurance business conducted by the Companies and their Subsidiaries) or any assets which in the aggregate are material to the Companies and their Subsidiaries, taken as a whole, or enter into any contract, agreement, commitment or transaction with respect thereto outside the ordinary course of business consistent with past practice; (g) change any of the accounting principles, practices, methods or policies (including, without limitation, any reserving methods, practices or policies) used by it, except as may be required as a result of a change in law, SEC guidelines or GAAP or SAP; 55 62 (h) change the method of determining the GAAP reserves for any guaranty fund assessment, second injury fund assessment, special insurance assessment or similar assessment or tax; (i) (i) acquire (by merger, consolidation, or acquisition of stock or assets, but excluding foreclosure) any corporation, partnership or other business organization or division thereof; (ii) authorize any new capital expenditure or expenditures which, individually, is in excess of $500,000 or, in the aggregate, are in excess of $2,500,000; (iii) settle any litigation existing as of the Balance Sheet Date for amounts more than $1,500,000 above held reserves existing as of the Balance Sheet Date; (iv) settle any litigation commenced after the Balance Sheet Date for amounts more than $1,500,000; or (v) enter into or amend any contract, agreement, commitment or arrangement with respect to any of the foregoing; (j) make any Tax election or settle or compromise any Tax liability, other than in the ordinary course of business and as limited by Article 8 hereof or enter into any tax sharing agreements or arrangements with any party, or amend or modify the Tax Sharing Agreement in a manner which adversely affects any of the Companies or their Subsidiaries; (k) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in the consolidated financial statements (or the notes thereto) of the Companies and their Subsidiaries or incurred in the ordinary course of business consistent with past practice; 56 63 (l) terminate, or in any manner material thereto modify, amend or waive compliance with, any provision of any of the Significant Agreements; (m) change its underwriting standards or practices in any material way; (n) (i) enter into any facultative reinsurance contract other than in the ordinary course of business consistent with past practice; (ii) commute any reinsurance contract (provided that Buyer will not unreasonably withhold its consent to any of the transactions specified in the foregoing clauses (i) and (ii) and provided further that Seller may cause ACSC to enter into an excess of loss reinsurance contract with a term of up to one year, provided that Seller agrees to use its best efforts to negotiate with the other party to such contract to provide for a shorter term, such term to be as close to six months as is reasonably practicable); or (iii) without giving Buyer at least 10 business days' prior written notice thereof, enter into any treaty reinsurance contract; (o) effect any material or unusual insurance transaction other than in the ordinary course of business consistent with past practice; (p) significantly change the compensation structure of, or other benefits available to, any of its significant agents or to its agents generally; (q) make any investment in Company Investment Assets other than in accordance with Seller's investment policies set forth in Schedule 3.9(xiii); (r) with respect to any leased facility shared by Seller or any of its Affiliates, on the one hand, and any Company or any Subsidiary of any Company, on the other hand, in which the Companies and their Subsidiaries occupy less than 57 64 50% of such facility as of the date hereof, enter into or renew any lease or other arrangement in the name of any Company or any Subsidiary of any Company relating to such facility; (s) effect any transactions with Seller or any of its Affiliates, other than pursuant to arrangements existing as of the date hereof; (t) except to the extent permitted by paragraphs (a) through (r) above, enter into any agreement of the type described in Section 3.11(a)(i), (ii), (iii), (vi), (vii), (viii), (x), (xi), (xii) or (xiii); or (u) take, or agree in writing or otherwise to take, any of the actions described above in this Section 5.1. 5.2 Access to Information. From the date hereof until _____________________ the Closing Date, subject to the terms of the Confidentiality Agreement referred to in Section 6.1, any applicable contractual restrictions and applicable legal privileges, and to the extent applicable law would not thereby be violated Seller will (i) give, and will cause the Companies and their Subsidiaries to give, Buyer, its counsel, financial advisors, auditors and other authorized representatives full access, upon reasonable prior notice and during normal business hours, to the offices, properties, books and records of the Companies and each of their Subsidiaries and to the books and records of Seller relating to the Companies and their Subsidiaries, (ii) furnish, and will cause the Companies and their Subsidiaries to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to the Companies or any of their Subsidiaries as such Persons may reasonably request and (iii) instruct the employees, counsel and 58 65 financial advisors of Seller or the Companies or any of their Subsidiaries to cooperate with Buyer in its investigation of the Companies or any of their Subsidiaries; provided that this Section 5.2 shall not obligate Seller to provide or make available to Buyer any employee medical records; provided, further, that to the extent contractual restrictions limit Seller's ability to take any of the actions set forth in this Section 5.2, Seller shall use its best efforts to obtain any necessary contractual consent or accommodate any reasonable request by Buyer with respect to such action by alternative means and provided, further, that to the extent applicable legal privileges or applicable laws limit Seller's ability to take any of the actions set forth in this Section 5.2, Seller shall use its best efforts to accommodate any reasonable request by Buyer with respect to such action by alternative means. 5.3 Notices of Certain Events. Seller shall promptly _________________________ notify Buyer of: (a) any notice or other communication received by Seller from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication received by Seller relating to the transactions contemplated by this Agreement and any other significant notices or other communications from any governmental or regulatory agency or authority; and (c) any actions, suits, claims, investigations or proceedings commenced or, to Seller's knowledge threatened against, relating to or involving or otherwise affecting Seller, the Companies or any 59 66 Subsidiary of any of the Companies that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.12 or that relate to the consummation of the transactions contemplated by this Agreement. 5.4 Resignations. Seller will deliver to Buyer the ____________ resignations of all officers and directors of the Companies and each Subsidiary of any of the Companies who will be officers, directors or employees of Seller or any of its Affiliates after the Closing Date from their positions with each of the Companies and each Subsidiary of any of the Companies at or prior to the Closing Date. 5.5 Covenant Not to Compete. For a period of five _______________________ years after the Closing, Seller will not, and will cause its Affiliates not to, engage, directly or indirectly, in any business in the United States, Canada or the United Kingdom that competes with any of the businesses of the Companies and their Subsidiaries as conducted in such countries as of the Closing; provided that Seller and its Affiliates shall not be prohibited ________ from engaging in any such businesses to the extent that such business is (a) incidental to any business that does not otherwise primarily compete with any of the businesses of the Companies and their Subsidiaries as conducted in such countries as of the Closing, (b) an integral part of any such business of Seller and its Affiliates and (c) reasonably necessary to be competitive with respect to any such business of Seller and its Affiliates; and provided further that Seller and its Affiliates ________ _______ shall not be prohibited from conducting any of the activities set forth in Schedule 5.5. 60 67 5.6 No Solicitation. Seller will immediately cease _______________ any existing discussions or negotiations with any third parties conducted prior to the date hereof with respect to any Acquisition Proposal (as defined below). Seller shall not, directly or indirectly, through any officer, director, employee, representative or agent or any of its Subsidiaries, (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or would lead to, a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, sale of a substantial percentage of shares of capital stock or similar transactions involving any of the Companies or their Subsidiaries, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide any nonpublic information to any person or entity relating to, any Acquisition Proposal or (iii) agree to or approve any Acquisition Proposal. Seller shall notify Buyer immediately (and no later than 24 hours) after receipt by Seller of any Acquisition Proposal or any request for nonpublic information in connection with an Acquisition Proposal or for access to the properties, books or records of the Companies or any of their Subsidiaries by any person or entity that informs Seller that it is considering making, or has made, an Acquisition Proposal. Such notice shall be made orally (and confirmed in writing) and shall indicate the identity of the offeror and the terms and conditions of such proposal, inquiry or contract. 5.7 Certain Other Transactions. (a) At or prior to __________________________ Closing, Seller will either (i) enter into a novation whereby Seller substitutes itself or one of its Affiliates for ACSC as assuming reinsurer under the Aggregate Excess Reinsurance Agreement 61 68 between ACSC and Aetna ReInsurance (U.K.) Ltd. dated May 28, 1993 (the "Aetna Re U.K. Stop Loss") and Aetna ReInsurance (U.K.) Ltd. releases ACSC from all liability thereunder; or (ii) otherwise indemnify Buyer to the extent that the amount paid by ACSC under the Aetna Re U.K. Stop Loss exceeds the amount reflected as a reserve (which Seller represents will not exceed $35,700,000) on the September Audited GAAP Balance Sheet for liabilities or potential liabilities under such agreement. In the event Seller elects to substitute itself or one of its Affiliates for ACSC as assuming reinsurer under the Aetna Re U.K. Stop Loss, the consideration for such novation will be an amount equal to ACSC's held reserve level relating to the Aetna Re U.K. Stop Loss at the time of such novation. Subject to receipt of any necessary regulatory approvals, such amount will be paid to the assuming company by ACSC as reflected on the September Audited Balance Sheet. In the event that Seller elects to indemnify Buyer pursuant to clause (ii) of the first sentence of this Section 5.7(a), to the extent that the amount paid by ACSC under the Aetna Re U.K. Stop Loss is less than the amount reflected as a reserve on the September Audited GAAP Balance Sheet for liabilities or potential liabilities under such agreement, Buyer shall pay such amount to Seller. (b) At or prior to the Closing, Seller will (i) cause Aetna Life Insurance Company of Illinois ("ALOI") to be substituted for Aetna Casualty & Surety Company of Illinois ("AC&S of Illinois") as reinsurer under the original cession from ALOI to AC&S of Illinois of Aetna Life Insurance Company's long-term disability and credit/mortgage disability business, and AC&S of Illinois will be released from all liabilities thereunder and (ii) take all other actions necessary to 62 69 ensure that, following the Closing, neither Company nor any Subsidiary of any Company shall have any liability with respect to any such agreements. 5.8 Confidentiality Agreements. Seller agrees that, __________________________ without Buyer's consent, after the date hereof and until the expiration of such agreements, it will not terminate, amend, waive or modify any provision of any confidentiality agreement pursuant to which information was provided to any Person (other than Buyer) with respect to the Companies or their Subsidiaries or their businesses and operations. Seller shall, at Buyer's expense, take all action reasonably requested by Buyer to enforce the terms of each such confidentiality agreement. 5.9 Other Financial Statements. (a) As promptly as __________________________ practicable after the date hereof, but in no event later than 60 days after the date hereof, Seller will prepare or cause to be prepared and delivered to Buyer, together with unqualified reports of KPMG Peat Marwick LLP thereon, (i) an audited combined balance sheet of the Companies and their Subsidiaries as of September 30, 1995 (the "September Audited GAAP Balance Sheet") and audited combined statements of results of operations and cash flows of the Companies and their Subsidiaries for the nine 63 70 months ended September 30, 1995, in each case prepared in accordance with GAAP applied on a basis consistent with that used in the preparation of the audited financial statements referred to in Section 3.8(a), and (ii) an audited combined balance sheet of the Companies and their Subsidiaries as of September 30, 1995 (the "September Audited SAP Balance Sheet" and, together with the September Audited GAAP Balance Sheet, the "September Audited Balance Sheets") and an audited combined statement of results of operations of the Companies and their Subsidiaries for the nine months ended September 30, 1995, in each case prepared in accordance with SAP applied on a basis consistent with that used in the preparation of the audited financial statements referred to in Section 3.8(b). (b) The September Audited Balance Sheets shall be accompanied by a schedule reflecting the balance sheet adjustments described in Schedule 5.9. The September Audited GAAP Balance Sheet, as so adjusted, is referred to herein as the "September Adjusted GAAP Balance Sheet," the September Audited SAP Balance Sheet, as so adjusted, is referred to herein as the "September Adjusted SAP Balance Sheet," and the September Adjusted GAAP Balance Sheet and the September Adjusted SAP Balance Sheet, collectively, are referred to herein as the "September Adjusted Balance Sheets." The report of KPMG Peat Marwick LLP referred to in Section 5.9(a) shall state that such firm has reviewed such adjustments. All audited financial statements delivered pursuant to this Section 5.9 will be audited in accordance with generally accepted auditing standards. (c) As promptly as practicable after December 31, 1995, but in no event later than March 15, 1996, Seller will prepare or cause to be prepared and delivered to Buyer, together with unqualified reports of KPMG Peat Marwick LLP thereon, (i) an audited combined balance sheet of the Companies and their Subsidiaries as of December 31, 1995 and audited combined statements of results of operations and cash flows of the Companies and their Subsidiaries for the year ended December 31, 1995, in each case prepared in conformity with GAAP consistently applied and (ii) an audited combined balance sheet of the Companies and their Subsidiaries as of December 31, 1995 and an audited combined statement of results of 64 71 operations of the Companies and their Subsidiaries for the year ended December 31, 1995, in each case prepared in conformity with SAP consistently applied. (d) As promptly as practicable after the Closing, but in no event later than 60 days after the Closing, Seller will prepare or cause to be prepared and delivered to Buyer, together with unqualified reports of KPMG Peat Marwick LLP thereon, (i) an audited combined balance sheet of the Companies and their Subsidiaries as of the Closing Date, if the Closing Date is the last day of a calendar month, or if the Closing Date is not the last day of a calendar month, as of the last day in the calendar month immediately preceding the calendar month in which the Closing occurs (such date, the "Deemed Closing Date") (the "Closing Date GAAP Balance Sheet") and audited combined statements of results of operations and cash flows of the Companies and their Subsidiaries for the period beginning on the January 1st next preceding the Deemed Closing Date and ending on the Deemed Closing Date, in each case prepared in conformity with GAAP consistently applied and (ii) an audited combined balance sheet of the Companies and their Subsidiaries as of the Deemed Closing Date and an audited combined statement of results of operations of the Companies and their Subsidiaries for the period beginning on the January 1st next preceding the Deemed Closing Date and ending on the Deemed Closing Date, in each case prepared in conformity with SAP consistently applied. In addition, from and after the date hereof until the Closing Date, Seller will prepare or cause to be prepared and, to the extent permitted by applicable law, delivered to the members of the Transition Committee the same periodic unaudited financial information relating to the Companies and their Subsidiaries which is provided to the senior management 65 72 of Seller and the Companies. Buyer shall bear 100% of the cost of the audit of the financial statements as of and for the period ending on the Deemed Closing Date referred to in this Section, and Seller shall bear 100% of the cost of the audit of all other financial statements and information referred to in this Section. (e) As promptly as practicable after December 31, 1995, but in no event later than March 15, 1996, Seller will deliver to Buyer copies of the Companies' and their Subsidiaries' respective annual statements for the fiscal year ended December 31, 1995, in the forms filed with the Regulators in their respective jurisdictions of domicile. 5.10 1992 Audit. Seller shall cause to be prepared __________ and delivered to Buyer, as promptly as practicable, but in no event later than December 31, 1995, audited combined statements of results of operations and cash flows of the Companies and their Subsidiaries for the year ended December 31, 1992, prepared in accordance with GAAP consistently applied, together with the unqualified reports of KPMG Peat Marwick LLP thereon. Buyer shall bear 100% of the cost of the audit of the financial statements referred to in this Section. 5.11 Use of Computer Software. (a) Prior to the ________________________ execution hereof, Seller and the Companies have entered into the Software License Agreement annexed hereto as Exhibit 5.11 (the "Software License Agreement"). (b) With respect to all Software not owned by Seller but which is presently used in the operation of the business of any of the Companies or their Subsidiaries as that business is conducted as of the date hereof, Seller shall use its best efforts, prior to Closing, to transfer or procure from the necessary third parties 66 73 an enforceable license with terms and conditions of like tenor to those that are currently enforced against Seller. Seller and Buyer shall share all costs and expenses in excess of ongoing royalty obligations incurred in connection with the transfer or license to the Companies and their Subsidiaries of all such Software, including, but not limited to, payment of any transfer or license fees or similar costs, in accordance with the last sentence of this paragraph (b). In the event that Seller is unable to effect the transfer or license to the Companies and their Subsidiaries of any such Software, Seller shall continue following the Closing to use its best efforts to effect such transfer or license in accordance with this Section 5.11, and shall in the interim make arrangements for the provision of replacement Software to the Companies and their Subsidiaries as of the Closing, which replacement software shall be reasonably acceptable to Buyer, the cost of which arrangements shall be shared by Seller and Buyer as provided in the following sentence. Seller shall pay 80%, and Buyer shall pay 20%, of the first $10 million of any costs and expenses referred to in this paragraph (b), and Seller and Buyer shall share equally in any such costs and expenses in excess of $10 million. (c) From the date hereof and prior to the Closing, Seller agrees that to the extent it develops, acquires or licenses any Software that is used in the operation of the business of the Companies and their Subsidiaries, any such Software owned exclusively by Seller shall be licensed to the Companies and their Subsidiaries prior to the Closing on the same terms and conditions as set forth in the Software License Agreement, and any such Software not owned exclusively by Seller shall be licensed directly by one or more of the Companies and the Subsidiaries. 67 74 (d) To the extent that Seller or the Companies or the Subsidiaries of the Companies negotiate or renegotiate licenses, leases, extensions of leases, purchases or sales of Software referred to in paragraphs (b) and (c) above, Seller shall notify Buyer of such discussions and Buyer and Seller will jointly participate in such negotiations or renegotiations as long as Seller has ongoing obligations under this Section 5.11. Section 5.12 Aetna Casualty Company. Seller will ______________________ use its best efforts to change, as soon as practicable after the Closing Date consistent with any required regulatory approvals, the corporate name of "Aetna Casualty Company" to a name which may include the word "Aetna" but shall not include the word "Casualty" or "Surety." ARTICLE 6 COVENANTS OF BUYER Buyer agrees that: 6.1 Confidentiality. All information provided to _______________ Buyer or any of the Persons referred to in Section 5.2 will be treated as if provided under the Confidentiality Agreement, dated October 2, 1995, between Seller and Buyer (the "Confidentiality Agreement"). 6.2 Post-Closing Access. Buyer will cause the ___________________ Companies and each of their Subsidiaries, on and after the Closing Date, to afford promptly to Seller and its agents reasonable access, upon reasonable prior notice and during normal business hours, to their offices, properties, books, records, employees and auditors to the 68 75 extent reasonably necessary to permit Seller to determine any matter relating to its ownership of the Companies prior to the Closing Date. 6.3 AmRe Agreement. If, at any time after the Closing ______________ Date and for so long as the AmRe Agreement is in effect, the rating of ACSC or such other Person which is the primary obligor (the "Obligor") under the Aggregate Excess of Loss Reinsurance Agreement between ACSC and American Re-Insurance Company dated September 30, 1992 (the "AmRe Agreement") as determined by A.M. Best falls below "A-" or its equivalent (or, if A.M. Best shall cease to publish ratings of insurance companies, an equivalent claims paying rating by a nationally recognized rating agency) (an "Adequate Rating"), Buyer shall promptly inform Seller of such fact and, at Buyer's option, shall (i) cause the Obligor to establish and fund a trust (satisfying the requirements of Regulation 113 of the New York Insurance Department or any successor provision thereto) with cash or cash equivalents in an amount equal to the Termination Account from time to time as provided in Article XIII of the AmRe Agreement (the "Termination Account") with the assets of such trust to be held and used solely for the purpose of satisfying the obligations of the Obligor under the AmRe Agreement, (ii) cause the parent company of the Obligor which is the immediate parent company of the property and casualty insurance operations of Buyer (the "Immediate Parent") to unconditionally guarantee the obligations of the Obligor under the AmRe Agreement (provided that if any such Immediate Parent ceases to be such, Buyer shall again have the obligation to elect one of the alternatives in clause (i), (ii) (with respect to the then Immediate Parent), or (iii) of this sentence, subject to the last sentence of this Section 6.3) or (iii) obtain 69 76 an unconditional letter of credit in favor of Seller in an amount not less than the Termination Account issued by a bank organized under the laws of the United States with combined capital and surplus of at least $3,000,000,000 and having a long-term deposit rating of "A+" or "A-1" or better from Standard & Poor's Corporation or Moody's Investor Services, Inc., respectively, which letter of credit would be drawn on solely for the purpose of satisfying the obligations of the Obligor under the AmRe Agreement. Buyer's obligation under the first sentence of this Section 6.3 shall terminate, and any existing trust, guarantee or letter of credit will be terminated at the election of the Obligor, at such time as the Obligor regains an Adequate Rating; provided that Buyer's obligation ________ under this Section 6.3 shall again be reinstated at any time such obligation is required in accordance with the first sentence of this Section 6.3. ARTICLE 7 COVENANTS OF BUYER AND SELLER Buyer and Seller agree that: 7 .1 Reasonable Efforts. Subject to the terms and __________________ conditions of this Agreement, Buyer and Seller will use their reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Buyer and Seller will promptly, and in any event within 30 days of the date hereof, prepare and file all applications, notices, consents and other documents necessary or advisable to obtain the regulatory approvals 70 77 specified in Schedule 4.3 and Schedule 3.3, respectively, promptly file all supplements or amendments thereto and use reasonable efforts to obtain the regulatory approvals specified in Schedule 4.3 and Schedule 3.3 as promptly as practicable. Buyer and Seller will provide each other and their counsel the opportunity to review in advance and comment on all such filings. Buyer and Seller will keep each other informed of the status of matters relating to obtaining the regulatory approvals specified in Schedule 4.3 and Schedule 3.3. Seller and Buyer agree, and Seller, prior to the Closing, and Buyer, after the Closing, agree to cause the Companies and each Subsidiary of any of the Companies to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. 7.2 Certain Filings. Seller and Buyer shall cooperate _______________ with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any contracts, in connection with the consummation of the transactions contemplated by this Agreement and (ii) in taking such reasonable actions or making any such filings, furnishing information required in connection therewith and reasonably seeking to obtain in timely fashion any such actions, consents, approvals or waivers. 7.3 Public Announcements. The parties agree to ____________________ consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby and, except as may be 71 78 required by applicable law or any listing agreement with any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation. 7.4 Trademarks; Trade Names. (a) Prior to the _______________________ execution hereof, the Companies and Seller have entered into the license agreement attached hereto as Exhibit 7.4(a) (the "License Agreement"). Prior to the execution hereof, the Companies and Seller have also entered into the assignment agreement attached hereto as Exhibit 7.4(b) (the "Assignment Agreement"). (b) After the Closing, Buyer will not, and will not permit the Companies or any of their Subsidiaries to, use any of Seller's other logos, marks or names not specifically licensed or assigned by the License Agreement or the Assignment Agreement giving effect to any updates to the schedules thereto as provided therein. (c) On or before the expiration of the term of the License Agreement, Buyer will cause each of the Companies and their Subsidiaries, to the extent necessary, to file with the applicable governmental body, agency or official amendments to the Companies' or such Subsidiaries' articles or certificate of incorporation to delete from its name the word "Aetna" and any marks and names derived therefrom and shall do or cause to be done all other acts, including the payment of any fees required in connection therewith, to cause each such amendment to become effective. (d) Seller agrees to cooperate with Buyer in connection with all regulatory matters relating to the License Agreement and the Assignment Agreement. 72 79 (e) After the Closing, Buyer will cause the Companies and their Subsidiaries to use the marks and names licensed to them pursuant to the License Agreement only in connection with one or more of Buyer's existing names or marks. (f) Notwithstanding any provision in this Agreement or the License Agreement to the contrary, following the Closing, the Companies and their Subsidiaries may continue to use signs, labels, containers, stationery, forms (including policy forms) and other printed material or matter which are included as of the Closing in the assets or inventory of any Company or any Subsidiary of any Company; provided that Buyer shall (i) use its ________ reasonable efforts to deplete the supply of such materials (excluding signs) containing or bearing the trademarks, trade names and service marks listed on Schedule B to the License Agreement as soon as practicable in the ordinary course of business, but in no event later than six months after the Closing Date and (ii) as promptly as practicable following the Closing, remove any such signs which contain or bear any of the trademarks, trade names and service marks listed on Schedule B to the License Agreement. 7.5 Intercompany Accounts. (a) All intercompany _____________________ accounts (other than those under or relating to reinsurance contracts and arrangements to the extent not then due and payable) between Seller or any of its Affiliates, on the one hand, and any Company or any Subsidiary of any Company, on the other hand, as of the Closing shall be settled (irrespective of the terms of payment of such intercompany accounts) in the manner provided in this Section 7.5. At least five business days prior to the Closing, Seller shall prepare and deliver to Buyer a statement setting out in reasonable detail the calculation of all such intercompany account balances 73 80 based upon the latest available financial information as of such date and, to the extent requested by Buyer, provide Buyer with supporting documentation to verify the underlying intercompany charges and transactions. All such intercompany account balances shall be paid in full in cash prior to the Closing. Except as contemplated by Section 5.7 and Section 7.12, all intercompany reinsurance agreements shall remain in effect and shall be performed and settled in accordance with their respective terms. (b) As promptly as practicable, but no later than 60 days after the Closing Date, Seller will cause to be prepared and delivered to Buyer a statement setting out in reasonable detail the calculation of such intercompany account balances as of the Closing Date (giving effect to any settlement under subsection (a) and any other payments in respect thereof). Buyer and Seller shall cooperate in the preparation of any such calculation including the provision of supporting documentation to verify the underlying intercompany charges, transaction and payments. If Buyer disagrees with Seller's calculation of such intercompany balances, Buyer may, within 30 days after delivery of such statement, deliver a notice to Seller disagreeing with such calculation and setting forth Buyer's calculation of such amount. If Buyer and Seller are unable to resolve such disagreement within 30 days thereafter, such disagreement shall be resolved by the Independent Accountants. The net amount of any such intercompany balance shall be paid in cash promptly thereafter, together with interest thereon from and including the Closing Date to but excluding the date of payment at a rate per annum equal to the three-month London Interbank Offered Rate (as published in The Wall Street Journal on the Closing Date) plus 40 basis 74 81 points. Such interest shall be payable at the same time as the payable to which it relates and shall be calculated on the basis of a year of 365 days and the actual number of days elapsed. (c) Liabilities of the Companies and their Subsidiaries reflecting allocations of certain expenses of Seller and its Affiliates set forth on Schedule 7.5(c) shall be settled in the manner contemplated by Section 7.5(a) and (b) with respect to intercompany accounts. 7.6 Non-Solicitation of Employees. (a) For a period _____________________________ commencing on the date hereof through the second anniversary of the Closing Date, (i) neither Seller nor any of its Affiliates shall affirmatively seek to hire any officer or key employee of the Companies or any Subsidiary whose annual base salary as of the date hereof equals or exceeds $75,000 in any capacity whatsoever without the express written consent of Buyer, and (ii) none of Buyer or any of its Affiliates shall affirmatively seek to hire any officer or key employee of Seller whose annual base salary as of the date hereof equals or exceeds $75,000 and with whom Buyer had significant contact in connection with the transactions contemplated hereby in any capacity whatsoever without the express written consent of Seller. (b) For a period commencing on the date hereof through the second anniversary of the termination of this Agreement pursuant to Section 12.1, none of Buyer or any of its Affiliates shall (x) affirmatively seek to hire in any capacity whatsoever any officer or key employee of the Companies whose annual base salary as of the date hereof equals or exceeds $75,000 and with whom Buyer had significant contact in connection with the transactions contemplated hereby or (y) while any such 75 82 officer or key employee is employed by Seller or any of its Affiliates in a position having greater or substantially the same level of compensation and responsibility as the position with the Companies held by such officer or key employee on the date hereof, hire any such officer or key employee in any capacity whatsoever without, in either case (x) or (y), the express written consent of Seller. (c) Seller recognizes that the provisions of clause (a)(i) of this Section 7.6 are reasonable and necessary for Buyer's protection and Buyer recognizes that the provisions of clause (a)(ii) and paragraph (b) of this Section 7.6 are reasonable and necessary for Seller's protection, and Seller and Buyer acknowledge that any breach of Section 7.6(a) or (b) will cause irreparable injury to Seller or Buyer, as the case may be, which injury will not be reasonably measurable or compensable by money damages. Accordingly, each of the parties hereto agrees that it shall be entitled without posting any bond to an injunction or injunctions to prevent breaches of the provisions of paragraphs (a) and (b) of this Section 7.6 and to enforce specifically the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having subject matter jurisdiction in addition to any other remedy to which such party may be entitled at law or equity. (d) If any provision of this Section 7.6 is held unenforceable because of the scope or duration of its applicability, the court making such determinations shall have the power to modify such scope or duration and such provisions shall then be applicable in such modified form. 7.7 Real Estate. Seller and the Companies shall enter ___________ into a sublease, effective as of the Closing Date, providing for the sublease by one or both of the 76 83 Companies of Seller's "CityPlace" facility and the lease by one or both of the Companies of Seller's Windsor facility, which sublease and lease shall have the principal terms set forth on Exhibit 7.7. 7.8 Transition Agreements. At the Closing, Seller, _____________________ Buyer and, as applicable, the Companies and their Subsidiaries will enter into transition agreements having the principal terms set forth in Exhibit 7.8. 7.9 Post-Closing Access. From and after the Closing ___________________ Date, Seller shall retain the originals of all records of the Companies and their Subsidiaries concerning Taxes for which Seller is responsible hereunder. To the extent permitted by applicable law, Seller shall at Closing provide to Buyer copies (or at its election originals) of all of the personnel, payroll, accounting and tax records (other than consolidated tax returns, consolidated accounting records and consolidated financial statements of Seller) of the Companies and their Subsidiaries that heretofore have been maintained by Seller. Seller shall cause all other books and records of the Companies and their Subsidiaries, whether currently maintained by the Seller, any Company or any Subsidiary of any Company, or a third party, to be available on the premises of the applicable Company or Subsidiary on the Closing Date. To the extent permitted by applicable law, Seller will, on and after the Closing Date, afford promptly to Buyer and its agents reasonable access, upon reasonable prior notice and during normal business hours, to its offices, properties, books, records, employees and auditors to the extent reasonably necessary to permit Buyer to determine any matter relating to the business of the Companies prior to the Closing Date. Buyer may, at its own expense, make such copies of and excerpts from such books and 77 84 records as it may deem necessary for the preparation of tax or regulatory reports or other purposes permitted hereby. Seller shall maintain all such books and records for the period required by law. Seller will hold, and will use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning the Companies or any Subsidiary of the Companies provided to it by Buyer pursuant to Section 6.2. 7.10 Supplemental Disclosure. Each of Seller and _______________________ Buyer shall have the continuing obligation promptly to advise the other with respect to (i) any material matter hereafter arising and (ii) any material matter hereafter discovered which, in the case of a matter being disclosed pursuant to clause (i) hereof if existing at the date hereof or, in the case of a matter being disclosed pursuant to clause (ii) hereof, if known at the date hereof would have been required to be set forth or described in the respective Schedules provided by them; provided, however, that for the purpose of the rights and ________ _______ obligations of the parties hereunder, any such supplemental or amended disclosure by any party shall not be deemed to have been disclosed as of the date hereof, to constitute part of, or an amendment or supplement to, such Party's Schedules or cure any breach or inaccuracy of a representation or warranty unless so agreed to in writing by the other party. If prior to the Closing Seller or Buyer becomes aware of a breach or inaccuracy of a representation or warranty made by it herein, such party shall use its best efforts to cure such breach or inaccuracy as 78 85 promptly as practicable; provided, however, that no such cure ________ _______ will relieve such party of any liability for such breach or inaccuracy. 7.11 Investment Portfolio; Real Estate Transactions. ______________________________________________ (a) From the date of this Agreement until the Closing Date, Buyer and Seller agree that (i) the investment portfolio of the Companies and their Subsidiaries consisting of bonds, notes, debentures and all other instruments of indebtedness, excluding mortgage loans, but including mortgage-backed securities ("Bond Portfolio"), shall be invested and managed at the direction of Buyer; provided that such investment and management shall be consistent with the existing investment guidelines of the Companies and their Subsidiaries set forth in Schedule 3.9(xiii), except that investments in U.S. Treasuries/Agencies may be increased to a level up to 40% of invested assets, provided that with respect to the additional 20% allowance being ________ provided herein, the duration of such additional 20% shall not exceed an average of 5.0 years and provided further that no tax ________ _______ exempt securities shall be purchased other than to replace tax exempt securities that are sold or redeemed or mature; and (ii) the equity investment portfolio of the Companies and their Subsidiaries consisting of the securities listed on Schedule 7.11(a) ("Equity Portfolio") shall be managed at the direction of Seller. Transactions involving real estate investments, mortgage loans and other Company Investment Assets not including the Bond Portfolio or the Equity Portfolio shall be managed at the direction of Seller, in consultation with Buyer. Subject to the foregoing, Seller shall effect the actual execution of transactions for all Company Investment Assets. To the extent that investment holdings at September 30, 1995 are at levels outside the existing investment guidelines of the Companies and their 79 86 Subsidiaries, no action is required pursuant to this Agreement to change the levels of such holdings. (b) Seller agrees that at the Closing the aggregate market value of the securities held in the Equity Portfolio shall not exceed $400 million, reduced by (i) the market value at the Closing of all shares of common stock, par value $1.00 per share ("MBIA Stock"), of MBIA, Inc. ("MBIA") held in the Equity Portfolio and (ii) 95.5% of the gross proceeds from the sale at or prior to the Closing of any shares of MBIA Stock to Seller or other Person(s). Prior to the Closing, Seller shall use its reasonable efforts to liquidate for cash, at least 50% of the shares of MBIA Stock held in the Equity Portfolio at the date hereof; provided that Seller need not seek to liquidate shares of MBIA Stock to the extent Seller provides Buyer with reasonable evidence of Seller's inability to obtain a price for such shares at least equal to the market value thereof at the Balance Sheet Date. Absent such evidence, Seller shall not permit to remain in the Equity Portfolio, and shall retain at or prior to the Closing, such shares of MBIA Stock, and in consideration for any such shares so retained, shall deliver to the Companies at the time of such retention, cash in an amount equal to 95.5% of the market value of such shares at such time. Notwithstanding any other provision of this Agreement to the contrary, Seller shall not permit to remain in the Equity Portfolio as of the Closing a number of shares of MBIA Stock or shares of common stock, par value $0.10 per share ("ERI Stock"), of Executive Risk Inc. ("ERI") that would result in Buyer being (x) an "Acquiring Person" under the Rights Agreement, dated as of December 31, 1993, between ERI and Mellon Bank, N.A., or the Rights Agreement, dated as of December 12, 1991, 80 87 between MBIA and Mellon Bank, N.A. or (y) subject, with respect to ERI, to the restrictions on "business combinations" with an "interested stockholder" under Section 203 of the Delaware General Corporation Law. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall not constitute an agreement, arrangement or understanding to acquire or dispose of any, and Seller shall therefore retain all, shares of MBIA Stock and ERI Stock, other than in either case any shares up to an amount that may remain in the Equity Portfolio by operation of the immediately preceding sentence. In consideration for any such shares so retained, Seller shall deliver to the Companies at the time of such retention cash in an amount equal to the market value (or, in the case of MBIA Stock, 95.5% thereof) of such shares at such time. Prior to the Closing, Buyer shall notify Seller of any shares of MBIA Stock or ERI Stock beneficially owned by Buyer, and Seller shall have no liability to Buyer for any losses incurred by Buyer due to any inaccuracy in such notification. Seller agrees that no shares of MBIA Stock shall be sold or retained for consideration other than cash. (c) At or prior to the Closing, Seller shall purchase or cause another Person to purchase for cash securities of American Re-Insurance Company held in the Equity Portfolio so that at Closing the aggregate market value of such securities held in the Equity Portfolio is not more than $20 million. Seller further agrees that the securities listed on Schedule 7.11(aa) shall not at the Closing be held in the Equity Portfolio. (d) At the Closing, if requested by Buyer, Seller shall transfer to the Companies readily marketable securities (to be reasonably agreed upon by Seller and 81 88 Buyer) with a market value at the Closing of up to one-seventh (but in no event more than $20 million in the aggregate) of the aggregate market value of the Equity Portfolio at such time, and in exchange therefor Buyer shall transfer to Seller securities held in the Equity Portfolio of equal market value at such time. (e) For purposes of this Section, securities to be valued at the Closing shall be valued at the market value at the close of business on the business day prior to the Closing Date (determined in accordance with Seller's pricing policies consistent with past practices), except that the value of any shares of MBIA Stock as so determined shall be reduced by 4 1/2%. (f) From the Balance Sheet Date to the date hereof Seller has not acquired any securities for the Equity Portfolio. From the date hereof until the Closing Date Seller shall transfer to the Bond Portfolio all cash proceeds received in respect of sales of securities in the Equity Portfolio immediately following receipt of such proceeds. (g) Schedule 7.11(b) lists (a) all mortgages with respect to which both a Company or Subsidiary of a Company and Seller or an Affiliate is a party (the "Shared Mortgages"), (b) each mortgage held by either Company or any of their Subsidiaries which is cross defaulted or cross collateralized with a mortgage held by Seller or an Affiliate of Seller (the "Cross Collateralized Mortgages") and (c) each real property in which or with respect to which both a Company or Subsidiary of a Company and Seller or an Affiliate has an ownership interest (the "Shared Real Estate"). Prior to the Closing, and subject to the receipt of all necessary consents and approvals (which Seller shall use its best efforts to obtain in a timely manner), 82 89 Seller shall exchange or cause to be exchanged for the Companies' and their Subsidiaries' interest in the Shared Mortgages and the Shared Real Estate, Seller's and its Affiliates' interest in the mortgages and properties set forth on Schedule 7.11(c); provided that if Seller does not effect the exchange of any such interest of any of the Companies or their Subsidiaries in any such Shared Mortgage or Shared Real Estate prior to the Closing (by reason of the failure to obtain any necessary consent or otherwise), then Seller shall use reasonable good faith efforts (including, but not limited to, committing to and effectuating the sale of its portion of any such shared investment on the same terms and conditions as the applicable Company or Subsidiary thereof may agree to sell its portion of such investment) to ensure that following the Closing the applicable Company or Subsidiary thereof will be permitted to sell its interest in such investment without any material limitations on such sale. (h) With respect to each Cross Collateralized Mortgage, prior to Closing, Seller shall either (i) exchange or cause to be exchanged for the interest of the Companies or their Subsidiaries in the Cross Collateralized Mortgage, Seller's or its Affiliate's interest in mortgages reasonably acceptable to Buyer or (ii) cause the cross collateral or cross default provisions of the Cross Collateralized Mortgage to be deleted or released. 7.12 Other Agreements. (a) Effective at the Closing, ________________ Buyer shall cause one of the Companies or one of their Subsidiaries (the "AL&C Buyer") to assume on a 100% quota share basis all of Seller's previously existing, in-force, new and renewal direct written property and casualty insurance business carried on directly by Seller in the states of Connecticut and Pennsylvania (the "AL&C 83 90 Business") in exchange for the payment to Buyer of an amount equal to the sum of the reserves for unearned premium, loss adjustment expense and incurred loss and other outstanding liabilities directly related to the AL&C Business as of the Closing Date. For each such insured, Buyer shall cause the AL&C Buyer to make offers of renewal to all persons insured under the AL&C Business at the next succeeding renewal date that occurs after the Closing. Seller agrees to provide the AL&C Buyer such underwriting information as may be reasonably required to effectuate the foregoing transactions. Buyer agrees to indemnify Seller for any losses sustained or expenses incurred by Seller as a result of the failure of Buyer or the AL&C Buyer to perform their obligations under this Section 7.12(a) or under the AL&C Business assumed. (b) ACSC has written and continues to write stop loss insurance business ("Stop Loss Business") in connection with group health business conducted by Seller's Aetna Health Plans Strategic Business Unit ("AHP"). All liabilities related to the Stop Loss Business are reinsured to Aetna Casualty Company ("ACC") on a 100% quota share basis pursuant to the Stop Loss Reinsurance Agreement dated March 25, 1991, by and between ACSC and ACC (the "Stop Loss Quota Share"). Buyer agrees that Seller shall retain the Stop Loss Business. Seller shall cause ACC, or another Affiliate, to make offers of renewal to all Persons insured under the Stop Loss Business at the next succeeding renewal date for each such insured that occurs after Closing. Buyer agrees to provide Seller or its designated Affiliate such underwriting information as may be reasonably necessary to effectuate the foregoing transactions. Notwithstanding anything in this Section 7.12(b) to the contrary, until 84 91 such time as all of the Stop Loss Business is being written in ACC or another Affiliate of Seller (but in no event for longer than three months following the Closing), Buyer agrees to continue to make ACSC available to Seller as an underwriter of Stop Loss Business in the State of Missouri, and to reinsure all such liabilities to ACC pursuant to the terms of the Stop Loss Quota Share. Seller agrees to indemnify Buyer for any losses sustained or expenses incurred by Buyer as a result of the failure of Seller or its Affiliates to perform their obligations under this Section 7.12(b) or under the Stop Loss Business. For so long as the Stop Loss Quota Share remains in effect, Seller agrees to cause one of its Affiliates to administer all of the Stop Loss Business. 7.13 Certain Insurance Policies. To the extent that, __________________________ after the Closing, any Company or any Subsidiary of any Company experiences any loss arising out of any event occurring prior to the Closing, which loss is covered by any insurance policy maintained by Seller or any of its Affiliates for the benefit of any Company or any Subsidiary of any Company, Seller will use its best efforts to assist the Companies and their Subsidiaries in pursuing a claim under such policy and shall remit to the Companies or their Subsidiaries any proceeds received by Seller or its Affiliates pursuant to such policy (it being understood that Seller has no obligation to provide or pay for insurance coverage for any of the Companies or their Subsidiaries after the Closing). 85 92 ARTICLE 8 TAX MATTERS 8.1 Definitions. The following terms, as used herein, ___________ have the following meanings: "Code" means the Internal Revenue Code of 1986, as amended. "Combined State Tax" means, with respect to each state or local taxing jurisdiction, any income, franchise or similar tax payable to such state or local taxing jurisdiction in which a member of the Seller Group files Returns (as hereinafter defined) with the Companies and their Subsidiaries (or any member thereof), on a consolidated, combined or unitary basis for purposes of such income or franchise tax. "Federal Tax" means any Tax imposed under the Code. "Final Determination" shall mean (i) with respect to Federal Taxes, a "determination" as defined in Section 1313(a) of the Code or the execution of an Internal Revenue Service Form 870AD and, (ii) with respect to Taxes other than Federal Taxes, any final determination of liability in respect of a Tax that, under applicable law, is not subject to further appeal, review or modification through proceedings or otherwise (including the expiration of a statute of limitations or a period for the filing of claims for refunds, amended returns or appeals from adverse determinations). "NOLs" mean all net operating losses and net capital losses of the Companies and their Subsidiaries. "Post-Closing Tax Period" means any Tax period beginning after the Closing Date and the portion of any Straddle Period beginning after the Closing Date pursuant to Section 8.5(i). 86 93 "Post-September 30 Tax Period" means (i) the portion of calendar year 1995 beginning after September 30, 1995, (ii) any Tax period beginning after December 31, 1995 and ending on or prior to the Closing Date, and (iii) the portion of any Straddle Period ending on and including the Closing Date pursuant to Section 8.5(i). "Pre-September 30 Tax Period" means any Tax period ending on or before September 30, 1995 and the portion of calendar year 1995 ending on and including September 30, 1995. "Seller Group" means, (i) with respect to Federal Taxes, the affiliated group of corporations (as defined in Section 1504(a) of the Code with due regard to Section 1504(c) of the Code) of which Seller is a member and, (ii) with respect to state or local income or franchise Taxes, the consolidated, combined, unitary or similar group of which Seller or any of its Affiliates is a member. "Separate State Tax" means with respect to each state, local or foreign taxing jurisdiction, any tax (other than Combined State Tax) payable by the Companies and their Subsidiaries to such state, local or foreign taxing jurisdiction. "Separate State Income Tax" means with respect to each state, local or foreign taxing jurisdiction, any income, franchise or similar tax (other than Combined State Tax) payable by the Companies and their Subsidiaries to such state, local or foreign taxing jurisdiction. "Straddle Period" means any Tax period beginning before and ending after the Closing Date. "Tax" or "Taxes" means all taxes, charges, fees, levies or other assessments, including, without limitation, any net income tax or franchise tax based 87 94 on net income, any alternative or add-on minimum taxes, any gross income, gross receipts, premium, sales, use, ad valorem, value added, transfer, profits, license, social security, medicare, payroll, employment, excise, severance, stamp, occupation, property, environmental or windfall profit tax, custom duty or other tax, governmental fee or other like assessment, together with any interest, penalty, addition to tax or additional amount imposed by any governmental authority (domestic or foreign) responsible for the imposition of any such tax (a "Taxing Authority"). "Tax Benefit" means any deduction, credit, amortization, exclusion from income, loss or other tax attribute. "Tax Sharing Agreement" means the Tax Sharing Agreement, entered into by Seller and its Subsidiaries, applicable to the taxable year ending December 31, 1994 and all other periods specified therein, and the procedures and practices employed pursuant thereto or reflected therein including, without limitation, all procedures and practices with respect to alternative minimum taxes. 8.2 Tax Representations. Seller represents and ___________________ warrants to Buyer as of the date hereof that, except as set forth on Schedule 8.2: (i) all Tax returns, statements, reports, forms and other documentation (collectively, "Returns") required to be filed with any Taxing Authority by or with respect to the Companies or any of their Subsidiaries on or before the Closing Date with respect to any Pre-September 30 Tax Period have been filed or will be timely filed on or before the Closing Date in accordance with all applicable laws, and all such Returns are true, correct and complete in all material respects; (ii) the Companies and their Subsidiaries have timely paid all Taxes shown to be due on such Returns; 88 95 (iii) the Companies and their Subsidiaries have made adequate provision on the September Adjusted GAAP Balance Sheet for all Taxes payable by the Companies and their Subsidiaries for any Pre-September 30 Tax Period for which no Return has yet been filed or for which Returns have been filed but payment of the Tax shown to be due thereon is not yet due; (iv) there is no action, suit, proceeding, investigation, assessment, adjustment, audit or claim now proposed or pending against or with respect to the Companies or their Subsidiaries in respect of any Tax; (v) there are no outstanding waivers or other agreements extending any statutory periods of limitation for the assessment of Taxes of the Companies and their Subsidiaries; (vi) on or prior to the date hereof, Seller has provided Buyer with copies of all record retention agreements currently in effect between the Seller Group and any Taxing Authority, and no such record retention agreements have been entered into or modified since September 30, 1995; and (vii) the Tax Sharing Agreement is the only agreement which governs the liability for Taxes between Seller and the Companies and their Subsidiaries. 8.3 Tax Covenants. (a) Except as otherwise required _____________ by law, Buyer covenants that it will not cause or permit the Companies, any of their Subsidiaries or any Affiliate of Buyer (i) to take any action on the Closing Date, other than in the ordinary course of business or except as agreed in writing between the parties (including, but not limited to, the distribution of any dividend or the effectuation of any redemption) that could give rise to any Tax liability or loss of the Seller Group under this Agreement, (ii) to make any election or deemed election 89 96 under Section 338 of the Code with respect to the purchase of the Shares pursuant to this Agreement or (iii) to amend any Return or file a claim for refund that results in any increased Tax liability or reduction of any Tax Benefit of the Seller Group or any Seller Affiliate. (b) Except as otherwise required by law or set forth in section (c) below, Seller covenants and agrees that no member of the Seller Group shall amend any Return, file any claim for refund, change any method of tax accounting, or make or change any Tax election with respect to (i) any Tax period that results in any increased Tax liability or reduction of Tax Benefits of Buyer, the Companies or any of their Subsidiaries, or any of their Affiliates in respect of any Post-September 30 Tax Period or any Post-Closing Tax Period and (ii) any Post-September 30 Tax Period. Furthermore, Seller covenants and agrees that it shall not make any change to its election under Treasury Regulation section 1.1502-20(g) as described in Section 8.7 hereof. (c) Prior to the Closing, Seller will reverse any deductions taken pursuant to Section 847 of the Code. Such reversal shall have no effect on the current or deferred tax balances on the September Adjusted GAAP Balance Sheet and shall not result in any Tax expense (state or Federal) for the Companies and their Subsidiaries for any Post-September 30 Tax Period or any Post-Closing Tax Period. (d) Each party agrees that, as between the Seller on the one hand and the Buyer on the other hand, the other is to have no liability for any Tax or reduction of Tax Benefits resulting from any action referred to in Sections 8.3(a), (b) and (c), and each party shall indemnify and hold harmless (hereafter, the "Tax Indemnified Party") the other party and its Affiliates (hereafter, the "Tax Indemni- 90 97 fied Party") against any such Tax or reduction in Tax Benefits. Each Tax Indemnified Party shall give prompt notice to the Tax Indemnifying Party of the assertion of any claim, or the commencement of any action or proceeding, in respect of which indemnity may be sought under this Section 8.3(d). Failure to give the Tax Indemnifying Party such notice shall not relieve such party of its indemnification obligation pursuant to Sections 8.3(a), (b) and (c) unless and to the extent that the Tax Indemnifying Party and its Affiliates are materially prejudiced as a result thereof. The Tax Indemnifying Party shall be entitled to participate in, and to the extent the matter reasonably can be handled separately from other items not within the scope of this Agreement, shall be entitled to control the defense of any such claim, action or proceeding at its own expense and neither party shall settle any such claim, action or proceeding without the other party's prior written consent, which shall not be unreasonably withheld. (e) Buyer shall promptly pay or cause to be paid to Seller all refunds of Taxes (including any interest thereon) received by Buyer or any of its Affiliates which are attributable to Taxes paid by or on behalf of Seller, the Companies or any of their Subsidiaries with respect to any Pre- September 30 Tax Period to the extent that such refund and any interest thereon were not reflected on the September Adjusted GAAP Balance Sheet. (f) Seller shall promptly pay or cause to be paid to Buyer all refunds of Taxes (including any interest thereon) received by any member of the Seller Group which are attributable to Taxes paid by or on behalf of the Companies or any of their Subsidiaries to the extent that such refund and any interest thereon were reflected on the September Adjusted GAAP Balance Sheet. 91 98 (g) All transfer, documentary, sales, use, stamp, registration and other such Taxes incurred in connection with this Agreement other than Taxes incurred in connection with the Transition Agreements (including, without limitation, any New York State real property transfer and transfer gains Taxes, New York City real property transfer Tax and any similar Taxes imposed in other states or subdivisions) (collectively, "Conveyance Taxes") shall be paid by Seller. Seller will, at its own expense, file all necessary Returns with respect to all such Conveyance Taxes, and, to the extent required by applicable law, Buyer will, and will cause its Affiliates to, join in the execution of any such Returns. Buyer shall, within ten days of a written request therefor (including a statement calculating in reasonable detail Buyer's payment obligation pursuant to this Section 8.3(g)), reimburse Seller for 50% of all such Conveyance Taxes and Seller's out-of-pocket expenses incurred in connection with the filing of such Returns. (h) Buyer and Seller shall jointly determine the provision for discounted P&C losses of the Companies and their Subsidiaries under Sections 832(b)(5) and 846 of the Code for the taxable period ending on the Closing Date. If the parties are unable to agree on the provision for discounted P&C losses, such dispute shall be resolved by independent accountants or an actuarial consultant acceptable to both parties whose fees and expenses shall be borne equally by Buyer and Seller. 8.4 Termination of Existing Tax Sharing Agreements. ______________________________________________ On the date hereof or as soon as practicable thereafter, the Tax Sharing Agreement between the Companies and their Subsidiaries and any member of the Seller Group shall be terminated as of September 30, 1995. After such date, neither the Companies and their 92 99 Subsidiaries, Seller nor any of its Affiliates shall have any further rights or liabilities thereunder. This Agreement shall be the sole Tax sharing agreement relating to the Companies and their Subsidiaries for all Tax periods ending on or prior to the Closing Date. 8.5 Return Filings and Payment of Tax. (a) Seller _________________________________ shall prepare and file or cause the relevant Company or Subsidiary to prepare and file on a timely basis and consistent with past practices all Returns with respect to the Companies and their Subsidiaries for (i) all Pre-September 30 Tax Periods (excluding calendar year 1995), (ii) calendar year 1995 and (iii) all Post-September 30 Tax Periods (excluding calendar year 1995 and any Straddle Period). (b) Buyer shall prepare or cause to be prepared and file or cause to be filed on a timely basis all other Returns with respect to the Companies and their Subsidiaries. Buyer shall pay or cause to be paid to the appropriate Taxing Authority the Taxes shown to be due on all Returns required to be filed by it pursuant to this Section 8.5(b). (c) In connection with Returns described in subsection (i) of Section 8.5(a), (x) Seller shall pay or cause the relevant Company or Subsidiary to pay, to the extent such Tax liability is reflected as a current liability on the September Adjusted GAAP Balance Sheet (as adjusted for any payments made by the Companies and their Subsidiaries with respect to such Returns after September 30, 1995 and prior to the payment date in question), the appropriate Taxing Authority the amount of Taxes shown to be due on such Returns, and (y) to the extent the amount, if any, reflected as a current liability on the September Adjusted GAAP Balance Sheet with respect thereto exceeds the actual amount of such liability, the Companies and their 93 100 Subsidiaries shall pay such excess to Seller simultaneously with the payment of Taxes to such Taxing Authority. (d) In connection with Returns for calendar year 1995, (x) with respect to the Pre-September 30 Tax Period of such year, Seller shall pay to the relevant Taxing Authority or Seller (or, if such payment is due after the Closing Date, Buyer) shall cause the relevant Company or Subsidiary to pay, to the extent such Tax liability is reflected as a current liability on the September Adjusted GAAP Balance Sheet (as adjusted for any payments made by the Companies and their Subsidiaries with respect to such Returns after September 30, 1995 and prior to the payment date in question), Seller or the appropriate Taxing Authority such Company's or Subsidiary's Attributable Amount (as defined in Section 8.5(i)) with respect to such Returns, (y) with respect to the Post-September 30 Tax Period of such year, Seller (or, if such payment is due after the Closing Date, Buyer) shall cause the relevant Company or Subsidiary to pay Seller or the appropriate Taxing Authority such Company's or Subsidiary's Attributable Amount with respect to such Returns, and (z) to the extent the amount reflected as a current liability on the September Adjusted GAAP Balance Sheet with respect to the Pre-September 30 Tax Period of such year exceeds the Attributable Amount with respect to such period, Seller or Buyer, as the case may be, shall cause the Companies and their Subsidiaries to pay such excess to Seller simultaneously with the payment of Taxes to such Taxing Authority. For purposes of this subsection (d), any payments required to be made by the Companies and their Subsidiaries shall be made one business day prior to the due date of the relevant Return (giving effect to any applicable extensions thereto). 94 101 (e) In connection with Returns described in subsection (iii) of Section 8.5(a), Seller (or, if the payment with respect to such Return is due after the Closing Date, Buyer) shall cause the relevant Company or Subsidiary to pay Seller or the appropriate Taxing Authority such Company's or Subsidiary's Attributable Amount with respect to such Returns one business day prior to the due date for such Return (giving effect to any applicable extensions thereto). (f) With respect to any Straddle Period, Seller or Buyer, as the case may be, shall cause the Companies and their Subsidiaries to pay, when due, Seller or the appropriate Taxing Authority the Attributable Amount, if any, with respect thereto. (g) Seller shall (i) provide Buyer with a copy of the income and franchise Tax Returns described in Section 8.5(a) hereof which have not been filed as of the date hereof at least fifteen days prior to filing such Returns, and (ii) make available for Buyer's review the premium Tax Returns described in Section 8.5(a) hereof which have not been filed as of the date hereof as soon as reasonably practicable, but in no event more than 60 days after filing such Returns, in both cases, accompanied by a statement calculating in reasonable detail the Attributable Amount, if any, pursuant to Sections 8.5(c), (d), (e) and (f). To the extent that the total amount of Tax payments made by the Companies and their Subsidiaries with respect to such Returns pursuant to Sections 8.5(c), (d), (e) and (f) (other than payments made by the Companies and their Subsidiaries pursuant to Section 8.5(c)(y) or Section 8.5(d)(z)) exceeds the aggregate amount of the liability shown on such statements or, in the case of Section 8.5(c) and the Pre- September 30 Tax Period of calendar year 1995, if less, the amount reflected on the September Adjusted GAAP 95 102 Balance Sheet, Seller shall pay the Companies and their Subsidiaries within 30 days the amount of such excess. (h) If Buyer disputes a liability of the Companies and their Subsidiaries as determined by Seller under Section 8.5(g), Buyer may, within 30 days after delivery of the statement referred to in Section 8.5(g), deliver a notice to Seller disagreeing with such calculation and setting forth Buyer's calculation of such amount. Any notice of disagreement shall specify those items and amounts as to which Buyer disagrees, and, solely for purposes of this Section 8.5, Buyer shall be deemed to have agreed with all other items and amounts contained in the statement not the subject of such disagreement, except for such items and amounts which may be affected by any disputed items and amounts. If a notice of disagreement shall be delivered pursuant to this Section 8.5(h), Seller and Buyer shall, during the 30 days following such delivery, use their best efforts to reach agreement on the disputed items or amounts. If the parties are unable to agree on the allocation of Tax payments between Seller, on the one hand, and the Companies and their Subsidiaries, on the other hand, under Sections 8.5(c), (d), (e) and (f) during such period, such dispute shall be resolved by the Independent Accountants whose fees and expenses shall be borne by the Companies and their Subsidiaries unless the resolution of such dispute as determined by such accountants results in an adjustment that reduces the obligation of the Companies and their Subsidiaries with respect to the disputed item or amount by more than 10% of such amount as determined by Seller pursuant to Section 8.5(g), in which case Seller shall bear the cost of such fees and expenses, and the party owing Taxes shall pay to the other party the amount determined by such accountants within three business days of such determination. 96 103 (i) For purposes of this Article 8, the Taxes attributable to the Companies and their Subsidiaries (the "Attributable Amount") shall be (i) with respect to each Federal Tax and Combined State Tax Return prepared pursuant to Section 8.5(a), an amount equal to the Tax liability that the Companies and their Subsidiaries would pay on their taxable income if they were not filing combined, consolidated or unitary returns with any other member of the Seller Group (excluding the Companies and their Subsidiaries), and (ii) for each Separate State Tax Return, the Tax liability of the Company and its Subsidiaries. For purposes of this Section 8.5(i), the Attributable Amount for the Pre-September 30 Tax Period and the Post-September 30 Tax Period of calendar year 1995 shall be allocated on an "interim closing of the books method" as of 11:59 p.m. on September 30 and the Closing Date, respectively; provided, however, that ________ _______ exemptions, allowances, deductions or other Taxes determined on a basis other than income, premium or sales that are calculated on an annual basis and annual property taxes shall be prorated by allocating the amount of such exemptions, allowances or deductions in the case of calendar year 1995, to Seller, by multiplying such amount by 273/365; provided, further, that the ________ _______ same amount of taxable income or loss of the Companies and their Subsidiaries for the Pre-September 30 Tax Period of calendar year 1995 used for determining the value of the NOLs reflected on the September Adjusted GAAP Balance Sheet shall be assumed to be the actual taxable income or loss of the Companies and their Subsidiaries for such period; provided, further, that for ________ _______ purposes of determining the taxable income or loss of the Companies and their Subsidiaries for any Post-September 30 Tax Period, the September 30 NOLs shall be assumed to be the actual NOLs as of September 30, 1995. 97 104 (j) For purposes of Section 8.5 and Section 8.8, the reserves accrued on the September Adjusted GAAP Balance Sheet with respect to any guaranty fund assessment, second injury fund assessment, special insurance assessment or similar assessment or tax shall be deemed to be the legal liability of the Companies and their Subsidiaries on September 30, 1995. No payments under Section 8.5 shall be made between Buyer or the Companies and their Subsidiaries and Seller with respect to any guaranty fund assessment, second injury fund assessment, special insurance assessment or similar assessment or tax. 8.6 Cooperation on Tax Matters. (a) Buyer shall, and __________________________ shall cause its Affiliates, the Companies and the Subsidiaries to, and Seller shall, and shall cause the members of the Seller Group to, provide any requesting party with such reasonable assistance (including the execution and delivery of such powers of attorney as are reasonably necessary to carry out the intent of this section) and information (including access to books and records) as may reasonably be requested by such party in connection with (i) the preparation of any Return, (ii) the conduct of any proceeding relating to liability for or refunds or adjustments with respect to Taxes, and (iii) any other matter that is a subject of this Article 8. Such cooperation and assistance shall be provided to the requesting party promptly upon its request. (b) Buyer and its Affiliates, on the one hand, and Seller and the Seller Group, on the other hand, shall retain or cause to be retained all Returns, schedules, workpapers, and all material records or other documents relating thereto, until the expiration of the statute of limitations (including any waivers or extensions thereof) of the taxable years to which such Returns and other documents relate. Prior to transferring, discarding or destroying any material records or documents relating 98 105 to any Pre-September 30 Tax Period or Post-September 30 Tax Period, Buyer and its Affiliates, on the one hand, and Seller and the Seller Group, on the other, shall provide the other party with reasonable notice and, if such party so requests, the opportunity to take possession of such records and documents solely at its cost and expense. Furthermore, each party agrees to abide by or cause the abidance with all record retention agreements entered into with any Taxing Authority to the extent that compliance therewith was possible as of September 30, 1995. Seller and its Affiliates shall not without the prior written consent of Buyer enter into or modify any record retention agreement with any Taxing Authority which relates to the Companies or any of their Subsidiaries. In order to keep all parties informed as to the expiration of the statute of limitations for any period, at least thirty days prior to the end of each calendar year, each Party (the "Notifying Party") shall provide the other (the "Notified Party") with a schedule setting forth in reasonable detail which Pre-September 30 Tax Periods or Post-September 30 Tax Periods remain open with respect to the assessment of income taxes of the Companies and their Subsidiaries as of the date of such notice and a good faith estimate of when such Tax periods are expected to be closed by the expiration of the applicable statutory period of limitations or otherwise. To the extent that the Notified Party does not receive the notice described in the preceding sentence with respect to any Pre-September 30 Tax Period or Post- September 30 Tax Period of the Companies or any of its Subsidiaries, such Notified Party shall retain such books and records relating to such Pre-September 30 Tax Periods and Post- September 30 Tax Periods until the expiration of the applicable statutory period of limitations (without giving effect to any extensions or waivers) and, subject to any record retention agreements with any Taxing Authority then in force, shall 99 106 notify the Notifying Party by registered mail and facsimile of its intention to destroy or dispose of such books and records (the "Disposal Notice"). To the extent that the Notified Party does not receive a response from the Notifying Party within thirty days of sending the Disposal Notice that the applicable statutory period of limitations for the years in question remain open or that the Notifying Party intends to take possession of such books and records within sixty days of receipt of such Disposal Notice at its sole cost and expense, the Notified Party shall be entitled to destroy or dispose of any such books and records after the expiration of such statutory period of limitations (without giving effect to any extensions or waivers). (c) Seller shall furnish to Buyer, simultaneously with the delivery of the September Adjusted GAAP Balance Sheet pursuant to Section 2.3(a), a schedule of the deferred and current Tax assets (including any NOLs) and deferred and current Tax liabilities of the Companies and their Subsidiaries to the extent such items are reflected on the September Adjusted GAAP Balance Sheet. Such schedule shall include a listing of temporary differences (including NOLs), the amount of deferred tax assets (including NOLs) or deferred tax liabilities associated with each temporary difference and the estimated reversal period (by amount and year) of each temporary difference. The schedule shall also include a detail of current tax assets and liabilities by type of tax (premium, property, state income, etc.). 8.7 Tax Benefits. (a) Seller shall elect to ____________ reattribute to itself, in accordance with Treasury regulation 1.1502-20(g), an amount of NOLs equal to the September 30 NOLs (v) reduced by (i) the portion of such NOLs for which the Seller has made payment pursuant to Section 8.7(j) hereof, and (ii) the portion of such NOLs used by the Companies and their Subsidiaries to reduce their taxable income 100 107 for a Post-September 30 Tax Period and (w) increased by the amount, if any, of NOLs attributable to Post-September 30 Special Items, as described in the last sentence of Section 8.7(e) hereof. Seller shall also reattribute any remaining amount of NOLs, based on the 1996 Seller Group consolidated Federal Tax Return, not otherwise fairly attributable to NOLs described in Section 8.7(k)(ii). For purposes of this Section 8.7(a), "taxable income" of the Companies and their Subsidiaries shall be determined without regard to (x) the September 30 NOLs, (y) the Post-September 30 Special Items (as defined in Section 8.7(e) hereof) and (z) any additions to reserves claimed with respect to the Post-September 30 Tax Period which satisfy the requirement for reserves relating to a Permitted Capital Contribution, calculated as if such entities were not filing a consolidated return with any other member of the Seller Group. At least five days prior to the Closing Date, Seller shall provide Buyer with a schedule setting forth Seller's good faith estimate of the amount of NOLs which will not be reattributed to Seller and the years in which such NOLs expire. (b) On or prior to the date on which Seller files its consolidated Federal Tax Return for the Tax period which includes the Closing Date, Seller shall provide Buyer with a schedule of the actual NOLs that were reattributed to Seller on such Return pursuant to Treasury regulation section 1.1502-20(g) (the "Reattributed NOLs"). Buyer agrees to cause each of the Companies and their Subsidiaries with respect to which NOLs are reattributed under this Section 8.7 to execute such statements or other documents as may be required to comply with the provisions of the Code and the regulations. (c) If there is a Final Determination that (i) reduces the amount of the Reattributed NOLs or (ii) relates to a Return for, or with respect to, a Pre-September 101 108 30 Tax Period of any member of the Seller Group which, in either case, entitles (x) the Companies or any of their Subsidiaries to claim Tax Benefits in their Post-September 30 Tax Period Returns solely as a result of such Final Determination or (y) Buyer and its Affiliates to claim Tax Benefits in their Post-Closing Tax Period Returns solely as a result of such Final Determination, to the extent permitted by law, the relevant party shall claim such Tax Benefits in its earliest available Post-September 30 Tax Period Returns or Post-Closing Tax Period Returns, as the case may be. With respect to each such Post-September 30 Tax Period or Post-Closing Tax Period in which a Federal Tax Savings (as defined below) is realized, the relevant party shall pay to Seller the Federal Tax Savings within 90 days of filing the applicable Federal Tax Return for such period. The Federal Tax Savings for the Post-September 30 Tax Period or the Post-Closing Tax Period in question shall be an amount equal to the excess, if any, of (i) the amount of Federal Taxes which would have been payable by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, for such Tax period had such Tax Benefit not been claimed in their Federal Tax Return for such period over (ii) the amount of Federal Taxes actually payable by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, with respect to such period. If, subsequent to the payment to Seller of any such amount, there shall be a reduction in the amount of the Federal Tax Savings as a result of the utilization by Buyer, the Companies or any of their Subsidiaries or Affiliates of any other Tax Benefits that arise in a Post-September 30 Tax Period or Post- Closing Tax Period, Seller shall repay to Buyer, within 90 days of such event (an "Event"), any amount which would not have been payable to Seller pursuant to this Section 8.7(c) had the Federal Tax Savings originally been determined in light 102 109 of the Event. The principles of the foregoing provisions shall continue to apply with respect to any utilization of a Federal Tax Savings subsequent to an Event, as well as to any Event subsequent thereto. (d) If there is a Final Determination that relates to a Return for, or with respect to, a Pre-September 30 Tax Period of any member of the Seller Group which results in an increase in the liability for Federal Taxes of (x) the Companies or any of their Subsidiaries for any Post-September 30 Tax Period solely as a result of such Final Determination or (y) Buyer and its Affiliates for any Post-Closing Tax Period solely as a result of such Final Determination, Seller shall pay the relevant party the Federal Tax Detriment (as defined below) within 90 days of such party's filing of the applicable Federal Tax Return for the Post-September 30 Tax Period or Post-Closing Tax Period in which such party incurs the Federal Tax Detriment. The Federal Tax Detriment for the Post-September 30 Tax Period or the Post-Closing Tax Period in question shall be the excess, if any, of (i) the aggregate amount of Federal Taxes payable by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, with respect to such period after giving effect to any adjustments required to be reported on their Federal Tax Return for such period by reason of such Final Determination over (ii) the aggregate amount of Federal Taxes that would have been payable by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, for such period had such adjustments not been reported in their Federal Tax Return for such period. If the Companies or any of their Subsidiaries or Buyer and its Affiliates realize any reduction in a Federal Tax Detriment for which they have received a payment pursuant to this subsection (d), other than by reason of an Event, Buyer shall pay Seller the amount of any such reduction. The principles 103 110 of this Section 8.7(d) shall continue to apply upon the recurrence of a Federal Tax Detriment subject to reversal pursuant to the preceding sentence, as well as any subsequent reduction of such reversal. (e) To the extent that the Companies and their Subsidiaries realize a Federal Tax Savings on their Federal Tax Returns for a Post-September 30 Tax Period as a result of the use in any such Return of any Tax Benefit attributable to (i) deductions arising in respect of Transferred Employee stock options which are exercised for Seller common stock after September 30, 1995 and on or prior to the Closing Date, (ii) alternative minimum tax credits available by reason of alternative minimum tax paid by the Seller Group, and (iii) other deductions relating to Benefit Arrangements, the costs of which are borne by the Seller Group (excluding the Companies and their Subsidiaries) (hereafter (i), (ii) and (iii) are referred to as "Post-September 30 Special Items"), Seller or Buyer, as the case may be, shall cause the Companies and their Subsidiaries to pay Seller the amount of such Federal Tax Savings within 90 days of filing the applicable Federal Tax Return for the Post-September 30 Tax Period in which the relevant party realizes such Federal Tax Savings; provided, ________ however, that such Federal Tax Savings shall be payable to _______ Seller only to the extent that the value of any such Post- September 30 Special Item is not reflected on the September Adjusted GAAP Balance Sheet; provided, further, that the amount ________ _______ of Federal Tax Savings to be paid to Seller shall be reduced by any costs or expenses (including Taxes) incurred by the Companies and their Subsidiaries solely as a result of claiming the Tax Benefits relating to such Post-September 30 Special Items. If, subsequent to the payment to Seller of such Federal Tax Savings, there shall be a reduction in the amount of such Federal Tax Savings as a result of the 104 111 utilization by the Companies and their Subsidiaries of any other Tax Benefits that arise in (i) a Post-September 30 Tax Period or (ii) a Post-Closing Tax Period due to a Final Determination, Seller shall repay to the Companies and their Subsidiaries within 90 days of such Event, any amount which would not have been payable to Seller pursuant to this Section 8.7(e) had such Federal Tax Savings originally been determined in light of the Event. The principles of the last sentence of Section 8.7(c) hereof shall apply here mutatis mutandis. Solely for purposes _______ ________ of determining whether the Companies and their Subsidiaries realize such Federal Tax Savings, the taxable income of the Companies and their Subsidiaries for such Post-September 30 Tax Period (determined in accordance with the principles of Section 8.5(i) and without regard to any Post-September 30 Special Item) and then the taxable income of the members of the Seller Group (excluding the Companies and their Subsidiaries) shall be offset by the NOLs and any Tax Benefit attributable to a Post-September 30 Special Item in the following order; first, by the September 30 NOLs; second, by any NOLs generated by the Companies and their Subsidiaries in any Post-September 30 Tax Period; and third, by any Tax Benefit relating to a Post-September 30 Special Item. To the extent that a Post-September 30 Special Item generates a Tax Benefit that is not utilized by the Companies and their Subsidiaries in a Post-September 30 Tax Period, such amount will be included in the amount of NOLs to be reattributed to Seller as described in Section 8.7(a) hereof. (f)(A) To the extent that Buyer and its Affiliates realize a Federal Tax Savings on their Federal Tax Returns for a Post-Closing Tax Period, as a result of the use in any such Return of any Tax Benefit attributable to (i) deductions arising in respect of Transferred Employee stock options which are exercised for 105 112 Seller common stock after the Closing Date, (ii) alternative minimum tax credits available by reason of alternative minimum tax paid by the Seller Group, and (iii) other deductions relating to retiree life and health and the 1996 payout on the Aetna employee incentive program, subject to the receipt of a private letter ruling from the Internal Revenue Service which concludes that such deductions are allowable to the Companies and their Subsidiaries without any inclusion in the income of Buyer or any of its Affiliates in a Post-Closing Tax Period ((hereafter (i), (ii) and (iii) are referred to as "Post-Closing Special Items," and together with the Post-September 30 Special Items, the "Special Items"), Buyer shall pay Seller such Federal Tax Savings within 90 days of filing the applicable Federal Tax Return for the Post-Closing Tax Period in which Buyer and its Affiliates realize such Federal Tax Savings; provided, however, ________ _______ that such Federal Tax Savings shall be payable to Seller only to the extent that the value of such Post-Closing Special Item is not reflected on the September Adjusted GAAP Balance Sheet; provided, further, that the amount of Federal Tax Savings to be ________ _______ paid to Seller shall be reduced by any costs or expenses (including Taxes) incurred by Buyer and its Affiliates solely as a result of claiming the Tax Benefits relating to the Post- Closing Special Items which resulted in the Federal Tax Savings. If, subsequent to the payment to Seller of such Federal Tax Savings, there shall be a reduction in the amount of such Federal Tax Savings as a result of the utilization by Buyer and its Affiliates of any other Tax Benefits that arise in a Post- Closing Tax Period, Seller shall repay to Buyer within 90 days of such Event, any amount which would not have been payable to Seller pursuant to this Section 8.7(f) had such Federal Tax Savings originally been determined in light of the Event. The principles of the foregoing 106 113 provisions shall continue to apply with respect to any utilization of a Federal Tax Savings subsequent to an Event, as well as to any Event subsequent thereto. (B) If the private letter ruling described in Section 8.7(f)(A)(iii) above is not obtained, Buyer and its Affiliates may, in their sole discretion, claim the deductions referred to in such subsection (iii). In any case, if Buyer and its Affiliates claim such deductions, such deductions shall be treated as if they were Post-Closing Special Items for purposes of Sections 8.7(f)(A), (g), (h) and (i). (g) To the extent that, with respect to a Post- Closing Tax Period, Buyer and its Affiliates, incur a Special Item Federal Tax Detriment (as defined below) as a result of any adjustment (including, but not limited to, any adjustment resulting from an audit by any Taxing Authority, filing an amended Return or the use by the Companies or their Subsidiaries or Buyer and its Affiliates of a carryforward or carryback) to the taxable income of the relevant party in any Post-Closing Tax Period Return caused by the use of any Tax Benefit attributable to a Special Item, Seller shall pay the relevant party, and indemnify the relevant party against, the Special Item Federal Tax Detriment within 15 days of the incurrence of such detriment. The Special Item Federal Tax Detriment for the Post- Closing Tax Period in question shall be the excess, if any, of (i) the aggregate amount of Federal Taxes payable by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, with respect to such period after giving effect to any adjustments required to be made by reason of claiming such Tax Benefit over (ii) the aggregate amount of Federal Taxes that would have been payable by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, for such period had such adjustments not been made. 107 114 (h) With respect to subsections (e), (f) and (g) of this Section 8.7, (i) any conflicts arising between such subsections and any other provision of this Article 8 shall be resolved by applying first the provisions of subsections (e), (f) and (g) of Section 8.7 and then, to the extent such other provision is not in conflict, such other provision of this Article 8, and (ii) in determining whether a Tax Benefit relating to a Special Item is utilized by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, (including, but not limited to, as a result of any audit by any Taxing Authority, filing an amended Return or as a result of the use by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, of any carryforward or carryback), any Tax Benefit relating to a Special Item shall be presumed to be used by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, only after all other available Tax Benefits have been utilized by the Companies and their Subsidiaries or Buyer and its Affiliates, as the case may be, to reduce their taxable income. (i) To the extent permitted by law, as determined by Buyer in good faith, Buyer agrees to claim or cause the Companies or their Subsidiaries to claim in a proper and timely fashion in the earliest Post-Closing Tax Period all or any Tax Benefits attributable to the Special Items. Buyer shall promptly notify Seller of any proposed disallowance of any such Tax Benefit and shall give Seller such information with respect thereto as Seller may reasonably request. Seller may, at its own expense, assist Buyer in the defense of any Tax Claim with respect to any Tax Benefit described in Sections 8.7(e) and (f); provided, however, that such assistance shall be limited solely ________ _______ to communications with Buyer and its Affiliates. Neither 108 115 Buyer nor any of its Affiliates shall settle, compromise or otherwise dispose of any such Tax Claim without providing prior written notice to Seller. (j) Notwithstanding anything contained in this Agreement, to the extent that any NOLs or other Tax Benefits that are reflected on the September Adjusted GAAP Balance Sheet or were generated by the Companies and the Subsidiaries in any Post-September 30 Tax Period (determined without regard to the Post-September 30 Special Items) are absorbed or otherwise utilized by the Seller Group (other than the Companies and their Subsidiaries) to offset its taxable income in any Tax period ending on or prior to December 31 of the calendar year that includes the Closing Date, Seller shall pay to the party or parties which generated such NOLs or Tax Benefits, within 15 days of the end of the quarter in which such reduction or elimination occurred, an amount equal to 35% of such NOLs or Tax Benefits (other than credits) or the amount of any such credit, as the case may be. (k) Notwithstanding anything in this Section 8.7 to the contrary, it is the intent of the parties that the Buyer receive a value relating to the NOLs equal to the amount of the NOL deferred tax asset (i) stated on the September Adjusted GAAP Balance Sheet, and (ii) generated by the Companies and their Subsidiaries in any Post-September 30 Tax Period (including the portion of calendar year 1995 beginning after September 30) or Post-Closing Tax Period, in each case computed pursuant to the principles established in Section 8.5(i) and excluding any Special Items. The parties agree to take all actions necessary (including, without limitation, adjusting the amount of NOLs to be reattributed pursuant to Section 8.7(a) hereof and/or intercompany settlements) in order to ensure that Buyer and its Affiliates 109 116 receive only the value (but no less than such value) attributable to the NOLs which it is entitled pursuant to the preceding sentence. 