-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, bAYVPW3SyYqSzPEQrzW9b8so61+Lff4OxjotzgewMMuYaYhM0kyiK7bmh0DjFXMQ pmzhvR3lkyPRluZLRuWe+A== 0000002648-95-000024.txt : 19950615 0000002648-95-000024.hdr.sgml : 19950615 ACCESSION NUMBER: 0000002648-95-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950317 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: 95521619 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-K 1 1994 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, 1994 Commission file number 1-5704 Aetna Life and Casualty Company _______________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 _______________________________ _____________________ (State or other jurisdiction of (I.R.S. Employer incorporation) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 _______________________________ _____________________ (Address of principal (ZIP Code) executive offices) Registrant's telephone number, including area code: (203) 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 February 28, 1995 was $6,056,533,552. As of February 28, 1995, 112,698,701 shares of the registrant's Common Capital Stock without par value were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1994 annual report to shareholders (the "Annual Report"). (Parts I, II and IV) Portions of the registrant's proxy statement filed on or about March 17, 1995 (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 4 2. Large Case Pensions 7 3. Aetna Life Insurance & Annuity 9 4. Property-Casualty 12 5. Reserves Related to Property-Casualty Operations 17 6. International 21 7. Corporate 22 8. General Account Investments 22 a. Investments Related to Life, Health, Annuity and Pension Operations 22 b. Investments Related to Property-Casualty Operations 25 9. Other Matters a. Regulation 27 b. NAIC IRIS Ratios 29 c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends 30 d. Miscellaneous 31 Item 2. Properties. 31 Item 3. Legal Proceedings. 32 Item 4. Submission of Matters to a Vote of Security Holders. 33 Executive Officers of Aetna Life and Casualty Company 34 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 57 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 in the United States based on its assets at December 31, 1993. Based on 1993 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 in 1994 was derived from domestic sources. The company's reportable segments have been changed to better reflect the way the businesses are managed and prior years' results have been restated to conform to the new segments. The new reportable segments are Aetna Health Plans, Large Case Pensions, Aetna Life Insurance & Annuity, Property-Casualty, International and Corporate. The principal products included in such segments (other than Corporate) are: Aetna Health Plans: Health care Group insurance Specialty health Large Case Pensions: Group retirement and other savings products Aetna Life Insurance & Annuity: Individual life Retirement and other savings and investment products (including individual and group annuities) Financial and administrative services Mutual funds Property-Casualty: Automobile Fidelity and surety Fire and allied lines General liability Homeowners Marine Multiple peril Workers' compensation International: Life insurance and financial services 4 B. Financial Information about Industry Segments Revenue, income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments, 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 and income (loss) from continuing operations before extraordinary item and cumulative effect adjustments 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 1993 and 1992 financial information to conform to 1994 presentation. C. Description of Business Segments 1. Aetna Health Plans Principal Products __________________ Group health products and services are offered through two business units, health care and specialty health, of the Aetna Health Plans segment ("AHP"). These products and services are marketed primarily to employers for the benefit of employees and their dependents. The health care business unit provides managed care and traditional indemnity health care plans. The specialty health business unit provides behavioral health, pharmacy, dental and occupational managed care plans. Plans may be insured, whereby Aetna assumes all or a portion of health care cost and utilization risk, or self-funded, 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. Group insurance consists of group life, disability and long-term care insurance plans and is marketed in the same manner as group health products and services. 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. 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. Managed care products, which may be sold on a stand-alone basis or in combination with traditional indemnity products, vary from traditional indemnity products primarily through the use of health care networks (physicians and hospitals) and the implementation of medical management procedures designed to enhance the quality and reduce the cost of medical services provided. 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. Beginning in 1993, the company, in an effort to further contain health care costs and to improve quality and access, initiated a program to acquire or develop ownership or management interests in primary care physician practices. AHP expects to invest substantial amounts in 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. 5 The company offers a broad spectrum of traditional indemnity and managed care products. The latter include preferred provider ("PPO") arrangements, which offer enhanced coverage benefits for services received from participating providers; point-of-service ("POS") plans, which typically combine strong HMO-style medical management with an option to seek health care outside of the provider network; and health maintenance organizations ("HMOs"), which arrange for non-emergency services exclusively through the HMO's network of providers. The company's health care network physicians and hospitals have traditionally been independent contractors. As previously indicated, in 1993, the company began to develop and manage primary care physician practices as a means of increasing network access and overall product integration. As of year-end 1994, the company owned and managed 21 physician practices in six cities. At year-end 1994, Aetna operated various types of managed care networks in approximately 229 Standard Metropolitan Statistical Areas with enrollment of approximately 7 million. The number of members covered under all arrangements, including traditional health plans, was approximately 16 million at December 31, 1994. AHP units continue to develop a wide range of products and services tailored to help employers manage their employee benefit plan costs effectively. The company ceased selling individual health insurance products in mid-1990 and transferred this business to another company in 1991. 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. The following table summarizes group health and group life and disability premiums for the years indicated:
(Millions) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Group health (1)........... $4,456.0 $3,553.3 $3,387.6 $3,257.5 $2,905.9 Group life and disability (2)............ 1,155.5 1,147.3 1,199.1 1,209.8 1,284.2 ________ ________ ________ ________ ________ Total.................. $5,611.5 $4,700.6 $4,586.7 $4,467.3 $4,190.1 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes managed health care. (2) Decrease in 1993 premiums reflects increased refunds on retrospectively rated policies due to favorable experience.
6 Competition ___________ The markets for AHP products are highly competitive. In addition to competition among insurance companies, competition in the health field arises from organizations such as Blue Cross and Blue Shield, from various specialty service providers, from local and regional HMOs and other types of medical and dental provider organizations, from integrated health care delivery organizations and, in certain coverages, from the federal and 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 1993 written premiums, Aetna is one of the largest insurance company providers of group health and life benefits in the United 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. Reserves ________ For group life 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 group health 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. Health care and group life 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 non- affiliated insurers to share insurance risks on health care and group life business 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. For additional information on reinsurance, see Note 16 of Notes to Financial Statements in the Annual Report. 7 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) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Sales and additions......... $ 13,496 $ 22,781 $ 30,131 $ 37,876 $ 51,900 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Terminations: (1) Lapses ................... $ 18,850 $ 22,991 $ 26,087 $ 17,522 $ 15,707 All other terminations.... 6,096 6,864 2,235 3,036 23,476 ________ ________ ________ ________ ________ Total................... $ 24,946 $ 29,855 $ 28,322 $ 20,558 $ 39,183 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ In force, end of year....... $288,546 $299,996 $307,070 $305,261 $287,943 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Number of policies and contracts in force, end of year: (2) Group life contracts...... 23,268 24,440 24,496 25,737 26,061 Group conversion policies (3)............. 37,513 38,431 39,567 40,370 41,207 (1) The increases in 1993 and 1992 terminations resulted primarily from the non-renewal 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. Large Case Pensions Principal Products __________________ Business units in the Large Case Pensions segment manage a variety of retirement and other savings products (including pension and annuity products), and offer investment management advisory services to non-pension customers. Some 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 or on the mutual funds in which certain of the Separate Accounts invest. 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.) 8 At December 31, assets under management, including Separate Accounts, were $46.3 billion in 1994, $52.8 billion in 1993, $53.4 billion in 1992, $52.8 billion in 1991, and $50.6 billion in 1990. Under Financial Accounting Standard No. 115 ("FAS 115"), assets under management at December 31, 1994 and 1993 included net unrealized gains (losses) of approximately $(540.0) million and $750.0 million, respectively. The following table summarizes premiums and deposits for the years indicated:
(Millions) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Premiums................ $ 234.4 $ 185.9 $ 204.2 $ 292.4 $ 597.0 Deposits (1)............ 2,121.5 3,207.2 3,553.1 4,357.8 5,716.2 _________ _________ _________ _________ _________ Total................. $ 2,355.9 $ 3,393.1 $ 3,757.3 $ 4,650.2 $ 6,313.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Under Financial Accounting Standard No. 97 ("FAS 97"), certain deposits are not included in premiums or revenue.
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. 9 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. 3. Aetna Life Insurance & Annuity Principal Products __________________ Business units in the Aetna Life Insurance & Annuity segment ("ALIAC") market a variety of life insurance, retirement and other savings and investment products (including individual and group annuities) financial and administrative services and mutual funds to individuals, pension plans, small businesses and employer- sponsored groups. ALIAC's universal life product accounted for approximately 89% of individual life sales in 1994. (For additional information regarding the products offered by ALIAC, see MD&A - Aetna Life Insurance & Annuity in the Annual Report.) 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 more than 10 years. To further encourage retention, life insurance agents are typically paid renewal commissions or service fees. Product retention is also a key driver of profitability for annuity products. To encourage product retention, annuity contracts typically impose a surrender charge on policyholder balances withdrawn in the first 5 to 7 years after deposit. 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 of an incremental interest rate if withdrawals from the fixed account are spread over a period of five years. Further, more favorable credited rates and policy loan terms may be offered after policies have been in force for more than 10 years. 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 other insurance carriers. 10 Certain of the ALIAC life insurance and annuity products allow for customers to borrow against their policies. At December 31, 1994, approximately 23% of outstanding policy loans were on individual annuity policies and had fixed interest rates ranging from 1% to 3%. Approximately 72% of outstanding policy loans at December 31, 1994 were on individual life policies and had fixed interest rates ranging from 5% to 8%. The remaining 5% of outstanding policy loans had variable interest rates averaging 8% at December 31, 1994. Investment income from policy loans was $23 million for the year ended December 31, 1994. The company's variable products (variable universal life, variable life and variable annuity 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 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 these variable life and annuity contracts. ALIAC also receives fees for serving as investment advisor, providing shareholder services, and promoting sales. Various investment advisory services also are offered through a number of affiliates that are registered investment advisors. At December 31, assets under management, including Separate Accounts, were $19.4 billion in 1994, $18.2 billion in 1993, $15.0 billion in 1992, $13.2 billion in 1991 and $10.9 billion in 1990. Under FAS 115, assets under management at December 31, 1994 and 1993 included net unrealized gains (losses) of approximately $(390.0) million and $750.0 million, respectively. The following table summarizes premiums and deposits for the years indicated:
(Millions) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Premiums................ $ 168.3 $ 125.7 $ 111.9 $ 174.5 $ 272.9 Deposits (1)............ 3,375.7 2,797.6 1,937.3 1,871.0 1,645.6 _________ _________ _________ _________ _________ $ 3,544.0 $ 2,923.3 $ 2,049.2 $ 2,045.5 $ 1,918.5 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Under FAS 97, certain deposits are not included in premiums or revenue.
Competition ___________ The markets for individual life insurance products are highly competitive among insurance companies. Competition largely is based upon product features and prices. In the retirement and other savings and investment 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. 11 Method of Distribution ______________________ Individual life insurance products are marketed by independent agents and brokers, career agents and registered representatives of selected broker-dealers. Retirement products are sold through pension professionals, stock brokers and third party administrators who work closely with salaried field office employees. Annuity products and mutual funds are distributed primarily through dedicated career agents and registered life brokers. Reserves ________ 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. 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. 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 in the event of an insured's death, retirement 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. For additional information on reinsurance, see Note 16 of Notes to Financial Statements in the Annual Report. 12 Individual Life Insurance In Force and Other Statistical Data _____________________________________________________________ The following table summarizes changes in individual 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) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Sales and additions: Permanent: Non-participating....... $ 3,348 $ 2,656 $ 3,107 $ 2,930 $ 3,836 Participating........... - - - - 1 Term: Non-participating....... 595 247 92 114 142 Participating........... 1,800 1,851 761 1,222 1,921 ________ ________ ________ ________ ________ Total.................. $ 5,743 $ 4,754 $ 3,960 $ 4,266 $ 5,900 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Terminations: Surrenders and conversions $ 1,494 $ 1,692 $ 2,004 $ 1,976 $ 1,930 Lapses.................... 1,973 2,151 2,372 2,752 2,953 Other .................... 306 321 371 358 402 ________ ________ ________ ________ ________ Total.................. $ 3,773 $ 4,164 $ 4,747 $ 5,086 $ 5,285 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ In force, end of year: Permanent................. $ 31,879 $ 31,139 $ 31,270 $ 31,263 $ 31,981 Term...................... 10,853 9,623 8,902 9,696 9,798 ________ ________ ________ ________ ________ Total.................. $ 42,732 $ 40,762 $ 40,172 $ 40,959 $ 41,779 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Number of policies in force, end of year: Non-participating......... 551,381 569,322 580,846 605,233 626,420 Participating............. 120,967 127,319 135,440 146,308 157,309 ________ ________ ________ ________ ________ Total.................. 672,348 696,641 716,286 751,541 783,729 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Average size of policies in force, end of year: Non-participating......... $ 61,121 $ 56,639 $ 55,281 $ 52,983 $ 53,194 Participating............. 74,658 66,887 59,528 60,775 60,124
4. Property-Casualty Principal Products __________________ The business units in the Property-Casualty segment provide 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 1994 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 non-affiliated insurers, on both a treaty and facultative basis. Personal coverages include auto and homeowners insurance. (For additional information regarding the products offered by Property-Casualty, see MD&A - Property-Casualty in the Annual Report.) 13 Approximately 87% of Aetna's 1994 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 property-casualty business, 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. The following table sets forth the premium revenue, underwriting results and net investment income, fees and other income and net realized capital gains of Property-Casualty for the years indicated:
(Dollar amounts in millions) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Statutory: Net written premiums..... $ 4,400.5 $ 4,517.0 $ 4,916.3 $ 5,810.6 $ 6,290.8 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Premiums earned.......... $ 4,321.9 $ 4,656.2 $ 5,046.9 $ 5,973.0 $ 6,403.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Loss ratios.............. 87.5% 90.1% 92.5% 83.7% 83.3% Expense ratios........... 35.2 34.4 32.9 30.7 29.2 _________ _________ _________ _________ _________ Combined ratios: Before policyholder dividends.............. 122.7% 124.5% 125.4% 114.4% 112.5% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends.............. 123.3% 125.2% 126.1% 115.4% 113.4% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends, adjusted for discounting........ 123.3% 116.4% (1) 126.1% 115.4% 113.4% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ GAAP: (2) Net written premiums..... $ 4,431.2 $ 4,465.2 $ 4,916.3 $ 5,810.6 $ 6,290.8 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Premiums earned.......... $ 4,390.8 $ 4,653.2 $ 5,076.3 $ 6,010.4 $ 6,447.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Adjusted underwriting loss (pretax) (3)....... $ (795.2) $ (989.8) $(1,291.6) $ (850.3) $ (821.1) _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Net investment income, fees and other income and net realized capital gains........... $ 948.1 $ 1,247.7 $ 1,437.2 $ 1,323.3 $ 1,389.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Loss ratios.............. 84.9% 89.6% 93.0% 83.7% 83.0% Expense ratios........... 32.2 32.3 32.7 30.4 29.3 Combined ratios: Before policyholder dividends.............. 117.1% 121.9% 125.7% 114.1% 112.3% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends.............. 117.7% 122.5% 126.4% 115.0% 113.3% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ After policyholder dividends, adjusted for discounting............ 117.7% 113.6% (1) 126.4% 115.0% 113.3% _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Has been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after-tax). (2) Generally Accepted Accounting Principles. (3) 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.
14 Property-casualty 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 income/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 major domestic Property- Casualty coverages for the years indicated (a) the percentage of Property-Casualty statutory net written premiums (NWP) and (b) statutory combined ratios before policyholders' dividends: PERCENTAGE DISTRIBUTION OF STATUTORY NET WRITTEN PREMIUMS AND COMBINED RATIOS
1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ COMBINED COMBINED COMBINED COMBINED COMBINED NWP RATIO NWP RATIO NWP RATIO NWP RATIO NWP RATIO ___ _____ ___ _____ ___ _____ ___ _____ ___ _____ Auto liability: Bodily injury....... 15.6% 111.6 17.7% 119.3 17.1% 127.7 18.3% 133.0 17.9% 131.4 Property damage..... 5.7 95.9 6.5 70.0 6.5 81.2 7.2 101.8 7.1 101.8 Auto physical damage.. 8.2 99.4 9.2 91.8 9.6 94.9 11.8 90.3 12.7 93.6 Fidelity and surety... 3.8 80.4 3.7 92.9 3.0 91.8 3.0 99.4 2.9 100.1 Fire and allied lines. 4.7 116.5 4.3 123.7 3.2 127.0 3.2 127.0 3.0 95.3 General liability..... 12.4 177.9 12.4 150.5 13.2 166.8 11.0 118.7 11.3 107.7 Homeowners............ 9.0 136.1 9.1 124.0 7.9 132.6 8.8 112.4 9.6 108.0 Marine................ 3.1 97.0 3.0 94.1 2.6 90.6 2.3 105.6 2.4 95.3 Multiple peril........ 18.5 112.0 17.2 115.6 15.0 115.2 12.2 110.0 11.4 108.1 Workers' compensation. 17.5 117.1 17.9 171.1 20.8 138.2 21.2 120.0 20.7 125.8 Other (1)............. 1.5 N/M* (1.0) N/M* 1.1 N/M* 1.0 N/M* 1.0 N/M* _____ _____ _____ _____ _____ Total before policyholders' dividends.......... 100.0% 122.7 100.0% 124.5 100.0% 125.4 100.0% 114.4 100.0% 112.5 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total after policyholders' dividends.......... 123.3 125.2 126.1 115.4 113.4 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Total after policyholders' dividends, adjusted for discounting.... 123.3 116.4 (2) 126.1 115.4 113.4 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ (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). * Not meaningful.
15 The following table summarizes Property-Casualty statutory net written premiums for the years indicated:
(Millions) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Auto liability: Bodily injury............... $ 685.9 $ 798.9 $ 841.6 $1,061.0 $ 1,126.0 Property damage............. 251.1 295.1 322.0 420.1 448.0 Auto physical damage......... 359.6 414.3 472.1 686.2 800.3 Fidelity and surety.......... 169.3 166.8 146.9 174.4 184.9 Fire and allied lines........ 206.0 192.6 156.4 186.2 191.1 General liability............ 544.2 560.6 647.4 641.7 710.8 Homeowners................... 394.9 412.7 389.5 509.0 604.6 Marine....................... 137.7 134.0 125.8 135.6 150.2 Multiple peril............... 815.3 776.1 738.0 707.5 717.4 Workers' compensation........ 768.8 808.4 1,021.4 1,231.3 1,298.3 Other (1).................... 67.7 (42.5) 55.2 57.6 59.2 ________ ________ ________ ________ ________ Total..................... $4,400.5 $4,517.0 $4,916.3 $5,810.6 $6,290.8 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ _____________________ (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 Property-Casualty direct written premiums in various jurisdictions for the years indicated: GEOGRAPHIC DISTRIBUTION OF DIRECT WRITTEN PREMIUMS
1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ California (1,2)........ 7.8% 9.2% 9.6% 9.2% 9.4% Connecticut............. 5.9 5.8 6.0 6.0 5.9 Florida................. 5.4 4.7 4.1 4.1 4.5 Georgia................. 1.6 1.6 1.7 2.1 2.1 Illinois................ 2.8 2.8 2.7 2.7 2.6 Louisiana............... 1.0 1.2 2.1 2.5 2.3 Massachusetts (3)....... 5.4 6.2 7.5 8.3 8.1 New Jersey.............. 5.6 5.1 4.4 3.9 3.4 New York................ 17.9 17.7 17.4 16.8 16.1 North Carolina.......... 3.4 3.4 3.0 3.1 3.2 Ohio.................... 2.2 2.0 1.7 1.7 1.9 Pennsylvania............ 7.5 7.6 7.3 7.0 6.6 Tennessee............... 2.0 2.2 2.0 1.9 1.8 Texas................... 5.9 4.9 4.9 6.0 6.3 Virginia................ 2.8 2.7 2.7 2.6 3.4 All other (4)........... 22.8 22.9 22.9 22.1 22.4 _____ _____ _____ _____ _____ 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.
16 Competition ___________ Property-casualty insurance is highly competitive in the areas of price, service, agent relationships and, in the case of personal property-casualty business, method of distribution (i.e., use of independent agents, captive agents and/or employees). There are approximately 3,900 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 2,300 offer one or more personal 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 1993 written premiums, Aetna is 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 4,500 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 Property-Casualty Operations on pages 17 through 20. 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 non-affiliated insurers, to control its 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 Aetna depends on the underwriter's evaluation of the specific account, 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 $400 million. The company also has in place for 1995 an aggregate excess of loss arrangement with respect to all of its property-casualty lines for accident year 1995, providing up to additional net protection of approximately $250 million. For additional information on reinsurance, see MD&A - Property- Casualty Reserves and Note 16 of Notes to Financial Statements in the Annual Report. 17 Aetna has internal property-casualty reinsurance arrangements under which the risks and premiums of virtually all coverages written by the company's property-casualty subsidiaries (other than fidelity and surety bonds beginning in 1995) 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. 5. Reserves Related to Property-Casualty Operations Aetna establishes reserve liabilities designed to reflect estimates of the ultimate cost, to the extent reasonably estimable, of claims (including claim adjustment expenses). Such liabilities for workers' compensation life table indemnity claims are discounted. 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 yet 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 property-casualty 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. For additional information on property-casualty reserves, including reserves for environmental-related claims, workers' compensation claims (including discounting) and asbestos-related claims, see MD&A - Property Casualty Reserves in the Annual Report. 18 The following represents changes in aggregate reserves, net of reinsurance, for the combined property-casualty experience: (1,2)
(Millions) 1994 1993 1992 ____ ____ ____ Net unpaid claims and claim adjustment expenses, net of discount, at beginning of year.................... $11,438 $11,747 $11,407 Incurred claims and claim adjustment expenses: Provision for insured events of the current year................... 3,631 3,724 4,407 Increases in provision for insured events of prior years.............. 252 574 (3) 466 Cumulative effect of discounting.... - (514) - _______ _______ _______ Total incurred claims and claim adjustment expenses.................. 3,883 3,784 4,873 _______ _______ _______ Payments: Claims and claim adjustment expenses attributable to insured events of the current year................... 1,375 1,204 1,560 Claims and claim adjustment expenses attributable to insured events of prior years........................ 2,783 2,889 2,973 _______ _______ _______ Total payments........................ 4,158 4,093 4,533 _______ _______ _______ Net unpaid claims and claim adjustment expenses, net of discount, at end of the year................... 11,163 11,438 11,747 Reinsurance recoverables, end of year. 4,629 4,410 4,233 Deductible amounts recoverable from policyholders, end of year (4)....... 352 - - _______ _______ _______ Gross unpaid claims and claim adjustment expenses, at end of year... $16,144 $15,848 $15,980 _______ _______ _______ _______ _______ _______ (1) Accident and health business is excluded. (2) Includes International. (3) Includes increases in provision for insured events of prior years of $674 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.