8.8 Indemnification by Seller. (a) Seller hereby _________________________ indemnifies Buyer and its Affiliates against and agrees to hold them harmless from any (i) Tax of the Companies and their Subsidiaries for any Pre-September 30 Tax Period, (ii) liability of the Companies and their Subsidiaries for any Tax of the Seller Group under Treasury regulation section 1.1502-6 or any similar provision of state or local law as a result of the Companies or any of their Subsidiaries being a member of the Seller Group, (iii) penalties, interest or other costs and expenses with respect to Taxes for a Post-September 30 Tax Period attributable to the failure of any member of the Seller Group to prepare or timely file any Returns or pay any Taxes shown to be due on such Returns of the Companies and their Subsidiaries in a manner consistent with past practice, and (iv) liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses), arising out of or incident to the imposition, assessment or assertion of any Tax (including those incurred in the contest in good faith in appropriate proceedings relating to the imposition, assessment or assertion of any Tax) described in clause (i) through (iv) of this paragraph (the sum of (i) through (iv) being referred to as a "Buyer Loss"); provided, however, that Seller shall not indemnify Buyer and its ________ _______ Affiliates for (i) any Taxes that are measured on a retrospective base (e.g., superfund taxes) that includes any Pre-September 30 Tax Period and that are imposed with respect to any Post-September 30 Tax Period (including, without limitation, only that portion of calendar year 1995 beginning after September 30) or Post-Closing Tax Period of the Companies and their Subsidiaries by reason of any change in law 110 117 enacted after September 30, 1995, (ii) any Taxes reflected on the September Adjusted GAAP Balance Sheet, (iii) any Loss attributable to or resulting from any action described in Section 8.3(a) hereof, or (iv) any guaranty fund assessment, second injury fund assessment, special insurance assessment or similar assessment or tax that was not actually assessed on or prior to September 30, 1995 or for which there is not a specified legal liability in existence on September 30, 1995 ("Excluded Taxes"); provided, further, that such Excluded Taxes ________ _______ shall not include assessments made on or prior to September 30, 1995 (including any correction in the amount of any assessments made after such date to take account of a computational error, such as using the wrong base or wrong rate or a mathematical error, in light of the facts and law at the time such computation was made) or assessments for which there is a legal liability in existence on such date; provided, further, that ________ _______ Seller shall have no obligation to make any payment to Buyer pursuant to this Section 8.8 until the amount of all claims arising pursuant hereto in the aggregate which are treated as adjustments to the Purchase Price (minus the actual reduction in the liability for Taxes of Buyer and its Affiliates as a result of realizing any Tax Benefit attributable thereto) exceeds the cushion for Taxes, if any, with respect to the Companies and their Subsidiaries reflected on the September Adjusted GAAP Balance Sheet (the "Cushion"), as adjusted for any payments made by Buyer or the Companies and any of their Subsidiaries to Seller pursuant to subsection (z) of Section 8.5(d) or otherwise pursuant to this Article 8 after September 30, 1995 and prior to Buyer's request for payment pursuant to this Section 8.8(a). On or prior to the date hereof, Seller shall provide Buyer with a schedule setting forth a good faith estimate of the Cushion, 111 118 which shall be adjusted (and promptly provided to Buyer) to reflect assets and liabilities on the September Adjusted GAAP Balance Sheet. (b) Any payment required of Seller pursuant to Section 8.8(a) shall be made not later than 30 days after receipt by Seller of written notice from Buyer stating that a Buyer Loss has been paid by Buyer or any of its Affiliates and the amount thereof and of the indemnity payment requested. Failure to give Seller such written notice shall not relieve Seller of its indemnification obligation pursuant to Section 8.8(a) unless and to the extent that Seller is materially prejudiced as a result thereof. (c) Each party shall notify the other, within ten days of receipt thereof, of any claim for Taxes made in writing to such party or its Affiliates by a Taxing Authority (a "Tax Claim") which, if successful, could affect the other party's liability for Taxes. Seller may discharge, at any time, its indemnification obligation under this Section 8.8 by paying to Buyer the amount of the applicable Buyer Loss, calculated on the date of such payment; provided, however, that if the amount of ________ _______ such Buyer Loss, at the time of a Final Determination with respect thereto, exceeds the amount paid by Seller to Buyer pursuant to the preceding clause, Seller shall pay such excess to Buyer within ten days of such Final Determination. Seller may, at its own expense, participate in and, upon notice to Buyer, assume the defense of any Tax Claim for which Seller has agreed to indemnify Buyer pursuant to Section 8.8(a). If Seller assumes such defense, Buyer shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Seller; provided, however, that to the extent such action ________ _______ reasonably could be expected adversely to affect any Tax liability of Buyer and 112 119 its Affiliates for any Post-September 30 Tax Period or Post- Closing Tax Period Seller shall not settle, compromise, or otherwise dispose of any such Tax Claim without Buyer's prior written consent, which shall not be unreasonably withheld. Buyer shall indemnify Seller from and against any (i) increase in the amount of Buyer Loss and (ii) increase in the liability for Taxes of the Seller Group incurred by reason of Buyer unreasonably withholding its consent to the matters described in this Section 8.8(c). (d) Seller shall not be liable under Section 8.8(a) for (i) any Tax the payment of which by Buyer was made without Seller's prior written consent, which shall not be unreasonably withheld, or (ii) any settlements relating to a Tax of the Companies or any of their Subsidiaries for a Pre-September 30 Tax Period effected without the consent of Seller, which shall not be unreasonably withheld, or resulting from any Tax Claim in which Seller was not permitted an opportunity to participate, but only to the extent (in the case of both clause (i) and (ii) herein) that Buyer's failure to obtain Seller's consent or provide Seller with such an opportunity to participate materially prejudiced Seller. Seller shall indemnify Buyer from and against any Buyer Loss incurred by Buyer or any of its Affiliates by reason of Seller unreasonably withholding its consent to the matters described in clause (i) or (ii) of this Section 8.8(d). 8.9 Indemnification by Buyer. (a) After the Closing ________________________ Date, Buyer shall indemnify the Seller Group against and agrees to hold it harmless from any (i) Tax of the Companies and their Subsidiaries for any Post-September 30 Tax Period, (ii) any Tax with respect to a Return described in Section 8.5(b) and (iii) liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses), arising out of or incident to the 113 120 imposition, assessment or assertion of any Tax (including those incurred in the contest in good faith in appropriate proceedings relating to the imposition, assessment or assertion of any Tax) described in clause (i) of this paragraph (the sum of (i), (ii) and (iii) being referred to as a "Seller Loss"); provided, ________ however, that Buyer shall not indemnify the Seller Group against _______ any (x) liability described in subsections (ii) or (iii) of Section 8.8(a), and (y) liability for Taxes and other costs and expenses attributable to claiming the Post-September 30 Special Items described in Section 8.7(e). (b) Any payment required of Buyer pursuant to Section 8.9(a) shall be made not later than 30 days after receipt by Buyer of written notice from Seller stating that a Seller Loss has been paid by any member of the Seller Group and the amount thereof and of the indemnity payment requested. Failure to give Buyer such written notice shall not relieve Buyer of its indemnification obligation pursuant to Section 8.9(a) unless and to the extent that Buyer is materially prejudiced as a result thereof. (c) Each party shall notify the other, within ten days of receipt thereof, of any Tax Claim which, if successful, could affect the other party's liability for Taxes. Buyer may discharge, at any time, its indemnification obligation under this Section 8.9 by paying to Seller the amount of the applicable Seller Loss, calculated on the date of such payment; provided, however, that if the amount of such Seller Loss, at ________ _______ the time of a Final Determination with respect thereto, exceeds the amount paid by Buyer to Seller pursuant to the preceding clause, Buyer shall pay such excess to Seller with interest within ten days of such Final Determination. Buyer may, at its own expense, participate in and, upon notice to Seller, assume the 114 121 defense (other than with respect to the Seller Group consolidated Federal Tax Returns or Combined State Tax Returns) of any Tax Claim for which Buyer has agreed to indemnify Seller pursuant to this Section 8.9. If Buyer assumes such defense (including, for this purpose, as provided in the penultimate sentence of this Section 8.9(c)), Seller shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Buyer; provided, however, that to the extent such ________ _______ action reasonably could be expected to adversely affect any Tax liability of the Seller Group for any Post-September 30 Tax Period or any Post-Closing Tax Period Buyer shall not settle, compromise, or otherwise dispose of any such Tax Claim without Seller's prior written consent, which shall not be unreasonably withheld. With respect to a Tax Claim relating to a Seller Group consolidated Federal Tax Return or a Combined State Tax Return, (i) to the extent possible, Buyer shall have the right to litigate (at its own expense) such Tax Claim upon resolution of the Tax audit with the Taxing Authority for which such Tax Claim relates in a court determined by Seller, and (ii) Seller shall use good faith in defending and maintaining Buyer's position with respect to such Tax Claim and shall not discriminate against such claim due to its indemnified nature. Seller shall indemnify Buyer from and against any (i) increase in the amount of Seller Loss and (ii) increase in the liability for Taxes of Buyer and its Affiliates incurred by reason of Seller unreasonably withholding its consent to the matters described in this Section 8.9(c). (d) Buyer shall not be liable under Section 8.9(a) for (i) any Tax the payment of which by Seller was made without Buyer's prior written consent, which shall not be unreasonably withheld, or (ii) any settlements relating to a Tax of the 115 122 Companies or any of their Subsidiaries for a Post-September 30 Tax Period or Post-Closing Tax Period effected without the consent of Buyer, which shall not be unreasonably withheld, or resulting from any Tax Claim in which Buyer was not permitted an opportunity to participate, but only to the extent (in the case of both clause (i) and (ii) herein) that Seller's failure to obtain Buyer's consent or provide Buyer with such an opportunity to participate caused Buyer to incur a loss. Buyer shall indemnify Seller from and against any Seller Loss incurred by any member of the Seller Group by reason of Buyer unreasonably withholding its consent to the matters described in clause (i) or (ii) of this Section 8.9(d). 8.10 Survival; Exclusivity. Notwithstanding anything _____________________ in this Agreement to the contrary, (i) this Article 8 shall govern the procedure for all indemnification claims relating to Taxes and (ii) the provisions of this Article 8 shall survive for the full period of all statutes of limitations (giving effect to any waiver, mitigation or extension thereof) for the assessment of Taxes for the Tax period in question, and any claim to be brought under this Article 8 must be brought prior to the expiration of such period. 8.11 Purchase Price Adjustment. Any amount paid to or _________________________ by Seller under this Article 8 will be treated as an adjustment to the Purchase Price unless a Final Determination causes any such amount to not constitute an adjustment to the Purchase Price for Federal Tax purposes. 8.12 Late Payments. Any payment required to be made _____________ by Buyer or Seller pursuant to this Article 8 that is not made when due shall bear interest from and including the due date of payment to but excluding the date of payment at a rate 116 123 per annum equal to the three-month London Interbank Offered Rate (as published in the Wall Street Journal on such due date) plus 40 basis points. 8.13 No Duplicative Payments; Offsets. The provisions ________________________________ of this Article 8 shall be interpreted in a manner such that no payment shall be made by any party with respect to the same item more than once. To the extent that any item causes parties to make reciprocal payments in any Tax period, such parties shall be entitled to offset such payments and the party which is obligated to make the greater payment shall pay only the difference between the amount of its original obligation and the amount it would have received had the reciprocal payments been made. 8.14 Rule of Construction. For purposes of this ____________________ Article 8, the term "Buyer and its Affiliates" shall include the Companies and their Subsidiaries for all Post-Closing Tax Periods. 8.15 Notices. All notices required to be provided to _______ any party under this Article 8 shall be sent by both registered mail and facsimile to, in the case of Buyer, the Vice-President of Taxes (with a copy to Chief Counsel) or, in the case of Seller, the Corporate Controller at the addresses provided in Section 13.1 hereof. 8.16 Allocation of Purchase Price. Prior to the ____________________________ Closing Date, Buyer and Seller shall negotiate in good faith to agree on an allocation of the Purchase Price to the Shares of the Companies. 117 124 ARTICLE 9 EMPLOYEES AND EMPLOYEE BENEFITS 9.1 Employees. Effective December 31, 1995, Seller _________ shall cause all employees of Seller or any of its Subsidiaries who perform substantially all of their services in Seller's property and casualty business units ("P&C Employees") to become employees of one of the Companies or one of their Subsidiaries (as directed by Buyer). Schedule 9.1 sets forth the complete description of the P&C Employees and the employers of such P&C Employees as of the date hereof. With respect to each P&C Employee who, as of the Closing Date, is employed by any Company or any Subsidiary of any Company (including any P&C Employee absent as of such date from active service for any reason, including but not limited to disability or leave of absence but excluding any terminated P&C Employees receiving severance) ("Transferred Employees"), Buyer shall cause each Transferred Employee's employer to continue to employ such Transferred Employee at the same rate of base salary per annum as is in effect on the day prior to the Closing Date, provided, however, ________ _______ that nothing herein is intended to, or shall require, such employer to employ any such employee on a basis other than as an employee at will; and, provided, further, that the individuals listed on Schedule 9.6(c)(ii) (Affected Employees) shall not be Transferred Employees except as provided in Section 9.6(c)(ii). Seller agrees that, as of the date hereof, employees expected to become Transferred Employees consist of 11,350 active employees and 275 employees absent from active service (of whom 250 are on disability and 25 are on a leave of absence). 9.2 Pension Plan. (a) Transferred Employees shall ____________ cease to participate in the Pension Plan as of the Closing Date. 118 125 Effective as of the day immediately prior to the Closing Date, each Transferred Employee shall be granted service for all purposes (including benefit accrual) under the Pension Plan for the period commencing on the Closing Date and ending on December 31, 1997 (the "Advance Accrual Period"). Buyer shall cause the Companies to reimburse Seller for the grant of service for the Advance Accrual Period within 30 days following the Closing Date (but in no event earlier than 15 days after receipt of relevant information from Seller). Such reimbursement shall be made in accordance with the formula set forth in Schedule 9.2(a) but in no event will such amount exceed the after-tax equivalent of the present value (based upon an 8% discount factor) of $15 million per year (pre-tax) for two years. Seller shall provide Buyer with all documentation reasonably requested by Buyer to substantiate the amount of such charge. (b) After the Closing Date, Seller and its Affiliates shall retain all liabilities and obligations in respect of benefits accrued by Transferred Employees under the Pension Plan. Accrued benefits of Transferred Employees under the Pension Plan shall be fully vested as of the Closing Date. Benefit accruals in respect of Transferred Employees under the Pension Plan shall cease as of the Closing Date and Transferred Employees participating therein shall be considered terminated vested participants in such Pension Plan. No Pension Plan assets shall be transferred to Buyer or any of its Affiliates or to the Companies or their Subsidiaries or to any plan of Buyer or its Affiliates or of the Companies or their Subsidiaries. (c) Effective as of January 1, 1998, the Transferred Employees who are then eligible to participate in the Travelers Group Pension Plan ("Travelers Plan") shall become participants in the Travelers Plan and in a defined contribution profit sharing plan to be established by Buyer for the benefit of the Transferred Employees 119 126 ("New Plan"). Under the Travelers Plan, each Transferred Employee shall be granted credit for service, to the extent recognized by the Pension Plan, for the purpose of eligibility and vesting (but not benefit accrual). The New Plan shall be designed to supplement the benefits under the Travelers Plan. The amount available to satisfy obligations under the New Plan shall be initially $4,000,000 per year, reduced each year after 1996 to reflect Transferred Employees who have terminated employment with the Companies and their Subsidiaries, whether voluntarily, involuntarily, by retirement or otherwise (such amount in effect from time to time, the "Maximum Annual Contribution"). Buyer will in good faith, calculate the Maximum Annual Contribution for each year. Buyer and Seller shall bear the Maximum Annual Contribution in the proportions set forth below to meet the obligations to employees under the New Plan. In respect of its obligations, at the Closing, Seller shall pay to Buyer $10,000,000 in cash, which shall be treated as an adjustment to the Purchase Price ("Initial Contribution"). The Initial Contribution shall be credited interest at the rate of 6.0% per annum simple interest on the unused balance. From time to time such amount shall be debited by 32.5%, until such time as the Initial Contribution (and all interest credited thereto) is exhausted, of all amounts paid to Transferred Employees under the New Plan as and when such amounts are paid, up to an aggregate amount of 32.5%, until such time as the Initial Contribution (and all interest credited thereto) is exhausted, of the Maximum Annual Contribution. The remaining obligations to Transferred Employees, up to 67.5%, until such time as the Initial Contribution (and all interest credited thereto) is exhausted, of the Maximum Annual Contribution shall be funded by Buyer. As promptly as practicable after the close of each year of the New Plan, Buyer will 120 127 provide Seller an accounting in reasonable detail of the remaining Initial Contribution and the aggregate interest credited thereon. As soon as practicable after December 31, 2002, Buyer and Seller will negotiate in good faith to settle and liquidate Seller's remaining obligations under the New Plan. If they are unable to agree on such a settlement, Buyer shall continue to apply any remaining Initial Contribution (and interest credited thereto) to Seller's obligations as set forth above. If such funds are exhausted during the term of the New Plan, Buyer shall so notify Seller, and Seller shall promptly deposit with Buyer an additional amount (the "Subsequent Contribution") reasonably estimated to fund any remaining liabilities of Seller under the New Plan. The Subsequent Contribution shall be credited with interest and otherwise treated as the Initial Contribution described above is treated, except that the Subsequent Contribution shall be debited at the rate of 50% of amounts contributed in lieu of 32.5%, up to an amount equal to 50% of the Maximum Annual Contribution, and Buyer shall fund the remaining obligations to Transferred Employees up to 50% of the Maximum Annual Contribution. At the time when no additional obligations are due under the New Plan, Buyer will repay to Seller an amount equal to any remaining unused Initial Contribution or Subsequent Contribution and the amount of interest credited thereon. If at any time the funds held by Buyer are not sufficient to satisfy Seller's obligations hereunder, Buyer shall assess Seller for its obligations under the New Plan, up to an aggregate of 50% of the Maximum Annual Contribution, and Seller shall promptly pay to Buyer the amount of each such assessment. As of the Closing, each Transferred Employee will be assigned points, based upon the participant's age, length of service and compensation level, by such reasonable method of allocation as Seller determines and Buyer shall 121 128 not unreasonably withhold its consent thereto. The number of points held by each employee shall be fixed until such time as such employee's employment is terminated for any reason, at which time they will be forfeited. For each calendar year of the New Plan, an amount equal to the Maximum Annual Contribution shall be allocated to Transferred Employees entitled to participate in the New Plan in accordance with each such participant's Points. 9.3 Individual Account Plan. (a) Seller shall retain _______________________ all liabilities and obligations in respect to benefits accrued by Transferred Employees under the Individual Account Plan. On the Closing Date, Seller shall take such action as may be necessary, if any, to permit each Transferred Employee to exercise such Transferred Employee's rights under the Individual Account Plan to effect an immediate distribution of such Transferred Employee's vested account balances under the Individual Account Plan or to effect a tax-free rollover of the taxable portion of the account balances into an eligible retirement plan (within the meaning of Section 401(a)(31) of the Code, a "Direct Rollover") maintained by Buyer or an Affiliate of Buyer (the "Buyer Plan") or to an individual retirement account. Seller and Buyer shall work together in order to facilitate any such distribution or rollover and to effect a Direct Rollover for those participants who elect to roll over their account balances directly into Buyer Plan; provided, ________ however, that nothing contained herein shall obligate Buyer Plan _______ to accept a Direct Rollover in a form other than cash. No contributions to the Individual Account Plan in respect of Transferred Employees shall be made after the Closing Date and Transferred Employees shall be considered terminated as of the Closing Date. To the extent reasonably practicable, Seller and Buyer shall work together to develop a process whereby Transferred Employees who 122 129 have loans outstanding under the Individual Account Plan will be permitted to continue to make periodic (at least monthly) repayments on such loans through a reduction of salary paid by Buyer (it being understood that such loans are to be retained by the Individual Account Plan). Except as required by law, no communication shall be sent to the Transferred Employees relating to the treatment or status of their loans outstanding under the Individual Account Plan without the consent of both Buyer and Seller. (b) On the Closing Date, or as soon as practicable thereafter, Buyer shall establish or designate Buyer Plan in order to accommodate the Direct Rollovers described above and shall take all action necessary, if any, to qualify Buyer Plan under the applicable provisions of the Code and shall make any and all filings and submissions to the appropriate governmental authorities required to be made by it in connection with any Direct Rollover. Under Buyer Plan, each Transferred Employee will be given credit for service, to the extent recognized by the Individual Account Plan, for the purpose of eligibility and vesting. (c) From the Closing Date and until December 31, 1996, under the Buyer Plan and Buyer's supplemental plan, each Transferred Employee shall be entitled to (i) make salary deferral contributions (which contributions shall be fully vested as of the time they are made) and (ii) receive employer matching contributions (which contributions shall be fully vested as of the time they are made) in accordance with the terms of the Individual Account Plan and the Supplemental Incentive Savings Plan identified on Schedule 9.3(c) (the "Supplemental Plan") relating to salary deferral and employer matching contributions. 9.4 Certain Welfare Benefit Plans. As of the Closing _____________________________ Date, the Transferred Employees shall cease to participate in 123 130 the welfare benefit plans listed in Schedule 9.4(a) ("Prior Welfare Plans") and shall commence to participate (without any break in service for purpose of any eligibility, pre-existing condition, deductible or co-payment provisions) in welfare benefit plans of Buyer or the Companies ("Replacement Welfare Plans"), which Replacement Welfare Plans shall provide for identical benefits at identical cost to the employee and on substantially identical terms and conditions as those provided by Prior Welfare Plans immediately prior to the Closing Date. Such Replacement Welfare Plans may not be amended or terminated, except as may be required by law or to preserve intended tax results, before December 31, 1996. Notwithstanding the above, nothing herein shall prohibit, or be construed to prohibit, Buyer or the Companies from terminating or amending the Replacement Welfare Plans at any time after December 31, 1996 ("Welfare Transfer Date"). Unless Buyer otherwise elects by no later than 60 days prior to the Closing Date, from the Closing Date until the Welfare Transfer Date Seller shall administer the Replacement Welfare Plans on behalf of Buyer under terms substantially similar to those applicable to welfare benefit plans then maintained by Seller; provided, however, that the ________ _______ Companies or Buyer may terminate such administration at any time. After the Closing Date, Buyer shall be responsible for any claims by Transferred Employees for medical benefits relating to claims incurred but not reported prior to the Closing Date, but only to the extent the liability relating to any such claim is fully reflected on the September Adjusted GAAP Balance Sheet. 9.5 Other Employee Benefit Plans and Benefit _________________________________________ Arrangements. ____________ 124 131 (a) Except to the extent otherwise provided in this Agreement, Seller shall retain all obligations and liabilities under the Employee Plans and Benefit Arrangements in respect of any employee or former employee or any independent contractor or former independent contractor or other participant (in each case including any beneficiary or dependent thereof) who is not a Transferred Employee. (b) Except to the extent otherwise provided in this Article 9, with respect to Transferred Employees, Seller shall retain all obligations and liabilities relating to or arising under the Employee Plans or Benefit Arrangements which (i) are attributable to service performed, or benefits accrued or payable, on or prior to the Closing Date or (ii) arise out of actions, events or omissions that occurred (or, in the case of omissions, failed to occur) prior to the Closing Date. (c) As of the Closing Date, Buyer shall cause the Company to assume all the assets, if any, and liabilities of the plans listed on Schedule 9.5(c) that are included on the September Adjusted GAAP Balance Sheet estimated as of the Closing Date. Each such plan constitutes a plan under Section 401(a)(1) of ERISA. (d) Unless otherwise notified in writing by Seller on or prior to the Closing Date, Buyer shall cause the applicable Company to assume all obligations in respect of any Transferred Employee for the final performance payment, if any, in connection with the first cycle of ACE Shares and APEX Unit Awards described in Schedule 9.5(d); provided that if Buyer or ________ either Company is obligated to make any payments hereunder, Seller shall promptly pay Buyer for any such payments in excess of the accrual for such obligation included on the September Adjusted GAAP Balance Sheet prior to Buyer or a Company making such payments. To the extent the accrual for such obligation as of the Closing Date exceeds the aggregate of such payments made by Buyer and the Companies, Buyer shall promptly reimburse Seller in the amount of such excess accrual. Communications with Transferred Employees and any other administrative activities required to be performed in connection with such Shares and Awards shall be handled by Seller. 9.6 Plans Following the Closing. (a) With respect to ___________________________ 125 132 the Transferred Employees who would have been eligible for benefits under Seller's Retiree Medical and Life Program ("Retiree Benefit Program") had they remained employed by Seller or an Affiliate of Seller until December 31, 1997, each such Transferred Employee shall continue to participate in the Retiree Benefit Program at the sole cost of Seller or its Affiliates and shall be credited for service with any Company or any Subsidiary of any Company on and after the Closing Date until December 31, 1997 for all purposes thereunder provided such Transferred Employee is a participant in Seller's Medical/Dental Plan or Seller's Life Insurance Plan on the day prior to the Closing Date. (b) Except to the extent otherwise provided in Section 9.2, Buyer will cause the Companies to give Transferred Employees full credit for such Transferred Employees' service with Seller or any Subsidiary of Seller to the same extent recognized by Seller for purposes of eligibility, vesting and benefit accrual under any employee benefit plans or arrangements maintained by Buyer or any Subsidiary of Buyer in which such Transferred Employees are entitled to participate. (c)(i) Buyer shall cause the Companies to pay severance and other job elimination benefits to the Transferred Employees (other than those who are parties to the Employment Agreements and letter 126 133 agreements entered into upon hiring identified on Schedule 9.6(c)(iii) for so long as those Agreements and letter agreements are in effect and to the extent such Agreements and letter agreements enhance severance) whose employment is terminated after the Closing Date and prior to December 31, 1997 to the extent required by Seller's severance plans and programs identified on Schedule 9.6(c)(i) ("Severance Plans"); provided, ________ however, that, consistent with the interpretation of the _______ Severance Plans by the plan administrator, no reduction or change in benefits (excluding reductions in base salary) shall constitute failure to offer (i) an "equivalent or alternate position" or (ii) "job with comparable compensation" under the Severance Plans; and, provided, further, that if any period of ________ _______ severance provided under the Severance Plans constitutes service for purpose of eligibility, vesting or benefit accrual under any pension plan, then any such service shall be reduced by any Advance Accrual Period remaining from the date of termination of employment. In no case will Buyer or any Company pay severance under the Severance Plans to any Transferred Employee unless such Transferred Employee's employment is terminated after the Closing Date and prior to December 31, 1997. Seller covenants that in no case will Buyer or any Company pay severance under the Severance Plans to any Transferred Employee solely by reason of the consummation of the transactions contemplated by this Agreement. Severance will be paid to a Transferred Employee who is a party to an Employment Agreement or letter agreements identified on Schedule 9.6(c)(iii) to the extent provided in such employee's Employment Agreement or letter agreements. (ii) Buyer shall cause one or more of the Companies and their Subsidiaries to reimburse Seller for 50% of any severance payments under the Severance Plans made by Seller to individuals identified on Schedule 9.6(c)(ii) ("Affected Employees"); provided, however, that if Buyer, any of its ________ _______ 127 134 Subsidiaries (including, after the Closing Date, the Companies and their Subsidiaries) or any of its Affiliates offers to any of the Affected Employees as of the Closing Date (but prior to the termination of such Affected Employee's employment by Seller; provided, however, that prior to the Closing Date no ________ _______ Affected Employee may be terminated by Seller or the Companies without prior consent of Buyer) continued employment with Buyer, any of its Subsidiaries (including, after the Closing, the Companies and their Subsidiaries) or any of its Affiliates with a base salary substantially equal to the base salary such Affected Employee received immediately prior to the Closing Date (such employment, "Continued Employment"), the amount of reimbursement owed hereunder shall be tax-effected and shall equal (A) the amount of reimbursement that would have been owed in absence of such offers of employment, multiplied by (B) one minus a fraction the numerator of which is the number of Affected Employees offered Continued Employment and the denominator of which is one-half of the total number of Affected Employees; provided, further, that in no case may the amount of ________ _______ reimbursement owed hereunder be less than zero. Any Affected Employee who accepts Continued Employment shall be treated as a Transferred Employee for all purposes under this Agreement. (iii) Buyer shall cause the Employment Agreements and letter agreements identified on Schedule 9.6(c)(iii) to be assumed by a Company or a Subsidiary of a Company, which shall become a successor with respect thereto. Seller shall indemnify and hold harmless Buyer and its Affiliates (including, after the Closing, the Companies and their Subsidiaries) with respect to (i) any liabilities or obligations under the Employment Agreements to make payments to any Transferred Employees with respect to any tax liability under Section 4999 of the Code on 128 135 "excess parachute payments" as defined in Section 280G of the Code and (ii) for any loss of a tax benefit resulting from the treatment of any payment under the Employment Agreement as an excess parachute payment. (iv) Seller shall indemnify and hold harmless Buyer and its Affiliates (including, after the Closing, the Companies and their Subsidiaries) with respect to any liabilities or obligations to make retention bonus payments to the Transferred Employees listed on Schedule 9.6(c)(iv) except to the extent any such liabilities relating to retention bonus payments are reflected on the September Adjusted GAAP Balance Sheet. (d) To the extent any vacation days earned by any Transferred Employee during the period from July 1, 1995 through December 31, 1995 are not projected to be used as of the Closing Date, Seller will accrue the liability for such vacation days as of the September Adjusted GAAP Balance Sheet. Buyer shall be responsible for any vacation days earned after December 31, 1995, which shall be calculated in accordance with Schedule 9.6(d)(i) hereto (less any vacation days taken by such Transferred Employee in 1996 prior to the Closing Date); provided, however, that such vacation entitlement shall be ________ _______ calculated on the same calendar year basis as under current Buyer plan. Vacation days earned during the period commencing on July 1, 1995 and ending on December 31, 1995 that are used by the Closing Date shall be credited to Seller's obligation as accrued on September Adjusted GAAP Balance Sheet. Any vacation days earned since July 1, 1995 that are used after December 31, 1995 and before the Closing Date will reduce Buyer's obligation after the Closing Date. Any vacation days or required payments related thereto earned prior to July 1, 1995 (i) will not affect Buyer's obligation after the 129 136 Closing Date, (ii) will be used prior to any days earned after July 1, 1995, and (iii) shall in no event become responsibility of Buyer. After December 31, 1996 each Transferred Employee shall be entitled to the number of vacation days calculated in accordance with Buyer's current plan as modified by Schedule 9.6(d)(ii). Seller covenants that, notwithstanding the above, no Transferred Employee may take a number of vacation days during the 1996 calendar year in excess of the number of vacation days earned by such Transferred Employee during the 1996 calendar year and the July 1 - December 31 period during 1995, all determined as of the Closing Date. (e) Nothing in this Article 9 shall be construed to impair in any way the application of Buyer's Arbitration Policy with respect to Transferred Employees. (f) Prior to the Closing Date, no communications shall be made by either party to any Transferred Employee relating to any of the provisions of this Article 9 without the approval of the other party, which approval shall not be unreasonably delayed or withheld. Seller shall provide Buyer with copies of any other communications directed at Transferred Employees generally which relate to an employee benefit plan in which Transferred Employees participate. Buyer and Seller agree to cooperate in connection with employee benefit plans and arrangements covering Transferred Employees. (g) Buyer agrees that it will cooperate fully with Seller's investigation of, response to, and defense of, any claims made by Seller's employees or former employees, or their legal representatives, with respect to employment-related matters or decisions, including employee benefit plan determinations, made or alleged to have been made by Seller or its directors, officers, employees, or agents. Such 130 137 cooperation shall include, but not be limited to, making Buyer's officers, employees and agents reasonably available (upon reasonable notice but at no cost (other than reasonable out of pocket expenses) to Seller) to Seller or Seller's representatives for interviews and the giving of testimony in legal proceedings, making available to Seller any documents in Buyer's care, custody or control which are, or may be, relevant to such claims, unless prohibited by law and designating an attorney employed by Buyer to manage the cooperation contemplated by this paragraph and seek to ensure compliance by Buyer's employees. 9.7 Indemnification. (a) Seller hereby agrees to _______________ indemnify Buyer and its Affiliates (including, after the Closing, the Companies and their Subsidiaries) against and agrees to hold them harmless from any and all Damages incurred or suffered as a result of any failure by Seller to satisfy and discharge its obligations under this Article 9. Buyer hereby agrees to indemnify Seller and its Affiliates against and agrees to hold Seller and its Affiliates harmless from any and all Damages incurred or suffered as a result of any failure by Buyer to satisfy and discharge its obligations under this Article 9. (b) Seller hereby agrees to indemnify Buyer and its Affiliates (including, after the Closing, the Companies and their Subsidiaries) against, and agrees to hold them harmless from any and all Damages incurred or suffered as a result of any claim by any present or former employee of Seller or any of its Subsidiaries who performed or performs services in Seller's property and casualty business units, including, without limitation, the Transferred Employees which arises under federal, state or local statute (including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in 131 138 Employment Act of 1990, the Equal Pay Act, the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974 and all other statutes regulating the terms and conditions of employment), regulation or ordinance, under the common law or in equity (including any claims for wrongful discharge or otherwise), or under any policy, agreement, understanding or promise, written or oral, formal or informal, between the Company and the Transferred Employee, which arose out of actions, events or omissions that occurred (or, in the case of omissions, failed to occur) prior to the Closing Date. (c) The indemnification provided for in this Section 9.7 shall be subject to the provisions of Section 11.3(a). ARTICLE 10 CONDITIONS TO CLOSING 10.1 Conditions to Obligations of Buyer and Seller. _____________________________________________ The obligations of Buyer and Seller to consummate the Closing are subject to the satisfaction of the following conditions: (i) Any applicable waiting period under the HSR Act relating to the transactions contemplated hereby shall have expired or been terminated. (ii) All other regulatory consents, approvals or clearances necessary for the consummation of the Closing shall have been obtained, and no provision of any applicable law or regulation shall prohibit the consummation of the Closing. 132 139 (iii) All material consents, approvals or waivers of all non-governmental Persons necessary for the consummation of the Closing shall have been obtained. (iv) There shall not be in effect any temporary restraining order, preliminary injunction or permanent injunction or other order issued by any court of competent jurisdiction preventing the consummation of the transactions contemplated hereby; provided that the party invoking this condition shall have used its reasonable best efforts to have such order or injunction vacated. (v) The Ancillary Agreements, other than the agreement referenced in Section 10.2(ii), shall have been executed and delivered by the parties thereto. 10.2 Conditions to Obligation of Buyer. The _________________________________ obligation of Buyer to consummate the Closing is subject to the satisfaction of the following further conditions: (i)(A) Seller shall have performed in all material respects all of its obligations hereunder required to be performed by it on or prior to the Closing Date, (B) the representations and warranties of Seller contained in this Agreement shall be true at and as of the Closing Date, as if made at and as of such date (without giving effect to any materiality qualifications or materiality exceptions contained therein); provided that this condition (B) shall be deemed satisfied if any inaccuracies in any such representations and warranties at and as of the Closing Date (without giving effect to any materiality qualifications or materiality exceptions contained therein) would 133 140 not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on the Companies, and (C) Buyer shall have received a certificate signed by the Chief Financial Officer of Seller to the effect that the foregoing conditions have been satisfied. (ii) Seller shall have executed a reinsurance contract, in form and substance satisfactory to Buyer, relating to certain matters previously discussed by the parties. (iii) Buyer shall have received all documents it may reasonably request relating to the existence of Seller, the Companies and their Subsidiaries and the authority of Seller for this Agreement, all in form and substance reasonably satisfactory to Buyer. (iv) Except as disclosed in Schedule 3.9, since the Balance Sheet Date, there shall not have been any event, occurrence, development or state of circumstances or facts which has had or would reasonably be expected to have a Material Adverse Effect on the Companies, other than those resulting from changes in general economic conditions. (v) No governmental or regulatory authority shall have commenced any proceeding seeking a temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the transactions contemplated hereby, other than any such proceeding which, in the reasonable judgment of Buyer, would not be reasonably likely, assuming such consummation occurs, to have a material adverse effect on the Companies and their Subsidiaries, taken as a whole; provided that Buyer shall 134 141 have used its reasonable best efforts to have such proceeding dismissed or terminated. 10.3 Conditions to Obligation of Seller. The __________________________________ obligation of Seller to consummate the Closing is subject to the satisfaction of the following further conditions: (i)(A) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date, (B) the representations and warranties of Buyer contained in this Agreement shall be true at and as of the Closing Date, as if made at and as of such date (without giving effect to any materiality qualifications or materiality exceptions contained therein); provided that this condition (B) shall be deemed satisfied if any inaccuracies in any such representations and warranties at and as of the Closing Date (without giving effect to any materiality qualifications or materiality exceptions contained therein) would not, individually or in the aggregate, have or reasonably be expected to have a Material Adverse Effect on Buyer, and (C) Seller shall have received a certificate signed by the Chief Financial Officer of Buyer to the effect that the foregoing conditions have been satisfied. (ii) Seller shall have received all documents it may reasonably request relating to the existence of Buyer and the authority of Buyer for this Agreement, all in form and substance reasonably satisfactory to Seller. 135 142 ARTICLE 11 SURVIVAL; INDEMNIFICATION 11.1 The covenants, agreements, representations and warranties of the parties hereto contained in this Agreement shall not survive the Closing; provided that (i) the covenants ________ and agreements which, by their terms, are to have effect or be performed after the Closing shall survive in accordance with their terms; (ii) the representations and warranties contained in Sections 3.2, 3.4(v), 3.5, 3.6, 3.7, 3.10(c), 4.2 and 4.6 shall survive for two years after the Closing, (iii) the covenants, agreements, representations and warranties contained in Article 8 shall survive to the extent provided in Article 8 and (iv) the covenants and agreements contained in Article 9 shall survive indefinitely. No covenant, agreement, representation or warranty contained in this Agreement shall survive after the time at which it would otherwise terminate pursuant to the preceding sentence unless notice of the inaccuracy or breach thereof shall have been given to the party against whom indemnity for such breach or inaccuracy may be sought prior to such time, in which case such covenant, agreement, representation or warranty shall survive until such claim for indemnity is finally resolved. 11.2 Indemnification. (a) Effective at the Closing, _______________ Seller hereby indemnifies Buyer and, effective at the Closing, without duplication, the Companies and their Subsidiaries against and agrees to hold them harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) ("Damages") incurred or suffered by Buyer, any Company or any Subsidiary of any Company arising out of the breach of any representation or 136 143 warranty which survives the Closing for such period as provided in Section 11.1 or the breach of any covenant or agreement made or to be performed by Seller pursuant to this Agreement which covenant or agreement survives the Closing for such period as provided in Section 11.1 (other than pursuant to Articles 8 and 9). (b) Effective at the Closing, Buyer hereby indemnifies Seller against and agrees to hold it harmless from any and all Damages incurred or suffered by Seller arising out of the breach of any representation or warranty which survives the Closing for such period as provided in Section 11.1 or the breach of any covenant or agreement made or to be performed by Buyer pursuant to this Agreement which covenant or agreement survives the Closing for such period as provided in Section 11.1 (other than pursuant to Articles 8 and 9). (c) Any amount of Damages paid by Seller or Buyer under this Section 11.2 will be treated as an adjustment to the Purchase Price unless and to the extent that a Final Determination causes any such amount not to constitute an adjustment to the Purchase Price for Federal Tax purposes. 11.3 Procedures; Exclusivity. (a) The party seeking _______________________ indemnification under Section 11.2 (the "Indemnified Party") agrees to give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under such Section, provided, however, that the failure to give any such notice ________ _______ shall not prejudice the right of such party to receive indemnification hereunder unless the Indemnifying Party is actually prejudiced by such failure. The Indemnifying Party may, and at the request of the Indemnified Party shall, participate in or control the defense of any such suit, action or 137 144 proceeding at its own expense. If the Indemnifying Party assumes such defense, the Indemnified Party shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from counsel employed by the Indemnifying Party. Whether or not Indemnifying Party chooses to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. The Indemnifying Party shall not be liable under Section 11.2 for any settlement effected without its consent of any claim, litigation or proceeding in respect of which indemnity may be sought hereunder, which consent shall not be unreasonably withheld or delayed. (b) After the Closing, Article 8, and Sections 9.7 and 11.2 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement (other than those contained in Sections 2.3, 2.4, 2.5, 5.5, 5.7, 5.8, 5.9(d), 6.2, 6.3, 7.4, 7.5, 7.6, 7.9, 7.12 and 9.6) or other claim arising out of this Agreement or the transactions contemplated hereby. ARTICLE 12 TERMINATION 12.1 Grounds for Termination. This Agreement may be _______________________ terminated at any time prior to the Closing: (i) by mutual written agreement of Seller and Buyer; or (ii) by either Seller or Buyer if the Closing shall not have been consummated on or before September 30, 1996. The party desiring to terminate this Agreement shall give notice of such termination to the other party. 138 145 12.2 Effect of Termination. If this Agreement is _____________________ terminated as permitted by Section 12.1, termination shall be without liability of either party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement, except as provided in Section 13.3 and except that no such termination shall relieve Buyer of its obligations under Section 6.1; and provided ________ that if such termination shall result from the willful failure of either party to fulfill a condition to the performance of the obligations of the other party or to perform a covenant of this Agreement or from a willful breach by either party to this Agreement, such party shall be fully liable for any and all Damages incurred or suffered by the other party as a result of such failure or breach. The provisions of Section 7.6, this Section 12.2, Section 13.3 and Section 13.5 shall survive any termination hereof pursuant to Section 12.1. ARTICLE 13 MISCELLANEOUS 13.1 Notices. All notices, requests and other _______ communications to any party hereunder shall be in writing (including facsimile transmission) and shall be given: if to Buyer, to: The Travelers Insurance Group Inc. One Tower Square Hartford, Connecticut 06183 Attention: Chief Financial Officer Fax: (203) 954-1161 139 146 with copies to: Travelers Group Inc. 388 Greenwich Street New York, NY 10013 Attention: General Counsel Fax: (212) 816-8969 Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 Attention: Kenneth J. Bialkin, Esq. Fax: (212) 735-2000 if to Seller, to: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: Chief Financial Officer Fax: (203) 273-2428 with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: Richard J. Sandler, Esq. Fax: (212) 450-4800 or at such other address to the attention of such other person as Buyer or Seller may designate by written notice to the other party hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. 13.2 Amendments and Waivers. (a) Any provision of ______________________ this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing 140 147 and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. Other than as provided herein, the rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 13.3 Expenses. Except as otherwise expressly provided ________ herein, all costs and expenses incurred in connection with this Agreement, including all brokers', finders', investment advisory or similar fees, shall be paid by the party incurring or responsible for incurring such cost or expense. 13.4 Successors and Assigns. The provisions of this ______________________ Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise ________ transfer any of its rights or obligations under this Agreement without the consent of each other party hereto. Notwithstanding the foregoing, Buyer may assign any of its rights and obligations under this Agreement to a wholly owned Subsidiary without Seller's consent; provided that no such assignment shall relieve Buyer of any of its obligations under this Agreement. 13.5 Governing Law. This Agreement shall be governed _____________ by and construed in accordance with the law of the State of New York, without regard to the conflict of laws rules of such state. 141 148 13.6 Jurisdiction. Except as otherwise expressly ____________ provided in this Agreement, any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought only in the United States District Court for the Southern District of New York or any New York State court sitting in New York City, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in this Section 13.6 shall be deemed effective service of process on such party. 13.7 Counterparts; No Third Party Beneficiaries. This __________________________________________ Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. No provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 13.8 Entire Agreement. Except for the ________________ Confidentiality Agreement and the Ancillary Agreements, this Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all 142 149 prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto. 13.9 Construction. This Agreement is the result of ____________ arms-length negotiations between the parties hereto and has been prepared jointly by the parties. In applying and interpreting the provisions of this Agreement, there shall be no presumption that the Agreement was prepared by any one party or that the Agreement shall be construed in favor of or against any one party. 143 150 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE TRAVELERS INSURANCE GROUP INC. By: /s/ Jay S. Fishman _______________________________ Name: Jay S. Fishman Title: Vice Chairman and Chief Financial Officer AETNA LIFE AND CASUALTY COMPANY By: /s/ Ronald E. Compton ________________________ Name: Ronald E. Compton Title: Chairman and President 144 EX-10 3 MATERIAL CONTRACTS PAGE 1 AEtna Ronald E. Compton Chairman (203) 273-3087 January 19, 1995 Richard L. Huber 143 East 78th Street Garden Apartment New York, NY 10024 Dear Dick: On behalf of Aetna, I am pleased to offer you the position of Vice Chairman for Strategy and Finance. As we discussed, this offer is subject to the approval of Aetna's Board of Directors. The specifics of the offer are as follows: 1. Starting Date: 2. Base Salary: Your base salary will be $500,000 per annum payable biweekly. This will be reviewed on the basis of your performance during our annual salary review process in 1996 and each year thereafter as long as you are employed by Aetna. The Company may also, from time to time, review and adjust salaries to reflect appropriate compensation for each position. 3. Annual Incentive Program: You will also be eligible for consideration for an award under the Company's annual incentive program beginning with the 1995 performance year (payable in 1996) as long as the plan is in effect. Payable in 1996 for the 1995 performance year, you will receive a minimum award of $300,000 gross. Each year thereafter, while you are employed at Aetna, you will be eligible for consideration for additional awards under the annual incentive program while the plan remains in effect. As discussed during our interviews, the target bonus level for your position is currently 60% of your base salary. Awards are subject to both your performance and that of Aetna. 4. Long-Term Incentive Program: You will be eligible for consideration of an award under the Company's long-term incentive program for the cycle running from 1995 through 1998. This award will vest, if at all, only upon attainment of performance objectives determined by the Company's Board Committee on Compensation and Organization. 5. Stock Options: We will recommend to the Aetna Board Committee on Compensation and Organization that you be granted an option to purchase 17,500 shares of Aetna's common stock. The option will be based on the price of a share on the date on which approval is secured from the Committee. These options are not exercisable for the first year after the date of grant and will vest in installments thereafter. Thereafter while employed by Aetna, you will be eligible for consideration for grants under the Stock Incentive Plan while the plan remains in effect. In addition, we will recommend a sign-on grant of 50,000 stock options and 75,000 "premium" options (exercise price at 10% above market at time of grant) based on the share price on the effective date of the grant which will be the same as the date you begin employment. These options are not PAGE 2 exercisable for the first year after the date of grant and will vest in installments thereafter. You will also receive a sign-on grant of 28,000 ACEShares subject to Committee approval for the performance cycle 1993 to 1996, provided that any interim award will not vest until the end of the performance period. Details of the Company's Long- Term Incentive Program exercise, ownership and vesting provisions are included with this offer letter. 6. Pension: Your participation in the pension plan will automatically begin after you have completed one year of service with Aetna. Under the terms of the plan currently in effect, you will receive credit for years of service from your date of employment, accumulating one year for each year you remain in the employ of the Company thereafter (but no more than 35 years, the maximum under the plan) as long as the plan remains in effect. Under the plan, your benefit vests after five years of credited service. 7. Incentive Savings Plan: You will be eligible to participate in the Aetna Incentive Savings Plan after you complete one year of service. However, during your first year of service, you will be eligible to defer up to six percent of your base salary under a non-qualified supplemental plan. Under the supplemental plan now in effect, the Company will match 100% of the first 5% of base salary you defer. 8. Medical, Dental and Life Insurance: You will be eligible to participate in our contributory flexible benefit plan. 9. Sick Pay: The Company will provide you with full pay for a maximum of 26 weeks as soon as you begin work regardless of the number of years of credited service. 10. Severance Pay: If your employment is involuntarily terminated under circumstances that would call for severance pay benefits, you will receive payment for not less than 52 weeks of severance pay including amounts payable under the Severance Pay Plan then in effect in consideration for a customary release. 11. Vacation: In 1995, you will receive 20 days of accrued vacation for our use as soon as you join the Company. Thereafter, for the purpose of vacation day accrual only, you will be treated like a 10-year employee. This means you will accrue two days per month to a maximum of 20 days per year. You will also have three discretionary days in 1995 and three per year thereafter. 12. Sign-On Bonus: A one-time payment of $200,000 gross will be made as soon as possible after you begin work at Aetna in recognition of your career move. 13. Relocation: The Company will assist you with relocation expenses associated with your move to Connecticut including Aetna's third-party home purchase program, movement of household goods and temporary living expenses as covered in the Standard New Hire transfer program. Contact Rachel Frenette at 203-273-3570 for more information about this program. PAGE 3 14. Contingencies: This offer is dependent upon: (1) successful completion of a drug test prior to the scheduled _____ start date of your new job; and (2) receipt of documents which show that you are legally entitled to work in the United States. Please read the enclosed Benefits Handbook carefully in order to fully understand the terms and conditions of the plans mentioned above. We are delighted to extend this offer to you and look forward to your acceptance. We hope this employment relationship will be mutually enjoyable and lasting. Of course, you may terminate your employment at any time, as may Aetna. Please acknowledge your acceptance of this offer by initialing the enclosing copy of this letter, completing the enclosed employment application and returning both to me. I would greatly appreciate your response within seven (7) days after receipt of this letter. If you have any questions or would like to discuss the terms of our offer, please do not hesitate to call me. Sincerely, /s/ Ronald E. Compton _______________________ Ronald E. Compton /s/ Richard L. Huber _______________________ Accepted Richard L. Huber Enclosures: EX-10 4 MATERIAL CONTRACTS PAGE 1 EMPLOYMENT AGREEMENT ____________________ EMPLOYMENT AGREEMENT, dated as of October 27, 1995, by and between Aetna Life and Casualty Company, a Connecticut corporation (the "Company"), and Gary G. Benanav ("Executive"). W I T N E S S E T H: _ _ _ _ _ _ _ _ _ _ WHEREAS, the Company is considering certain restructuring alternatives that could result in significant changes in the structure of its business, including, without limitation, dividing the business of the Company into two or more separate publicly traded companies or otherwise transferring a portion of the business to a third party; WHEREAS, the Company believes that Executive is a key employee and that it is in the Company's best interests to retain the services of Executive for the period during which such restructuring alternatives are considered and, to the extent applicable, implemented; WHEREAS, the Company therefore desires to retain the services of Executive and to enter into an agreement embodying the terms of such employment (the "Agreement"); and WHEREAS, Executive desires to accept such employment and enter into such Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and Executive hereby agree as follows: 1. Employment. Except as provided in Paragraph 6(a), __________ the Company shall continue to employ Executive and Executive agrees to remain employed by the Company under the terms of this Agreement for the period commencing on the date first written above (the "Commencement Date") and ending April 28, 1998. The period during which Executive is employed pursuant to this Agreement shall be referred to as the "Contract Employment Period". Upon the expiration of the Contract Employment Period, Executive's employment with the Company shall continue on an at- will basis. 2. Position and Duties. During the Contract ___________________ Employment Period, Executive shall serve as Executive Vice President, Property/Casualty of the Company and in such other comparable or better position or positions with the Company and its subsidiaries as the Chief Executive Officer or the Board of Directors of the Company (the "Board") shall specify from time to time. During the Contract Employment Period, Executive shall have the duties, responsibilities and obligations customarily assigned to individuals serving in the position or positions in which Executive serves hereunder and such other duties, responsibilities and obligations as the Chief Executive Officer or the Board shall from time to time specify. Executive shall devote his full business time to the services required of him hereunder, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, and shall use his best efforts, judgment, skill and energy to perform such services in a manner consistent with the duties of his position and to improve and advance the business and interests of the Company and its subsidiaries. Nothing contained herein shall preclude PAGE 2 Executive from (i) serving on the board of directors of any _ business corporation on which he currently serves or, if the Board consents to such service, on any other board of directors, (ii) __ serving on the board of, or working for, any charitable or community organization or (iii) pursuing his personal, financial ___ and legal affairs, so long as such activities, individually or collectively, do not interfere with the performance of Executive's duties hereunder. 3. Cash Compensation. _________________ a. Base Salary. During the Contract Employment ___________ Period, the Company shall pay Executive a base salary at the annual rate of $500,000. The Board shall periodically review Executive's base salary and the Company may, in its discretion, increase such base salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. Executive's annual base salary payable hereunder, as it may be increased from time to time and without reduction for any amounts deferred as described above, is referred to herein as "Base Salary". Executive's Base Salary, as in effect from time to time, may not be reduced by the Company without Executive's consent, provided that the Base Salary ________ ____ payable under this paragraph shall be reduced to the extent Executive elects to defer or reduce such salary under the terms of any deferred compensation or savings plan or other employee benefit arrangement maintained or established by the Company. The Company shall pay Executive the portion of his Base Salary not deferred in accordance with its customary payroll practices. b. Incentive Compensation. During the term of the ______________________ Contract Employment Period, Executive shall remain eligible for participation in the Company's existing and future annual and long term incentive compensation programs at a level consistent with his position at the Company and the Company's then current policies and practices; provided that following any assignment of ________ ____ this Agreement in accordance with the provisions of Paragraph 9(c) or a Change in Control of the Company (as defined in Paragraph 7(e)), the calculation of the amount payable as annual incentive compensation and the conditions upon which such bonus shall be payable shall be no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to such assignment or Change in Control. Without limiting the generality of the foregoing, for each calendar year ending during the term hereof, Executive shall receive the opportunity to receive an annual bonus of at least 60% of his Base Salary (the "Minimum Bonus Percentage"), subject to satisfaction of such performance criteria as shall be established with respect to such year. c. Retention Bonus Payment. Unless Executive receives _______________________ the alternative bonus described in Paragraph 3(d), the Company shall pay Executive a bonus (the "Retention Bonus"), in addition to Executive's base salary and the incentive compensation opportunities set forth above, in an aggregate amount equal to $1,000,000 or, if applicable, the amount determined after the reduction, if any, specified by the Board in the manner set forth below (the "Aggregate Amount"). Notwithstanding the preceding sentence, unless the Option described in Paragraph 4 is canceled PAGE 3 due to Executive's failure to agree to become employed by the New Entity (as defined in Paragraph 6(a)) or a subsidiary thereof, the Aggregate Amount shall be reduced, at the time and in the manner set forth below, by an amount (the "Adjustment Amount") equal to the lesser of (i) $500,000 or (ii) one-half of the product of _ __ (A) the excess, if any, of (1) the Option Share Value (as defined below) over (2) $57.00 times (B) 45,000. Unless Executive elects to defer the payment of all or a portion of such Retention Bonus on such terms and conditions as the Company shall permit, the amount, if any, payable to Executive under this Paragraph 3(c) shall be paid to Executive in two installments, as hereinafter set forth. Subject in each case to Executive being continuously and comparably employed by the Company through the date such installment would otherwise have been paid, (i) the first installment (the "First Installment") shall be equal to the remainder of (A) 75% of the Aggregate Amount minus (B) the Adjustment Amount, and will be payable as of the second anniversary of the Commencement Date; (ii) the second installment (the "Second Installment") shall be equal to 25% of such Aggregate Amount and will be payable at the end of the Contract Employment Period. Notwithstanding anything in this Paragraph 3(c) to the contrary, the Board may, by resolution and notice thereof to Executive, reduce the amount to be paid to Executive as a retention bonus under this Paragraph 3(c) by up to 100% if, prior to December 31, 1995, the Board (i) affirmatively elects to _ abandon the restructuring options being considered for the Company without effecting any such option and (ii) elects to reduce any __ similar payment to be made under any and all employment agreements entered into by the Company in connection with the consideration of the restructuring options by the same percentage. For purposes of this Paragraph 3(c), the following terms have the following meanings: "Fair Market Value" means the closing price of the Company's Common Stock as reported on the New York Stock Exchange Consolidated Tape (or, if the Common Stock is not traded on the New York Stock Exchange, the closing price on whichever exchange on which the Common Stock is principally traded at such time or the average of the closing bid and asked prices reported on the national system of price quotations or which the Common Stock is then quoted). PAGE 4 "Option Share Value" means (i) except as provided in subclause _ (ii) below, if Executive's employment does not terminate prior to __ April 28, 1997, the average of the Fair Market Values for a period of five consecutive trading days ending on April 28, 1997; (ii) if __ there is a Change in Control (as defined in Paragraph 7(e)) prior to April 27, 1997, the aggregate value of any cash and any property received by the stockholders of the Company for a share of Common Stock in the transaction giving rise to such Change in Control (or if no such value is readily determinable, the Fair Market Value on the last business day immediately preceding the Change in Control on which shares of Common Stock are traded on an established securities market); or (iii) solely for purposes of ___ determining the amount, if any, payable under Paragraph 6 in respect of the Retention Bonus or a Pro Rata Retention Bonus, if Executive's employment terminates prior to April 28, 1997 by reason of a Termination due to death, a Termination due to Disability, a Termination Without Cause or a Termination for Good Reason (as each such term is defined in Paragraph 6 hereof), the average of the Fair Market Values for a period of five consecutive trading days ending on the date of such termination (or, if such date is not a trading day, on the next following trading date). The Option Share Value determined in accordance with the preceding sentence shall apply for purposes of this Paragraph 3(c) regardless of whether (x) Executive exercises the Option on or _ before the relevant date, (y) such Option lapses on or before the _ relevant date, or (z) continues in effect following the relevant _ date or is replaced by an Alternative Option (as described in Paragraph 7(b)) that continues in effect following the relevant date. d. Alternative Bonus. If the Company shall complete the sale _________________ of its property casualty business (the "Property Casualty Sale") to a strategic purchaser (that is, a purchaser which is already in the property casualty business and is not primarily a financial purchaser) prior to the second anniversary of the Commencement Date, and Executive has not voluntarily terminated his employment with the Company other than pursuant to a Termination for Good Reason (as defined in Paragraph 6(d) below) or had his employment terminated by the Company pursuant to a Termination for Cause (as defined in Paragraph 6(d) below), the Company shall pay Executive an additional bonus (the "Alternative Bonus") as soon as practicable following the closing of the Property Casualty Sale in an amount at least equal to $1,040,000, plus a share of the aggregate Alternative Bonus pool for eligible property-casualty employees, to the extent such pool exceeds the minimum pool size. 4. Stock Option Grants. Contingent upon the execution of ___________________ this Agreement by the Executive, the Company has granted Executive an option, having a ten year term, to purchase 45,000 shares of the Company's Common Stock at an exercise price per share equal to $57 a share (the "Option"). Except to the extent specified below, the terms of the Option shall be determined in accordance with the terms of the 1994 Stock Incentive Plan (the "1994 Plan") and shall be set forth in the separate agreement embodying the grant of such Option (the "Option Agreement"), the form of which is attached hereto as Exhibit A. 5. Benefits, Perquisites and Expenses. __________________________________ PAGE 5 a. Benefits. During the Contract Employment Period, ________ Executive shall be eligible to participate in (i) each welfare _ benefit plan sponsored or maintained by the Company, including, without limitation, each group life, hospitalization, medical, dental, health, accident or disability insurance or similar plan or program of the Company, and (ii) each pension, profit sharing, __ retirement, deferred compensation or savings plan sponsored or maintained by the Company, in each case, whether now existing or established hereafter, to the extent that Executive is eligible to participate in any such plan under the generally applicable provisions thereof. Nothing in this Paragraph 5(a) shall be construed to limit the ability of the Company to amend or terminate any particular plan, program or arrangement, provided _________ that, following the occurrence of a Change in Control (as defined ____ in Paragraph 7(e)) or the assignment of this Agreement to a New Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b), the benefits made available to the Executive thereafter shall be at least substantially comparable, in the aggregate, to the benefits made available to the Executive immediately prior to such Change in Control or assignment. Without limiting the generality of the foregoing, Executive understands and acknowledges that the amounts payable under Paragraph 3(c) or (d) shall not be taken into account for purposes of determining any benefits provided to Executive based, in whole or in part, on compensation. With respect to the pension or retirement benefits payable to Executive, Executive's service credited for purposes of determining Executive's benefits and vesting shall be determined in accordance with the terms of the applicable plan or program or, if applicable, pursuant to any written agreement between Executive and the Company (whether now existing or hereafter adopted) that provides Executive a more favorable method of crediting service for any purpose thereunder. b. Perquisites. During the Contract Employment Period, ___________ Executive shall be entitled to receive such perquisites as are generally provided to other senior officers of the Company in accordance with the then current policies and practices of the Company. c. Business Expenses. During the Contract Employment _________________ Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. 6. Termination of Employment. _________________________ a. Early Termination of the Contract Employment Period. ___________________________________________________ Notwithstanding Paragraph 1, the Contract Employment Period shall end upon the earliest to occur of (i) a termination of Executive's _ employment on account of Executive's death, (ii) a Termination due __ to Disability, (iii) a Termination for Cause, (iv) a Termination ___ __ Without Cause, (v) a Termination for Good Reason or (vi) a _ __ termination of Executive's employment by Executive other than a Termination for Good Reason. For purposes of this Agreement, a transfer of Executive's employment (i) to any other entity _ PAGE 6 controlled by or under common control with the Company shall not be treated as a termination unless and until such entity ceases to be controlled by or under common control with the Company or (ii) __ as a result of the implementation of any restructuring of the Company (whether occurring by spin-off or otherwise) shall not be treated as a termination of employment, provided that, in either ________ ____ case, the successor employer (the "New Entity") expressly assumes and agrees to perform all of the Company's obligations under this Agreement. b. Benefits Payable Upon Termination. Following the end of the _________________________________ Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Paragraph 6(c):
Earned Vested Accrued Severance Additional Salary Benefits Bonus Benefit Benefits ______ ________ _______ _________ Payable _______ Termination due Not Additional to death Payable Payable Payable Payable Bonus Termination due Not Additional to Disability Payable Payable Payable Payable Bonus Termination for Not Not None Cause Payable Payable Payable Payable Payable Termination Additional Without Cause Payable Payable Payable Payable Bonus Termination for Additional Good Reason Payable Payable Payable Payable Bonus Termination by Executive other than for Good Not Not None Reason Payable Payable Payable Payable Payable
c. Timing of Payments. Earned Salary and Accrued Bonus shall __________________ be paid in a single lump sum as soon as practicable, but in no event more than 30 days, following the end of the Contract Employment Period. Vested Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement under which such benefits have accrued. Any Retention Bonus or Pro-Rata Retention Bonus, as applicable, payable shall be paid to Executive in a single lump sum payment within 30 business days of Executive's termination of employment. Any amount payable as an Additional Bonus in respect of the excess of the Alternative Bonus over the Pro-Rata Retention Bonus or the Retention Bonus, whichever is applicable, shall be payable as soon as practicable following the closing of the Property Casualty Sale. Severance Benefits shall be paid in approximately equal installments, at the same intervals at which Executive was receiving his salary payments hereunder, for the greater of (i) _ one year, (ii) the period over which such benefits would be __ payable if paid to Executive under the Company's otherwise applicable plans, policies or procedures as currently in effect or (iii) the period over which such benefits would be payable if paid ___ to Executive under the Company's otherwise applicable plans, policies or procedures, as in effect at the time of Executive's termination of employment. Notwithstanding the foregoing, PAGE 7 Executive may elect, by written notice given to the Company prior to the first periodic payment and within ten business days after such termination, that, instead of periodic installments Severance Benefits shall be paid in either a single lump sum, payable within ten business days of receipt by the Company of such election, or in two equal installments, the first payable within ten business days of receipt by the Company of such election, and the second payable on the first business day of the following calendar year. d. Definitions. For purposes of this Paragraph 6, ___________ capitalized terms have the following meanings: "Accrued Bonus" means a pro-rated amount equal to the product of (i) the annual incentive compensation Executive would have been _ entitled to receive under Paragraph 3(b) for the calendar year in which his active service for the Company terminates pursuant to Paragraph 6(a) had he remained employed for the entire year and assuming that all targets for such year had been met, multiplied by (ii) a fraction, the numerator of which is equal to the number __ of days in such calendar year occurring on or prior to the termination of Executive's active service for the Company and the denominator of which is 365. "Additional Bonus" means (x) (i) in the case of a Termination _ _ due to death or a Termination due to Disability, the Pro-Rata Retention Bonus, or (ii) in the case of a Termination Without __ Cause or a Termination for Good Reason, the Retention Bonus, and (y) in case of a Termination due to death, a Termination due to _ Disability, a Termination Without Cause or a Termination for Good Reason, the excess, if any, of (i) the amount, if any, of the _ Alternative Bonus that would otherwise be payable to Executive in connection with the Property Casualty Sale pursuant to Paragraph 3(d) over (ii) the amount paid to Executive in respect of __ whichever of the Pro-Rata Retention Bonus or the Retention Bonus is payable to Executive hereunder. "Earned Salary" means any Base Salary earned, but unpaid, for services rendered to the Company on or prior to the date on which the Contract Employment Period ends (other than Base Salary deferred pursuant to Executive's election, as provided in Paragraph 3(a) hereof). "Pro-Rata Retention Bonus" means (i) if a Termination due to death or a Termination due to Disability occurs prior to the date the First Installment of the Retention Bonus otherwise would have been paid, an amount equal to the product of (A) the _ First Installment multiplied by (B) a fraction, the _ numerator of which is equal to the number of calendar days which have elapsed from the Commencement Date until Executive's death or the date the Company specifies as the date Executive's active service terminates due to Disability, and the denominator of which is the number of calendar days from the Commencement Date until the date the First Installment otherwise would have been paid; and PAGE 8 (ii) if a Termination due to death or a Termination due to Disability occurs after payment of the First Installment, but prior to the date the Second Installment of the Retention Bonus otherwise would have been paid under Paragraph 3(c), an amount equal to the product of (A) the Second Installment multiplied by (B) _ _ a fraction, the numerator of which is equal to the number of calendar days which have elapsed from the date as of which the First Installment under Paragraph 3(c) was payable until Executive's death or the date the Company specifies as the date Executive's active service terminates due to Disability, and the denominator of which is the number of calendar days from the First Installment Date until the date the Second Installment was otherwise scheduled to have been paid. "Severance Benefit" means an amount equal to the sum of (i) and (ii) below, where (i) and (ii) are: (i) the sum of (A) the annual Base Salary payable to Executive immediately prior to the end of the Contract Employment Period; and (B) an amount (the "Bonus Severance Amount") equal to the product of Executive's Base Salary times the greater of (1) the Minimum Bonus Percentage and _ (2) the percentage of Base Salary that would have _ been payable to Executive for the year of such termination assuming achievement of target levels of performance and Executive's continued employment for the entire year, and (ii) the amount otherwise payable to Executive under the Company's otherwise applicable severance plans, policies or programs as in effect on the date hereof (or, if more favorable to Executive, as in effect on the date of Executive's termination), assuming for purposes of determining the amount payable thereunder that Executive's employment was terminated as a result of the elimination of his position, but calculated by including the Bonus Severance Amount as part of Executive's eligible compensation for purposes of calculating the benefits payable under such plans, policies or programs; except that, in the event that Executive becomes entitled to receive Severance Benefits hereunder following the sale of the Company's property casualty business or a Change in Control, the Severance Benefit payable to Executive shall be determined under whichever of Paragraph 6(g) or Paragraph 7(c) is applicable. Additionally, while Executive is receiving payment of Severance Benefits in periodic installments, Executive shall also be eligible to continue to participate in the welfare benefit plans and programs (excluding the long-term disability plan, the sick-pay plan and vacation accruals) generally made available to employees of the Company and in which he participated PAGE 9 immediately prior to the termination of his employment on the same terms and conditions as would have applied had Executive continued to be employed. Upon an election to receive Severance Benefits in either a single lump sum payment or in two installments, Executive will forfeit any right to continue to receive any coverage under the Company's welfare benefit plans, other than COBRA coverage (determined from the original date of termination) at Executive's expense as required by applicable law; provided that, if Executive elects ________ ____ to receive Severance Benefits in two installments instead of periodic installments, the Company shall pay one-half of the cost of Executive's COBRA coverage from the date the first installment payment is made until the date the second installment payment is made. Notwithstanding the foregoing, receipt of a lump sum payment or two installment payments hereunder shall not cause Executive to cease to be eligible for any retiree benefit programs for which he is otherwise eligible under the terms of the Company's employee benefit plans, policies or programs. "Termination for Cause" means a termination of Executive's employment by the Company due to (i) the willful failure by _ Executive to perform substantially Executive's duties as an employee of the Company (other than due to physical or mental illness) after reasonable notice to Executive of such failure, (ii) Executive's engaging in serious misconduct that is injurious __ to the Company or any subsidiary or any affiliate of the Company, (iii) Executive's having been convicted of, or entered a plea of ___ nolo contendere to, a crime involving an act that is immoral or ____ __________ wrong in and of itself (e.g., burglary, larceny, murder and arson) ____ or a crime involving deceit, fraud, perjury or embezzlement, (iv) __ the breach by Executive of any written covenant or agreement not to compete with the Company or any subsidiary or any affiliate or (v) the breach by Executive of his duty of loyalty to the Company _ which shall include, without limitation, (A) the disclosure by _ Executive of any confidential information pertaining to the Company or any subsidiary or any affiliate of the Company, other than (x) in the ordinary course of the performance of his duties _ on behalf of the Company or (y) pursuant to a judicial or _ administrative subpoena from a court or governmental authority with jurisdiction over the matter in question, (B) the harmful _ interference by Executive in the business or operations of the Company or any subsidiary or any affiliate of the Company, (C) any _ attempt by Executive directly or indirectly to induce any employee, insurance agent, insurance broker or broker-dealer of the Company or any subsidiary or any affiliate to be employed or perform services elsewhere, (D) any attempt by Executive directly _ or indirectly to solicit the trade of any customer or supplier, or prospective customer or supplier, of the Company on behalf of any person other than the Company or a subsidiary thereof or (E) any _ breach or violation of the Company's Code of Conduct, as amended from time to time. Notwithstanding the foregoing, a breach of Executive's duty of loyalty to the Company as described in subclause (A) or (E) of clause (v) of the preceding sentence shall not be grounds for a Termination for Cause unless such breach has had or could reasonably be expected to have a significant adverse effect on the business or reputation of the Company. PAGE 10 "Termination due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable of substantially fulfilling the positions, duties, responsibilities and obligations set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of (i) at least four _ consecutive months or (ii) more than six months in any twelve __ month period. Any question as to the existence, extent or potentiality of Executive's disability shall be made by the Company, except that Executive shall have the right to request that the Company present the question of whether he is disabled to a qualified, independent physician selected by the chief or assistant chief (or the equivalent position) of the department which treats the disease giving rise to Executive's absence at a nationally or regionally recognized teaching hospital chosen by the Company. The determination of any such physician shall be final and conclusive for all purposes of this Agreement. "Termination for Good Reason" means a termination of Executive's employment by Executive within 90 days following (i) a _ reduction in Executive's annual Base Salary or incentive compensation opportunity as provided under Paragraph 3(b), (ii) a __ material reduction in Executive's positions, duties and responsibilities from those described in Paragraph 2 hereof, (iii) ___ the relocation of Executive's principal place of employment to a location more than 50 miles from the location at which he performed his principal duties on the date immediately prior to such relocation, (iv) a breach of the obligation to provide __ Executive with the benefits required to be provided in accordance with Paragraph 5(a), (v) a failure by the Company to pay any _ amounts due and owing to Executive within 10 days following written notice from Executive of such failure to pay, or (vi) any __ other material breach of the Company's obligations to Executive hereunder that significantly affects the compensation or benefits payable to Executive or materially impairs Executive's ability to perform the duties and responsibilities of his position. Notwithstanding the foregoing, a termination shall not be treated as a Termination for Good Reason (i) if Executive shall have _ consented in writing to the occurrence of the event giving rise to the claim of Termination for Good Reason or (ii) unless Executive __ shall have delivered a written notice to the Chief Executive Officer of the Company within 60 days of his having actual knowledge of the occurrence of one of such events stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination, and such event shall not have been cured within 30 days of the receipt of such notice. "Termination Without Cause" means any termination of Executive's employment by the Company other than (i) a Termination _ due to Disability or (ii) a Termination for Cause. Subject to the __ Company's obligations to make the payments, if any, required pursuant to this paragraph 6, nothing in this Agreement shall be construed to limit the right of the Company to terminate Executive's employment at any time for any reason or without reason. PAGE 11 "Vested Benefits" means amounts which are vested or which Executive is otherwise entitled to receive under the terms of or in accordance with any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its subsidiaries (including, without limitation, any supplemental pension plan, supplemental savings plan or other deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock Option Plan (the "1984 Plan"), at or subsequent to the date of his termination without regard to the performance by Executive of further services or the resolution of a contingency, provided _________ that, at any time during which Executive is entitled to receive ____ the Severance Benefits hereunder, Executive shall not also be entitled to receive any benefits under the Company's generally applicable severance or other termination plans, policies or programs. e. Full Discharge of Company Obligations. Except to the _____________________________________ extent provided in this Paragraph 6, the amounts payable to Executive pursuant to this Paragraph 6 (including, without limitation, under Paragraph 6(f)) following termination of his employment shall be in full and complete satisfaction of Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims, shall not be subject to any offset or mitigation, and, upon Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to Executive in connection with this Agreement or otherwise in connection with Executive's employment with the Company and its subsidiaries. Notwithstanding anything else contained herein to the contrary, (i) the Company's _ obligations under this Paragraph 6 are expressly conditioned upon Executive's execution of a release and waiver, substantially in the form attached hereto as Exhibit B (subject to, in the event of any change of law occurring after the date hereof, to such modifications as shall be necessary or appropriate to place the Company in a substantially the same position as though no change in law had occurred), of any claims he may have in connection with the termination of, or arising out of, his employment with the Company and (ii) nothing in this Section 6(e) shall be construed __ to waive, release or otherwise limit any amounts required to be paid hereunder or any benefits due and payable to Executive under the terms of any employee pension benefit plan, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, or any other Vested Benefit. f. Special Continuation of Certain Protection for the ___________________________________________________ Executive. Notwithstanding anything contained in this Agreement _________ to the contrary, if, at the end of the Contract Employment Period, (i) Executive remains an at-will employee of the Company and (ii) _ __ within one year following the end of the Contract Employment Period, the Company takes actions which, if they had occurred within the Contract Employment Period, would have given Executive the right to terminate his employment pursuant to a Termination for Good Reason and Executive, after giving the Company timely written notice of the events permitting a Termination for Good Reason and the opportunity to cure described in the definition of a Termination for Good Reason, voluntarily terminates his employment within 90 days of the date of such actions by the Company, then in either case, Executive shall receive payment of the Severance Benefits that would otherwise have been payable to Executive hereunder had his termination of employment occurred PAGE 12 during the Contract Employment Period. Notwithstanding the preceding sentence, this Section 6(f) shall not be applicable unless Executive executes the waiver and release referred to in Paragraph 6(e) above in connection with his termination of employment pursuant to this Paragraph 6(f). g. Enhanced Severance Payments. If Executive's employment ___________________________ is terminated following a sale of the Company's property and casualty business pursuant to a Termination for Good Reason or a Termination Without Cause, the Severance Benefit payable to Executive pursuant to this Paragraph 6 shall be equal to three times the sum of Executive's annual Base Salary and the Bonus Severance Amount. h. Outplacement Services. In addition to any other benefits _____________________ described in this Paragraph 6, in the event Executive is eligible to receive Severance Benefits, the Company shall also provide to Executive, at its expense, individual outplacement services from a qualified outplacement firm selected by the Company. The outplacement services to be provided to Executive shall be no less favorable to Executive than those made available to other executives prior to the date hereof under the Company's generally applicable policies, programs or arrangements. 7. Change in Control of the Company. ________________________________ a. Accelerated Vesting and Payment. Unless the Board (or the _______________________________ appropriate committee thereof) shall otherwise determine in the manner set forth in Paragraph 7(b), the Option shall become fully exercisable upon the occurrence of a Change in Control (as defined below) and shall remain exercisable for a period of one year thereafter regardless of whether Executive continues to be employed by the Company or, if longer, for the period during which such Option would otherwise be exercisable in accordance with its terms or the generally applicable provisions of the 1994 Plan. If no Alternative Option is provided as set forth in Section 7(b) below, and the Company does not survive as a publicly traded corporation following a Change in Control, the Company shall pay Executive, in full settlement of all rights with respect to the Option, an aggregate amount in cash equal to the product of (i) _ the lesser of (A) the Fair Market Value of a Share of the Company's Common Stock on the date the Change in Control occurs over (B) the per share exercise price for the Option times (ii) __ the number of shares as to which such Option has not been exercised at the time of the Change in Control. Any amount payable pursuant to the preceding sentence shall be paid within 30 days following such Change in Control. b. Alternative Options. Notwithstanding Paragraph 7(a), no ___________________ acceleration of exercisability shall occur with respect to any Option if the Board (or the appropriate committee thereof) reasonably determines in good faith, prior to the occurrence of a Change in Control, that such Option shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted Option being hereinafter referred to as an "Alternative Option") by the successor in interest to the Company, provided that any such Alternative Option must: ________ ____ PAGE 13 (i) provide Executive with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under the Option, including, but not limited to, an identical or better exercise and vesting schedule and identical or better timing and methods of payment; (ii) have substantially equivalent economic value to such Option (determined at the time of the Change in Control); and (iii) have terms and conditions which provide that, in the event that Executive's employment is terminated by the Company for any reason or is terminated by Executive pursuant to a Termination for Good Reason within two years following a Change in Control, (A) any _ conditions on Executive's rights under, or any restrictions on exercisability applicable to, each such Alternative Option shall be waived or shall lapse, as the case may be and (B) the Alternative _ Option shall remain exercisable until the second anniversary of the Change in Control or, if longer, for the period during which such Alternative Option would otherwise be exercisable in accordance with its terms or the provisions of the plan under which it is granted that permit the longest post-termination exercise period for involuntary terminations (other than due to death, disability or retirement). c. Enhanced Severance Payments. If Executive's ___________________________ employment is terminated following a Change in Control pursuant to a Termination for Good Reason or a Termination Without Cause, the Severance Benefit payable to Executive pursuant to Paragraph 6 shall be equal to three times the sum of Executive's annual Base Salary and the Bonus Severance Amount. d. Additional Payments by the Company. __________________________________ (i) Application of Section 7(d). In the event that any ___________________________ amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(d) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following _______________________ delivery of any Notice of Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. PAGE 14 (iii) Imposition of Payment Cap. If the aggregate value of _________________________ all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by less than 105%, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced (but not below zero) to the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Further Payments by the Company. If the aggregate _______________________________ value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by more than 105%, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(d)(iv), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (v) Application of Section 280G. For purposes of determining ___________________________ whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and PAGE 15 (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (vi) Applicable Tax Rates. For purposes of determining ____________________ whether Executive would receive a greater net after- tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(d)(iii), Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vii) Adjustments in Respect of the Payment Cap. If _________________________________________ Executive receives reduced payments and benefits under this Section 7(d) (or this Section 7(d) is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Section 7(d) is not applied to reduce Executive's entitlements under this Section 7 because the Accountants determine that Executive would not receive a greater net-after tax benefit by applying this Section 7(d) and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the PAGE 16 terms of this Agreement, Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If Executive receives reduced payments and benefits by reason of this Section 7(d) and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (viii) Adjustments in Respect of the Tax Reimbursement ________________________________________________ Payments. In the event that the Excise Tax is ________ subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the PAGE 17 Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (ix) Timing of Payment. Any Tax Reimbursement Payment (or _________________ portion thereof) provided for in Section 7(d)(iv) above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). e. Definition of "Change in Control". For purposes of _________________________________ this Paragraph 7, a "Change in Control" means the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary thereof and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) When, during any period of 24 consecutive months after the Commencement Date, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided that a director who was not a director at the ________ ____ beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as PAGE 18 Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 7(e)(ii); or (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. 8. Noncompetition and Confidentiality. __________________________________ a. Noncompetition. During the Contract Employment ______________ Period and for a period of one year following Executive's termination of employment during the Contract Employment Period other than due to a Termination Without Cause or a Termination for Good Reason, Executive shall not become associated, whether as a principal, partner, employee, consultant or shareholder (other than as a holder of not in excess of 1% of the outstanding voting shares of any publicly traded company), with any entity that is actively engaged in any geographic area in any business which is in substantial and direct competition with the business or businesses of the Company for which Executive provides substantial services or for which Executive has substantial responsibility, provided that nothing in this Section 8(a) shall preclude ________ ____ Executive from performing services solely and exclusively for a division or subsidiary of such an entity that is engaged in a non- competitive business. Notwithstanding the foregoing, this Section 8(a) shall not be enforceable in any manner that would be in violation of the rules contained in the Code of Professional Responsibility with responsibility applicable with respect to services as a lawyer. b. Nondisclosure, Nonsolicitation and Cooperation. ______________________________________________ (i) Executive shall not (except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency) disclose to any third person, whether during or subsequent to the Executive's employment with the Company, any trade secrets; customer lists; product development and related information; marketing plans and related information; sales plans and related information; operating policies and manuals; business plans; financial records; or other financial, commercial, business or technical information related to the Company or any subsidiary or affiliate thereof unless such information has been previously disclosed to the public by the Company or has become public knowledge other than by a breach of this Agreement; provided, ________ however, that this limitation shall not apply to any such _______ disclosure made while Executive is employed by the Company, or any subsidiary or affiliate thereof if such disclosure is reasonably intended to benefit the Company, or any subsidiary or affiliate; (ii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any employee or Insurance Agent (as defined below) of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere; PAGE 19 (iii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any insurance agent or agency, insurance broker, broker-dealer or supplier of the Company, or any subsidiary or affiliate thereof to cease providing services to the Company, or any subsidiary or affiliate thereof; (iv) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to solicit, on behalf of any person or entity other than the Company or any of its subsidiaries, the trade of any individual or entity which, at the time of the solicitation, is a customer of the Company, or any subsidiary or affiliate thereof, or which the Company, or any subsidiary or affiliate thereof is undertaking reasonable steps to procure as a customer at the time of or immediately preceding termination of the Contract Employment Period; provided, however, that this limitation shall only apply to (x) ________ _______ _ any product or service which is in competition with a product or service of the Company or any subsidiary or affiliate thereof and (y) with respect to any customer or prospective _ customer with whom Executive has or had (by virtue of Executive's position or otherwise) a personal relationship; and (v) following the termination of the Contract Employment Period, Executive shall provide assistance to and shall cooperate with the Company or any subsidiary or affiliate thereof, upon its reasonable request, with respect to matters within the scope of Executive's duties and responsibilities during the Contract Employment Period. (The Company agrees and acknowledges that it shall, to the maximum extent possible under the then prevailing circumstances, coordinate (or cause a subsidiary or affiliate thereof to coordinate) any such request with Executive's other commitments and responsibilities to minimize the degree to which such request interferes with such commitments and responsibilities). The Company agrees that it will reimburse Executive for reasonable travel expenses (i.e., ____ travel, meals and lodging) that Executive may incur in providing assistance to the Company hereunder. Solely for purposes of Paragraph 8(b)(ii) above, the term "Insurance Agent" shall mean those insurance agents or agencies representing the Company or any subsidiary or affiliate thereof, that are exclusive or career agents or agencies of the Company or any subsidiary or affiliate thereof, or any insurance agents or agencies which derive 50% or more of their business revenue from the Company or any subsidiary or affiliate thereof (calculated on an aggregate basis for the 12-month period prior to the date of determination or such other similar period for which such information is more readily available). c. Company Property. Promptly following Executive's ________________ termination of employment, Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under his control. d. Intention of the Parties. If any provision of Paragraph ________________________ 8 is determined by an arbitrator (or a court of competent jurisdiction asked to enforce the decision of the arbitrator) not to be enforceable in the manner set forth in this Agreement, the Company and Executive agree that it is the intention of the PAGE 20 parties that such provision should be enforceable to the maximum extent possible under applicable law and that such arbitrator (or court) shall reform such provision to make it enforceable in accordance with the intent of the parties. Executive acknowledges that a material part of the inducement for the Company to provide the salary and benefits evidenced hereby is Executive's covenants set forth in Paragraph 8(a), (b) and (c) and that the covenants and obligations of Executive with respect to nondisclosure and nonsolicitation relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that, if Executive shall breach any of those covenants, the Company shall have no further obligation to pay Executive any benefits otherwise payable hereunder and the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post a bond) restraining Executive from committing any violation of the covenants and obligations contained in Paragraph 8(a), (b) and (c). The remedies in the preceding sentence are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity as an arbitrator (or court) shall reasonably determine. e. Waiver. Without limiting the generality of the ______ foregoing, upon request of Executive prior to engaging in any conduct otherwise prohibited by this Paragraph 8, the Company may, in its sole discretion, waive in writing, on such terms and conditions as it may deem appropriate, any violation of this Paragraph 8 which would otherwise occur due to such conduct. 9. Miscellaneous. _____________ a. Survival. Paragraphs 7 (relating to a Change in ________ Control), 8 (relating to noncompetition, nonsolicitation and confidentiality) and 9 (relating, among other things, to survival, assignment and governing law) shall survive the termination hereof, whether such termination shall be by expiration of the Contract Employment Period or an early termination pursuant to Paragraph 6 hereof. Paragraph 6 ((other than Paragraph 6(f)) (relating to early termination) shall survive the termination hereof to the extent that, prior thereto, Executive (or his beneficiary) has become entitled to receive any of the benefits payable thereunder. Paragraph 6(f) (and to the extent applicable to such Paragraph 6(f), 6(e)) shall survive for one year following the termination hereof. b. Binding Effect. This Agreement shall be binding on, and ______________ shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or, unless the Company otherwise elects in writing, a sale of the assets of the business of the Company (or portion thereof) in which Executive performs a majority of his services. Any successor in interest to the Company shall acknowledge in writing to Executive that it has assumed this Agreement and is responsible to Executive for the performance of the Company's obligations under this Agreement. Without limiting the generality of the foregoing, the Company shall have the right, without the consent of Executive, to assign this Agreement and its obligations PAGE 21 hereunder to any New Entity or any subsidiary of any New Entity by which Executive becomes employed, at the discretion of the Company, by reason of the implementation of any restructuring of the Company, and, following any such assignment, such New Entity or subsidiary shall be treated as the Company for all purposes of this Agreement. This Agreement shall also enure to the benefit of Executive's heirs, executors, administrators and legal representatives. c. Assignment. Except as provided under Paragraph 9(b), __________ neither this Agreement nor any of the rights or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. In the event the Company assigns this Agreement pursuant to Section 9(b), the Company shall guarantee payment to Executive of any amounts at any time due and payable hereunder in the event (and only to the extent) that the assignee has become a debtor in bankruptcy, is the subject of a receivership or similar preceding or has become insolvent, provided that Executive shall be required to assign his ________ ____ rights against the assignee through subrogation as a condition of receiving any payment under the Company's guarantee. In consideration of such guarantee, Executive agrees that following such assignment, the covenants of Executive in Paragraphs 8(b)(i) and (v) shall continue to inure to the benefit of the Company, as well as the assignee. The Company and Executive agree that following any assignment all other covenants described herein in favor of the Company shall, from and after the date of such assignment, inure solely to the benefit of the assignee. d. Entire Agreement. Except as expressly provided below, ________________ this Agreement, the Option Agreement and the portion, if any, of any other agreement relating to pension service or credits referred to in Paragraph 5(a) shall constitute the entire agreement between the parties hereto with respect to the matters referred to herein and any other agreement or any portion of any such other agreement not expressly preserved hereby shall cease to be effective upon the execution hereof and shall not become reinstated upon the expiration or other termination of this Agreement. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. Other than the provisions of Paragraph 6 which limit Executive's eligibility to receive severance benefits under the Company's generally applicable plans, programs or agreements, nothing in this Agreement shall be construed to limit or otherwise supersede Executive's rights or entitlements under any compensatory plan, program or arrangement made available generally to all employees or all officers of the Company or under the 1994 Plan or the 1984 Plan and this Paragraph 9(d) shall not preclude reference to the documents governing any such plan, program or arrangement to determine such rights and entitlements. PAGE 22 e. Severability; Reformation. In the event that one or more _________________________ of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event any of Paragraph 8(a), (b) or (c) is not enforceable in accordance with its terms, Executive and the Company agree that such Paragraph shall be reformed to make such Paragraph enforceable in a manner which provides the Company the maximum rights permitted at law. f. Waiver. Waiver by any party hereto of any breach or ______ default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. g. Notices. Any notice required or desired to be delivered _______ under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): If to the Company: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut Attention: Secretary If to Executive: Gary G. Benanav _____________________________ 20 Northmoor Road _____________________________ West Hartford, CT 06117-1709 _____________________________ h. Arbitration. The Company and Executive agree that any ___________ claim, dispute or controversy arising under or in connection with this Agreement, or otherwise in connection with Executive's employment by the Company (including, without limitation, any such claim, dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Company's employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in the city of Hartford, Connecticut (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA. All fees and expenses of the arbitration, including a transcript if either requests, shall be borne equally by the parties. If Executive prevails as to any material issue presented to the arbitrator, the entire cost of such proceedings (including, PAGE 23 without limitation, Executive's reasonable attorneys fees) shall be borne by the Company. If Executive does not prevail as to any material issue, each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the party prevails on a claim for which attorney's fees are recoverable under the Rules). Any action to enforce or vacate the arbitrator's award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney's fees related to such action. i. Amendments. This Agreement may not be altered, modified __________ or amended except by a written instrument signed by each of the parties hereto. j. Headings. Headings to paragraphs in this Agreement are ________ for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof. k. Counterparts. This Agreement may be executed in ____________ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. l. Withholding. Any payments provided for herein shall be ___________ reduced by any amounts required to be withheld by the Company from time to time under applicable Federal, State or local income or employment tax laws or similar statutes or other provisions of law then in effect. m. Governing Law. This Agreement shall be governed by the _____________ laws of the State of Connecticut, without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Executive has hereunto set his hand as of the day and year first above written. Aetna Life and Casualty Company WITNESS: /s/ Mary Ann Champlin /s/ Ronald E.Compton _____________________ _______________________________ Mary Ann Champlin Ronald E. Compton Chairman WITNESS: /s/ Donna R. LeMay /s/ Gary G. Benanav _____________________ _______________________________ Donna R. LeMay Gary G. Benanav EX-10 5 MATERIAL CONTRACTS PAGE 1 EMPLOYMENT AGREEMENT ____________________ EMPLOYMENT AGREEMENT, dated as of January 29, 1996 by and between Aetna Life and Casualty Company, a Connecticut corporation (the "Company"), and Ronald E. Compton ("Executive"). W I T N E S S E T H: _ _ _ _ _ _ _ _ _ _ WHEREAS, the Company is considering certain restructuring alternatives that could result in significant changes in the structure of its business, including, without limitation, dividing the business of the Company into two or more separate publicly traded companies or otherwise transferring a portion of the business to a third party; WHEREAS, the Company believes that Executive is a key employee and that it is in the Company's best interests to retain the services of Executive for the period during which such restructuring alternatives are considered and, to the extent applicable, implemented; WHEREAS, the Company therefore desires to retain the services of Executive and to enter into an agreement embodying the terms of such employment (the "Agreement"); and WHEREAS, Executive desires to accept such employment and enter into such Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and Executive hereby agree as follows: 1. Employment. Except as provided in Paragraph 6(a), __________ the Company shall continue to employ Executive and Executive agrees to remain employed by the Company under the terms of this Agreement for the period commencing on the date first written above (the "Commencement Date") and ending on February 27, 1998. The period during which Executive is employed pursuant to this Agreement shall be referred to as the "Contract Employment Period". Upon the expiration of the Contract Employment Period, Executive's employment with the Company shall continue on an at- will basis. 2. Position and Duties. During the Contract ___________________ Employment Period, Executive shall serve as the Chairman and Chief Executive Officer of the Company. During the Contract Employment Period, Executive shall have such duties, responsibilities and obligations as the Board of Directors of the Company (the "Board") shall specify from time to time. Executive shall devote his full business time to the services required of him hereunder, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, and shall use his best efforts, judgment, skill and energy to perform such services in a manner consistent with the duties of his position and to improve and advance the business and interests of the Company and its subsidiaries. Nothing contained herein shall preclude Executive from (i) serving on the board of directors of _ any business corporation on which he currently serves or, if the Board consents to such service, on any other board of directors, PAGE 2 (ii) serving on the board of, or working for, any charitable or __ community organization or (iii) pursuing his personal, financial ___ and legal affairs, so long as such activities, individually or collectively, do not interfere with the performance of Executive's duties hereunder. 3. Cash Compensation. _________________ a. Base Salary. During the Contract Employment ___________ Period, the Company shall pay Executive a base salary at the annual rate of $810,000. The Board shall periodically review Executive's base salary and the Company may, in its discretion, increase such base salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. Executive's annual base salary payable hereunder, as it may be increased from time to time and without reduction for any amounts deferred as described above, is referred to herein as "Base Salary". Executive's Base Salary, as in effect from time to time, may not be reduced by the Company without Executive's consent, provided that the Base Salary ________ ____ payable under this paragraph shall be reduced to the extent Executive elects to defer or reduce such salary under the terms of any deferred compensation or savings plan or other employee benefit arrangement maintained or established by the Company. The Company shall pay Executive the portion of his Base Salary not deferred in accordance with its customary periodic payroll practices. b. Incentive Compensation. During the term of the ______________________ Contract Employment Period, Executive shall remain eligible for participation in the Company's existing and future annual and long term incentive compensation programs at a level consistent with his position at the Company and the Company's then current policies and practices; provided that following any assignment of ________ ____ this Agreement in accordance with the provisions of Paragraph 9(c) or a Change in Control of the Company (as defined in Paragraph 7(e)), the calculation of the amount payable as annual incentive compensation and the conditions upon which such bonus shall be payable shall be no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to such assignment or Change in Control. Without limiting the generality of the foregoing, for each calendar year ending during the term hereof, Executive shall receive the opportunity to receive an annual bonus of at least 65% of his Base Salary (the "Minimum Bonus Percentage"), subject to satisfaction of such performance criteria as shall be established with respect to such year. 4. Stock Option Grant. Contingent upon the execution __________________ of this Agreement by the Executive, the Company has granted Executive an option, having a ten-year term, to purchase 100,000 shares of the Company's Common Stock at an exercise price per share equal to $57 a share (the "Option"). Except to the extent specified below, the terms of the Option shall be determined in accordance with the terms of the 1994 Stock Incentive Plan (the "1994 Plan") and shall be set forth in the separate agreement embodying the grant of such Option (the "Option Agreement"), the form of which is attached hereto as Exhibit A. PAGE 3 5. Benefits, Perquisites and Expenses. __________________________________ a. Benefits. During the Contract Employment Period, ________ Executive shall be eligible to participate in (i) each welfare _ benefit plan sponsored or maintained by the Company, including, without limitation, each group life, hospitalization, medical, dental, health, accident or disability insurance or similar plan or program of the Company, and (ii) each pension, profit sharing, __ retirement, deferred compensation or savings plan sponsored or maintained by the Company, in each case, whether now existing or established hereafter, to the extent that Executive is eligible to participate in any such plan under the generally applicable provisions thereof. Nothing in this Paragraph 5(a) shall be construed to limit the ability of the Company to amend or terminate any particular plan, program or arrangements, provided _________ that, following the occurrence of a Change in Control (as defined ____ in Paragraph 7(e)) or the assignment of this Agreement to a New Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b), the benefits made available to the Executive thereafter shall be at least substantially comparable, in the aggregate, to the benefits made available to the Executive immediately prior to such Change in Control or assignment. With respect to the pension or retirement benefits payable to Executive, Executive's service credited for purposes of determining Executive's benefits and vesting shall be determined in accordance with the terms of the applicable plan or program or, if applicable, pursuant to any written agreement between Executive and the Company (whether now existing or hereafter adopted) that provides Executive a more favorable method of crediting service for any purpose thereunder. b. Perquisites. During the Contract Employment ___________ Period, Executive shall be entitled to receive such perquisites as are generally provided to the Chief Executive Officer of the Company in accordance with the then current policies and practices of the Company. c. Business Expenses. During the Contract Employment _________________ Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. 6. Termination of Employment. _________________________ a. Early Termination of the Contract Employment _____________________________________________ Period. Notwithstanding Paragraph 1, the Contract Employment ______ Period shall end upon the earliest to occur of (i) a termination _ of Executive's employment on account of Executive's death, (ii) a __ Termination due to Disability, (iii) a Termination for Cause, (iv) ___ __ a Termination Without Cause, (v) a Termination for Good Reason or _ (vi) a termination of Executive's employment by Executive other __ than a Termination for Good Reason. For purposes of this Agreement, a transfer of Executive's employment (i) to any other _ entity controlled by or under common control with the Company shall not be treated as a termination unless and until such entity ceases to be controlled by or under common control with the Company or (ii) as a result of the implementation of any __ PAGE 4 restructuring of the Company (whether occurring by spin-off or otherwise) shall not be treated as a termination of employment, provided that, in either case, the successor employer (the "New ________ ____ Entity") expressly assumes and agrees to perform all of the Company's obligations under this Agreement. b. Benefits Payable Upon Termination. Following the _________________________________ end of the Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Paragraph 6(c):
Earned Vested Accrued Severance Salary Benefits Bonus Benefit ________ __________ ________ ________ Termination due Payable Payable Payable Not Payable to death Termination due to Payable Payable Payable Not Payable Disability Termination for Payable Payable Not Payable Not Payable Cause Termination Without Payable Payable Payable Payable Cause Termination for Payable Payable Payable Payable Good Reason Termination by Payable Payable Not Payable Not Payable Executive other than for Good Reason
c. Timing of Payments. Earned Salary and Accrued __________________ Bonus shall be paid in a single lump sum as soon as practicable, but in no event more than 30 days, following the end of the Contract Employment Period. Vested Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement under which such benefits have accrued. Severance Benefits shall be paid in approximately equal installments, at the same intervals at which Executive was receiving his salary payments hereunder, for the greater of (i) _ one year, (ii) the period over which such benefits would be __ payable if paid to Executive under the Company's otherwise applicable plans, policies or procedures as currently in effect or (iii) the period over which such benefits would be payable if paid ___ to Executive under the Company's otherwise applicable plans, policies or procedures, as in effect at the time of Executive's termination of employment. Notwithstanding the foregoing, Executive may elect, by written notice given to the Company prior to the first periodic payment and within ten business days after such termination, that, instead of periodic installments, Severance Benefits shall be paid in either a single lump sum, payable within ten business days of receipt by the Company of such election, or in two equal installments, the first payable within ten business days of receipt by the Company of such election, and PAGE 5 the second payable on the first business day of the following calendar year. d. Definitions. For purposes of this Paragraph 6, ___________ capitalized terms have the following meanings: "Accrued Bonus" means a pro-rated amount equal to the product of (i) the annual incentive compensation Executive would _ have been entitled to receive under Paragraph 3(b) for the calendar year in which his active service for the Company terminates pursuant to Paragraph 6(a) had he remained employed for the entire year and assuming that all targets for such year had been met, multiplied by (ii) a fraction, the numerator of which is __ equal to the number of days in such calendar year occurring on or prior to the termination of Executive's active service for the Company and the denominator of which is 365. "Earned Salary" means any Base Salary earned, but unpaid, for services rendered to the Company on or prior to the date on which the Contract Employment Period ends (other than Base Salary deferred pursuant to Executive's election, as provided in Paragraph 3(a) hereof). "Severance Benefit" means an amount equal to the sum of (i) and (ii) below, where (i) and (ii) are: (i) the sum of (A) the annual Base Salary payable to Executive immediately prior to the end of the Contract Employment Period; and (B) an amount (the "Bonus Severance Amount") equal to the product of Executive's Base Salary times the greater of (1) the Minimum Bonus Percentage and _ (2) the percentage of Base Salary that would have _ been payable to Executive for the year of such termination assuming achievement of target levels of performance and Executive's continued employment for the entire year, and (ii) the amount otherwise payable to Executive under the Company's otherwise applicable severance plans, policies or programs as in effect on the date hereof (or, if more favorable to Executive, as in effect on the date of Executive's termination), assuming for purposes of determining the amount payable thereunder that Executive's employment was terminated as a result of the elimination of his position, but calculated by including the Bonus Severance Amount as part of Executive's eligible compensation for purposes of calculating the benefits payable under such plans, policies or programs; except that, in the event that Executive becomes entitled to receive Severance Benefits hereunder following a Change in Control, the Severance Benefit payable to Executive shall be determined under Paragraph 7(c). Additionally, while Executive is receiving payment of Severance Benefits in periodic installments, Executive shall also be eligible to continue to participate in the welfare benefit plans and programs (excluding the long-term disability plan, the sick-pay plan and vacation accruals) PAGE 6 generally made available to employees of the Company and in which he participated immediately prior to the termination of his employment on the same terms and conditions as would have applied had Executive continued to be employed. Upon an election to receive Severance Benefits in either a single lump sum payment or in two installments, Executive will forfeit any right to continue to receive any coverage under the Company's welfare benefit plans, other than COBRA coverage (determined from the original date of termination) at Executive's expense as required by applicable law; provided that, if Executive elects to receive Severance Benefits ________ ____ in two installments instead of periodic installments, the Company shall pay one-half of the cost of Executive's COBRA coverage from the date the first installment payment is made until the date the second installment payment is made. Notwithstanding the foregoing, receipt of a lump sum payment or two installment payments hereunder shall not cause Executive to cease to be eligible for any retiree benefit programs for which he is otherwise eligible under the terms of the Company's employee benefit plans, policies or programs. "Termination for Cause" means a termination of Executive's employment by the Company due to (i) the willful _ failure by Executive to perform substantially Executive's duties as an employee of the Company (other than due to physical or mental illness) after reasonable notice to Executive of such failure, (ii) Executive's engaging in serious misconduct that is __ injurious to the Company or any subsidiary or any affiliate of the Company, (iii) Executive's having been convicted of, or entered a ___ plea of nolo contendere to, a crime involving an act that is ____ __________ immoral or wrong in and of itself (e.g., burglary, larceny, murder ____ or arson) or a crime involving deceit, fraud, perjury or embezzlement, (iv) the breach by Executive of any written covenant __ or agreement not to compete with the Company or any subsidiary or any affiliate or (v) the breach by Executive of his duty of _ loyalty to the Company which shall include, without limitation, (A) the disclosure by Executive of any confidential information _ pertaining to the Company or any subsidiary or any affiliate of the Company, other than (x) in the ordinary course of the _ performance of his duties on behalf of the Company or (y) pursuant _ to a judicial or administrative subpoena from a court or governmental authority with jurisdiction over the matter in question, (B) the harmful interference by Executive in the _ business or operations of the Company or any subsidiary or any affiliate of the Company, (C) any attempt by Executive directly or _ indirectly to induce any employee, insurance agent, insurance broker or broker-dealer of the Company or any subsidiary or any affiliate to be employed or perform services elsewhere, (D) any _ attempt by Executive directly or indirectly to solicit the trade of any customer or supplier, or prospective customer or supplier, of the Company on behalf of any person other than the Company or a subsidiary thereof or (E) any breach or violation of the Company's _ Code of Conduct, as amended from time to time. Notwithstanding the foregoing, a breach of Executive's duty of loyalty to the Company as described in subclause (A) or a breach of the Company's Code of Conduct as described in subclause (E) of clause (v) of the preceding sentence shall not be grounds for a Termination for Cause unless such breach has had or could reasonably be expected to have a significant adverse effect on the business or reputation of the Company. PAGE 7 "Termination due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable of substantially fulfilling the positions, duties, responsibilities and obligations set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of (i) at least four _ consecutive months or (ii) more than six months in any twelve __ month period. Any question as to the existence, extent or potentiality of Executive's disability shall be made by a qualified, independent physician selected by the chief or assistant chief (or the equivalent position) of the department which treats the disease giving rise to Executive's absence at a nationally or regionally recognized teaching hospital chosen by the Company. The determination of any such physician shall be final and conclusive for all purposes of this Agreement. Notwithstanding the foregoing, (i) a Termination for Disability _ shall not affect Executive's right to receive any amount that would otherwise have been payable to Executive under the Company's plans, policies, practices or programs pertaining to short-term or long-term disability had Executive's employment continued and (ii) __ if it is determined, at the time Executive is first eligible to receive long-term disability benefits under the Company's plans, policies, practices or programs, that Executive is not entitled to receive such long-term disability benefits (other than due to Executive's failure to cooperate), Executive shall, for purposes of this Paragraph 6, be deemed to have been terminated as of the date of such determination pursuant to a Termination Without Cause and to be entitled to receive any additional benefits payable hereunder in respect of a Termination Without Cause. "Termination for Good Reason" means a termination of Executive's employment by Executive within 90 days following (i) a _ reduction in Executive's annual Base Salary or incentive compensation opportunity as provided under Paragraph 3(b), (ii) a __ material reduction in Executive's positions, duties and responsibilities from those described in Paragraph 2 hereof, (iii) ___ the relocation of Executive's principal place of employment to a location more than 50 miles from the location at which he performed his principal duties on the date immediately prior to such relocation, (iv) a breach of the obligation to provide __ Executive with the benefits required to be provided in accordance with Paragraph 5(a), (v) a failure by the Company to pay any _ amounts due and owing to Executive within 10 days following written notice from Executive of such failure to pay, or (vi) any __ other material breach of the Company's obligations to Executive hereunder that significantly affects the compensation or benefits payable to Executive or materially impairs Executive's ability to perform the duties and responsibilities of his position. Notwithstanding the foregoing, a termination shall not be treated as a Termination for Good Reason (i) if Executive shall have _ consented in writing to the occurrence of the event giving rise to the claim of Termination for Good Reason or (ii) unless Executive __ shall have delivered a written notice to the Board within 60 days of his having actual knowledge of the occurrence of one of such events stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination, and such event shall not have been cured within 30 days of the receipt of such notice. "Termination Without Cause" means any termination of Executive's employment by the Company other than (i) a Termination due to _ Disability or (ii) a Termination for Cause. __ PAGE 8 Subject to the Company's obligations to make the payments, if any, required pursuant to this paragraph 6, nothing in this Agreement shall be construed to limit the right of the Company to terminate Executive's employment at any time for any reason or without reason. "Vested Benefits" means amounts which are vested or which Executive is otherwise entitled to receive under the terms of or in accordance with any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its subsidiaries (including, without limitation, any supplemental pension plan, supplemental savings plan or other deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock Option Plan (the "1984 Plan")), at or subsequent to the date of his termination without regard to the performance by Executive of further services or the resolution of a contingency, provided _________ that, at any time during which Executive is entitled to receive ____ the Severance Benefits hereunder, Executive shall not also be entitled to receive any benefits under the Company's generally applicable severance or other termination plans, policies or programs. e. Full Discharge of Company Obligations. Except to _____________________________________ the extent provided in this Paragraph 6, the amounts payable to Executive pursuant to this Paragraph 6 (including, without limitation, under Paragraph 6(f)) following termination of his employment shall be in full and complete satisfaction of Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims, shall not be subject to any offset or mitigation, and, upon Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to Executive in connection with this Agreement or otherwise in connection with Executive's employment with the Company and its subsidiaries. Notwithstanding anything else contained herein to the contrary, (i) the Company's _ obligations under this Paragraph 6 are expressly conditioned upon Executive's execution of a release and waiver, substantially in the form attached hereto as Exhibit B (subject to, in the event of any change of law occurring after the date hereof, to such modifications as shall be necessary or appropriate to place the Company in a substantially the same position as though no change in law had occurred), of any claims he may have in connection with the termination of, or arising out of, his employment with the Company and (ii) nothing in this Section 6(e) shall be construed __ to waive, release or otherwise limit any amounts required to be paid hereunder or any benefits due and payable to Executive under the terms of any employee pension benefit plan, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, or any other Vested Benefit. f. Special Continuation of Certain Protection for the ___________________________________________________ Executive. Notwithstanding anything contained in this Agreement _________ to the contrary, if, at the end of the Contract Employment Period, (i) Executive remains an at-will employee of the Company and (ii) _ __ within one year following the end of the Contract Employment Period, the Company takes actions which, if they had occurred within the Contract Employment Period, would have given Executive the right to terminate his employment pursuant to a Termination for Good Reason and Executive, after giving the Company timely PAGE 9 written notice of the events permitting a Termination for Good Reason and the opportunity to cure described in the definition of a Termination for Good Reason, voluntarily terminates his employment within 90 days of the date of such actions by the Company, then in either case, Executive shall receive payment of the Severance Benefits that would otherwise have been payable to Executive hereunder had his termination of employment occurred during the Contract Employment Period. Notwithstanding the preceding sentence, this Section 6(f) shall not be applicable unless Executive executes the waiver and release referred to in Paragraph 6(e) above in connection with his termination of employment pursuant to this Paragraph 6(f). g. Outplacement Services. In addition to any other _____________________ benefits described in this Paragraph 6, in the event Executive is eligible to receive Severance Benefits, the Company shall also provide to Executive, at its expense, individual outplacement services from a qualified outplacement firm selected by the Company. The outplacement services to be provided to Executive shall be no less favorable to Executive than those made available to other executives prior to the date hereof under the Company's generally applicable policies, programs or arrangements. 7. Change in Control of the Company. ________________________________ a. Accelerated Vesting and Payment. Unless the Board _______________________________ (or the appropriate committee thereof) shall otherwise determine in the manner set forth in Paragraph 7(b), the Option shall become fully exercisable upon the occurrence of a Change in Control (as defined below) and shall remain exercisable for a period of one year thereafter regardless of whether Executive continues to be employed by the Company or, if longer, for the period during which such Option would otherwise be exercisable in accordance with its terms or the generally applicable provisions of the 1994 Plan. If no Alternative Option is provided as set forth in Section 7(b) below, and the Company does not survive as a publicly traded corporation following a Change in Control, the Company shall pay Executive, in full settlement of all rights with respect to the Option, an aggregate amount in cash equal to the product of (i) _ (A) the Fair Market Value of a Share of the Company's Common Stock on the date the Change in Control occurs minus (B) the per share exercise price for the Option times (ii) the number of shares as __ to which such Option has not been exercised at the time of the Change in Control. Any amount payable pursuant to the preceding sentence shall be paid within 30 days following such Change in Control. b. Alternative Options. Notwithstanding ___________________ Paragraph 7(a), no acceleration of exercisability shall occur with respect to any Option if the Board (or the appropriate committee thereof) reasonably determines in good faith, prior to the occurrence of a Change in Control, that such Option shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted Option being hereinafter referred to as an "Alternative Option") by the successor in interest to the Company, provided that any such Alternative Option must: ________ ____ (i) provide Executive with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under the Option, including, but not limited to, an identical or better PAGE 11 exercise and vesting schedule and identical or better timing and methods of payment; (ii) have substantially equivalent economic value to such Option (determined at the time of the Change in Control); and (iii) have terms and conditions which provide that, in the event that Executive's employment is terminated by the Company for any reason or is terminated by Executive pursuant to a Termination for Good Reason within two years following a change in Control, (A) any conditions _ on Executive's rights under, or any restrictions on exercisability applicable to, each such Alternative Option shall be waived or shall lapse, as the case may be and (B) the Alternative Option shall _ remain exercisable until the second anniversary of the Change in Control or, if longer, for the period during which such Alternative Option would otherwise be exercisable in accordance with its terms or the provisions of the plan under which it is granted that permit the longest post-termination exercise period for involuntary terminations (other than due to death, disability or retirement). c. Enhanced Severance Payments. If Executive's __________________________ employment is terminated following a Change in Control pursuant to a Termination for Good Reason or a Termination Without Cause, the Severance Benefit payable to Executive pursuant to Paragraph 6 shall be equal to three times the sum of Executive's annual Base Salary and the Bonus Severance Amount. d. Additional Payments by the Company. __________________________________ (i) Application of Paragraph 7(d). In the event that any ______________________________ amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(d) shall apply to determine the amounts payable to Executive pursuant to this agreement. (ii) Calculation of Benefits. Immediately following delivery _______________________ of any Notice of Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. PAGE 11 (iii) Imposition of Payment Cap. If the aggregate value of _________________________ all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by less than 105%, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced (but not below zero) to the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Further Payments by the Company. If the aggregate _______________________________ value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by more than 105%, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Paragraph 7(d)(iv), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (v) Application of Section 280G. For purposes of ___________________________ determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and PAGE 12 (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (vi) Applicable Tax Rates. For purposes of determining ___________________ whether Executive would receive a greater net after- tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(d)(iii), Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vii) Adjustments in Respect of the Payment Cap. If Executive ________________________________________ receives reduced payments and benefits under this Paragraph 7(d) (or this Paragraph 7(d) is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Paragraph 7(d) is not applied to reduce Executive's entitlements under this Paragraph 7 because the Accountants determine that Executive would not receive a greater net-after tax benefit by applying this Paragraph 7(d) and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate PAGE 13 "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If Executive receives reduced payments and benefits by reason of this Paragraph 7(d) and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (viii) Adjustments in Respect of the Tax Reimbursement Payments. ________________________________________________________ In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. PAGE 14 (ix) Timing of Payment. Any Tax Reimbursement Payment (or _________________ portion thereof) provided for in Paragraph 7(d)(iv) above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). e. Definition of "Change in Control". For purposes of _________________________________ this Paragraph 7, a "Change in Control" means the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary thereof and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) When, during any period of 24 consecutive months after the Commencement Date, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided that a ________ ____ director who was not a director at the beginning of such 24- month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Paragraph 7(e)(ii); or (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. 8. Noncompetition and Confidentiality. _________________________________ a. Noncompetition. During the Contract Employment ______________ Period and for a period of one year following Executive's termination of employment during the Contract Employment Period other than due to a Termination Without Cause or a Termination for Good Reason, Executive shall not become associated, whether as a principal, partner, employee, consultant or shareholder (other than as a holder of not in excess of 1% of the outstanding voting shares of any publicly traded company), with any entity that is actively engaged in any geographic area in any business which is in substantial and direct competition with the business or businesses of the Company for which Executive provides substantial services or for which Executive has substantial responsibility, provided that nothing in this Paragraph 8(a) shall preclude ________ ____ Executive from performing services solely and exclusively for a division or subsidiary of such an entity that is engaged in a non- competitive business. b. Nondisclosure, Nonsolicitation and Cooperation. ______________________________________________ (i) Executive shall not (except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency) disclose to any third person, whether during or subsequent to the Executive's employment with the Company, any trade secrets; customer lists; product development and related information; marketing plans and related information; sales plans and related information; operating policies and manuals; business plans; financial records; or other financial, commercial, business or technical information related to the Company or any subsidiary or affiliate thereof unless such information has been previously disclosed to the public by the Company or has become public knowledge other than by a breach of this Agreement; provided, however, that this ________ _______ limitation shall not apply to any such disclosure made while Executive is employed by the Company, or any subsidiary or affiliate thereof if such disclosure is reasonably intended to benefit the Company, or any subsidiary or affiliate; (ii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any employee or Insurance Agent (as defined below) of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere; (iii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any insurance agent or agency, insurance broker, broker-dealer or supplier of the Company, or any subsidiary or affiliate thereof to cease providing services to the Company, or any subsidiary or affiliate thereof; (iv) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to solicit, on behalf of any person or entity other than the Company or any of its subsidiaries, the trade of any individual or entity which, at the time of the solicitation, is a customer of the Company, or any subsidiary or affiliate thereof, or which the Company, or any subsidiary or affiliate thereof is undertaking reasonable steps to procure as a customer at the time of or immediately preceding termination of the Contract Employment Period; provided, however, that this ________ _______ PAGE 16 limitation shall only apply to (x) any product or service which is _ in competition with a product or service of the Company or any subsidiary or affiliate thereof and (y) with respect to any _ customer or prospective customer with whom Executive has or had (by virtue of Executive's position or otherwise) a personal relationship; and (v) following the termination of the Contract Employment Period, Executive shall provide assistance to and shall cooperate with the Company or any subsidiary or affiliate thereof, upon its reasonable request, with respect to matters within the scope of Executive's duties and responsibilities during the Contract Employment Period. (The Company agrees and acknowledges that it shall, to the maximum extent possible under the then prevailing circumstances, coordinate (or cause a subsidiary or affiliate thereof to coordinate) any such request with Executive's other commitments and responsibilities to minimize the degree to which such request interferes with such commitments and responsibilities). The Company agrees that it will reimburse Executive for reasonable travel expenses (i.e., travel, meals and ____ lodging) that Executive may incur in providing assistance to the Company hereunder. Solely for purposes of Paragraph 8(b)(ii) above, the term "Insurance Agent" shall mean those insurance agents or agencies representing the Company or any subsidiary or affiliate thereof, that are exclusive or career agents or agencies of the Company or any subsidiary or affiliate thereof, or any insurance agents or agencies which derive 50% or more of their business revenue from the Company or any subsidiary or affiliate thereof (calculated on an aggregate basis for the 12-month period prior to the date of determination or such other similar period for which such information is more readily available). c. Company Property. Promptly following Executive's ________________ termination of employment, Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under his control. d. Intention of the Parties. If any provision of ________________________ Paragraph 8 is determined by an arbitrator (or a court of competent jurisdiction asked to enforce the decision of the arbitrator) not to be enforceable in the manner set forth in this Agreement, the Company and Executive agree that it is the intention of the parties that such provision should be enforceable to the maximum extent possible under applicable law and that such arbitrator (or court) shall reform such provision to make it enforceable in accordance with the intent of the parties. Executive acknowledges that a material part of the inducement for the Company to provide the salary and benefits evidenced hereby is Executive's covenants set forth in Paragraph 8(a), (b) and (c) and that the covenants and obligations of Executive with respect to nondisclosure and nonsolicitation relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that, if Executive shall breach any of those covenants, the Company shall have no further obligation to pay Executive any benefits otherwise payable hereunder and the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post a PAGE 17 bond) restraining Executive from committing any violation of the covenants and obligations contained in Paragraph 8(a), (b) and (c). The remedies in the preceding sentence are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity as an arbitrator (or court) shall reasonably determine. e. Waiver. Without limiting the generality of the ______ foregoing, upon request of Executive prior to engaging in any conduct otherwise prohibited by this Paragraph 8, the Board may, in its sole discretion, waive in writing, on such terms and conditions as it may deem appropriate, any violation of this Paragraph 8 which would otherwise occur due to such conduct. 9. Miscellaneous. _____________ a. Survival. Paragraphs 7 (relating to a Change in ________ Control), 8 (relating to noncompetition, nonsolicitation and confidentiality)and 9 (relating, among other things, to survival, assignment and governing law) shall survive the termination hereof, whether such termination shall be by expiration of the Contract Employment Period or an early termination pursuant to Paragraph 6 hereof. Paragraph 6((other than Paragraph 6(f)) (relating to early termination) shall survive the termination hereof to the extent that, prior thereto, Executive (or his beneficiary) has become entitled to receive any of the benefits payable thereunder. Paragraph 6(f) (and to the extent applicable to such Paragraph 6(f), 6(e)) shall survive for one year following the termination hereof. b. Binding Effect. This Agreement shall be binding on, ______________ and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or, unless the Company otherwise elects in writing, a sale of the assets of the business of the Company (or portion thereof) in which Executive performs a majority of his services. Any successor in interest to the Company shall acknowledge in writing to Executive that it has assumed this Agreement and is responsible to Executive for the performance of the Company's obligations under this Agreement. Without limiting the generality of the foregoing, the Company shall have the right, without the consent of Executive, to assign this Agreement and its obligations hereunder to any New Entity or any subsidiary of any New Entity by which Executive becomes employed, at the discretion of the Company, by reason of the implementation of any restructuring of the Company, and, following any such assignment, such New Entity or subsidiary shall be treated as the Company for all purposes of this Agreement. This Agreement shall also endure to the benefit of Executive's heirs, executors, administrators and legal representatives. c. Assignment. Except as provided under Paragraph __________ 9(b), neither this Agreement nor any of the rights or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. In the event the Company assigns this Agreement pursuant to Section 9(b), the Company shall guarantee payment to Executive of any amounts at any time due and payable hereunder in the event (and only to the PAGE 18 extent) that the assignee has become a debtor in bankruptcy, is the subject of a receivership or similar preceding or has become insolvent, provided that Executive shall be required to assign his ________ ____ rights against the assignee through subrogation as a condition of receiving any payment under the Company's guarantee. In consideration of such guarantee, Executive agrees that following such assignment, the covenants of Executive in Paragraphs 8(b)(i) and (v) shall continue to inure to the benefit of the Company, as well as the assignee. The Company and Executive agree that following any assignment all other covenants described herein in favor of the Company shall, from and after the date of such assignment, inure solely to the benefit of the assignee. d. Entire Agreement. Except as expressly provided ________________ below, this Agreement, the Option Agreement, and the portion, if any, of any other agreement relating to pension service or credits referred to in Paragraph 5(a) shall constitute the entire agreement between the parties hereto with respect to the matters referred to herein and any other agreement or any portion of any such other agreement not expressly preserved hereby shall cease to be effective upon the execution hereof and shall not become reinstated upon the expiration or other termination of this Agreement. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. Other than the provisions of Paragraph 6 which limit Executive's eligibility to receive severance benefits under the Company's generally applicable plans, programs or agreements, nothing in this Agreement shall be construed to limit or otherwise supersede Executive's rights or entitlements under any compensatory plan, program or arrangement made available generally to all employees or all officers of the Company or under the 1994 Plan or the 1984 Plan and this Paragraph 9(d) shall not preclude reference to the documents governing any such plan, program or arrangement to determine such rights and entitlements. e. Severability; Reformation. In the event that one or _________________________ more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event any of Paragraph 8(a), (b) or (c) is not enforceable in accordance with its terms, Executive and the Company agree that such Paragraph shall be reformed to make such Paragraph enforceable in a manner which provides the Company the maximum rights permitted at law. f. Waiver. Waiver by any party hereto of any breach ______ or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. PAGE 19 g. Notices. Any notice required or desired to be _______ delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): If to the Company: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: Corporate Secretary If to Executive: Ronald E. Compton 59 Northgate Simsbury, Connecticut 06070 h. Arbitration. The Company and Executive agree that any ___________ claim, dispute or controversy arising under or in connection with this Agreement, or otherwise in connection with Executive's employment by the Company (including, without limitation, any such claim, dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Company's employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in the city of Hartford, Connecticut (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA. All fees and expenses of the arbitration, including a transcript if either requests, shall be borne equally by the parties. If Executive prevails as to any material issue presented to the arbitrator, the entire cost of such proceedings (including, without limitation, Executive's reasonable attorneys fees) shall be borne by the Company. If Executive does not prevail as to any material issue, each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the party prevails on a claim for which attorney's fees are recoverable under the Rules). Any action to enforce or vacate the arbitrator's award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney's fees related to such action. PAGE 20 i. Amendments. This Agreement may not be altered, __________ modified or amended except by a written instrument signed by each of the parties hereto. j. Headings. Headings to paragraphs in this Agreement ________ are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof. k. Counterparts. This Agreement may be executed in ____________ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. l. Withholding. Any payments provided for herein shall ___________ be reduced by any amounts required to be withheld by the Company from time to time under applicable Federal, State or local income or employment tax laws or similar statutes or other provisions of law then in effect. m. Governing Law. This Agreement shall be governed by _____________ the laws of the State of Connecticut, without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Executive has hereunto set his hand as of the day and year first above written. Aetna Life and Casualty Company /s/ Mary Ann Champlin ________________________________ Mary Ann Champlin Senior Vice President, Aetna Human Resources /s/ Ronald E. Compton ________________________________ Ronald E. Compton EX-10 6 MATERIAL CONTRACTS PAGE 1 EMPLOYMENT AGREEMENT ____________________ EMPLOYMENT AGREEMENT, dated as of December 19, 1995, by and between Aetna Life and Casualty Company, a Connecticut corporation (the "Company"), and Daniel P. Kearney ("Executive"). W I T N E S S E T H: _ _ _ _ _ _ _ _ _ _ WHEREAS, the Company is considering certain restructuring alternatives that could result in significant changes in the structure of its business, including, without limitation, dividing the business of the Company into two or more separate publicly traded companies or otherwise transferring a portion of the business to a third party; WHEREAS, the Company believes that Executive is a key employee and that it is in the Company's best interests to retain the services of Executive for the period during which such restructuring alternatives are considered and, to the extent applicable, implemented; WHEREAS, the Company therefore desires to retain the services of Executive and to enter into an agreement embodying the terms of such employment (the "Agreement"); and WHEREAS, Executive desires to accept such employment and enter into such Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and Executive hereby agree as follows: 1. Employment. Except as provided in Paragraph 6(a), the __________ Company shall continue to employ Executive and Executive agrees to remain employed by the Company under the terms of this Agreement for the period commencing on the date first written above and ending April 28, 1998. The period during which Executive is employed pursuant to this Agreement shall be referred to as the "Contract Employment Period". Upon the expiration of the Contract Employment Period, Executive's employment with the Company shall continue on an at-will basis. 2. Position and Duties. During the contract Employment ___________________ Period, Executive shall serve as Executive Vice President, Investments/Financial Services, of the Company and in such other comparable or better position or positions with the Company and its subsidiaries as the Chief Executive Officer or the Board of Directors of the Company (the "Board") shall specify from time to time. During the Contract Employment Period, Executive shall have the duties, responsibilities and obligations customarily assigned to individuals serving PAGE 2 in the position or positions in which Executive serves hereunder and such other duties, responsibilities and obligations as the Chief Executive Officer or the Board shall from time to time specify. Executive shall devote his full business time to the services required of him hereunder, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, and shall use his best efforts, judgment, skill and energy to perform such services in a manner consistent with the duties of his position and to improve and advance the business and interests of the Company and its subsidiaries. Nothing contained herein shall preclude Executive from (i) serving on any _ corporate or governmental board of directors on which he currently serves or, if the Board consents to such service, on any other board of directors, (ii) serving on the board of, or working for, __ any charitable, not-for profit or community organization, (iii) ___ pursuing any other activity to which the Board consents or (iv) __ pursuing his personal, financial and legal affairs, so long as such activities, individually or collectively, do not interfere with the performance of Executive's duties hereunder. 3. Cash Compensation. _________________ a. Base Salary. During the Contract Employment Period, ___________ the Company shall pay Executive a base salary at the annual rate of $525,000. The Board shall periodically review Executive's base salary and the Company may, in its discretion, increase such base salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. Executive's annual base salary payable hereunder, as it may be increased from time to time and without reduction for any amounts deferred as described above, is referred to herein as "Base Salary". Executive's Base Salary, as in effect from time to time, may not be reduced by the Company without Executive's consent, provided that the Base Salary payable under ________ ____ this paragraph shall be reduced to the extent Executive elects to defer or reduce such salary under the terms of any deferred compensation or savings plan or other employee benefit arrangement maintained or established by the Company. The Company shall pay Executive the portion of his Base Salary not deferred in accordance with its customary periodic payroll practices. b. Incentive Compensation. During the term of the ______________________ Contract Employment Period, Executive shall remain eligible for participation in the Company's existing and future annual and long term incentive compensation programs at a level consistent with his position at the Company and the Company's then current policies and practices; provided that following any assignment of _____________ this Agreement in accordance with the provisions of Paragraph 9(c) or a Change in Control of the Company (as defined in Paragraph 7(e)), the calculation of the amount payable as annual incentive compensation and the conditions upon which such bonus shall be payable shall be no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) PAGE 3 than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to such assignment or Change in Control. Without limiting the generality of the foregoing, for each calendar year ending during the term hereof, Executive shall receive the opportunity to receive an annual bonus of at least 60% of his Base Salary (the "Minimum Bonus Percentage"), subject to satisfaction of such reasonable performance criteria as shall be established with respect to such year. 4. Stock Option Grant. Contingent upon the execution of __________________ this Agreement by the Executive, the Company has granted Executive an option, having a ten-year term, to purchase 65,000 shares of the Company's Common Stock at an exercise price per share equal to $57 a share (the "Option"). Except to the extent specified below, the terms of the Option shall be determined in accordance with the terms of the 1994 Stock Incentive Plan (the "1994 Plan") and shall be set forth in the separate agreement embodying the grant of such Option (the "Option Agreement"), the form of which is attached hereto as Exhibit A. 5. Benefits, Perquisites and Expenses. __________________________________ a. Benefits. During the Contract Employment Period, ________ Executive shall be eligible to participate in (i) each welfare _ benefit plan sponsored or maintained by the Company, including, without limitation, each group life, hospitalization, medical, dental, health, accident or disability insurance or similar plan or program of the Company, and (ii) each pension, profit sharing, __ retirement, deferred compensation or savings plan sponsored or maintained by the Company, in each case, whether now existing or established hereafter, to the extent that Executive is eligible to participate in any such plan under the generally applicable provisions thereof. Nothing in this Paragraph 5(a) shall be construed to limit the ability of the Company to amend or terminate any particular plan, program or arrangements, provided _________ that, following the occurrence of a Change in Control (as defined ____ in Paragraph 7(e)) or the assignment of this Agreement to a New Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b), the benefits made available to the Executive thereafter shall be at least substantially comparable, in the aggregate, to the benefits made available to the Executive immediately prior to such Change in Control or assignment. With respect to the pension or retirement benefits payable to Executive, Executive's service credited for purposes of determining Executive's benefits and vesting shall be determined in accordance with the terms of the applicable plan or program or, if applicable, pursuant to any written agreement between Executive and the Company (whether now existing or hereafter adopted) that provides Executive a more favorable method of crediting service for any purpose thereunder. b. Perquisities. During the Contract Employment Period, ____________ Executive shall be entitled to receive such perquisites as are PAGE 4 generally provided to other senior officers of the Company in accordance with the then current policies and practices of the Company. c. Business Expenses. During the Contract Employment _________________ Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. 6. Termination of Employment. __________________________ a. Early Termination of the Contract Employment Period. ___________________________________________________ Notwithstanding Paragraph 1, the Contract Employment Period shall end upon the earliest to occur of (i) a termination of Executive's _ employment on account of Executive's death, (ii) a Termination due __ to Disability, (iii) a Termination for Cause, (iv) a Termination ___ __ Without Cause, (v) a Termination for Good Reason or (vi) a _ __ termination of Executive's employment by Executive other than a Termination for Good Reason. For purposes of this Agreement, a transfer of Executive's employment (i) to any other entity _ controlled by or under common control with the Company shall not be treated as a termination unless and until such entity ceases to be controlled by or under common control with the Company or (ii) __ as a result of the implementation of any restructuring of the Company (whether occurring by spin-off or otherwise) shall not be treated as a termination of employment, provided that, in either _____________ case, the successor employer (the "New Entity") expressly assumes and agrees to perform all of the Company's obligations under this Agreement. b. Benefits Payable Upon Termination. Following the end _________________________________ of the Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Paragraph 6(c):
Earned Vested Accrued Severance Salary Benefits Bonus Benefit ________ __________ ________ ________ Termination due Payable Payable Payable Not Payable to death Termination due to Payable Payable Payable Not Payable Disability Termination for Payable Payable Not Payable Not Payable Cause Termination Without Payable Payable Payable Payable Cause Termination for Payable Payable Payable Payable Good Reason Termination by Payable Payable Not Payable Not Payable Executive other than for Good Reason