19 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 property-casualty unpaid claims and claim adjustment expenses: (1)
(Millions) 1994 1993 1992 ____ ____ ____ Statutory unpaid claims and claim adjustment expenses.......... $11,009 $11,253 $11,541 Adjustments: Subsidiary operations (2)......... 154 185 206 Reinsurance recoverables (3)...... 4,629 4,410 4,233 Deductible amounts recoverable from policyholders (4)........... 352 - - _______ _______ _______ GAAP unpaid claims and claim adjustment expenses.......... $16,144 $15,848 $15,980 _______ _______ _______ _______ _______ _______ (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 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 property-casualty 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 1994; 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. 20
Year Ended 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ (Millions) Net liability for unpaid claims and claim adjustment expenses net of discount (1)........ $5,948 $6,560 $7,503 $8,708 $9,843 $10,557 $11,064 $11,407 $11,747 $11,438 $11,163 Paid (cumulative) as of: End of year.............. 0 0 0 0 0 0 0 0 0 0 0 One year later........... 1,844 2,067 2,180 2,552 3,134 3,069 3,080 2,973 2,889 2,783 Two years later.......... 3,055 3,372 3,727 4,547 4,955 4,994 5,133 5,116 4,890 Three years later........ 3,936 4,436 5,179 5,797 6,250 6,404 6,735 6,603 Four years later......... 4,669 5,504 6,065 6,682 7,212 7,578 7,789 Five years later......... 5,493 6,118 6,692 7,354 8,048 8,340 Six years later.......... 5,942 6,571 7,197 7,991 8,584 Seven years later........ 6,290 6,955 7,705 8,376 Eight years later........ 6,597 7,375 8,002 Nine years later......... 6,959 7,639 Ten years later.......... 7,183 Net liability reestimated as of: End of year.............. 5,948 6,560 7,503 8,708 9,843 10,557 11,064 11,407 11,747 12,072 11,807 One year later........... 6,013 6,778 7,746 9,022 10,015 10,644 11,109 11,873 12,421 12,311 Two years later.......... 6,272 7,056 8,188 9,312 10,203 10,791 11,737 12,677 12,741 Three years later........ 6,531 7,536 8,539 9,547 10,457 11,376 12,578 13,068 Four years later......... 6,926 7,910 8,813 9,808 10,985 12,090 13,038 Five years later......... 7,291 8,156 9,084 10,319 11,624 12,643 Six years later.......... 7,515 8,422 9,577 10,860 12,169 Seven years later........ 7,778 8,907 10,089 11,419 Eight years later........ 8,250 9,398 10,652 Nine years later......... 8,707 9,964 Ten years later.......... 9,248 Effect of discounting: 1993..................... (235) (274) (317) (362) (417) (473) (528) (577) (614) (634) 1994..................... (216) (256) (299) (343) (397) (453) (512) (563) (596) (621) (644) Net liability reestimated, net of discounting: (1) 1993..................... 8,472 9,124 9,772 10,498 11,207 11,617 12,050 12,100 11,807 11,438 1994..................... 9,032 9,708 10,353 11,076 11,772 12,190 12,526 12,505 12,145 11,690 11,163 Redundancy (Deficiency)....(3,084)(3,148)(2,850)(2,368)(1,929) (1,633) (1,462) (1,098) (398) (252) 0 Change in redundancy (deficiency)............. N/A (64) 298 482 439 296 171 364 700 146 252 Gross liability, end of year (2,3)........ $15,980 $15,848 $16,144 Reinsurance recoverables... 4,233 4,410 4,629 Deductible amounts recoverable from policyholders............ - - 352 _______ _______ _______ Net liability, end of year.............. $11,747 $11,438 $11,163 _______ _______ _______ _______ _______ _______ Gross reestimated liability-latest (2)..... $16,701 $16,237 Reestimated recoverable-latest....... 4,556 4,547 _______ _______ Net reestimated liability-latest......... $12,145 $11,690 _______ _______ _______ _______ Gross cumulative deficiency $ (721)$ (389) _______ _______ _______ _______ (1) The reestimated liability at December 31, 1993 includes $574 million related to development in workers' compensation reserves in the fourth quarter of 1993. This affected the reestimated liability by reserve year as follows: $574 million in 1992; $565 million in 1991; $534 million in 1990; $484 million in 1989; $433 million in 1988; $396 million in 1987; $372 million in 1986; $346 million in 1985; and $308 million in 1984. (2) Information presented gross in 1994 and 1993 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. (3) Information presented gross in 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.
21 6. 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 Korea. (For additional information regarding the products offered by International, see MD&A - International in the Annual Report.) As part of the company's decision to realign its segments (please see "Organization of Business" on page 3), United Kingdom reinsurance operations, previously included within International, are now reflected in the Property-Casualty segment. 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 ventures. 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 cumulative 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. Operations outside the U.S. have added risks such as nationalization, expropriation, foreign currency fluctuations and the potential for restrictive capital regulations. Despite these risks, management believes that its operations are sufficiently maturing and, therefore, such risks are not substantial to the company. 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) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Premiums.......................... $ 887.1 $ 909.5 $ 814.8 $ 500.0 $ 415.9 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net investment income, other income and net realized capital gains/losses..................... $ 409.9 $ 369.8 $ 387.6 $ 390.2 $ 257.0 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Life insurance in force, end of year......................... $ 45,126 $ 44,186 $ 37,172 $ 30,083 $ 21,238 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
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. 22 7. Corporate The Corporate segment includes interest expense and other corporate net expenses, which are not directly related to the company's business segments. Other corporate net expenses include operating expenses such as corporate staff areas, advertising and contributions, and net investment income. 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 is to fund policyholder and certain corporate 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 matches 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 portfolios of assets which support the liabilities. 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. The company also utilizes futures and forward contracts, swap agreements and certain debt instruments with derivative characteristics in order to manage investment returns and to align maturities, interest rates, currency rates and funds availability with its obligations. (See Note 18 of Notes to Financial Statements in the Annual Report for a discussion of the company's hedging activities.) See MD&A - General Account Investments in the Annual Report for a further discussion of investments. a. Investments Related to Life, Health, Annuity and Pension Operations Consistent with the nature of the contract obligations involved in the company's 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. 23 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) 1994 (2,3) 1993 (2,3) 1992 1991 1990 ____ ____ ____ ____ ____ Debt securities: Bonds: United States Government and government agencies and authorities.................. $ 4,214.4 $ 4,800.8 $ 2,318.7 $ 1,443.1 $ 585.7 States, municipalities and political subdivisions....... 276.3 157.8 171.7 247.6 123.4 Foreign(4)..................... 846.1 2,538.5 846.5 1,410.6 1,526.9 Public utilities............... 1,944.1 2,046.1 1,615.3 2,079.9 2,518.3 Financial...................... 3,999.7 3,643.0 2,188.6 2,477.3 2,985.7 Transportation/Capital goods... 2,234.4 1,950.8 1,728.6 2,285.2 2,650.9 Mortgage-backed securities..... 5,433.1 8,735.5 10,117.4 8,208.3 7,132.1 Other loan-backed securities... 1,331.8 49.1 - - - Food and fiber................. 597.8 708.5 652.5 750.4 857.7 Natural resources and services 686.8 842.0 600.4 738.5 800.0 All other corporate bonds...... 4,165.0 3,033.6 3,037.5 2,816.1 2,765.1 _________ _________ _________ _________ _________ Total bonds.................. 25,729.5 28,505.7 23,277.2 22,457.0 21,945.8 Redeemable preferred stocks...... 3.2 1.3 1.8 3.3 1.6 _________ _________ _________ _________ _________ Total debt securities........ 25,732.7 28,507.0 23,279.0 22,460.3 21,947.4 _________ _________ _________ _________ _________ Equity securities: Common stocks.................. 277.4 210.5 108.8 101.1 73.2 Non-redeemable preferred stocks 92.3 101.0 107.8 158.3 147.4 _________ _________ _________ _________ _________ Total equity securities...... 369.7 311.5 216.6 259.4 220.6 _________ _________ _________ _________ _________ Short-term investments........... 261.8 413.5 838.7 73.3 883.1 Mortgage loans................... 9,742.9 12,331.2 15,203.0 17,507.0 19,499.2 Real estate (5).................. 1,162.2 944.1 1,116.3 1,022.2 728.7 Policy loans..................... 481.3 448.3 427.4 414.2 404.1 Other............................ 319.3 242.3 319.9 229.4 593.8 _________ _________ _________ _________ _________ Total investments............ $38,069.9 $43,197.9 $41,400.9 $41,965.8 $44,276.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Cash and cash equivalents.......... $ 2,158.4 $ 1,232.5 $ 1,516.3 $ 2,231.3 $ 1,037.8 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Accrued investment income.......... $ 552.9 $ 529.7 $ 523.6 $ 575.8 $ 630.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Excludes International, Separate Accounts and investments in affiliates. (2) The majority of debt securities are carried at fair value in 1994 and 1993 due to the adoption of FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, at December 31, 1993. (3) Includes $11.9 billion and $14.7 billion of assets supporting discontinued products in 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 1994) of mortgage loans.
24 Mortgage-backed securities at December 31, 1994, 1993 and 1992 included the following categories of collateralized mortgage obligations: (1)
(Millions) Amortized Cost Fair Value Yield (2) ______________ __________ _____ 1994 Sequentials.................... $ 775.7 $ 765.3 9.4% Planned Amortization Class..... 1,971.9 1,831.2 8.1 Interest Only.................. 21.1 38.7 27.9 Principal Only................. 56.0 61.3 11.8 Z-Tranches..................... 300.6 271.0 9.1 Other.......................... 124.5 123.8 8.6 ________ ________ Total........................ $3,249.8 $3,091.3 8.7 ________ ________ ________ ________ 1993 Sequentials.................... $1,788.4 $1,890.9 10.3% Planned Amortization Class..... 3,347.7 3,562.2 8.8 Interest Only.................. 45.0 45.7 13.1 Principal Only................. 73.8 110.5 19.6 Z-Tranches..................... 276.8 319.6 10.2 Other.......................... 66.1 65.4 6.9 ________ ________ Total........................ $5,597.8 $5,994.3 9.5 ________ ________ ________ ________ 1992 Sequentials.................... $2,090.5 $2,213.6 10.2% Planned Amortization Class..... 2,689.6 2,847.2 9.0 Interest Only.................. 287.3 236.3 5.3 Principal Only................. 242.7 273.3 10.4 Z-Tranches..................... 661.6 714.5 10.4 Other.......................... 204.9 205.1 7.9 ________ ________ Total........................ $6,176.6 $6,490.0 9.4 ________ ________ ________ ________ (1) Excludes Separate Accounts. (2) Based on fair value at year-end.
The following table summarizes investment results of the company's life, health, disability, annuity and pension 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: 1994............... $3,327.7 8.1% $ (50.8) $ (821.3) 1993............... 3,653.0 8.8 (40.8) 281.8 1992............... 3,835.9 8.9 (111.7) (26.9) 1991............... 4,202.7 9.7 (373.0) 79.9 1990............... 4,258.9 9.9 (171.8) (29.3) (1) Excludes International, 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 after gains and losses allocable to experience rated pension contractholders. Intercompany transactions between life, health, disability, annuity and pension operations and property-casualty operations 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 1994 and 1993.
25 b. Investments Related to Property-Casualty Operations The investment strategies for assets related to property-casualty 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. Common stocks are held with the primary objective of achieving portfolio appreciation through capital gains and income. The size of common stock holdings is controlled in relation to surplus levels. For information concerning the valuation of investments, see Notes 1, 5, and 6 of Notes to Financial Statements in the Annual Report. 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) 1994 (2) 1993 (2) 1992 1991 1990 ____ ____ ____ ____ ____ Debt Securities: Bonds: United States Government and government agencies and authorities............... $ 3,417.5 $ 3,341.9 $ 895.7 $ 828.2 $ 622.9 States, municipalities and political subdivisions........ 1,408.1 2,086.9 2,210.0 2,953.1 4,114.4 Foreign(3)...................... 161.2 757.2 533.0 597.8 431.4 Public utilities................ 520.3 717.3 676.3 455.9 293.3 Financial....................... 536.1 1,280.0 708.6 946.3 768.1 Transportation/Capital goods.... 616.3 215.9 290.3 256.2 225.1 Mortgage-backed securities...... 1,273.6 1,453.5 3,029.5 2,561.7 2,009.9 Other loan-backed securities.... 317.5 - - - - Food and fiber.................. 141.9 218.3 213.9 169.8 122.3 Natural resources and services.. 282.1 279.6 334.3 268.6 166.6 All other corporate bonds....... 863.9 636.8 602.9 287.0 217.3 _________ _________ _________ _________ _________ Total bonds................. 9,538.5 10,987.4 9,494.5 9,324.6 8,971.3 Redeemable preferred stocks..... 71.1 92.3 162.8 140.5 166.0 _________ _________ _________ _________ _________ Total debt securities....... 9,609.6 11,079.7 9,657.3 9,465.1 9,137.3 _________ _________ _________ _________ _________ Equity securities: Common stocks..................... 1,038.5 1,169.5 1,015.0 645.9 484.2 Non-redeemable preferred stocks... 17.3 7.2 7.8 14.4 21.0 _________ _________ _________ _________ _________ Total equity securities..... 1,055.8 1,176.7 1,022.8 660.3 505.2 _________ _________ _________ _________ _________ Short-term investments.............. 113.2 235.8 506.8 479.2 720.1 Mortgage loans...................... 1,453.7 1,834.1 2,126.0 2,303.8 2,629.7 Real estate (4)..................... 267.6 314.8 344.6 317.0 240.3 Other............................... 389.3 295.7 258.9 490.0 331.8 _________ _________ _________ _________ _________ Total investments........... $12,889.2 $14,936.8 $13,916.4 $13,715.4 $13,564.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Cash and cash equivalents........... $ 699.5 $ (11.0) $ 597.1 $ 382.4 $ 471.3 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Accrued investment income........... $ 179.6 $ 206.8 $ 192.7 $ 201.6 $ 209.2 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (1) Excludes International and investments in affiliates. (2) The majority of debt securities are carried at fair value in 1994 and 1993 due to the adoption of FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, 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 1994) of mortgage loans.
26 Mortgage-backed securities at December 31, 1994, 1993 and 1992 included the following categories of collateralized mortgage obligations: (1)
(Millions) Amortized Cost Fair Value Yield (2) ______________ __________ _____ 1994 Sequentials.................... $ 169.4 $ 148.3 8.8% Planned Amortization Class..... 143.5 129.8 9.1 ________ ________ Total........................ $ 312.9 $ 278.1 8.9 ________ ________ ________ ________ 1993 Sequentials.................... $ 102.4 $ 102.4 6.7% Planned Amortization Class..... 211.6 213.0 6.8 Principal Only................. 53.3 54.7 6.5 Z-Tranches..................... 7.0 7.0 4.8 Other.......................... 10.3 10.2 8.9 ________ ________ Total........................ $ 384.6 $ 387.3 6.8 ________ ________ ________ ________ 1992 Sequentials.................... $ 468.9 $ 488.4 7.9% Planned Amortization Class..... 874.7 909.7 7.9 Principal Only................. 40.5 46.4 1.0 Z-Tranches..................... 11.1 11.5 6.8 Other.......................... 80.1 80.9 - ________ ________ Total........................ $1,475.3 $1,536.9 7.7 ________ ________ ________ ________ (1) Excludes International. (2) Based on fair value at year-end.
The following table summarizes investment results of the company's property-casualty insurance 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 (4) __________ _______________ _____________ ____________________ For the year: 1994............... $ 842.5 6.5% $ (8.4) $ (914.1) 1993............... 959.0 7.3 149.2 207.6 1992............... 946.1 7.2 217.4 200.6 1991............... 1,057.9 8.3 36.2 118.3 1990............... 1,136.0 8.8 53.8 (129.8) (1) Excludes International 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 and unrealized capital gains (losses) are before federal income taxes. Intercompany transactions between life, health, disability, annuity and pension operations and property-casualty operations have not been eliminated.
27 9. Other Matters a. Regulation General Aetna's insurance businesses 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 also regulate investment activities on the basis of quality, distribution and other quantitative criteria. Further, many jurisdictions compel participation in, and regulate composition of, various residual market mechanisms. Aetna's operations and accounts are subject to examination at regular intervals by domestic and other 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 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. 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 may provide incentives to insureds to use services from "preferred" health care service providers or pay contractual and non-contractual 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 non- contracting providers. Additionally, these plans are subject to state, and in some cases federal, regulation concerning solvency and other operational requirements. Legislative proposals to change the health insurance system have been prominent at both the state and national levels. (For additional discussion, see MD&A - Aetna Health Plans in the Annual Report.) 28 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. 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 some of its pension, annuity, life insurance and other investment and retirement products. Additionally, certain Separate Accounts and mutual funds of Aetna Life Insurance and Annuity Company are subject to SEC regulation 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. Property-Casualty 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. 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. 29 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 years ended December 31, 1993 and 1992 were $17 million and $49 million, respectively. There were no such charges in 1994. The level of the 1992 provision is principally related to insolvencies of certain large insurance companies. 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. In addition, there have been some legislative efforts to limit or repeal the tax offset provisions, although these efforts have, for the most part, been unsuccessful. 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. 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 1993, 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 1993 for: (i) the Net Change in Capital and Surplus Ratio which is calculated by dividing the change in capital and surplus between the prior and the current year (net of any capital and surplus paid in) by the prior year capital and surplus; (ii) the Gross Change in Capital and Surplus Ratio which is calculated by dividing the change in capital and surplus between the prior and the current year by the prior year capital and surplus; (iii) the Adequacy of Investment Income Ratio which compares investment income to credited interest; and (iv) the 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. The regulators were satisfied, after analysis, that ALIC did not warrant special attention. 30 In 1993, The Aetna Casualty and Surety Company ("AC&S") fell outside of the usual ranges 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; (iii) the Ratio of Liabilities to Liquid Assets which measures the liquidity of a company; and (iv) 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. Significant additions to prior years' losses for asbestos bodily injury and environmental liability claims and the redeployment of capital by Aetna Life and Casualty Company from another of its subsidiaries to AC&S caused certain of the ratios described above to fall outside of the usual ranges. The regulators were satisfied, after analysis, that AC&S 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 1994. 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) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges 4.60 (a) .42 (b) 2.13 3.03 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 4.60 (a) .42 (b) 2.13 3.03 (a) Aetna reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.1 billion. (b) Earnings were inadequate to cover fixed charges by $112.8 million in 1992.
For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) 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, 1994, 1993, 1992, 1991 and 1990 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges. 31 d. Miscellaneous Aetna had approximately 40,900 domestic employees at December 31, 1994. 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 1994. 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. 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. The company vacated certain of these facilities in 1994. (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. 32 Item 3. Legal Proceedings. In Re: Stepak v. Aetna Life and Casualty Company, et al. On October 22, 1990, a shareholder filed a lawsuit in United States District Court for the District of Connecticut ("District Court"). The suit, which was filed on behalf of a class of company shareholders, named as defendants Aetna Life and Casualty Company and certain present and former officers and directors thereof. The suit alleges that the defendants fraudulently and in violation of federal securities laws failed, among other things, to adequately disclose alleged deterioration in the value of mortgage loan and real estate investment portfolios and that the plaintiff, acting in reliance upon such allegedly misleading public statements, purchased Aetna Life and Casualty Company common stock at artificially inflated prices. The suit seeks certification of the class and compensatory and punitive damages. In November 1990, the plaintiff filed an amended complaint. The defendants moved to have the amended complaint dismissed. The plaintiff subsequently filed a second amended complaint, and in August 1991 the District Court denied the defendants' motion to dismiss this complaint. In the interim, the plaintiff dropped all but two of the original individual defendants. Subsequently, a class was conditionally certified composed of purchasers of Aetna common stock during the period from February 16, 1989 through November 13, 1990, with some exceptions. Aetna answered the complaint, denying all substantive averments, and the parties engaged in substantial discovery. On August 29, 1994, the District Court granted the defendants' motion for summary judgment and on September 8, 1994, entered a final judgment in favor of all defendants. The plaintiff has filed an appeal from that judgment to the United States Court of Appeals for the Second Circuit. Aetna believes that the suit is supported neither as a matter of fact nor as a matter of law and, with the other defendants, will continue to contest vigorously the litigation. 33 In Re: Attorneys General Antitrust Litigation The description of this litigation is contained in Note 19 of Notes to Financial Statements in the Annual Report and is incorporated herein by reference. Other Litigation Aetna is continuously involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. See MD&A - Property-Casualty Reserves in the Annual Report. While the ultimate outcome of the litigation described herein cannot be determined at this time, such litigation (other than that related to environmental and asbestos-related claims, which is subject to significant uncertainties), net of reserves established therefor and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. The company is expected to be affected adversely in the future by losses for environmental and asbestos-related claims and related litigation expenses and such effect could be material to the company's future results, liquidity and/or capital resources. Item 4. Submission of Matters to a Vote of Security Holders. None. 34 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 62 (1) Richard L. Huber Vice Chairman for Strategy and Finance 58 (2) Zoe Baird Senior Vice President and General Counsel 42 (3) Gary G. Benanav Executive Vice President, Property/Casualty** 49 (4) Mary Ann Champlin Senior Vice President, Human Resources 47 (5) Daniel P. Kearney Executive Vice President, Investments/Financial Services** 55 (6) James W. McLane Executive Vice President, Health/Group Life** 56 (7) Vanda B. McMurtry Senior Vice President, Federal Government Relations 45 (8) Robert E. Broatch Senior Vice President, Finance, and Corporate Controller 46 (9) Brian E. Scott Vice President and Senior Corporate Actuary 58 (10) * As of March 1, 1995. ** 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. In addition, each Executive Vice President is responsible for overseeing key initiatives and business decisions of the following businesses: Mr. Benanav -- property-casualty and international; Mr. Kearney -- investments, large case pensions and ALIAC; Mr. McLane -- Aetna Health Plans.
35 (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. From 1986 to July 1990 she was with General Electric Company, Fairfield, Connecticut, most recently as Counselor and Staff Executive. (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. From August 1989 until April 1990, he served as Vice President, International Insurance Division. (5) 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. (6) 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. From 1989 to 1990 he served as President and Chief Executive Officer of the Oversight Board of the Resolution Trust Corporation. (7) 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. 36 (8) 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. (9) Mr. Broatch has served in his current position since December 1993. From May 1988 to December 1993, he served as Vice President and Corporate Controller. (10) Mr. Scott has served in his current position since November 1991. From April 1991 until November 1991, he served as Vice President, Standard Commercial Accounts. From October 1988 through April 1991, he served as Vice President, Standard Markets Department, Commercial Insurance Division. 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 February 28, 1995, there were 25,429 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 1994 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. 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. ** 40 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. ** $500,000,000 Short-Term Credit Agreement dated as of July 27, 1994 among Aetna Life and Casualty Company, the banks listed on the signature pages thereof, Morgan Guaranty Trust Company of New York, as Managing Agent, Deutsche Bank AG, as Co-Arranger, and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co-Agents, incorporated by reference to the company's Form 10-Q filed on August 15, 1994 (the "1994 Second Quarter Form 10-Q"). $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 1994 Second Quarter Form 10-Q. 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. 41 (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. 1994 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 October 4, 1994, relating to the lowering, by certain of the rating agencies, of the senior debt and commercial paper ratings of Aetna Life and Casualty Company and the claims paying ratings of certain of its subsidiaries. The company filed a report on Form 8-K filed on November 7, 1994, relating to the lowering by A.M. Best of the claims paying rating of The Aetna Casualty and Surety Company. The company filed a report on Form 8-K filed on November 14, 1994, relating to the lowering by Duff & Phelps of the claims paying ratings of certain of Aetna Life and Casualty Company's subsidiaries. The company filed a report on Form 8-K filed on November 22, 1994, relating to a pricing agreement with certain underwriters to offer and sell $275 million of Aetna Capital L.L.C.'s, a subsidiary of the company, 9 1/2% Cumulative Monthly Income Preferred Securities, Series A guaranteed by the company. * 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 Page ____ Independent Auditors' Report........................ 43 I Summary of Investments - Other than Investments in Affiliates as of December 31, 1994.......................... 44 III Condensed Financial Information of the Registrant as of December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993 and 1992........................... 45 V Supplementary Insurance Information as of and for the years ended December 31, 1994, 1993 and 1992................................. 51 VIII Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1994, 1993 and 1992...................................... 54 IX Short-term Borrowings for the years ended December 31, 1994, 1993 and 1992.............. 55 X Supplemental Information Concerning Property-Casualty Operations for the years ended December 31, 1994, 1993 and 1992........ 56 Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the Financial Statements or Notes thereto in the Annual Report. Columns omitted from schedules filed have been omitted because the information is not applicable. Certain reclassifications have been made to 1993 and 1992 financial information to conform to 1994 presentation. 43 INDEPENDENT AUDITORS' REPORT ____________________________ The Shareholders and Board of Directors Aetna Life and Casualty Company: Under date of February 7, 1995, we reported on the consolidated balance sheets of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1994 and 1993, 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, 1994, as contained in the 1994 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 1994. 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 Note 1 to the consolidated financial statements, in 1993 the company changed its methods of accounting for certain investments in debt and equity securities, reinsurance of short- duration and long-duration contracts, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts. In 1992, the company changed its methods of accounting for income taxes and postretirement benefits other than pensions. By /s/ KPMG Peat Marwick LLP __________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut February 7, 1995 44 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE I Summary of Investments - Other than Investments in Affiliates As of December 31, 1994
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............. $ 8,321.5 $ 7,652.8 $ 7,652.8 States, municipalities and political subdivisions...... 2,000.3 1,933.9 1,941.7 Foreign (1)................... 1,739.2 1,685.5 1,685.5 Public utilities.............. 2,821.0 2,630.8 2,628.3 Financial..................... 4,776.5 4,567.8 4,675.7 Transportation/Capital goods.. 2,993.0 2,992.8 2,883.3 Mortgage-backed securities.... 7,065.2 6,759.9 6,772.8 Other loan-backed securities.. 1,706.1 1,649.4 1,649.4 Food and fiber................ 801.5 767.1 739.9 Natural resources and services 1,038.1 1,038.1 1,037.9 All other corporate bonds..... 5,640.9 5,342.3 5,362.7 _________ _________ _________ Total bonds................. 38,903.3 37,020.4 37,030.0 Redeemable preferred stocks..... 81.7 81.5 81.5 _________ _________ _________ Total debt securities....... 38,985.0 $37,101.9 37,111.5 _________ _________ _________ _________ Equity securities: Common stocks: Public utilities.............. 84.6 $ 83.6 83.6 Banks, trust and insurance companies................... 86.1 178.4 178.4 Industrial, miscellaneous and all other............... 1,074.7 1,282.1 1,282.1 _________ _________ _________ Total common stocks......... 1,245.4 1,544.1 1,544.1 Non-redeemable preferred stocks........................ 107.7 111.5 111.5 _________ _________ _________ Total equity securities..... 1,353.1 $ 1,655.6 1,655.6 _________ _________ _________ _________ Short-term investments............. 450.4 450.4 Mortgage loans..................... 11,843.6 11,843.6 Real estate........................ 1,545.7 1,545.7 Policy loans....................... 533.8 533.8 Other.............................. 936.8 (2) 1,152.7 (3) _________ _________ Total investments........... $55,648.4 $54,293.3 _________ _________ _________ _________ ________________________ * See Notes 1 and 5 of Notes to Financial Statements in the company's 1994 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 $215.9 million. (3) Includes investments in affiliates of $215.9 million.
45 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Statements of Income
For the years ended December 31, 1994 1993 1992 ____ ____ ____ (Millions) Premiums............................... $ - $ 1.3 $ .9 Net investment income (expense)........ (7.9) (7.9) (18.2) Net realized capital gains (losses).... (7.9) (22.1) 5.7 _______ _______ ________ Total revenue................... (15.8) (28.7) (11.6) Current and future benefits............ - .8 .2 Operating expenses..................... 31.8 43.1 30.3 Severance and facilities charge........ - 50.3 22.1 Interest expense....................... 92.5 70.1 76.9 _______ _______ ________ Total benefits and expenses..... 124.3 164.3 129.5 _______ _______ ________ Insurance operating losses before federal income taxes and equity in earnings of affiliates............. (140.1) (193.0) (141.1) Federal income tax benefits: Current.............................. (23.3) (53.4) (35.5) Deferred............................. (29.4) (45.6) (15.7) Equity in earnings (losses) of affiliates............................ 554.9 (521.3) 84.6 _______ _______ ________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments..... 467.5 (615.3) (5.3) Discontinued operations, net of tax: Income from operations............... - - 86.8 Gain on sale......................... - 27.0 38.1 Cumulative effect adjustments........ - - 48.9 _______ _______ ________ Income (Loss) before extraordinary item and cumulative effect adjustments for continuing operations................. 467.5 (588.3) 168.5 Extraordinary loss on debenture redemption, net of tax................ - (4.7) - Cumulative effect adjustments for continuing operations................. - 227.1 (1) (112.5) (2) _______ _______ ________ Net income (loss)....................... $ 467.5 $(365.9) $ 56.0 _______ _______ ________ _______ _______ ________ ________________________ (1) The amount of the cumulative effect adjustment applicable to affiliates is $276.3 million. (2) The amount of the cumulative effect adjustment applicable to affiliates is $285.4 million. See Notes to Condensed Financial Statements.
46 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Balance Sheets
As of December 31, 1994 1993 ____ ____ (Millions, except share data) ASSETS Investments: Debt securities, available for sale at fair value (cost of $3.8)........... $ 3.8 $ - Equity securities, at market (cost $18.3 and $5.6)................. 14.8 1.6 Short-term investments.................. 22.5 83.3 Other................................... 10.9 10.5 Investments in affiliates: Insurance and financial services companies........................... 6,815.8 7,916.4 International insurance and financial services companies........ 644.6 636.4 ________ _________ Total investments................. 7,512.4 8,648.2 Cash and cash equivalents.................. - 5.8 Premiums due and other receivables......... 2.5 2.5 Due from affiliates........................ 179.3 165.5 Accrued investment income.................. 1.6 1.3 Deferred federal income taxes.............. 306.6 263.8 Other assets............................... 32.8 39.4 ________ _________ Total assets...................... $8,035.2 $ 9,126.5 ________ _________ ________ _________ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance reserve liabilities........... $ .6 $ .5 Dividends payable to shareholders....... 77.7 77.4 Long-term debt.......................... 1,058.2 1,057.6 Other liabilities....................... 127.2 154.6 Liability for postretirement benefits other than pensions........... 624.1 638.9 Due to affiliates....................... 513.1 149.0 Federal income taxes payable............ 131.3 5.4 ________ _________ Total liabilities................. 2,532.2 2,083.4 ________ _________ 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; 114,939,275 issued; and 112,657,758 and 112,200,567 outstanding).......................... 1,419.2 1,422.0 Net unrealized capital gains (losses)... (1,071.5) 648.2 Retained earnings....................... 5,259.6 5,103.3 Treasury stock, at cost................. (104.3) (130.4) Total shareholders' equity.......... 5,503.0 7,043.1 ________ _________ Total............................. $8,035.2 $ 9,126.5 ________ _________ ________ _________ ________________________ See Notes to Condensed Financial Statements.
47 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Statements of Shareholders' Equity
Net Unrealized Three years ended December 31, 1994 Common Capital Retained Treasury (Millions, except share data) Total Stock Gains (Losses) Earnings Stock ___________________________________________________________________________________________________________ Balances at December 31, 1991 $ 7,384.5 $ 1,420.1 $ 165.9 $ 6,026.0 $ (227.5) ___________________________________________________________________________________________________________ Net income.............................. 56.0 56.0 Net change in unrealized capital gains and losses............................ 93.7 93.7 Common stock issued for benefit plans (205,848 shares)...................... 10.6 10.6 Loss on issuance of treasury stock...... (2.4) (2.4) Common stock dividends declared......... (304.1) (304.1) ______________________________________________________________ Balances at December 31, 1992 $ 7,238.3 $ 1,417.7 $ 259.6 $ 5,777.9 $ (216.9) ___________________________________________________________________________________________________________ Net income.............................. (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 Loss 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) ___________________________________________________________________________________________________________ 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 III Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Statements of Cash Flows
For the years ended December 31, 1994 1993 1992 (Millions) ____ ____ ____ Cash Flows from Operating Activities: Net income (loss)............................. $ 467.5 $(365.9) $ 56.0 Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities: Cumulative effect adjustments............... - (227.1) 112.5 Extraordinary loss on debenture redemption.. - 4.7 - Discontinued operations..................... - (27.0) (86.8) Cumulative effect of discontinued operations - - (48.9) (Increase) Decrease in premiums due and other receivables.......................... (12.3) 5.0 (41.7) (Increase) Decrease in accrued investment income..................................... (0.3) 0.3 (3.1) Depreciation and amortization............... 0.1 - 0.1 Increase (Decrease) in federal income taxes 83.1 (58.6) 73.3 Net (decrease) increase in other assets and other liabilities...................... (19.7) 38.3 110.2 Increase in insurance reserve liabilities................................ 0.1 0.1 0.3 Equity in (earnings) losses of affiliates... (554.9) 521.3 (84.6) Gain on sale of subsidiaries................ - (15.0) (38.1) Net realized capital (gains) losses......... 7.9 22.1 (5.7) Amortization of net investment discounts.... (0.2) (0.2) (0.2) Other, net.................................. (90.6) (118.2) 65.8 _______ _______ _______ Net cash (used for) provided by operating activities..................... (119.3) (220.2) 109.1 _______ _______ _______ Cash Flows from Investing Activities: Proceeds from sales of: Equity securities............................. 1.1 - - Short-term investments........................ 1,200.3 1,591.3 2,479.8 Cost of investments in: Debt securities available for sale............ (3.8) - - Equity securities............................. (21.8) (26.3) (2.9) Short-term investments........................ (1,139.6) (1,591.5) (2,538.6) Real estate................................... (1.0) (0.5) (1.8) Proceeds from disposal of subsidiaries.......... - 93.1 - Investment in and advances from subsidiaries.... 13.4 (631.3) 220.4 Dividends received from affiliates.............. - 302.1 250.0 Other, net...................................... 4.0 366.0 (72.9) _______ _______ _______ Net cash provided by investing activities..... 52.6 102.9 334.0 _______ _______ _______ Cash Flows from Financing Activities: Issuance of long-term debt.................... .6 600.0 - Issuance of subordinated debentures to affiliates............................... 348.1 - - Stock issued under benefit plans.............. 23.3 90.8 8.2 Repayment of long-term debt................... - (347.2) (69.9) Dividends paid to shareholders................ (311.2) (308.7) (304.1) _______ _______ _______ Net cash (used for) provided by financing activities....................... 60.8 34.9 (365.8) _______ _______ _______ Effect of exchange rate on cash and cash equivalents............................ 0.1 - - _______ _______ _______ Net (decrease) increase in cash and cash equivalents................................ (5.8) (82.4) 77.3 Cash and cash equivalents, beginning of year..... 5.8 88.2 10.9 _______ _______ _______ Cash and cash equivalents, end of year........... $ - $ 5.8 $ 88.2 _______ _______ _______ _______ _______ _______ Supplemental disclosure of cash flow information: Interest paid............................... $ 90.6 $ 64.2 $ 83.2 _______ _______ _______ _______ _______ _______ Income taxes received, net.................. $ 150.3 $ 56.7 $ 40.6 _______ _______ _______ _______ _______ _______ ________________________ See Notes to Condensed Financial Statements.
49 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III 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 1993 and 1992 financial information to conform to 1994 presentation. 1. Long-Term Debt
(Millions) 1994 1993 ____ ____ Long-term debt: Eurodollar Notes, 9 1/2% due 1995.. $ 100.2 $ 100.4 Notes, 8 5/8% due 1998............. 99.8 99.8 Notes, 6 3/8% due 2003............. 198.9 198.7 Debentures, 6 3/4% due 2013........ 198.4 198.3 Eurodollar Notes, 7 3/4% due 2016.. 63.5 63.5 Debentures, 8% due 2017............ 199.1 198.6 Debentures, 7 1/4% due 2023........ 198.3 198.3 ________ ________ $1,058.2 $1,057.6 ________ ________ ________ ________
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 1995 to 1999 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, 1994, 1993 and 1992 were as follows:
(Millions) 1994 1993 1992 ____ ____ ____ Consolidated subsidiaries..... - $302.1 $250.0
See Note 8 to the Consolidated Financial Statements in the Annual Report for a description of dividend restrictions from the consolidated insurance subsidiaries to the company. 3. Due to Affiliates See Note 11 to the Consolidated Financial Statements in the Annual Report for a description of amounts due to Aetna Capital L.L.C., a subsidiary of the company. 50 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE III Condensed Financial Information AETNA LIFE AND CASUALTY COMPANY Notes to Condensed Financial Statements (Continued) 4. Accounting Changes See Note 1 to the Consolidated Financial Statements in the Annual Report for a description of accounting changes. 5. Discontinued Products See Note 2 to the Consolidated Financial Statements in the Annual Report for a description of discontinued products. 6. Sales of Subsidiaries See Note 3 to the Consolidated Financial Statements in the Annual Report for a description of the sales of subsidiaries. 7. Severance and Facilities Charge See Note 4 to the Consolidated Financial Statements in the Annual Report for a description of the severance and facilities charges. 8. Federal and Foreign Income Taxes See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of federal and foreign income taxes. 9. Litigation See Note 19 to the Consolidated Financial Statements in the Annual Report for a description of the Attorneys General Antitrust litigation. 51 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE V Supplementary Insurance Information As of and for the year ended December 31, 1994
Deferred Unpaid Policyholders' policy Future claims funds left acquisition policy and claim Unearned with the Premium Segment costs benefits expenses premiums company revenue _______ ___________ _________ _________ _________ ___________ _________ (Millions) Aetna Health Plans..........$ 74.2 $ 2,487.4 $ 1,204.5 (1) $ 137.5 $ 682.1 $ 5,611.5 Large Case Pensions......... - 9,916.9 1.5 - 12,548.7 234.4 Aetna Life Insurance & Annuity.................. 1,147.3 3,281.8 25.3 - 9,106.2 168.3 Property-Casualty........... 316.0 - 16,192.9 1,425.9 46.7 4,390.8 International............... 477.2 2,293.1 54.1 41.5 839.4 887.1 Corporate................... - - - - - - _________ _________ _________ _________ _________ _________ Total....................$ 2,014.7 $17,979.2 $17,478.3 $ 1,604.9 $23,223.1 $11,292.1 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ 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 $ - $ 1,845.9 $ 83.8 Large Case Pensions............ 2,017.4 103.4 2,175.9 - 98.2 - Aetna Life Insurance & Annuity..................... 958.7 277.2 914.4 37.1 217.7 - Property-Casualty.............. 832.1 116.0 3,746.8 647.2 914.1 4,467.1 International.................. 308.4 101.5 782.7 65.7 349.8 39.5 Corporate...................... (4.7) (5.0) 22.2 - 293.6 - _________ _________ _________ _________ _________ _________ Total..................... $ 4,463.5 $ 1,769.1 $12,397.1 $ 750.0 $ 3,719.3 $ 4,590.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (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 V 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 Large Case Pensions......... - 10,027.0 1.2 - 16,318.5 185.9 Aetna Life Insurance & Annuity.................. 1,042.4 3,075.6 15.4 - 9,207.2 125.7 Property-Casualty........... 329.6 16.9 15,771.5 1,332.5 51.2 4,653.2 International............... 421.5 1,964.3 96.1 40.0 1,318.1 909.5 Corporate................... - - - - - - _________ _________ _________ _________ _________ _________ Total....................$ 1,867.0 $17,597.6 $17,112.2 $ 1,502.2 $27,592.2 $10,574.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ 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............. $ 376.3 $ 1,029.1 $ 3,989.3 $ - $ 1,701.8 $ 67.0 Large Case Pensions............ 2,327.7 52.4 2,428.1 - 142.1 - Aetna Life Insurance & Annuity..................... 962.4 270.3 870.9 38.5 275.7 - Property-Casualty.............. 952.4 295.3 4,214.7 646.2 1,172.7 4,464.7 International.................. 311.6 58.2 860.1 51.7 365.3 114.1 Corporate...................... (11.4) 4.5 28.8 - 295.2 - _________ _________ _________ _________ _________ _________ Total..................... $ 4,919.0 $ 1,709.8 $12,391.9 $ 736.4 $ 3,952.8 $ 4,645.8 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (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 V Supplementary Insurance Information As of and for the year ended December 31, 1992
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..........$ 57.0 $ 2,543.0 $ 1,074.0 (1) $ 107.6 $ 644.8 $ 4,586.7 Large Case Pensions......... 1.8 8,741.6 1.8 - 17,595.4 204.2 Aetna Life Insurance & Annuity.................. 961.6 2,867.4 34.0 - 7,502.1 111.9 Property-Casualty........... 328.6 .2 15,923.0 1,335.0 61.0 5,076.3 International............... 357.0 1,838.2 89.4 45.6 1,466.9 814.8 Corporate................... - - - - - - _________ _________ _________ _________ _________ _________ Total....................$ 1,706.0 $15,990.4 $17,122.2 $ 1,488.2 $27,270.2 $10,793.9 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ 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............. $ 388.2 $ 957.2 $ 3,793.1 $ - $ 1,727.0 $ 59.8 Large Case Pensions............ 2,560.4 (13.3) 2,697.7 - 107.7 - Aetna Life Insurance & Annuity..................... 884.3 245.6 821.3 32.7 240.7 - Property-Casualty.............. 1,016.5 420.7 4,772.2 725.9 1,282.3 4,916.3 International.................. 278.5 109.1 732.3 41.6 385.6 72.3 Corporate...................... (58.9) _ 16.2 32.3 - _ 327.4 - _________ _________ _________ _________ _________ _________ Total..................... $ 5,069.0 $ 1,735.5 $12,848.9 $ 800.2 $ 4,070.7 $ 5,048.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (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 VIII Valuation and Qualifying Accounts and Reserves
For the years ended December 31, (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 __________ ____________ _____________ ____________ _________ 1994 ____ Asset valuation reserves: Debt securities........... $ 102.8 $ 2.7 $ 14.7 $ (120.2) $ - Mortgage loans............ 1,308.3 103.3 197.9 (825.4) 784.1 Equity securities......... 10.6 - - (10.6) - Real estate............... 267.7 (1.2) 24.2 (145.0) 145.7 Other..................... 6.0 - - - 6.0 _________ _________ _________ _________ _________ $ 1,695.4 $ 104.8 $ 236.8 $(1,101.2) $ 935.8 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ 1993 ____ Asset valuation reserves: Debt securities........... $ 105.2 $ 14.5 $ 12.5 $ (29.4) $ 102.8 Mortgage loans............ 1,065.6 421.7 176.5 (355.5) 1,308.3 Equity securities......... 12.5 .8 - (2.7) 10.6 Real estate............... 68.8 176.7 79.3 (57.1) 267.7 Other..................... 6.0 - - - 6.0 _________ _________ _________ _________ _________ $ 1,258.1 $ 613.7 $ 268.3 $ (444.7) $ 1,695.4 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ 1992 ____ Asset valuation reserves: Debt securities........... $ 145.7 $ (9.0) $ (3.1) $ (28.4) $ 105.2 Mortgage loans............ 767.6 366.5 115.4 (183.9) 1,065.6 Equity securities......... 8.0 4.5 - - 12.5 Real estate............... - 53.6 22.6 (7.4) 68.8 Other..................... 131.6 - - (125.6) (4) 6.0 _________ _________ _________ _________ _________ $ 1,052.9 $ 415.6 $ 134.9 $ (345.3) $ 1,258.1 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ ________________________ (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. (4) Primarily related to oil and gas properties. During 1992, the majority of the oil and gas properties were sold.