PAGE 5 c. Timing of Payments. Earned Salary and Accrued Bonus __________________ shall be paid in a single lump sum as soon as practicable, but in no event more than 30 days, following the end of the Contract Employment Period. Vested Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement under which such benefits have accrued. Severance Benefits shall be paid in approximately equal installments, at the same intervals at which Executive was receiving his salary payments hereunder, for the greater of (i) _ one year, (ii) the period over which such benefits would be __ payable if paid to Executive under the Company's otherwise applicable plans, policies or procedures as currently in effect or (iii) the period over which such benefits would be payable if paid ___ to Executive under the Company's otherwise applicable plans, policies or procedures, as in effect at the time of Executive's termination of employment. Notwithstanding the foregoing, Executive may elect, by written notice given to the Company prior to the first periodic payment and within ten business days after such termination, that, instead of periodic installments, Severance Benefits shall be paid in either a single lump sum, payable within ten business days of receipt by the Company of such election, or in two equal installments, the first payable within ten business days of receipt by the Company of such election, and the second payable on the first business day of the following calendar year. d. Definitions. For purposes of this Paragraph 6, ___________ capitalized terms have the following meanings: "Accrued Bonus" means a pro-rated amount equal to the product of (i) the annual incentive compensation Executive would have been _ entitled to receive under Paragraph 3(b) for the calendar year in which his active service for the Company terminates pursuant to Paragraph 6(a) had he remained employed for the entire year and assuming that all targets for such year had been met, multiplied by (ii) a fraction, the numerator of which is equal to the number __ of days in such calendar year occurring on or prior to the termination of Executive's active service for the Company (including any period of absence due to disability) and the denominator of which is 365. "Earned Salary" means any Base Salary earned, but unpaid, for services rendered to the Company on or prior to the date on which the Contract Employment Period ends (other than Base Salary deferred pursuant to Executive's election, as provided in Paragraph 3(a) hereof). "Severance Benefit" means an amount equal to the sum of (i) and (ii) below, where (i) and (ii) are: (I) the sum of (A) the annual Base Salary payable to Executive immediately prior to the end of the Contract Employment Period; and PAGE 6 (B) an amount (the "Bonus Severance Amount") equal to the product of Executive's Base Salary times the greater of (1) the Minimum Bonus Percentage and (2) the _ _ percentage of Base Salary that would have been payable to Executive for the year of such termination assuming achievement of target levels of performance and Executive's continued employment for the entire year, and (ii) the amount otherwise payable to Executive under the Company's otherwise applicable severance plans, policies or programs as in effect on the date hereof (or, if more favorable to Executive, as in effect on the date of Executive's termination), assuming for purposes of determining the amount payable thereunder that Executive's employment was terminated as a result of the elimination of his position, but calculated by including the Bonus Severance Amount as part of Executive's eligible compensation for purposes of calculating the benefits payable under such plans, policies or programs; except that, in the event that Executive becomes entitled to receive Severance Benefits hereunder following a Change in Control, the Severance Benefit payable to Executive shall be determined under Paragraph 7(c). Additionally, while Executive is receiving payment of Severance Benefits in periodic installments, Executive shall also be eligible to continue to participate in the welfare benefit plans and programs (excluding the long-term disability plan, the sick-pay plan and vacation accruals) generally made available to employees of the Company and in which he participated immediately prior to the termination of his employment on the same terms and conditions as would have applied had Executive continued to be employed. Upon an election to receive Severance Benefits in either a single lump sum payment or in two installments, Executive will forfeit any right to continue to receive any coverage under the Company's welfare benefit plans, other than COBRA coverage (determined from the original date of termination) at Executive's expense as required by applicable law; provided that, if Executive elects to receive Severance Benefits _____________ in two installments instead of periodic installments, the Company shall pay one-half of the cost of Executive's COBRA coverage from the date the first installment payment is made until the date the second installment payment is made. Notwithstanding the foregoing, receipt of a lump sum payment or two installment payments hereunder shall not cause Executive to cease to be eligible for any retiree benefit programs for which he is otherwise eligible under the terms of the Company's employee benefit plans, policies or programs. "Termination for Cause" means a termination of Executive's employment by the Company due to (i) the willful failure by _ Executive to perform substantially Executive's duties as an employee of the Company (other than due to physical or mental illness) after reasonable notice to Executive of such failure, (ii) Executive's engaging in misconduct that is materially __ injurious to the Company or any subsidiary or any affiliate of the Company, (iii) Executive's having been convicted of, or entered a ___ plea of nolo contendere to, a crime that constitutes a felony, ____ __________ (iv) the material breach by Executive of any written covenant or __ agreement not to compete with the Company or any subsidiary or any affiliate or (v) the breach by Executive of his duty of loyalty to _ the Company which shall include, without limitation, (A) the _ PAGE 7 disclosure by Executive of any confidential information pertaining to the Company or any subsidiary or any affiliate of the Company, other than (x) in the ordinary course of the performance of his _ duties on behalf of the Company or (y) pursuant to a judicial or _ administrative subpoena from a court or governmental authority with jurisdiction over the matter in question, (B) the harmful _ interference by Executive in the business or operations of the Company or any subsidiary or any affiliate of the Company, (C) any _ attempt by Executive directly or indirectly to induce any employee, insurance agent, insurance broker or broker-dealer of the Company or any subsidiary or any affiliate to be employed or perform services elsewhere, other than actions taken by Executive that are intended to benefit the Company or any subsidiary or affiliate and do not benefit Executive financially other than as an employee or stockholder of the Company, (D) any attempt by _ Executive directly or indirectly to solicit the trade of any customer or supplier, or prospective customer or supplier, of the Company on behalf of any person other than the Company or a subsidiary thereof, other than actions taken by Executive that are intended to benefit the Company or any subsidiary or affiliate and do not benefit Executive financially other than as an employee or stockholder of the Company, provided, however, that this provision ________ _______ shall only apply to any product or service which is in competition with a product or service of the Company or any subsidiary or affiliate thereof or (E) any breach or violation of the Company's _ Code of Conduct, as amended from time to time sufficient to warrant a for cause termination consistent with the Company's past practice. Notwithstanding the foregoing, a breach of Executive's duty of loyalty to the Company as described in subclause (A) or a breach of the Company's Code of Conduct as described in subclause (E) of clause (v) of the preceding sentence shall not be grounds for a Termination for Cause unless such breach has had or could reasonably be expected to have a significant adverse effect on the business or reputation of the Company. "Termination due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable, with or without reasonable accommodation, of substantially fulfilling the positions, essential duties, responsibilities and obligations of Executive's positions set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of (i) at least four consecutive months or (ii) more than six _ __ months in any twelve month period. Any question as to the existence, extent or potentiality of Executive's disability shall be made by a qualified, independent physician selected by the chief or assistant chief (or the equivalent position) of the department which treats the condition giving rise to Executive's absence at a nationally or regionally recognized teaching hospital chosen by the Company. The determination of any such physician shall be final and conclusive for all purposes of this Agreement. Notwithstanding the foregoing, (i) a Termination for Disability _ shall not affect Executive's right to receive any amount that would otherwise have been payable to Executive under the Company's plans, policies, practices or programs pertaining to short-term or long-term disability had Executive's employment continued and (ii) __ if it is determined, at the time Executive is first eligible to receive long-term disability benefits under the Company's plans, policies, practices or programs, that Executive is not entitled to receive such long-term disability benefits (other than due to Executive's failure to cooperate), Executive shall, for purposes of this Paragraph 6, be deemed to have been terminated as of the PAGE 8 date of such determination pursuant to a Termination Without Cause and to be entitled to receive any additional benefits payable hereunder in respect of a Termination Without Cause. "Termination for Good Reason" means a termination of Executive's employment by Executive within 90 days following actual knowledge of (i) a reduction in Executive's annual Base _ Salary or incentive compensation opportunity as provided under Paragraph 3(b), (ii) a material reduction in Executive's __ positions, duties and responsibilities from those described in Paragraph 2 hereof, (iii) the relocation of Executive's principal ___ place of employment to a location more than 50 miles from the location at which he performed his principal duties on the date immediately prior to such relocation, (iv) a breach of the __ obligation to provide Executive with the benefits required to be provided in accordance with Paragraph 5(a), (v) a failure by the __ Company to pay any amounts due and owing to Executive within 10 days following written notice from Executive of such failure to pay, or (vi) any other material breach of the Company's __ obligations to Executive hereunder that materially affects the compensation or benefits payable to Executive or materially impairs Executive's ability to perform the duties and responsibilities of his position. Notwithstanding the foregoing, a termination shall not be treated as a Termination for Good Reason (i) if Executive shall have consented in writing to the _ occurrence of the event giving rise to the claim of Termination for Good Reason or (ii) unless Executive shall have delivered a __ written notice to the Chief Executive Officer of the Company within 60 days of his having actual knowledge of the occurrence of one of such events stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination, and such event shall not have been cured within 30 days of the receipt of such notice. "Termination Without Cause" means any termination of Executive's employment by the Company other than (i) a Termination _ due to Disability or (ii) a Termination for Cause. Subject to the __ Company's obligations to make the payments, if any, required pursuant to this paragraph 6, nothing in this Agreement shall be construed to limit the right of the Company to terminate Executive's employment at any time for any reason or without reason. "Vested Benefits" means amounts payable under the terms of or in accordance with any plan, policy or practice or program of, or any contract or agreement with, the Company or any of its subsidiaries (including, without limitation, any supplemental pension plan, supplemental savings plan or other deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock Option Plan (the "1984 Plan") with respect to which Executive's rights to such amounts (i) have become vested and _ nonforfeitable on or before Executive's termination of employment or (ii) otherwise have or will become nonforfeitable at or __ subsequent to his termination of employment without regard to the performance by Executive of further services or the resolution of a contingency that is not satisfied at or after such termination, provided that, at any time during which Executive is entitled to _____________ receive the Severance Benefits hereunder, Executive shall not also be entitled to receive any benefits under the Company's generally applicable severance or other termination plans, policies or programs. PAGE 9 e. Full Discharge of Company Obligations. Except to the _____________________________________ extent provided in this Paragraph 6, the amounts payable to Executive pursuant to this Paragraph 6 (including, without limitation, under Paragraph 6(f)) following termination of his employment shall be in full and complete satisfaction of Executive's rights under this Agreement and, except to the extent prohibited by law, any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and shall not be subject to any offset or mitigation. Notwithstanding anything else contained herein to the contrary, unless the Company shall waive its rights to any such release, the Company's obligations under this Paragraph 6 are expressly conditioned upon Executive's execution simultaneously with or immediately following such termination of employment, of a release and waiver, substantially in the form attached hereto as Exhibit B (subject to, in the event any change of law occurring after the date hereof, to such modifications as shall be necessary or appropriate to place the Company in a substantially the same position as though no change in law had occurred), of any claims he may have in connection with the termination of, or arising out of, his employment with the Company, provided that such release shall not be construed to waive, release or otherwise limit any amounts required to be paid hereunder or any benefits due and payable to Executive under the terms of any employee pension benefit plan, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, any other Vested Benefit or any right of Executive to be indemnified by the Company pursuant to its applicable policies and practices from and against any third party claims arising out of or relating to Executive's employment with or other services on behalf of the Company or any subsidiary of the Company. f. Special Continuation of Certain Protection for the ___________________________________________________ Executive. Notwithstanding anything contained in this Agreement _________ to the contrary, if, at the end of the Contract Employment Period, (i) Executive remains an at-will employee of the Company and (ii) _ __ within one year following the end of the Contract Employment Period, the Company effects a Termination Without Cause or takes actions which, if they had occurred within the Contract Employment Period, would have given Executive the right to terminate his employment pursuant to a Termination for Good Reason and Executive, after giving the Company timely written notice of the events permitting a Termination for Good Reason and the opportunity to cure described in the definition of a Termination for Good Reason, voluntarily terminates his employment within 90 days of the date of such actions by the Company, then in either case, Executive shall receive payment of the Severance Benefits that would otherwise have been payable to Executive hereunder had his termination of employment occurred during the Contract Employment Period. Notwithstanding the preceding sentence, this Section 6(f) shall not be applicable unless Executive executes the waiver and release referred to in Paragraph 6(e) above in connection with his termination of employment pursuant to this Paragraph 6(f). g. Outplacement Services. In addition to any other _____________________ benefits described in this Paragraph 6, in the event Executive is eligible to receive Severance Benefits, the Company shall also provide to Executive, at its expense, individual outplacement services from a qualified outplacement firm selected by the Company. The outplacement services to be provided to Executive PAGE 10 shall be no less favorable to Executive than those made available to other executives prior to the date hereof under the Company's generally applicable policies, programs or arrangements. 7. Change in Control of the Company. ________________________________ a. Accelerated Vesting and Payment. Unless the Board (or _______________________________ the appropriate committee thereof) shall otherwise determine in the manner set forth in Paragraph 7(b), the Option shall become fully exercisable upon the occurrence of a Change in Control (as defined below) and shall remain exercisable for a period of one year thereafter regardless of whether Executive continues to be employed by the Company or, if longer, for the period during which such Option would otherwise be exercisable in accordance with its terms or the generally applicable provisions of the 1994 Plan. If no Alternative Option is provided as set forth in Section 7(b) below, and the Company does not survive as a publicly traded corporation following a Change in Control, the Company shall pay Executive, in full settlement of all rights with respect to the Option, an aggregate amount in cash equal to the product of (i) __ (A) the Fair Market Value of a Share of the Company's Common Stock on the date the Change in Control occurs minus (B) the per share exercise price for the Option times (ii) the number of shares as __ to which such Option has not been exercised at the time of the Change in Control. Any amount payable pursuant to the preceding sentence shall be paid within 30 days following such Change in Control. b. Alternative Options. Notwithstanding Paragraph 7(a), no ___________________ acceleration of exercisability shall occur with respect to any Option if the Board (or the appropriate committee thereof) reasonably determines in good faith, prior to the occurrence of a Change in Control, that such Option shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted Option being hereinafter referred to as an "Alternative Option") by the successor in interest to the Company, provided that any such Alternative Option must: ________ ____ (i) provide Executive with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under the Option, including, but not limited to, an identical or better exercise and vesting schedule and identical or better timing and methods of payment; (ii) have substantially equivalent economic value to such Option (determined at the time of the Change in Control); and (iii) have terms and conditions which provide that, in the event that Executive's employment is terminated by the Company for any reason or is terminated by Executive pursuant to a Termination for Good Reason within two years following a Change in Control, (A) any conditions _ on Executive's rights under, or any restrictions on exercisability applicable to, each such Alternative Option shall be waived or shall lapse, as the case may be and (B) the Alternative Option shall remain _ exercisable until the second anniversary of the Change in Control or, if longer, for the period during which such Alternative Option would otherwise be exercisable PAGE 11 in accordance with its terms or the provisions of the plan under which it is granted that permit the longest post-termination exercise period for involuntary terminations (other than due to death, disability or retirement). c. Enhanced Severance Payments. If Executive's employment ___________________________ is terminated following a Change in Control pursuant to a Termination for Good Reason or a Termination Without Cause, the Severance Benefit payable to Executive pursuant to Paragraph 6 shall be equal to three times the sum of Executive's annual Base Salary and the Bonus Severance Amount. d. Additional Payments by the Company. __________________________________ (i) Application of Paragraph 7(d). In the event that any _____________________________ amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(d) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery _______________________ of any Notice of Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value of all _________________________ compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by less than 105%, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced (but not below zero) to the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. PAGE 12 (iv) Further Payments by the Company. If the aggregate value _______________________________ of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by more than 105%, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Paragraph 7(d)(iv), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (v) Application of Section 280G. For purposes of determining ___________________________ whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (vi) Applicable Tax Rates. For purposes of determining ____________________ whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(d)(iii), Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and PAGE 13 (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vii) Adjustments in Respect of the Payment Cap. If _________________________________________ Executive receives reduced payments and benefits under this Paragraph 7(d) (or this Paragraph 7(d) is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Paragraph 7(d) is not applied to reduce Executive's entitlements under this Paragraph 7 because the Accountants determine that Executive would not receive a greater net-after tax benefit by applying this Paragraph 7(d) and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If Executive receives reduced payments and benefits by reason of this Paragraph 7(d) and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay PAGE 14 Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (viii) Adjustments in Respect of the Tax Reimbursement ________________________________________________ Payments. In the event that the Excise Tax is ________ subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (ix) Timing of Payment. Any Tax Reimbursement Payment (or _________________ portion thereof) provided for in Paragraph 7(d)(iv) above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, PAGE 15 but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). e. Definition of "Change in Control". For purposes ________________________________ of this Paragraph 7, a "Change in Control" means the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary thereof and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) When, during any period of 24 consecutive months after the Commencement Date, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided that a ________ ____ director who was not a director at the beginning of such 24- month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Paragraph 7(e)(ii); or (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. 8. Noncompetition and Confidentiality. __________________________________ a. Noncompetition. During the Contract ______________ Employment Period and for a period of one year following Executive's termination of employment during the Contract Employment Period other than due to a Termination Without Cause or a Termination for Good Reason, Executive shall not become associated, whether as a principal, partner, employee, consultant or shareholder (other than as a holder of not in excess of 1% of the outstanding voting shares of any publicly traded company), with any entity that is actively engaged in any geographic area in any business which is in substantial and direct competition with the business or businesses of the Company for which Executive provides substantial services or for which Executive has substantial responsibility, provided that nothing in this ________ ____ PAGE 16 Paragraph 8(a) shall preclude Executive from performing services solely and exclusively for a division or subsidiary of such an entity that is engaged in a non-competitive business. b. Nondisclosure, Nonsolicitation and Cooperation. ______________________________________________ (i) Executive shall not (except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency) disclose to any third person, whether during or subsequent to the Executive's employment with the Company, any trade secrets; customer lists; product development and related information; marketing plans and related information; sales plans and related information; operating policies and manuals; business plans; financial records; or other financial, commercial, business or technical information related to the Company or any subsidiary or affiliate thereof unless such information has been previously disclosed to the public by the Company or has become public knowledge other than by a breach of this Agreement; provided, however, that this limitation shall not ________ _______ apply to any such disclosure made while Executive is employed by the Company, or any subsidiary or affiliate thereof in the ordinary course of the performance of Executive's duties; (ii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any employee or Insurance Agent (as defined below) of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere provided that this ________ ____ covenant shall not preclude Executive from taking any actions during the Contract Employment Period that (x) are _ intended to benefit the Company or any subsidiary or affiliate and (y) do not benefit Executive financially other _ than as an employee or stockholder of the Company; (iii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any insurance agent or agency, insurance broker, broker-dealer or supplier of the Company, or any subsidiary or affiliate thereof to cease providing services to the Company, or any subsidiary or affiliate thereof provided that this covenant ________ ____ shall not preclude Executive from taking any actions during the Contract Employment Period that (x) are intended to _ benefit the Company or any subsidiary or affiliate and (y) _ do not benefit Executive financially other than as an employee or stockholder of the Company; (iv) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to solicit, on behalf of any person or entity other than the Company or any of its subsidiaries, the trade of any individual or entity which, at the time of the solicitation, is a customer of the Company, or any subsidiary or affiliate thereof, or which the Company, or any subsidiary or affiliate thereof is undertaking reasonable steps to procure as a customer at the time of or immediately preceding termination of the Contract PAGE 17 Employment Period; provided, however, that this limitation ________ _______ shall only apply to (x) any product or service which is in _ competition with a product or service of the Company or any subsidiary or affiliate thereof and (y) with respect to any _ customer or prospective customer with whom Executive has or had (by virtue of Executive's position or otherwise) a personal relationship; and (v) following the termination of the Contract Employment Period, Executive shall provide assistance to and shall cooperate with the Company or any subsidiary or affiliate thereof, upon its reasonable request, with respect to matters within the scope of Executive's duties and responsibilities during the Contract Employment Period. (The Company agrees and acknowledges that it shall, to the maximum extent possible under the then prevailing circumstances, coordinate (or cause a subsidiary or affiliate thereof to coordinate) any such request with Executive's other commitments and responsibilities to minimize the degree to which such request interferes with such commitments and responsibilities). The Company agrees that it will reimburse Executive for reasonable travel expenses (i.e., travel, meals and lodging) that Executive ____ may incur in providing assistance to the Company hereunder. Solely for purposes of Paragraph 8(b)(ii) above, the term " Insurance Agent" shall mean those insurance agents or agencies representing the Company or any subsidiary or affiliate thereof, that are exclusive or career agents or agencies of the Company or any subsidiary or affiliate thereof, or any insurance agents or agencies which derive 50% or more of their business revenue from the Company or any subsidiary or affiliate thereof (calculated on an aggregate basis for the 12-month period prior to the date of determination or such other similar period for which such information is more readily available). c. Company Property. Promptly following Executive's ________________ termination of employment, Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under his control. d. Intention of the Parties. If any provision of ________________________ Paragraph 8 is determined by an arbitrator (or a court of competent jurisdiction asked to enforce the decision of the arbitrator) not to be enforceable in the manner set forth in this Agreement, the Company and Executive agree that it is the intention of the parties that such provision should be enforceable to the maximum extent possible under applicable law and that such arbitrator (or court) shall reform such provision to make it enforceable in accordance with the intent of the parties. Executive acknowledges that a material part of the inducement for the Company to provide the salary and benefits evidenced hereby is Executive's covenants set forth in Paragraph 8(a), (b) and (c) and that the covenants and obligations of Executive with respect to nondisclosure and nonsolicitation relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that, if Executive shall materially breach any of those covenants following termination of employment, the Company shall have no further obligation to pay Executive any benefits otherwise payable hereunder and the Company shall be entitled to an injunction, restraining order or such other PAGE 18 equitable relief (without the requirement to post a bond) restraining Executive from committing any violation of the covenants and obligations contained in Paragraph 8(a), (b) and (c). The remedies in the preceding sentence are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity as an arbitrator (or court) shall reasonably determine. e. Waiver. Without limiting the generality of the ______ foregoing, upon request of Executive prior to engaging in any conduct otherwise prohibited by this Paragraph 8, the Company may, in its sole discretion, waive in writing, on such terms and conditions as it may deem appropriate, any violation of this Paragraph 8 which would otherwise occur due to such conduct. 9. Miscellaneous. _____________ a. Survival. Paragraphs 5(c) (dealing with reimbursement ________ of expenses), 7 (relating to a Change in Control), 8 (relating to noncompetition, nonsolicitation and confidentiality) and 9 (relating, among other things, to survival, assignment and governing law) shall survive the termination hereof, whether such termination shall be by expiration of the Contract Employment Period or an early termination pursuant to Paragraph 6 hereof. Paragraph 6((other than Paragraph 6(f)) (relating to early termination) shall survive the termination hereof to the extent that, prior thereto, or at the time of termination, Executive (or his beneficiary) has become or becomes entitled to receive any of the benefits payable thereunder. Paragraph 6(f) (and to the extent applicable to such Paragraph 6(f), 6(e)) shall survive for one year following the termination hereof. The option referred to in Paragraph 4 survives for the term specified in Attachment A. b. Binding Effect. This Agreement shall be binding on, ______________ and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or, unless in the case of a sale involving less than all or substantially all of the Company's assets the Company otherwise elects in writing, a sale of the assets of the business of the Company (or portion thereof) in which Executive performs a majority of his services. Any successor in interest to the Company shall acknowledge in writing to Executive that it has assumed this Agreement and is responsible to Executive for the performance of the Company's obligations under this Agreement. Without limiting the generality of the foregoing, the Company shall have the right, without the consent of Executive, to assign this Agreement and its obligations hereunder to any New Entity or any subsidiary of any New Entity by which Executive becomes employed, at the discretion of the Company, by reason of the implementation of any restructuring of the Company, and, following any such assignment, such New Entity or subsidiary shall be treated as the Company for all purposes of this Agreement. This Agreement shall also enure to the benefit of Executive's heirs, executors, administrators and legal representatives. c. Assignment. Except as provided under Paragraph 9(b), __________ neither this Agreement nor any of the rights or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. In the PAGE 19 event the Company assigns this Agreement pursuant to Section 9(b), the Company shall guarantee payment to Executive of any amounts at any time due and payable hereunder in the event (and only to the extent) that the assignee has become a debtor in bankruptcy, is the subject of a receivership or similar preceding or has become insolvent, provided that Executive shall be required to assign his ________ ____ rights against the assignee through subrogation as a condition of receiving any payment under the Company's guarantee. In consideration of such guarantee, Executive agrees that following such assignment, the covenants of Executive in Paragraphs 8(b)(i) and (v) shall continue to inure to the benefit of the Company, as well as the assignee. The Company and Executive agree that following any assignment all other covenants described herein in favor of the Company shall, from and after the date of such assignment, inure solely to the benefit of the assignee. d. Entire Agreement. Except as expressly provided below, ________________ this Agreement, the Option Agreement and Paragraph 3 of the letter dated February 7, 1991 from Ronald E. Compton to Executive shall constitute the entire agreement between the parties hereto with respect to the matters referred to herein and any other agreement or any portion of any such other agreement not expressly preserved hereby shall cease to be effective upon the execution hereof and shall not become reinstated upon the expiration or other termination of this Agreement. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. Other than the provisions of Paragraph 6 which limit Executive's eligibility to receive severance benefits under the Company's generally applicable plans, programs or agreements, nothing in this Agreement shall be construed to limit or otherwise supersede Executive's rights or entitlements under any compensatory plan, program or arrangement made available generally to all employees or all officers of the Company or under the 1994 Plan or the 1984 Plan and this Paragraph 9(d) shall not preclude reference to the documents governing any such plan, program or arrangement to determine such rights and entitlements. e. Severability; Reformation. In the event that one or _________________________ more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event any of Paragraph 8(a), (b) or (c) is not enforceable in accordance with its terms, Executive and the Company agree that such Paragraph shall be reformed to make such Paragraph enforceable in a manner which provides the Company the maximum rights permitted at law. f. Waiver. Waiver by any party hereto of any breach or ______ default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. PAGE 20 g. Notices. Any notice required or desired to be _______ delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): If to the Company: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut Attention: Corporate Secretary If to Executive: Daniel P. Kearney 13 Flint Street Marblehead, Massachusetts 01945 h. Arbitration. The Company and Executive agree that any ___________ claim, dispute or controversy arising under or in connection with this Agreement, or otherwise in connection with Executive's employment by the Company (including, without limitation, any such claim, dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Company's employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in the city of Hartford, Connecticut (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA. All fees and expenses of the arbitration, including a transcript if either requests, shall be borne equally by the parties. If Executive prevails as to any material issue presented to the arbitrator, the entire cost of such proceedings (including, without limitation, Executive's reasonable attorneys fees) shall be borne by the Company. If Executive does not prevail as to any material issue, each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the party prevails on a claim for which attorney's fees are recoverable under the Rules). Any action to enforce or vacate the arbitrator's award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney's fees related to such action. PAGE 21 i. Amendments. This Agreement may not be altered, __________ modified or amended except by a written instrument signed by each of the parties hereto. j. Headings. Headings to paragraphs in this Agreement ________ are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof. k. Counterparts. This Agreement may be executed in ____________ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. l. Withholding. Any payments provided for herein shall ___________ be reduced by any amounts required to be withheld by the Company from time to time under applicable Federal, State or local income or employment tax laws or similar statutes or other provisions of law then in effect. m. Governing Law. This Agreement shall be governed by _____________ the laws of the State of Connecticut, without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Executive has hereunto set his hand as of the day and year first above written. Aetna Life and Casualty Company /s/ Ronald E. Compton _______________________________ Ronald E. Compton Chairman /s/ Daniel P. Kearney _______________________________ Daniel P. Kearney EX-10 7 MATERIAL CONTRACTS 1 EMPLOYMENT AGREEMENT ____________________ EMPLOYMENT AGREEMENT, dated as of January 19, 1996, by and between Aetna Life and Casualty Company, a Connecticut corporation (the "Company"), and James W. McLane ("Executive"). W I T N E S S E T H: _ _ _ _ _ _ _ _ _ _ WHEREAS, the Company is considering certain restructuring alternatives that could result in significant changes in the structure of its business, including, without limitation, dividing the business of the Company into two or more separate publicly traded companies or otherwise transferring a portion of the business to a third party; WHEREAS, the Company believes that Executive is a key employee and that it is in the Company's best interests to retain the services of Executive for the period during which such restructuring alternatives are considered and, to the extent applicable, implemented; WHEREAS, the Company therefore desires to retain the services of Executive and to enter into an agreement embodying the terms of such employment (the "Agreement"); and WHEREAS, Executive desires to accept such employment and enter into such Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and Executive hereby agree as follows: 1. Employment. Except as provided in Paragraph 6(a), __________ the Company shall continue to employ Executive and Executive agrees to remain employed by the Company under the terms of this Agreement for the period commencing on the date first written above and ending April 28, 1998. The period during which Executive is employed pursuant to this Agreement shall be referred to as the "Contract Employment Period". Upon the expiration of the Contract Employment Period, Executive's employment with the Company shall continue on an at-will basis. 2. Position and Duties. During the Contract ___________________ Employment Period, Executive shall serve as Executive Vice President, Health/Group Life, of the Company and in such other comparable or better position or positions with the Company and its subsidiaries as the Chief Executive Officer or the Board of Directors of the Company (the "Board") shall specify from time to time. During the Contract Employment Period, Executive shall have the duties, responsibilities and obligations customarily assigned to individuals serving in the position or positions in which Executive serves hereunder and such other duties, responsibilities and obligations as the Chief Executive Officer or the Board shall from time to time specify. Executive shall devote his full business time to the services required of him hereunder, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, and shall use his best efforts, judgment, skill and energy to perform such services in a manner consistent with the duties of his position and to improve and advance the business and interests of the Company and its subsidiaries. 2 Nothing contained herein shall preclude Executive from (i) serving _ on any corporate or governmental board of directors on which he currently serves or, if the Board consents to such service, on any other board of directors, (ii) serving on the board of, or working __ for, any charitable, not-for-profit or community organization, (iii) pursuing any other activity to which the Board consents or ___ (iv) pursuing his personal, financial and legal affairs, so long __ as such activities, individually or collectively, do not interfere with the performance of Executive's duties hereunder. 3. Cash Compensation. _________________ a. Base Salary. During the Contract Employment ___________ Period, the Company shall pay Executive a base salary at the annual rate of $600,000. The Board shall periodically review Executive's base salary and the Company may, in its discretion, increase such base salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. Executive's annual base salary payable hereunder, as it may be increased from time to time and without reduction for any amounts deferred as described above, is referred to herein as "Base Salary". Executive's Base Salary, as in effect from time to time, may not be reduced by the Company without Executive's consent, provided that the Base Salary ________ ____ payable under this paragraph shall be reduced to the extent Executive elects to defer or reduce such salary under the terms of any deferred compensation or savings plan or other employee benefit arrangement maintained or established by the Company. The Company shall pay Executive the portion of his Base Salary not deferred in accordance with its customary periodic payroll practices. b. Incentive Compensation. During the term of the ______________________ Contract Employment Period, Executive shall remain eligible for participation in the Company's existing and future annual and long term incentive compensation programs at a level consistent with his position at the Company and the Company's then current policies and practices; provided that following any assignment of ________ ____ this Agreement in accordance with the provisions of Paragraph 9(c) or a Change in Control of the Company (as defined in Paragraph 7(e)), the calculation of the amount payable as annual incentive compensation and the conditions upon which such bonus shall be payable shall be no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to such assignment or Change in Control. Without limiting the generality of the foregoing, for each calendar year ending during the term hereof, Executive shall receive the opportunity to receive an annual bonus of at least 60% of his Base Salary (the "Minimum Bonus Percentage"), subject to satisfaction of such reasonable performance criteria as shall be established with respect to such year. 4. Stock Option Grant. Contingent upon the execution __________________ of this Agreement by the Executive, the Company has granted Executive an option, having a ten-year term, to purchase 75,000 shares of the Company's Common Stock at an exercise price per share equal to $57 a share (the "Option"). Except to the extent specified below, the terms of the Option shall be determined in accordance with the terms of the 1994 Stock Incentive Plan (the "1994 Plan") and shall be set forth in the separate agreement embodying the grant of such Option (the "Option Agreement"), the form of which is attached hereto as Exhibit A. 3 5. Benefits, Perquisites and Expenses. __________________________________ a. Benefits. During the Contract Employment Period, ________ Executive shall be eligible to participate in (i) each welfare _ benefit plan sponsored or maintained by the Company, including, without limitation, each group life, hospitalization, medical, dental, health, accident or disability insurance or similar plan or program of the Company, and (ii) each pension, profit sharing, __ retirement, deferred compensation or savings plan sponsored or maintained by the Company, in each case, whether now existing or established hereafter, to the extent that Executive is eligible to participate in any such plan under the generally applicable provisions thereof. Nothing in this Paragraph 5(a) shall be construed to limit the ability of the Company to amend or terminate any particular plan, program or arrangements, provided _________ that, following the occurrence of a Change in Control (as defined ____ in Paragraph 7(e)) or the assignment of this Agreement to a New Entity (as defined in Paragraph 6(a)) pursuant to Paragraph 9(b), the benefits made available to the Executive thereafter shall be at least substantially comparable, in the aggregate, to the benefits made available to the Executive immediately prior to such Change in Control or assignment. With respect to the pension or retirement benefits payable to Executive, Executive's service credited for purposes of determining Executive's benefits and vesting shall be determined in accordance with the terms of the applicable plan or program or, if applicable, pursuant to any written agreement between Executive and the Company (whether now existing or hereafter adopted) that provides Executive a more favorable method of crediting service for any purpose thereunder. b. Perquisites. During the Contract Employment ___________ Period, Executive shall be entitled to receive such perquisites as are generally provided to other senior officers of the Company in accordance with the then current policies and practices of the Company. c. Business Expenses. During the Contract Employment _________________ Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. 6. Termination of Employment. _________________________ a. Early Termination of the Contract Employment ____________________________________________ Period. Notwithstanding Paragraph 1, the Contract Employment ______ Period shall end upon the earliest to occur of (i) a termination _ of Executive's employment on account of Executive's death, (ii) a __ Termination due to Disability, (iii) a Termination for Cause, (iv) ___ __ a Termination Without Cause, (v) a Termination for Good Reason or _ (vi) a termination of Executive's employment by Executive other __ than a Termination for Good Reason. For purposes of this Agreement, a transfer of Executive's employment (i)to any other _ entity controlled by or under common control with the Company shall not be treated as a termination unless and until such entity ceases to be controlled by or under common control with the Company or (ii) as a result of the implementation of any __ restructuring of the Company (whether occurring by spin-off or otherwise) shall not be treated as a termination of employment, 4 provided that, in either case, the successor employer (the "New ________ ____ Entity") expressly assumes and agrees to perform all of the Company's obligations under this Agreement. b. Benefits Payable Upon Termination. Following the _________________________________ end of the Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Paragraph 6(c):
Earned Vested Accrued Severance Salary Benefits Bonus Benefit ________ __________ ________ ________ Termination due Payable Payable Payable Not Payable to death Termination due to Payable Payable Payable Not Payable Disability Termination for Payable Payable Not Payable Not Payable Cause Termination Without Payable Payable Payable Payable Cause Termination for Payable Payable Payable Payable Good Reason Termination by Payable Payable Not Payable Not Payable Executive other than for Good Reason
c. Timing of Payments. Earned Salary and Accrued __________________ Bonus shall be paid in a single lump sum as soon as practicable, but in no event more than 30 days, following the end of the Contract Employment Period. Vested Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement under which such benefits have accrued. Severance Benefits shall be paid in approximately equal installments, at the same intervals at which Executive was receiving his salary payments hereunder, for the greater of (i) _ one year, (ii) the period over which such benefits would be __ payable if paid to Executive under the Company's otherwise applicable plans, policies or procedures as currently in effect or (iii) the period over which such benefits would be payable if paid ___ to Executive under the Company's otherwise applicable plans, policies or procedures, as in effect at the time of Executive's termination of employment. Notwithstanding the foregoing, Executive may elect, by written notice given to the Company prior to the first periodic payment and within ten business days after such termination, that, instead of periodic installments, Severance Benefits shall be paid in either a single lump sum, payable within ten business days of receipt by the Company of such election, or in two equal installments, the first payable within ten business days of receipt by the Company of such election, and the second payable on the first business day of the following calendar year. 5 b. Definitions. For purposes of this Paragraph 6, ___________ capitalized terms have the following meanings: "Accrued Bonus" means a pro-rated amount equal to the product of (i) the annual incentive compensation Executive would _ have been entitled to receive under Paragraph 3(b) for the calendar year in which his active service for the Company terminates pursuant to Paragraph 6(a) had he remained employed for the entire year and assuming that all targets for such year had been met, multiplied by (ii) a fraction, the numerator of which is __ equal to the number of days in such calendar year occurring on or prior to the termination of Executive's active service for the Company (including any period of absence due to disability) and the denominator of which is 365. "Earned Salary" means any Base Salary earned, but unpaid, for services rendered to the Company on or prior to the date on which the Contract Employment Period ends (other than Base Salary deferred pursuant to Executive's election, as provided in Paragraph 3(a) hereof). "Severance Benefit" means an amount equal to the sum of (i) and (ii) below, where (i) and (ii) are: (i) the sum of (A) the annual Base Salary payable to Executive immediately prior to the end of the Contract Employment Period; and (B) an amount (the "Bonus Severance Amount") equal to the product of Executive's Base Salary times the greater of (1) the Minimum Bonus Percentage and _ (2) the percentage of Base Salary that would _ have been payable to Executive for the year of such termination assuming achievement of target levels of performance and Executive's continued employment for the entire year, and (ii) the amount otherwise payable to Executive under the Company's otherwise applicable severance plans, policies or programs as in effect on the date hereof (or, if more favorable to Executive, as in effect on the date of Executive's termination), assuming for purposes of determining the amount payable thereunder that Executive's employment was terminated as a result of the elimination of his position, but calculated by including the Bonus Severance Amount as part of Executive's eligible compensation for purposes of calculating the benefits payable under such plans, policies or programs; except that, in the event that Executive becomes entitled to receive Severance Benefits hereunder following a Change in Control, the Severance Benefit payable to Executive shall be determined under Paragraph 7(c). Additionally, while Executive is receiving payment of Severance Benefits in periodic installments, Executive shall also be eligible to continue to participate in the welfare benefit plans and programs (excluding the long-term disability plan, the sick-pay plan and vacation accruals) generally made available to employees of the Company and in which he participated immediately prior to the termination of his 6 employment on the same terms and conditions as would have applied had Executive continued to be employed. Upon an election to receive Severance Benefits in either a single lump sum payment or in two installments, Executive will forfeit any right to continue to receive any coverage under the Company's welfare benefit plans, other than COBRA coverage (determined from the original date of termination) at Executive's expense as required by applicable law; provided that, if Executive elects to receive Severance Benefits ________ ____ in two installments instead of periodic installments, the Company shall pay one-half of the cost of Executive's COBRA coverage from the date the first installment payment is made until the date the second installment payment is made. Notwithstanding the foregoing, receipt of a lump sum payment or two installment payments hereunder shall not cause Executive to cease to be eligible for any retiree benefit programs for which he is otherwise eligible under the terms of the Company's employee benefit plans, policies or programs. "Termination for Cause" means a termination of Executive's employment by the Company due to (i) the willful _ failure by Executive to perform substantially Executive's duties as an employee of the Company (other than due to physical or mental illness) after reasonable notice to Executive of such failure, (ii) Executive's engaging in misconduct that is __ materially injurious to the Company or any subsidiary or any affiliate of the Company, (iii) Executive's having been convicted ___ of, or entered a plea of nolo contendere to, a crime that ____ __________ constitutes a felony, (iv) the material breach by Executive of any __ written covenant or agreement not to compete with the Company or any subsidiary or any affiliate or (v) the breach by Executive of _ his duty of loyalty to the Company which shall include, without limitation, (A) the disclosure by Executive of any confidential _ information pertaining to the Company or any subsidiary or any affiliate of the Company, other than (x) in the ordinary course of _ the performance of his duties on behalf of the Company or (y) _ pursuant to a judicial or administrative subpoena from a court or governmental authority with jurisdiction over the matter in question, (B) the harmful interference by Executive in the _ business or operations of the Company or any subsidiary or any affiliate of the Company, (C) any attempt by Executive directly or _ indirectly to induce any employee, insurance agent, insurance broker or broker-dealer of the Company or any subsidiary or any affiliate to be employed or perform services elsewhere, other than actions taken by Executive that are intended to benefit the Company or any subsidiary or affiliate and do not benefit Executive financially other than as an employee or stockholder of the Company, (D) any attempt by Executive directly or indirectly _ to solicit the trade of any customer or supplier, or prospective customer or supplier, of the Company on behalf of any person other than the Company or a subsidiary thereof, other than actions taken by Executive that are intended to benefit the Company or any subsidiary or affiliate and do not benefit Executive financially other than as an employee or stockholder of the Company, provided, ________ however, that this provision shall only apply to any product or _______ service which is in competition with a product or service of the Company or any subsidiary or affiliate thereof or (E) any breach _ or violation of the Company's Code of Conduct, as amended from time to time sufficient to warrant a for cause termination consistent with the Company's past practice. Notwithstanding the foregoing, a breach of Executive's duty of loyalty to the Company as described in subclause (A) or a breach of the Company's Code of Conduct as described in subclause (E) of clause (v) of the preceding sentence shall not be grounds for a Termination for 7 Cause unless such breach has had or could reasonably be expected to have a significant adverse effect on the business or reputation of the Company. "Termination due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable, with or without reasonable accommodation, of substantially fulfilling the positions, essential duties, responsibilities and obligations of Executive's positions set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of (i) at least four consecutive months or (ii) more than six _ __ months in any twelve month period. Any question as to the existence, extent or potentiality of Executive's disability shall be made by a qualified, independent physician selected by the chief or assistant chief (or the equivalent position) of the department which treats the condition giving rise to Executive's absence at a nationally or regionally recognized teaching hospital chosen by the Company. The determination of any such physician shall be final and conclusive for all purposes of this Agreement. Notwithstanding the foregoing, (i) a Termination for Disability _ shall not affect Executive's right to receive any amount that would otherwise have been payable to Executive under the Company's plans, policies, practices or programs pertaining to short-term or long-term disability had Executive's employment continued and (ii) __ if it is determined, at the time Executive is first eligible to receive long-term disability benefits under the Company's plans, policies, practices or programs, that Executive is not entitled to receive such long-term disability benefits (other than due to Executive's failure to cooperate), Executive shall, for purposes of this Paragraph 6, be deemed to have been terminated as of the date of such determination pursuant to a Termination Without Cause and to be entitled to receive any additional benefits payable hereunder in respect of a Termination Without Cause. "Termination for Good Reason" means a termination of Executive's employment by Executive within 90 days following actual knowledge of (i) a reduction in Executive's annual Base _ Salary or incentive compensation opportunity as provided under Paragraph 3(b), (ii) a material reduction in Executive's __ positions, duties and responsibilities from those described in Paragraph 2 hereof, (iii) the relocation of Executive's principal ___ place of employment to a location more than 50 miles from the location at which he performed his principal duties on the date immediately prior to such relocation, (iv) a breach of the __ obligation to provide Executive with the benefits required to be provided in accordance with Paragraph 5(a), (v) a failure by the _ Company to pay any amounts due and owing to Executive within 10 days following written notice from Executive of such failure to pay, or (vi) any other material breach of the Company's __ obligations to Executive hereunder that materially affects the compensation or benefits payable to Executive or materially impairs Executive's ability to perform the duties and responsibilities of his position. Notwithstanding the foregoing, a termination shall not be treated as a Termination for Good Reason (i) if Executive shall have consented in writing to the _ occurrence of the event giving rise to the claim of Termination for Good Reason or (ii) unless Executive shall have delivered a __ written notice to the Chief Executive Officer of the Company within 60 days of his having actual knowledge of the occurrence of one of such events stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination, and such event shall not have been cured within 30 days of the receipt of such notice. 8 "Termination Without Cause" means any termination of Executive's employment by the Company other than (i) a Termination _ due to Disability or (ii) a Termination for Cause. Subject to the __ Company's obligations to make the payments, if any, required pursuant to this Paragraph 6, nothing in this Agreement shall be construed to limit the right of the Company to terminate Executive's employment at any time for any reason or without reason. "Vested Benefits" means amounts payable under the terms of or in accordance with any plan, policy or practice or program of, or any contract or agreement with, the Company or any of its subsidiaries (including, without limitation, any supplemental pension plan, supplemental savings plan or other deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock Option Plan (the "1984 Plan") with respect to which Executive's rights to such amounts (i) have become vested and nonforfeitable on or before Executive's termination of employment or (ii) otherwise have or will become nonforfeitable at or subsequent to his termination of employment without regard to the performance by Executive of further services or the resolution of a contingency that is not satisfied at or after such termination, provided that, at any time during which Executive is entitled to ________ ____ receive the Severance Benefits hereunder, Executive shall not also be entitled to receive any benefits under the Company's generally applicable severance or other termination plans, policies or programs. e. Full Discharge of Company Obligations. Except to _____________________________________ the extent provided in this Paragraph 6, the amounts payable to Executive pursuant to this Paragraph 6 (including, without limitation, under Paragraph 6(f)) following termination of his employment shall be in full and complete satisfaction of Executive's rights under this Agreement and, except to the extent prohibited by law, any other claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and shall not be subject to any offset or mitigation. Notwithstanding anything else contained herein to the contrary, unless the Company shall waive its rights to any such release, the Company's obligations under this Paragraph 6 are expressly conditioned upon Executive's execution simultaneously with or immediately following such termination of employment, of a release and waiver, substantially in the form attached hereto as Exhibit B (subject to, in the event any change of law occurring after the date hereof, to such modifications as shall be necessary or appropriate to place the Company in a substantially the same position as though no change in law had occurred), of any claims he may have in connection with the termination of, or arising out of, his employment with the Company, provided that such release shall not be construed to waive, release or otherwise limit any amounts required to be paid hereunder or any benefits due and payable to Executive under the terms of any employee pension benefit plan, as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, any other Vested Benefit or any right of Executive to be indemnified by the Company pursuant to its applicable policies and practices from and against any third party claims arising out of or relating to Executive's employment with or other services on behalf of the Company or any subsidiary of the Company. 9 f. Special Continuation of Certain Protection for the ___________________________________________________ Executive. Notwithstanding anything contained in this Agreement _________ to the contrary, if, at the end of the Contract Employment Period, (i) Executive remains an at-will employee of the Company and (ii) _ __ within one year following the end of the Contract Employment Period, the Company effects a Termination Without Cause or takes actions which, if they had occurred within the Contract Employment Period, would have given Executive the right to terminate his employment pursuant to a Termination for Good Reason and Executive, after giving the Company timely written notice of the events permitting a Termination for Good Reason and the opportunity to cure described in the definition of a Termination for Good Reason, voluntarily terminates his employment within 90 days of the date of such actions by the Company, then in either case, Executive shall receive payment of the Severance Benefits that would otherwise have been payable to Executive hereunder (including, without limitation, the enhanced benefit described in Section 7(c)) had his termination of employment occurred during the Contract Employment Period. Notwithstanding the preceding sentence, this Section 6(f) shall not be applicable unless Executive executes the waiver and release referred to in Paragraph 6(e) above in connection with his termination of employment pursuant to this Paragraph 6(f). g. Outplacement Services. In addition to any other _____________________ benefits described in this Paragraph 6, in the event Executive is eligible to receive Severance Benefits, the Company shall also provide to Executive, at its expense, individual outplacement services from a qualified outplacement firm selected by the Company. The outplacement services to be provided to Executive shall be no less favorable to Executive than those made available to other executives prior to the date hereof under the Company's generally applicable policies, programs or arrangements. 7. Change in Control of the Company. ________________________________ a. Accelerated Vesting and Payment. Unless the Board _______________________________ (or the appropriate committee thereof) shall otherwise determine in the manner set forth in Paragraph 7(b), the Option shall become fully exercisable upon the occurrence of a Change in Control (as defined below) at any time during the term hereof or thereafter during the period Executive is eligible for the protections afforded under Section 6(f) and shall remain exercisable for a period of one year thereafter regardless of whether Executive continues to be employed by the Company or, if longer, for the period during which such Option would otherwise be exercisable in accordance with its terms or the generally applicable provisions of the 1994 Plan. If no Alternative Option is provided as set forth in Section 7(b) below, and the Company does not survive as a publicly traded corporation following a Change in Control, the Company shall pay Executive, in full settlement of all rights with respect to the Option, an aggregate amount in cash equal to the product of (i) (A) the Fair Market Value of a Share of the _ Company's Common Stock on the date the Change in Control occurs minus (B) the per share exercise price for the Option times (ii) __ the number of shares as to which such Option has not been exercised at the time of the Change in Control. Any amount payable pursuant to the preceding sentence shall be paid within 30 days following such Change in Control. 10 b. Alternative Options. Notwithstanding ___________________ Paragraph 7(a), no acceleration of exercisability shall occur with respect to any Option if the Board (or the appropriate committee thereof) reasonably determines in good faith, prior to the occurrence of a Change in Control, that such Option shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted Option being hereinafter referred to as an "Alternative Option") by the successor in interest to the Company, provided that any such Alternative Option must: ________ ____ (i) provide Executive with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under the Option, including, but not limited to, an identical or better exercise and vesting schedule and identical or better timing and methods of payment; (ii) have substantially equivalent economic value to such Option (determined at the time of the Change in Control); and (iii) have terms and conditions which provide that, in the event that Executive's employment is terminated by the Company for any reason or is terminated by Executive pursuant to a Termination for Good Reason within two years following a Change in Control, (A) _ any conditions on Executive's rights under, or any restrictions on exercisability applicable to, each such Alternative Option shall be waived or shall lapse, as the case may be and (B) the Alternative _ Option shall remain exercisable until the second anniversary of the Change in Control or, if longer, for the period during which such Alternative Option would otherwise be exercisable in accordance with its terms or the provisions of the plan under which it is granted that permit the longest post- termination exercise period for involuntary terminations (other than due to death, disability or retirement). c. Enhanced Severance Payments. If Executive's ___________________________ employment is terminated following a Change in Control pursuant to a Termination for Good Reason or a Termination Without Cause, the Severance Benefit payable to Executive pursuant to Paragraph 6 shall be equal to three times the sum of Executive's annual Base Salary and the Bonus Severance Amount. d. Additional Payments by the Company. ___________________________________ (i) Application of Paragraph 7(d). In the event that _____________________________ any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(d) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following _______________________ delivery of any notice of termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments that could be paid without Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value _________________________ of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by less than 105%, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced (but not below zero) to the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Further Payments by the Company. If the aggregate _______________________________ value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to Executive without Executive incurring an Excise Tax by more than 105%, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Paragraph 7(d)(iv), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (v) Application of Section 280G. For purposes of ___________________________ determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, 12 (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (vi) Applicable Tax Rates. For purposes of determining ____________________ whether Executive would receive a greater net after- tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 7(d)(iii), Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year; provided, however, that Executive may request that such determination be made based on his individual tax circumstances, which shall govern such determination so long as Executive provides to the Accountants such information and documents as the Accountants shall reasonably request to determine such individual circumstances. (vii) Adjustments in Respect of the Payment Cap. If _________________________________________ Executive receives reduced payments and benefits under this Paragraph 7(d) (or this Paragraph 7(d) is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, the 13 aggregate "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would have resulted in the imposition of the Payment Cap under Section 7(d)(iii) and result in Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If the Payment Cap was applied, and it is established pursuant to a Final Determination that the aggregate "parachute payments" payable to Executive equals or exceeds 105% of the amount which could be paid to Executive without Executive incurring an Excise Tax, Executive shall be entitled to receive the benefits available under Section 7(d)(iv). If this Paragraph 7(d) is not applied to reduce Executive's entitlements under this Paragraph 7 because the Accountants determine that Executive would not receive a greater net-after tax benefit by applying this Paragraph 7(d) and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If Executive receives reduced payments and benefits by reason of this Paragraph 7(d) and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. (viii) Adjustments in Respect of the Tax Reimbursement ______________________________________________ Payments. In the event that the Excise Tax is ________ subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have 14 been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (ix) Timing of Payment. Any Tax Reimbursement Payment (or _________________ portion thereof) provided for in Paragraph 7(d)(iv) above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). e. Definition of "Change in Control". For _________________________________ purposes of this Paragraph 7, a "Change in Control" means the happening of any of the following: 15 (i) when any "person" as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary thereof and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) When, during any period of 24 consecutive months after the date of this Agreement, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided that a director who was not a director at the ________ ____ beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two- thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Paragraph 7(e)(ii); or (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. 8. Noncompetition and Confidentiality. __________________________________ a. Noncompetition. During the Contract Employment ______________ Period and for a period of one year following Executive's termination of employment during the Contract Employment Period other than due to a Termination Without Cause or a Termination for Good Reason, Executive shall not become associated, whether as a principal, partner, employee, consultant or shareholder (other than as a holder of not in excess of 1% of the outstanding voting shares of any publicly traded company), with any entity that is actively engaged in any geographic area in any business which is in substantial and direct competition with the business or businesses of the Company for which Executive provides substantial services or for which Executive has substantial responsibility, provided that nothing in this Paragraph 8(a) shall preclude ________ ____ Executive from performing services solely and exclusively for a division or subsidiary of such an entity that is engaged in a non- competitive business. b. Nondisclosure, Nonsolicitation and Cooperation. ______________________________________________ (i) Executive shall not (except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency) disclose to any third person, whether during or subsequent to the Executive's employment with the Company, any trade secrets; customer lists; product development and related information; marketing plans and related information; sales plans and related information; operating policies and manuals; business plans; financial records; or other 16 financial, commercial, business or technical information related to the Company or any subsidiary or affiliate thereof unless such information has been previously disclosed to the public by the Company or has become public knowledge other than by a breach of this Agreement; provided, however, that this limitation shall ________ _______ not apply to any such disclosure made while Executive is employed by the Company, or any subsidiary or affiliate thereof in the ordinary course of the performance of Executive's duties; (ii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any employee or Insurance Agent (as defined below) of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere provided that this ________ ____ covenant shall not preclude Executive from taking any actions during the Contract Employment Period that (x) are _ intended to benefit the Company or any subsidiary or affiliate and (y) do not benefit Executive financially _ other than as an employee or stockholder of the Company; (iii) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to induce any insurance agent or agency, insurance broker, broker-dealer or supplier of the Company, or any subsidiary or affiliate thereof to cease providing services to the Company, or any subsidiary or affiliate thereof provided that this ________ ____ covenant shall not preclude Executive from taking any actions during the Contract Employment Period that (x) are _ intended to benefit the Company or any subsidiary or affiliate and (y) do not benefit Executive financially _ other than as an employee or stockholder of the Company; (iv) during the Contract Employment Period and for two years after the termination of such Period, Executive shall not attempt, directly or indirectly, to solicit, on behalf of any person or entity other than the Company or any of its subsidiaries, the trade of any individual or entity which, at the time of the solicitation, is a customer of the Company, or any subsidiary or affiliate thereof, or which the Company, or any subsidiary or affiliate thereof is undertaking reasonable steps to procure as a customer at the time of or immediately preceding termination of the Contract Employment Period; provided, however, that this limitation ________ _______ shall only apply to (x) any product or service which is in _ competition with a product or service of the Company or any subsidiary or affiliate thereof and (y) with respect _ to any customer or prospective customer with whom Executive has or had (by virtue of Executive's position or otherwise) a personal relationship; and (v) following the termination of the Contract Employment Period, Executive shall provide assistance to and shall cooperate with the Company or any subsidiary or affiliate thereof, upon its reasonable request, with respect to matters within the scope of Executive's duties and responsibilities during the Contract Employment Period. (The Company agrees and acknowledges that it shall, to the maximum extent possible under the then prevailing circumstances, coordinate (or cause a subsidiary or affiliate thereof to coordinate) any such request with Executive's other commitments and responsibilities to minimize the degree to which such request interferes with such commitments and responsibilities). The Company agrees that it will reimburse Executive for reasonable travel expenses (i.e., ____ travel, meals and lodging) that Executive may incur in providing assistance to the Company hereunder. 17 Solely for purposes of Paragraph 8(b)(ii) above, the term "Insurance Agent" shall mean those insurance agents or agencies representing the Company or any subsidiary or affiliate thereof, that are exclusive or career agents or agencies of the Company or any subsidiary or affiliate thereof, or any insurance agents or agencies which derive 50% or more of their business revenue from the Company or any subsidiary or affiliate thereof (calculated on an aggregate basis for the 12-month period prior to the date of determination or such other similar period for which such information is more readily available). c. Company Property. Promptly following ________________ Executive's termination of employment, Executive shall return to the Company all property of the Company, and all copies thereof in Executive's possession or under his control. d. Intention of the Parties. If any provision of ________________________ Paragraph 8 is determined by an arbitrator (or a court of competent jurisdiction asked to enforce the decision of the arbitrator) not to be enforceable in the manner set forth in this Agreement, the Company and Executive agree that it is the intention of the parties that such provision should be enforceable to the maximum extent possible under applicable law and that such arbitrator (or court) shall reform such provision to make it enforceable in accordance with the intent of the parties. Executive acknowledges that a material part of the inducement for the Company to provide the salary and benefits evidenced hereby is Executive's covenants set forth in Paragraph 8(a), (b) and (c) and that the covenants and obligations of Executive with respect to nondisclosure and nonsolicitation relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that, if Executive shall materially breach any of those covenants following termination of employment, the Company shall have no further obligation to pay Executive any benefits otherwise payable hereunder and the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post a bond) restraining Executive from committing any violation of the covenants and obligations contained in Paragraph 8(a), (b) and (c). The remedies in the preceding sentence are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity as an arbitrator (or court) shall reasonably determine. 18 e. Waiver. Without limiting the generality of the ______ foregoing, upon request of Executive prior to engaging in any conduct otherwise prohibited by this Paragraph 8, the Company may, in its sole discretion, waive in writing, on such terms and conditions as it may deem appropriate, any violation of this Paragraph 8 which would otherwise occur due to such conduct. 9. Miscellaneous. _____________ a. Survival. Paragraphs 5(c) (dealing with ________ reimbursement of expenses), 7 (relating to a Change in Control), 8 (relating to noncompetition, nonsolicitation and confidentiality) and 9 (relating, among other things, to survival, assignment and governing law) shall survive the termination hereof, whether such termination shall be by expiration of the Contract Employment Period or an early termination pursuant to Paragraph 6 hereof. Paragraph 6((other than Paragraph 6(f)) (relating to early termination) shall survive the termination hereof to the extent that, prior thereto, or at the time of termination, Executive (or his beneficiary) has become or becomes entitled to receive any of the benefits payable thereunder. Paragraph 6(f) (and to the extent applicable to such Paragraph 6(f), 6(e)) shall survive for one year following the termination hereof. The option referred to in Paragraph 4 survives for the term specified in Attachment A. b. Binding Effect. This Agreement shall be binding ______________ on, and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or, unless in the case of a sale involving less than all or substantially all of the Company's assets the Company otherwise elects in writing, a sale of the assets of the business of the Company (or portion thereof) in which Executive performs a majority of his services. Any successor in interest to the Company shall acknowledge in writing to Executive that it has assumed this Agreement and is responsible to Executive for the performance of the Company's obligations under this Agreement. Without limiting the generality of the foregoing, the Company shall have the right, without the consent of Executive, to assign this Agreement and its obligations hereunder to any New Entity or any subsidiary of any New Entity by which Executive becomes employed, at the discretion of the Company, by reason of the implementation of any restructuring of the Company, and, following any such assignment, such New Entity or subsidiary shall be treated as the Company for all purposes of this Agreement. This Agreement shall also inure to the benefit of Executive's heirs, executors, administrators and legal representatives. c. Assignment. Except as provided under Paragraph __________ 9(b), neither this Agreement nor any of the rights or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. In the event the Company assigns this Agreement pursuant to Section 9(b), the Company shall guarantee payment to Executive of any amounts at any time due and payable hereunder in the event (and only to the extent) that the assignee has become a debtor in bankruptcy, is the subject of a receivership or similar preceding or has become insolvent, provided that Executive shall be required to assign his ________ ____ 19 rights against the assignee through subrogation as a condition of receiving any payment under the Company's guarantee. In consideration of such guarantee, Executive agrees that following such assignment, the covenants of Executive in Paragraphs 8(b)(i) and (v) shall continue to inure to the benefit of the Company, as well as the assignee. The Company and Executive agree that following any assignment all other covenants described herein in favor of the Company shall, from and after the date of such assignment, inure solely to the benefit of the assignee. d. Entire Agreement. Except as expressly provided ________________ below, this Agreement, the Option Agreement and the portion, if any, of any other agreement relating to pension service or credits referred to in Paragraph 5(a) shall constitute the entire agreement between the parties hereto with respect to the matters referred to herein and any other agreement or any portion of any such other agreement not expressly preserved hereby shall cease to be effective upon the execution hereof and shall not become reinstated upon the expiration or other termination of this Agreement, provided that paragraph 2(h) of that certain letter dated January 2, 1991 from Edmund F. Kelly to Executive relating to severance pay benefits payable for 52 weeks shall become reinstated upon expiration of this Agreement. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. Other than the provisions of Paragraph 6 which limit Executive's eligibility to receive severance benefits under the Company's generally applicable plans, programs or agreements, nothing in this Agreement shall be construed to limit or otherwise supersede Executive's rights or entitlements under any compensatory plan, program or arrangement made available generally to all employees or all officers of the Company or under the 1994 Plan or the 1984 Plan and this Paragraph 9(d) shall not preclude reference to the documents governing any such plan, program or arrangement to determine such rights and entitlements. e. Severability; Reformation. In the event that _________________________ one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event any of Paragraph 8(a), (b) or (c) is not enforceable in accordance with its terms, Executive and the Company agree that such Paragraph shall be reformed to make such Paragraph enforceable in a manner which provides the Company the maximum rights permitted at law. f. Waiver. Waiver by any party hereto of any ______ breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 20 g. Notices. Any notice required or desired to be _______ delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): If to the Company: Aetna Life and Casualty Company 151 Farmington Avenue Hartford, Connecticut Attention: Corporate Secretary If to Executive: James W. McLane 20 Colony Road West Hartford, Connecticut 06117 h. Arbitration. The Company and Executive agree ___________ that any claim, dispute or controversy arising under or in connection with this Agreement, or otherwise in connection with Executive's employment by the Company (including, without limitation, any such claim, dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Company's employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in the city of Hartford, Connecticut (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Expedited Employment Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA. All fees and expenses of the arbitration, including a transcript if either requests, shall be borne equally by the parties. If Executive prevails as to any material issue presented to the arbitrator, the entire cost of such proceedings (including, without limitation, Executive's reasonable attorneys fees) shall be borne by the Company. If Executive does not prevail as to any material issue, each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the party prevails on a claim for which attorney's fees are recoverable under the Rules). Any action to enforce or vacate the arbitrator's award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney's fees related to such action. i. Amendments. This Agreement may not be altered, __________ modified or amended except by a written instrument signed by each of the parties hereto. 21 j. Headings. Headings to paragraphs in this ________ Agreement are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof. k. Counterparts. This Agreement may be executed in ____________ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. l. Withholding. Any payments provided for herein ___________ shall be reduced by any amounts required to be withheld by the Company from time to time under applicable Federal, State or local income or employment tax laws or similar statutes or other provisions of law then in effect. m. Governing Law. This Agreement shall be governed _____________ by the laws of the State of Connecticut, without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Executive has hereunto set his hand as of the day and year first above written. Aetna Life and Casualty Company /s/ Ronald E. Compton _______________________________ Ronald E. Compton Chairman /s/ James W. McLane _______________________________ James W. McLane EX-12 8 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
(Millions) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations $ 726.2 $ 627.5 $(1,014.7) $ 145.5 $ (97.9) Add back fixed charges 187.0 170.8 154.7 171.5 200.5 Minority interest 16.1 11.4 7.0 8.6 5.9 _________ _________ _________ _________ _________ Income (loss) as adjusted $ 929.3 $ 809.7 $ (853.0) $ 325.6 $ 108.5 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Fixed charges: Interest on indebtedness $ 115.9 (1) $ 98.6 (1) $ 77.4 $ 81.4 $ 110.9 Portion of rents representative of interest factor 71.1 72.2 77.3 90.1 89.6 _________ _________ _________ _________ _________ Total fixed charges $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Preferred stock dividend requirements - - - - - _________ _________ _________ _________ _________ Total combined fixed charges and preferred stock dividend requirements $ 187.0 $ 170.8 $ 154.7 $ 171.5 $ 200.5 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Ratio of earnings to fixed charges 4.97 4.74 (5.51) 1.90 .54 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Ratio of earnings to combined fixed charges and preferred stock dividends 4.97 4.74 (5.51) 1.90 .54 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the 1995 Annual Report to Shareholders.)