55 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE IX Short-Term Borrowings
For the years ended December 31, (Millions) Weighted Maximum Average average rate Category of Weighted amount amount on amount aggregate Balance average outstanding outstanding outstanding short-term at end of interest during the during the during the borrowings period rate period period* period* ___________ _________ _________ ___________ ___________ ____________ 1994 ____ Commercial paper.......... $ - -% $383.5 $177.3 4.6% Bank notes................ 13.6 11.0 21.1 19.2 9.0 Other..................... 10.3 0.8 143.8 23.4 2.3 1993 ____ Commercial paper.......... $ 8.4 7.0% $560.1 $150.4 3.6% Bank notes................ - - 7.5 7.5 6.0 Other..................... 27.3 0.4 385.1 57.7 2.5 1992 ____ Commercial paper.......... $ 22.5 6.0% $539.0 $263.9 3.7% Bank notes................ - - 7.5 7.5 6.3 Other..................... 2.1 8.8 2.1 1.7 8.8 ________________________ * Method of computation - daily weighted average based upon respective time outstanding and the amount of borrowings.
56 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES SCHEDULE X Supplemental Information Concerning Property-Casualty Operations
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(1) expenses(2) adjustment expenses premiums(1) premiums(1) ___________ ___________ _____________ ___________________ ________ ________ 1994 Consolidated property- casualty entities $ 316 $11,163 $ 644 (3) $ 1,426 $ 4,391 1993 Consolidated property- casualty entities $ 330 $11,438 $ 634 (3) $ 1,333 $ 4,653 1992 Consolidated property- casualty entities $ 329 $11,747 $ - $ 1,335 $ 5,076 Claims and claim Paid Net adjustment expenses claims Affiliation investment incurred related to: Amortization of and claim with and other Current Prior deferred policy adjustment Premiums registrant income(1) year(2) years(2) acquisition costs(1) expenses(1) written(1) ___________ __________ _______ ______ _________________ __________ ________ 1994 Consolidated property- casualty entities $ 832 $ 3,631 $ 252 $ 647 $ 4,158 $ 4,467 1993 Consolidated property- casualty entities $ 952 $ 3,724 $ 60 $ 646 $ 4,093 $ 4,465 1992 Consolidated property- casualty entities $ 1,017 $ 4,407 $ 466 $ 726 $ 4,533 $ 4,916 (1) Excludes International. (2) Net of reinsurance and discounting. (3) Reserves for workers' compensation life table indemnity claims are discounted at 5% for voluntary business and 3.5% for involuntary business.
57 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: March 17, 1995 AETNA LIFE AND CASUALTY COMPANY (Registrant) By /s/ Robert E. Broatch _______________________________ (Signature) Robert E. Broatch Senior Vice President, Finance, 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 March 17, 1995. Signature Title * ________________________ Chairman, President and Director Ronald E. Compton (Principal Executive Officer) * ________________________ Wallace Barnes Director * ________________________ John F. Donahue Director * ________________________ William H. Donaldson Director * ________________________ Barbara Hackman Franklin Director * ________________________ Earl G. Graves Director * ________________________ Gerald Greenwald Director * ________________________ Michael H. Jordan Director * ________________________ Jack D. Kuehler Director * ________________________ Frank R. O'Keefe, Jr. Director * ________________________ David M. Roderick Director * ________________________ Richard L. Huber Vice Chairman for Strategy and Finance (Principal Financial Officer) /s/ Robert E. Broatch ________________________ Robert E. Broatch Senior Vice President, Finance, and Corporate Controller (Controller) * By /s/ Robert E. Broatch ________________________ Robert E. Broatch (Attorney-in-Fact) 58 INDEX TO EXHIBITS
Exhibit Filing Number Description of Exhibit Method ______ ______________________ ______ (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 P authorities. Paper 1994 Consolidated Schedule P of Annual Statements provided to state regulatory authorities.
EX-12 2 STATEMENT RE COMPUTATION OF RATIOS 1 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Millions) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Pretax income (loss) from continuing operations........... $ 658.3 $ (1,147.4) $ (121.4) $ 243.5 $ 459.6 Add back fixed charges........... 186.1 171.0 194.3 221.5 229.0 Minority interest................ 11.4 7.0 8.6 5.9 4.9 _________ _________ _________ _________ _________ Income (loss) as adjusted..... $ 855.8 $ (969.4) $ 81.5 $ 470.9 $ 693.5 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Fixed charges: Interest on indebtedness....... $ 98.6 $ 77.4 $ 81.4 $ 110.9 $ 119.9 Portion of rents representative of interest factor............ 87.5 93.6 112.9 110.6 109.1 _________ _________ _________ _________ _________ Total fixed charges........... $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Preferred stock dividend requirements.................... - - - - - _________ _________ _________ _________ _________ Total combined fixed charges and preferred stock dividend requirements.................... $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Ratio of earnings to fixed charges......................... 4.60 (5.67) 0.42 2.13 3.03 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ Ratio of earnings to combined fixed charges and preferred stock dividends................. 4.60 (5.67) 0.42 2.13 3.03 _________ _________ _________ _________ _________ _________ _________ _________ _________ _________
EX-13 3 ANNUAL REPORT TO SECURITY HOLDERS 1 Selected Financial Data (1)
(Millions, except per share data) 1994 1993 1992 1991 1990 ____ ____ ____ ____ ____ Revenue: Premiums: Aetna Health Plans $ 5,611.5 $ 4,700.6 $ 4,586.7 $ 4,467.3 $ 4,190.1 Large Case Pensions 234.4 185.9 204.2 292.4 597.0 Aetna Life Insurance & Annuity 168.3 125.7 111.9 174.5 272.9 Property-Casualty 4,390.8 4,653.2 5,076.3 6,010.4 6,447.2 International 887.1 909.5 814.8 500.0 415.9 __________________________________________________________ Total premiums 11,292.1 10,574.9 10,793.9 11,444.6 11,923.1 _____________________________________________________________________________________________________ Net Investment Income, Fees and Other Income, and Net Realized Capital Gains and Losses: Aetna Health Plans 1,527.6 1,405.4 1,345.4 1,124.2 1,086.8 Large Case Pensions 2,120.8 2,380.1 2,547.1 2,730.6 3,069.9 Aetna Life Insurance & Annuity 1,235.9 1,232.7 1,129.9 1,041.3 973.2 Property-Casualty 948.1 1,247.7 1,437.2 1,323.3 1,389.9 International 409.9 369.8 387.6 390.2 257.0 Corporate: Other (9.7) (6.9) (42.7) (11.7) (.7) Federated Investors - - - - - __________________________________________________________ Total net investment income, fees and other income, and net realized capital gains and losses 6,232.6 6,628.8 6,804.5 6,597.9 6,776.1 _____________________________________________________________________________________________________ Total Revenue $ 17,524.7 $ 17,203.7 $ 17,598.4 $ 18,042.5 $ 18,699.2 _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments: Aetna Health Plans $ 341.7 $ 272.2 $ 274.3 $ 382.6 $ 288.3 Large Case Pensions 54.4 (822.3) (17.3) (167.0) 1.1 Aetna Life Insurance & Annuity 159.1 111.4 99.0 115.8 85.5 Property-Casualty 58.1 (13.0) (106.3) 225.3 355.6 International 71.2 55.0 25.1 38.2 (48.2) Corporate: Interest (60.5) (44.7) (50.9) (65.0) (73.8) Other (156.5) (173.9) (229.2) (163.5) (127.9) Federated Investors - - - - - _____________________________________________________________________________________________________ Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments 467.5 (615.3) (5.3) 366.4 480.6 _____________________________________________________________________________________________________ Income from Discontinued Operations - 27.0 173.8 138.8 133.5 _____________________________________________________________________________________________________ Cumulative Effect Adjustments - 227.1 (112.5) - - _____________________________________________________________________________________________________ Net Income (Loss) $ 467.5 $ (365.9) $ 56.0 $ 505.2 $ 614.1 _____________________________________________________________________________________________________ Net Realized Capital Gains (Losses), Net of Tax (included above) (42.6) 59.0 78.6 (187.4) (79.2) _____________________________________________________________________________________________________ Total Assets (2) 94,172.5 100,036.7 94,519.6 91,987.6 89,300.7 _____________________________________________________________________________________________________ Total Long-Term Debt 1,114.7 1,160.0 955.6 1,019.6 1,010.3 _____________________________________________________________________________________________________ Minority Interest in Preferred Securities of Subsidiary 275.0 - - - - _____________________________________________________________________________________________________ Redeemable Preferred Stock, Net of Treasury Shares - - - - - _____________________________________________________________________________________________________ Shareholders' Equity 5,503.0 7,043.1 7,238.3 7,384.5 7,072.4 _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ Per Common Share Data: Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments $ 4.14 $ (5.54) $ (.05) $ 3.33 $ 4.32 Income (Loss) from Discontinued Operations - .24 1.58 1.26 1.20 Cumulative Effect Adjustments for Continuing Operations - 2.05 (1.02) - - Net Income (Loss) 4.14 (3.29) .51 4.59 5.52 Dividends Declared 2.76 2.76 2.76 2.76 2.76 Shareholders' Equity 48.85 62.77 65.64 67.09 64.23 Market Price at Year End 47.13 60.38 46.50 44.00 39.00 _____________________________________________________________________________________________________ See Notes to Financial Statements and Management's Discussion and Analysis for significant events affecting the comparability of current year results with 1993 and 1992 results. (1) In 1994, the company changed its external reporting segments to better align the segments with the way the businesses are managed. Prior periods have been restated to reflect the change. (2) Total assets at December 31, 1994 and 1993 include $12.4 billion and $15.2 billion, respectively, of assets attributable to discontinued fully guaranteed large case pension products.
2 Selected Financial Data (1)
(Millions, except per share data) 1989 1988 1987 1986 1985 1984 ____ ____ ____ ____ ____ ____ Revenue: Premiums: Aetna Health Plans $ 3,730.7 $ 2,770.1 $ 2,562.8 $ 2,893.5 $ 2,556.0 $ 2,708.4 Large Case Pensions 1,303.8 855.3 1,767.5 1,130.2 410.9 182.2 Aetna Life Insurance & Annuity 302.0 286.7 270.0 253.1 242.3 269.3 Property-Casualty 6,785.6 6,782.6 6,444.9 5,801.3 4,679.6 4,013.7 International 310.5 389.1 421.8 343.1 372.7 387.6 _______________________________________________________________ Total premiums 12,432.6 11,083.8 11,467.0 10,421.2 8,261.5 7,561.2 ___________________________________________________________________________________________________________ Net Investment Income, Fees and Other Income, and Net Realized Capital Gains and Losses: Aetna Health Plans 920.8 703.9 564.4 663.2 660.1 549.5 Large Case Pensions 3,162.5 3,083.7 2,884.7 2,917.9 2,709.3 2,300.9 Aetna Life Insurance & Annuity 865.5 715.0 631.7 593.4 475.6 400.0 Property-Casualty 1,349.3 1,076.5 1,047.7 903.6 739.5 585.1 International 258.8 244.7 277.2 200.5 133.1 153.7 Corporate: Other (17.1) 17.6 15.4 (79.3) (13.7) (30.5) Federated Investors 240.3 193.5 209.2 180.6 149.3 109.1 ________________________________________________________________ Total net investment income, fees and other income, and net realized capital gains and losses 6,780.1 6,034.9 5,630.3 5,379.9 4,853.2 4,067.8 ___________________________________________________________________________________________________________ Total Revenue $19,212.7 $17,118.7 $17,097.3 $15,801.1 $13,114.7 $11,629.0 ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments: Aetna Health Plans $ 254.8 $ 152.4 $ 182.1 $ 277.6 $ 289.5 $ 233.9 Large Case Pensions 107.0 125.1 83.8 185.9 144.2 94.8 Aetna Life Insurance & Annuity 67.7 82.6 61.7 112.6 72.8 101.1 Property-Casualty 258.7 344.0 500.4 295.7 121.8 (38.3) International (14.1) (18.0) 28.5 39.1 (32.7) 15.9 Corporate: Interest (68.9) (62.5) (51.2) (39.4) (53.2) (42.5) Other (146.4) (120.8) (127.7) (198.8) (117.9) (145.4) Federated Investors 54.0 54.6 58.3 49.4 38.7 23.3 ___________________________________________________________________________________________________________ Income from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments 512.8 557.4 735.9 722.1 463.2 242.8 ___________________________________________________________________________________________________________ Income (Loss) from Discontinued Operations 126.6 142.1 130.9 138.3 (101.9) (130.2) ___________________________________________________________________________________________________________ Cumulative Effect Adjustments - - - - - - ___________________________________________________________________________________________________________ Net Income (Loss) $ 676.4 $ 713.3 $ 915.3 $ 1,015.6 $ 365.3 $ 112.6 ___________________________________________________________________________________________________________ Net Realized Capital Gains (Losses), Net of Tax (included above) 111.7 32.0 4.0 97.6 59.5 (36.0) ___________________________________________________________________________________________________________ Total Assets 87,099.0 81,344.6 75,724.1 69,360.1 60,096.0 52,604.3 ___________________________________________________________________________________________________________ Total Long-Term Debt 1,037.7 1,093.8 930.9 654.4 527.9 484.2 ___________________________________________________________________________________________________________ Minority Interest in Preferred Securities of Subsidiary - - - - - - ___________________________________________________________________________________________________________ Redeemable Preferred Stock, Net of Treasury Shares - 118.6 177.1 200.0 75.0 - ___________________________________________________________________________________________________________ Shareholders' Equity 6,936.7 6,453.8 6,015.7 5,633.4 4,745.9 4,112.3 ___________________________________________________________________________________________________________ ___________________________________________________________________________________________________________ Per Common Share Data: Income (Loss) from Continuing Operations before Extraordinary Item and Cumulative Effect Adjustments $ 4.56 $ 4.87 $ 6.33 $ 6.25 $ 4.14 $ 2.20 Income (Loss) from Discontinued Operations 1.13 1.26 1.15 1.24 (.95) (1.31) Cumulative Effect Adjustments for Continuing Operations - - - - - - Net Income (Loss) 6.02 6.25 7.91 8.87 3.23 .89 Dividends Declared 2.76 2.76 2.76 2.64 2.64 2.64 Shareholders' Equity 61.94 57.50 52.95 48.58 41.19 39.14 Market Price at Year End 56.50 47.25 45.25 56.38 53.50 36.50 ___________________________________________________________________________________________________________ See Notes to Financial Statements. (1) In 1994, the company changed its external reporting segments to better align the segments with the way the businesses are managed. Prior periods have been restated to reflect the change.
3 Management's Discussion and Analysis of Financial Condition and Results of Operations.* Consolidated Results of Operations: Operating Summary
(Millions, except per share data) 1994 1993 1992 _________________________________________________________________________________________ Premiums...................................... $ 11,292.1 $ 10,574.9 $ 10,793.9 Net investment income......................... 4,463.5 4,919.0 5,069.0 Fees and other income........................ 1,823.9 1,620.0 1,620.6 Net realized capital gains (losses)........... (54.8) 89.8 114.9 ________________________________________ Total revenue............................. 17,524.7 17,203.7 17,598.4 ________________________________________ Current and future benefits................... 12,397.1 12,391.9 12,848.9 Operating expenses............................ 3,719.3 3,644.8 3,925.7 Amortization of deferred policy acquisition costs......................... 750.0 736.4 800.2 Loss on discontinuance of products............ - 1,270.0 - Severance and facilities charge............... - 308.0 145.0 ________________________________________ Total benefits and expenses............... 16,866.4 18,351.1 17,719.8 ________________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments......... 658.3 (1,147.4) (121.4) Income taxes (benefits)....................... 190.8 (532.1) (116.1) ________________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments........................ 467.5 (615.3) (5.3) Discontinued operations, net of tax........... - 27.0 173.8 ________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments............. 467.5 (588.3) 168.5 Extraordinary loss on debenture redemption.... - (4.7) - Cumulative effect adjustments................. - 227.1 (112.5) ________________________________________ Net income (loss) $ 467.5 $ (365.9) $ 56.0 _________________________________________________________________________________________ ________________________________________ Net realized capital gains (losses), net of tax (included above) $ (42.6) $ 59.0 $ 78.6 _________________________________________________________________________________________ ________________________________________ Per common share data: Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments.......... $ 4.14 $ (5.54) $ (.05) Income from discontinued operations, net of tax............................. - .24 1.58 Extraordinary loss on debenture redemption - (.04) - Cumulative effect adjustments............. - 2.05 (1.02) ________________________________________ Net income (loss)...................... $ 4.14 $ (3.29) $ .51 ________________________________________ ________________________________________ Dividends declared........................ $ 2.76 $ 2.76 $ 2.76 ________________________________________ ________________________________________ Shareholders' equity $ 48.85 $ 62.77 $ 65.64 _________________________________________________________________________________________ ________________________________________ Sources of earnings: Aetna Health Plans.......................... $ 341.7 $ 272.2 $ 274.3 Large Case Pensions......................... 54.4 (822.3) (17.3) Aetna Life Insurance & Annuity.............. 159.1 111.4 99.0 Property-Casualty........................... 58.1 (13.0) (106.3) International............................... 71.2 55.0 25.1 Corporate: Interest........................ (60.5) (44.7) (50.9) Other........................... (156.5) (173.9) (229.2) ________________________________________ Total from continuing operations.......... 467.5 (615.3) (5.3) Discontinued operations..................... - 27.0 173.8 Extraordinary loss on debenture redemption.. - (4.7) - Cumulative effect adjustments............... - 227.1 (112.5) ________________________________________ Net income (loss)........................... $ 467.5 $ (365.9) $ 56.0 ________________________________________ ________________________________________ * This Management's Discussion and Analysis is as of February 7, 1995.
4 Overview Aetna's 1994 net income was $468 million, compared with a net loss of $366 million and net income of $56 million in 1993 and 1992, respectively. The 1993 net loss included income from discontinued operations of $27 million (compared with $174 million in 1992) and a net benefit of $227 million for cumulative effect adjustments for accounting changes (compared with a net charge of $113 million for such adjustments in 1992). (Please see "Cumulative Effect Adjustments" on page 6.) Aetna's reportable segments have been changed to better reflect the way the businesses are managed, and prior years' results have been restated to conform to the new segments. The new reportable segments are Aetna Health Plans, Large Case Pensions, Aetna Life Insurance & Annuity, Property-Casualty, International and Corporate. Adjusted Earnings For purposes of the discussions which follow, adjusted earnings represent income (loss) before cumulative effect adjustments excluding after-tax net realized capital gains (losses) in 1994, 1993 and 1992, the 1993 and 1992 after-tax severance and facilities charges and the 1993 after-tax loss on discontinuance of products. Adjusted earnings by segment were as follows:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Aetna Health Plans $ 355.3 $ 332.4 $ 324.3 Large Case Pensions 71.4 47.4 44.0 Aetna Life Insurance & Annuity 162.9 125.3 100.1 Property-Casualty 59.5 (18.4) (199.0) International 69.1 73.7 17.9 Corporate (208.1) (209.7) (275.5)
Summary Segment Results The following summary of segment results is based upon adjusted earnings. Aetna Health Plans: Results improved in 1994, reflecting improved earnings in the group insurance and health care businesses. Within the health care businesses, managed care volume grew, consistent with the increased costs associated with the continued expansion of managed care. Large Case Pensions: Results in 1994 reflected the net benefits from the absence of losses from discontinued fully guaranteed products. Aetna Life Insurance & Annuity: Results improved in 1994, principally reflecting a decrease in operating expenses and strong sales growth. 5 Overview (Continued) Property-Casualty: Results in 1994 reflected $114 million of indemnity-related environmental reserve additions, partially offset by a $66 million reduction in loss and loss adjustment reserves for prior accident years in the personal auto business. Catastrophe losses were $190 million in 1994 compared with $85 million in 1993. Results in 1994 also reflected lower net investment income and lower operating expenses. International: Results in 1994 reflected earnings from the company's increased investment in a Mexican insurance operation and continued improvement in the Pacific Rim operations. Earnings in 1993 included a $37 million tax benefit from prior year operating losses related to the sale of the U.K. life and investment management operations. Corporate: Results in 1994 reflected higher interest expense resulting from the issuance by a subsidiary of 9 1/2% cumulative monthly income preferred securities in November 1994, as well as certain other long-term debt issued by the company in late 1993, which was offset by lower corporate staff area expenses associated with previous restructurings. 1993 results also reflected lower corporate staff area expenses associated with previous restructurings. Results of Continuing Operations Income from continuing operations (before extraordinary item and cumulative effect adjustments) was $468 million in 1994, compared with losses of $615 million and $5 million in 1993 and 1992, respectively. The following factors complicate the comparison of results: Results for the year ended December 31, 1994 included after-tax catastrophe losses of $190 million related primarily to the Los Angeles earthquake and the severe winter weather occurring in early 1994. After-tax catastrophe losses for the years ended December 31, 1993 and 1992 were $85 million and $118 million, respectively. Catastrophe losses in 1992 were primarily due to Hurricane Andrew and Winter Storm Beth. Results in 1994 reflected net losses of $114 million (after-tax and net of reinsurance) for prior year reserve development on indemnity-related environmental liability claims, in the Property-Casualty segment, partially offset by a benefit of $66 million on personal auto claims. Results in 1993 included an addition to workers' compensation reserves for prior accident years of $259 million (after-tax and after discounting). Reserve additions in 1992 for prior accident years included a charge for asbestos and environmental liability claims of $293 million. (Please see "Property-Casualty" on pages 26 through 39.) 6 Overview (Continued) Results in 1993 included an after-tax charge for anticipated future losses on discontinuance of the fully guaranteed large case pension products of $825 million and losses on discontinued products of $90 million ($53 million excluding net realized capital losses). Results of discontinued products for the year ended December 31, 1994 were charged against the reserve for anticipated future losses and did not impact the net income of the company. (Please see pages 19 through 22 for a discussion of discontinued products.) Results in 1993 and 1992 included after-tax severance and facilities charges of $200 million and $96 million, respectively. (Please see "Severance and Facilities Charges" on page 9.) Results in 1994 included net realized capital losses of $43 million compared with net realized capital gains of $59 million and $79 million in 1993 and 1992, respectively. (Please see "Net Realized Capital Gains and Losses" on page 7.) Results of Discontinued Operations Discontinued operations reflect the results of the company's former wholly owned subsidiary, American Re-Insurance Company ("Am Re"), which was sold effective September 30, 1992. Income from discontinued operations was $27 million in 1993 and $174 million in 1992. The 1993 income resulted from the redemption of preferred stock received in connection with the sale. Cumulative Effect Adjustments Net income in 1993 and 1992 included the following cumulative effect adjustments, net of tax:
(Millions) 1993 1992 _______________________________________________________________________ Discounting of workers' compensation life table indemnity claims $ 250.0 $ - Change in accounting for postemployment benefits (primarily accrual of long-term disability benefits) (48.5) - Change in accounting for retrospectively rated reinsurance contracts 26.3 - Change in accounting for debt and equity securities (.7) - Change in accounting for postretirement benefits other than pensions - (385.0) Change in accounting for income taxes - 272.5 _____________________ Net cumulative effect benefit (charge) $ 227.1 $ (112.5) _______________________________________________________________________ _____________________
There were no cumulative effect adjustments reflected in 1994 net income. (Please see Notes 1, 5, 10 and 14 of Notes to Financial Statements.) 7 Overview (Continued) Net Realized Capital Gains and Losses Net realized after-tax capital gains (losses) included in the results of continuing operations, allocable to experience rated pension contractholders, and supporting discontinued products were as follows:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Net realized capital gains from sales $ 25.5 $ 486.5 $ 355.8 Net realized capital losses from additions to reserves for mortgage loans and real estate (66.4) (417.6) (280.2) Net realized capital gains (losses) from write-downs of debt and equity securities (1.7) (9.9) 3.0 _______ _______ _______ Net realized capital gains (losses) from continuing operations $ (42.6) $ 59.0 $ 78.6 _______ _______ _______ _______ _______ _______ Net realized capital losses allocable to experience rated pension contractholders (excluded above) $(126.8) $(117.1) $ (39.4) _______ _______ _______ _______ _______ _______ Net realized capital losses on assets supporting discontinued products (excluded above) $(135.8)* $ ** $ ** _______ _______ ________ _______ _______ ________ * The 1994 net realized capital losses of $135.8 million on assets supporting discontinued products were charged to the reserve for future losses on discontinued products. (Please see "Large Case Pensions - Discontinued Products" on page 19.) ** Net realized capital losses of $37.4 million and $59.0 million, respectively for 1993 and 1992 on assets supporting discontinued products are included in the $59.0 million and $78.6 million of capital gains, respectively, shown above.
Net realized capital gains from sales included a $12 million loss in 1993 on the sale of the U.K. life and investment management operations and a $50 million gain in 1992 from the sale of a portion of the company's equity interest in MBIA Inc. Adverse conditions in commercial real estate markets have negatively impacted earnings in each of the last three years. The impact in 1994 reflects improvement in certain segments of the commercial real estate markets. The company has reduced the mortgage loan and equity real estate portfolios, after reserves and write-downs, by $10.8 billion since the end of 1990, bringing mortgage loans and real estate as a percentage of general account invested assets (net of impairment reserves) from 40% at December 31, 1990 to 25% at December 31, 1994. 8 Overview (Continued) Income 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. For federal income tax purposes, capital losses are deductible only against capital gains in the year of sale or during the carryback and carryforward periods (three and five years, respectively). Due to the expected full utilization of capital gains in the carryback period and the uncertainty of future capital gains, a valuation allowance of $262 million related to such net unrealized capital losses has been reflected in shareholders' equity. In addition, $609 million of unrealized capital losses related to experience rated contracts are not reflected in shareholders' equity since such losses, if realized, will be charged to contractholders. However, the potential loss of tax benefits on such losses is the risk of the company and therefore would adversely affect the company rather than the contractholder. Accordingly, an additional valuation allowance of $213 million has been reflected in shareholders' equity as of December 31, 1994. Any reversals of the valuation allowance are contingent upon the recognition of future capital gains in the company's federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. Non-recognition of the deferred tax benefits on net unrealized losses described above had no impact on net income for 1994, but has the potential to adversely affect future results if such losses are realized. Potential losses of tax benefits related to net unrealized losses on assets supporting the discontinued products are not expected to adversely affect the company's future results. Management believes that it is more likely than not that the company will realize the benefit of the net deferred tax asset of $1.3 billion. (Please see Note 10 of Notes to Financial Statements.) Per Common Share Income from continuing operations per common share before extraordinary item and cumulative effect adjustments was $4.14 in 1994 compared with a loss from continuing operations per common share in each of 1993 and 1992 of $5.54 and $.05, respectively. Net income per common share in 1994 was $4.14 compared with a net loss per common share in 1993 of $3.29 and net income per common share in 1992 of $.51. Return on shareholders' equity was 7.5% in 1994 compared with (5.1)% in 1993 and .8% in 1992. The weighted average number of common shares outstanding was 112.8 million in 1994, 111.1 million in 1993 and 110.1 million in 1992. Shareholders' equity was $48.85 per common share at the end of 1994, down from $62.77 at the end of 1993 and $65.64 at the end of 1992. The decline in 1994 equity per common share primarily reflects unrealized depreciation on debt securities. 9 Overview (Continued) Revenue Total revenue, excluding net realized capital gains and losses, increased 3% in 1994, primarily as a result of increased premiums, partially offset by a decrease in net investment income. Premium income increased 7%, primarily reflecting an increase in premiums in the Aetna Health Plans segment resulting from growth in covered members, modest price increases and a movement toward higher revenue products. Partially offsetting this increase was a decrease in premiums in the Property-Casualty segment due to continued reduction in personal auto and workers' compensation exposures, a decrease in commercial auto exposures and generally stricter underwriting in commercial lines. Net investment income decreased 9% in 1994, reflecting a decline in invested assets and lower investment yields. Severance and Facilities Charges In late 1993, management decided upon a plan under which it would take additional restructuring actions as part of its strategic and financial assessment of the company's businesses. As a result, the company recorded a $200 million after-tax ($308 million pretax) severance and facilities charge to fourth quarter 1993 earnings. The planned actions include the elimination of approximately 4,000 positions. As a result of the elimination of these positions, the company determined that it would have excess office space. Accordingly, the severance and facilities charge also included costs related to vacating excess leased office space and costs related to vacating and selling an owned property in Hartford, Connecticut. 10 Overview (Continued) During 1994, the company charged costs of $224 million related to the cost-reduction actions to the severance and facilities reserve established in 1993. Of the approximately 4,000 positions expected to be eliminated, approximately 3,300 had been eliminated by December 31, 1994 and the related severance benefits charged against the reserve. The remaining headcount reductions are expected to be completed by the first half of 1995. The annualized after-tax savings of approximately $200 million related to these and other cost reduction actions are expected in 1995. The total annual estimated savings of approximately $200 million are expected to benefit individual segments in 1995 as follows:
(Millions) Aetna Health Plans..................... $ 56 Large Case Pensions.................... 6 Aetna Life Insurance & Annuity......... 8 Property-Casualty...................... 120 International.......................... 3 Corporate.............................. 7 _____ Total estimated savings.............. $ 200 _____ _____
In addition to the above, the company also recorded an after-tax charge of $96 million ($145 million pretax) to second quarter 1992 earnings. Among the steps taken to reduce costs was the elimination of approximately 4,800 positions in the latter half of 1992 and through 1993. By year-end 1993, all expected actions under the 1992 restructuring had been completed, and after-tax savings of $100 million ($130 million annualized) had been achieved. While 1994 earnings reflected the full benefit of the 1992 restructuring and slightly over half the benefits associated with the 1993 cost reduction actions, total operating expenses for 1994 increased due to other factors, reflecting growth in premiums and increased investments related to the company's health care operations. (Please see Note 4 of Notes to Financial Statements for further discussions related to severance and facilities charges.) Strategic Outlook The company continues to review its Property-Casualty and other businesses and assess their potential for contribution to the company's long-term strategic and financial objectives. 11 Aetna Health Plans
Operating Summary (Millions) 1994 1993 1992 ____________________________________________________________________________ Premiums $ 5,611.5 $ 4,700.6 $ 4,586.7 Net investment income 351.6 376.3 388.2 Fees and other income 1,197.2 1,039.5 992.6 Net realized capital losses (21.2) (10.4) (35.4) _________________________________ Total revenue 7,139.1 6,106.0 5,932.1 _________________________________ Current and future benefits 4,755.1 3,989.3 3,793.1 Operating expenses 1,845.9 1,622.0 1,686.8 Severance and facilities charge - 79.8 40.2 _________________________________ Income before taxes 538.1 414.9 412.0 Income taxes 196.4 142.7 137.7 _________________________________ Income before cumulative effect adjustments $ 341.7 $ 272.2 $ 274.3 ____________________________________________________________________________ _________________________________ Net realized capital losses, net of tax (included above) $ (13.6) $ (8.3) $ (23.3) ____________________________________________________________________________ _________________________________ Self-funded benefit payments administered for customers other than Medicare $12,226.6 $12,339.8 $12,730.4 ____________________________________________________________________________ _________________________________ Benefit payments administered for Medicare $13,260.1 $11,356.0 $10,140.2 ____________________________________________________________________________ _________________________________
The Aetna Health Plans ("AHP") segment includes three business units: (1) health care, (2) specialty health, and (3) group insurance. Products and services for these businesses are marketed primarily to employers for the benefit of employees and their dependents. Plans may be insured, in whole or in part, or benefits may be entirely funded by the customer ("self-funded"). Insured plans generally involve the assumption of all or a portion of health care cost and utilization risk by the company. Self- funded plans do not involve the assumption of significant risk by the company and thus typically generate lower, but more consistent, earnings than comparable insured plans. Revenue produced by AHP is reflected in "premiums" if substantial risk is assumed by the company and in "fees and other income" if risk is assumed by the customer. The health care business unit provides managed care and traditional indemnity health care plans. These plans are administered on both an insured and a self-funded basis. The specialty health business unit provides behavioral health, pharmacy, dental and occupational managed care plans. These plans are primarily administered on a self-funded basis. The group insurance business unit provides life insurance, disability income and long-term care insurance plans. These plans are primarily administered on an insured basis. AHP's adjusted earnings (after-tax) follow:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Income before cumulative effect adjustments $ 341.7 $ 272.2 $ 274.3 Less: Net realized capital losses (13.6) (8.3) (23.3) Severance and facilities charge - (51.9) (26.7) _______ _______ _______ Adjusted earnings $ 355.3 $ 332.4 $ 324.3 _______ _______ _______ _______ _______ _______
12 Aetna Health Plans (Continued) AHP's adjusted earnings increased $23 million in 1994, following an $8 million increase in 1993. 1994 adjusted earnings reflected improved earnings in the group insurance and health care businesses. The improvement in group insurance was primarily driven by a reduction in operating expenses and favorable claim experience. Within the health care businesses, earnings improved from an increase in premiums and fees, along with favorable medical claim experience on several contracts, offset in part by an increase in operating expenses. The growth in operating expenses is primarily attributable to migration toward more resource-intensive managed care business, to investments in managed care-related systems and to investments in the development of primary care physician practices. Adjusted earnings in 1993 benefited from a reduction in operating expenses. Premiums and fees and other income increased 19% in 1994 and 3% in 1993, primarily resulting from growth in covered members, modest price increases and a movement toward higher revenue products, such as point-of-service (POS) and health maintenance organizations (HMOs). The company offers a broad spectrum of traditional indemnity and managed care products. The latter include preferred provider ("PPO") arrangements, which offer enhanced coverage benefits for services received from participating providers; POS plans, which typically combine strong HMO-style medical management with an option to seek health care outside of the provider network; and HMOs, which arrange for non-emergency services exclusively through the HMO's network of providers. The company's health care network physicians and hospitals have traditionally been independent contractors. In 1993, the company began to develop and manage primary care physician practices as a means of increasing network access and overall product integration. As of year-end 1994, the company owned and managed 21 physician practices in six cities. The number of members covered at December 31 were approximately:
(Millions) 1994 (1) 1993 (2) 1992 ___________________________________________________________ Managed Health Care PPO 4.0 3.5 2.1 POS 1.5 .5 .1 HMO 1.5 1.4 1.3 ____________________________ Total Managed Health Care 7.0 5.4 3.5 ____________________________ Traditional Health Plans (3) 8.6 9.6 9.5 Total Covered Members 15.6 15.0 13.0 (1) Managed health care reflects a net addition of approximately .5 million members in 1994 attributable to a contract with the Civilian Health and Military Program of the Uniformed Services ("Champus") which covers medical care for military retirees and dependents in California and Hawaii. This contract is subject to periodic renewal and is currently under review with Champus. (2) During 1993, the company implemented a more comprehensive membership reporting system. This change in membership counting resulted in a .8 million increase in traditional health plan membership and a 1.0 million increase in PPO membership as of December 31, 1993. HMO and POS membership was not affected by the change. 1992 membership has not been restated for this change. (3) Includes members of traditional health plans and those who have elected AHP dental plans but who have not currently elected an AHP medical plan.
13 Aetna Health Plans (Continued) Enrollment in AHP's managed health care products increased 30% during 1994, from 5.4 million members to 7.0 million members as of December 31, including growth of 1.0 million members in POS products. Although aggregate enrollment growth in HMO products was 8% in 1994 and 3% in 1993, enrollment in HMOs in which the company is a majority owner grew by 121,000 members or 15% in 1994 and 93,000 members or 13% in 1993. Aggregate enrollment growth in HMO products was partially offset by the divestiture of HMOs in which the company was less than a majority owner and by declining membership in plans where the company has only a management relationship. At December 31, 1994, AHP's specialty health business served approximately 14 million people for behavioral health, 5 million people for managed pharmacy and 8 million people for dental benefits. Many of these members overlap those identified within the AHP covered members table on page 12 due to such products being typically sold in combination with a health care product. At December 31, 1994, AHP's group insurance business covered nearly 6 million lives related to group life insurance and over 2 million lives associated with disability insurance. In addition, AHP is the largest commercial administrator of Medicare benefits, processing claims for over 6,900 hospitals, skilled nursing facilities and home health agencies, and for physicians in nine states. Outlook Management expects that AHP should continue to be a source of substantial earnings to the company, subject to the considerations discussed below. The outlook for AHP is heavily dependent upon its ability to effectively manage health care costs for customers. AHP attempts to achieve this through a combination of negotiated contracts with health care providers, development and implementation of guidelines for appropriate utilization of health care resources and by working with health care providers to review treatment patterns in order to improve consistency and quality. Beginning in 1993, the company, in an effort to further contain health care costs and to improve quality and access, initiated a program to acquire or develop ownership or management interests in primary care physician practices. Operating losses (after-tax) associated with this program, which include both current operations and development costs, were $15 million and $3 million in 1994 and 1993, respectively. AHP expects to invest substantial amounts in 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. The continued market shift from traditional health plans toward managed care programs will require continued attention and investment by AHP in managed care if it is to maintain or increase the level of earnings in the business. Management expects that AHP's results in the near term will be lower than in 1994 due to increased investments in managed care. 14 Aetna Health Plans (Continued) Legislative proposals to change the health insurance system have been prominent at both the state and national levels. AHP has actively supported proposals designed to enhance managed care and to expand access to health care coverage through private sector competition. State legislative action is expected to intensify in 1995. Although anti-managed care legislation is expected to be proposed broadly in the states, to date such legislation has been enacted in only a few states and, where enacted, has been limited in scope. Management is not able to predict the outcome of the various state and federal initiatives, or the effect any such legislation, if adopted, would have on the company. 15 Large Case Pensions
Operating Summary (Millions) 1994 1993 1992 _______________________________________________________________________________ Premiums $ 234.4 $ 185.9 $ 204.2 Net investment income 2,017.4 2,327.7 2,560.4 Fees and other income 128.4 95.3 76.8 Net realized capital losses (25.0) (42.9) (90.1) ____________________________________ Total revenue 2,355.2 2,566.0 2,751.3 ____________________________________ Current and future benefits 2,175.9 2,428.1 2,697.7 Operating expenses 98.2 120.2 104.6 Loss on discontinuance of products - 1,270.0 - Severance and facilities charge - 21.9 3.1 ____________________________________ Income (Loss) before taxes 81.1 (1,274.2) (54.1) Income taxes (benefits) 26.7 (451.9) (36.8) ____________________________________ Income (Loss) before cumulative effect adjustments $ 54.4 $ (822.3) $ (17.3) _______________________________________________________________________________ ____________________________________ Net realized capital losses, net of tax (included above) $ (17.0) $ (30.5) $ (59.2) Net loss attributable to discontinued products, net of tax $ * $ (915.4) $ (131.0) _______________________________________________________________________________ ____________________________________ Deposits not included in premiums above: (1) Fully guaranteed $ 212.3 $ 797.7 $ 870.3 Experience rated 630.8 677.4 790.6 Non-guaranteed 1,278.4 1,732.1 1,892.2 ____________________________________ Total $ 2,121.5 $ 3,207.2 $ 3,553.1 _______________________________________________________________________________ ____________________________________ Assets under management: (2) Fully guaranteed $ 11,905.3 $ 14,695.1 $ 15,008.0 Experience rated 15,944.9 17,020.6 17,021.7 Non-guaranteed 18,491.9 21,050.2 21,354.1 ____________________________________ Total $ 46,342.1 $ 52,765.9 $ 53,383.8 _______________________________________________________________________________ ____________________________________ (1) Under FAS No. 97, certain deposits are not included in premiums or revenue. (2) Under FAS No. 115, included above are net unrealized gains (losses) of approximately $(540.0) million and $750.0 million at December 31, 1994 and 1993, respectively. * Results of discontinued products in 1994 (loss of $172.1 million) were charged against the reserve for anticipated future losses and did not impact net income of the segment. (Please see "Discontinued Products" on page 19.)
Business units in Large Case Pensions manage a variety of retirement and other savings products (including pension and annuity products) and offer investment management and advisory services to non-pension 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 19.) 16 Large Case Pensions (Continued) Large Case Pensions' adjusted earnings (after-tax) follow:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Income (Loss) before cumulative effect adjustments $ 54.4 $(822.3) $ (17.3) Less: Net realized capital losses (17.0) (30.5) (59.2) Severance and facilities charge - (14.2) (2.1) Loss on discontinuance of products - (825.0) - _______ _______ _______ Adjusted earnings $ 71.4 $ 47.4 $ 44.0 _______ _______ _______ _______ _______ _______
Large Case Pensions' adjusted earnings increased $24 million in 1994, following a $3 million increase in 1993. The 1994 increase in adjusted earnings reflects net benefits from the absence of losses from discontinued fully guaranteed products. At December 31, 1993, the company discontinued the fully guaranteed products, took a charge for anticipated future losses and established a reserve that management believes is adequate to absorb such future losses as they are recognized. Accordingly, the results of discontinued products for 1994 (i.e., a loss of $172 million, after-tax and including net realized capital losses) were charged against the reserve and did not impact adjusted earnings of the segment. Adjusted earnings of the segment include investment income on the assets available to fund the expected cash flow shortfall in discontinued products and is substantially offset in 1994 by the interest cost ($31 million, after-tax), related to the payable to discontinued products established to fund such shortfall. 1994 adjusted earnings were adversely affected by continued declines in the level of assets under management. Experience rated large case pension products 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 realized gains and losses does not impact the company's results. Experience rated products are supported by either general account or separate account assets. Those supported by general account assets have declined in recent years, principally due to concerns about the company's mortgage loan and real estate portfolios, declines in the company's ratings and declining consumer confidence in the life insurance industry. Experience rated products supported by separate accounts have increased modestly to $3.3 billion at December 31, 1994 from $2.9 billion at December 31, 1993. 17 Large Case Pensions (Continued) General account assets supporting experience rated products may be subject to participant and/or contractholder withdrawal. At December 31, 1994, approximately $3.0 billion of such contracts allowed for unscheduled contractholder withdrawals, subject to timing restrictions and market value adjustments intended to reflect the estimated value of the assets supporting the contract at the time of withdrawal. The extent to which market value adjustments on individual contractholder withdrawals actually reflect such estimated value is dependent upon, among other factors, the difference between assumed and actual experience on assets supporting experience rated contracts. Unscheduled contractholder withdrawals have declined in recent years, due in part to the 1992 conversion offer described below. Further, at December 31, 1994, approximately $4.5 billion of the experience rated pension contracts supported by general account assets could be withdrawn (including transfers 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. Participant withdrawal activity has declined in recent years. 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) 1994 1993 1992 ___________________________________________________________________________________ Scheduled contract maturities and benefit payments (1) $1,000.1 $1,049.8 $ 999.5 Contractholder withdrawals other than scheduled contract maturities and benefit payments 590.6 893.2 1,129.7 Participant withdrawals 183.6 222.5 396.8 (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
During 1992, the company offered to holders of certain classes of experience rated contracts the opportunity to modify such contracts ("conversion offer"). The conversion offer provided, with respect to pre-1993 deposits, that the company would increase minimum guaranteed credited rates in return for contractholders relinquishing the right to make lump-sum withdrawals and accepting defined payout schedules. Such contract conversions reduced the company's exposure to significant fluctuations in unscheduled withdrawals, but also have reduced the company's capacity to pass through future investment losses, should they emerge, to contractholders. 18 Large Case Pensions (Continued) Non-guaranteed large case products provide for full assumption by the customer of investment results. Assets ($18.5 billion at December 31, 1994) supporting non-guaranteed products are held in the company's various separate accounts or by unaffiliated trustees and are managed by the company for a fee. Separate account investment income and realized capital gains and losses are allocated to such customers' contracts and are not reflected in the company's consolidated results of operations. Withdrawals are based on the actual market value of the assets in the separate account. 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 61) 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 further, particularly if further ratings downgrades or other developments reduce consumer confidence. The impact of capital losses from the company's mortgage loan portfolio is expected to be less significant in the future because such losses related to the fully guaranteed products have been reflected in the loss on discontinuance of these products. The company will continue to incur interest expense on the payable related to its discontinued products until the assets supporting such amounts payable are transferred to the discontinued products' portfolios. 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, future losses on investments, including mortgage loans and experience rated contract modifications, and significant increases in interest rates, 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 are expected to decline as assets under management decline. Management expects to be able to redeploy capital to other businesses. 19 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 products of $825 million in 1993 and established a reserve of $1,270 million at December 31, 1993 for anticipated future losses expected on the run off 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"). Management believes the reserve for anticipated losses at December 31, 1994 is adequate to provide for future losses associated with the guaranteed product liabilities. Losses on discontinued products for 1994, as shown below, 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. Results of discontinued products for years ended December 31 were as follows:
(Millions) 1994 1993 1992 ________________________________________________________________________________________________________ GICs SPAs Total Total Total ____ ____ _____ _____ _________ Negative interest margin (1)............. $ (86.1) $ (.7) $ (86.8) $ (87.9) $ (82.8) Net realized capital losses.............. (97.6) (38.2) (135.8) (37.4) (59.0) Interest earned on receivable from continuing operations.................. 12.6 18.3 30.9 - - Non-recurring gains on futures contracts. - - - 18.8 - Other, net............................... 6.5 13.1 19.6 16.1 10.8 ________ ________ _______ _________ _________ Results of discontinued products, after-tax.............................. $ (164.6) $ (7.5) $ (172.1) $ (90.4) $ (131.0) ________ ________ _______ _________ _________ ________ ________ _______ _________ _________ Results of discontinued products, pretax. $ (254.4) $ (18.6) $ (273.0) $ (137.8) $ (210.5) ________ ________ _______ _________ _________ ________ ________ _______ _________ _________ (1) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts exceeds interest earned on invested assets supporting such contracts.