EX-13 9 ANNUAL REPORT TO SECURITY HOLDERS 1 Selected Financial Data
(Millions, except per share data) 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Revenue: Premiums: Aetna Health Plans $ 5,949.7 $ 5,611.5 $ 4,700.6 $ 4,586.7 $ 4,467.3 Aetna Life Insurance & Annuity 178.3 168.3 125.7 111.9 174.5 International 1,038.5 887.1 909.5 814.8 500.0 Large Case Pensions 264.9 234.4 185.9 204.2 292.4 __________________________________________________________ Total premiums 7,431.4 6,901.3 5,921.7 5,717.6 5,434.2 _____________________________________________________________________________________________________ Net Investment Income, Fees and Other Income, and Net Realized Capital Gains and Losses: Aetna Health Plans 1,665.7 1,527.6 1,405.4 1,345.4 1,124.2 Aetna Life Insurance & Annuity 1,445.9 1,269.1 1,269.6 1,129.9 1,046.6 International 421.3 409.9 369.8 387.6 390.2 Large Case Pensions 2,004.0 2,120.8 2,380.1 2,547.1 2,730.6 Corporate: Other 9.7 (9.7) (6.9) (42.7) (11.7) Federated Investors - - - - - __________________________________________________________ Total net investment income, fees and other income, and net realized capital gains and losses 5,546.6 5,317.7 5,418.0 5,367.3 5,279.9 _____________________________________________________________________________________________________ Total Revenue from Continuing Operations $ 12,978.0 $ 12,219.0 $ 11,339.7 $ 11,084.9 $ 10,714.1 _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments: Aetna Health Plans $ 286.0 $ 341.7 $ 272.2 $ 274.3 $ 382.6 Aetna Life Insurance & Annuity 198.0 159.1 111.4 99.0 115.1 International 86.6 71.2 55.0 25.1 38.2 Large Case Pensions 89.2 54.4 (822.3) (17.3) (167.0) Corporate: Interest (70.4) (60.5) (44.7) (50.9) (65.0) Other (115.5) (156.5) (173.9) (229.2) (163.5) Federated Investors - - - - - _____________________________________________________________________________________________________ Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments 473.9 409.4 (602.3) 101.0 140.4 _____________________________________________________________________________________________________ Income (Loss) from Discontinued Operations (222.2) 58.1 290.3 324.8 364.8 _____________________________________________________________________________________________________ Cumulative Effect Adjustments for continuing operations - - (49.2) (369.8) - _____________________________________________________________________________________________________ Net Income (Loss) $ 251.7 $ 467.5 $ (365.9) $ 56.0 $ 505.2 _____________________________________________________________________________________________________ Net Realized Capital Gains (Losses), Net of Tax (from Continuing Operations) (included above) 29.5 (41.2) (42.0) (76.7) (200.6) _____________________________________________________________________________________________________ Total Assets (1) 84,323.7 75,486.7 81,572.8 77,022.0 78,966.8 _____________________________________________________________________________________________________ Total Long-Term Debt 989.1 1,079.2 1,112.2 900.9 976.0 _____________________________________________________________________________________________________ Minority Interest in Preferred Securities of Subsidiary 275.0 275.0 - - - _____________________________________________________________________________________________________ Redeemable Preferred Stock, Net of Treasury Shares - - - - - _____________________________________________________________________________________________________ Shareholders' Equity 7,272.8 5,503.0 7,043.1 7,238.3 7,384.5 _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ Per Common Share Data: Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments $ 4.16 $ 3.63 $ (5.42) $ .92 $ 1.28 Income (Loss) from Discontinued Operations (1.95) .51 2.61 2.95 3.31 Cumulative Effect Adjustments for continuing operations - - (.44) (3.36) - Net Income (Loss) 2.21 4.14 (3.29) .51 4.59 Dividends Declared 2.76 2.76 2.76 2.76 2.76 Shareholders' Equity 63.39 48.85 62.77 65.64 67.09 Market Price at Year End 69.25 47.13 60.38 46.50 44.00 _____________________________________________________________________________________________________ See Notes to Financial Statements and Management's Discussion and Analysis for significant events affecting the comparability of current year results with 1994 and 1993 results. (1) Total assets at December 31, 1995, 1994, and 1993 include $10.6 billion, $12.4 billion and $15.2 billion, respectively, of assets attributable to discontinued fully guaranteed large case pension products.
2 Selected Financial Data
(Millions, except per share data) 1990 1989 1988 1987 1986 1985 ____ ____ ____ ____ ____ ____ Revenue: Premiums: Aetna Health Plans $ 4,190.1 $ 3,730.7 $ 2,770.1 $ 2,562.8 $ 2,893.5 $ 2,556.0 Aetna Life Insurance & Annuity 272.9 302.0 286.7 270.0 253.1 242.3 International 415.9 310.5 389.1 421.8 343.1 372.7 Large Case Pensions 597.0 1,303.8 855.3 1,767.5 1,130.2 410.9 ________________________________________________________________ Total premiums 5,475.9 5,647.0 4,301.2 5,022.1 4,619.9 3,581.9 ___________________________________________________________________________________________________________ Net Investment Income, Fees and Other Income, and Net Realized Capital Gains and Losses: Aetna Health Plans 1,086.8 920.8 703.9 564.4 663.2 660.1 Aetna Life Insurance & Annuity 973.2 865.5 715.0 631.7 593.4 475.6 International 257.0 258.8 244.7 277.2 200.5 133.1 Large Case Pensions 3,069.9 3,162.5 3,083.7 2,884.7 2,917.9 2,709.3 Corporate: Other (.7) (17.1) 17.6 15.4 (79.3) (13.7) Federated Investors - 240.3 193.5 209.2 180.6 149.3 ________________________________________________________________ Total net investment income, fees and other income, and net realized capital gains and losses 5,386.2 5,430.8 4,958.4 4,582.6 4,476.3 4,113.7 ___________________________________________________________________________________________________________ Total Revenue from Continuing Operations $ 10,862.1 $11,077.8 $ 9,259.6 $ 9,604.7 $ 9,096.2 $ 7,695.6 ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments: Aetna Health Plans $ 288.3 $ 254.8 $ 152.4 $ 182.1 $ 277.6 $ 289.5 Aetna Life Insurance & Annuity 85.5 67.7 82.6 61.7 112.6 72.8 International (48.2) (14.1) (18.0) 28.5 39.1 (32.7) Large Case Pensions 1.1 107.0 125.1 83.8 185.9 144.2 Corporate: Interest (73.8) (68.9) (62.5) (51.2) (39.4) (53.2) Other (127.9) (146.4) (120.8) (127.7) (198.8) (117.9) Federated Investors - 54.0 54.6 58.3 49.4 38.7 ___________________________________________________________________________________________________________ Income from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments 125.0 254.1 213.4 235.5 426.4 341.4 ___________________________________________________________________________________________________________ Income (Loss) from Discontinued Operations 489.1 385.3 486.1 631.3 434.0 19.9 ___________________________________________________________________________________________________________ Cumulative Effect Adjustments for continuing operations - - - - - - ___________________________________________________________________________________________________________ Net Income (Loss) $ 614.1 $ 676.4 $ 713.3 $ 915.3 $ 1,015.6 $ 365.3 ___________________________________________________________________________________________________________ Net Realized Capital Gains (Losses), Net of Tax (from Continuing Operations) (included above) (117.0) 57.7 34.0 (12.0) 88.6 24.5 ___________________________________________________________________________________________________________ Total Assets 77,686.1 75,534.2 69,934.4 64,371.8 59,477.1 50,802.9 ___________________________________________________________________________________________________________ Total Long-Term Debt 975.5 1,002.4 1,058.5 902.8 644.2 520.5 ___________________________________________________________________________________________________________ Minority Interest in Preferred Securities of Subsidiary - - - - - - ___________________________________________________________________________________________________________ Redeemable Preferred Stock, Net of Treasury Shares - - 118.6 177.1 200.0 75.0 ___________________________________________________________________________________________________________ Shareholders' Equity 7,072.4 6,936.7 6,453.8 6,015.7 5,633.4 4,745.9 ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Per Common Share Data: Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments $ 1.12 $ 2.25 $ 1.82 $ 1.92 $ 3.60 $ 3.00 Income (Loss) from Discontinued Operations 4.40 3.44 4.31 5.56 3.89 .19 Cumulative Effect Adjustments for Continuing Operations - - - - - - Net Income (Loss) 5.52 6.02 6.25 7.91 8.87 3.23 Dividends Declared 2.76 2.76 2.76 2.76 2.64 2.64 Shareholders' Equity 64.23 61.94 57.50 52.95 48.58 41.19 Market Price at Year End 39.00 56.50 47.25 45.25 56.38 53.50 ___________________________________________________________________________________________________________ See Notes to Financial Statements.
3 Consolidated Results of Operations: Operating Summary
(Millions, except per share data) 1995 1994 1993 _________________________________________________________________________________________ Premiums $ 7,431.4 $ 6,901.3 $ 5,921.7 Net investment income 3,575.1 3,631.4 3,966.6 Fees and other income 1,924.3 1,741.5 1,512.6 Net realized capital gains (losses) 47.2 (55.2) (61.2) ________________________________________ Total revenue 12,978.0 12,219.0 11,339.7 ________________________________________ Current and future benefits 9,027.2 8,652.0 8,189.2 Operating expenses 3,087.5 2,805.9 2,632.8 Amortization of deferred policy acquisition costs 137.1 133.6 101.7 Loss on discontinuance of products - - 1,270.0 Severance and facilities charge - - 160.7 ________________________________________ Total benefits and expenses 12,251.8 11,591.5 12,354.4 ________________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments 726.2 627.5 (1,014.7) Income taxes (benefits) 252.3 218.1 (412.4) ________________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 473.9 409.4 (602.3) Income (Loss) from Discontinued Operations, net of tax (222.2) 58.1 290.3 ________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 251.7 467.5 (312.0) Extraordinary loss on debenture redemption, net of tax - - (4.7) Cumulative effect adjustments, net of tax - - (49.2) ________________________________________ Net income (loss) $ 251.7 $ 467.5 $ (365.9) _________________________________________________________________________________________ ________________________________________ Net realized capital gains (losses) from continuing operations, net of tax (included above) $ 29.5 $ (41.2) $ (42.0) _________________________________________________________________________________________ ________________________________________ Per common share data: Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments $ 4.16 $ 3.63 $ (5.42) Income (Loss) from Discontinued Operations, net of tax (1.95) .51 2.61 Extraordinary loss on debenture redemption, net of tax - - (.04) Cumulative effect adjustments, net of tax - - (.44) ________________________________________ Net income (loss) $ 2.21 $ 4.14 $ (3.29) ________________________________________ ________________________________________ Dividends declared $ 2.76 $ 2.76 $ 2.76 ________________________________________ ________________________________________ Shareholders' equity $ 63.39 $ 48.85 $ 62.77 _________________________________________________________________________________________ ________________________________________ Sources of earnings: Aetna Health Plans $ 286.0 $ 341.7 $ 272.2 Aetna Life Insurance & Annuity 198.0 159.1 111.4 International 86.6 71.2 55.0 Large Case Pensions 89.2 54.4 (822.3) Corporate: Interest (70.4) (60.5) (44.7) Other (115.5) (156.5) (173.9) ________________________________________ Total from continuing operations 473.9 409.4 (602.3) Discontinued Operations (222.2) 58.1 290.3 Extraordinary loss on debenture redemption, net of tax - - (4.7) Cumulative effect adjustments, net of tax - - (49.2) ________________________________________ Net income (loss) $ 251.7 $ 467.5 $ (365.9) _________________________________________________________________________________________ ________________________________________ * This Management's Discussion and Analysis is as of February 6, 1996.
4 Overview The company entered into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc. for $4.0 billion in cash, subject to various closing adjustments. The sale is subject to state regulatory approval and other customary conditions and is expected to be completed no later than midyear 1996. (Please see "Sale of Property-Casualty Operations" on page 6.) The agreement to sell the company's property-casualty business reflects the company's strategic decision to focus its resources on pursuing growth opportunities in its managed care business and other remaining businesses. The company is considering a variety of strategic options, and is looking for opportunities to make managed care investments or acquisitions to further strengthen the company's overall market position. The company also expects to evaluate opportunities for growth of its financial services businesses and strengthen their competitive position, and opportunities to develop its current international operations and enter selected new markets where suitable opportunities exist. Net Income Aetna's 1995 net income was $252 million, compared with net income of $468 million in 1994 and a net loss of $366 million in 1993. Net income in 1995 included a loss from property-casualty operations (Discontinued Operations) of $222 million compared with income of $58 million in 1994 and $290 million (includes a $276 million cumulative effect benefit for accounting changes) in 1993. The 1993 net loss also included a charge of $49 million for cumulative effect adjustments for accounting changes. (Please see Notes 1 and 2 of Notes to Financial Statements for further discussions related to cumulative effect adjustments.) Adjusted Earnings from Continuing Operations For purposes of the discussions which follow, adjusted earnings represent income (loss) from continuing operations before cumulative effect adjustments excluding after-tax net realized capital gains (losses) in 1995, 1994 and 1993, the 1993 after-tax severance and facilities charge and the 1993 after-tax loss on discontinuance of products. Adjusted earnings by segment were as follows:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Aetna Health Plans $ 293.1 $ 355.3 $ 332.4 Aetna Life Insurance & Annuity 171.0 162.9 125.3 International 88.7 69.1 73.7 Large Case Pensions 78.2 71.4 47.4 Corporate (186.6) (208.1) (209.7)
5 Overview (Continued) Summary Segment Results The following summary of segment results is based upon adjusted earnings. Aetna Health Plans: Results in 1995 reflected an increase in managed care investments and a deterioration of medical trend in the first half of the year on indemnity and preferred provider organization health products, partially offset by increased earnings from health maintenance organization operations and improved expense management in the Specialty Health and Group Insurance businesses. Results in 1994 reflected improved earnings in the Health business. Aetna Life Insurance & Annuity: Results improved in 1995 primarily due to increased revenues associated with growth in assets under management, which were partially offset by an increase in operating expenses reflecting continued business growth. Results in 1994 principally reflected a decrease in operating expenses and strong sales growth. International: Results in 1995 and 1994 reflected continued improvement in the Pacific Rim operations and increased investment income from Mexico. Results in 1994 also reflected earnings from the company's increased investment in a Mexican insurance operation. Large Case Pensions: Results in 1995 improved, reflecting an increase in fees and other income and in net interest margins partially offset by the effect of reduced net investment income as a result of returning capital to the parent company and lower interest rates. Corporate: Results in 1995 and 1994 reflected higher interest expense resulting from the issuance by a subsidiary of 9 1/2% cumulative monthly income preferred securities in November 1994. Results in 1995 and 1994 also reflected lower corporate staff area expenses as a result of previous restructurings. Results of Continuing Operations Income from continuing operations (before extraordinary item and cumulative effect adjustments) was $474 million in 1995, compared with $409 million in 1994 and a loss of $602 million in 1993. The following significant factors affect the comparison of results of continuing operations: Results of continuing operations in 1993 included an after-tax charge for anticipated future losses on discontinuance of fully guaranteed large case pension products of $825 million and losses on these discontinued products of $90 million ($53 million excluding net realized capital losses). Results of discontinued products for the years ended December 31, 1995 and 1994 were charged against the reserve for anticipated future losses and did not impact the company's net income. (Please see pages 23 through 26 for a discussion of discontinued products.) 6 Overview (Continued) Results of Continuing Operations (continued) Results of continuing operations in 1993 included an after-tax severance and facilities charge of $104 million. (Please see "Severance and Facilities Charge" on page 9.) Results of continuing operations in 1995 included net after-tax realized capital gains of $30 million compared with net after-tax realized capital losses of $41 million in 1994 and $42 million in 1993. (Please see "Net Realized Capital Gains and Losses" on page 7.) Sale of Property-Casualty Operations The company entered into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc. ("Travelers") for $4.0 billion in cash, subject to various closing adjustments. The sale is subject to state regulatory approval and other customary conditions and is expected to be completed no later than midyear 1996. In light of the sale agreement, the company's property-casualty operations have been classified as Discontinued Operations. Results of the Discontinued Operations will be included in the company's consolidated results of operations until the closing. While such results will not adjust the purchase price, income or loss from such operations will decrease or increase, respectively, the gain expected to be recognized on such sale. As part of the agreement, Travelers will sublease the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company expects to take a charge of approximately $190 million (after tax). Such charge represents the present value of the difference between rent required to be paid by the company under the master lease and future rentals expected to be received by the company. The company also anticipates taking other restructuring charges in 1996 due to actions expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. For a further discussion of Discontinued Operations, please see "Discontinued Operations - Property-Casualty Operations" on page 28. 7 Overview (Continued) Net Realized Capital Gains and Losses Net realized after-tax capital gains (losses) included in results of continuing operations, on assets supporting discontinued products, allocable to experience rated pension contractholders, and on assets related to Discontinued Operations were as follows:
(Millions) 1995 1994 1993 _________________________________________________________________________________ Net realized capital gains (losses) from sales $ 38.5 $ (11.1) $ 291.7 Net realized capital losses from changes in reserves for mortgage loans and real estate (9.0) (27.7) (321.1) Net realized capital losses from write-downs of debt and equity securities - (2.4) (12.6) _______ _______ ________ Net realized capital gains (losses) included in results of continuing operations $ 29.5 $ (41.2) $ (42.0) _______ _______ ________ _______ _______ ________ Net realized capital losses on assets supporting discontinued products (excluded above) $ (8.6)* $(135.8)* $ ** _______ _______ ________ _______ _______ ________ Net realized capital gains (losses) allocable to experience rated pension contractholders (excluded above) $ 59.4 $(126.8) $ (117.1) _______ _______ ________ _______ _______ ________ Net realized capital gains (losses) on assets related to Discontinued Operations (excluded above) $ 106.0 $ (1.4) $ 128.0 _______ _______ ________ _______ _______ ________ * Charged to the reserve for future losses on discontinued products. (Please see "Large Case Pensions - Discontinued Products" on page 23.) ** Net realized capital losses of $37.4 million for 1993 on assets supporting discontinued products are included in the $42.0 million of capital losses included in results of continuing operations above.
Net realized capital gains from sales in 1995 include gains from the sale of debt securities. Net realized capital losses from changes in reserves for mortgage loans and real estate in 1995 and 1994 declined and reflect improvements in certain segments of the commercial real estate markets. Net realized capital gains (losses) from sales in 1993 include a $12 million loss on the sale of the U.K. life and investment management operations. Net realized capital gains in 1995 on assets related to Discontinued Operations include $156 million of gains resulting from the sale of equity securities primarily due to the company's efforts to reduce volatility in its statutory surplus, and increase income, and in connection with the agreement to sell the property-casualty operations. Such gains are partially offset by a $23 million loss from the write-down of the company's investment in a consolidated subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., which it intends to sell. Net realized capital gains (losses) on assets related to Discontinued Operations include a $14 million gain resulting from the sale of a portion of an unconsolidated subsidiary in 1994 and a $27 million gain in 1993 from the redemption of preferred stock received in connection with the sale of American Re-Insurance Company. 8 Overview (Continued) Income Taxes During 1995, the company moved from a net unrealized capital loss position of $1,072 million ($381 million of which related to Discontinued Operations) at December 31, 1994 to a net unrealized capital gain position of $641 million ($303 million of which related to Discontinued Operations) at December 31, 1995, primarily due to decreases in interest rates. As a result, the $475 million of valuation allowances related to deferred tax assets on these losses at December 31, 1994 (of which $102 million related to Discontinued Operations) were reversed, with no impact on 1995 net income. The establishment of the valuation allowances described above had no impact on net income for 1994. Management believes that it is more likely than not that the company will realize the benefit of its net deferred tax assets of $272 million for continuing operations and $642 million for Discontinued Operations. (Please see Note 10 of Notes to Financial Statements.) Return on Shareholders' Equity Return on shareholders' equity for the years ended December 31 was as follows:
1995 1994 1993 _______________________________________________________________________________________ Return on shareholders' equity 3.9% 7.5% (5.1)% Return on shareholders' equity excluding additions to environmental and asbestos-related claims reserves 14.8% 10.0% (3.9)%
9 Overview (Continued) Revenue Total revenue from continuing operations, excluding net realized capital gains and losses, increased 5% in 1995, primarily as a result of increased premiums and fees and other income, partially offset by a decrease in net investment income. Premium income increased 8% in 1995. Such increase primarily reflects a movement toward higher revenue products in the Aetna Health Plans segment and increases in the volume of business sold in the Pacific Rim and Latin American markets in the International segment. Fees and other income increased 10%, reflecting an increase in the Aetna Health Plans segment primarily due to growth in covered members related to the point-of-service product and the Aetna Life Insurance & Annuity segment primarily due to an increase in fees assessed against policyholders related to growth in assets under management. (Please see "Discontinued Operations - Property- Casualty Operations" on page 30 for further discussions related to revenue.) Severance and Facilities Charge In 1993 the company recorded a $200 million after-tax ($308 million pretax) severance and facilities charge to fourth quarter 1993 earnings (of which $96 million after tax and $147 million pretax related to Discontinued Operations). The planned actions included the elimination of approximately 4,000 positions (2,000 of which related to Discontinued Operations). The severance and facilities charge also included costs related to vacating excess leased office space and costs related to vacating and selling an owned property in Hartford, Connecticut. All of the positions expected to be eliminated had been completed by December 31, 1995 and the related severance benefits charged against the reserve. The annualized after-tax savings of approximately $200 million resulting from these and other cost reduction actions (of which $120 million related to Discontinued Operations) had been realized as of December 31, 1995. (Please see Note 4 of Notes to Financial Statements for further discussions related to severance and facilities charges.) The company continues to conduct strategic and financial reviews of its continuing operations in order to make such operations more competitive. Such reviews may result in restructuring actions in 1996 which would be in addition to the severance and facilities charges anticipated in connection with the sale of the company's property-casualty operations, though the amount of any such charges cannot be estimated at this time. (Please see "Sale of Property-Casualty Operations" on page 6.) 10 Aetna Health Plans
Operating Summary (Millions) 1995 1994 1993 ____________________________________________________________________________ Premiums $ 5,949.7 $ 5,611.5 $ 4,700.6 Net investment income 364.0 351.6 376.3 Fees and other income 1,312.3 1,197.2 1,039.5 Net realized capital losses (10.6) (21.2) (10.4) _________________________________ Total revenue 7,615.4 7,139.1 6,106.0 _________________________________ Current and future benefits 5,100.4 4,755.1 3,989.3 Operating expenses 2,038.4 1,805.4 1,592.6 Amortization of deferred policy acquisition costs 22.2 40.5 29.4 Severance and facilities charge - - 79.8 _________________________________ Income before taxes 454.4 538.1 414.9 Income taxes 168.4 196.4 142.7 _________________________________ Income before cumulative effect adjustments $ 286.0 $ 341.7 $ 272.2 ____________________________________________________________________________ _________________________________ Net realized capital losses, net of tax (included above) $ (7.1) $ (13.6) $ (8.3) ____________________________________________________________________________ _________________________________
The Aetna Health Plans ("AHP") segment consists of Health, Specialty Health and Group Insurance businesses. The Health business provides a full spectrum of managed care and traditional indemnity plans, providing its members with a choice of health plans to meet their individual needs. Managed care products vary with respect to the extent to which the company manages health care costs and utilization. Such products range from preferred provider organization (PPO) plans to point-of- service (POS) and health maintenance organization (HMO) plans. In addition, the company owns and manages physician practices for use by its members and other consumers. The number of health members covered at December 31 was approximately:
(Millions) 1995 1994 1993 ___________________________________________________________ Health HMO 1.5 1.5 1.4 POS 2.3 1.5 0.5 _______________________ Total Gated Managed Care (1) 3.8 3.0 1.9 PPO 4.2 4.0 3.5 _______________________ Total Managed Care 8.0 7.0 5.4 Traditional Indemnity (2) 4.0 4.8 5.9 ________________________ Total Health 12.0 11.8 11.3 ________________________ ________________________ (1) Gated managed care refers to the role of the primary care physician (i.e., gatekeeper). In the HMO and POS products, the physician is selected by the member to coordinate the total health care of the member and seeks to ensure that only appropriate and high- quality services are provided. (2) During 1995, AHP redefined its traditional indemnity membership in order to better align the components of such membership with its businesses. Accordingly, AHP "dental-only" members of 3.8 million in 1994 and 3.7 million in 1993, previously included in traditional indemnity, are now included solely in Specialty Health.
11 Aetna Health Plans (Continued) Membership attributable to a risk contract with the Civilian Health and Military Program of the Uniformed Services (Champus), of .7 million, .7 million and .2 million members at December 31, 1995, 1994 and 1993, respectively, is included in managed care membership. Champus has awarded renewal of the contract to another provider, although the company will remain the primary provider through March 31, 1996. Specialty Health products include behavioral health, pharmacy and dental plans, which provide managed care or indemnity features. The number of members covered by Specialty Health products at December 31 was approximately:
(Millions) 1995 (1) 1994 (1) 1993 (1) _____________________________________________________________ Behavioral Health 14.9 15.3 13.3 ______________________________ ______________________________ Dental 8.3 8.3 8.6 ______________________________ ______________________________ Managed Pharmacy 4.2 3.3 2.7 ______________________________ ______________________________ (1) Many Specialty Health members participate in more than one type of AHP coverage and are therefore counted in each.
The Group Insurance business provides life insurance, disability, including managed disability, and long-term care plans. The number of members covered by Group Insurance products at December 31 was approximately:
(Millions) 1995 (1) 1994 (1) 1993 (1) _____________________________________________________________ Group Life (2) 8.0 7.8 7.7 _____________________________ _____________________________ Disability 2.2 2.1 2.1 _____________________________ _____________________________ Long-Term Care .1 .1 .1 _____________________________ _____________________________ (1) Many Group Insurance members participate in more than one type of AHP coverage and are therefore counted in each. (2) Group life includes members with accident coverages.
12 Aetna Health Plans (Continued) Products and services for AHP's businesses are marketed primarily to employers (i.e., plan sponsors) for the benefit of employees and their dependents (i.e., members). Plans may be insured, in whole or in part, or benefits may be entirely funded by the plan sponsor ("self-funded"). Insured plans generally involve the assumption of all or a portion of health care cost and utilization risk by the company ("risk plans"). Self-funded plans do not involve the assumption of significant risk by the company ("nonrisk plans") and thus typically generate lower, but more consistent, earnings than comparable insured plans. Stop loss arrangements are available to self-funded plan sponsors, which limit the risk they retain. Revenue produced by risk plans is reflected in "premiums" and by nonrisk plans is reflected in "fees and other income." Benefit expenses provided under risk plans are reflected in current and future benefits. Administrative expenses are associated with both risk and nonrisk plans and are reflected in operating expenses. The number of Health members at December 31, 1995 participating in risk versus nonrisk plans was as follows:
(Millions) Risk Nonrisk Total ______________________________________________________________ Health HMO 1.2 .3 1.5 POS .4 1.9 2.3 _____________________________ Total Gated Managed Care 1.6 2.2 3.8 PPO 1.4 2.8 4.2 _____________________________ Total Managed Care 3.0 5.0 8.0 Traditional Indemnity .7 3.3 4.0 _____________________________ Total Health 3.7 8.3 12.0 _____________________________ _____________________________
At December 31, 1995, the majority of AHP's Specialty Health members participated in nonrisk plans, while the majority of AHP's Group Insurance members were covered by risk plans. The risk/nonrisk composition of AHP's 1995 total membership is generally consistent with the composition of 1994 and 1993 total membership. 13 Aetna Health Plans (Continued) AHP's adjusted earnings (after tax) follow:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Income before cumulative effect adjustments $ 286.0 $ 341.7 $ 272.2 Less: Net realized capital losses (7.1) (13.6) (8.3) Severance and facilities charge - - (51.9) _______ _______ _______ Adjusted earnings $ 293.1 $ 355.3 $ 332.4 _______ _______ _______ _______ _______ _______
AHP's adjusted earnings decreased $62 million in 1995, compared with an increase of $23 million in 1994. The lower earnings in 1995 are primarily due to the expenses associated with an increase in managed care investments and a deterioration of medical trend in the first half of the year on indemnity and PPO health products, partially offset by increased earnings from HMO operations and improved expense management in the Specialty Health and Group Insurance businesses. HMO earnings were $41 million, $30 million and $11 million in 1995, 1994 and 1993, respectively, and the related medical loss ratios were 84.3%, 84.6% and 84.6%, respectively. The increase in HMO earnings is due to growth of membership in risk plans of over 80,000 members in 1995 and 120,000 members in 1994 and to stronger management of medical costs in both years. 1994 adjusted earnings reflected improved earnings in the Health business which resulted from an increase in premiums and fees, offset in part by an increase in expenses related to investments in managed care. Group Insurance earnings represented approximately one-third of AHP's earnings for 1995, and were comparable to the earnings in 1994 and 1993. Revenue for the Health and Specialty Health businesses increased approximately $540 million or 10% in 1995 and increased approximately $1 billion or 23% in 1994. The 1995 and 1994 increases were primarily due to the shift in membership to managed care products. Group Insurance represented approximately 18%, 20% and 24% of AHP's revenue for 1995, 1994 and 1993, respectively. Health and Specialty Health benefit expense increased from 1994 to 1995 due to higher medical costs in the nongated indemnity and PPO risk products, which was partially offset by reduced membership in the indemnity product. HMO benefit expense also increased due to growth in membership, although it has improved on a per member basis. In 1994, the Health and Specialty Health benefit expense increased evenly with revenue. Operating expenses increased significantly for the Health and Specialty Health businesses in 1995 and 1994 due to planned investments in managed care-related systems and processes, and in primary care physician practices, which have grown from 21 practices in six cities in 1994 to 62 practices in eight cities in 1995. In addition, the migration of members from indemnity to the more resource intensive POS product contributed to the increase in operating expenses in both 1995 and 1994. 14 Aetna Health Plans (Continued) Outlook Management expects that AHP will continue to be a primary source of earnings to the company. With the market shift from traditional indemnity plans toward managed care, the continued profitability of AHP is dependent upon growing its managed care business while effectively managing the health care costs and operating expenses of that business, as well as the quality of services provided. Factors that may affect AHP's ability to control these costs and expenses include competition, changes in health care practices, inflation, contracts with providers, changing medical technologies, government imposed surcharges, taxes or assessments, and changes in federal or state laws. Legislative efforts to change the health insurance system have received increased attention in recent years at both the state and national levels, including various proposals to reform the federal Medicare program. AHP actively supports proposals designed to enhance managed care and expand access to health care coverage through private sector competition. Management is not able to predict the outcome of state and federal legislative efforts, or the effect any additional legislation, if adopted, would have on the company. AHP will continue to invest in its managed care infrastructure in its effort to effectively manage health care costs and operating expenses, and the quality of services provided. The company is looking for opportunities to make managed care investments or acquisitions to further strengthen the company's overall market position. The Specialty Health and Group Insurance businesses will concentrate on increased cross-selling of their products to current AHP members, as well as marketing to non-AHP customers. 15 Aetna Life Insurance & Annuity
Operating Summary (Millions) 1995 1994 1993 _______________________________________________________________________________ Premiums $ 178.3 $ 168.3 $ 125.7 Net investment income 1,044.1 958.7 962.4 Fees and other income 359.1 316.0 294.4 Net realized capital gains (losses) 42.7 (5.6) 12.8 ____________________________________ Total revenue 1,624.2 1,437.4 1,395.3 ____________________________________ Current and future benefits 979.5 916.1 882.9 Operating expenses 305.8 258.9 287.7 Amortization of deferred policy acquisition costs 44.1 27.4 20.6 Severance and facilities charge - - 30.8 ____________________________________ Income before taxes 294.8 235.0 173.3 Income taxes 96.8 75.9 61.9 ____________________________________ Income before cumulative effect adjustments $ 198.0 $ 159.1 $ 111.4 _______________________________________________________________________________ ____________________________________ Net realized capital gains (losses), net of tax (included above) $ 27.0 $ (3.8) $ 6.1 _______________________________________________________________________________ ____________________________________ Deposits not included in premiums above: Annuities: Fully guaranteed $ 415.7 $ 249.0 $ 263.7 Experience rated 928.6 1,058.2 970.5 Non-guaranteed 2,019.4 1,340.4 1,040.1 ____________________________________ Total annuities 3,363.7 2,647.6 2,274.3 Individual Life 539.1 318.7 268.7 ____________________________________ Total $ 3,902.8 $ 2,966.3 $ 2,543.0 _______________________________________________________________________________ ____________________________________ Assets under management:(1)(2) Fully guaranteed $ 3,408.4 $ 2,626.7 $ 2,428.1 Experience rated 10,999.9 9,272.0 9,241.5 Non-guaranteed 11,522.9 8,064.6 7,111.0 ____________________________________ Total $ 25,931.2 $ 19,963.3 $ 18,780.6 _______________________________________________________________________________ ____________________________________ (1) Included above are net unrealized capital gains (losses) of approximately $800 million, $(390) million and $750 million at December 31, 1995, 1994 and 1993, respectively. (2) Includes $2,604.2 million, $902.9 million and $369.0 million at December 31, 1995, 1994 and 1993, respectively, related to assets held and managed by unaffiliated mutual funds.
The Aetna Life Insurance & Annuity segment ("ALIAC") markets and services two principal types of products: (1) financial services and (2) life insurance. The financial services products include individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under IRC Sections 401, 403, 408 and 457, and individual and group nonqualified annuity contracts. These contracts may be immediate or deferred and are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, education (collectively "not-for-profit" organizations) and corporate markets. Financial services also include pension plan administrative services. The life insurance products include universal life, variable universal life, interest-sensitive whole life and term insurance. These products are offered primarily to individuals, small businesses, employer-sponsored groups and executives of Fortune 2000 companies. 16 Aetna Life Insurance & Annuity (Continued) The annuity and life insurance contracts marketed by ALIAC include fully guaranteed, experience rated and non-guaranteed investment options and are written primarily by Aetna Life Insurance and Annuity Company. Fully guaranteed options provide guarantees on investment return, maturity values, and if applicable, benefit payments. The experience rated options require the customer to assume investment (including realized capital gains and losses) and other risks subject, among other things, to certain minimum guarantees. The effect of such realized gains and losses does not impact the company's results. The non-guaranteed investment options provide for full assumption by the customer of investment results. Assets supporting non-guaranteed options are held in separate accounts that invest in Aetna and unaffiliated mutual funds (which are included in assets under management) and are managed by the company for a fee. Separate account investment income and realized capital gains and losses are not reflected in the company's consolidated results of operations. Aetna retail mutual funds also are available to individual and institutional investors outside of the ALIAC retirement products. ALIAC's adjusted earnings (after tax) follow:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Income before cumulative effect adjustments $ 198.0 $ 159.1 $ 111.4 Less: Net realized capital gains (losses) 27.0 (3.8) 6.1 Severance and facilities charge - - (20.0) _______ _______ _______ Adjusted earnings $ 171.0 $ 162.9 $ 125.3 _______ _______ _______ _______ _______ _______
ALIAC's adjusted earnings increased $8 million in 1995, following a $38 million increase in 1994. Results in 1995 reflected improved earnings in the financial services products, while earnings in the life insurance products were level with the prior year. The improvement in earnings related to the financial services products reflected an increase in fees assessed against policyholders and increased net investment income related to the growth in assets under management which were partially offset by an increase in operating expenses. This increase in operating expenses primarily reflects continued business growth. The improvement in ALIAC's 1994 adjusted earnings reflected improved earnings in both the life insurance and financial services products primarily as a result of a decrease in operating expenses reflecting savings associated with prior restructurings in ALIAC's life insurance and pension plan administrative service businesses. The 1994 improvement also reflected an increase in fees assessed against policyholders, primarily due to an increase in the volume of business in force for certain universal life and annuity contracts. 17 Aetna Life Insurance & Annuity (Continued) Premiums relate to term life, whole life and annuity products containing life contingencies. Premiums increased by $10 million in 1995 and by $43 million in 1994. The 1995 and 1994 increases resulted primarily from increases in immediate annuity sales. Deposits relate to annuity contracts not involving life contingencies and universal life contracts. Deposits increased 32% in 1995, which included the assumption of a $471 million variable annuity and universal life block of business. The increase in 1994 reflected the $215 million assumption of a block of primarily individual annuity business and strong universal life sales. Assets under management increased by 30% during 1995 primarily as a result of continued business growth and overall improvement in the stock and bond markets. ALIAC's contracts typically impose surrender fees which decline over the duration of the contract. Assets held under experience rated general account options have transfer and withdrawal limitations. Withdrawals from the fully guaranteed accumulation options prior to maturity include an adjustment intended to reflect the estimated fair value of the assets supporting the contract at the time of withdrawal. Withdrawals from non- guaranteed options are based on the actual market value of the assets in the separate account. Approximately 91% and 90% of assets under management at December 31, 1995 and 1994, respectively, allowed for contractholder withdrawal, 63% and 57% of which, respectively, are subject to market value adjustments or deferred surrender charges at December 31, 1995. Outlook ALIAC's sales of life insurance and tax-qualified annuities are expected to continue to be strong in 1996. Sales of nonqualified products, a primary focus for 1995, are expected to significantly exceed 1995 levels as relationships formed with broker/dealers and banks in 1995 build sales momentum. ALIAC intends to expand its retirement planning capabilities. The company expects to evaluate opportunities for growth of its financial services businesses and strengthen their competitive position. Management expects that ALIAC will continue to be a significant source of earnings to the company. 18 International
Operating Summary (Millions) 1995 1994 1993 ____________________________________________________________________________ Premiums $1,038.5 $ 887.1 $ 909.5 Net investment income 308.7 308.4 311.6 Fees and other income 115.0 97.0 83.4 Net realized capital gains (losses) (2.4) 4.5 (25.2) ________________________________ Total revenue 1,459.8 1,297.0 1,279.3 ________________________________ Current and future benefits 911.2 782.7 860.1 Operating expenses 350.5 349.8 354.3 Amortization of deferred policy acquisition costs 70.8 65.7 51.7 Severance and facilities charge - - 11.0 ________________________________ Income before taxes 127.3 98.8 2.2 Income taxes (benefits) 40.7 27.6 (52.8) ________________________________ Income before cumulative effect adjustments $ 86.6 $ 71.2 $ 55.0 ____________________________________________________________________________ ________________________________ Net realized capital gains (losses), net of tax (included above) $ (2.1) $ 2.1 $ (11.6) ____________________________________________________________________________ ________________________________
The International segment, through subsidiaries and joint venture operations, sells primarily life insurance and financial services products in non-U.S. markets including Canada, Mexico, Taiwan, Chile, Malaysia, Hong Kong, New Zealand, Peru, Argentina and Indonesia. International's adjusted earnings (after tax) follow:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Income before cumulative effect adjustments $ 86.6 $ 71.2 $ 55.0 Less: Net realized capital gains (losses) (2.1) 2.1 (11.6) Severance and facilities charge - - (7.1) _______ _______ _______ Adjusted earnings $ 88.7 $ 69.1 $ 73.7 _______ _______ _______ _______ _______ _______
International's adjusted earnings increased $20 million in 1995, following a $5 million decrease in 1994. Results in 1995 and 1994 primarily reflected continued improvement in the Pacific Rim operations and increased investment income from Mexico. Results in 1994 also reflected earnings from the company's increased investment (from 30% ownership in 1993 to 45% ownership in 1994) in its Mexican insurance operation. 1993 adjusted earnings included $37 million of tax benefits from prior year operating losses related to the sale of the U.K. life and investment management operations. 19 International (Continued) During 1994, the company changed its accounting for an affiliate from the consolidated basis of accounting to the equity basis of accounting. Prior to the change, the company recognized revenue of $98 million and $173 million in 1994 and 1993, respectively, and benefits and expenses of $98 million and $180 million in 1994 and 1993, respectively, from the affiliate. During the first quarter of 1995, the company sold its interest in the affiliate at book value. Premiums in 1995 were 17% higher than in 1994, following a 2% decrease in 1994 premiums as compared with 1993. Excluding the change in accounting for the affiliate discussed above, premiums increased 29% and 5% in 1995 and 1994, respectively, primarily due to increases in the volume of business sold in the Pacific Rim and Latin American markets. Outlook International's strategy is to invest in areas outside the U.S. that have the potential for attractive returns, with emphasis on the emerging insurance and financial services markets. Recently, International has entered new markets in Argentina and Indonesia, and has obtained a license to sell life and health insurance products in the Philippines. Approximately 28% of International's 1995 adjusted earnings are derived from the company's Mexican affiliate. The current difficult economic environment in Mexico is expected to limit the ability of this affiliate to increase its earnings contribution. Conducting business and investing in international markets pose unique risks which vary from country to country. Such risks include, but are not limited to, political developments, including tax changes, nationalization and changes in regulatory policy, currency restrictions, currency fluctuations, as well as the consequence of hostilities and unrest. Management believes that its continued focus on entering new markets where suitable opportunities exist and development of existing operations will help to reduce the exposure to the above- indicated risks through further diversification of its operations, and that International will be a meaningful contributor to overall company results. 20 Large Case Pensions
Operating Summary (Millions) 1995 1994 1993 _______________________________________________________________________________ Premiums $ 264.9 $ 234.4 $ 185.9 Net investment income 1,850.6 2,017.4 2,327.7 Fees and other income 135.3 128.4 95.3 Net realized capital gains (losses) 18.1 (25.0) (42.9) ____________________________________ Total revenue 2,268.9 2,355.2 2,566.0 ____________________________________ Current and future benefits 2,036.1 2,175.9 2,428.1 Operating expenses 100.1 98.2 120.2 Loss on discontinuance of products - - 1,270.0 Severance and facilities charge - - 21.9 ____________________________________ Income (Loss) before taxes 132.7 81.1 (1,274.2) Income taxes (benefits) 43.5 26.7 (451.9) ____________________________________ Income (Loss) before cumulative effect adjustments $ 89.2 $ 54.4 $ (822.3) _______________________________________________________________________________ ____________________________________ Net realized capital gains (losses), net of tax (included above) $ 11.0 $ (17.0) $ (30.5) _______________________________________________________________________________ ____________________________________ Net loss attributable to discontinued products, net of tax $ * $ * $ (915.4) _________________________________________________________________________________ ______________________________________ Deposits not included in premiums above: Fully guaranteed $ 31.5 $ 212.3 $ 797.7 Experience rated 719.9 630.8 677.4 Non-guaranteed 872.3 1,072.5 1,316.5 ____________________________________ Total $ 1,623.7 $ 1,915.6 $ 2,791.6 _______________________________________________________________________________ ____________________________________ Assets under management: (1) Fully guaranteed $ 10,324.6 $ 11,905.3 $ 14,695.1 Experience rated 17,446.4 15,944.9 17,020.6 Non-guaranteed 18,634.1 18,491.9 21,050.2 ____________________________________ Total $ 46,405.1 $ 46,342.1 $ 52,765.9 _______________________________________________________________________________ ____________________________________ (1) Included above are net unrealized capital gains (losses) of approximately $790 million, $(540) million and $750 million at December 31, 1995, 1994 and 1993, respectively. * Results of discontinued products in 1995 and 1994 (losses of $26.2 million and $172.1 million, respectively) were charged against the reserve for anticipated future losses and did not impact net income of the segment. (Please see "Discontinued Products" on page 23.)
The Large Case Pensions segment manages a variety of retirement and other savings products (including pension and annuity products) and offers investment management and advisory services to nonpension customers. Large case pension products are offered primarily by Aetna Life Insurance Company and certain of its registered investment advisor affiliates, and generally are tailored for defined benefit and defined contribution pension plans that qualify under Internal Revenue Code ("IRC") Section 401 for tax-preferred treatment. Contracts provide fully guaranteed, partially guaranteed (experience rated) and non-guaranteed investment options. As discussed below, fully guaranteed large case pension products are no longer offered by the company. (Please see "Discontinued Products" on page 23.) 21 Large Case Pensions (Continued) Large Case Pensions' adjusted earnings (after tax) follow:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Income (Loss) before cumulative effect adjustments $ 89.2 $ 54.4 $(822.3) Less: Net realized capital gains (losses) 11.0 (17.0) (30.5) Severance and facilities charge - - (14.2) Loss on discontinuance of products - - (825.0) _______ _______ _______ Adjusted earnings $ 78.2 $ 71.4 $ 47.4 _______ _______ _______ _______ _______ _______
Large Case Pensions' adjusted earnings increased $7 million in 1995, following a $24 million increase in 1994. 1995 and 1994 adjusted earnings reflect net benefits from the absence of losses from discontinued fully guaranteed products. 1995 adjusted earnings also reflected an increase in fees and other income and in net interest margins. Such favorable results were partially offset by the effect of reduced net investment income as a result of returning capital to the parent company and lower interest rates. 1994 adjusted earnings were adversely affected by the decline in the level of general account assets under management. The increase in 1995 premiums primarily related to additional premiums from existing contractholders and did not have a material effect on results. Experience rated products are supported by either general account or separate account assets. Such products supported by general account assets have declined in recent years, initially due to customer concerns about the company's ratings, as well as the life insurance industry's financial strength, and the company's investment concentrations in mortgage loans and real estate. More recently, the decline has slowed, and management believes that such decline is more attributable to competitive pressures and a shift to separate account products. Experience rated products supported by separate accounts have increased to $4.6 billion at December 31, 1995 from $3.3 billion at December 31, 1994. General account assets supporting experience rated products may be subject to participant and/or contractholder withdrawal. At December 31, 1995, approximately $2.7 billion of such contracts allowed for unscheduled contractholder withdrawals, subject to timing restrictions and formula-based market value adjustments. Further, at December 31, 1995, approximately $4.0 billion of the experience rated pension contracts supported by general account assets could be withdrawn or transferred to other plan investment options at the direction of plan participants without market value adjustment. Participant withdrawals are generally subject to significant tax and plan constraints. 22 Large Case Pensions (Continued) Experience rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other company products) for the years ended December 31:
(Millions) 1995 1994 1993 ___________________________________________________________________________________ Scheduled contract maturities and benefit payments (1) $1,012.3 $1,000.1 $1,049.8 Contractholder withdrawals other than scheduled contract maturities and benefit payments 381.3 590.6 893.2 Participant withdrawals 182.2 183.6 222.5 (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
Outlook The company's ability to retain and grow its continuing large case pension business is affected by consumer confidence in both the company and the life insurance industry. Consumer confidence may be influenced by such factors as reduced insurance company ratings (please see "Liquidity and Capital Resources" on page 65) and perceived financial difficulties in the industry. Management believes that a continuation of the substantial competitive pressures in the large case pension market is likely to cause assets under management to continue to decline. Although the company is seeing some improvement in certain segments of the commercial real estate market, capital losses on experience rated pension business may increase in the future if the company's capacity to pass through future investment losses to experience rated contractholders is reduced. Changes in customer withdrawal activity, interest rate changes, future losses on investments and experience rated contract modifications, if any, could further 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. Earnings for Large Case Pensions are expected to decline as general account assets under management decline. A slowing in the earnings decline is dependent upon new separate account deposits, the recapture of general account maturities and withdrawals, higher interest rates and a continued reduction in operating costs. As assets decline, management expects to continue to redeploy capital to other businesses. The company is exploring sale or other alternatives for certain portions of its large case pension investment management and advisory business conducted through its subsidiary, Aeltus Investment Management. Such actions have included the signing, in 1996, of a letter of intent by the company to sell Aetna Realty Investors ("ARI") to TA Associates. ARI contributed $6 million to Large Case Pensions' net income in 1995 as compared to $5 million in 1994. 23 Large Case Pensions (Continued) Discontinued Products In January 1994, the company announced its decision to discontinue the sale of its fully guaranteed large case pension products. As a result of this decision, the company recognized an after-tax loss on discontinuance of $825 million in 1993 and established a reserve of $1,270 million at December 31, 1993 for anticipated future losses expected on the runoff of these products. The 1993 loss on discontinuance was composed of $390 million for guaranteed investment contracts ("GICs") and $435 million for single-premium annuities ("SPAs"). The reserve for anticipated future losses on discontinued products was established based on 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 as of December 31, 1993. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. Management believes the reserve for anticipated losses at December 31, 1995 is adequate to provide for future losses associated with the guaranteed product liabilities. Results of discontinued products for 1995 and 1994, as shown in the following tables, were charged to the reserve and did not affect the company's results of operations. Future losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in continuing products. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At December 31, 1995, for GICs and SPAs, the receivables from continuing operations, net of the related deferred taxes payable of $14 million and $21 million, respectively, on the accrued interest income, were $416 million and $473 million, respectively. At December 31, 1994, for GICs and SPAs, the receivables from continuing operations, net of the related deferred taxes payable of $7 million and $10 million, respectively, on the accrued interest income, were $403 million and $453 million, respectively. As of December 31, 1995 no funding had taken place. 24 Large Case Pensions (Continued) Results of discontinued products for years ended December 31 were as follows:
(Millions) 1995 _____________________________________________________________________________ GICs SPAs Total ____ ____ ______ Interest margin $ (61.1) $ 2.5 $ (58.6) Net realized capital gains (losses) (38.8) 30.2 (8.6) Interest earned on receivable from continuing operations 13.2 19.8 33.0 Other, net 3.9 4.1 8.0 ________ ________ _______ Results of discontinued products, after tax $ (82.8) $ 56.6 $ (26.2) ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax $ (124.2) $ 86.0 $ (38.2) ________ ________ ________ ________ ________ ________ Net realized capital gains (losses) from sales of bonds, after tax, included above $ (1.8) $ 41.7 $ 39.9 ________ ________ ________ ________ ________ ________ 1994 ________________________________ GICs SPAs Total ____ ____ ______ Negative interest margin $ (86.1) $ (.7) $ (86.8) Net realized capital losses (97.6) (38.2) (135.8) Interest earned on receivable from continuing operations 12.6 18.3 30.9 Other, net 6.5 13.1 19.6 ________ ________ _______ Results of discontinued products, after tax $ (164.6) $ (7.5) $ (172.1) ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax $ (254.4) $ (18.6) $ (273.0) ________ ________ ________ ________ ________ ________ Net realized capital losses from sales of bonds, after tax, included above $ (35.5) $ (15.7) $ (51.2) ________ ________ ________ ________ ________ ________ 1993 ________ Total ______ Negative interest margin $ (87.9) Net realized capital losses (37.4) Nonrecurring gains on futures contracts 18.8 Other, net 16.1 ________ Results of discontinued products, after tax $ (90.4) ________ ________ Results of discontinued products, pretax $ (137.8) ________ ________
The interest margin for the discontinued products represents the difference between the interest earned on the invested assets supporting fully guaranteed large case pension contracts and the interest credited to the holders of such contracts. The negative interest margins for the GIC products for years ended December 31, 1995 and 1994 include a loss (pretax) of $50 million and $4 million, respectively, due to the early retirement of approximately $730 million and $630 million of contract liabilities in 1995 and 1994, respectively. These losses are expected to reduce the level of negative interest margins in future periods. The company periodically reviews its liquidity needs related to meeting contract liabilities for both GICs and SPAs. The early retirement of GICs in 1995 and 1994, as well as potential additional such retirements in the future, may require the company to consider the need for such liquidity resources as borrowings between GICs and SPAs or from continuing operations, as well as funding of the receivables from continuing operations. 25 Large Case Pensions (Continued) The activity in the reserve for anticipated future losses on discontinued products for the years ended December 31, 1995 and 1994 was as follows (pretax):
(Millions) GICs SPAs Total ___________________________________________________________________ Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0 Results of discontinued products (254.4) (18.6) (273.0) ________ ________ ________ Reserve at December 31, 1994 345.6 651.4 997.0 Results of discontinued products (124.2) 86.0 (38.2) ________ ________ ________ Reserve at December 31, 1995 $ 221.4 $ 737.4 $ 958.8 ________ ________ ________ ________ ________ ________
Discontinued fully guaranteed products provide guarantees on investment return, maturity values, and if applicable, benefit payments. The interest credited on these contracts during 1995 ranged from 3.0% to 17.7% with an average rate of 8.9% (unchanged from 1994). For the contracts remaining at December 31, 1995, the average credited rate was 8.6%. None of these contracts allow for contractholder withdrawal, except in extraordinary circumstances. Distributions on GICs and SPAs for the years ended December 31 were as follows:
(Millions) 1995 ___________________________________________________________________ GICs SPAs Total ____ ____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1) $2,685.6 $ 522.9 $3,208.5 Participant directed withdrawals 92.8 - 92.8 1994 1993 ______________________________ ________ GICs SPAs Total Total ____ ____ _____ _____ Scheduled contract maturities, GIC settlements and benefit payments (1) $2,340.3 $ 531.6 $2,871.9 $2,672.2 Participant directed withdrawals 198.5 - 198.5 232.2 (1) Includes payments made upon contract maturity, early settlement of approximately $730 million and $630 million of GIC liabilities in 1995 and 1994, respectively, and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of (including a securitization of mortgage loans), and scheduled payments on invested assets. 26 Large Case Pensions (Continued) At December 31, 1995, contractholder liabilities were $5.1 billion and $4.9 billion for GICs and SPAs, respectively. Scheduled maturities, future benefit payments, and other expected payments of GICs and SPAs, including future interest, were as follows (in millions):
GICs SPAs ________ ________ 1996 $1,962.5 $ 520.9 1997 1,276.5 513.7 1998 967.8 507.4 1999 770.3 501.4 2000 437.9 495.3 2001-2005 605.0 2,388.0 2006-2010 15.2 2,185.3 2011-2015 2.5 1,880.9 2016-2020 .6 1,503.7 Thereafter - 2,807.6
Please see Note 3 of Notes to Financial Statements and "General Account Investments" on pages 42 through 60 for additional discussions related to discontinued products. 27 Corporate
Operating Summary (Millions, after tax) 1995 1994 1993 ________________________________________________________________________________ Interest expense $ 70.4 $ 60.5 $ 44.7 Other expense, net $ 115.5 $ 156.5 $ 173.9
The Corporate segment includes interest expense and other net corporate expenses which are not directly related to the company's business segments. "Other net corporate expense" includes items such as corporate staff areas, advertising and contributions, partially offset by net investment income. The 1995 and 1994 increase in interest expense resulted primarily from the issuance by a subsidiary of 9 1/2% cumulative monthly income preferred securities in November 1994. Other expense for 1993 included after-tax severance and facilities charges of $11 million. Other expense also included after-tax realized capital gains of $1 million in 1995, after-tax realized capital losses of $9 million in 1994 and after-tax realized capital gains of $2 million in 1993. Excluding the 1993 severance and facilities charge and realized capital gains and losses in all three years, the decrease in other expenses in 1995 and 1994 resulted from a reduction of corporate staff area expenses as a result of previous restructurings. In connection with the sale of the company's property-casualty operations, Travelers will sublease the space currently occupied by the company in the CityPlace office facility in Hartford for eight years at current market rates. The company expects to take a charge of approximately $190 million (after tax). Such charge represents the present value of the difference between rent required to be paid by the company under the master lease and future rentals expected to be received by the company. The company also anticipates taking other restructuring charges in 1996 due to actions expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by the property-casualty operations. 28 Discontinued Operations - Property-Casualty Operations
Operating Summary (Millions) 1995 1994 1993 _____________________________________________________________________________________ Premiums $ 4,118.9 $ 4,390.8 $ 4,653.2 Net investment income 901.7 832.1 952.4 Fees and other income 82.0 115.6 144.3 Net realized capital gains 155.6 .4 178.0 ____________________________________ Total revenue 5,258.2 5,338.9 5,927.9 ____________________________________ Current and future benefits 4,232.5 3,746.8 4,214.7 Operating expenses 787.3 914.1 1,025.4 Amortization of deferred policy acquisition costs 622.7 647.2 646.2 Severance and facilities charge - - 147.3 ____________________________________ Income (Loss) before taxes (384.3) 30.8 (105.7) Income tax benefits(1) (162.1) (27.3) (119.7) ____________________________________ Income (Loss) before cumulative effect adjustments $ (222.2) $ 58.1 $ 14.0 _____________________________________________________________________________________ ____________________________________ Cumulative effect adjustments, net of tax $ - $ - $ 276.3 _____________________________________________________________________________________ ____________________________________ Net realized capital gains (losses), net of tax (included above) $ 106.0 $ (1.4) $ 128.0 _____________________________________________________________________________________ ____________________________________ Catastrophe losses, net of tax (included above) $ 65.1 $ 189.6 $ 85.0 _____________________________________________________________________________________ ____________________________________ Statutory combined ratio 136.7% 123.3% 125.2% _____________________________________________________________________________________ ____________________________________ Statutory combined ratio (2) 136.7% 123.3% 116.4% _____________________________________________________________________________________ ____________________________________ Statutory combined ratio (3) 108.1% 117.1% 113.6% _____________________________________________________________________________________ ____________________________________ GAAP combined ratio (4) 135.1% 117.7% 122.5% _____________________________________________________________________________________ ____________________________________ GAAP combined ratio (2) 135.1% 117.7% 113.6% _____________________________________________________________________________________ ____________________________________ GAAP combined ratio (3) 106.6% 111.5% 110.8% _____________________________________________________________________________________ ____________________________________ (1) Income tax benefits resulted from pretax losses in 1995 and 1993 and tax-exempt interest income in 1995, 1994 and 1993. (2) The 1993 combined ratios have been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after tax). (3) Excludes the effect of additions to environmental and asbestos-related claims reserves, and in 1993, has also been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after tax). (4) The difference between the statutory and GAAP combined ratios primarily reflects the establishment of a reserve for statutory purposes for severance and facilities charges (affecting 1995 and 1994) and the settlement of Proposition 103 (affecting 1994), which were both previously reserved for on a GAAP basis.