20 Large Case Pensions (Continued) The activity in the reserve for anticipated future losses on discontinued products for the year ended December 31, 1994 was as follows (pretax):
(Millions) GICs SPAs Total ___________________________________________________________________ Reserve at December 31, 1993..... $ 600.0 $ 670.0 $1,270.0 Loss on discontinued products.... (254.4) (18.6) (273.0) ________ ________ ________ Reserve at December 31, 1994..... $ 345.6 $ 651.4 $ 997.0 ________ ________ ________ ________ ________ ________
The 1994 loss on discontinued products which was charged against the reserve included $98 million and $38 million (after-tax) of net realized capital losses on GICs and SPAs, respectively, which included losses from the sale of bonds of $35 million and $16 million, respectively. As a result of selling bonds and realizing losses and reinvesting the proceeds at higher interest rates or settling GIC liabilities at favorable pricing, the anticipated future losses associated with the negative interest margin are expected to be reduced in the future. At December 31, 1994 and 1993, estimated future after-tax capital losses of $127 million and $190 million ($196 million and $292 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs, and $47 million and $70 million ($73 million and $108 million, pretax), respectively, attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Discontinued fully guaranteed products provide guarantees on investment return, maturity values, and if applicable, benefit payments. The interest credited on these contracts at December 31, 1994 ranged from 2.9% to 17.7% with an average rate of 8.9% (compared with an average rate of 9.5% at December 31, 1993). As of December 31, 1994 and 1993, none of these contracts allowed for contractholder withdrawal, except in extraordinary circumstances. 21 Large Case Pensions (Continued) 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. Calculation of the loss required projection of both the amount and the timing of cash flows over approximately the next 30 years, including consideration of, among other things, future investment results, participant withdrawal and mortality rates, and cost of asset management and customer service. The cash flows on the assets of the discontinued products projected to occur in each period were risk-adjusted such that the present value (at the risk-free rate at December 31, 1993, consistent with the duration of the liabilities) of those cash flows approximated the current fair value of the assets. Projections of future investment results took into account both industry and company data and were based on recent performance of mortgage loan and real estate assets, projections regarding certain levels of future defaults and prepayments, and assumptions regarding future real estate market conditions, which assumptions management believes reasonable. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. Such differences may occur because the calculation of anticipated future losses reflects a number of estimates, including estimates relating to the expected future performance of invested assets supporting discontinued products. At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables will be funded from invested assets supporting Large Case Pensions and accrue interest at the discount rates used to calculate the loss on discontinuance until the receivable is funded. The offsetting payable established in continuing products will similarly accrue interest, generally offsetting the investment income on the assets available to fund the shortfalls. At December 31, 1994, the receivables from continuing operations were $409 million and $463 million for GICs and SPAs, respectively, and no funding had taken place. Distributions on GICs and SPAs for the years ended December 31 were as follows:
(Millions) 1994 1993 1992 _______________________________________________________________________________________ GICs SPAs Total Total Total ____ ____ _____ ______ ________ Scheduled contract maturities, GIC settlements and benefit payments (1).................... $2,340.3 $ 531.6 $2,871.9 $2,672.2 $3,711.5 Participant directed withdrawals. 198.5 - 198.5 232.2 453.1 (1) Includes payments made upon contract maturity, early settlement of GIC liabilities and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on, invested assets. 22 Large Case Pensions (Continued) At December 31, 1994, contractholder liabilities were $7.2 billion and $5.0 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 ________ ________ 1995 $1,994.9 $ 527.0 1996 2,212.5 520.4 1997 1,387.5 513.8 1998 1,152.9 507.9 1999 950.5 502.6 2000-2004 1,236.4 2,428.2 2005-2009 18.7 2,238.6 2010-2014 6.4 1,947.9 2015-2019 3.6 1,578.9 Thereafter 1.1 2,916.4
Invested assets (net of impairment reserves) supporting discontinued products and the related impairment reserves were as follows at December 31:
1994 1993 ______________________ ______________________ Carrying Impairment Carrying Impairment (Millions) Value Reserves Value Reserves ______________________________________________________________________________________________ Debt securities $ 6,155.0 $ - $ 8,269.0 $ - Mortgage loans 4,294.9 372.1 5,419.1 647.2 Real estate 730.0 376.0 (1) 534.5 298.3 (1) Short-term and other invested assets 725.4 - 472.5 - ___________________________________________________________ Total $11,905.3 $ 748.1 $14,695.1 $ 945.5 ______________________________________________________________________________________________ ___________________________________________________________ (1) Includes real estate write-downs in addition to impairment reserves.
Debt securities attributable to discontinued products at December 31, 1994 and 1993 had an average quality rating of A+ and AA-, respectively. Please see "General Account Investments" on pages 43 through 57 for additional discussion of investments supporting discontinued products. 23 Aetna Life Insurance & Annuity
Operating Summary (Millions) 1994 1993 1992 _______________________________________________________________________________ Premiums $ 168.3 $ 125.7 $ 111.9 Net investment income 958.7 962.4 884.3 Fees and other income 282.8 257.5 243.5 Net realized capital gains (losses) (5.6) 12.8 2.1 ____________________________________ Total revenue 1,404.2 1,358.4 1,241.8 ____________________________________ Current and future benefits 914.4 870.9 821.3 Operating expenses 217.7 244.9 234.5 Amortization of deferred policy acquisition costs 37.1 38.5 32.7 Severance and facilities charge - 30.8 6.2 ____________________________________ Income before taxes 235.0 173.3 147.1 Income taxes 75.9 61.9 48.1 ____________________________________ Income before cumulative effect adjustments $ 159.1 $ 111.4 $ 99.0 _______________________________________________________________________________ ____________________________________ Net realized capital gains (losses), net of tax (included above) $ (3.8) $ 6.1 $ 2.8 _______________________________________________________________________________ ____________________________________ Deposits not included in premiums above:(1) Annuities: Fully guaranteed $ 323.0 $ 194.9 $ 40.6 Experience rated 853.6 970.5 791.4 Non-guaranteed 1,884.7 1,363.5 844.8 ____________________________________ Total annuities 3,061.3 2,528.9 1,676.8 Individual Life 314.4 268.7 260.5 ____________________________________ Total deposits $ 3,375.7 $ 2,797.6 $ 1,937.3 _______________________________________________________________________________ _______________________________________________________________________________ Assets under management: Fully guaranteed $ 1,973.8 $ 1,836.2 $ 1,690.9 Experience rated 9,201.2 9,241.5 7,416.3 Non-guaranteed 8,223.2 7,111.0 5,894.5 ____________________________________ Total $ 19,398.2 $ 18,188.7 $ 15,001.7 _______________________________________________________________________________ ____________________________________ (1) Under FAS No. 97, certain deposits are not included in premiums or revenue.
Business units in the Aetna Life Insurance & Annuity segment ("ALIAC") market a variety of life insurance, retirement and other savings and investment products (including individual and group annuities), financial and administrative services and mutual funds to individuals, pension plans, small businesses, and employer- sponsored groups. These products include contracts that qualify under IRC Sections 401, 403, 408 and 457, and individual non- qualified annuity contracts, and are written primarily by Aetna Life Insurance and Annuity Company. The annuity and life insurance contracts include fully guaranteed, experience rated and non-guaranteed investment options. The non-guaranteed investment options offered under these contracts are separate accounts that invest in Aetna and unaffiliated mutual funds. 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) 1994 1993 1992 ________________________________________________________________________________ Income before cumulative effect adjustments $ 159.1 $ 111.4 $ 99.0 Less: Net realized capital gains (losses) (3.8) 6.1 2.8 Severance and facilities charge - (20.0) (3.9) _______ _______ _______ Adjusted earnings $ 162.9 $ 125.3 $ 100.1 _______ _______ _______ _______ _______ _______
24 Aetna Life Insurance & Annuity (Continued) ALIAC's adjusted earnings increased $38 million in 1994, following a $25 million increase in 1993. The improvement in 1994 adjusted earnings principally reflected a decrease in operating expenses reflecting savings associated with prior year restructurings, primarily related to ALIAC's financial and administrative service and life insurance 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. Adjusted earnings in 1993 improved primarily due to increased investment income from growth in certain annuity and universal life contracts partially offset by lower investment yields on newly invested assets. The 1993 increase also reflected an increase in fee income within the annuity contracts. Premiums relate to term life, whole life and annuity products containing life contingencies. Premiums increased by $43 million in 1994 and by $14 million in 1993. Such increases resulted primarily from increases in structured settlement annuity sales. Deposits relate to annuity contracts not involving life contingencies and universal life contracts. Deposits increased by $578 million in 1994 reflecting the $215 million acquisition of a block of primarily individual annuity business and strong universal life sales. The increase in deposits in 1993 primarily reflected growth in the annuity business. Assets under management at December 31, 1994 included $2.0 billion in fully guaranteed investment options, $9.2 billion in experience rated investment options, and $8.2 billion in non-guaranteed investment options. 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 and experience rated investment options include an adjustment intended to reflect the estimated fair value of the assets supporting the contract at the time of withdrawal. Approximately 90% and 91% of assets under management at December 31, 1994 and 1993, respectively, allowed for contractholder withdrawal, 54% and 53% of which, respectively, are subject to market value adjustments or deferred surrender charges at December 31, 1994. 25 Aetna Life Insurance & Annuity (Continued) Outlook ALIAC's annuity, pension and universal life sales through traditional channels (primarily career agents, managing general agents, regional brokers, consultants, and third party administrators) are expected to continue to be strong in 1995. ALIAC intends to increase its focus on the sale of non-qualified products through non-traditional distribution channels (banks and broker/dealers). ALIAC is also exploring attaining growth through additional acquisitions of blocks of business. Management expects that ALIAC should continue to be a material source of earnings to the company. 26 Property-Casualty
Operating Summary (Millions) 1994 1993 1992 _____________________________________________________________________________________ Premiums $ 4,390.8 $ 4,653.2 $ 5,076.3 Net investment income 832.1 952.4 1,016.5 Fees and other income 115.6 144.3 207.3 Net realized capital gains .4 151.0 213.4 ____________________________________ Total revenue 5,338.9 5,900.9 6,513.5 ____________________________________ Current and future benefits 3,746.8 4,214.7 4,772.2 Operating expenses 914.1 1,025.4 1,206.9 Amortization of deferred policy acquisition costs 647.2 646.2 725.9 Severance and facilities charge - 147.3 75.4 ____________________________________ Income (Loss) before taxes 30.8 (132.7) (266.9) Income tax benefits(1) (27.3) (119.7) (160.6) ____________________________________ Income (Loss) before cumulative effect adjustments $ 58.1 $ (13.0) $ (106.3) _____________________________________________________________________________________ ____________________________________ Cumulative effect adjustment for the change in accounting for workers' compensation reserves $ - $ 250.0 $ - _____________________________________________________________________________________ ____________________________________ Net realized capital gains (losses), net of tax (included above) $ (1.4) $ 101.0 $ 142.4 _____________________________________________________________________________________ ____________________________________ Catastrophe losses, net of tax (included above) $ 189.6 $ 85.0 $ 118.2 _____________________________________________________________________________________ ____________________________________ Statutory combined loss and expense ratio 123.3% 125.2% 126.1% _____________________________________________________________________________________ ____________________________________ Statutory combined loss and expense ratio, adjusted for accounting change (2) 123.3% 116.4% 126.1% _____________________________________________________________________________________ ____________________________________ GAAP combined loss and expense ratio (3) 117.7% 122.5% 126.4% _____________________________________________________________________________________ ____________________________________ GAAP combined loss and expense ratio, adjusted for accounting change (2) 117.7% 113.6% 126.4% _____________________________________________________________________________________ ____________________________________ (1) Income tax benefits resulted from pretax losses in 1993 and 1992 and tax-exempt interest income in 1994, 1993 and 1992. (2) The 1993 combined loss and expense ratios have been adjusted for the cumulative effect benefit of discounting of workers' compensation life table indemnity reserves ($250.0 million, after-tax). (3) The difference between the statutory and GAAP combined loss and expense ratios of 1994 primarily reflects the establishment of a reserve for statutory purposes for severance and facilities charges and for the settlement of Proposition 103, which were both previously reserved for on a GAAP basis.
The business units in the Property-Casualty segment provide most types of commercial and personal property-casualty insurance, bonds, and insurance-related services for businesses, government units and associations and individuals. Property-Casualty's adjusted earnings (after-tax) follow:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Income (Loss) before cumulative effect adjustments $ 58.1 $ (13.0) $ (106.3) Less: Net realized capital gains (losses) (1.4) 101.0 142.4 Severance and facilities charge - (95.6) (49.7) _______ _______ _______ Adjusted earnings $ 59.5 $ (18.4) $(199.0) _______ _______ _______ _______ _______ _______
27 Property-Casualty (Continued) Property-Casualty's adjusted earnings increased $78 million in 1994, following a $181 million increase in 1993. The following significant factors impact the comparison of adjusted earnings: Adjusted earnings included after-tax catastrophe losses of $190 million, $85 million and $118 million in 1994, 1993 and 1992, respectively, (net of reinsurance of $138 million, $28 million and $329 million, respectively). Such losses contributed 6.4 points to the combined ratio in 1994, compared with 2.8 points and 3.5 points for 1993 and 1992, respectively. Catastrophe losses in 1994 included $161 million ($453 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather in early 1994. Catastrophe losses in 1992 included $85 million ($574 million pretax and before reinsurance) from Hurricane Andrew and Winter Storm Beth. Adjusted earnings in 1994 reflected losses of $114 million (after-tax and net of reinsurance) related to indemnity-related environmental prior year reserve development. Partially offsetting this prior year reserve development in commercial lines in 1994 were 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. 1992 adjusted earnings included an after-tax charge of $293 million related to increases in environmental and asbestos-related reserves, which was partially offset by favorable loss trends in the personal lines of business. (Please see "Property-Casualty Reserves" on page 28.) Adjusted earnings in 1993 reflected a net tax benefit of $25 million related to revaluing the deferred tax asset as a result of the increase in federal income tax rates. Adjusted earnings in 1992 included an after-tax charge of $30 million related to an Olympia & York financial guarantee. In addition, 1994 adjusted earnings benefited from a reduction in operating expenses, primarily due to management's continuing efforts to lower costs and exiting unprofitable markets. Adjusted earnings in 1993 reflected a reduction in operating expenses, improved underwriting in commercial lines and benefits from reduced exposure in unprofitable personal auto markets. Partially offsetting the improvements in 1994 and 1993 adjusted earnings was lower net investment income primarily due to lower investment yields. 28 Property-Casualty (Continued) Property-Casualty earned premiums decreased approximately 6% in 1994 and 8% in 1993. Continued reduction in personal auto and workers' compensation exposures (though at a lesser rate than in 1993), a decrease in commercial auto exposures, generally stricter underwriting in commercial lines, and the current competitive marketplace contributed to the decreases. During 1994, the company continued to review its exposure in, and capital committed to, the personal auto and homeowners and workers' compensation insurance markets to limit exposure in states that do not offer the potential to achieve an acceptable return. Personal auto and homeowners policies in force at December 31 were:
(Millions) 1994 1993 1992 ____________________________________________________________ Auto .6 .7 .8 Homeowners 1.5 1.5 1.6
Property-Casualty Reserves
(Millions) 1994 1993 1992 ______________________________________________________________________ Loss and Loss Expense Reserves: Commercial Property-Casualty $ 14,133 $ 13,500 $ 13,405 Personal Property-Casualty 2,011 2,348 2,575 ________________________________ Total (1) $ 16,144 $ 15,848 $ 15,980 ______________________________________________________________________ ________________________________ (1) Loss and loss expense reserves are shown without reduction for reinsurance recoverable in all three years and deductible amounts recoverable from policyholders in 1994. Reinsurance recoverables and deductible amounts recoverable from policyholders were $4.6 billion and $352 million, respectively, at December 31, 1994. Reinsurance recoverables were $4.4 billion and $4.2 billion at December 31, 1993 and 1992, respectively.
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 yet reported ("IBNR"). 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. Because the size of the reserves is substantial relative to shareholders' equity and earnings, reserves are continually monitored and adjusted using a variety of actuarial and statistical techniques as more current information becomes available. 29 Property-Casualty (Continued) 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 workers' compensation claims, environmental liability risks, and asbestos and other product liability risks. Additions (reductions) to reserves for prior accident years reduce (increase) net income for the period in which the adjustment is made.
Commercial Personal (Millions) Lines Lines Total _______________________________________________________________________ 1994 Pretax $ 348 $ (96) $ 252 After-tax 226 (62) 164 1993 (1) Pretax 79 (19) 60 After-tax 51 (12) 39 1992 Pretax 465 1 466 After-tax 307 1 308 (1) Reserve additions in 1993 are net of the $250 million effect of discounting workers' compensation life table indemnity reserves.
Environmental and Asbestos-Related Claims Reserving for environmental and asbestos-related claims is subject to significant uncertainties (discussed below). Because of these significant uncertainties, management is currently unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all environmental and asbestos- related claims and related litigation expenses. However, reserves for these liabilities are evaluated by management regularly, and, subject to the significant uncertainties discussed below, adjustments have been and are expected to be made to such reserves as developing loss patterns and other information appear to warrant. The company's reinsurance arrangements have been designed to provide a significant amount of protection for all types of casualty losses which may arise, including losses which may arise from environmental and asbestos-related claims. It is not possible at this time to determine whether reinsurance coverage for these claims will be exhausted prior to disposing of or otherwise settling all such claims, primarily because the ultimate amount of payments that the company may make for all of these claims and related litigation expenses is currently unknown. The company has taken reinsurance recoveries into account in its reserve calculations for known claims, and for unreported asbestos bodily injury claims where, in many cases, the company reserves for policy limits. The company believes that the reinsurance recoveries 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. 30 Property-Casualty (Continued) Environmental-Related Claims The company has been a major writer of commercial insurance policies which are the types of policies alleged to cover hazardous waste cleanup costs. Management is currently unable to make a reasonable estimate as to the ultimate amount or a reasonable range of its environmental-related liability. However, in 1994, the company was able to begin estimating indemnity- related liability on certain environmental claims and increased reserves significantly. The company is continuing to gather and analyze developing legal and factual information on known environmental-related claims and continues to reassess its reserving techniques in order to determine whether it can reasonably estimate its liability for additional claims. As part of this ongoing process, the company is aware of developing databases and methodologies which may be useful in estimating environmental liabilities, and the company is in the process of reviewing its methodologies and reviewing additional data obtained from an outside actuarial firm in an effort to improve the company's ability to estimate all or a further portion of its environmental-related liability. The review underway is expected to be completed in the second or third quarter of this year. In addition to this review, as claims in litigation mature and approach the trial stage, the company obtains information that may allow it to estimate exposure on certain of the claims involved in the litigation and policyholders may seek to settle their claims with the company. Also, the outcome of coverage litigation involving the company or other insurers may assist in the determination of additional amounts that might be paid in the future for similar claims. The estimation of reserves for reported environmental claims is likely to change as additional information emerges and reserving techniques continue to develop. The company is expected to be affected adversely by losses for environmental claims and related litigation and such effect could be material. The company and the insurance industry are litigating issues, described further below, that will ultimately determine, in many cases, whether and to what extent insurance coverage exists for environmental pollution claims. Once courts rule definitively on the various legal issues, many cases will still present complicated factual questions affecting coverage that will need to be resolved. The company is involved in certain coverage dispute cases where insureds have presented the company with particularly large claims for coverage, based on the number of sites alleged to be covered, the nature of the business conducted and the alleged scope of coverage. One case involving such an insured may begin trial in early to mid-1995 with respect to a portion of the sites alleged to be subject to coverage. 31 Property-Casualty (Continued) The company generally disputes that there is insurance coverage for environmental claims and is vigorously litigating coverage and related issues. As such, the company is continuously involved in lawsuits regarding policy coverage and judicial interpretation of legal liability for environmental pollution claims. Environmental claims are complex and subject to significant uncertainties in addition to the vagaries of and risks inherent in major litigation generally. First, the underlying liabilities of the claimants are difficult to estimate. At any given waste site, the amount of remediation cost that may be allocated to a potentially responsible party ("PRP") depends on a wide variety of factors, including volumetric contribution, relative toxicity, number of years active at the site, extent of impairment to the environment and ability of others to pay. A PRP may have no liability, may share responsibility with others or may bear the cost alone. Second, there are significant uncertainties for the company and the insurance industry relating to whether insurance policies will be found to cover such PRP liabilities. For example, courts have reached inconsistent conclusions regarding such scope of coverage issues as: whether insurance coverage exists at all; what policies provide the coverage; whether an insurer has a duty to defend; whether an insured's environmental losses are caused by one or more "occurrences" for purposes of determining applicable policy limits; how pollution exclusions in policies should be applied; and whether cleanup costs are payable as "damages." The company establishes reserves for indemnity-related liabilities (and related loss adjustment expenses, including legal fees relating to its duty, if any, to defend a policyholder) for particular known environmental claims when it believes it has sufficient information to reasonably estimate its liability. The company also has established a bulk reserve for legal fees expected to be paid over the next several years related to coverage disputes with policyholders. At this time, however, because of the significant uncertainties discussed above, the company does not establish reserves for unknown environmental claims, for known claims where the estimated ultimate liability is not reasonably estimable or for adverse development of currently held reserves. 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) 1994 1993 1992 _______________________________________________________________________________ Beginning reserve $ 233.3 $ 237.8 $ 73.4 Reserve additions for incurred losses (1) 289.5 37.2 212.8 Payments for claims and claim adjustment expense (2,3) 86.7 41.7 48.4 _______________________________ Ending reserve (4) $ 436.1 $ 233.3 $ 237.8 _______________________________________________________________________________ _______________________________ (1) Before reduction for reinsurance of $59 million in 1994, $(3) million in 1993 and $11 million in 1992. (2) Before reduction for reinsurance of $4 million in 1994, $2 million in 1993 and $4 million in 1992. (3) Includes legal fees paid of $52 million in 1994, $31 million in 1993 and $35 million in 1992. (4) Before reduction for reinsurance of $58 million in 1994, $3 million in 1993 and $7 million in 1992.
32 Property-Casualty (Continued) At December 31, 1994 and 1993, approximately $299 million and $94 million, respectively, of the reserve for environmental liability claims represented estimated indemnity-related liabilities (including loss adjustment expenses). 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 indemnity-related liabilities. The indemnity- related liabilities recorded principally relate to certain of the known claim sites involved in coverage dispute litigation between the company and some of its policyholders (including certain of the sites relating to policyholders, which appear to present the largest risk of liability to the company) and to settlements with certain policyholders during the period. In 1992, the company added $202 million (pretax) to reserves for environmental liability claims primarily establishing the bulk reserve for legal fees. 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:
1994 (1) 1993 (1) 1992 (1) ________ ________ ________ Beginning balance 3,860 2,913 2,424 New claims 1,765 1,903 1,127 Closed claims 1,038 956 638 ______ ______ ______ Ending balance (2) 4,587 3,860 2,913 ______ ______ ______ ______ ______ ______ Policyholders 1,146 1,132 1,000 ______ ______ ______ ______ ______ ______ (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, 1994, 1993 and 1992, approximately 87%, 87% and 91%, respectively, represented environmental pollution-related cleanup cases (including Superfund claims) against policyholders, and approximately 13%, 13% and 9%, respectively, represented environmental pollution-related third-party bodily injury and property damage claims against policyholders. Of the claims open at December 31, 1994, 1993 and 1992, approximately 53%, 48% and 34%, respectively, were involved in coverage disputes between the company and its policyholders that had reached the litigation stage.
33 Property-Casualty (Continued) 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. Because the company has generally disputed that there is insurance coverage for environmental claims, and because of significant uncertainties, the company generally is not able to reasonably estimate the amount of indemnity loss, if any, for a claim until well after the claim is reported. 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 pre- existing 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. Congress was scheduled to reauthorize the Superfund law in 1994, but adjourned without doing 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 1995-1996, what the substance of the enacted legislation will be, or what the effect of any such reforms will be on the company. 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 1992, CCR members agreed to settle approximately 8,000 asbestos bodily injury cases which had been consolidated in state court in Maryland. 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. 34 Property-Casualty (Continued) Over the last few years, asbestos bodily injury claims also have been filed by plaintiffs against entities that installed or produced products that contained asbestos. Additionally, some policyholders have attempted to recharacterize asbestos bodily injury product liability claims in an effort to avoid applicable policy coverage limits. The company is currently involved in binding arbitration with one such major producer that had exhausted applicable policy limits on asbestos products claims and is awaiting the arbitrator's decision, which is appealable to a panel of arbitrators. There is inadequate history from which the company can estimate the ultimate liability it may have with respect to these types of claims. 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) 1994 1993 1992 ________________________________________________________________________________ Beginning reserve $ 248.1 $ 294.9 $ 47.5 Reserve additions for incurred losses (1) 117.3 95.2 334.4 Payments for claims and claim adjustment expense (2,3) 69.5 142.0 87.0 _______________________________ Ending reserve (4) $ 295.9 $ 248.1 $ 294.9 ________________________________________________________________________________ _______________________________ (1) Before reduction for reinsurance of $82 million in 1994, $20 million in 1993 and $115 million in 1992. (2) Before reduction for reinsurance of $65 million in 1994, $27 million in 1993 and $51 million in 1992. (3) Includes legal fees paid of $30 million in 1994, $56 million in 1993 and $25 million in 1992. (4) Before reduction for reinsurance of $62 million in 1994, $45 million in 1993 and $52 million in 1992.
At December 31, 1994 and 1993, approximately 33% and 43%, respectively, of reserves (pretax and before reinsurance) represented legal fees. In 1993, payments increased, primarily reflecting increased settlements of asbestos bodily injury claims, including settlements of certain large claims for which reserves had previously been established. In 1992, the company added $334 million (pretax and before reinsurance) to reserves for asbestos bodily injury claims. Of this increase, $152 million (pretax and before reinsurance) was added primarily because of the CCR developments described above. These reserves are equal to the remaining coverage limits for many of the company's largest insureds, plus an estimate of the associated future costs of litigation. 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. 35 Property-Casualty (Continued) The number of asbestos bodily injury claims the company had as of December 31 (and policyholders involved in those claims), were as follows:
1994 (1) 1993 (1) 1992 (1) ____ ____ ____ Beginning balance 1,283 1,864 2,330 New claims 271 248 172 Closed claims 277 829 638 _____ _____ _____ Ending balance (2) 1,277 1,283 1,864 _____ _____ _____ _____ _____ _____ Policyholders 318 287 239 _____ _____ _____ _____ _____ _____ (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, 1994, 1993 and 1992, approximately 84%, 83% and 52%, 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 individually. The closed claims in 1993 and 1992 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. 36 Property-Casualty (Continued) The table below reflects activity in the reserve (a significant portion of which represents legal fees) for asbestos property damage claims (pretax and before reinsurance) for the years ended December 31:
Asbestos Property Damage Claims (Millions) 1994 1993 1992 ______________________________________________________________________________ Beginning reserve $ 28.7 $ 31.3 $ 21.1 Reserve additions for incurred losses (1) 6.2 16.9 28.6 Payments for claims and claim adjustment expense (2) 5.0 19.5 18.4 _______________________________ Ending reserve (3) $ 29.9 $ 28.7 $ 31.3 ______________________________________________________________________________ _______________________________ (1) Before reduction for reinsurance of $3 million in each of 1994 and 1993 and $6 million in 1992. (2) Before reduction for reinsurance of $3 million in 1994 and $2 million in 1992. There were no such reinsurance recoveries in 1993. (3) Before reduction for reinsurance of $7 million in each of 1994 and 1993 and $3 million in 1992.
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:
1994 1993 1992 ____ ____ ____ Beginning balance 336 308 479 New claims 53 53 51 Closed claims 114 25 222 ___ ___ ___ Ending balance (1) 275 336 308 ___ ___ ___ ___ ___ ___ Policyholders 48 43 24 ___ ___ ___ ___ ___ ___ (1) Certain of the company's claims represent claims related to individual properties and others represent claims related to multiple properties. At December 31, 1994, 1993 and 1992, approximately 44%, 32% and 30%, respectively, represent claims which relate to multiple properties.
37 Property-Casualty (Continued) While the total number of open asbestos property damage claims increased from December 31, 1992 to December 31, 1993, the reserve balance for such claims decreased by $3 million. Reserve additions for the period reflect the company's belief that new claims arising during the period were primarily small or incidental claims, many of which were closed in 1994. Workers' Compensation Claims The company added $574 million (pretax, before discount) 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 $574 million resulted from a study of the company's workers' compensation reserves which supported adjustment of workers' compensation reserve balances to reflect (i) a 60-year tail (compared to the 40-year tail previously utilized) and (ii) a judgment that, because of application of costly medical technologies sooner after injury and medical advancements in the early treatment of injuries, recent claims would benefit from a slowing in the growth of medical costs from that being experienced by the company on older claims. 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. Further, such discounting was consistent with industry practice. This discounting resulted in a reduction as of December 31, 1993 of $634 million (pretax) to loss reserves for workers' compensation claims. (Please see Note 1 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 laws. 38 Property-Casualty (Continued) The company has noted evidence of adverse loss developments in its commercial general liability line of business. The company believes that such developments largely are attributable to the unusual frequency and size of claims in this line of business. The company also believes that the unusual frequency and size of construction defect claims brought against contractor policyholders (observed by the company in 1994) and the increasing size of other types of claims brought against contractor policyholders (observed by the company to be continuing in 1994) are contributing to these loss developments. The company believes that it is reasonably possible that these adverse loss developments will continue, and if so they would adversely affect the company's future results although the company is currently unable to estimate the extent to which results would be affected. Management has and continues to review the factors contributing to these developments (by, for example, segregating and examining data on an individual policyholder basis) and to adjust its reserves as more current data becomes available. 39 Outlook Significant actions have been taken, especially in the commercial lines, to improve basic underwriting and claim-handling fundamentals in order to improve profitability. Continued focus on stricter underwriting programs, geographic specific strategies, and increased service and value-added business, which address the requirements of customers with more complicated insurance needs, is expected to improve the earnings outlook in commercial lines. However, except in isolated markets and lines of business, expectations in recent years among market analysts that prices would significantly increase in the commercial lines of business have proven incorrect. Should existing market conditions continue, earnings will continue to be under pressure. In personal lines, recent actions have improved personal auto underwriting profitability. However, increasingly competitive market conditions will put pressure on further improvement. Management will continue to evaluate personal auto market conditions in each state and maintain or increase the company's presence in those states that offer acceptable returns and reduce its presence in those states where the company is unable to earn acceptable returns. Management will continue to seek to obtain personal lines rate increases where appropriate and will continue to challenge regulatory or legislative initiatives that deny the company an opportunity to earn a satisfactory return. The company has undertaken a number of actions in the past few years to improve its expense position. It will continue to seek to further reduce the costs associated with acquiring, processing and servicing business. The benefits of reduced expenses, driven by a 17% staff reduction in 1994, should be fully reflected in 1995 earnings. However, the competitive marketplace and stricter underwriting programs may depress premium levels in the shorter term, in which case improvement in the company's expense ratios would take longer to achieve. The company is taking a number of steps intended to moderate the volatility of property-casualty earnings, including transferring more risk through restructured and expanded reinsurance programs. Additionally, exposure to catastrophes is being reduced through restricting business writings in certain geographic areas, to the extent that the company can legally do so, and increasing deductibles. These actions may somewhat reduce premium levels. The company is aggressively managing its asbestos and environmental liabilities. The company is expected to be affected adversely in 1995 by losses for environmental and asbestos claims and related litigation expenses, and such effect could be material to the company's future results, liquidity and/or capital resources. 40 International
Operating Summary (Millions) 1994 1993 1992 ____________________________________________________________________________ Premiums $ 887.1 $ 909.5 $ 814.8 Net investment income 308.4 311.6 278.5 Fees and other income 97.0 83.4 100.4 Net realized capital gains (losses) 4.5 (25.2) 8.7 ________________________________ Total revenue 1,297.0 1,279.3 1,202.4 Current and future benefits 782.7 860.1 732.3 Operating expenses 349.8 354.3 385.6 Amortization of deferred policy acquisition costs 65.7 51.7 41.6 Severance and facilities charge - 11.0 - ________________________________ Income before taxes 98.8 2.2 42.9 Income taxes (benefits) 27.6 (52.8) 17.8 ________________________________ Income before cumulative effect adjustments $ 71.2 $ 55.0 $ 25.1 ____________________________________________________________________________ ________________________________ Net realized capital gains (losses), net of tax (included above) $ 2.1 $ (11.6) $ 7.2 ____________________________________________________________________________ ________________________________
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 Korea. As part of the company's decision to realign its segments (please see "Overview" on page 4), the United Kingdom reinsurance operations, previously included within International, are now reflected in the Property-Casualty segment. International's adjusted earnings (after-tax) follow:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Income before cumulative effect adjustments $ 71.2 $ 55.0 $ 25.1 Less: Net realized capital gains (losses) 2.1 (11.6) 7.2 Severance and facilities charge - (7.1) - _______ _______ _______ Adjusted earnings $ 69.1 $ 73.7 $ 17.9 _______ _______ _______ _______ _______ _______
International's adjusted earnings decreased $5 million in 1994, following a $56 million increase in 1993. Results in 1994 and 1993 reflected earnings from the company's increased investment in a Mexican insurance operation and continued improvement in Pacific Rim operations and earnings. 1993 adjusted earnings included a $37 million tax benefit from prior year operating losses related to the sale of the U.K. life and investment management operations. 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, $173 million and $134 million for 1994, 1993 and 1992, respectively, and benefits and expenses of $105 million, $190 million and $148 million for 1994, 1993 and 1992, respectively. This change did not impact results of the segment in 1994. 41 International (Continued) Premiums in 1994 were 2% lower than in 1993, following a 12% increase in 1993 premiums as compared with 1992. Excluding the change in accounting for an affiliate discussed above, premiums increased 5% and 8% in 1994 and 1993, respectively, primarily due to increases in the volume of business sold in the Pacific Rim and South American markets. Outlook International's strategy is to invest resources in areas outside the U.S. that have the potential for attractive returns, with emphasis on the emerging insurance and financial services markets. These markets have added risks such as nationalization, expropriation, foreign currency fluctuations and the potential for restrictive capital regulations. Approximately 25% of International's adjusted earnings are derived from the company's Mexican affiliate. The devaluation of the Mexican peso which occurred primarily in the fourth quarter of 1994 resulted in the recording of a $39 million unrealized loss (after-tax) on the consolidated balance sheet of the company related to the company's investment in its Mexican affiliate. The company's currency risk with respect to the Mexican peso cannot be hedged due to the fact that there is no active market for currency forward contracts. As a result, the Mexican affiliate's contribution to earnings could be negatively impacted. Despite these risks, management believes that its operations are sufficiently maturing and, therefore, expects International to be a meaningful contributor to overall corporate results. 42 Corporate
Operating Summary (Millions, after-tax) 1994 1993 1992 ________________________________________________________________________________ Interest expense $ 60.5 $ 44.7 $ 50.9 Other expense $ 156.5 $ 173.9 $ 229.2
The Corporate segment includes interest expense and other corporate net expenses which are not directly related to the company's business segments. "Other expense" includes operating expenses such as corporate staff areas, advertising and contributions, and net investment income. The 1994 increase in interest expense of $16 million resulted from the issuance by a subsidiary of 9 1/2% cumulative monthly income preferred securities in November 1994, as well as certain other long-term debt by the company in late 1993. Other expense for 1993 and 1992 included after-tax severance and facilities charges of $11 million and $13 million, respectively. Other expense also included an after-tax realized capital loss of $9 million in 1994, and after-tax realized capital gains of $2 million and $9 million in 1993 and in 1992, respectively. Excluding the 1993 and 1992 severance and facilities charges and realized capital gains and losses in all three years, the decrease in other expenses in 1994 and 1993 resulted from a reduction of corporate staff area expenses associated with previous restructurings. 43 General Account Investments Investment-related amounts disclosed in the following investment section relate to the total portfolio (including assets supporting discontinued products and experience rated products). (Please see "Large Case Pensions" on page 19 for a discussion of discontinued products.)
December 31, ________________________ (Millions) 1994 1993 __________________________________________________________________________ Invested Assets: Life Companies: Fully Guaranteed $ 14,486.3 $ 16,933.1 Experience Rated 16,670.9 18,824.1 Other 8,216.6 7,445.5 Property-Casualty Companies 14,919.5 18,253.1 ________________________ Total General Account Assets, net of impairment reserves $ 54,293.3 $ 61,455.8 __________________________________________________________________________ ________________________ Net investment income $ 4,463.5 $ 4,919.0 __________________________________________________________________________ ________________________
At December 31, 1994 and 1993, the company's invested assets were comprised of the following, net of impairment reserves:
(Millions) 1994 1993 __________________________________________________________________________ Debt securities: Held for investment, at amortized cost (fair value $1,991.2 and $2,704.2) $ 2,000.8 $ 2,557.8 Available for sale, at fair value (amortized cost $36,984.2 and $36,933.6) 35,110.7 38,868.9 Trading securities, at fair value (1993 amortized cost, $119.0) - 117.8 Equity securities, at fair value (cost $1,326.9 and $1,238.1) 1,655.6 1,658.9 Short-term investments 450.4 669.9 Mortgage loans 11,843.6 14,839.2 Real estate 1,545.7 1,315.8 Policy loans 533.8 490.7 Other 1,152.7 936.8 __________________________________________________________________________ Total invested assets $ 54,293.3 $ 61,455.8 __________________________________________________________________________ ________________________
The company's investment objective is to fund policyholder and certain corporate 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 matches 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 portfolios of assets which support the liabilities. 44 General Account Investments (Continued) 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 56.) 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 1994, the company operated within such investment guidelines by maintaining a mix of investments that diversifies its assets and matches the characteristics of the liabilities which they support. The decline in invested assets from December 31, 1993 to December 31, 1994 related principally to debt securities and mortgage loans. The decrease in debt securities of $4.4 billion was due principally to changes in market values of such securities. Interest rates rose during 1994, causing a decrease in the value of debt securities and resulting in a change from unrealized capital gains on such securities of $1.9 billion at December 31, 1993 to unrealized capital losses of $1.9 billion at December 31, 1994. Of such unrealized capital losses at December 31, 1994, $195 million and $607 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The decrease in mortgage loans of $3.0 billion principally reflected prepayments, payments at maturity on mortgage loans, the company's foreclosure of $515 million of mortgage loans (net of write-offs) and $193 million of in-substance foreclosures (net of write-offs). The risks associated with investments supporting experience rated pension and annuity products are assumed by those customers subject to, among other things, certain minimum guarantees. The anticipated future losses associated with investments supporting discontinued products were provided for in the loss on discontinuance of products established at December 31, 1993. 45 General Account Investments (Continued) Debt Securities As of December 31, 1994 and 1993, the company's investments in debt securities represented 68% of total general account invested assets and were as follows:
(Millions) 1994 1993 _______________________________________________________________________ Supporting discontinued products $ 6,155.0 $ 8,269.0 Supporting experience rated products 11,770.5 11,763.8 Supporting remaining products 19,186.0 21,511.7 ________________________________ Total $37,111.5 $41,544.5 ________________________________ ________________________________
At December 31, 1994 and 1993, 5% and 6%, respectively, of the fixed income investments included in Aetna's debt securities portfolio were carried at amortized cost. At year-end 1994, the estimated market value of investments carried at amortized cost was approximately $10 million less than their carrying value. Of the difference between market and carrying value, an unrealized capital gain of less than $1 million is related to debt securities supporting experience rated contracts. 46 General Account Investments (Continued) It is management's objective that the portfolio of debt securities be of high quality and be well-diversified by market sector. The debt securities in the company's portfolio 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. The average quality rating of the company's portfolio of debt securities was AA at December 31, 1994 and 1993.