The company entered into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc. for $4.0 billion in cash, subject to various closing adjustments. The sale is subject to state regulatory approval and other customary conditions and is expected to be completed no later than midyear 1996. (Please see "Overview - - Sale of Property-Casualty Operations" on page 6 for further discussion of Discontinued Operations.) Discontinued Operations provide most types of commercial and personal property-casualty insurance, bonds, and insurance-related services for businesses, government units and associations and individuals. 29 Discontinued Operations - Property-Casualty Operations (Continued) Discontinued Operations' adjusted earnings (after tax) follow:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Income (Loss) before cumulative effect adjustments $(222.2) $ 58.1 $ 14.0 Less: Net realized capital gains (losses) 106.0 (1.4) 128.0 Additions to environmental-related claims reserves (505.7) (149.9) (26.0) Additions to asbestos-related claims reserves (259.5) (25.4) (57.7) Severance and facilities charge - - (95.6) _______ _______ _______ Adjusted earnings $ 437.0 $ 234.8 $ 65.3 _______ _______ _______ _______ _______ _______
Discontinued Operations' adjusted earnings increased $202 million in 1995, following a $170 million increase in 1994. The following significant factors impact the comparison of adjusted earnings: Catastrophe losses (after tax and net of reinsurance) were $65 million, $190 million and $85 million in 1995, 1994 and 1993 ($190 million, $504 million and $174 million pretax and before reinsurance), respectively. Such losses contributed 2.4 points to the combined ratio in 1995, compared with 6.4 points and 2.8 points for 1994 and 1993, respectively. Catastrophe losses in 1994 included $161 million ($453 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather. 1994 adjusted earnings reflected after-tax reductions of $66 million in prior year loss reserves related to the personal auto business. 1993 adjusted earnings included an increase of $259 million (after tax and after discounting) in workers' compensation reserves for prior accident years. Adjusted earnings in 1993 were also adversely affected by after-tax additions to loss and loss expense reserves for prior accident years of $29 million from the company's U.K. reinsurance operation, arising principally on discontinued lines and, non-U.S. property exposures. (Please see "Discontinued Operations' Reserves" on page 31.) Adjusted earnings in 1993 also reflected a net tax benefit of $23 million related to revaluing the deferred tax asset as a result of the increase in federal income tax rates. 30 Discontinued Operations - Property-Casualty Operations (Continued) Adjusted earnings in 1995 as compared to 1994 reflected a reduction in the level of ongoing operating expenses, primarily due to actions taken by management in prior years to lower costs, increased emphasis on underwriting and claims handling, and higher net investment income resulting from the reinvestment of proceeds from the sale of equity and U.S. Treasury securities in higher yielding corporate bonds. 1994 adjusted earnings as compared to 1993 also reflected a reduction in operating expenses, primarily due to management's efforts to lower costs and exiting unprofitable markets. Partially offsetting the improvements in 1994 adjusted earnings was lower net investment income primarily due to lower investment yields. Earned premiums decreased approximately 6% in both 1995 and 1994. The decline in 1995 was due primarily to the transferring of additional risk through restructured and expanded reinsurance programs, and reductions in residual market business assumed as a result of exiting certain markets. During 1995, the company continued to evaluate personal auto market conditions in each state and attempted to maintain or increase the company's presence in those states that offered acceptable returns and reduce its presence in those remaining states where the company was unable to earn acceptable returns. Reductions in personal auto and workers' compensation exposures, a decrease in commercial auto exposures, generally stricter underwriting in commercial lines, and the competitive marketplace contributed to the premium decline in 1994. Personal auto and homeowners policies in force at December 31 were:
(Millions) 1995 1994 1993 ____________________________________________________________ Auto .6 .6 .7 Homeowners 1.5 1.5 1.5
Please see "Severance and Facilities Charge" on page 9 for a discussion related to Discontinued Operations' severance and facilities charges. Net realized capital gains (after tax) in 1995 include $156 million resulting from the sale of equity securities in the property-casualty investment portfolio primarily due to the company's efforts to reduce volatility in its statutory surplus, and increase income, and in connection with the agreement to sell the property-casualty operations. Such gains are partially offset by a $23 million realized capital loss from the write-down of the company's investment in a consolidated subsidiary, Aetna Re- Insurance Company (U.K.) Ltd., which it intends to sell. Net realized capital gains (losses) (after tax) include a $14 million gain resulting from the sale of a portion of an unconsolidated subsidiary in 1994 and a $27 million gain in 1993 from the redemption of preferred stock received in connection with the sale of American Re-Insurance Company. 31 Discontinued Operations - Property-Casualty Operations (Continued) Discontinued Operations' Reserves Loss and loss expense reserves represent the estimated liability for the ultimate cost, to the extent reasonably estimable, of claims (including claim adjustment expenses) that have been reported but not settled and claims that have been incurred but not reported ("IBNR"). Such reserves at December 31 were as follows:
(Millions) 1995 1994 1993 ______________________________________________________________________ Loss and Loss Expense Reserves (1) $ 16,569 $ 16,089 $ 15,806 ________________________________ ________________________________ (1) Loss and loss expense reserves are shown without reduction for reinsurance recoverables in all three years and deductible amounts recoverable from policyholders in 1995 and 1994. Reinsurance recoverables and deductible amounts recoverable from policyholders were $4.4 billion and $412 million, respectively, at December 31, 1995 and $4.6 billion and $352 million, respectively, at December 31, 1994. Reinsurance recoverables were $4.4 billion at December 31, 1993.
The length of time between occurrence and settlement of a claim varies depending on the coverage and type of claim involved. Estimates become more difficult to make (and are, therefore, more subject to change) as such length of time increases. Actual claim costs are dependent upon a number of complex factors including social and economic trends and changes in doctrines of legal liability and damage awards. Reserves are continually monitored and adjusted using a variety of actuarial and statistical techniques as more current information becomes available. Additions to Reserves for Prior Accident Years The table below shows the changes in loss estimates (net of reinsurance) related to prior accident years, most of which were for losses and related expenses for environmental liability risks, asbestos and other product liability risks, and workers' compensation claims. Additions (reductions) to reserves for prior accident years reduce (increase) net income for the period in which the adjustment is made.
(Millions) 1995 (1) 1994 1993 (2) _____________________________________________________________________ Pretax $1,134 $ 259 $ 65 After tax 737 168 42 (1) Reserve additions in 1995 include the addition to environmental reserves of $750 million ($488 million, after tax) upon the completion of the company's 1995 environmental study in the second quarter of 1995 and the addition to asbestos reserves of $335 million ($218 million, after tax) in the fourth quarter of 1995. (2) Reserve additions in 1993 are net of the cumulative effect of $514 million (pretax) related to the implementation of discounting of workers' compensation life table indemnity reserves.
32 Discontinued Operations - Property-Casualty Operations (Continued) Environmental and Asbestos-Related Claims Reserving for environmental and asbestos-related claims is subject to significant uncertainties. Reserves for these liabilities are evaluated by management regularly and adjustments are made to such reserves as developing loss patterns, reserving methodologies and other information appear to warrant. As a result of developments that have occurred inside and outside of the company (discussed below), reserves for environmental and asbestos-related claims were increased significantly in 1995. The company takes reinsurance into account in its reserve calculations for environmental and asbestos-related claims only when it is probable of collection, based on past experience or agreements with reinsurers. The company believes that the reinsurance recoveries which have been taken into account in its reserve calculations are probable of recovery; however, there can be no assurances that reinsurance for these types of claims will not become subject to coverage disputes with reinsurers, or that all reinsurers will have the ability to pay the company for such claims. Environmental-Related Claims Background. The company has been a major writer of commercial __________ insurance policies which are the types of policies alleged to cover hazardous waste cleanup costs. The company generally disputes that there is insurance coverage for environmental claims, and is vigorously litigating coverage and related issues that will ultimately determine, in many cases, whether and to what extent insurance coverage exists for environmental claims. Environmental claims, particularly large coverage disputes, are complex and subject to significant uncertainties in addition to the vagaries of and risks inherent in major litigation generally. These uncertainties include estimation of the underlying liability of a claimant as a potentially responsible party ("PRP") at waste disposal sites and whether insurance policies will be found to cover PRP liabilities. Courts have reached inconsistent conclusions regarding a wide range of insurance coverage issues relating to an insurer's indemnity and defense obligations for environmental-related liabilities. Because of these uncertainties and a lack of historically developed data, such liabilities are not estimable using conventional actuarial reserving techniques. 33 Discontinued Operations - Property-Casualty Operations (Continued) The Company's Environmental Study. The company has continued to _________________________________ gather and analyze legal and factual information on environmental- related claims, and reassess its environmental reserving techniques as developments have occurred over time. During 1994 and 1995, certain of the company's environmental claims in litigation matured (providing the company with additional information relating to the claim) or settled. The maturing and settling of these claims, coupled with increasing expertise in handling environmental claims, also better enabled the company to understand the profile of its other environmental claims. Additionally, supplemental data bases and alternative methodologies were being developed by outside firms for possible use in estimating environmental liabilities. In connection with these developments, the company conducted a comprehensive environmental reserving review during the first half of 1995, and, upon completion of the review, significantly increased its reserves for environmental-related claims. The company developed a sophisticated methodology which, when used in conjunction with other methods and information available to it, assisted the company in estimating indemnity-related liabilities for all of its known environmental claims. This methodology (the "exposure methodology"), while not a conventional actuarial reserving technique, is a detailed analysis that involves the estimation of indemnity-related liabilities for environmental claims from direct policies on a site-by-site, policyholder-by- policyholder basis. The exposure methodology depends heavily upon management's subjective judgment, in that it requires management to make numerous assumptions as to, among other things, estimated total cleanup costs for each site, allocation of site cleanup costs to particular policyholders under joint and several liability principles, resolution of unsettled coverage questions, and resolution of unsettled questions involving the allocation of losses to specific insurance policies. As all of the information necessary to estimate liability on a particular site frequently is not available, the exposure methodology also simulates data in such cases from available data. Although the exposure methodology relies heavily upon management judgment and simulated data, the use of simulation models is an appropriate, accepted actuarial practice to estimate liabilities subject to significant uncertainties. 34 Discontinued Operations - Property-Casualty Operations (Continued) In addition to estimating indemnity-related liabilities on known claims, as part of its reserving review the company also estimated losses for incurred but not reported environmental claims ("IBNR"), unallocated loss adjustment expenses ("ULAE") associated with environmental claims, and additional costs of expected future coverage litigation. The company's estimation of IBNR, ULAE and coverage litigation costs are based on a combination of historical data and various assumptions about the future, including assumptions regarding the number and severity of new environmental claims that will arise, and trends in the volume and cost of future litigation. Upon completing its 1995 reserving review, the company added $750 million (pretax) ($488 million, after tax) to environmental- related claims reserves. While the company expects to recover some of its environmental losses from its reinsurers, due to the uncertainty in estimating amounts to be recovered, no reinsurance benefits were recorded in establishing this reserve addition. The table below reflects activity in the reserve for environmental liability claims (pretax and before reinsurance) for the years ended December 31:
Environmental Liability Claims (Millions) 1995 1994 1993 _______________________________________________________________________________ Beginning reserve $ 436.1 $ 233.3 $ 237.8 Reserve additions for incurred losses (1) 827.0 289.5 37.2 Payments for claims and claim adjustment expense (2,3) 257.2 86.7 41.7 _______________________________ Ending reserve (4) $1,005.9 $ 436.1 $ 233.3 _______________________________________________________________________________ _______________________________ (1) Before reduction for reinsurance of $49 million in 1995, $59 million in 1994 and $(3) million in 1993. In 1995, includes the addition to reserves of $750 million upon the completion of the company's 1995 environmental study. (2) Before reduction for reinsurance of $78 million in 1995, $4 million in 1994 and $2 million in 1993. (3) Includes legal fees paid of $46 million in 1995, $52 million in 1994 and $31 million in 1993. (4) Before reduction for reinsurance of $29 million in 1995, $58 million in 1994 and $3 million in 1993 and net of $32 million of discount on settlements in 1995.
The reserves at December 31, 1995 consist of approximately $560 million for indemnity-related environmental liabilities for all of the company's known environmental claims. The remainder of the reserve represents IBNR, estimated coverage litigation costs, and ULAE. The reserve at December 31, 1994 consists of approximately $299 million for estimated indemnity-related liabilities, and the remainder represented a bulk reserve for legal fees. In 1994, the company added $290 million pretax and before reinsurance ($231 million pretax and after reinsurance) to reserves for environmental liability claims primarily for certain indemnity- related liabilities. 35 Discontinued Operations - Property-Casualty Operations (Continued) Conclusion. In the opinion of management, the company's reserves __________ for environmental-related claims at December 31, 1995 represent the company's best estimate of its ultimate environmental-related liability, based on currently known facts, current law (including Superfund), current technology, and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgment involved in estimating the company's environmental liability, no assurances can be given that the environmental reserve represents the amount that will ultimately be paid by the company for all environmental- related losses. The amount ultimately paid could differ materially from the company's currently recorded reserve as legal and factual issues are clarified, but any difference cannot be reasonably estimated at this time. The company actively manages its environmental claims through a special environmental claim unit. The number of environmental- related liability claims the company had as of December 31 (and policyholders involved in those claims) were as follows: (1)
1995 1994 1993 ______ ______ ______ Beginning balance 4,587 3,860 2,913 New claims 1,242 1,765 1,903 Closed claims 2,058 1,038 956 ______ ______ ______ Ending balance (2) 3,771 4,587 3,860 ______ ______ ______ ______ ______ ______ Policyholders 1,007 1,146 1,132 ______ ______ ______ ______ ______ ______ (1) For purposes of this table, "claims" are calculated separately for each of the categories described in (2) below and are calculated on a "per policyholder, per site" basis. The "claims" numbers reflect cases where policyholders have notified the company of a claim under primary insurance policies. In addition, policyholders have placed the company on notice of possible claims that may potentially involve excess general liability policies. The company generally does not consider these notifications open "claims" (and the claims numbers above do not include these notifications) because under these policies (i) the company does not have a duty to defend the policyholder and (ii) the policyholders must first exhaust their primary insurance coverage for such claims before they can look to the company for coverage. (2) Of the claims open at December 31, 1995, 1994 and 1993, approximately 88%, 87% and 87%, respectively, represented environmental pollution-related cleanup cases (including Superfund claims) against policyholders, and the balance represented environmental pollution-related third-party bodily injury and property damage claims against policyholders. Of the claims open at December 31, 1995, 1994 and 1993, approximately 44%, 53% and 48%, respectively, were involved in coverage disputes between the company and its policyholders that had reached the litigation stage.
The closed claims in 1995 reflect the settlement of certain of the company's large cases (which involved multiple claims per case) and include claims for which there are remaining reserves of $119 million which have been discounted and will be paid over a number of years, in accordance with a fixed payment schedule. Management believes that year over year there is not a meaningful correlation between the number of outstanding environmental claims and either the indemnity or loss expense portions of the environmental liability. In addition, loss expenses do not increase proportionately with the number of outstanding claims primarily because of the company's management of legal costs and because a number of new claims involve additional sites relating to preexisting policyholder coverage disputes which should not proportionately increase legal fees. Legal costs may vary in particular years, however, due to other factors, such as the timing of stages of certain large litigation. 36 Discontinued Operations - Property-Casualty Operations (Continued) Congress was scheduled to reauthorize the Superfund law in 1995, but did not do so. 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. 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 1996, what the substance of the enacted legislation will be, or what the effect of any such reforms will be on the company. Asbestos-Related Claims Reserving for asbestos-related claims is subject to significant uncertainties and management is currently unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all asbestos-related claims and related litigation expenses. Management has continued to evaluate the company's reserves for asbestos liabilities as the company continued to gather and analyze new information and reassess its reserving techniques for these claims in order to determine whether it can better estimate its liability. In connection with such evaluation, the company added $335 million ($218 million, after tax) to asbestos-related claims reserves in the fourth quarter of 1995. While the company expects to recover some of its asbestos losses from its reinsurers, due to the uncertainty in estimating amounts to be recovered, no reinsurance benefits were recorded in establishing this addition to reserves. Further adjustments may be made to such reserves as loss patterns develop and other information is obtained, and the amount ultimately paid for such claims could differ materially from reserves, although any difference cannot be reasonably estimated at this time. Asbestos Bodily Injury Claims 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. In order to control transaction costs and provide efficient claim handling, the Center for Claims Resolution ("CCR") was formed in 1988 to handle asbestos-related bodily injury claims on behalf of its member producers. The company participates in CCR by virtue of its insurance contracts with certain CCR members and is assessed a fee by CCR for its claim-handling services. The company also provides insurance coverage to producers that are not CCR members. A large number of asbestos bodily injury actions that were pending in pretrial stages in various courts have been consolidated and transferred to single federal or state courts. In January 1993, CCR announced a global proposal involving plaintiffs, attorneys, producers and insurers to settle asbestos bodily injury claims over the next 10 years. The proposed settlement is subject to, among other things, court approval and acceptance by a minimum number of plaintiffs, and no assurance can be given that all such claims will be settled, or settled on the terms proposed. To date, the CCR proposed settlement has not received final approval by the courts. 37 Discontinued Operations - Property-Casualty Operations (Continued) Over the last few years, asbestos bodily injury claims also have been filed by plaintiffs against entities that installed asbestos products and others involved in ancillary ways with asbestos products or processes, including insureds of the company. Additionally, some policyholders have attempted to recharacterize asbestos bodily injury product liability claims in an effort to avoid applicable policy coverage limits on product liability claims (i.e., nonproducts asbestos claims). In 1995 the company settled a case involving one such major producer that had exhausted applicable policy limits on asbestos products claims and asserted coverage under policy provisions for other types of liability. The company obtained a release from the insured for all current and future asbestos bodily injury claims and certain asbestos property damage claims (along with all environmental claims) under existing policies in exchange for fixed, scheduled cash payments, which were recorded on a discounted basis. In connection with this settlement, $120 million of property-casualty reserves not previously classified as covering asbestos-related claims were transferred to asbestos reserves. No amounts were transferred from environmental reserves, and the environmental-related portion of the settlement was covered by existing environmental reserves. As a result, this settlement did not affect 1995 results of operations. As part of the settlement, the company also agreed, among other things, to make insurance coverage available to the insured in the year 2000 (on a one-time basis), for a percentage of all asbestos defense and indemnity claim payments made by the insured in the years 2000 through 2007. The company's payment obligations would be subject to annual dollar caps. Given the uncertainty as to whether the insured will elect to purchase this additional insurance, no related premiums or losses have been recorded by the company at this time. The table below reflects activity in the reserve for asbestos bodily injury claims (pretax and before reinsurance) for the years ended December 31:
Asbestos Bodily Injury Claims (Millions) 1995 1994 1993 ________________________________________________________________________________ Beginning reserve $ 295.9 $ 248.1 $ 294.9 Reserve additions for incurred losses (1) 436.6 117.3 95.2 Transfers 107.4 - - Payments for claims and claim adjustment expense (2,3) 85.6 69.5 142.0 _______________________________ Ending reserve (4) $ 754.3 $ 295.9 $ 248.1 ________________________________________________________________________________ _______________________________ (1) Before reduction for reinsurance of $37 million in 1995, $82 million in 1994 and $20 million in 1993. (2) Before reduction for reinsurance of $9 million in 1995, $65 million in 1994 and $27 million in 1993. (3) Includes legal fees paid of $29 million in 1995, $30 million in 1994 and $56 million in 1993. (4) Before reduction for reinsurance of $90 million in 1995, $62 million in 1994 and $45 million in 1993 and net of $26 million of discount on settlements in 1995.
38 Discontinued Operations - Property-Casualty Operations (Continued) At December 31, 1995 and 1994, approximately 26% and 33%, respectively, of reserves (pretax and before reinsurance) represented legal fees. 1993 payment levels primarily reflect increased settlements of asbestos bodily injury claims, including settlements of certain large claims for which reserves had previously been established. The company's indemnity payments per claim with respect to all asbestos bodily injury claims have varied over time and from case to case, due primarily to wide variations in insureds, policy terms, types of claims, injury and the results of claim-settling mechanisms (such as CCR). Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same. The number of asbestos bodily injury claims the company had as of December 31 (and policyholders involved in those claims) were as follows: (1)
1995 1994 1993 _____ _____ _____ Beginning balance 1,277 1,283 1,864 New claims 261 271 248 Closed claims 540 277 829 _____ _____ _____ Ending balance (2) 998 1,277 1,283 _____ _____ _____ _____ _____ _____ Policyholders 329 318 287 _____ _____ _____ _____ _____ _____ (1) The "claims" numbers above reflect cases where policyholders have notified the company of a claim under primary insurance policies. In addition, they reflect cases where policyholders have placed the company on notice of possible claims that may potentially involve excess general liability policies in those instances where the company believes its excess policies are likely to be accessed. (2) Certain of the company's claims represent a claim by an individual claimant and others represent a claim on behalf of multiple claimants. At December 31, 1995, 1994 and 1993, approximately 83%, 84% and 83%, respectively, represent claims which have multiple claimants.
Management believes that there is not a high correlation between the number of outstanding asbestos claims and the recorded reserves for such claims. The new claims generally relate to policyholders having a small number of claims and lower exposure individually. The closed claims in 1995 reflect the consolidation of certain multiple claimant claims into a single claim count, and the settlement of a large nonproducts asbestos case. Reserves with a discounted value of $92 million related to this 1995 settlement will be paid over a number of years, in accordance with a fixed payment schedule. The closed claims in 1993 reflect the increased activity related to a small number of large policyholders pertaining to the CCR settlement. Asbestos Property Damage Claims 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. It is the company's position that in most cases its product liability policies do not cover this replacement expense. Management cannot predict whether the courts will ultimately support the company's position. Recently, however, the company has selectively settled claims where it has considered it reasonable and appropriate to do so. 39 Discontinued Operations - Property-Casualty Operations (Continued) The table below reflects activity in the reserve for asbestos property damage claims (pretax and before reinsurance) for the years ended December 31:
Asbestos Property Damage Claims (Millions) 1995 1994 1993 _____________________________________________________________________________ Beginning reserve $ 29.9 $ 28.7 $ 31.3 Reserve additions for incurred losses (1) .2 6.2 16.9 Transfers 12.6 - - Payments for claims and claim adjustment expense (2) 20.4 5.0 19.5 ______________________________ Ending reserve (3) $ 22.3 $ 29.9 $ 28.7 _____________________________________________________________________________ ______________________________ (1) Before reduction for reinsurance of less than $1 million in 1995 and $3 million in each of 1994 and 1993. (2) Before reduction for reinsurance of $8 million in 1995 and $3 million in 1994. There were no such reinsurance recoveries in 1993. (3) Before reduction for reinsurance of $(1) million in 1995 and $7 million in each of 1994 and 1993.
In the limited number of asbestos property damage cases where payments have been made by the company, indemnity payments per claim have varied over time and from case to case primarily because of variations in insurance policies and policy limits, the type of asbestos product installed and relevant state law. Management cannot predict whether such indemnity payments per claim will increase, decrease or remain the same. The number of asbestos property damage claims the company had as of December 31 (and policyholders involved on those claims) were as follows:
1995 1994 1993 ____ ____ ____ Beginning balance 275 336 308 New claims 18 53 53 Closed claims 167 114 25 ___ ___ ___ Ending balance (1) 126 275 336 ___ ___ ___ ___ ___ ___ Policyholders 19 48 43 ___ ___ ___ ___ ___ ___ (1) Certain of the company's claims represent claims related to individual properties and others represent claims related to multiple properties. At December 31, 1995, 1994 and 1993, approximately 62%, 44% and 32%, respectively, represent claims which relate to multiple properties.
The closed claims in 1995 reflect management's efforts to settle certain significant cases and extinguish the company's potential liability for such claims. 40 Discontinued Operations - Property-Casualty Operations (Continued) Workers' Compensation Claims The company added $579 million (pretax, before the cumulative effect of implementing discounting) to prior accident year loss reserves in 1993 for workers' compensation claims. Of this addition, approximately $250 million related to reserves for workers' compensation life table indemnity claims. The increase of $579 million resulted from a study of the company's workers' compensation reserves and the factors which were contributing to its adverse developments. Concurrent with this addition to workers' compensation reserves, the company implemented a change in accounting to discount reserves for workers' compensation life table indemnity claims in order to more accurately reflect the economic value of the company's obligations and improve the matching of revenues and expenses. Such discounting was consistent with industry practice. This discounting resulted in a reduction as of December 31, 1993 of $614 million (pretax) to loss reserves for workers' compensation claims. (Please see Note 2 of Notes to Financial Statements.) Estimating workers' compensation reserves is particularly difficult (and, therefore, more subject to change than many other types of property-casualty claims), largely because of the length of the "tail" associated with workers' compensation claims. Workers' compensation claim costs are dependent on a number of complex factors including social and economic trends and changes in doctrines of legal liability and damage awards. Other Policyholders of the company also seek insurance coverage from the company for other long-term exposure claims against them, including claims relating to silicone-based personal products, lead paint and other allegedly toxic or harmful substances. Evaluating and reserving for these types of exposures is complex and subject to many uncertainties including those stemming from coverage issues, long latency periods and changing or expanding laws and legal theories of liability. Adjustments will be made to such reserves as claims mature or settle and as new information becomes available to the company, and such adjustments may be material. As a result of the sale of the property-casualty operations, Aetna currently expects to retain no property-casualty claim liability other than an obligation to indemnify Travelers for a portion of certain potential liability exposures which are currently under discussion with insureds. While there can be no assurances, management does not believe that the ultimate loss arising from this indemnification, if any, will be material to the company. In connection with the 1992 sale of American Re-Insurance Company ("Am Re"), Am Re and a property-casualty subsidiary ("the subsidiary") entered into a reinsurance agreement which provides that to the extent Am Re incurred losses in 1991 and prior that were still outstanding at January 1, 1992 in excess of $2.7 billion (or $362 million in excess of Am Re's reserves as of December 31, 1991, adjusted for certain reinsurance transactions), the subsidiary has an 80% participation in payments on those losses up to a maximum payment by the subsidiary of $500 million. In 1995, Am Re increased reserves for asbestos, environmental and other latent liabilities. As a result of this increase, losses of approximately $228 million ($120 million after discount), which were largely workers' compensation life table indemnity claims, were ceded to the subsidiary. There was no material impact on 1995 earnings as the subsidiary had previously established reserves. It is reasonably possible that additional undiscounted losses of up to approximately $270 million pretax could be ceded to the company in the future. 41 Discontinued Operations - Property-Casualty Operations (Continued) Outlook The company expects that the sale of its property-casualty operations will be completed no later than midyear 1996 with a resulting gain on sale. Company earnings up through the close of the transaction are subject to variability due to the results of the property-casualty operations. While such results will not adjust the purchase price, income or loss from such operations will decrease or increase, respectively, the gain expected to be recognized on such sale. 42 General Account Investments Investment-related amounts disclosed in the following investment section relate to assets supporting continuing operations (including assets supporting discontinued products and experience rated products) and assets supporting Discontinued Operations. (Please see "Large Case Pensions" on page 23 for a discussion of discontinued products and "Discontinued Operations - Property- Casualty Operations" on page 28.)
December 31, ________________________ (Millions) 1995 1994 ____________________________________________________________________________ Invested Assets: Fully Guaranteed $ 13,490.3 $ 14,415.9 Experience Rated 18,763.4 16,362.3 Other 11,796.6 10,751.6 __________ _________ Total General Account Invested Assets - continuing operations, net of impairment reserves $ 44,050.3 $ 41,529.8 ____________________________________________________________________________ ________________________ Net investment income - continuing operations $ 3,575.1 $ 3,631.4 ____________________________________________________________________________ ________________________ Invested Assets - Discontinued Operations $ 13,986.5 $ 12,763.5 ____________________________________________________________________________ ________________________ Net investment income - Discontinued Operations $ 901.7 $ 832.1 ____________________________________________________________________________ ________________________
At December 31, 1995 and 1994, the company's invested assets supporting continuing operations were comprised of the following, net of impairment reserves:
(Millions) 1995 1994 __________________________________________________________________________ Debt securities: Available for sale, at fair value (amortized cost $29,962.5 and $27,208.3) $ 31,860.3 $ 25,938.1 Held for investment, at amortized cost (fair value $1,584.1)* - 1,587.3 Equity securities, at fair value (cost $597.8 and $594.0) 659.7 614.6 Short-term investments 607.8 344.4 Mortgage loans 8,327.2 10,389.9 Real estate 1,277.3 1,283.7 Policy loans 629.4 533.8 Other 688.6 838.0 __________________________________________________________________________ Total invested assets - continuing operations $ 44,050.3 $ 41,529.8 __________________________________________________________________________ ________________________ * Please see Note 1 of Notes to Financial Statements for a discussion of transfers of securities from Held for Investment to Available for Sale in 1995.
43 General Account Investments (Continued) At December 31, 1995 and 1994, the company's invested assets supporting Discontinued Operations were comprised of the following, net of impairment reserves:
(Millions) 1995 1994 __________________________________________________________________________ Debt securities: Available for sale, at fair value (amortized cost $11,293.8 and $9,775.9) $ 11,705.6 $ 9,172.6 Held for investment, at amortized cost (fair value $407.1)* - 413.5 Equity securities, at fair value (cost $313.8 and $802.5) 525.5 1,041.0 Short-term investments 137.2 106.0 Mortgage loans 1,061.7 1,453.7 Real estate 264.7 262.0 Other 291.8 314.7 __________________________________________________________________________ Total invested assets - Discontinued Operations $ 13,986.5 $ 12,763.5 __________________________________________________________________________ ________________________ * Please see Note 1 of Notes to Financial Statements for a discussion of transfers of securities from Held for Investment to Available for Sale in 1995.
The company's investment objective for both continuing operations and Discontinued Operations is to fund policyholder and other liabilities in a manner which enhances shareholder and contractholder value, subject to appropriate risk constraints. It is the company's intention that this investment objective be met by a mix of investments which reflects the characteristics 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 asset portfolios. 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. (Please see "Use of Derivatives and Other Investments" on page 59.) 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 1995, the company operated within such investment guidelines by maintaining a mix of investments that diversifies its assets and reflects the characteristics of the liabilities which they support. 44 General Account Investments (Continued) The change in the invested assets portfolio supporting continuing operations from December 31, 1994 to December 31, 1995 primarily reflected appreciation of debt securities due to a decrease in interest rates, partially offset by a net decrease in the mortgage loan and real estate portfolios. Debt securities reflected net unrealized capital gains of $1.9 billion at December 31, 1995, compared with net unrealized capital losses of $1.3 billion at December 31, 1994. Of such net unrealized capital gains at December 31, 1995, $421 million and $960 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The net decrease in the mortgage loan and real estate portfolios of $2.1 billion principally reflected prepayments, payments at maturity on mortgage loans, write-offs on foreclosures and sales of foreclosed properties and loans. The risks associated with investments supporting experience rated pension and annuity products are assumed by those customers subject to, among other things, certain minimum guarantees. The anticipated future losses associated with investments supporting discontinued large case pension products were provided for in the reserve on discontinuance of products. The change in the invested assets portfolio supporting Discontinued Operations from December 31, 1994 to December 31, 1995 reflected increases in debt securities due to appreciation of value resulting from a decrease in interest rates and reinvestment of proceeds from sales of equity securities, and a net decrease in the mortgage loan and real estate portfolios. Debt securities reflected net unrealized capital gains of $412 million at December 31, 1995, compared with net unrealized capital losses of $603 million at December 31, 1994. The net decrease in the mortgage loan and real estate portfolios of $389 million principally reflected prepayments, payments at maturity on mortgage loans, write-offs on foreclosures and sales of foreclosed properties and loans. The net decrease in the equity securities portfolio of $516 million principally reflected sales which were completed in an effort to reduce volatility in statutory surplus, and increase income, as well as in connection with the sale of this business to The Travelers Insurance Group Inc. ("Travelers"). Such decreases were partially offset by market appreciation in the equity securities portfolio. The company intends to continue to reduce the equity securities portfolio through the closing date of the sale to Travelers through a combination of sales, including the sale of a significant portion of its holdings in MBIA Inc. to the public, and transfers to continuing operations. Debt Securities As of December 31, 1995 and 1994, the company's investments in debt securities (including those supporting Discontinued Operations) represented 75% and 68%, respectively, of total general account invested assets and were as follows:
(Millions) 1995 1994 ____________________________________________________________________________ Supporting discontinued products $ 5,765.2 $ 6,155.0 Supporting experience rated products 14,243.4 11,770.5 Supporting remaining products 11,851.7 9,599.9 ____________________________________________________________________________ Total debt securities - continuing operations $31,860.3 $27,525.4 ____________________________________________________________________________ ____________________________ Debt securities - Discontinued Operations $11,705.6 $ 9,586.1 ____________________________________________________________________________ ____________________________
45 General Account Investments (Continued) It is management's objective that the continuing operations and Discontinued Operations portfolios of debt securities be of high quality and be well-diversified by market sector. The debt securities in the company's portfolios are generally rated by external rating agencies, and, if not externally rated, are rated by the company on a basis believed to be similar to that used by the rating agencies. As of December 31, 1995 and 1994, the company's investments in debt securities supporting continuing operations and Discontinued Operations by quality ratings and market sector were as follows:
Debt Securities Quality Ratings Debt Securities Investments by Market Sector Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations_ ______________________________________ ___________________________________________________ December 31, 1995: December 31, 1995: _________________ _________________ AAA 39.6% 53.9% Corporate 38.4% 27.6% AA 13.3% 11.1% Treasuries/Agencies 14.3% 27.8% A 26.7% 20.8% Mortgage-Backed Securities 18.1% 14.5% BBB 15.3% 10.9% Financial 15.1% 11.9% BB & Below 5.1% 3.3% Public Utilities 8.0% 6.6% Other Loan Backed 5.5% 6.1% Average Rating AA- AA Municipals .6% 5.5% December 31, 1994: December 31, 1994: _________________ _________________ AAA 44.6% 58.8% Corporate 30.0% 22.5% AA 10.6% 10.2% Treasuries/Agencies 18.7% 36.5% A 23.2% 18.0% Mortgage-Backed Securities 19.8% 13.3% BBB 16.3% 8.7% Financial 18.1% 5.8% BB & Below 5.3% 4.3% Public Utilities 7.7% 5.6% Other Loan Backed 4.9% 3.3% Average Rating AA AA Municipals .8% 13.0%
46 General Account Investments (Continued) Included in the company's total debt security balances were the following categories of debt securities:
(Millions) December 31, 1995 _______________________________________________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Securities Securities Debt Securities _________________ ______________ __________________ Total - continuing operations $1,623.8 (1) $ 81.0 $ 90.4 ________ ________ ________ ________ ________ ________ Percentage of total - continuing operations: Supporting discontinued products 26.1% 36.9% 57.5% Supporting experience rated products 42.6 12.5 24.1 Supporting remaining products 31.3 50.6 18.4 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Total - Discontinued Operations $ 381.3 (1) $ .6 $ - ________ ________ ________ ________ ________ ________ December 31, 1994 ________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Securities Securities Debt Securities _________________ ______________ __________________ Total - continuing operations $1,462.3 (1) $ 143.4 $ 149.5 ________ ________ ________ ________ ________ ________ Percentage of total - continuing operations: Supporting discontinued products 35.7% 36.3% 31.7% Supporting experience rated products 33.0 14.7 33.7 Supporting remaining products 31.3 49.0 34.6 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Total - Discontinued Operations $ 410.7 (1) $ 3.0 $ 20.5 ________ ________ ________ ________ ________ ________ (1) "Below Investment Grade" securities supporting continuing operations at December 31, 1995 and 1994 include $625.1 million and $900.2 million, respectively, of securities that were investment grade when purchased, but have since deteriorated in quality. Likewise, "Below Investment Grade" securities supporting Discontinued Operations at December 31, 1995 and 1994 include $113.5 million and $186.5 million, respectively, of securities that were investment grade when purchased, but have since deteriorated in quality.
"Below investment grade" securities (which include "problem" debt securities and "potential problem" debt securities described below) are defined to be securities that carry a rating below BBB- /Baa3. Such debt securities have been written down for other than temporary declines in value. Management defines "problem" debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. "Potential problem" debt securities are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. 47 General Account Investments (Continued) 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 years ended December 31 was as follows:
(Millions) 1995 1994 1993 ______________________________________________________________________ Allocable to discontinued products $ 1.5 $ 3.4 $ 3.5 Allocable to experience rated products 1.3 1.0 .5 Allocable to remaining products 2.5 4.8 .6 ______________________________________________________________________ Total lost investment income - continuing operations $ 5.3 $ 9.2 $ 4.6 ______________________________________________________________________ _____________________________ Lost investment income - Discontinued _ Operations $ .6 $ 1.0 $ 1.0 ______________________________________________________________________ _____________________________
Collateralized Mortgage Obligations Included in the company's total collateralized mortgage obligations ("CMOs") balances were the following categories of CMOs:
(Millions) 1995 1994 ___________________________________________________________________________________________ Fair Amortized Fair Amortized Value Cost Value Cost___ _________ _________ ________ _________ Total CMOs - continuing operations (1) $ 3,082.8 $ 2,876.1 $ 3,091.4 $ 3,249.8 _________ _________ _________ _________ _________ _________ _________ _________ Percentage of total CMOs - continuing operations: Sequential and planned amortization class bonds 76.6% 83.7% Z-tranches 15.8 8.8 Interest-only strips and principal-only strips 2.3 3.2 Other 5.3 4.3 _________ _________ Total - continuing operations 100.0% 100.0% _________ _________ _________ _________ Total CMOs - Discontinued Operations (1) $ 306.0 $ 304.4 $ 278.1 $ 312.9 _________ _________ _________ _________ _________ _________ _________ _________ (1) At December 31, 1995 and 1994, approximately 74% and 77%, respectively, of the company's continuing operations' CMO holdings and approximately 38% and 44%, respectively, of the company's Discontinued Operations' CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC).
48 General Account Investments (Continued) The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the value of the CMOs would be subject to variability on the repayment of principal from the underlying mortgages earlier or later than originally anticipated. If due to declining interest rates, principal was to be repaid earlier than originally anticipated, the company could be affected by a decrease in investment income due to the reinvestment of these funds at a lower interest rate. Such prepayments may also result in a duration mismatch between assets and liabilities, which could be corrected as cash from prepayments could be reinvested at an appropriate duration to adjust the mismatch. Conversely, if due to increasing interest rates, principal was to be repaid slower than originally anticipated, the company could be affected by a decrease in cash flow, which reduces the ability to reinvest expected principal repayments at higher interest rates. Such slower payments may also result in a duration mismatch between assets and liabilities, which could be corrected as available cash flow could be reinvested at an appropriate duration to adjust the mismatch. The various categories of CMOs are subject to different degrees of risk from changes in interest rates and defaults (for non-agency- backed bonds). Sequential and planned amortization class bonds are subject to less prepayment and extension risk than other CMO instruments. Interest-only strips ("IOs") receive payments of interest and principal-only strips ("POs") receive payments of principal on the underlying pool of residential mortgages. The company has mitigated the risks associated with holding IOs and POs by holding positions in both types of instruments such that exposure from significant changes in interest rates is reduced. Z-tranches receive principal payments from the underlying mortgage pool only after all other priority classes have been retired. 49 General Account Investments (Continued) Mortgage Loans During 1995, the total mortgage loan portfolio was reduced 21% to $9.4 billion, net of impairment reserves. At December 31, 1995 and 1994, the company's total mortgage loan investments, net of impairment reserves, supported the following types of business:
(Millions) 1995 1994 ______________________________________________________________________ Supporting discontinued products $ 3,388.6 $ 4,294.9 Supporting experience rated products 2,642.6 3,652.1 Supporting remaining products 2,296.0 2,442.9 ______________________________________________________________________ Total mortgage loan investments - continuing operations $ 8,327.2 $10,389.9 ______________________________________________________________________ ___________________________ Mortgage loan investments - Discontinued Operations $ 1,061.7 $ 1,453.7 ______________________________________________________________________ ___________________________
The company continued to manage its mortgage loan portfolio during 1995 to reduce the balance in absolute terms and relative to invested assets, and to reduce its overall risk. The $2.5 billion decrease in the total mortgage loan portfolio since December 31, 1994 reflects the effect of repayments of maturing loans, loan prepayments and foreclosures (actual and in-substance). Additionally, in December 1995, the company completed the sale and securitization of $443 million of commercial mortgage loans supporting discontinued products. Concurrent with the sale, the company retained approximately $108 million of subordinate and residual certificates which were classified as debt securities at December 31, 1995. The net proceeds from the sale were approximately $338 million. 50 General Account Investments (Continued) At December 31, 1995 and 1994, the company's mortgage loan balances, net of specific impairment reserves, by property type and geographic region were as follows:
December 31, 1995 _________________ Hotel/ Mixed (Millions) Office Retail Apartment Motel Industrial Use Other Total __________________________________________________________________________________________________ South Atlantic $ 538.8 $ 301.6 $ 114.0 $ 426.7 $ 195.3 $ 152.1 $ 27.1 $ 1,755.6 Middle Atlantic 807.3 400.3 116.3 81.7 33.8 118.5 4.8 1,562.7 New England 555.6 214.9 .5 124.2 41.7 37.5 11.0 985.4 South Central 300.2 192.4 56.7 54.6 29.3 - 23.4 656.6 North Central 537.1 146.4 62.9 101.3 28.5 24.6 32.3 933.1 Pacific and Mountain 786.4 426.7 122.4 113.2 334.0 21.6 98.5 1,902.8 Other 94.5 152.1 127.8 20.2 64.3 6.5 309.3 774.7 __________________________________________________________________________________________________ Total - continuing operations $ 3,619.9 $ 1,834.4 $ 600.6 $ 921.9 $ 726.9 $ 360.8 $ 506.4 8,570.9 __________________________________________________________________________________________________ Less general portfolio loss reserve 243.7 __________________________________________________________________________________________________ Adjusted total - continuing operations, net of reserves $ 8,327.2 __________________________________________________________________________________________________ _________ Total - Discontinued Operations $ 527.2 $ 256.3 $ 168.7 $ 59.7 $ 31.1 $ 42.8 $ 20.3 $ 1,106.1 __________________________________________________________________________________________________ Less general portfolio loss reserve 44.4 __________________________________________________________________________________________________ Adjusted total - Discontinued Operations, net of reserves $ 1,061.7 __________________________________________________________________________________________________ _________ December 31, 1994 _________________ Hotel/ Mixed (Millions) Office Retail Apartment Motel Industrial Use Other Total __________________________________________________________________________________________________ South Atlantic $ 667.9 $ 380.6 $ 205.6 $ 610.3 $ 232.9 $ 153.2 $ 33.0 $ 2,283.5 Middle Atlantic 944.3 452.6 188.0 124.0 52.2 118.5 9.2 1,888.8 New England 635.6 217.2 4.8 75.8 44.2 209.9 28.9 1,216.4 South Central 314.1 274.3 153.3 63.6 46.4 - 27.3 879.0 North Central 585.5 235.8 77.2 144.8 29.0 47.6 45.0 1,164.9 Pacific and Mountain 1,052.3 535.9 242.7 143.0 435.3 76.6 80.0 2,565.8 Other 95.8 149.1 131.3 21.0 59.8 3.4 222.6 683.0 __________________________________________________________________________________________________ Total - continuing operations $ 4,295.5 $ 2,245.5 $ 1,002.9 $ 1,182.5 $ 899.8 $ 609.2 $ 446.0 10,681.4 __________________________________________________________________________________________________ Less general portfolio loss reserve 291.5 * __________________________________________________________________________________________________ Adjusted total - continuing operations, net of reserves $10,389.9 __________________________________________________________________________________________________ _________ Total - Discontinued Operations $ 660.6 $ 379.4 $ 224.4 $ 132.7 $ 33.6 $ 50.9 $ 30.6 $ 1,512.2 __________________________________________________________________________________________________ Less general portfolio loss reserve 58.5 __________________________________________________________________________________________________ Adjusted total - Discontinued Operations, net of reserves $ 1,453.7 __________________________________________________________________________________________________ _________ * The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. Had such reserves been included, the general reserve would have been $500.0 million. In connection with the company's adoption of FAS Nos. 114 and 118, the general reserve at December 31, 1995 included such reserves, related to experience rated products. The inclusion of these reserves did not impact earnings or shareholders' equity.
The company has a comprehensive process for managing mortgage loans which includes an ongoing risk assessment to evaluate key attributes of the mortgage investment, specifically, debt service coverage, cash flow sustainability, property condition, loan to value, market/economic trends, deal structure, borrower strength and ability to refinance. Action plans are established with the objective of reducing potential risk and maximizing the return on the investment. In addition, a collateral valuation is performed on a regular basis for mortgage loans with a balance greater than $5 million (approximately 90% of the total principal balance of the portfolios supporting continuing operations and Discontinued Operations), to help determine whether adjustments to impairment reserves are warranted. 51 General Account Investments (Continued) The company has a troubled debt restructuring program, the primary objective of which is to restructure eligible loans in a manner which creates a market rate transaction which will perform in accordance with its restructured terms. The program is applied to those loans which have sound property and borrower fundamentals but suffer from excess debt. An important feature of these loans is that in exchange for principal forgiveness on a portion of the loan, the company typically retains the right to participate in property appreciation to the extent market conditions improve in the future. In those situations where the property fundamentals do not support a restructuring of the loan, the company generally acquires the collateral through foreclosure. Loans with a principal balance of $309 million and collateral with a fair market value of $210 million (of which $9 million and $7 million, respectively, relates to loans supporting Discontinued Operations) were foreclosed upon in 1995. Additional loans with a principal balance of $120 million ($19 million of which relates to loans supporting Discontinued Operations) were in the process of foreclosure at year end. In certain cases, the company has taken substantive possession of the property supporting its loan, coupled with the borrower surrendering its interest in the future economic benefits in the property. Where this has occurred, the loans are considered in-substance foreclosures, written down to their fair market value less selling costs and classified as real estate held for sale. At December 31, 1995 and 1994, there were $190 million and $172 million, respectively, of in-substance foreclosures, (net of write-offs of $126 million and $126 million, respectively) in portfolios supporting continuing operations. Likewise, at December 31, 1995 and 1994 there were $54 million and $21 million, respectively, of in-substance foreclosures (net of write-offs of $65 million and $10 million, respectively) in portfolios supporting Discontinued Operations. 52 General Account Investments (Continued) Included in the company's total mortgage loan balances were the following categories of mortgage loans:
(Millions) December 31, 1995 _______________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ _____________ _____ Total - continuing operations $ 160.3 $ 514.1 $ 839.1 $1,513.5 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total - continuing operations: Supporting discontinued products 22.6% 50.9% 54.3% Supporting experience rated products 39.7 30.7 25.2 Supporting remaining products 37.7 18.4 20.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves on loans - continuing operations (1) $ 604.9 ________ ________ Impairment reserves as a percentage of total - continuing operations 40.0% ________ ________ Total - Discontinued Operations $ 20.1 $ 35.8 $ 92.1 $ 148.0 ________ ________ ________ ________ ________ ________ ________ ________ Impairment reserves on loans - Discontinued Operations $ 65.7 ________ ________ Impairment reserves as a percentage of total - Discontinued Operations 44.4% ________ ________ December 31, 1994 ________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ _____________ _____ Total - continuing operations $ 567.1 $ 618.0 $ 881.7 $2,066.8 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total - continuing operations: Supporting discontinued products 43.8% 44.6% 50.8% Supporting experience rated products 36.5 35.5 26.6 Supporting remaining products 19.7 19.9 22.6 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves on loans - continuing operations (1) $ 647.5** ________ ________ Impairment reserves as a percentage of total - continuing operations 31.3% ________ ________ Total - Discontinued Operations $ 106.0 $ 88.1 $ 37.0 $ 231.1 ________ ________ ________ ________ ________ ________ ________ ________ Impairment reserves on loans - Discontinued Operations $ 136.6 ________ ________ Impairment reserves as a percentage of total - Discontinued Operations 59.1% ________ ________ (1) Please see Note 5 of Notes to Financial Statements for composition of impairment reserves between specific and general impairment reserves. * In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (please see Note 1 of Notes to Financial Statements), management has revised the definition of "potential problem loans." (Please see "potential problem loans" on page 54.) ** The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. Had such reserves been included, total reserves would have been $856.0 million. In connection with the company's adoption of FAS Nos. 114 and 118, the general reserve at December 31, 1995 included such reserves, related to experience rated products. The inclusion of these reserves did not impact earnings or shareholders' equity.
53 General Account Investments (Continued) As of December 31, 1995 and 1994, the company's investments in problem, potential problem and restructured mortgage loans supporting continuing operations and Discontinued Operations by property type and geographic distribution were as follows:
Problem, Potential Problem and Restructured Geographic Distribution of Problem, Potential Mortgage Loans by Property Type Problem and Restructured Mortgage Loans Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations_ _________________________________________ ____________________________________________ December 31, 1995: December 31, 1995: __________________ __________________ Agriculture 1.5% - Apartment 3.5% 13.3% Middle Atlantic 15.5% 11.9% Hotel/Motel 4.8% - New England 23.9% .2% Industrial 3.0% - North Central 10.3% 13.4% Mixed Use 9.4% - Pacific and Mountain 27.8% 62.2% Office 58.2% 48.8% South Atlantic 11.0% 12.3% Retail 15.0% 37.9% South Central 7.2% - Other 4.6% - Non-U.S. 4.3% - December 31, 1994: December 31, 1994: __________________ __________________ Agriculture 1.1% - Apartment 5.3% 9.0% Middle Atlantic 12.0% 22.1% Hotel/Motel 8.8% .8% New England 21.7% 1.3% Industrial 6.5% - North Central 17.0% 32.6% Mixed Use 7.7% - Pacific and Mountain 25.6% 7.3% Office 54.5% 72.4% South Atlantic 16.6% 17.6% Retail 13.4% 17.0% South Central 4.7% 19.1% Other 2.7% .8% Non-U.S. 2.4% -
"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 supporting continuing operations decreased to $101 million at December 31, 1995 from $364 million at December 31, 1994. Likewise, loans on properties in the process of foreclosure supporting Discontinued Operations decreased to $19 million at December 31, 1995 from $58 million at December 31, 1994. "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 mortgage loans within the total portfolio supporting continuing operations and Discontinued Operations at December 31, 1995 and 1994 yielded cash returns of approximately 7% and 6%, respectively. 54 General Account Investments (Continued) 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. 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. During 1995 two loans in the continuing operations portfolio which had been restructured, with a carrying value of $17 million (net of write-offs of $6 million) and an average current yield of 8%, were classified as performing. Likewise, during 1995 two loans in the Discontinued Operations portfolio which had been restructured, with a carrying value of $20 million (net of write-offs of $15 million) and an average current yield of 9%, were classified as performing. In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (please see Note 1 of Notes to Financial Statements), management has revised the definition of "potential problem loans" to include all loans which are performing pursuant to existing terms and are considered likely to become classified as problem or restructured loans. Prior to January 1, 1995, potential problem loans were performing loans which management believed were likely to become classified as problem or restructured loans in the next 12 months or so. As a result of the revised definition, potential problem loans at December 31, 1995 supporting continuing operations and Discontinued Operations are approximately $293 million and $65 million, respectively, higher than they would have been had the definition not been changed. Potential problem loans are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem loans requires significant judgment as to likely future market conditions and developments specific to individual properties and borrowers. Provision for losses that management believes are likely to arise from such potential problem loans is included in the specific impairment reserves. (Please see Note 5 of Notes to Financial Statements for a discussion of mortgage loan impairment reserves.) 55 General Account Investments (Continued) The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such problem and restructured loans outstanding at December 31 and the portion thereof actually recorded as income for the years ended December 31 were as follows:
(Millions) 1995 1994 1993 ____________________________________________________________________ Income which would have been recorded under original terms of loans - continuing operations $ 72.2 $ 127.2 $ 269.6 Income recorded 42.4 64.5 133.9 _______ _______ _______ Lost investment income - continuing operations $ 29.8 $ 62.7 $ 135.7 _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 10.4 $ 28.8 $ 73.8 _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension products (included above) $ 15.4 $ 22.5 $ 41.7 _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ 4.0 $ 11.4 $ 20.2 _______ _______ _______ _______ _______ _______ Lost investment income - Discontinued Operations $ 2.2 $ 13.9 $ 13.5 _______ _______ _______ _______ _______ _______
56 General Account Investments (Continued) Real Estate The company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) December 31, 1995 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total equity real estate - continuing operations $ 153.0 $1,124.3 (1) $1,277.3 ________ ________ ________ ________ ________ ________ Percentage of total equity real estate - continuing operations: Supporting discontinued products 7.5% 55.5% Supporting experience rated products 7.8 24.4 Supporting remaining products 84.7 20.1 ________ ________ 100.0% 100.0% ________ ________ ________ ________ Total equity real estate - Discontinued Operations $ 106.8 $ 157.9 (1) $ 264.7 ________ ________ ________ ________ ________ ________ December 31, 1994 _________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total equity real estate - continuing operations $ 241.5 $1,042.2 (1) $1,283.7 ________ ________ ________ ________ ________ ________ Percentage of total equity real estate - continuing operations: Supporting discontinued products 37.6% 61.3% Supporting experience rated products 13.2 24.1 Supporting remaining products 49.2 14.6 ________ ________ 100.0% 100.0% ________ ________ ________ ________ Total equity real estate - Discontinued Operations $ 140.8 $ 121.2 (1) $ 262.0 ________ ________ ________ ________ ________ ________ (1) Includes $190.4 million and $172.4 million of in-substance foreclosures supporting continuing operations and $54.1 million and $21.0 million supporting Discontinued Operations at December 31, 1995 and 1994, respectively. (Please see "Mortgage Loans" on page 51 for discussion of in-substance foreclosures.)
57 General Account Investments (Continued) As of December 31, 1995 and 1994, the company's investments in equity real estate by property type and geographic distribution were as follows:
Equity Real Estate by Property Type Geographic Distribution of Equity Real Estate Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations ______________________________________ __________________________________________________ December 31, 1995: December 31, 1995: __________________ __________________ Apartment 5.2% - Middle Atlantic 11.1% 7.9% Hotel/Motel 7.4% 21.3% New England 2.9% 12.5% Industrial 4.4% 8.6% North Central 16.1% 18.3% Land 1.2% 14.3% Pacific and Mountain 20.7% 37.9% Mixed Use 2.1% - South Atlantic 29.0% 16.7% Office 60.8% 47.1% South Central 8.2% 6.7% Retail 16.0% 7.6% Non-U.S. 12.0% - Other 2.9% 1.1% December 31, 1994: December 31, 1994: __________________ __________________ Apartment 7.4% 6.0% Middle Atlantic 8.1% 8.2% Hotel/Motel 7.8% 17.3% New England 9.0% 16.1% Industrial 3.8% 8.7% North Central 12.3% 12.3% Land 2.5% 13.2% Pacific and Mountain 16.9% 40.1% Mixed Use 2.5% - South Atlantic 31.7% 20.4% Office 54.2% 44.1% South Central 11.8% 2.9% Retail 20.2% 9.5% Non-U.S. 10.2% - Other 1.6% 1.2%
All real estate acquired through foreclosure, including in- substance foreclosures, is classified as properties held for sale. Foreclosed real estate supporting continuing operations was carried at 61% of the company's cash investment (unpaid mortgage balance plus capital additions) at December 31, 1995 and 1994. Likewise, foreclosed real estate of Discontinued Operations was carried at 53% and 49% of the company's cash investment at December 31, 1995 and 1994, respectively. Investment real estate, which is generally carried at depreciated cost, is written down to fair value to reflect other than temporary declines in market value. The fair value of assets acquired through foreclosure is established as the cost basis at the time of foreclosure. Subsequent to acquisition, properties classified as held for sale are carried at the lower of cost or fair value less estimated selling costs. Adjustments to the carrying value of properties held for sale resulting from changes in fair value are recorded in a valuation reserve. Property valuations are reviewed regularly by investment management. Capital additions and asset improvements increase the cost basis of the asset while depreciation reduces the cost basis. 58 General Account Investments (Continued) Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances at December 31 were as follows:
(Millions) 1995 1994 _____________________________________________________________ Allocable to discontinued products $ 381.0 $ 376.0 Allocable to experience rated products 208.2 179.6 Allocable to remaining products 96.8 89.0 _____________________________________________________________ Total real estate write-downs and valuation reserves - continuing operations $ 686.0 $ 644.6 _____________________________________________________________ ______________________ Real estate write-downs and valuation reserves - Discontinued Operations $ 131.5 $ 117.6 _____________________________________________________________ ______________________
For the years ended December 31, total after-tax net realized capital (gains) losses from real estate write-downs and changes in the valuation reserves were as follows:
(Millions) 1995 1994 1993 _____________________________________________________________________ Allocable to discontinued products $ 30.9 (1) $ 12.8 (1) $ 55.1 Allocable to experience rated products (2) 5.1 2.9 51.5 Allocable to remaining products 2.2 (3.0) 31.4 _____________________________________________________________________ Total after-tax net realized capital losses - continuing operations $ 38.2 $ 12.7 $138.0 _____________________________________________________________________ ______________________________ Total after-tax net realized capital (gains) losses - Discontinued Operations $(10.6) * $ 2.2 $ 33.1 _____________________________________________________________________ ______________________________ (1) Write-downs and impairment expense allocable to discontinued products for the years ended December 31, 1995 and 1994 were charged against the reserve for future losses and did not affect the company's results of operations. (2) Write-downs and impairment expense allocable to experience rated products do not affect the company's results of operations. * Includes a $12.8 million realized capital gain related to the reversal of valuation reserves on a foreclosed property that appreciated in value.
59 General Account Investments (Continued) Use of Derivatives and Other Investments The company's use of derivatives is limited to hedging activity and has principally consisted of using futures, forward contracts and interest rate swaps to hedge interest rate risk and currency risk. These instruments, viewed separately, subject the company to varying degrees of market and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall market risk. Market risk is the possibility that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 16 of Notes to Financial Statements for a discussion of the company's hedging activities.) The company also had investments in certain debt instruments with derivative characteristics, including those where market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the debt securities portfolios supporting continuing operations and Discontinued Operations, as of December 31, 1995 was as follows:
Continuing Discontinued Operations Operations ______________________ _______________________ Amortized Fair Amortized Fair (Millions) Cost Value Cost Value_ ______________________________________________________________________________________________ Collateralized mortgage obligations: $ 2,876.1 $ 3,082.8 $ 304.4 $ 306.0 Principal-only strips (included above) 38.7 50.0 - - Interest-only strips (included above) 11.9 21.3 - - Structured notes (1) 95.0 100.3 - - Warrants to purchase debt securities (2) 2.8 4.5 - - (1) Represents nonleveraged instruments whose fair values and credit risk are based on underlying securities, including fixed-income securities and interest rate swap agreements. (2) Represents the right to purchase specific debt securities and is accounted for as a hedge. Upon exercise, the cost of the warrants will be added to the basis of the debt securities purchased and amortized over their lives.
60 General Account Investments (Continued) Outlook Management intends that continuing operations general account investments in new mortgage loans for the foreseeable future will be restricted largely to extending and refinancing existing mortgages as they mature. (Please see "Liquidity and Capital Resources" on page 62.) It is management's objective over the next several years, real estate and capital market conditions permitting, to continue to reduce the size and the risk 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 reduce risk, maximize returns and reduce portfolio levels. 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 relating to the $4.0 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. (Please see "Discontinued Products" on page 23.) During 1995, Discontinued Operations began to sell equity securities primarily in an effort to reduce volatility in statutory surplus and increase income. Such sales were increased in connection with the anticipated sale of the company's property- casualty operations. The company intends to continue to reduce the equity portfolio through the closing date of the sale of the property-casualty operations through a combination of sales, including the sale of a significant portion of its holdings in MBIA Inc. to the public, and transfers to continuing operations. 61 Liquidity and Capital Resources
(Millions) 1995 1994 1993 ______________________________________________________________________ Consolidated Assets (1) $84,323.7 $75,486.7 $81,572.8 ______________________________________________________________________ ________________________________ Shareholders' Equity $ 7,272.8 $ 5,503.0 $ 7,043.1 ______________________________________________________________________ ________________________________ Cash and Cash Equivalents and Short-Term Investments (2) $ 2,320.5 $ 2,621.6 $ 2,096.5 ______________________________________________________________________ ________________________________ Minority Interest in Preferred Securities of Subsidiary $ 275.0 $ 275.0 $ - ______________________________________________________________________ ________________________________ ____ Long-Term Debt (2) $ 989.1 $ 1,079.2 $ 1,112.2 ______________________________________________________________________ ________________________________ Average Short-Term Debt (2) $ 96.0 $ 213.7 $ 205.5 ______________________________________________________________________ ________________________________ Interest Expense (2) $ 115.9 $ 98.6 $ 77.4 ______________________________________________________________________ ________________________________ (1) Includes net assets of Discontinued Operations of $3,932.8 million, $3,167.3 million and $3,873.0 million in 1995, 1994 and 1993, respectively. (2) Excludes Discontinued Operations.
Liquidity needs of the company's businesses have generally been met by cash provided by premiums, deposits, asset maturities and income received on investments. Cash provided from these sources is used primarily for claim and benefit payments, fund withdrawals and operating expenses. Please see "Large Case Pensions" on pages 20 through 26 for a discussion of the liquidity requirements specific to the large case pension business. The following discussion addresses the sources of liquidity available to meet the needs of all of the company's continuing businesses. Bonds, redeemable preferred stocks and mortgage loans have durations that were selected to approximate the durations of the liabilities they support. The duration of these investments is monitored, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the company's maturing liabilities. As the company's investment strategy focuses on matching asset and liability durations, and not specific cash flows, and additionally, since these duration assessments are dependent on numerous cash flow assumptions, asset sales may be required, from time to time, to satisfy liability obligations and/or rebalance asset portfolios. The investment portfolios are closely monitored to assess asset and liability matching in order to rebalance the portfolios as conditions warrant. As a result of the addition by the company of $750 million ($488 million, after tax) to the environmental-related claims reserves in the second quarter of 1995, the company contributed $303 million of additional capital to its Discontinued Operations in the fourth quarter of 1995 in order to restore capital levels (including risk-based capital), to appropriate levels for regulatory and other purposes. The funding for such capital contributions was obtained through short-term parent company borrowings. 62 Liquidity and Capital Resources (Continued) The company has significant short-term liquidity supporting its businesses. At year-end 1995, cash and cash equivalents supporting continuing operations and Discontinued Operations were $1.7 billion and $1.2 billion, respectively, and short-term securities were $.6 billion and $.1 billion, respectively. Given the high quality of the total debt securities portfolio supporting continuing operations and Discontinued Operations (please see "General Account Investments" on page 45), management expects the vast majority of the company's investments in debt securities to be repaid in accordance with contractual terms. In addition, the mortgage-backed securities, treasuries and public bonds included within the debt securities portfolio are highly marketable and thus can be used to enhance cash flow before maturity. At December 31, 1995 and 1994, approximately 91% of the outstanding principal balance of the total mortgage loan portfolio consisted of commercial loans with balloon maturity features. The company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere due to tight lending practices by banks and other financial institutions over the past several years. In 1995 the mortgage loan portfolio generated $2.3 billion in cash ($346 million of which relates to Discontinued Operations) which included $805 million of payoffs or 39% of scheduled combined maturities ($154 million of which relates to Discontinued Operations), $732 million of prepayments ($149 million of which relates to Discontinued Operations), $601 million of loan sales ($29 million of which relates to Discontinued Operations) and $181 million of amortization ($14 million of which relates to Discontinued Operations). Despite various indications that liquidity has returned to certain real estate markets, the company expects it will continue to extend or refinance maturing loans. At December 31, 1995, scheduled mortgage loan principal repayments were as follows:
Continuing Discontinued (Millions) Operations Operations ______________________________________________________________ 1996 $1,509.5 $136.5 1997 1,133.9 108.7 1998 822.9 61.5 1999 1,019.5 344.8 2000 1,282.1 250.4 Thereafter 3,155.6 225.3
63 Liquidity and Capital Resources (Continued) Consolidated Cash Flows
(Millions) 1995 1994 1993 ___________________________________________________________________________ Net cash provided by (used for) operating activities: Continuing Operations $ 647.7 $ 840.8 $ (160.2) ______________________________________ ______________________________________ Discontinued Operations $ 688.7 $ (586.7) $ (1,027.0) ______________________________________ ______________________________________ Net cash provided by (used for) investing activities: Continuing Operations $ 381.8 $ 1,416.0 $ 204.6 ______________________________________ ______________________________________ Discontinued Operations $ (461.4) $ 1,342.7 $ 592.1 ______________________________________ ______________________________________ Net cash provided by (used for) financing activities: Continuing Operations $ (1,596.0) $ (1,529.0) $ (382.2) ______________________________________ ______________________________________ Discontinued Operations $ 250.5 $ (84.0) $ (73.0) ______________________________________ ______________________________________ Cash and cash equivalents: Continuing Operations $ 1,712.7 $ 2,277.2 $ 1,553.6 ______________________________________ ______________________________________ Discontinued Operations $ 1,153.6 $ 676.4 $ 4.2 ______________________________________ ______________________________________
The company's cash flow requirements for 1995 were met by funds provided from operations, from the maturity and sale of investments and from financing activities. Net cash provided by (used for) operating activities related to continuing operations included $880 million used for net purchases of debt trading securities in 1993. Net cash provided by investing activities related to continuing operations included $2,048 million, $2,359 million and $2,617 million from net sales, including a securitization in 1995, as well as maturities and repayments of mortgage loans and real estate in 1995, 1994 and 1993, respectively. Net cash used for financing activities related to continuing operations during 1995 included a $303 million capital contribution to Discontinued Operations. Please see "Liquidity and Capital Resources" on page 61 for a further discussion of the capital contribution. Net cash used for financing activities also includes cash generated by sales of investment contracts which was lower in 1995, 1994 and 1993 than cash paid for maturing investment contracts and other withdrawals. In 1995, 1994 and 1993, the company paid annual dividends to shareholders of $2.76 per share (approximately $315 million in 1995). (Please see "Parent Company Cash Flow" on page 65 and "Debt and Short-Term Borrowing" on page 66.) 64 Liquidity and Capital Resources (Continued) Net cash provided by (used for) operating activities related to Discontinued Operations included $1,209 million used for net purchases of debt trading securities in 1993. Net cash provided by (used for) investing activities related to Discontinued Operations included $1,164 million from increases in debt securities in 1995, $617 million from decreases in debt securities in 1994 and $232 million from net sales, as well as maturities and repayments of mortgage loans and real estate in 1993. Net cash provided by (used for) financing activities related to Discontinued Operations during 1995 included a $303 million infusion of capital from continuing operations. Sale of Property-Casualty Operations The sale of the property-casualty operations to The Travelers Insurance Group Inc. is expected to close no later than midyear 1996. The expected net proceeds of approximately $4.0 billion from this sale are expected to be utilized primarily to support the company's strategic initiatives. The agreement to sell the property-casualty operations prohibits the payment of further cash dividends from the property-casualty businesses to the parent company, Aetna Life and Casualty Company, although the effect of such prohibition is not expected to be material to the company's liquidity position. Other Factors Affecting Cash Flow Cash flow may be influenced by general economic conditions, including general interest rate levels, investment returns, competition for business, and the perceived financial strength of the company. Financial strength is significant because of questions about insurers' asset quality and the well-publicized insolvencies of certain insurers. Adverse changes in, among other factors, claims-paying ratings, general economic conditions, or overall customer confidence have the effect of decreasing new sales and deposits and increasing withdrawals and surrenders. Additionally, lower debt and commercial paper ratings may adversely affect the availability and cost of certain external funding sources. 65 Liquidity and Capital Resources (Continued) During 1995 and 1994, ratings of Aetna Life and Casualty Company and certain of its subsidiaries were lowered by certain of the rating agencies. Aetna's ratings at February 7, 1995 and at February 6, 1996 follow:
Rating Agencies ____________________________________________________________ Moody's Investors Standard A.M. Best Duff & Phelps Service & Poor's ____________________________________________________________ Aetna Life and Casualty Company (senior debt) February 7, 1995 * A+ A2 A+ February 6, 1996 * A *** A2 A- *** Aetna Life and Casualty Company (commercial paper) February 7, 1995 * D-1 P-1 A-1 February 6, 1996 * D-1 *** P-1 A-2 *** Aetna Life Insurance Company (claims paying) February 7, 1995 A AA **** Aa3 A+ February 6, 1996 A AA- *** Aa3 A+ *** Aetna Life Insurance and Annuity Company (claims paying) February 7, 1995 A++ AA+ Aa2 AA February 6, 1996 A+ AA+ Aa2 AA *** The Aetna Casualty and Surety Company (claims paying) February 7, 1995 A- AA- A1 A+ February 6, 1996 A- A+ A1 A Aetna Casualty and Surety Company of America (claims paying) February 7, 1995 A ** ** ** February 6, 1996 A ** ** ** * Not rated by the agency. ** Not rated on a separate company basis. *** On rating watch-up or credit watch with positive implications. **** On rating watch-down.
Parent Company Cash Flow Cash flow needs at the parent company level include primarily shareholder dividends and debt service. The Board of Directors ("the Board") reviews the company's common stock dividend each quarter. Among the factors considered by the Board are the company's results of operations, and the capital requirements, growth and other characteristics of its businesses. The parent company also may fund growth or meet capital needs of the company's businesses. Such parent company cash flow needs historically have been met, in large part, through a combination of borrowings and dividends from operating subsidiaries. As a matter of course, the company monitors existing and alternative financing sources to support the parent company's capital and liquidity needs including, but not limited to, debt issuance, preferred stock issuance, intercompany borrowings and pledging or selling of assets. The sale of the property-casualty operations is expected to generate substantial cash which will be available for investment in one or more of the remaining businesses. Efforts to simultaneously grow certain of the company's remaining businesses to their full potential and meet capital requirements of other businesses may require significant future capital. 66 Liquidity and Capital Resources (Continued) Should significant cash flow reductions occur in any of the company's businesses, for any combination of the reasons discussed above, the company has several alternatives for meeting its cash requirements. These include, among other things, selling or pledging public bond investments or other assets, borrowing among affiliates and using external borrowing or other capital-raising capacity. The company has credit facilities aggregating $1 billion with a group of worldwide banks. One $500 million facility terminates in July 1996. Another $500 million facility terminates in July 1999. The company intends to obtain an extension of the facility that terminates in July 1996. (Please see Note 9 of Notes to Financial Statements.) The company has agreed with Travelers Group Inc. to invest up to $200 million in a potential offering of common stock in a new property-casualty entity to be established by Travelers Group Inc. Minority Interest in Preferred Securities of Subsidiary On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a subsidiary of the company, issued $275 million (11,000,000 shares) of 9 1/2% cumulative monthly income preferred securities. ACLLC loaned the proceeds from the preferred stock issuance to the company. The company used the proceeds of the loan for general corporate purposes. (Please see Note 11 of Notes to Financial Statements.) Debt and Short-Term Borrowing Long-term debt of continuing operations at December 31, 1995 was approximately $1.0 billion, of which $66 million was attributable to the company's international subsidiaries. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission, the company may offer and sell up to an additional $550 million of various types of securities, and ACLLC may offer and sell up to an additional $225 million of preferred securities. Short-term borrowing through commercial paper and other markets is used to fund interim cash requirements. Funding interim cash requirements with short-term borrowing allows funds that support the insurance lines to remain invested at higher rates, thus benefiting the company's earnings. Treasury Stock The company issued 1,994,935 shares, 457,191 shares and 1,930,085 shares of treasury stock for benefit plans in 1995, 1994 and 1993, respectively. In 1995, 1994 and 1993, the company did not acquire any shares of its common stock. 67 Liquidity and Capital Resources (Continued) Dividend Restrictions Because Aetna Life and Casualty Company is a Connecticut insurance company, the amount of dividends that it may pay to shareholders in 1996 without prior approval by the Insurance Commissioner of the State of Connecticut is $660 million. Dividend payments by the domestic insurance subsidiaries to Aetna Life and Casualty Company are subject to similar restrictions in Connecticut and other states, and are limited in 1996 to approximately $657 million ($217 million of which relates to Discontinued Operations) in the aggregate. Please see "Sale of Property-Casualty Operations" on page 64 for additional discussions regarding dividend restrictions. Regulatory Environment Solvency Regulation In recent years, state insurance regulators have been considering changes in statutory accounting practices and other initiatives to strengthen solvency regulation. The National Association of Insurance Commissioners ("NAIC") has adopted risk-based capital ("RBC") standards for both life and property-casualty insurers. The RBC formula is a regulatory tool designed to identify weakly capitalized companies by comparing the adjusted surplus to the required surplus, which reflects the risk profile of the company (RBC ratio). Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action ranging from requiring insurers to submit a comprehensive plan (an RBC plan) to the state insurance commissioner to when the state insurance commissioner places the insurer under regulatory control. The RBC ratio for each of the company's primary insurance subsidiaries as measured at December 31, 1995 was significantly above the levels which would require regulatory action. Rating agencies also use their own risk-based capital standards as part of determining a company's rating. The NAIC also is considering several other solvency-related regulations including risk-based capital standards for HMOs and the development of a model investment law and amendments to the model insurance holding company law which would limit types and amounts of investments by insurance companies. In addition, in recent years there has been growing interest among certain members of Congress concerning possible federal roles in the regulation of the insurance industry. Because these other initiatives are in a preliminary stage, management cannot assess the potential impact of their adoption on the company. 68 Regulatory Environment (Continued) Federal Employee Benefit Regulation The company provides a variety of products and services to employee benefit plans that are covered by the Employee Retirement Income Security Act of 1974 ("ERISA"). In December 1993, in a case involving an employee benefit plan and an insurance company, the United States Supreme Court ruled that assets in the insurance company's general account that were attributable to the non-guaranteed portion of a group pension contract issued to the plan were "plan assets" for purposes of ERISA and that the insurance company was an ERISA fiduciary with respect to those assets. In reaching its decision, the Court declined to follow a 1975 Department of Labor ("DOL") interpretive bulletin that had suggested that insurance company general account assets were not plan assets. The company and other insurers are seeking clarification from the DOL of the effects, if any, of the decision on their businesses, as well as pursuing clarification of the decision through Federal legislation. Management is not currently able to predict how the decision, or the outcome of any legislative or regulatory initiatives, will ultimately affect its businesses. New Accounting Pronouncements Please see Notes 1 and 2 of Notes to Financial Statements for a discussion of recently issued accounting pronouncements. Forward-Looking Information The Private Securities Litigation Reform Act of 1995 ("the Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward- looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The company desires to take advantage of the "safe harbor" provisions of the Act. Certain information contained herein, particularly the information appearing under the heading "Outlook" contained in the discussion of results of operations of the company's business segments, is forward-looking. Information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appear together with such statement, and/or elsewhere herein. Information regarding additional factors that may affect such statements appears in the company's 1995 Annual Report on Form 10-K filed with the Securities and Exchange Commission (see Item 1-Business, including descriptions of the company's business segments and "Other Matters - Regulation" in the Form 10-K). 69 Management's Responsibility for Financial Statements Management is responsible for the financial statements of Aetna Life and Casualty Company, which have been prepared in accordance with generally accepted accounting principles. The financial statements are the product of a number of processes that include the gathering of financial data developed from the records of the company's day-to-day business transactions. Informed judgments and estimates are used for those transactions not yet complete or for which the ultimate effects cannot be measured precisely. The company emphasizes the selection and training of personnel who are qualified to perform these functions. In addition, company personnel are subject to rigorous standards of ethical conduct that are widely communicated throughout the organization. The company's internal controls are designed to reasonably assure that company assets are safeguarded from unauthorized use or disposition and that company transactions are authorized, executed and recorded properly. Company personnel maintain and monitor these internal controls on an ongoing basis. In addition, the company's internal auditors review and report upon the functioning of these controls with the right of full access to all company personnel. The company engages KPMG Peat Marwick LLP as independent auditors to audit its financial statements and express their opinion thereon. Their audits include reviews and tests of the company's internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their opinion. Members of that firm also have the right of full access to each member of management in conducting their audits. The report of KPMG Peat Marwick LLP appears on page 123. Aetna's Board of Directors has an Audit Committee composed solely of independent directors. The committee meets periodically with management, the internal auditors and KPMG Peat Marwick LLP to oversee and monitor the work of each and to inquire of each as to their assessment of the performance of the others in their work relating to the company's financial statements. Both the independent and internal auditors have, at all times, the right of full access to the Audit Committee, without management present, to discuss any matter they believe should be brought to the attention of the committee. 70 Consolidated Statements of Income For the years ended December 31,
(Millions, except share and per share data) 1995 1994 1993 _________________________________________________________________________________________________ Revenue: Premiums $ 7,431.4 $ 6,901.3 $ 5,921.7 Net investment income 3,575.1 3,631.4 3,966.6 Fees and other income 1,924.3 1,741.5 1,512.6 Net realized capital gains (losses) 47.2 (55.2) (61.2) _______________________________________________ Total revenue 12,978.0 12,219.0 11,339.7 _________________________________________________________________________________________________ Benefits and Expenses: Current and future benefits 9,027.2 8,652.0 8,189.2 Operating expenses 3,087.5 2,805.9 2,632.8 Amortization of deferred policy acquisition costs 137.1 133.6 101.7 Loss on discontinuance of products - - 1,270.0 Severance and facilities charge - - 160.7 _______________________________________________ Total benefits and expenses 12,251.8 11,591.5 12,354.4 _________________________________________________________________________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments 726.2 627.5 (1,014.7) Income taxes (benefits) 252.3 218.1 (412.4) _______________________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 473.9 409.4 (602.3) Income (Loss) from Discontinued Operations, net of tax (222.2) 58.1 290.3 _______________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 251.7 467.5 (312.0) Extraordinary loss on debenture redemption, net of tax - - (4.7) Cumulative effect adjustments, net of tax - - (49.2) _______________________________________________ Net income (loss) $ 251.7 $ 467.5 $ (365.9) _______________________________________________ _______________________________________________ Results Per Common Share: Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments $ 4.16 $ 3.63 $ (5.42) Income (Loss) from Discontinued Operations, net of tax (1.95) .51 2.61 _______________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 2.21 4.14 (2.81) Extraordinary loss on debenture redemption, net of tax - - (.04) Cumulative effect adjustments, net of tax - - (.44) _______________________________________________ Net income (loss) $ 2.21 $ 4.14 $ (3.29) _________________________________________________________________________________________________ _______________________________________________ Weighted average common shares outstanding 113,897,633 112,848,653 111,062,954 _________________________________________________________________________________________________ See Notes to Financial Statements.
71 Consolidated Balance Sheets As of December 31,
(Millions, except share and per share data) 1995 1994 __________________________________________________________________________________ Assets: Investments: Debt securities: Available for sale, at fair value (amortized cost $29,962.5 and $27,208.3) $ 31,860.3 $ 25,938.1 Held for investment, at amortized cost (fair value $1,584.1) - 1,587.3 Equity securities, at fair value (cost $597.8 and $594.0) 659.7 614.6 Short-term investments 607.8 344.4 Mortgage loans 8,327.2 10,389.9 Real estate 1,277.3 1,283.7 Policy loans 629.4 533.8 Other 688.6 838.0 ____________________________ Total investments 44,050.3 41,529.8 __________________________________________________________________________________ Cash and cash equivalents 1,712.7 2,277.2 Reinsurance recoverables and receivables 109.4 129.4 Accrued investment income 618.3 596.8 Premiums due and other receivables 971.5 593.7 Deferred federal and foreign income taxes 271.5 404.2 Deferred policy acquisition costs 1,953.1 1,691.0 Other assets 1,004.4 974.7 Separate Accounts assets 29,699.7 24,122.6 Net assets of Discontinued Operations 3,932.8 3,167.3 ____________________________ Total assets $ 84,323.7 $ 75,486.7 __________________________________________________________________________________ __________________________________________________________________________________ Liabilities: Future policy benefits $ 18,372.9 $ 17,971.5 Unpaid claims and claim expenses 1,563.1 1,389.4 Unearned premiums 142.4 179.4 Policyholders' funds left with the company 22,898.7 23,176.4 ____________________________ Total insurance liabilities 42,977.1 42,716.7 Dividends payable to shareholders 79.2 77.7 Short-term debt 389.6 14.8 Long-term debt 989.1 1,079.2 Current federal and foreign income taxes 154.0 4.2 Other liabilities 2,344.2 1,642.0 Participating policyholders' interests 204.8 170.5 Separate Accounts liabilities 29,637.9 24,003.6 ____________________________ Total liabilities 76,775.9 69,708.7 __________________________________________________________________________________ Minority interest in preferred securities of subsidiary 275.0 275.0 __________________________________________________________________________________ Commitments and Contingent Liabilities (Notes 2, 16 and 17) Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding) - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding) - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding) - - Common Capital Stock (no par value; 250,000,000 shares authorized; 115,013,675 and 114,939,275 issued, and 114,727,093 and 112,657,758 outstanding) 1,448.2 1,419.2 Net unrealized capital gains (losses) 641.1 (1,071.5) Retained earnings 5,195.6 5,259.6 Treasury stock, at cost (286,582 and 2,281,517 shares) (12.1) (104.3) ____________________________ Total shareholders' equity 7,272.8 5,503.0 __________________________________________________________________________________ Total liabilities, minority interest and shareholders' equity $ 84,323.7 $ 75,486.7 __________________________________________________________________________________ __________________________________________________________________________________ Shareholders' equity per common share $ 63.39 $ 48.85 __________________________________________________________________________________ __________________________________________________________________________________ See Notes to Financial Statements.
72 Consolidated Statements of Shareholders' Equity
Net Unrealized Three Years Ended December 31, 1995 Common Capital Retained Treasury (Millions, except share data) Total Stock Gains (Losses) Earnings Stock ______________________________________________________________________________________________________ Balances at December 31, 1992 $ 7,238.3 $ 1,417.7 $ 259.6 $ 5,777.9 $ (216.9) ______________________________________________________________________________________________________ Net loss (365.9) (365.9) Net change in unrealized capital gains and losses 388.6 388.6 Common stock issued for benefit plans (1,930,085 shares) 86.5 86.5 Gain on issuance of treasury stock 4.3 4.3 Common stock dividends declared (308.7) (308.7) _____________________________________________________________ Balances at December 31, 1993 7,043.1 1,422.0 648.2 5,103.3 (130.4) ______________________________________________________________________________________________________ Net income 467.5 467.5 Net change in unrealized capital gains and losses (1,719.7) (1,719.7) Common stock issued for benefit plans (457,191 shares) 26.1 26.1 Loss on issuance of treasury stock (2.8) (2.8) Common stock dividends declared (311.2) (311.2) _____________________________________________________________ Balances at December 31, 1994 5,503.0 1,419.2 (1,071.5) 5,259.6 (104.3) ______________________________________________________________________________________________________ Net income 251.7 251.7 Net change in unrealized capital gains and losses 1,712.6 1,712.6 Common stock issued for benefit plans (2,069,335 shares) 97.4 5.2 92.2 Gain on issuance of treasury stock 23.8 23.8 Common stock dividends declared (315.7) (315.7) ______________________________________________________________ Balances at December 31, 1995 $ 7,272.8 $ 1,448.2 $ 641.1 $ 5,195.6 $ (12.1) _______________________________________________________________________________________________________ _______________________________________________________________________________________________________ See Notes to Financial Statements.
73 Consolidated Statements of Cash Flows For the years ended December 31,
(Millions) 1995 1994 1993 ______________________________________________________________________________________________________ Cash Flows from Operating Activities: Net income (loss) $ 251.7 $ 467.5 $ (365.9) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Cumulative effect adjustments - - 49.2 Extraordinary loss on debenture redemption - - 4.7 Loss (Income) from Discontinued Operations 222.2 (58.1) (290.3) Increase in accrued investment income (21.0) (25.9) (4.4) Increase in premiums due and other receivables (271.8) (110.9) (102.6) Decrease in reinsurance recoverables and receivables 21.1 255.2 49.8 Increase in deferred policy acquisition costs (267.1) (193.5) (159.0) Depreciation and amortization 175.8 174.1 179.2 Increase (Decrease) in federal and foreign income taxes 263.0 321.9 (453.9) Net (increase) decrease in other assets and other liabilities (55.5) 10.3 278.5 Increase in other insurance liabilities 522.4 95.8 1,733.2 Net sales (purchases) of debt trading securities - 52.3 (880.1) Net realized capital (gains) losses (47.2) 55.2 61.2 Amortization of net investment discounts (123.7) (141.3) (175.7) Other, net (22.2) (61.8) (84.1) Discontinued Operations, net 688.7 (586.7) (1,027.0) ___________________________________________ Net cash provided by (used for) operating activities 1,336.4 254.1 (1,187.2) ___________________________________________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 13,747.2 14,801.6 - Debt securities held for investment - 5.6 - Debt securities, prior to adoption of FAS No. 115 - - 4,093.6 Equity securities 355.9 124.2 174.4 Mortgage loans 668.4 162.1 194.4 Real estate 317.1 543.4 427.1 Short-term investments 48,763.1 51,936.7 55,569.0 Investment maturities and repayments of: Debt securities available for sale 2,190.9 2,499.6 - Debt securities held for investment - 573.5 - Debt securities, prior to adoption of FAS No. 115 - - 4,457.2 Mortgage loans 1,404.2 1,960.5 2,319.0 Cost of investment purchases in: Debt securities available for sale (16,842.1) (17,639.5) - Debt securities held for investment - (350.3) - Debt securities, prior to adoption of FAS No. 115 - - (10,558.2) Equity securities (353.2) (353.7) (245.4) Mortgage loans (244.9) (247.7) (231.8) Real estate (96.9) (59.1) (91.4) Short-term investments (49,024.1) (51,811.1) (55,160.9) Increase in property and equipment (155.3) (135.9) (138.6) Other, net (348.5) (593.9) (603.8) Discontinued Operations, net (461.4) 1,342.7 592.1 ___________________________________________ Net cash (used for) provided by investing activities (79.6) 2,758.7 796.7 ___________________________________________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 2,017.1 3,063.7 3,909.5 Withdrawals of investment contracts (3,442.3) (4,609.1) (4,358.3) Issuance of long-term debt 52.4 62.5 689.9 Repayment of long-term debt (144.6) (91.8) (483.3) Issuance of preferred securities by subsidiary - 275.0 - Capital contribution to Discontinued Operations (303.0) - - Stock issued under benefit plans 121.2 23.3 90.8 Net increase (decrease) in short-term debt 375.5 (22.2) 11.7 Corporate expenses paid by Discontinued Operations 43.4 80.8 66.2 Dividends paid to shareholders (315.7) (311.2) (308.7) Discontinued Operations, net 250.5 (84.0) (73.0) ___________________________________________ Net cash used for financing activities (1,345.5) (1,613.0) (455.2) ______________________________________________________________________________________________________ Effect of exchange rate changes on cash and cash equivalents 1.4 (4.0) (11.5) Net decrease (increase) in cash and cash equivalents of Discontinued Operations (477.2) (672.2) 511.5 ______________________________________________________________________________________________________ Net (decrease) increase in cash and cash equivalents (564.5) 723.6 (345.7) Cash and cash equivalents, beginning of year 2,277.2 1,553.6 1,899.3 ___________________________________________ Cash and cash equivalents, end of year $ 1,712.7 $ 2,277.2 $ 1,553.6 ______________________________________________________________________________________________________ ______________________________________________________________________________________________________ See Notes to Financial Statements.
74 Notes to Financial Statements 1. Summary of Significant Accounting Policies Aetna Life and Casualty Company and its subsidiaries provide insurance and financial services, primarily in the United States. The company's continuing business segments are Aetna Health Plans, Aetna Life Insurance & Annuity, International and Large Case Pensions. Aetna Health Plans markets health care and related products and services, and other group insurance products primarily to employers for the benefit of employees and their dependents. Aetna Life Insurance & Annuity markets a variety of financial services and life insurance products, including individual and group annuities, financial and administrative services and mutual funds to individuals, pension plans, small businesses and employer-sponsored groups. The International segment markets a variety of life insurance and financial services products, primarily in non-U.S. markets. Group retirement and other savings products (other than fully guaranteed products which have been discontinued and are in run-off) are offered to Large Case Pensions' customers. The Discontinued Operations include commercial and personal property-casualty operations. The commercial insurance operations provide most types of commercial property-casualty insurance (primarily workers' compensation, auto, liability and other specialty products), bonds and insurance-related services for businesses, government units and associations. The personal insurance operations underwrite private-passenger auto and homeowner insurance, which is sold to individuals through independent agents, with a significant market in the Northeastern states. The Discontinued Operations also include the international reinsurance business. Principles of Consolidation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). The company has agreed to sell its property-casualty operations to The Travelers Insurance Group Inc. ("Travelers") and, accordingly, they are classified as Discontinued Operations (please refer to Note 2). 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. Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation. 75 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Accounting Changes Accounting by Creditors for Impairment of a Loan As of January 1, 1995, the company adopted Financial Accounting Standard ("FAS") No. 114, Accounting by Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. In accordance with these standards, a loan is considered impaired when it is probable that the company will be unable to collect amounts due according to the contractual terms of the loan agreement. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the mortgage loan and the fair value of the collateral. General reserves are established for losses management believes are likely to arise from the overall portfolio but cannot be attributed to specific loans. Prior to the adoption of FAS Nos. 114 and 118, the company included the reserve for estimated losses on potential problem loans (other than those allocable to experience rated products) which management believed were likely to become classified as problem or restructured in the next 12 months or so in the general reserve. Adoption of these standards had no impact on 1995 net income. Accounting for Certain Investments in Debt and Equity Securities On December 31, 1993, the company adopted FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires the classification of debt securities into three categories and equity securities into two categories. (Please refer to Note 5.) Initial adoption of this standard in 1993 resulted in a cumulative effect charge of $.7 million ($.01 per common share), net of taxes of $.4 million, which is reflected in the 1993 Consolidated Statement of Income. These amounts exclude gains and losses allocable to discontinued products and experience rated contractholders. Adoption of FAS No. 115 did not have a material effect on deferred policy acquisition costs. Accounting for Postemployment Benefits In 1993, the company adopted, retroactive to January 1, 1993, 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 1993 Consolidated Statement of Income. Adoption of FAS No. 112 had no impact on the 1993 loss from continuing operations before extraordinary item and cumulative effect adjustments. 76 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Future Application of Accounting Standards Accounting for The Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of In March 1995, the Financial Accounting Standards Board ("FASB") issued FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement requires write down to fair value when long-lived assets to be held and used are impaired. The statement also requires long-lived assets to be disposed of (e.g., real estate held for sale) to be carried at the lower of cost or fair value less estimated selling costs and does not allow such assets to be depreciated. The company will adopt this statement in 1996 and the impact on earnings is not expected to be material. Accounting for Stock-Based Compensation In October 1995, the FASB issued FAS No. 123, Accounting for Stock-Based Compensation. This statement addressed the accounting for the cost of stock-based compensation, such as stock options. FAS No. 123 permits either expensing the cost of stock-based compensation over the vesting period or disclosing in the financial statement footnotes what this expense would have been. This cost would be measured at the grant date based upon estimated fair values, using option pricing models. The company expects to adopt the disclosure alternative of this statement in 1996. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. Investments Debt securities which may be sold prior to maturity are classified as available for sale and carried at fair value. Available for sale debt securities are written down (as realized losses) for other than temporary declines in value. Unrealized gains and losses related to available for sale investments, after deducting amounts allocable to experience rated contractholders, discontinued products and related taxes, are reflected in shareholders' equity. Debt securities which the company has the positive intent and ability to hold to maturity are classified as held for investment and are carried at amortized cost, net of write-downs for other than temporary declines in value. The company had no held for investment securities at December 31, 1995. 77 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Investments (Continued) In December 1995, in accordance with guidance published by the FASB, the company reassessed the classifications of all debt securities. As a result of this review, debt securities with an amortized cost of $1,859.7 million (fair value of $1,896.3 million) were reclassified from the held for investment category to the available for sale category. Debt securities which are held with the objective of trading to generate profits on short-term differences in price ("trading securities") are carried at fair value. Changes in fair value related to the trading portfolio are reflected in net realized capital gains or losses in the Consolidated Statements of Income. The company had no trading securities at December 31, 1995 or 1994. Equity securities are classified as available for sale and carried at fair value. Equity securities are written down (as realized losses) for other than temporary declines in value. Unrealized gains and losses related to such securities, after deducting amounts allocable to experience rated contractholders and net of related taxes, are reflected in shareholders' equity. Fair values for debt and equity securities are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair values are measured utilizing quoted market prices for similar securities or by using discounted cash flow methods. Cost for mortgage-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. Purchases and sales of debt and equity securities are recorded on the trade date. Purchases and sales of mortgage loans are recorded on the closing date. Mortgage loans and policy loans are carried at unpaid principal balances, net of impairment reserves, and are generally secured. A mortgage loan is considered impaired when it is probable that the company will be unable to collect amounts due according to the contractual terms of the loan agreement. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the mortgage loan and the fair value of the collateral. A general reserve is established for losses management believes are likely to arise from the overall portfolio but cannot be attributed to specific loans. Investment real estate, which the company has the intent to hold for the production of income, is carried at depreciated cost including capital additions net of write-downs for other than temporary declines in fair value. Properties held for sale (primarily acquired through foreclosure) are carried at the lower of depreciated cost (fair value at foreclosure plus capital additions less accumulated depreciation) or fair value less estimated selling costs. Adjustments to the carrying value of properties held for sale are recorded in a valuation reserve when the fair value less estimated selling costs is below depreciated cost. 78 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Investments (Continued) Short-term investments, consisting primarily of money market instruments and other debt issues purchased with a maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. Other invested assets consist primarily of partnerships, equity subsidiaries and agency loans. Partnerships and equity subsidiaries are carried on an equity basis, and agency loans are carried at the unpaid principal balance. The company utilizes foreign exchange forward contracts, futures contracts and swap agreements for other than trading purposes in order to manage investment returns and to align maturities, interest rates, currency rates and funds availability with its obligations. (Please refer to Note 16.) Foreign exchange forward contracts which are designated at inception and are effective as hedges of foreign translation exposures and foreign transaction exposures related to investments classified as available for sale are accounted for using the deferral method. Under the deferral method, realized and unrealized gains and losses from these forward contracts are deferred on the Consolidated Balance Sheets, net of tax, in net unrealized capital gains or losses. Upon disposal of the hedged item, deferred gains and losses are recognized in net realized capital gains or losses in the Consolidated Statements of Income. Excess realized or unrealized gain or loss, if any, from the foreign exchange forward contract compared to the foreign investment being hedged, is reported as a net realized gain or loss in the Consolidated Statements of Income. Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Deferred gains or losses on such futures contracts are amortized over the life of the acquired asset or liability as a yield adjustment or through realized capital gains or losses upon disposal of an asset. Changes in the fair value of futures contracts that do not qualify as hedges are reflected in net realized capital gains or losses in the Consolidated Statements of Income. Hedge designation requires specific asset or liability identification and at inception, a probability of high correlation between the hedge instrument and the position that underlies the hedge. The company's policy requires that high correlation be maintained. If a hedging instrument ceases to be highly correlated with the position underlying the hedge, excess gains and losses on the hedging instrument would be reflected in net realized capital gains or losses in the Consolidated Statements of Income. Swap agreements which are designated as interest rate or foreign exchange rate risk management instruments at inception are accounted for using the accrual method. Under the accrual method, the difference between amounts paid and received on such agreements is reported in net investment income in the Consolidated Statements of Income; there is no recognition in the Consolidated Balance Sheets for changes in the fair value of the agreement. 79 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Deferred Policy Acquisition Costs Certain costs of acquiring insurance business are deferred. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain expenses of underwriting and issuing contracts, and certain agency expenses. For fixed ordinary life and annuity contracts, such costs are amortized over expected premium-paying periods. For universal life and certain annuity and pension contracts, such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits. These costs are amortized over 20 years for annuity and pension contracts, and over the contract period for universal life type contracts. For all other lines of business, acquisition costs are amortized over the life of the insurance contract. Deferred policy acquisition costs would be written off to the extent that it is determined that future policy premiums and investment income or gross profits would not be adequate to cover related losses and expenses. Other Assets Property and equipment are reported at depreciated cost using the straight-line method based upon the estimated useful lives of the assets. The carrying value of property and equipment for continuing operations at December 31, 1995 and 1994 was $644.3 million and $645.4 million, respectively, and was net of accumulated depreciation of $823.8 million and $765.0 million, respectively. Goodwill, which represents the excess of cost over the fair value of net assets of acquired subsidiaries and affiliates, is amortized on a straight-line basis over periods not exceeding 40 years. Total unamortized goodwill, which is included in other assets for continuing operations, was $147.3 million and $148.8 million at December 31, 1995 and 1994, respectively. Separate Accounts Separate Accounts assets and liabilities generally represent funds maintained in accounts to meet specific investment objectives of contractholders who bear the investment risk, subject to minimum guaranteed rates for certain contractholders. Investment income and investment gains and losses generally accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the company. The assets and liabilities are carried at market value. Deposits, net investment income and realized and unrealized capital gains and losses on Separate Accounts assets are not reflected in the Consolidated Statements of Income. Management fees charged to contractholders are included in fees and other income. 80 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Insurance Liabilities Future policy benefits include reserves for universal life, limited payment and traditional life insurance contracts. Reserves for universal life contracts are equal to cumulative premiums less charges plus credited interest thereon. Reserves for limited payment and traditional life insurance contracts are computed on the basis of assumed investment yield, mortality, morbidity and expenses, including a margin for adverse deviation, which generally vary by plan, year of issue and policy duration. Reserve interest rates range from 2.25% to 11.50%. Investment yield is based on the company's experience. Mortality, morbidity and withdrawal rate assumptions are based on the experience of the company and are periodically reviewed against both industry standards and experience. Policyholders' funds left with the company includes reserves for pension and annuity investment contracts. Reserves on such contracts are equal to cumulative deposits less charges plus credited interest thereon (rates range from 2.50% to 17.80%) net of adjustments for investment experience that the company is entitled to reflect in future credited interest. Reserves on contracts subject to experience rating reflect the rights of contractholders, plan participants and the company. Reserves for group health products (included in unpaid claims and claim adjustment expenses) reflect estimates, derived from past experience, of the ultimate cost of incurred claims including claims that have been incurred but not reported, and claims that have been reported, but not settled. Revenue Recognition 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 in the Consolidated Statements of 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, specialty health and insurance premiums are generally recorded as premium revenue over the term of the 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 or other administrative services are recorded over the period the service is provided and are reflected in fees and other income. 81 Notes of Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Federal and Foreign Income Taxes The company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. The company files a consolidated federal income tax return. The Internal Revenue Code limits the amount of non-life insurance company losses that may offset life insurance company taxable income. Foreign subsidiaries and U.S. subsidiaries operating outside of the United States are taxed under applicable foreign statutes. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities and non-life net operating losses. Earnings Per Share Earnings per common share are computed using net income divided by the weighted average number of common shares outstanding, including common share equivalents. There is no difference between primary and fully diluted earnings per share. Reinsurance The continuing operations of the company utilize reinsurance agreements to reduce exposure to large losses in all aspects of its insurance business. Reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the company as direct insurer of the risks reinsured. The company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of present reinsurers. Only those reinsurance recoverables deemed probable of recovery are reflected as assets on the company's Consolidated Balance Sheets. 2. Sales of Subsidiaries Property-Casualty Subsidiaries The company entered into a definitive agreement, dated November 28, 1995, to sell The Aetna Casualty and Surety Company and The Standard Fire Insurance Company and their subsidiaries (collectively, the "P&C companies"), to Travelers. The sale is subject to state regulatory approval and other customary conditions and is expected to be completed no later than midyear 1996. The operating results of the Property-Casualty Operations are presented as Discontinued Operations. The company also intends to sell its subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., and, accordingly, the operating results of this subsidiary are included in Discontinued Operations. Results of the Discontinued Operations will be included in the company's consolidated results of operations until the closing. While such results will not adjust the purchase price, income or loss from such operations will decrease or increase, respectively, the gain expected to be recognized on the sale. All prior year financial data has been restated to reflect the presentation as Discontinued Operations. 82 Notes of Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Property-Casualty Subsidiaries (Continued) Results of Discontinued Operations for the years ended December 31, were:
(Millions) 1995 1994 1993 ______________________________________________________________________________________________ Revenue: Premiums $4,118.9 $4,390.8 $4,653.2 Net investment income 901.7 832.1 952.4 Fees and other income 82.0 115.6 144.3 Net realized capital gains 155.6 .4 178.0 ____________________________________________ Total revenue 5,258.2 5,338.9 5,927.9 ______________________________________________________________________________________________ Claims and Expenses: Claims and claim adjustment expenses 4,232.5 3,746.8 4,214.7 Operating expenses 787.3 914.1 1,025.4 Amortization of deferred policy acquisition costs 622.7 647.2 646.2 Severance and facilities charge - - 147.3 ____________________________________________ Total claims and expenses 5,642.5 5,308.1 6,033.6 ______________________________________________________________________________________________ Income (Loss) before income tax benefits and cumulative effect adjustments (384.3) 30.8 (105.7) Income tax benefits (162.1) (27.3) (119.7) ____________________________________________ Income (Loss) before cumulative effect adjustments (222.2) 58.1 14.0 Cumulative effect adjustments, net of tax - - 276.3 ____________________________________________ Net income (loss) $ (222.2) $ 58.1 $ 290.3 ____________________________________________ ____________________________________________ Pro forma net income (loss) assuming the discounting of workers' compensation life table indemnity reserves is applied retroactively $ (222.2) $ 58.1 $ 40.3 ____________________________________________ ____________________________________________ Pro forma net income (loss) assuming the accounting for retrospectively rated reinsurance contracts is applied retroactively $ (222.2) $ 58.1 $ 264.0 ______________________________________________________________________________________________ ____________________________________________
83 Notes of Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) The Balance Sheets of the Discontinued Operations at December 31, were:
(Millions) 1995 1994 _________________________________________________________________________________ Assets: Investments: Debt securities: Available for sale, at fair value (amortized cost $11,293.8 and $9,775.9) $11,705.6 $ 9,172.6 Held for investment, at amortized cost (1994 fair value, $407.1) - 413.5 Equity securities, at fair value (cost $313.8 and $802.5) 525.5 1,041.0 Short-term investments 137.2 106.0 Mortgage loans 1,061.7 1,453.7 Real estate 264.7 262.0 Other 291.8 314.7 ___________________________ Total investments 13,986.5 12,763.5 _________________________________________________________________________________ Cash and cash equivalents 1,153.6 676.4 Reinsurance recoverables and receivables 5,144.0 4,881.6 Accrued investment income 188.3 180.4 Premiums due and other receivables 1,057.4 1,129.2 Federal and foreign income taxes: Current 13.6 22.5 Deferred 642.3 862.5 Deferred policy acquisition costs 305.8 316.0 Other assets 1,010.9 1,017.5 ___________________________ Total assets $23,502.4 $21,849.6 _________________________________________________________________________________ _________________________________________________________________________________ Liabilities: Unpaid claims and claim expenses $16,569.3 $16,088.9 Unearned premiums 1,400.3 1,425.5 Policyholders' funds left with the companies 39.1 46.7 ___________________________ Total insurance liabilities 18,008.7 17,561.1 Short-term debt - 9.1 Long-term debt 35.2 35.5 Other liabilities 1,525.7 1,076.6 ___________________________ Total liabilities 19,569.6 18,682.3 _________________________________________________________________________________ Total shareholder's equity (including net unrealized capital gains (losses) of $303.1 and $(381.3)) 3,932.8 3,167.3 _________________________________________________________________________________ Total liabilities and shareholder's equity $23,502.4 $21,849.6 _________________________________________________________________________________ _________________________________________________________________________________
84 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) In addition to the applicable accounting policies of the continuing operations of the company (please refer to Note 1), Discontinued Operations have the following accounting policies: Discounting of Workers' Compensation Life Table Indemnity Reserves In 1993, the company elected to change, retroactive to January 1, 1993, the 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. A cumulative effect benefit of $250.0 million ($2.25 per common share), net of taxes of $134.7 million, was reported in income from Discontinued Operations in the 1993 Consolidated Statement of Income. The effect of the change for the year ended December 31, 1993 was an increase to results from Discontinued Operations before cumulative effect adjustments of $78.0 million ($.70 per common share), net of taxes of $42.0 million. Accounting for Retrospectively Rated Reinsurance Contracts In 1993, the company changed its method of accounting for retrospectively rated reinsurance contracts to conform to the consensus reached by the Emerging Issues Task Force of the FASB. 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. The company reported a cumulative effect benefit related to this accounting change of $26.3 million ($.24 per common share), net of taxes of $8.6 million, in income from Discontinued Operations in the 1993 Consolidated Statement of Income. The effect of the change for the year ended December 31, 1993 was an increase to results from Discontinued Operations before extraordinary item and cumulative effect adjustments of $3.3 million ($.03 per common share), net of taxes of $1.8 million. Insurance Liabilities Liabilities for unpaid property-casualty claims and claim adjustment expenses include, to the extent reasonably estimable, provisions for payments to be made on reported claims, and claims incurred but not reported and for associated claim adjustment expenses (see Environmental and Asbestos-Related Claims). Workers' compensation life table indemnity reserves are discounted at 5% for voluntary business and 3.5% for involuntary business. Workers' compensation life table indemnity reserves, net of the related discount, totaled $863 million and $821 million at December 31, 1995 and 1994, respectively, which were 26% and 24% of the P&C companies' total workers' compensation reserves for unpaid claims and claim adjustment expenses at December 31, 1995 and 1994, respectively. Certain other reserves with fixed or reasonably determinable payment patterns over periods of up to seven years, including reserves related to certain environmental and asbestos-related claim settlements, also have been discounted. The rates used in discounting such reserves range from 4% to 7%, and the amount of such discounted reserves, net of reinsurance, was approximately $190 million at December 31, 1995. 85 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Insurance Liabilities (Continued) The P&C companies' insurance reserve liabilities are reported net of estimated amounts of salvage and subrogation. Revenue Recognition 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. Claims and expenses, including acquisition costs such as commissions, certain premium taxes and certain other items, are charged to current operations as incurred. Claims are reported net of salvage and subrogation received and anticipated. Premiums, claims and expenses are also reported net of deductions for reinsurance ceded. Reinsurance Prepaid reinsurance premiums were $.4 billion for the year ended December 31, 1995 and $.3 billion for both the years ended December 31, 1994 and 1993. A summary of earned premiums for the years ended December 31 was as follows:
(Millions) 1995 1994 1993 _________________________________________________________________________________ Direct Amount $ 5,007.6 $ 5,094.8 $ 5,477.8 Ceded to Other Companies 1,307.0 1,206.0 1,232.6 Assumed from Other Companies 418.3 502.0 408.0 _________________________________________ Net Amount $ 4,118.9 $ 4,390.8 $ 4,653.2 _________________________________________________________________________________
There is not a material difference in premiums on a written versus an earned basis. Ceded claims and claim adjustment expenses were $.9 billion for the year ended December 31, 1995 and $1.2 billion for both the years ended December 31, 1994 and 1993. Certain subsidiaries of the P&C companies act as servicing carriers for several involuntary pools. This business is ceded completely to the pools, and the P&C companies have no direct underwriting risk associated with it. Reinsurance recoverables for this business were approximately $1.7 billion and $1.8 billion as of December 31, 1995 and 1994, respectively. The P&C companies also participate as members in a number of the involuntary pools, and as a result assume their share of premiums and losses associated with these pools. 86 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Reinsurance (Continued) The P&C companies also utilize a variety of reinsurance agreements, primarily with nonaffiliated insurers, to control their exposure to large property-casualty losses. These agreements, most of which are renegotiated annually as to coverage, limits and price, are structured either on a treaty basis (where all risks meeting prescribed criteria are automatically covered) or on a facultative basis (where the circumstances of specific individual insurance risks are reflected). The amount of risk retained by the P&C companies depends on the underwriter's evaluation of the specific risk, subject to maximum limits based on risk characteristics and the type of coverage. The principal catastrophe reinsurance agreement currently in force covers approximately 90% of specified property losses between $150 million and $325 million. The P&C companies also have in place an aggregate excess of loss arrangement with respect to all of its property-casualty lines for accident year 1995, providing up to approximately $250 million of additional net protection. Reserves The following represents changes in aggregate reserves for the P&C companies:
(Millions) 1995 1994 1993 ___________________________________________________________________________________________ Net unpaid claims and claim adjustment expenses at beginning of year $ 11,144 $ 11,412 $ 11,733 Incurred claims and claim adjustment expenses: Provision for insured events of the current year 3,099 3,488 3,536 Increases in provision for insured events of prior years 1,134 (1) 259 65 (2) ___________________________________________________________________________________________ Total incurred claims and claim adjustment expenses 4,233 3,747 3,601 ___________________________________________________________________________________________ Payments: Claims and claim adjustment expenses attributable to insured events of the current year 1,092 1,240 1,039 Claims and claim adjustment expenses attributable to insured events of prior years 2,540 2,775 2,883 ___________________________________________________________________________________________ Total payments 3,632 4,015 3,922 ___________________________________________________________________________________________ Net unpaid claims and claim adjustment expenses at end of the year 11,745 11,144 11,412 Plus: Reinsurance recoverables 4,412 4,593 4,394 Deductible amounts recoverable from policyholders 412 352 - ___________________________________________________________________________________________ Gross unpaid claims and claim adjustment expenses at end of the year $ 16,569 $ 16,089 $ 15,806 ___________________________________________________________________________________________ ___________________________________ (1) Includes increases in provision for insured events of prior years of $399 million related to asbestos-related claims and $778 million related to environmental- related claims. (2) Includes increases in provision for insured events of prior years of $679 million, offset by the cumulative effect adjustment related to the change in accounting to report workers' compensation life table indemnity claims on a discounted basis of $(514) million and the current year effect of this change in accounting of $(100) million related to the provision for insured events of prior years.
87 Notes to Combined Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Environmental and Asbestos-Related Claims The P&C companies added $778 million ($505.7 million, after tax) to environmental-related claims reserves in 1995. In the opinion of management, the P&C companies' reserves for environmental- related claims at December 31, 1995 represent the company's best estimate of the P&C companies' ultimate environmental-related liability, based on currently known facts, current law (including Superfund), current technology, and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgment involved in estimating the P&C companies' environmental liability, no assurances can be given that the environmental reserve represents the amount that will ultimately be paid by the P&C companies for all environmental-related losses. The amount ultimately paid could differ materially from the P&C companies' currently recorded reserve as legal and factual issues are clarified, but any difference cannot be reasonably estimated at this time. As a result of this addition to the environmental-related claims reserves, the company contributed $303 million of additional capital to the P&C companies in the fourth quarter of 1995 in order to restore capital levels (including risk-based capital), to appropriate levels for regulatory and other purposes. The funding for such capital contribution was obtained through short-term parent company borrowings. In conjunction with the reserve addition for environmental-related claims, the P&C companies purchased reinsurance which provided aggregate protection of $335 million for the adverse loss development beyond reserves held (net of existing reinsurance). Under this arrangement, approximately $165 million of the existing reserves for such losses were ceded at the time the contract was entered into. As a result of the asbestos-related reserve addition (see below) and other reserve developments, substantially all of the available statutory surplus protection was utilized during 1995. There was an immaterial benefit to results of Discontinued Operations under this arrangement. 88 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Environmental and Asbestos-Related Claims (Continued) In 1995, the P&C companies settled a case involving a policyholder (a major producer of asbestos and asbestos products) that had exhausted applicable policy limits on asbestos products claims and asserted coverage under policy provisions for other types of liability. The P&C companies obtained a release from the insured for all current and future asbestos bodily injury claims and certain asbestos property damage claims (along with all environmental claims) under existing policies in exchange for fixed, scheduled cash payments, which were recorded on a discounted basis. In connection with this settlement, $120 million of property-casualty reserves not previously classified as covering asbestos-related claims were transferred to asbestos reserves. No amounts were transferred from environmental reserves, and the environmental-related portion of the settlement was covered by existing environmental reserves. As a result, this settlement did not affect 1995 results of operations. As part of the settlement, the companies also agreed, among other things, to make insurance coverage available to the insured in the year 2000 (on a one-time basis), for a percentage of all asbestos defense and indemnity claim payments made by the insured during the years 2000 through 2007. The P&C companies' payment obligations would be subject to annual dollar caps. Given the uncertainty as to whether the insured will elect to purchase this additional insurance, no related premiums or losses have been recorded by the P&C companies at this time. Reserving for asbestos-related claims is subject to significant uncertainties and management is currently unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all asbestos-related claims and related litigation expenses. Management has continued to evaluate reserves for asbestos liabilities as the company continued to gather and analyze new information and reassess its reserving techniques for these claims in order to determine whether it can better estimate its liability. In connection with such evaluation, the company added $335 million ($218 million, after tax) to asbestos-related claims reserves in the fourth quarter of 1995. While the company expects to recover some of its asbestos losses from its reinsurers, due to the uncertainty in estimating amounts to be recovered, no reinsurance benefits were recorded in establishing this addition to reserves. Further adjustments may be made to such reserves as loss patterns develop and other information is obtained, and the amount ultimately paid for such claims could differ materially from reserves, although any difference cannot be reasonably estimated at this time. 89 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Environmental and Asbestos-Related Claims (Continued) Environmental and asbestos-related loss and loss adjustment expense reserves, as reflected on the Balance Sheets at December 31, were as follows (before reinsurance and net of discounts on certain environmental and asbestos settlements):
(Millions) 1995 1994 ______________________________________________________________ Environmental Liability $ 1,005.9 $ 436.1 Asbestos Bodily Injury* 754.3 295.9 Asbestos Property Damage* 22.3 29.9 _____________________ Total Environmental and Asbestos-Related Reserves $ 1,782.5 $ 761.9 _____________________________________________________________ ______________________
[FN] *Includes $107.4 million and $12.6 million of reserves transferred to asbestos bodily injury and asbestos property damage reserves, respectively, in 1995. Workers' Compensation Claims Estimating workers' compensation reserves is particularly difficult (and, therefore, more subject to change than many other types of property-casualty claims), largely because of the length of the "tail" associated with workers' compensation claims. Workers' compensation claim costs are dependent on a number of complex factors including social and economic trends and changes in doctrines of legal liability and damage awards. Adjustments may be made to such reserves as loss patterns develop and other information is obtained. Other Policyholders of the P&C companies also seek insurance coverage from the P&C companies for other long-term exposure claims against them, including claims relating to silicone-based personal products, lead paint and other allegedly toxic or harmful substances. Evaluating and reserving for these types of exposures is complex and subject to many uncertainties including those stemming from coverage issues, long latency periods and changing or expanding laws and legal theories of liability. Adjustments will be made to such reserves as loss patterns develop and new information becomes available, and such adjustments may be material to Discontinued Operations. Sale of American Re-Insurance Company On September 30, 1992, Aetna Casualty and Surety Company ("AC&S") completed the sale of American Re-Insurance Company ("Am Re"), formerly a wholly owned subsidiary. As part of the sale, AC&S received 70,000 shares of American Re Corporation's (the new holding company) Preferred Stock, which were redeemed in 1993 resulting in an after-tax gain of $27.0 million. 90 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Sale of American Re-Insurance Company (Continued) In connection with the 1992 sale of Am Re, Am Re and AC&S entered into a reinsurance agreement which provides that to the extent Am Re incurred losses in 1991 and prior that were still outstanding at January 1, 1992 in excess of $2.7 billion, AC&S has an 80% participation in payments on those losses up to a maximum payment by AC&S of $500 million. In 1995, Am Re increased reserves for asbestos, environmental and other latent liabilities. As a result of this increase, losses of approximately $228 million ($120 million after discount), which were largely workers' compensation life table indemnity claims, were ceded to AC&S. There was no material impact on 1995 earnings as AC&S had previously established reserves. It is reasonably possible that additional undiscounted losses of up to approximately $270 million pretax could be ceded to the company in the future. Financial Guarantees The company no longer writes municipal bond insurance, and such business previously written by the company was reinsured with another company. It is not practicable to estimate the fair value of the business that has been ceded. AC&S was a writer of financial guarantees on obligations secured by real estate, corporate debt obligations, and of municipal and nonmunicipal tax-exempt entities through December 31, 1987, and ceased writing such guarantees as of January 1, 1988. The aggregate net par value of financial guarantees outstanding at December 31, 1995 and 1994 was $656.4 million and $728.3 million, respectively. Future runoff of financial guarantees as of December 31, 1995, after adjusting for extensions granted on certain guarantees, is estimated to be $31.9 million for 1996, $135.4 million for 1997, $276.7 million for 1998, $3.8 million for 1999, $7.4 million for 2000 and $201.2 million thereafter. It is not practicable to estimate a fair value for AC&S' financial guarantees because AC&S no longer writes such guarantees, there is no quoted market price for such contracts, and it is not practicable to reliably estimate the timing and amount of all future cash flows due to the unique nature of each of these contracts. Total reserves for the financial guarantee business, which include reserves for defaults, probable losses not yet identified and unearned premiums, were $40.5 million and $47.7 million at December 31, 1995 and 1994, respectively. Premium income received from such guarantees is recognized pro rata over the contract coverage period. 91 Notes to Financial Statements (Continued) 2. Sales of Subsidiaries (Continued) Structured Settlements The P&C companies had contingent liabilities in the amount of $1,189.3 million and $1,097.2 million for structured settlements at December 31, 1995 and 1994, respectively. Included in such liabilities is $352.4 million and $280.0 million of structured settlements purchased from affiliates, consisting of $177.2 million and $153.4 million from Aetna Life Insurance Company at December 31, 1995 and 1994, respectively, and $175.2 million and $126.6 million from Aetna Life Insurance and Annuity Company at December 31, 1995 and 1994, respectively. Structured settlements, net of the affiliate amounts, are reflected in reinsurance recoverables on the Discontinued Operations' Balance Sheets. Litigation The P&C companies are continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of their business operations either as liability insurers defending third- party claims brought against their insureds or as insurers defending coverage claims brought against them, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefor and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the P&C companies, although it may adversely affect results of operations in future periods. Other Subsidiaries On June 30, 1993, the company completed the sale of its U.K. life and investment management operations. The company realized a continuing operations after-tax capital 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. 92 Notes to Financial Statements (Continued) 3. Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the years ended December 31, 1995 and 1994 were charged to the reserve for anticipated future losses and did not affect the company's results of operations. Assets supporting the discontinued products are distinguished from other continuing operation assets. Future losses (including capital losses) for each product will be charged to the respective reserve at the time such losses are realized. Management believes the reserve for anticipated losses at December 31, 1995 is adequate to provide for future losses associated with these products. To the extent that actual future losses differ from anticipated future losses or future projected cash flows are revised, the company's results of operations would be affected. Results of discontinued products were as follows (pretax):
Guaranteed Single- Charged to Investment Premium Reserve for (Millions) Contracts Annuities Total Future Losses Net(1) ____________________________________________________________________________________________________________ 1995 Net investment income $ 515.4 $ 447.5 $ 962.9 $ - $ 962.9 Net realized capital gains (losses) (56.4) 49.3 (7.1) 7.1 - Interest earned on receivable from continuing business 20.3 30.5 50.8 - 50.8 Other income 8.8 11.9 20.7 - 20.7 _______________________________________________________________________ Total revenue 488.1 539.2 1,027.3 7.1 1,034.4 _______________________________________________________________________ Current and future benefits (2) 609.4 443.7 1,053.1 (31.1) 1,022.0 Operating expenses 2.9 9.5 12.4 - 12.4 _______________________________________________________________________ Total benefits and expenses 612.3 453.2 1,065.5 (31.1) 1,034.4 _______________________________________________________________________ Results of discontinued products $ (124.2) $ 86.0 $ (38.2) $ 38.2 $ - ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ 1994 Premiums $ - $ 57.3 $ 57.3 $ - $ 57.3 Net investment income 633.1 433.0 1,066.1 - 1,066.1 Net realized capital losses (150.2) (58.8) (209.0) 209.0 - Interest earned on receivable from continuing business 19.4 28.1 47.5 - 47.5 Other income 14.9 16.2 31.1 - 31.1 _______________________________________________________________________ Total revenue 517.2 475.8 993.0 209.0 1,202.0 _______________________________________________________________________ Current and future benefits 765.5 491.4 1,256.9 (64.0) 1,192.9 Operating expenses 6.1 3.0 9.1 - 9.1 _______________________________________________________________________ Total benefits and expenses 771.6 494.4 1,266.0 (64.0) 1,202.0 _______________________________________________________________________ Results of discontinued products $ (254.4) $ (18.6) $ (273.0) $ 273.0 $ - ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ (1) Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of $50.8 million and $47.5 million, respectively, earned on the receivable from continuing business which is eliminated in consolidation. (2) Current and future benefits include losses of $50 million (pretax) due to early retirement of GICs.
Deposits of $31.5 million and $212.3 million were received during 1995 and 1994, respectively, under preexisting GICs. 93 Notes to Financial Statements (Continued) 3. Discontinued Products (Continued) Assets and liabilities of discontinued products were as follows (1):
December 31, 1995 December 31, 1994 _______________________________________________________________________________ Guaranteed Single- Guaranteed Single- Investment Premium Investment Premium (Millions) Contracts Annuities Total Contracts Annuities Total ____________________________________________________________________________________________________________ Debt securities available for sale $ 2,120.3 $ 3,644.9 $ 5,765.2 $ 2,978.5 $ 3,176.5 $ 6,155.0 Mortgage loans 1,883.0 1,505.6 3,388.6 2,749.6 1,545.3 4,294.9 Real estate 457.3 177.7 635.0 555.0 175.0 730.0 Short-term and other investments 425.3 110.5 535.8 587.4 138.0 725.4 ______________________________________________________________________________ Total investments 4,885.9 5,438.7 10,324.6 6,870.5 5,034.8 11,905.3 Current and deferred income taxes 135.7 123.1 258.8 218.8 115.4 334.2 Receivable from continuing products (1) 429.7 493.6 923.3 409.4 463.1 872.5 Other - - - 90.7 92.9 183.6 ______________________________________________________________________________ Total Assets $ 5,451.3 $ 6,055.4 $ 11,506.7 $ 7,589.4 $ 5,706.2 $ 13,295.6 ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Future policy benefits $ - $ 4,924.5 $ 4,924.5 $ - $ 5,032.6 $ 5,032.6 Policyholders' funds left with the company 5,058.9 - 5,058.9 7,224.4 - 7,224.4 Reserve for future losses on discontinued products 221.4 737.4 958.8 345.6 651.4 997.0 Other 171.0 393.5 564.5 19.4 22.2 41.6 ___________________________________________________________________________________________________________ Total Liabilities $ 5,451.3 $ 6,055.4 $ 11,506.7 $ 7,589.4 $ 5,706.2 $ 13,295.6 ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ (1) The receivable from continuing products is eliminated in consolidation at December 31, 1995 and 1994.
Net unrealized capital gains in 1995 and losses in 1994 on available for sale debt securities are included above in other liabilities and other assets, respectively, and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses on GICs is included in policyholders' funds left with the company, and the reserve for anticipated future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheets. The reserve for anticipated future losses on discontinued products represents the present value (at the risk free rate at the time of discontinuance, consistent with the duration of the liabilities) 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 anticipated 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. Projections of future investment results took into account both industry and company data and were based on 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 runoff of the liabilities. 94 Notes to Financial Statements (Continued) 3. Discontinued Products (Continued) At December 31, 1995 and 1994, estimated future after-tax realized capital losses of $92.8 million and $127.7 million ($142.8 million and $196.4 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs, and $38.0 million and $47.7 million ($58.5 million and $73.4 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 $(56.4) million and $49.3 million of net realized capital (losses) gains (pretax) on GICs and SPAs, respectively, for the year ended December 31, 1995, are (losses) gains from the sale of bonds of $(2.8) million and $64.2 million, respectively. Included in the $150.2 million and $58.8 million of net realized capital losses (pretax) on GICs and SPAs, respectively, for the year ended December 31, 1994, are losses from the sale of bonds of $54.6 million and $24.1 million, respectively. The activity in the reserve for anticipated future losses on discontinued products for the years ended December 31, 1995 and 1994 was as follows:
Guaranteed Single- Investment Premium (Millions) Contracts Annuities Total ______________________________________________________________________________ Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0 Results of discontinued products (254.4) (18.6) (273.0) ______________________________________ Reserve at December 31, 1994 345.6 651.4 997.0 Results of discontinued products (124.2) 86.0 (38.2) ______________________________________ Reserve at December 31, 1995 $ 221.4 $ 737.4 $ 958.8 ______________________________________________________________________________ ______________________________________________________________________________
At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in continuing products. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At December 31, 1995, for GICs and SPAs, the receivables from continuing products, net of the related deferred taxes payable of $13.9 million and $20.5 million, respectively, on the accrued interest income were $415.8 million and $473.1 million, respectively. At December 31, 1994, for GICs and SPAs, the receivables from continuing products, net of the related deferred taxes payable of $6.8 million and $9.8 million, respectively, on the accrued interest income were $402.6 million and $453.3 million, respectively. As of December 31, 1995, no funding had taken place. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheets. 95 Notes to Financial Statements (Continued) 4. Severance and Facilities Charge The company recorded a $200 million after-tax ($308 million pretax) severance and facilities charge in the fourth quarter of 1993 (of which $96 million after-tax and $147 million pretax related to Discontinued Operations). The planned actions included the elimination of approximately 4,000 positions (2,000 of which related to Discontinued Operations). The severance and facilities charge included costs related to vacating excess leased office space and costs related to vacating and selling an owned property in Hartford, Connecticut. The 1993 severance and facilities charge included the following (pretax):
Facility and Vacated Severance Asset Write- Leased (Millions) Related Off Related Property Other Total _________ ____________ ________ _______ _______ Aetna Health Plans..................... $ 44.4 $ 20.4 $ 11.8 $ 3.2 $ 79.8 Aetna Life Insurance & Annuity......... 10.9 5.1 1.4 13.4 (1) 30.8 International.......................... 4.6 2.9 2.0 1.5 11.0 Large Case Pensions.................... 11.5 8.4 1.0 1.0 21.9 Corporate: Other...................... 12.2 5.0 - - 17.2 _______ _______ _______ _______ _______ Total Continuing Operations (2)........ $ 83.6 $ 41.8 (3) $ 16.2 $ 19.1 $ 160.7 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Discontinued Operations................ $ 96.8 $ 24.2 $ 20.7 $ 5.6 $ 147.3 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ (1) Includes a charge of $13.0 million related to the cessation of a business providing administrative services to defined contribution pension plans. The charge includes broker buyout, direct losses on runoff of the existing contracts and other related costs. (2) Facility and asset write-off related charges are noncash costs. All other items shown above required, or will require, cash outlays. (3) Facility and asset write-off related charges included the write-down of a company property that was vacated and sold. Facility and asset write-off related charges also included costs to retire computer equipment used by employees whose positions were eliminated and other related costs.
During 1995 and 1994, the company charged costs of $83.9 million and $224.1 million (pretax) (of which $12.6 million and $134.7 million related to Discontinued Operations), respectively, to the 1993 severance and facilities reserve related to the cost reduction actions. The remaining lease payments (net of expected subrentals) on vacated leased office space are payable over approximately the next five years. 96 Notes to Financial Statements (Continued) 5. Investments
Debt securities at December 31, 1995 were as follows: Gross Gross Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value ________________________________________________________________________________________________ Available for Sale: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 3,452.2 $ 183.5 $ .7 $ 3,635.0 Obligations of states and political subdivisions 292.5 41.3 .6 333.2 Utilities 2,599.4 213.8 3.4 2,809.8 Financial 5,158.3 245.6 13.5 5,390.4 Transportation/Capital Goods 1,967.5 205.3 2.4 2,170.4 Other corporate securities 4,058.1 299.8 13.0 4,344.9 Mortgage-backed securities 5,393.4 381.4 11.1 5,763.7 Other loan-backed securities 1,720.4 46.0 1.2 1,765.2 Foreign governments 3,102.9 178.4 17.7 3,263.6 Other 2,217.8 175.3 9.0 2,384.1 ______________________________________________________ Total Available for Sale - continuing operations $ 29,962.5 $ 1,970.4 $ 72.6 $ 31,860.3 _______________________________________________________________________________________________ ______________________________________________________ Available for sale securities of discontinued products (included above) $ 5,344.1 $ 435.5 $ 14.4 $ 5,765.2 _______________________________________________________________________________________________ ______________________________________________________ Available for sale securities - Discontinued Operations $ 11,293.8 $ 456.4 $ 44.6 $ 11,705.6 _______________________________________________________________________________________________ ______________________________________________________
97 Notes to Financial Statements (Continued) 5. Investments (Continued)
Debt securities at December 31, 1994 were as follows: Gross Gross Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value ________________________________________________________________________________________________ Available for Sale: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 4,668.9 $ 12.4 $ 375.0 $ 4,306.3 Obligations of states and political subdivisions 331.6 7.3 7.0 331.9 Utilities 2,084.4 50.8 113.5 2,021.7 Financial 4,640.2 28.6 238.7 4,430.1 Transportation/Capital Goods 2,088.6 58.2 88.5 2,058.3 Other corporate securities 2,195.6 27.9 113.4 2,110.1 Mortgage-backed securities 5,643.1 119.6 323.0 5,439.7 Other loan-backed securities 1,359.0 .2 41.8 1,317.4 Foreign governments 1,997.4 10.4 192.0 1,815.8 Other 2,199.5 26.9 119.6 2,106.8 _______________________________________________________ Total Available for Sale - continuing operations $ 27,208.3 $ 342.3 $ 1,612.5 $ 25,938.1 ________________________________________________________________________________________________ _______________________________________________________ Available for sale securities - discontinued products (included above) $ 6,349.8 $ 137.9 $ 332.7 $ 6,155.0 ________________________________________________________________________________________________ _______________________________________________________ Available for sale securities - Discontinued Operations $ 9,775.9 $ 16.6 $ 619.9 $ 9,172.6 ________________________________________________________________________________________________ _______________________________________________________ Held for Investment: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 6.5 .5 $ - $ 7.0 Obligations of states and political subdivisions 29.2 .4 1.6 28.0 Utilities 98.3 - 1.0 97.3 Financial 181.3 1.9 1.3 181.9 Transportation/Capital Goods 207.7 3.3 1.5 209.5 Other corporate securities 49.8 - - 49.8 Mortgage-backed securities 10.5 - .6 9.9 Other loan-backed securities 15.0 - .6 14.4 Foreign governments 600.1 .3 .1 600.3 Other 388.9 4.3 7.2 386.0 _______________________________________________________ Total Held for Investment - continuing operations $ 1,587.3 $ 10.7 $ 13.9 $ 1,584.1 ________________________________________________________________________________________________ _______________________________________________________ Held for Investment - Discontinued Operations $ 413.5 $ 3.9 $ 10.3 $ 407.1 ________________________________________________________________________________________________ _______________________________________________________
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) from continuing operations of $1,897.8 million and $(1,270.2) million, respectively, on available for sale debt securities included $960.0 million and $(607.3) million, respectively, related to experience rated contractholders and $421.1 million and $(194.8) million, respectively, related to discontinued products, which were not reflected in shareholders' equity. 98 Notes to Financial Statements (Continued) 5. Investments (Continued) The carrying and fair value of debt securities are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid.
1995 Amortized Fair (Millions) Cost Value ____________________________________________________________________ Available for Sale - Continuing Operations Due to mature: One year or less $ 1,515.7 $ 1,520.7 After one year through five years 7,218.3 7,388.1 After five years through ten years 5,990.1 6,401.5 After ten years 8,124.6 9,021.1 Mortgage-backed securities 5,393.4 5,763.7 Other loan-backed securities 1,720.4 1,765.2 _____________________________________________________________________ Total $ 29,962.5 $ 31,860.3 _____________________________________________________________________ _________________________ Available for Sale - Discontinued Operations Due to mature: One year or less $ 808.9 $ 851.7 After one year through five years 3,873.0 3,922.3 After five years through ten years 2,530.9 2,645.2 After ten years 1,718.3 1,870.5 Mortgage-backed securities 1,655.5 1,697.5 Other loan-backed securities 707.2 718.4 _____________________________________________________________________ Total $ 11,293.8 $ 11,705.6 _____________________________________________________________________ _________________________
The company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Cash collateral, which is in excess of the market value of the loaned securities, is deposited by the borrower with a lending agent, and retained and invested by the lending agent to generate additional income for the company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. At December 31, 1995, the company had loaned securities (which are reflected as invested assets on the Consolidated Balance Sheets) with a market value of approximately $1.3 billion (an additional $.9 billion is included in Discontinued Operations assets). Investments in equity securities were as follows:
Gross Gross Unrealized Unrealized Fair (Millions) Cost Gains Losses Value _________________________________________________________________________________ 1995 _________________________________________________________________________________ Equity securities - continuing operations $ 597.8 $ 85.1 $ 23.2 $ 659.7 _________________________________________________________________________________ ____________________________________________________ Equity securities - Discontinued Operations $ 313.8 $ 288.3 $ 76.6 $ 525.5 _________________________________________________________________________________ ____________________________________________________ 1994 _________________________________________________________________________________ Equity securities - continuing operations $ 594.0 $ 63.6 $ 43.0 $ 614.6 _________________________________________________________________________________ ____________________________________________________ Equity securities - Discontinued Operations $ 802.5 $ 336.1 $ 97.6 $ 1,041.0 _________________________________________________________________________________ ____________________________________________________
99 Notes to Financial Statements (Continued) 5. Investments (Continued) Real Estate holdings at December 31 were as follows:
(Millions) 1995 1994 _____________________________________________________________________ Properties held for sale $ 1,230.2 $ 1,198.5 Investment real estate 177.7 196.6 _______________________ 1,407.9 1,395.1 Valuation reserve 130.6 111.4 _______________________ Net carrying value of real estate of continuing operations $ 1,277.3 $ 1,283.7 _____________________________________________________________________ _______________________ Net carrying value of real estate of discontinued products (included above) $ 635.0 $ 730.0 _____________________________________________________________________ _______________________ Net carrying value of real estate of Discontinued Operations $ 264.7 $ 262.0 _____________________________________________________________________ _______________________
The accumulated depreciation for real estate for continuing operations was $116.6 million and $102.4 million at December 31, 1995 and 1994, respectively. Discontinued Operations' accumulated depreciation for real estate was $29.0 million and $19.1 million at December 31, 1995 and 1994, respectively. Total real estate write-downs included in the net carrying value of the company's continuing operations real estate holdings on the Consolidated Balance Sheets at December 31, 1995 and 1994 were $555.4 million and $533.2 million, respectively, (including $299.2 million and $315.8 million, respectively, attributable to assets of discontinued products). Real estate write-downs included in the real estate holdings of Discontinued Operations were $116.4 million and $83.3 million at December 31, 1995 and 1994, respectively. At December 31, 1995, the total recorded investment in mortgage loans that are considered to be impaired (which include problem loans, restructured loans and potential problem loans) under FAS No. 114 and related specific reserves are presented in the table below. Included in the total recorded investment are impaired loans of $478 million ($61 million of which are related to Discontinued Operations) for which no specific reserves are considered necessary.
Total Recorded Specific (Millions) Investment Reserves _________________________________________________________________________ Supporting discontinued products $ 755.4 $ 200.9 Supporting experience rated products 439.2 115.1 Supporting remaining products 329.8 45.2 ___________________________ Total Impaired Loans - continuing operations $ 1,524.4 $ 361.2 _________________________________________________________________________ ___________________________ Supporting Discontinued Operations $ 164.4 $ 21.3 _________________________________________________________________________ ___________________________
100 Notes to Financial Statements (Continued) 5. Investments (Continued) The activity in the specific and general reserves as of December 31, 1995 is summarized below:
General Reserve Balance at Allocated to Balance at Charged December 31, Experience December 31, to net Charged Balance at 1994, as Rated 1994, as realized to other Principal December 31, (Millions) reported Products (1) adjusted loss accounts (2) Write-offs 1995 (3) ____________________________________________________________________________________________________________ Supporting discontinued products $ 372.1 $ - $ 372.1 $ - $ 25.2 $ (109.8) $ 287.5 Supporting experience rated products 156.1 208.5 364.6 - (30.2) (106.1) 228.3 Supporting remaining products 119.3 - 119.3 10.4 - (40.6) 89.1 _______________________________________________________________________________________________ Total continuing operations $ 647.5 $ 208.5 $ 856.0 $ 10.4 $ (5.0) $ (256.5) $ 604.9 ____________________________________________________________________________________________________________ _______________________________________________________________________________________________ Supporting Discontinued Operations $ 136.6 $ - $ 136.6 $ 6.4 $ - $ (77.3) $ 65.7 ____________________________________________________________________________________________________________ _______________________________________________________________________________________________ (1) The general reserve at December 31, 1994 excluded reserves of $208.5 million related to experience rated products. (2) Reflects additions to (releases of) reserves related to assets supporting experience rated products and discontinued products which do not affect the company's results of operations. (3) Total reserves for continuing operations at December 31, 1995 include $361.2 million of specific reserves and $243.7 million of general reserves.
The company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. Income earned (pretax) and received on the average recorded investment in impaired loans for the twelve months ended December 31, 1995 was as follows:
Average Impaired Income Income (Millions) Loans Earned Received ____________________________________________________________________ Supporting discontinued products $ 952.9 $ 81.9 $ 81.0 Supporting experience rated products 739.8 50.6 51.6 Supporting remaining products 292.5 21.6 22.1 _____________________________ Total - continuing operations $1,985.2 $ 154.1 $ 154.7 ___________________________________________________________________ _____________________________ Supporting Discontinued Operations $ 227.0 $ 12.2 $ 12.2 ___________________________________________________________________ _____________________________
101 Notes to Financial Statements (Continued) 5. Investments (Continued) The carrying values of investments that were nonincome producing for the twelve months preceding the Balance Sheet date were as follows:
(Millions) 1995 1994 ____________________________________________________________________________________ Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations __________ ____________ __________ ____________ Debt securities $ 6.9 $ .6 $ 5.5 $ 2.4 Equity securities - 12.6 11.0 9.3 Mortgage loans 57.9 .3 65.2 14.9 Real estate 95.8 71.4 111.9 47.9 ______________________________________________________ Total nonincome producing assets $ 160.6 $ 84.9 $ 193.6 $ 74.5 ____________________________________________________________________________________ ______________________________________________________ Nonincome producing assets of discontinued products (included above) $ 33.9 $ - $ 68.0 $ - ______________________________________________________ ______________________________________________________
Significant noncash investing and financing activities include acquisition of real estate through foreclosures (including in- substance foreclosures) of mortgage loans amounting to $264 million in 1995, $649 million in 1994 and $278 million in 1993 for continuing operations and $40 million in 1995, $59 million in 1994 and $17 million in 1993 for Discontinued Operations. Disclosure of concentrations of credit risk for bonds and mortgage loans is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 42 through 55. 6. Capital Gains and Losses on Investment Operations Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Provisions for impairments and changes in the fair value of real estate subsequent to foreclosure are also included in net realized capital gains or losses. Unrealized capital gains and losses on available for sale investments, after deducting amounts allocable to experience rated contractholders and discontinued products, and net of related taxes, are reflected in shareholders' equity. Net realized capital gains allocable to experience rated contractholders of $96.5 million for the year ended December 31, 1995 and net realized capital losses of $195.0 million and $180.1 million for the years ended December 31, 1994 and 1993, respectively, were deducted from net realized capital gains (losses) as reflected on the Consolidated Statements of Income, and an offsetting amount is reflected on the Consolidated Balance Sheets in policyholders' funds left with the company. 102 Notes to Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations (Continued) Net realized capital gains (losses) on investments were as follows:
(Millions) 1995 1994 1993 _______________________ ________________________ _____________________ Continuing Discontinued Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations Operations Operations __________ ____________ __________ ____________ __________ ____________ Debt securities $ 34.4 $ (38.0) $ (42.3) $ 9.7 $ 375.8 $ 230.5 Equity securities 18.2 239.5 .8 30.7 15.4 75.9 Mortgage loans (9.4) (5.5) (39.0) (52.8) (328.2) (107.5) Real estate 3.5 28.7 30.0 12.2 (99.6) (51.9) Sales of subsidiaries - (43.3) (1) (3.9) 20.8 (18.2) 27.0 Other .5 (25.8) (.8) (20.2) (6.4) 4.0 ______________________________________________________________________ Pretax realized capital gains (losses) $ 47.2 $ 155.6 $ (55.2) $ .4 $ (61.2) $ 178.0 _______________________________________________________________________________________________ _____________________________________________________________________ After tax realized capital gains (losses) $ 29.5 $ 106.0 $ (41.2) $ (1.4) $ (42.0) $ 128.0 _______________________________________________________________________________________________ (1) A loss of $43.3 million ($22.5 million, after tax) is included in net realized capital losses in Discontinued Operations to reflect a write-down of the carrying value of Aetna Re-Insurance Company (U.K.) Ltd.
In December 1995, the company completed the sale and securitization of $443 million of commercial mortgage loans supporting discontinued products. Concurrent with the sale, the company retained approximately $108 million of subordinate and residual certificates which were classified as debt securities at December 31, 1995. The net proceeds from the sale were approximately $338 million. Proceeds from the sale of investments in available for sale, held for investment and trading debt securities and the related gross gains and losses on those sales were as follows:
(Millions) 1995 1994 1993 _______________________________________________________________________ Continuing Discontinued Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations Operations Operations __________ ____________ __________ ____________ __________ ____________ Proceeds on sales $ 13,747.2 $ 3,871.0 $ 14,807.2 $ 4,210.3 $ 34,183.1 $ 7,906.5 Gross gains 124.0 56.5 62.3 66.5 441.0 257.8 Gross losses 89.6 94.5 100.8 57.9 54.2 20.9
Changes in shareholders' equity included changes in unrealized capital gains (losses), excluding changes in unrealized capital gains (losses) related to experience rated contractholders and discontinued products, for the periods as follows:
(Millions) 1995 1994 1993 _______________________________________________________________________________________ Continuing Operations: Equity securities $ 41.3 $ (28.9) $ 22.2 Debt trading securities - - (35.5) Debt securities available for sale 984.8 (867.9) 399.8 Foreign exchange and other, net (23.3) (82.5) 17.4 Discontinued Operations 900.9 (910.5) 178.4 _________________________________________ Subtotal 1,903.7 (1,889.8) 582.3 Increase (Decrease) in deferred federal income taxes 191.1 (170.1) 193.7 _________________________________________ Net changes in unrealized capital gains (losses) $ 1,712.6 $ (1,719.7) $ 388.6 _______________________________________________________________________________________ _________________________________________
103 Notes to Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations (Continued) Changes in unrealized capital gains (losses) for the periods exclude pretax changes in debt securities carried at amortized cost. The unrecorded appreciation (depreciation) for continuing operations related to debt securities carried at amortized cost is the difference between estimated market and carrying values, and amounted to $(3.2) million and $125.8 million at December 31, 1994 and 1993, respectively. Such unrecorded appreciation (depreciation) includes amounts allocable to experience rated contractholders. The change in unrecorded appreciation (depreciation) for such securities was $3.2 million, $(129.0) million and $(1,325.6) million in 1995, 1994 and 1993, respectively. Shareholders' equity included the following unrealized capital gains (losses), which are net of amounts allocable to experience rated contractholders and amounts related to discontinued products, at December 31:
(Millions) 1995 1994 1993 ___________________________________________________________________________________ Continuing Operations: Equity securities: Gross unrealized capital gains $ 85.1 $ 63.6 $ 55.0 Gross unrealized capital losses (23.2) (43.0) (5.5) _____________________________________ 61.9 20.6 49.5 Debt securities available for sale: Gross unrealized capital gains 574.9 72.4 420.0 Gross unrealized capital losses (58.2) (540.5) (20.2) _____________________________________ 516.7 (468.1) 399.8 Foreign exchange and other, net (66.3) (43.0) 39.5 Discontinued Operations 474.0 (426.9) 483.6 Deferred federal income taxes 345.2 154.1 324.2 _____________________________________ Net unrealized capital gains (losses) $ 641.1 $(1,071.5) $ 648.2 ___________________________________________________________________________________ _____________________________________
At December 31, 1994, $749.0 million of net unrealized capital losses (of which $293.7 million related to Discontinued Operations) primarily on available for sale debt and equity securities were reflected in shareholders' equity without deferred tax benefits. An additional valuation allowance of $213 million was established at December 31, 1994 for potential loss of tax benefits on net unrealized capital losses on assets allocable to experience rated contractholders. (Please refer to Note 10 for discussion of the tax treatment for unrealized capital losses on available for sale debt and equity securities.) 104 Notes to Financial Statements (Continued) 7. Net Investment Income Net investment income includes amounts allocable to experience rated contractholders of $1.5 billion, $1.4 billion and $1.6 billion for the years ended December 31, 1995, 1994 and 1993, respectively. Interest credited to contractholders is included in current and future benefits. Sources of net investment income were as follows:
(Millions) 1995 1994 1993 _______________________ _______________________ _______________________ Continuing Discontinued Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations Operations Operations __________ ____________ __________ ____________ __________ ____________ Debt securities $ 2,275.9 $ 683.2 $ 2,250.0 $ 632.1 $ 2,276.8 $ 726.6 Equity securities 22.0 31.3 29.2 27.7 43.1 12.7 Short-term investments 25.1 .8 14.0 - 41.9 13.4 Mortgage loans 962.6 121.8 1,146.8 154.4 1,397.7 189.1 Real estate 306.4 56.6 302.0 59.2 308.4 70.1 Policy loans 30.6 - 28.0 - 29.9 - Other 133.2 22.6 86.2 10.1 146.8 13.4 Cash equivalents 151.8 48.3 109.1 26.0 65.0 11.7 ________________________________________________________________________ Gross investment income 3,907.6 964.6 3,965.3 909.5 4,309.6 1,037.0 Less investment expenses 332.5 62.9 333.9 77.4 343.0 84.6 ________________________________________________________________________ Net investment income $ 3,575.1 $ 901.7 $ 3,631.4 $ 832.1 $ 3,966.6 $ 952.4 _______________________________________________________________________________________________ ________________________________________________________________________
8. Dividend Restrictions and Shareholders' Equity The amount of dividends that may be paid to shareholders in 1996 without prior approval by the Insurance Commissioner of the State of Connecticut is $659.9 million. Dividend payments by the domestic insurance subsidiaries of Aetna Life and Casualty Company are subject to similar restrictions in Connecticut and other states, and are limited in 1996 to approximately $657.3 million in the aggregate of which $216.6 million relates to Discontinued Operations (the sale agreement with Travelers prohibits the payment of dividends from the property-casualty subsidiaries). During 1995, subsidiaries paid $451.7 million in dividends to Aetna Life and Casualty Company, none of which relates to Discontinued Operations. The amounts of statutory net loss for the years ended and shareholders' equity as of December 31 were as follows:
(Millions) 1995 1994 1993 ___________________________________________________________________________________ Statutory net loss $ (13.4) $ (389.8) $ (40.7) ___________________________________________________________________________________ _______________________________________ Statutory shareholders' equity $ 4,275.1 $ 3,996.5 ____________________________________________________________________ ________________________
As of December 31, 1995, the company does not utilize any statutory accounting practices which are not prescribed by insurance regulators that, individually or in the aggregate, materially affect statutory shareholders' equity. 105 Notes to Financial Statements (Continued) 9. Debt
(Millions) 1995 1994 ____________________________________________________________________________ Long-term debt: Domestic: Eurodollar Notes, 9 1/2% due 1995 $ - $ 100.2 Notes, 8 5/8% due 1998 99.8 99.8 Notes, 6 3/8% due 2003 198.9 198.9 Debentures, 6 3/4% due 2013 198.4 198.4 Eurodollar Notes, 7 3/4% due 2016 63.5 63.5 Debentures, 8% due 2017 199.1 199.1 Mortgage Notes and Other Notes, 3%-11% due in varying amounts to 2018 13.1 5.9 Debentures, 7 1/4% due 2023 198.3 198.3 International: Mortgage Notes, 6 1/2%-11 7/8% due in varying amounts to 2006 18.0 15.1 ______________________ Total $ 989.1 $ 1,079.2 ____________________________________________________________________________ ______________________
At December 31, 1995, $389.6 million of short-term borrowings were outstanding. Total unused committed bank lines available to the company at December 31, 1995 amounted to $1,020 million, including credit facilities aggregating $1.0 billion with a group of worldwide banks. One $500 million facility terminates in July 1996, which the company intends to extend. Another $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 billion. These facilities also support the company's commercial paper borrowing program. During 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 below. The remaining proceeds were used for general corporate purposes. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission ("SEC"), the company may offer and sell up to an additional $550 million of various types of securities. (Please refer to Note 11.) During 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 on the debenture redemption of $4.7 million (after taxes of $2.4 million). Additionally, $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 1993. The 8% Debentures due 2017 are subject to various redemption options beginning on January 15, 1997. 106 Notes to Financial Statements (Continued) 9. Debt (Continued) Aggregate maturities of long-term debt and sinking fund requirements for 1996 through 2000 for continuing operations are $11.9 million, $6.4 million, $100.0 million, $1.2 million and $3.0 million, respectively, and $866.6 million thereafter. Total interest expense for continuing operations was $115.9 million, $98.6 million and $77.4 million in 1995, 1994 and 1993, respectively, and interest paid was $122.7 million, $98.7 million and $74.1 million in 1995, 1994 and 1993, respectively. 10. Federal and Foreign Income Taxes 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. The enactment of OBRA resulted in an increase of $27.4 million, of which $23.0 million related to Discontinued Operations, in the company's deferred tax asset. Income tax expense (benefits) consists of:
(Millions) 1995 1994 1993 _______________________ _______________________ _______________________ Continuing Discontinued Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations Operations Operations __________ ____________ __________ ____________ __________ ____________ Current taxes (benefits): Income - federal taxes $ 225.7 $ (156.7) $ 267.8 $ 6.4 $ 187.1 $ (139.8) Income - foreign taxes 8.0 .9 6.6 2.0 1.6 .4 Realized capital gains (losses) 34.4 65.6 (292.5) (47.5) (37.9) 63.3 ________________________________________________________________________ 268.1 (90.2) (18.1) (39.1) 150.8 (76.1) Deferred taxes (benefits): Income - federal taxes (10.2) (55.5) (44.2) (37.2) (587.3) (30.4) Income - foreign taxes 9.9 (.1) .5 (.3) (1.4) - Realized capital gains (losses) (15.5) (16.3) 279.9 49.3 25.5 (13.2) ________________________________________________________________________ (15.8) (71.9) 236.2 11.8 (563.2) (43.6) ________________________________________________________________________ Total $ 252.3 $ (162.1) $ 218.1 $ (27.3) $ (412.4) $ (119.7) _______________________________________________________________________________________________ ________________________________________________________________________
107 Notes to Financial Statements (Continued) 10. Federal and Foreign Income Taxes (Continued) Income tax expense (benefits)on income (loss) was different from the amount computed by applying the federal income tax rate to income (loss) before income tax expense (benefits) for the following reasons:
(Millions) 1995 1994 1993 _______________________ _______________________ _______________________ Continuing Discontinued Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations Operations Operations __________ ____________ __________ ____________ __________ ____________ Income (Loss) from U.S. operations $ 544.8 $ (384.3) $ 502.2 $ 30.8 $(1,079.2) $ (105.7) Income from non-U.S. operations 181.4 - 125.3 - 64.5 - ________________________________________________________________________ Income (Loss) before taxes 726.2 (384.3) 627.5 30.8 (1,014.7) (105.7) Tax rate 35% 35% 35% 35% 35% 35% ________________________________________________________________________ Application of the tax rate 254.2 (134.5) 219.6 10.8 (355.2) (37.0) Tax effect of: Tax-exempt interest (4.3) (16.2) (7.8) (28.9) (12.9) (42.0) Foreign operations 10.1 (5.2) (1.8) .1 (47.6) .7 Excludable dividends (9.8) (6.2) (8.8) (6.7) (8.5) (12.0) Tax rate change on deferred assets and liabilities - - - - (2.0) (22.0) Goodwill 5.5 - 8.6 - 6.8 - Other, net (3.4) - 8.3 (2.6) 7.0 (7.4) ________________________________________________________________________ Income taxes (benefits) on income (loss) $ 252.3 $ (162.1) $ 218.1 $ (27.3) $ (412.4) $ (119.7) _______________________________________________________________________________________________ ________________________________________________________________________
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 are presented below:
(Millions) 1995 1994 _______________________ _______________________ Continuing Discontinued Continuing Discontinued Operations Operations Operations Operations __________ ____________ __________ ____________ Deferred tax assets: Insurance reserves $ 560.8 $ 814.4 $ 385.5 $ 756.6 Reserve for loss on discontinued products 325.4 - 344.1 - Reserve for severance and facilities expenses 13.9 5.6 31.3 26.3 Impairment reserves 49.2 1.8 63.7 49.5 Other postretirement benefits 229.4 - 230.6 - Net unrealized capital losses - - 462.1 139.5 Net operating loss carryforward 79.4 122.2 111.8 113.2 Other (18.2) 39.5 (1.7) 9.4 ______________________________________________ Total gross assets 1,239.9 983.5 1,627.4 1,094.5 Less valuation allowance 34.3 - 444.5 102.1 ______________________________________________ Assets net of valuation allowance 1,205.6 983.5 1,182.9 992.4 Deferred tax liabilities: Deferred policy acquisition costs 571.8 107.0 446.5 110.5 Unrealized losses allocable to experience rated contracts - - 213.0 - Net unrealized capital gains 282.8 220.4 - - Market discount 62.1 11.2 73.9 17.1 Other 17.4 2.6 45.3 2.3 ______________________________________________ Total gross liabilities 934.1 341.2 778.7 129.9 ______________________________________________ Net deferred tax asset $ 271.5 $ 642.3 $ 404.2 $ 862.5 ____________________________________________________________________________________ _______________________________________________
108 Notes to Financial Statements (Continued) 10. Federal and Foreign Income Taxes (Continued) The 1995 and 1994 valuation allowance relates to future tax benefits of $27.5 million and $22.9 million, respectively, on purchased domestic net operating losses; $6.8 million and $48.5 million, respectively, on foreign net operating losses and $475.2 million in 1994 on unrealized capital losses, the realization of which are uncertain. The valuation allowance on foreign net operating losses was reduced primarily due to a tax rate reduction in the foreign jurisdiction; a corresponding reduction in the deferred tax asset resulted in no impact on net income. Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. At December 31, 1994, $749 million of net unrealized capital losses primarily on available for sale debt and equity securities were reflected in shareholders' equity without deferred tax benefits. As of December 31, 1995, no valuation allowance was required for unrealized capital gains and losses. The reversal of the valuation allowance had no impact on net income in 1995. Management believes that it is more likely than not that the company will realize the benefit of the net deferred tax asset of $913.8 million of which $642.3 million related to Discontinued Operations. The company's election of special estimated tax payments in years 1989 through 1994 assures realizability of a substantial portion of the deferred tax asset from the discounting of property-casualty reserves included in Discontinued Operations. The company has more than 15 years to generate sufficient taxable income to cover the reversal of its temporary differences due to the long-term reversal patterns of these differences. Because of the company's long-term history of taxable income, which is projected to continue, and the availability of significant tax planning strategies, such as converting tax-exempt bonds to taxable bonds, the company expects sufficient taxable income in the future to realize the net deferred tax asset. The net deferred tax asset includes $3.5 million related to the company's expected utilization of its foreign net operating loss carryforward and $163.8 million related to the company's expected utilization of its current U.S. net operating loss carryforward of $468.0 million, $162.6 million which expires in the year 2008 of which $111.2 million relates to Discontinued Operations, $285.1 million which expires in the year 2009 of which $226.3 million relates to Discontinued Operations and $20.3 million which expires in 2010 of which $11.7 million relates to Discontinued Operations. The company has not recognized deferred taxes related to the estimated cumulative amount of undistributed earnings of approximately $225 million on its controlled foreign corporations because the company does not expect to repatriate these earnings. A deferred tax liability will be recognized when the company expects that it will recover these undistributed earnings in a taxable manner, such as through a receipt of dividends or a sale of the investment. 109 Notes to Financial Statements (Continued) 10. Federal and Foreign Income Taxes (Continued) The "Policyholders' Surplus Account," which arose under prior tax law, is generally that portion of a life insurance company's statutory income that has not been subject to taxation. As of December 31, 1983, no further additions could be made to the Policyholders' Surplus Account for tax return purposes under the Deficit Reduction Act of 1984. The balance in such account was $857.2 million at December 31, 1995. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes the conditions under which such taxes would become payable are remote. The Internal Revenue Service (the "Service") has completed examination of the consolidated federal income tax returns of Aetna Life and Casualty and Affiliated Companies through 1986. Discussions are being held with the Service with respect to proposed adjustments. The Service has commenced its examination for the years 1987 through 1990. However, management believes there are adequate defenses against, or sufficient reserves to provide for, such challenges. The company paid net federal income taxes for continuing operations of $127.1 million in 1995 and received net federal income tax refunds of $13.3 million in 1994 and paid net federal income taxes of $242.8 million in 1993. The company received net federal income tax refunds for Discontinued Operations of $148.4 million, $60.8 million and $141.2 million in 1995, 1994 and 1993, respectively. 11. Minority Interest in Preferred Securities of Subsidiary On November 22, 1994, Aetna Capital L.L.C. ("ACLLC"), a wholly owned subsidiary of the company, issued $275 million (11,000,000 shares) of 9 1/2% Cumulative Monthly Income Preferred Securities, Series A, on which payments are guaranteed to a certain extent by the company on a subordinated basis. The securities are redeemable, at the option of ACLLC with the company's consent, in whole or in part, from time to time, on or after November 30, 1999, or at any time under certain limited circumstances related to tax events, at a redemption price of $25 per security plus accumulated and unpaid dividends to the redemption date. The securities are scheduled to become due and payable in 2024. The maturity date may be changed under certain circumstances. ACLLC has loaned the proceeds from the preferred stock issuance and the common capital contributions to the company. In return, the company issued approximately $348 million principal amount of 9 1/2% subordinated debentures to ACLLC due in 2024. Interest on these debentures is payable monthly, and under certain circumstances, principal may be due prior to or later than the original maturity date. This loan is eliminated in the Consolidated Balance Sheets. ACLLC may offer and sell up to an additional $225 million of preferred securities under a shelf registration statement declared effective by the SEC. 110 Notes to Financial Statements (Continued) 12. Common Stock At December 31, 1995 and 1994, 3,802,256 common shares were reserved for issuance under the dividend reinvestment plan, 10,732,316 and 6,702,878 common shares, respectively, were reserved for the stock option plans, and 946,675 common shares were reserved for other benefit plans. In 1995 and 1994, the company did not acquire any shares of its common stock. Pursuant to the company's amended Share Purchase Rights Plan, a dividend of one share purchase right (a "Right") was made payable for each share of Aetna Life and Casualty Common Capital Stock ("Common Stock") outstanding on November 7, 1989, and one Right will attach to each share of Common Stock subsequently issued, prior to the time at which the Rights become exercisable, expire or are redeemed. The Rights trade with the Common Stock until they become exercisable. The Rights become exercisable 10 days after: (i) a public announcement that a person or group ("person") has acquired 15% or more of the outstanding shares of Common Stock or, 10% or more of the outstanding shares of Common Stock if such person is declared by the Board of Directors to be an "adverse person" ("triggering acquisition"); or (ii) a person commences a tender offer which, upon consummation, could result in such person owning 15% or more of the Common Stock; or (iii), in either event, such later date as the Board of Directors may determine. Upon becoming exercisable, each Right will entitle the holder thereof (the "Holder") to purchase one one-hundredth of a share of Aetna Life and Casualty Company's Class B Voting Preferred Stock, Series A (a "Fractional Preferred Share") at a price of $200 (the "Exercise Price"). Each Fractional Preferred Share has dividend, voting and liquidation rights designed to make it approximately equal in value to one share of Common Stock. Under certain circumstances, including a triggering acquisition, each Right (other than Rights that were or are owned by the acquirer) thereafter will entitle the Holder to purchase Common Stock worth twice the Exercise Price. Under certain circumstances, including the acquisition of Aetna Life and Casualty Company in a merger (following a triggering acquisition), each Right thereafter will entitle the Holder to purchase equity securities of the acquirer at a 50% discount. Under certain circumstances, Aetna Life and Casualty Company may redeem all of the Rights at a price of $.01 per Right. The Rights will expire on November 7, 1999, unless earlier redeemed. The Rights have no dilutive effect on earnings per share until exercised. Aetna Life and Casualty Company has authorized 2,500,000 Preferred Shares for issuance upon exercise of the Rights. 111 Notes to Financial Statements (Continued) 13. Participating Policyholders' Interests Under participating life insurance contracts issued by the company, the policyholder is entitled to share in the earnings of such contracts. This business is accounted for in the company's Consolidated Financial Statements on a statutory basis since any adjustments to policy acquisition costs and reserves on this business would have no effect on the company's net income or shareholders' equity. Premiums and assets allocable to the participating policyholders were as follows:
(Millions) 1995 1994 1993 ______________________________________________________________________________ Premiums $ 50.1 $ 52.0 $ 52.4 _______________________________________________________________________________ Assets $ 688.3 $ 700.8 $ 704.8 _______________________________________________________________________________
14. Benefit Plans Pension Plans - The company has noncontributory defined benefit pension plans covering substantially all employees and certain agents. The plans provide pension benefits based on years of service and average annual compensation (measured over 60 consecutive months of highest earnings in a 120-month period). Contributions are determined by using the Projected Unit Credit Method and, for qualified plans subject to ERISA requirements, are limited to the amounts that are currently deductible for tax reporting purposes. Components of the net periodic pension cost were as follows:
(Millions) 1995 1994 1993 ________________________________________________________________________________ Return on plan assets $ 427.5 $ 8.2 $ 178.7 Service cost - benefits earned during the period (86.7) (92.7) (82.2) Interest cost on projected benefit obligation (192.9) (175.2) (169.3) Net amortization and deferral (222.0) 202.3 31.3 _________________________________________________________________________________ Net periodic pension cost $ (74.1) $ (57.4) $ (41.5) _________________________________________________________________________________
112 Notes to Financial Statements (Continued) 14. Benefit Plans (continued) The measurement dates used to determine the funded status of the plans were September 30, 1995 and 1994. The funded status of plans for which assets exceeded accumulated benefits was as follows:
(Millions) 1995 1994 ____________________________________________________________________ Actuarial present value of vested benefit obligation $ 2,451.0 $ 1,930.3 ____________________________________________________________________ Actuarial present value of accumulated benefit obligation $ 2,472.1 $ 1,952.1 ____________________________________________________________________ Plan assets at fair value $ 2,506.3 $ 2,176.4 Actuarial present value of projected benefit obligation 2,650.5 2,333.3 ______________________ Plan assets less than projected benefit obligation (144.2) (156.9) Unrecognized net loss 129.1 216.7 Unrecognized service cost - prior period 7.5 9.1 Unrecognized net asset at date of adoption of FAS No. 87 (30.1) (58.2) ______________________ (Accrued) prepaid pension cost $ (37.7) $ 10.7 ____________________________________________________________________ ______________________
At 1995 and 1994, nonfunded plans had projected benefit obligations of $166.5 million and $130.1 million, respectively. The accumulated benefit obligations at 1995 and 1994 related to these plans were $155.6 million and $105.3 million, respectively, and the related accrued pension cost was $121.2 million and $107.9 million, respectively. The weighted average discount rate was 7.5% for 1995, 8.0% for 1994 and 7.5% for 1993. The expected long-term rate of return on plan assets was 8.5% for 1995 and 1994 and 9.0% for 1993. The rate of increase in future compensation was 4.5% for 1995, 5.0% for 1994 and 4.5% for 1993. The future annual cost-of-living adjustment was 3.0% for 1995, 1994 and 1993. All of the assets are held in trust and administered under an Immediate Participation Guarantee Contract issued by Aetna Life Insurance Company. Assets are held in the general account of Aetna Life Insurance Company and in various separate accounts. Postretirement Benefits - In addition to providing pension benefits, the company currently provides certain health care and life insurance benefits for retired employees. A comprehensive medical and dental plan is offered to all full-time employees retiring at age 50 with 15 years of service or at age 65 with 10 years of service. Retirees are generally required to contribute to the plans based on their years of service with the company. In January 1994, the company announced a modification of its postretirement benefit plan to cap the portion of the cost paid by the company relating to medical and dental benefits for individuals retiring after March 1, 1994. 113 Notes to Financial Statements (Continued) 14. Benefit Plans (Continued) Components of the net periodic postretirement benefit cost were as follows:
(Millions) 1995 1994 1993 _________________________________________________________________________________ Service cost - benefits earned during the period $ (8.3) $ (8.6) $ (19.0) Interest cost (34.7) (34.2) (42.9) Net amortization 28.3 31.2 11.7 Return on plan assets 2.0 3.2 3.1 ___________________________________ Net periodic postretirement benefit cost $ (12.7) $ (8.4) $ (47.1) _________________________________________________________________________________ ___________________________________
The measurement dates used to determine the funded status of the postretirement benefit plans were September 30, 1995 and 1994. The funded status of the plans was as follows:
(Millions) 1995 1994 ____________________________________________________________________ Actuarial present value of accumulated postretirement benefit obligation: Retirees $ 313.5 $ 285.2 Fully eligible active employees 70.9 64.3 Active employees not eligible to retire 107.6 97.2 ______________________ Total 492.0 446.7 Plan assets at fair value 54.3 48.1 ______________________ Accumulated postretirement benefit obligation in excess of plan assets 437.7 398.6 Unrecognized net gain 24.8 43.9 Prior service cost 173.6 204.3 ____________________________________________________________________ Accrued postretirement benefit cost $ 636.1 $ 646.8 ____________________________________________________________________ ______________________
The weighted average discount rates were 7.5% for 1995, 8.0% for 1994 and 7.5% for 1993. The health care cost trend rate for the 1995 valuation decreased gradually from 10.5% for 1996 to 5.5% by the year 2005. For the 1994 valuation, the rates decreased gradually from 11.5% for 1995 to 5.5% by the year 2005. Increasing the health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligation at 1995 by $32.3 million and would increase the net periodic postretirement benefit cost for 1995 by $3.0 million (pretax). It is the company's practice to fund amounts for postretirement life insurance benefits to the extent the contribution is deductible for federal income taxes. The plan assets are held in trust and administered by Aetna Life Insurance Company. The assets are in the general account of Aetna Life Insurance Company, and the expected rate of return on the plan assets was 7% for 1995, 1994 and 1993. Incentive Savings Plan - Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of Aetna Life and Casualty Company or certain other investments, are matched, up to 5% of compensation, by the company. Pretax charges to operations (including continuing and Discontinued Operations) for the incentive savings plan were $60.0 million, $59.9 million and $58.9 million for 1995, 1994 and 1993, respectively. The Plan trustee held 5,015,075 shares, 6,380,355 shares and 5,996,806 shares of Aetna Life and Casualty Company's common stock for Plan participants at the end of 1995, 1994 and 1993, respectively. 114 Notes to Financial Statements (Continued) 14. Benefit Plans (Continued) 1994 Stock Incentive Plan - The company's 1994 stock incentive plan replaced the 1984 stock option plan. The 1994 plan provides for stock options (see (1) Stock Options), and deferred contingent common stock or cash awards (see (2)Incentive Units) to certain key employees. The maximum number of shares of common stock issuable under the 1994 Stock Incentive Plan is 8 million, of which options and units to receive 2,374,540 and 1,502,900 shares were granted during 1995 and 1994, respectively. The total amount charged to operations (including continuing and Discontinued Operations) for the 1994 Stock Incentive Plan, which was determined from factors relating to various performance measures, was $36.3 million and $19.2 million, pretax, for the years ended December 31, 1995 and 1994, respectively. (1) Stock Options - Executive and middle management employees may be granted options to purchase common stock of the company at or above the market price on the date of grant. Certain options granted prior to 1992 contain stock appreciation rights permitting the employee to exercise those rights and receive the excess of fair market value at the date of exercise over the grant date fair market value in cash and/or stock. Stock option transactions under the 1994 Stock Incentive Plan and the 1984 Stock Option Plan are summarized below:
Range of Number Option Prices of Shares Per Share ____________________________________________________________________ Outstanding at December 31, 1992 5,789,649 $29.50-$61.50 Granted 1,034,560 $46.75-$55.00 Exercised (2,025,696) $29.50-$61.50 Canceled or expired (188,990) $29.50-$61.50 ____________________________________________________________________ Outstanding at December 31, 1993 4,609,523 $29.50-$61.50 Granted 1,140,100 $46.50-$55.25 Exercised (464,790) $29.50-$61.50 Canceled or expired (211,875) $29.50-$61.50 ____________________________________________________________________ Outstanding at December 31, 1994 5,072,958 $41.50-$61.50 Granted 2,131,100 $50.50-$72.25 Exercised (2,198,219) $41.50-$61.50 Canceled or expired (122,178) $42.13-$61.50 ____________________________________________________________________ Outstanding at December 31, 1995 4,883,661 $41.50-$72.25 ____________________________________________________________________ Range of expiration dates 6/96-10/2005 ____________________________________________________________________ Options exercisable at December 31, 1995 2,110,474 ____________________________________________________________________
(2) Incentive Units - Executive and middle management employees may be granted incentive units under the 1994 Stock Incentive Plan, which are rights to receive common stock or cash at the end of a vesting period (currently 1996 and 1998) conditioned upon the employee's continued employment during that period and achievement of company performance goals. The incentive unit holders are not entitled to dividends during the vesting period. 115 Notes to Financial Statements (Continued) 14. Benefit Plans (Continued) Incentive unit transactions related to the 1994 Stock Incentive Plan under which holders may be entitled to receive common stock, are summarized below:
Number of Shares _______________________________________________________ Granted 362,800 Canceled or expired (17,000) __________ Outstanding at December 31, 1994 345,800 Granted 243,440 Vested (24,320) __________ Outstanding at December 31, 1995 564,920 __________ __________
15. Segment Information (1)(2)(3)(4)(5) Summarized financial information for the company's principal operations was as follows:
(Millions) 1995 1994 1993 __________________________________________________________________________________ Revenue: Aetna Health Plans $ 7,615.4 $ 7,139.1 $ 6,106.0 Aetna Life Insurance & Annuity 1,624.2 1,437.4 1,395.3 International 1,459.8 1,297.0 1,279.3 Large Case Pensions 2,268.9 2,355.2 2,566.0 Corporate: Other 9.7 (9.7) (6.9) _________________________________ Total revenue $12,978.0 $12,219.0 $11,339.7 __________________________________________________________________________________ _________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments: Aetna Health Plans $ 454.4 $ 538.1 $ 414.9 Aetna Life Insurance & Annuity 294.8 235.0 173.3 International 127.3 98.8 2.2 Large Case Pensions 132.7 81.1 (1,274.2) Corporate: Interest (108.3) (94.8) (69.3) Other (174.7) (230.7) (261.6) _________________________________ Total income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments $ 726.2 $ 627.5 $(1,014.7) __________________________________________________________________________________ _________________________________ Net income (loss): Aetna Health Plans $ 286.0 $ 341.7 $ 272.2 Aetna Life Insurance & Annuity 198.0 159.1 111.4 International 86.6 71.2 55.0 Large Case Pensions 89.2 54.4 (822.3) Corporate: Interest (70.4) (60.5) (44.7) Other (115.5) (156.5) (173.9) _________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 473.9 409.4 (602.3) Income (Loss) from Discontinued Operations, net of tax (222.2) 58.1 290.3 _________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 251.7 467.5 (312.0) Extraordinary loss on debenture redemption - - (4.7) Cumulative effect adjustments - - (49.2) _________________________________ Net income (loss) $ 251.7 $ 467.5 $ (365.9) __________________________________________________________________________________ _________________________________
116 Notes to Financial Statements (Continued) 15. Segment Information (1)(2)(3)(4)(5) (Continued)
(Millions) 1995 1994 __________________________________________________________________ Assets: Aetna Health Plans $ 6,784.0 $ 6,184.7 Aetna Life Insurance & Annuity 27,509.6 21,318.2 International 4,383.8 4,532.9 Large Case Pensions 40,833.4 40,525.1 Corporate 880.1 (241.5) Discontinued Operations, net 3,932.8 3,167.3 _________________________ Total assets $ 84,323.7 $ 75,486.7 ___________________________________________________________________ _________________________ (1) The 1993 results from continuing operations before extraordinary item and cumulative effect adjustments include an after-tax loss on the discontinuance of fully guaranteed large case pension products of $825.0 million ($1,270.0 million pretax). This loss affected the Large Case Pensions segment only. (2) Assets at December 31, 1995 and 1994 include $10.6 billion and $12.4 billion, respectively, of assets attributable to discontinued products. Discontinued products are included in the Large Case Pensions segment. (3) The 1993 results from continuing operations before extraordinary item and cumulative effect adjustments include a net benefit of $21.8 million related to a change in the federal corporate tax rate from 34% to 35%. Of the $21.8 million benefit, $2.9 million reduced Aetna Health Plans results, $1.8 million reduced Large Case Pensions results, $4.4 million reduced Aetna Life Insurance & Annuity results, $.6 million increased International results, $7.6 million increased Corporate results, and $23.0 million increased results from Discontinued Operations. (4) The 1993 results reflect after tax severance and facilities charges of $200.0 million ($308.0 million pretax). Of the total 1993 charge, $51.9 million ($79.8 million pretax) was allocated to Aetna Health Plans, $20.0 million ($30.8 million pretax) to Aetna Life Insurance & Annuity, $7.1 million ($11.0 million pretax) to International, $14.2 million ($21.9 million pretax) to Large Case Pensions, $11.2 million ($17.2 million pretax) to Corporate and $95.6 million ($147.3 million pretax) to Discontinued Operations. (5) The 1995 results from Discontinued Operations include a $259.5 million after tax charges for asbestos-related claims and a $505.7 million after tax charges for environmental-related claims.
117 Notes to Financial Statements (Continued) 16. Financial Instruments Estimated Fair Value The carrying values and estimated fair values of the company's financial instruments at December 31, 1995 and 1994 were as follows:
Continuing Operations _________________________________________________ (Millions) 1995 1994 _________________________________________________ Carrying Fair Carrying Fair Value Value Value Value ________ _____ ________ _____ Assets: Cash and cash equivalents $ 1,712.7 $ 1,712.7 $ 2,277.2 $ 2,277.2 Short-term investments 607.8 607.8 344.4 344.4 Debt securities 31,860.3 31,860.3 27,525.4 27,522.2 Equity securities 659.7 659.7 614.6 614.6 Mortgage loans 8,327.2 8,544.0 10,389.9 10,109.9 Liabilities: Investment contract liabilities: With a fixed maturity $ 9,779.6 $ 9,738.2 $11,562.3 $11,555.1 Without a fixed maturity 12,316.2 12,332.7 11,250.6 10,927.9 Short-term debt 389.6 389.6 14.8 14.8 Long-term debt 989.1 988.3 1,079.2 973.9 Discontinued Operations _________________________________________________ (Millions) 1995 1994 _________________________________________________ Carrying Fair Carrying Fair Value Value Value Value ________ _____ ________ _____ Assets: Cash and cash equivalents $ 1,153.6 $ 1,153.6 $ 676.4 $ 676.4 Short-term investments 137.2 137.2 106.0 106.0 Debt securities 11,705.6 11,705.6 9,586.1 9,579.7 Equity securities 525.5 525.5 1,041.0 1,041.0 Mortgage loans 1,061.7 1,052.7 1,453.7 1,416.0 Liabilities: Short-term debt $ - $ - $ 9.1 $ 9.1 Long-term debt 35.2 35.2 35.5 35.5
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, such as estimates of timing and amount of expected future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument. In evaluating the company's management of interest rate and liquidity risk, and currency exposures, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. 118 Notes to Financial Statements (Continued) 16. Financial Instruments (continued) Estimated Fair Value (continued) The following valuation methods and assumptions were used by the company in estimating the fair value of the above financial instruments: Short-term instruments: Fair values are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, the carrying amounts reported in the Consolidated Balance Sheets approximate fair value. Short-term instruments have a maturity date of one year or less and include cash and cash equivalents, short-term investments and short-term debt. Debt and equity securities: Fair values are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair values are estimated by using quoted market prices for similar securities or discounted cash flow methods. Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates which reflect the rates at which similar loans would be made to similar borrowers. The rates reflect management's assessment of the credit quality and the remaining duration of the loans. The fair value estimates of mortgage loans of lower credit quality, including problem and restructured loans, are based on the estimated fair value of the underlying collateral. Investment contract liabilities (included in policyholders' funds left with the company): With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, the company for similar contracts. Without a fixed maturity: Fair value is estimated as the amount payable to the contractholder upon demand. However, the company has the right under such contracts to delay payment of withdrawals which may ultimately result in paying an amount different than that determined to be payable on demand. Long-term debt: Fair value is based on quoted market prices for the same or similar issued debt or, if no quoted market prices are available, on the current rates estimated to be available to the company for debt of similar terms and remaining maturities. 119 Notes to Financial Statements (Continued) 16. Financial Instruments (Continued) Off-Balance-Sheet Financial Instruments (including Derivative Financial Instruments): The notional amounts, carrying values and estimated fair values of the company's off-balance-sheet financial instruments at December 31, 1995 and 1994 were as follows:
Continuing Operations Discontinued Operations ___________________________ ___________________________ Carrying Carrying Value Value Notional Asset Fair Notional Asset Fair (Millions) Amount (Liability) Value Amount (Liability) Value ____________________________ ___________________________ 1995 _____________________________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $210.4 $ (2.0) $ (3.5) $ - $ - $ - Related to investments in nondollar denominated assets 54.0 (.1) (.1) 65.2 (.1) (.2) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 2.7 .2 .4 - - - Related to investments in nondollar denominated assets 43.8 .1 .6 - - - Interest rate swaps: Unrecognized gains 43.0 - 9.5 380.0 - 20.4 Unrecognized losses - - - 380.0 - (20.2) Futures contracts to sell investments 20.9 .2 .2 - - - Forward swap agreement 100.0 - .1 - - -
Continuing Operations Discontinued Operations ____________________________ ____________________________ Carrying Carrying Value Value Notional Asset Fair Notional Asset Fair (Millions) Amount (Liability) Value Amount (Liability) Value ____________________________ ___________________________ 1994 _________________________________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $470.7 $ (2.7) $ (4.9) $ 27.1 $ .2 $ .2 Related to investments in nondollar denominated assets 60.8 (1.0) (.1) 206.1 .2 (1.5) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 48.5 5.2 4.8 - - - Related to investments in nondollar denominated assets 37.1 .5 .3 3.8 (.4) (.1) Futures contracts to purchase investments 122.5 .1 .1 - - - Interest rate swaps: Unrecognized gains 43.0 - 2.4 386.4 - 18.3 Unrecognized losses - - - 386.4 - (18.3)
The notional amounts of these instruments do not represent the company's risk of loss. The fair value amounts of these instruments was estimated based on quoted market prices, dealer quotations or internal price estimates believed to be comparable to dealer quotations. These amounts reflect the estimated amounts that the company would have to pay or would receive if the contracts were terminated. 120 Notes to Financial Statements (Continued) 16. Financial Instruments (Continued) The company engages in hedging activities to manage foreign exchange and interest rate risk. Such hedging activities have principally consisted of using off-balance-sheet instruments including foreign exchange forward contracts, futures and forward contracts, and interest rate swap agreements. All of these instruments involve, to varying degrees, elements of market risk and credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The company evaluates the risks associated with off-balance-sheet financial instruments in a manner similar to that used to evaluate the risks associated with on-balance-sheet financial instruments. (Please see General Account Investments - Use of Derivatives and Other Investments on page 59 of Management's Discussion and Analysis of Financial Condition and Results of Operations.) Market risk is the possibility that future changes in market prices may make a financial instrument less valuable. For off-balance-sheet financial instruments used for hedging, such market price changes are generally offset by the market price changes in the hedged instruments held by the company. Credit risk arises from the possibility that counterparties may fail to perform under the terms of the contract, which could result in an unhedged position. However, unlike on-balance-sheet financial instruments, where credit risk generally is represented by the notional or principal amount, the off-balance-sheet financial instruments' risk of credit loss generally is significantly less than the notional value of the instrument and is represented by the positive fair value of the instrument. The company generally does not require collateral or other security to support the financial instruments discussed below. However, the company controls its exposure to credit risk through credit approvals, credit limits and regular monitoring procedures. There were no material concentrations of off-balance-sheet financial instruments at December 31, 1995. Foreign Exchange Forward Contracts: Foreign exchange forward contracts are agreements to exchange fixed amounts of two different currencies at a specified future date and at a specified price. The company utilizes foreign exchange forward contracts to hedge its foreign currency exposure arising from certain investments in foreign affiliates (primarily Canada and Great Britain) and nondollar denominated investment securities. The company generally utilizes foreign currency contracts with terms of up to three months. At December 31, 1995, the company had unhedged foreign currency exposures for continuing operations of $555.8 million related to net investments in foreign affiliates (primarily Taiwan, Mexico and Chile) and $61.6 million related to investments in nondollar denominated assets. These exposures include $317.8 million and $8.6 million in net investments in foreign affiliates and investments in nondollar denominated assets, respectively, for which effective markets for hedging vehicles do not currently exist. The unhedged foreign currency exposures for Discontinued Operations were immaterial. 121 Notes to Financial Statements (Continued) 16. Financial Instruments (Continued) Futures Contracts: Futures contracts represent commitments to either purchase or sell securities or money market instruments at a specified future date and at a specified price or yield. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. Interest Rate Swaps: The company utilizes interest rate swaps to manage certain exposures related to changes in interest rates in Discontinued Operations. This swap activity included transactions which were entered into in prior years where the company acts as an intermediary for entities whose debt the company has guaranteed to allow them to convert variable rate debt to a fixed rate, with the company retaining no interest rate risk. (Please refer to Note 2.) Interest rate swap activity also includes exchanging variable rate asset returns for fixed-rate returns. 17. Commitments and Contingent Liabilities Commitments Commitments to extend credit are legally binding agreements to lend monies at a specified interest rate and within a specified time period. Risk arises from the potential inability of counterparties to perform under the terms of the contracts and from interest rate fluctuations. The company's exposure to credit risk is reduced by the existence of conditions within the commitment agreements that release the company from its obligations in the event of a material adverse change in the counterparty's financial condition. At December 31, 1995 and 1994, the continuing operations of the company had $21.5 million and $19.6 million, respectively, in commitments to fund partnerships. The Discontinued Operations of the company had $79.8 million and $120.0 million in commitments to fund partnerships at December 31, 1995 and 1994, respectively. Through the normal course of investment operations, the company commits to either purchase or sell securities or money market instruments at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 1995, the continuing operations of the company had commitments to purchase investments for $49.1 million, the fair value of which was $49.2 million. 122 Notes to Financial Statements (Continued) 17. Commitments and Contingent Liabilities (Continued) At December 31, 1995, the Discontinued Operations had commitments to purchase investments for $66.9 million, the fair value of which was $67.3 million. The company has agreed with Travelers Group Inc. to invest up to $200 million in a potential offering of common stock in a new property-casualty entity to be established by Travelers Group Inc. Leases The company has entered into operating leases for office space and certain computer and other equipment. Rental expenses for continuing operations for these items were $203.0 million, $206.4 million and $220.9 million for 1995, 1994 and 1993, respectively. Future net minimum payments under noncancelable leases as of December 31, 1995 for continuing operations are estimated to be $159.3 million for 1996, $134.4 million for 1997, $115.7 million for 1998, $110.9 million for 1999, $95.3 million for 2000 and $622.8 million thereafter. Included in these future payments are $149.9 million and $328.5 million, attributable to the next five and subsequent eight years, respectively, of a master lease for office space. Concurrent with the sale of the Discontinued Operations, Travelers will sublease the space currently occupied by the company at market rates for a period of eight years. The company expects to record a charge to continuing operations of approximately $290.0 million pretax ($190.0 million after tax). Such charge represents the present value of the difference between rent required to be paid by the company under the master lease and future rentals expected to be received by the company. Litigation The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefor and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. 123 Independent Auditors' Report The Shareholders and Board of Directors Aetna Life and Casualty Company: We have audited the consolidated balance sheets of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Aetna Life and Casualty Company and Subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 2 to the consolidated financial statements, in 1993 the company changed its methods of accounting for certain investments in debt and equity securities, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 6, 1996 124 Quarterly Data (Unaudited)
(Millions, except per share data) First Second Third Fourth __________________________________________________________________________________________________ 1995 (1)(2) __________________________________________________________________________________________________ Total revenue $ 3,192.3 $ 3,244.2 $ 3,191.0 $ 3,350.5 __________________________________________________________________________________________________ Income from continuing operations before income taxes $ 143.4 $ 181.6 $ 176.0 $ 225.2 Federal and foreign income taxes 51.0 60.5 63.4 77.4 ________________________________________________________ Income from continuing operations $ 92.4 $ 121.1 $ 112.6 $ 147.8 Income (Loss) from discontinued operations, net of tax 68.4 (418.0) 99.5 27.9 ________________________________________________________ Net income (loss) $ 160.8 $ (296.9) $ 212.1 $ 175.7 __________________________________________________________________________________________________ Per Share Results: Income from continuing operations $ .82 $ 1.07 $ .99 $ 1.28 Income (Loss) from discontinued operations, net of tax .60 (3.69) .87 .25 ________________________________________________________ Net income (loss) $ 1.42 $ (2.62) $ 1.86 $ 1.53 __________________________________________________________________________________________________ Common Stock Data: Dividends Declared $ .69 $ .69 $ .69 $ .69 Common Stock Prices, High 57.00 64.25 74.38 75.88 Common Stock Prices, Low 46.88 54.50 60.38 67.88 __________________________________________________________________________________________________ (1) Second quarter 1995 net income includes reserve additions of $487.5 million, after tax, related to environmental-related claims. (2) Fourth quarter 1995 net income includes reserve additions of $218.1 million, after tax, related to asbestos-related claims.
(Millions, except per share data) First Second Third Fourth __________________________________________________________________________________________________ 1994 (1)(2)(3) __________________________________________________________________________________________________ Total revenue $ 2,935.5 $ 3,088.4 $ 3,099.4 $ 3,095.7 __________________________________________________________________________________________________ Income from continuing operations before income taxes $ 119.1 $ 169.8 $ 157.8 $ 180.8 Federal and foreign income taxes 47.2 57.4 54.4 59.1 ________________________________________________________ Income from continuing operations $ 71.9 $ 112.4 $ 103.4 $ 121.7 Income (Loss) from discontinued operations, net of tax (26.2) 20.0 26.0 38.3 ________________________________________________________ Net income $ 45.7 $ 132.4 $ 129.4 $ 160.0 __________________________________________________________________________________________________ Per Share Results: Income from continuing operations $ .64 $ 1.00 $ .92 $ 1.08 Income (Loss) from discontinued operations, net of tax (.24) .17 .23 .34 ________________________________________________________ Net income $ .40 $ 1.17 $ 1.15 $ 1.42 __________________________________________________________________________________________________ Common Stock Data: Dividends Declared $ .69 $ .69 $ .69 $ .69 Common Stock Prices, High 65.75 57.88 57.50 48.00 Common Stock Prices, Low 53.13 50.00 45.13 43.25 __________________________________________________________________________________________________ Earnings per share calculations are based on results of stand-alone quarters. Common stock prices are as reported on the NYSE-Composite Tape. See Notes to Financial Statements. (1) The 1994 net income includes net realized capital losses from additions to reserves for mortgage loans and real estate and real estate write-downs, after taxes and after gains and losses allocated to experience rated pension contractholders, of $22.2 million, $19.8 million, $17.9 million and $6.5 million for the first, second, third and fourth quarters of 1994, respectively. (2) First quarter 1994 net income includes catastrophe losses of $123.8 million, after tax, related primarily to the Los Angeles earthquake and severe winter weather. (3) Second quarter 1994 net income includes prior year reserve additions of $82.4 million, after tax, primarily related to environmental indemnity claims, offset by $53.5 million, after tax, of prior year reserve releases in the personal auto business.
125 Appendix to Exhibit 13 The following information, which is included/presented in tabular form in this exhibit, is presented in the form of pie charts or a graph in the printed 1995 annual report to shareholders of Aetna Life and Casualty Company:
Page No. in this Exhibit Description ________________________ ___________ 8 1995 Health Membership (1) 9 1995 Specialty Health Membership (1) 9 1995 Group Insurance Membership (1) 10 Participation in Risk versus Nonrisk Health Plans (2) (1) 1995 membership (included in tabular form with 1994 and 1993 membership) is also presented in the form of a pie chart in the printed 1995 annual report to shareholders of Aetna Life and Casualty Company. (2) Presented in the form of a bar graph in the printed 1995 annual report to shareholders of Aetna Life and Casualty Company.
59 EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1
State of Subsidiary Incorporation Ownership (1) Aetna Life and Casualty Company CT - Aetna Life Insurance Company CT 100% owned by Aetna Life and Casualty Company The Standard Fire Insurance Company CT 100% owned by Aetna Life and Casualty Company The Aetna Casualty and Surety Company CT 100% owned by Aetna Life and Casualty Company Aetna Life Insurance Company of Illinois IL 100% owned by Aetna Life and Casualty Company Aetna Capital L.L.C. DE 95% owned by Aetna Life and Casualty Company(2) Aetna Re-Insurance Company, (U.K.) Ltd. United Kingdom 100% owned by Aetna Life and Casualty Company Aetna International, Inc. CT 100% owned by Aetna Life and Casualty Company Aetna Retirement Services, Inc. CT 100% owned by Aetna Life and Casualty Company Aeltus Investment Management, Inc CT 100% owned by Aetna Life Insurance Company CMBS Holding, Inc. TX 100% owned by Aetna Life Insurance Company CDI Equity, Inc. DE 100% owned by Aetna Life Insurance Company AHP Holdings, Inc. CT 100% owned by Aetna Life Insurance Company Aetna Casualty Company CT 100% owned by Aetna Life Insurance Company Human Affairs International, Incorporated UT 100% owned by Aetna Life Insurance Company The Automobile Insurance Company of Hartford, Connecticut CT 100% owned by The Standard Fire Insurance Company Aetna Personal Security Insurance Company CT 100% owned by The Standard Fire Insurance Company Aetna Insurance Company of Illinois IL 100% owned by The Standard Fire Insurance Company Aetna Insurance Company CT 100% owned by The Standard Fire Insurance Company Aetna Canada Holdings Limited Canada 100% owned by Aetna International, Inc. Aetna Life Insurance Company of America CT 100% owned by Aetna International, Inc. Aetna Capital Holdings, Inc. CT 100% owned by Aetna International, Inc. Aetna Life & Casualty (Bermuda) Ltd. Bermuda 100% owned by Aetna International, Inc. Aetna Life Insurance and Annuity Company CT 100% owned by Aetna Retirement Services, Inc. Aetna Realty Investors, Inc. DE 100% owned by Aeltus Investment Management, Inc. Aeltus Capital, Inc. CT 100% owned by Aeltus Investment Management, Inc. Smith Whiley & Company DE 35% owned by Aeltus Investment Management, Inc. Aetna Health Plans of Ohio, Inc. OH 100% owned by AHP Holdings, Inc. Aetna Health Plans of the Mid-Atlantic, Inc. VA 100% owned by AHP Holdings, Inc. Aetna Health Plans of Florida, Inc. FL 100% owned by AHP Holdings, Inc. Aetna Health Plans of the Carolinas, Inc. NC 100% owned by AHP Holdings, Inc. Aetna Dental Care of Kentucky, Inc. KY 100% owned by AHP Holdings, Inc. Partners Health Plan of Pennsylvania, Inc. PA 81% owned by AHP Holdings, Inc. Aetna Health Plans of Central and Eastern Pennsylvania, Inc. PA 100% owned by AHP Holdings, Inc. Aetna Health Plans of Georgia, Inc. GA 100% owned by AHP Holdings, Inc. Aetna Health Plans of Louisiana, Inc. LA 100% owned by AHP Holdings, Inc. Aetna Dental Care of Texas, Inc. TX 100% owned by AHP Holdings, Inc. Aetna Health Plans of Arizona, Inc. AZ 100% owned by AHP Holdings, Inc. Med Southwest, Inc. TX 55% owned by AHP Holdings, Inc. Aetna Dental Care of California, Inc. CA 100% owned by AHP Holdings, Inc. Aetna Health Plans of Illinois, Inc. IL 100% owned by AHP Holdings, Inc. Aetna Health Plans of Texas, Inc. TX 100% owned by AHP Holdings, Inc. (1) Percentages are rounded to the nearest whole percent and are based on ownership of voting rights. (2) Aetna Capital Holdings, Inc. owns 5% of Aetna Capital L.L.C.
2
State of Subsidiary Incorporation Ownership (1) PHPSNE Parent Corporation DE 55% owned by AHP Holdings, Inc. Aetna Health Plans of Tennessee, Inc. TN 100% owned by AHP Holdings, Inc. Healthways Systems, Inc. DE 100% owned by AHP Holdings, Inc. Aetna Professional Management Corporation CT 100% owned by AHP Holdings, Inc. Aetna Health Management, Inc. TX 100% owned by AHP Holdings, Inc. Aetna National Accounts U.K. Ltd. United Kingdom 100% owned by The Aetna Casualty and Surety Company Aetna Casualty Company of Connecticut CT 100% owned by The Aetna Casualty and Surety Company Aetna Excess and Surplus Lines Company CT 100% owned by The Aetna Casualty and Surety Company Aetna Lloyds of Texas Insurance Company TX 100% owned by The Aetna Casualty and Surety Company Aetna Casualty & Surety Company of Illinois IL 100% owned by The Aetna Casualty and Surety Company Aetna Casualty & Surety Company of Canada Canada 100% owned by The Aetna Casualty and Surety Company Aetna Casualty & Surety Company of America CT 100% owned by The Aetna Casualty and Surety Company Executive Risk Inc. DE 39% owned by The Aetna Casualty and Surety Company Farmington Casualty Company CT 100% owned by The Aetna Casualty and Surety Company Aetna Commercial Insurance Company CT 100% owned by The Aetna Casualty and Surety Company Aetna Life Insurance Company of Canada Canada 100% owned by Aetna Canada Holdings Limited Aetna Variable Encore Fund MA 100% owned by Aetna Life Insurance and Annuity Company Aetna Variable Fund MA 98% owned by Aetna Life Insurance and Annuity Company Aetna Income Shares MA 99% owned by Aetna Life Insurance and Annuity Company Aetna Health Plans of Western Pennsylvania, Inc. PA 100% owned by Partners Health Plan of Pennsylvania, Inc. Aetna Insurance Company of America CT 100% owned by Aetna Life Insurance and Annuity Company Southwest Physicians Life Insurance Company TX 100% owned by Med Southwest, Inc. Aetna Health Plans of North Texas, Inc. TX 100% owned by Med Southwest, Inc. Executive Re Inc. DE 100% owned by Executive Risk Inc. Aetna Series Fund MD 5% owned by Aetna Life Insurance and Annuity Company(2) Aetna Investment Advisers Fund, Inc. MD 100% owned by Aetna Life Insurance and Annuity Company Aetna Health Plans of Southern New England, Inc. CT 100% owned by PHPSNE Parent Corporation Aetna Health Plans of New York, Inc. NY 100% owned by Healthways Systems, Inc. Aetna Health Plans of New Jersey, Inc. NJ 100% owned by Healthways Systems, Inc. Aetna Health Plans of California, Inc. CA 100% owned by Aetna Health Management, Inc. Aetna Government Health Plans, Inc. CA 100% owned by Aetna Health Management, Inc. Executive Risk Indemnity, Inc. DE 100% owned by Executive Re Inc. Executive Risk Specialty Insurance Company CT 100% owned by Executive Risk Indemnity, Inc. (1) Percentages are rounded to the nearest whole percent and are based on ownership of voting rights. (2) Aetna Life Insurance Company owns 1%.
EX-23 11 CONSENTS OF EXPERTS AND COUNSEL 1 Consent of Independent Auditors _______________________________ The Board of Directors Aetna Life and Casualty Company: We consent to incorporation by reference in the Registration Statements (No. 33-12993 on Form S-3, No. 33-49543 on Form S-3, No. 33-50427 on Form S-3, No. 33-52819 and No. 33-52819-01 on Form S-3, No. 2-91514 on Form S-8 and No. 2-73911 on Form S-8 and No 33-62893 on Form S-8) of Aetna Life and Casualty Company of our reports dated February 6, 1996, relating to the consolidated balance sheets of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of income, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1995, which reports appear in or are incorporated by reference in the December 31, 1995 annual report on Form 10-K of Aetna Life and Casualty Company. Our reports refer to changes in 1993 in the Company's accounting for certain investments in debt and equity securities, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts. By /s/ KPMG Peat Marwick LLP _____________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut February 26, 1996 EX-24 12 POWERS OF ATTORNEY 1 POWER OF ATTORNEY We, the undersigned directors and officers of Aetna Life and Casualty Company (the "Company"), hereby severally constitute and appoint Zoe Baird, Richard L. Huber and Robert J. Price, and each of them individually, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names and in the capacities indicated below, the Company's 1995 Form 10-K and any and all amendments thereto to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to the Form 10-K and to any and all amendments thereto. WITNESS our hands and common seal on this 16th day of February, 1996.
_____________________________ ______________________________ Ronald E. Compton Ellen M. Hancock Chairman, President and Director Director (Principal Executive Officer) /s/ Wallace Barnes _____________________________ ______________________________ Wallace Barnes Michael H. Jordan Director Director _____________________________ ______________________________ William H. Donaldson Jack D. Kuehler Director Director _____________________________ ______________________________ Barbara Hackman Franklin Frank R. O'Keefe, Jr. Director Director _____________________________ ______________________________ Earl G. Graves Judith Rodin Director Director ______________________________ _______________________________ Gerald Greenwald Richard L. Huber Director Vice Chairman for Strategy and Finance (Principal Financial Officer)
2 POWER OF ATTORNEY We, the undersigned directors and officers of Aetna Life and Casualty Company (the "Company"), hereby severally constitute and appoint Zoe Baird, Richard L. Huber and Robert J. Price, and each of them individually, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names and in the capacities indicated below, the Company's 1995 Form 10-K and any and all amendments thereto to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to the Form 10-K and to any and all amendments thereto. WITNESS our hands and common seal on this 22nd day of February, 1996.
_____________________________ ______________________________ Ronald E. Compton Ellen M. Hancock Chairman, President and Director Director (Principal Executive Officer) _____________________________ ______________________________ Wallace Barnes Michael H. Jordan Director Director _____________________________ ______________________________ William H. Donaldson Jack D. Kuehler Director Director _____________________________ ______________________________ Barbara Hackman Franklin Frank R. O'Keefe, Jr. Director Director /s/ Earl G. Graves _____________________________ ______________________________ Earl G. Graves Judith Rodin Director Director ______________________________ _______________________________ Gerald Greenwald Richard L. Huber Director Vice Chairman for Strategy and Finance (Principal Financial Officer)
3 POWER OF ATTORNEY We, the undersigned directors and officers of Aetna Life and Casualty Company (the "Company"), hereby severally constitute and appoint Zoe Baird, Richard L. Huber and Robert J. Price, and each of them individually, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names and in the capacities indicated below, the Company's 1995 Form 10-K and any and all amendments thereto to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to the Form 10-K and to any and all amendments thereto. WITNESS our hands and common seal on this 23rd day of February, 1996.
/s/ R. E. Compton /s/ Ellen M. Hancock _____________________________ ______________________________ Ronald E. Compton Ellen M. Hancock Chairman, President and Director Director (Principal Executive Officer) /s/ Michael H. Jordon _____________________________ ______________________________ Wallace Barnes Michael H. Jordan Director Director /s/ William H. Donaldson /s/ Jack D. Kuehler _____________________________ _____________________________ William H. Donaldson Jack D. Kuehler Director Director /s/ Barbara H. Franklin /s/ Frank R. O'Keefe, Jr. _____________________________ ______________________________ Barbara Hackman Franklin Frank R. O'Keefe, Jr. Director Director /s/ Judith Rodin _____________________________ ______________________________ Earl G. Graves Judith Rodin Director Director /s/ G. Greenwald /s/ R. L. Huber _____________________________ ______________________________ Gerald Greenwald Richard L. Huber Director Vice Chairman for Strategy and Finance (Principal Financial Officer)
EX-27 13 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-K for the fiscal year ended December 31, 1995 for Aetna Life and Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 YEAR DEC-31-1995 DEC-31-1995 31,860 0 0 660 8,327 1,277 44,050 1,713 109 1,953 84,324 18,373 142 1,563 22,899 989 1,448 0 0 5,825 84,324 7,431 3,575 47 1,924 9,027 137 0 726 252 474 (222) 0 0 252 2.21 0 11,144 3,099 1,134 1,092 2,540 11,745 (1,134) There is not a significant difference between primary and fully diluted earnings per share. Amounts are net of reinsurance recoverables and deductible amounts recoverable from policyholders.
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