Debt Securities Quality Ratings Debt Securities Investments by Market Sector 12/31/94 12/31/94 _______________________________ ____________________________________________ AAA 48.3% AA 10.5% Corporate 28.1% A 21.8% Treasuries/Agencies 23.3% BBB 14.4% Mortgage-Backed Securities 18.1% BB & Below 5.0% Financial 14.9% Public Utilities 7.2% Other Loan Backed 4.4% Municipals 4.0%
Included in the company's total debt security balances at December 31, 1994 and 1993 were the following categories of debt securities:
(Millions) December 31, 1994 _____________________________________________________________________________________________________ "Below Investment Problem Debt Potential Problem Grade" Securities Securities Debt Securities _________________ ____________ _________________ Total $1,873.0 $ 146.4 $ 170.0 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 27.8% 35.6% 27.9% Supporting experience rated products 25.8 14.3 29.6 Supporting remaining products 46.4 50.1 42.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ December 31, 1993 ______________________________________________________________ "Below Investment Problem Debt Potential Problem Grade" Securities Securities Debt Securities _________________ ____________ _________________ Total $1,951.1 $ 196.1 $ 191.0 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 31.5% 36.0% 30.5% Supporting experience rated products 23.0 13.6 34.1 Supporting remaining products 45.5 50.4 35.4 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________
"Below investment grade" securities (which include "problem debt securities" and "potential problem debt securities" described below) are defined to be securities that carry a rating below BBB- /Baa3. Such debt securities have been written down for other than temporary declines in value. At year-end 1994 and 1993, $1.1 billion and $1.2 billion, respectively, of the below investment grade debt securities were investments that were investment grade when purchased, but have since deteriorated in quality. 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. 47 General Account Investments (Continued) "Potential problem debt securities" are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. The company does not accrue interest on problem debt securities when management believes the likelihood of collection of interest is doubtful. Lost investment income on problem debt securities for the years ended December 31 was as follows:
(Millions) 1994 1993 1992 ______________________________________________________________________ Allocable to discontinued products $ 3.4 $ 3.5 $ 7.2 Allocable to experience rated products 1.0 .5 5.7 Allocable to remaining products 5.8 1.6 7.6
Collateralized Mortgage Obligations At December 31, 1994 and 1993, the carrying value (fair value) of collateralized mortgage obligations ("CMOs") was $3.4 billion and $6.3 billion, respectively. The $2.9 billion decline in CMOs from December 31, 1993 to December 31, 1994 was related primarily to sales and principal repayments. CMO sales of $1.6 billion resulted in net realized capital gains (pretax) of $35 million of which $23 million was allocated to experience rated contracts. The company's CMO exposure was reduced as a result of changes in their risk and return characteristics and to better diversify the risk profile of the company's assets. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the value of the CMOs would be subject to variability on the repayment of principal from the underlying mortgages earlier or later than originally anticipated. At December 31, 1994 and 1993, approximately 82% and 91%, respectively, of the company's CMO holdings consisted of sequential and planned amortization class ("PAC") bonds that are subject to less prepayment and extension risk than other CMO instruments. At December 31, 1994 and 1993, approximately 74% and 77%, respectively, of the company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC). At December 31, 1994 and 1993, 3% of the company's CMO holdings consisted of interest-only strips ("IOs") or principal-only strips ("POs"). IOs receive payments of interest and 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, which amounted to approximately 8% and 5% of the company's CMO holdings at December 31, 1994 and 1993, respectively, receive principal payments from the underlying mortgage pool only after all other priority classes have been retired. 48 General Account Investments (Continued) 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. Mortgage Loans During 1994, the mortgage loan portfolio was reduced 20% to $11.8 billion, net of impairment reserves. At December 31, 1994 and 1993, the company's mortgage loan investments net of impairment reserves, supported the following types of business:
(Millions) 1994 1993 ______________________________________________________________________ Supporting discontinued products $ 4,294.9 $ 5,419.1 Supporting experience rated products 3,652.1 4,732.7 Supporting remaining products 3,896.6 4,687.4 ___________________________ Total $11,843.6 $14,839.2 ___________________________ ___________________________
During 1994, the company continued to manage its mortgage loan portfolio to reduce the balance in absolute terms and relative to invested assets, and to reduce its overall risk. Since 1990 when the company ceased actively investing new money in mortgage loans, the focus has been on reducing the mortgage loan portfolio in an effort to maximize the return to the company. Mortgage loans, net of impairment reserves, now represent 22% of total general account invested assets, down from 38% in 1990. During this period, the principal balance of the mortgage portfolio was reduced by 46%. The $3.0 billion decrease since December 31, 1993 reflects the effect of repayments of maturing loans, loan prepayments, discounted loan payoffs, amortization and foreclosures (actual and in-substance). At December 31, 1994 and 1993, approximately 91% and 90%, respectively, of the outstanding principal balance of the portfolio consisted of commercial loans with balloon maturity features. (See "Liquidity and Capital Resources" on page 59.) 49 General Account Investments (Continued) At December 31, 1994 and 1993, the company's mortgage loan balances, net of specific impairment reserves, by property type and geographic region were as follows:
December 31, 1994 Hotel/ Mixed (Millions) Office Retail Apartment Motel Industrial Use Other Total __________________________________________________________________________________________________ South Atlantic $ 827.4 $ 545.8 $ 264.7 $ 672.4 $ 236.1 $ 203.9 $ 41.4 $ 2,791.7 Middle Atlantic 1,140.4 519.7 218.0 124.0 69.9 118.7 9.4 2,200.1 New England 758.2 282.7 64.2 120.9 44.6 209.9 32.7 1,513.2 South Central 346.2 286.4 166.5 65.6 50.1 - 28.2 943.0 North Central 617.2 276.1 132.3 168.3 29.8 47.6 46.3 1,317.6 Pacific and Mountain 1,170.9 565.1 250.3 143.0 443.1 76.6 84.2 2,733.2 Other 95.8 149.1 131.3 21.0 59.8 3.4 234.4 694.8 __________________________________________________________________________________________________ Total $ 4,956.1 $ 2,624.9 $ 1,227.3 $ 1,315.2 $ 933.4 $ 660.1 $ 476.6 $12,193.6 __________________________________________________________________________________________________ Less general portfolio loss reserve 350.0 __________________________________________________________________________________________________ Adjusted total, net of reserves $11,843.6 __________________________________________________________________________________________________ December 31, 1993 Hotel/ Mixed (Millions) Office Retail Apartment Motel Industrial Use Other Total __________________________________________________________________________________________________ South Atlantic $ 1,058.3 $ 667.1 $ 412.5 $ 758.6 $ 253.7 $ 238.9 $ 48.0 $ 3,437.1 Middle Atlantic 1,391.7 617.6 227.0 165.1 73.9 118.7 16.9 2,610.9 New England 975.2 511.9 82.9 130.6 46.5 215.5 37.4 2,000.0 South Central 430.1 394.3 236.2 103.0 80.7 - 34.8 1,279.1 North Central 855.1 444.6 193.7 244.9 45.7 92.9 61.3 1,938.2 Pacific and Mountain 1,341.9 668.5 367.2 203.3 502.3 78.0 86.4 3,247.6 Other 101.7 183.8 175.6 20.0 80.4 3.5 161.3 726.3 __________________________________________________________________________________________________ Total $ 6,154.0 $ 3,487.8 $ 1,695.1 $ 1,625.5 $ 1,083.2 $ 747.5 $ 446.1 $15,239.2 __________________________________________________________________________________________________ Less general portfolio loss reserve 400.0 __________________________________________________________________________________________________ Adjusted total, net of reserves $14,839.2 __________________________________________________________________________________________________
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 86% of the principal balance of the portfolio), to help determine whether adjustments to impairment reserves are warranted. 50 General Account Investments (Continued) Problem, restructured and potential problem loans were reduced by 50% to $2.3 billion at December 31, 1994. During the year, the company implemented a troubled debt restructuring program. The primary objective of this program is to restructure eligible loans in a manner which creates a market rate transaction which will perform in accordance with its restructured terms. The program is applied to those loans which have sound property and borrower fundamentals but 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 $764 million and collateral with a fair market value of $515 million were foreclosed upon in 1994. Additional loans with a principal balance of $422 million 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, 1994, there were $193 million of in-substance foreclosures (net of write-offs of $136 million). Included in the company's total mortgage loan balances at December 31 were the following categories of mortgage loans:
(Millions) December 31, 1994 ________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans Total _____________ ____________ _____________ _____ Total $ 673.1 $ 706.1 $ 918.7 $2,297.9 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 36.9% 39.1% 48.8% Supporting experience rated products 30.8 31.1 25.5 Supporting remaining products 32.3 29.8 25.7 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves $ 784.1 ________ ________ Impairment reserves as a percentage of total 34.1% ________ ________ December 31, 1993 _________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans Total _____________ ____________ _____________ _____ Total $1,116.0 $1,858.8 $1,575.6 $4,550.4 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 36.8% 51.5% 33.2% Supporting experience rated products 34.7 25.9 38.2 Supporting remaining products 28.5 22.6 28.6 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves $1,308.3 ________ ________ Impairment reserves as a percentage of total 28.8% ________ ________
51 General Account Investments (Continued) "Problem loans" are defined to be loans with payments over 60 days past due, loans on properties in the process of foreclosure, loans on properties involved in bankruptcy proceedings and loans on properties subject to redemption. Loans on properties in the process of foreclosure increased to $422 million at December 31, 1994 from $399 million at December 31, 1993.
Problem, Potential Problem and Geographic Distribution of Problem, Restructured Mortgage Loans by Potential Problem and Restructured Property Type Mortgage Loans 12/31/94 12/31/94 __________________________________ ___________________________________ Office 56.4% Pacific and Mountain 23.7% Retail 13.7% New England 19.7% Hotel/Motel 8.0% North Central 18.5% Mixed Use 6.9% South Atlantic 16.7% Industrial 5.8% Middle Atlantic 13.0% Apartment 5.7% South Central 6.2% Other 3.5% Non-U.S. 2.2%
"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 at December 31, 1994 and 1993 yielded cash returns of approximately 6%. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post-restructuring payment performance in accordance with the restructured terms) may be returned to performing status. Candidates for such treatment are re-underwritten and must meet specific guidelines which are intended to provide reasonable assurance that the loan will perform in accordance with its contract terms. These guidelines require (i) adequate debt service coverage throughout the term of the loan, (ii) appropriate loan-to-value ratios based upon collateral value at the time of restructuring and projected at maturity of the loan, and (iii) reasonable protection against capital expenditure risk associated with lease rollovers. In addition, such restructured loans are designed to enhance the company's security position in the collateral, maximize borrower commitment to the property, and in many cases, ensure the company's participation in any appreciation of the property as market conditions improve. Prior to restructuring, such loans are generally classified and accounted for as problem loans. However, in certain cases, loans may be classified as potential problem and restructured loans if they are performing pursuant to their existing loan terms at the time. Upon closing of the restructure, any uncollectible portion of the loan is written off against the impairment reserve and the remaining recorded investment in the loan is classified as restructured until it is returned to performing status. 52 General Account Investments (Continued) During 1994, loans which had been restructured, with a carrying value of $474 million (net of write-offs of $216 million) and with an average current yield of 9% were classified as performing. The amount of the write-off approximated the reserves related to these loans; therefore, there was no material effect on the Consolidated Statement of Income in 1994. Of the aforementioned loans, $136 million (net of write-offs of $58 million) supported experience rated pension contracts and $185 million (net of write-offs of $96 million) supported discontinued products. In addition, of the $474 million of restructured loans, approximately 91% had equity participation features. No such restructures and transfers to performing status occurred prior to 1994. "Potential problem loans" are currently performing loans which management believes are likely to become classified as problem or restructured loans in the next 12 months or so. Such loans are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem and restructured loans requires significant judgment as to likely future market conditions, developments specific to individual properties and borrowers, and the timing of potential defaults. Provision for losses that management believes are likely to arise from such potential problem and restructured loans, excluding those potential problem and restructured loans supporting experience rated pension contracts, is included in the general reserve. The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such 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) 1994 1993 1992 ____________________________________________________________________ Income which would have been recorded under original terms of loans $ 149.2 $ 299.1 $ 312.6 Income recorded 72.6 149.9 168.1 _______ _______ _______ Lost investment income $ 76.6 $ 149.2 $ 144.5 _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 28.8 $ 73.8 $ 76.7 _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension contracts (included above) $ 22.5 $ 41.7 $ 40.2 _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ 25.3 $ 33.7 $ 27.6 _______ _______ _______ _______ _______ _______
53 General Account Investments (Continued) Mortgage loan impairment reserves are established to provide for 1) probable estimated losses on specific loans (i.e., "specific reserves") and 2) losses that management believes are likely to arise from the overall portfolio excluding that portion of the portfolio supporting experience rated pension contracts (i.e., "general reserve"). As of December 31, the mortgage loan impairment reserves were as follows:
(Millions) 1994 1993 ________________________________________________________________________________________________ Specific General Specific General Reserves Reserve Total Reserves Reserve Total ______________________________ _______________________________ Allocable to discontinued products (1) $ 144.7 $ 227.4 $ 372.1 $ 406.0 $ 241.2 $ 647.2 Allocable to experience rated products 156.1 * 156.1 268.5 * 268.5 Allocable to remaining products 133.3 122.6 255.9 233.8 158.8 392.6 ________________________________________________________________ Total $ 434.1 $ 350.0 $ 784.1 $ 908.3 $ 400.0 $ 1,308.3 ________________________________________________________________ ________________________________________________________________ (1) Please see " Large Case Pensions" on pages 19 and 20 for a discussion of anticipated future capital losses on assets supporting discontinued products. * The general reserve at December 31, 1994 and 1993 excluded reserves of $208.5 million and $217.0 million, respectively, related to experience rated pension contracts. Had such reserves been included, total reserves would have been $992.6 million and $1,525.3 million at December 31, 1994 and 1993, respectively.
For the years ended December 31, after-tax mortgage loan impairment expense was as follows:
(Millions) 1994 1993 1992 _____________________________________________________________________ Allocable to discontinued products $ 68.8 (1) $152.6 $142.6 Allocable to experience rated products (2) 59.8 114.7 76.0 Allocable to remaining products 67.2 145.4 98.9 (1) Impairment expense allocable to discontinued products for the year ended December 31, 1994 was charged against the reserve for future losses and did not affect the company's results of operations. (2) Impairment expense allocable to experience rated products does not affect the company's results of operations.
The decrease in mortgage impairment expense in 1994 is largely attributable to improvement in certain segments of the commercial real estate markets, and the reduction in potential problem loans. (Please see "Outlook" on page 57.) 54 General Account Investments (Continued) Real Estate At December 31, 1994 and 1993, the company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) December 31, 1994 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 382.3 $1,163.4 (1) $1,545.7 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 23.8% 54.9% Supporting experience rated products 8.3 21.6 Supporting remaining products 67.9 23.5 ________ ________ 100.0% 100.0% ________ ________ ________ ________ December 31, 1993 _________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 434.9 $ 880.9 $1,315.8 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 22.6% 49.5% Supporting experience rated products 8.4 27.7 Supporting remaining products 69.0 22.8 ________ ________ 100.0% 100.0% ________ ________ ________ ________ (1) Includes $193.4 million of in-substance foreclosures. (Please see "Mortgage Loans" on page 50 for discussion of in-substance foreclosures.)
Equity Real Estate Geographic Distribution of by Property Type Equity Real Estate 12/31/94 12/31/94 ________________________ ___________________________ Office 52.5% South Atlantic 29.8% Retail 18.4% Pacific and Mountain 20.8% Hotel/Motel 9.4% North Central 12.3% Apartment 7.1% South Central 10.3% Industrial 4.6% New England 10.2% Land 4.3% Non-U.S. 8.5% Mixed Use 2.1% Middle Atlantic 8.1% Other 1.6%
All real estate acquired through foreclosure, including in- substance foreclosures, is classified as held for sale. These properties were carried at 60% and 52% of the company's cash investment (unpaid mortgage balance plus capital additions) at December 31, 1994 and 1993, respectively. 55 General Account Investments (Continued) Although all foreclosed real estate is classified as held for sale and carried at the lower of cost or currently estimated fair value less estimated selling costs, the company is managing its foreclosed real estate with the objective of maximizing the total return on the properties. To achieve this objective, management intends to hold certain foreclosed real estate having an aggregate value of approximately $500 million at December 31, 1994 for up to four years. Management believes these properties present opportunities to generate total returns, both in current cash flow and expected increases in value, over their anticipated holding period that are attractive compared to the expected total returns from alternative investments possessing similar risk characteristics. 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. 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) 1994 1993 _____________________________________________________________ Allocable to discontinued products $ 376.0 $ 298.3 Allocable to experience rated products 179.6 228.3 Allocable to remaining products 206.6 242.9 ________ ________ Total $ 762.2 $ 769.5 ________ ________ ________ ________
56 General Account Investments (Continued) For the years ended December 31, total after-tax net realized capital losses from real estate write-downs and changes in the valuation reserves were as follows:
(Millions) 1994 1993 1992 _____________________________________________________________________ Allocable to discontinued products $ 12.8 (1) $ 55.1 $ 22.8 Allocable to experience rated products (2) 2.9 51.5 15.4 Allocable to remaining products (.8) 64.5 15.9 (1) Write-downs and impairment expense allocable to discontinued products for the year ended December 31, 1994 was 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.
Use of Derivatives and Other Investments The company's hedging activity has been limited and has principally consisted of using futures, forward contracts and interest rate swaps to hedge interest rate risk and currency risk. These instruments subject the company to varying degrees of market and credit risk. Market risk is the risk that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 18 of Notes to Financial Statements for a discussion of the company's hedging activities.) 57 General Account Investments (Continued) The company also had investments in certain debt instruments with derivative characteristics, including those where market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the $37.1 billion debt securities portfolio, as of December 31, 1994 was as follows:
Amortized Fair (Millions) Cost Value _____________________________________________________________________________ Collateralized mortgage obligations:............ $ 3,562.7 $ 3,369.5 Interest-only strips (included above)......... 21.1 38.7 Principal-only strips (included above)........ 56.0 61.3 Treasury and agency strips: Principal..................................... 1,144.0 977.6 Interest...................................... 104.2 90.2 Structured notes (1)............................ 45.0 36.6 Warrants to purchase debt securities (2)........ 9.4 3.9 Mandatorily convertible preferred stock......... 12.1 11.6 (1) Includes instruments whose fair value is based on (and potentially magnified, positively or negatively, by) changes in LIBOR or the U.S. Dollar/Japanese Yen exchange rates. (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.
Outlook Management intends that general account investments in new mortgage loans for the foreseeable future will be restricted largely to extending and refinancing existing mortgages as they mature. (Please see "Liquidity and Capital Resources" on page 59.) The company has reduced the mortgage loan and equity real estate portfolios, after reserves and write-downs, by $10.8 billion since the end of 1990, bringing mortgage loans and real estate as a percentage of general account invested assets from 40% in 1990 to 25% at December 31, 1994. 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 by pursuing payoffs at maturity, loan restructurings and sales of foreclosed real estate. Management is seeing improvement in certain segments of the commercial real estate market. While additional losses may emerge in the company's mortgage loan and real estate portfolios, and may increase to the extent recovery in this market is delayed, management believes that the improvement in this market will favorably impact real estate values. The reserve for discontinued products reflects all anticipated future losses on discontinued products, including capital losses relating to the $5.0 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 19.) 58 Liquidity and Capital Resources
(Millions) 1994 1993 1992 ___________________________________________________________________ Consolidated Assets $ 94,172.5 $100,036.7 $ 94,519.6 ___________________________________________________________________ ____________________________________ Shareholders' Equity $ 5,503.0 $ 7,043.1 $ 7,238.3 ___________________________________________________________________ ____________________________________ Cash and Cash Equivalents and Short-Term Investments $ 3,404.0 $ 2,227.7 $ 3,925.8 ___________________________________________________________________ ____________________________________ Minority Interest in Preferred Securities of Subsidiary $ 275.0 $ - $ - ___________________________________________________________________ ____________________________________ Long-Term Debt $ 1,114.7 $ 1,160.0 $ 955.6 ___________________________________________________________________ ____________________________________ Average Short-Term Debt $ 219.8 $ 215.6 $ 273.1 ___________________________________________________________________ ____________________________________ Interest Expense $ 98.6 $ 77.4 $ 87.1 ___________________________________________________________________ ____________________________________
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 15 through 18 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 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. 59 Liquidity and Capital Resources (Continued) The company's invested assets at December 31, 1994 totaled $54.3 billion and consisted primarily of debt securities ($37.1 billion), mortgage loan and real estate investments ($13.4 billion), short-term investments ($.5 billion) and equity securities ($1.7 billion). (Please see "General Account Investments" on page 43.) The company also held substantial cash and cash equivalents at December 31, 1994. (Please see "Factors Affecting Cash Flow" on page 61.) Given the high quality of the debt securities portfolio, management expects the vast majority of the company's investments in debt securities to be repaid in accordance with contractual terms. At December 31, 1994, the scheduled principal repayments of investments in debt securities company-wide (excluding mortgage-backed securities of $6.7 billion) are $1.8 billion in 1995, $12.2 billion in the years 1996 through 2000, and $16.4 billion in the aggregate in the years after 2000. Mortgage-backed securities included in the debt securities portfolio are generally collateralized by residential mortgage loans on which the timely payment of principal and interest is backed by specified government agencies. (Please see "Debt Securities" on page 45.) Such mortgage-backed securities, treasuries and public bonds in the portfolio are highly marketable and thus can be used to enhance cash flow before maturity. Substantially all of the commercial mortgage loan portfolio consists of loans with balloon maturity features. (Please see "Mortgage Loans" on page 48.) As a result of adverse conditions in real estate markets and tight lending practices by banks and other financial institutions over the past several years, the company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere. Of the $2.0 billion of mortgage loans scheduled to mature during 1994, $1.2 billion was not paid as scheduled, a substantial portion of which supported large case pension liabilities. Of the loans not paid as scheduled, $386 million were extended at interest rates at least equal to current market (average rate of 9% over an average extension period of 5 years), $773 million were under forbearance (continuing to make payments under original loan terms) or under discussion with borrowers at December 31, 1994 and $37 million were foreclosed upon. Of the $773 million of loans under forbearance or under discussion with borrowers, $164 million were classified as problem or restructured loans at December 31, 1994. The decision to extend a loan involves an evaluation of many factors including, among others, property cash flow and collateral value, as well as an evaluation of alternative courses of action, such as foreclosure. Despite various indications that liquidity is returning to certain real estate markets, the company expects it will continue to extend or refinance certain maturing loans in the portfolio. However, the aggregate of normal principal amortization payments on traditional loans, payments at maturity on loans that paid off on schedule and prepayments (in whole or in part) on other loans, produced substantial cash flow in 1994. Prepayments on mortgage loans were $1.1 billion in 1994. 60 Liquidity and Capital Resources (Continued) At December 31, 1994, scheduled mortgage loan principal repayments were as follows (in millions):
1995 $1,765.1 1996 1,555.5 1997 1,507.7 1998 994.7 1999 1,607.3 Thereafter 5,197.4
Consolidated Cash Flows
(Millions) 1994 1993 1992 ___________________________________________________________________________ Net cash provided by (used for) operating activities $ 254.1 $ (1,187.2) $ (578.1) ___________________________________________________________________________ ______________________________________ Net cash provided by investing activities $ 2,758.7 $ 796.7 $ 2,203.0 ___________________________________________________________________________ ______________________________________ Net cash used for financing activities $ (1,613.0) $ (455.2) $ (2,110.5) ___________________________________________________________________________ ______________________________________ Cash and cash equivalents $ 2,953.6 $ 1,557.8 $ 2,415.0 ___________________________________________________________________________ ______________________________________
The company's cash flow requirements for 1994 were met by funds provided from operations, from the maturity and sale of investments and from financing activities. As detailed in the Consolidated Statements of Cash Flows, during 1994 net cash of $254 million was provided by operating activities. Net cash of $1,187 million used for operating activities during 1993 included $2,089 million used for net purchases of debt trading securities. Net cash provided by investing activities was $2,759 million in 1994 and included $2,710 million from net sales, as well as maturities and repayments of, mortgage loans and real estate. Net cash provided by investing activities of $797 million in 1993 included a decrease of $674 million in short-term investments. Net cash provided by investing activities of $2,203 million in 1992 included proceeds of $1,326 million from the sale of American Re-Insurance Company ("Am Re") and an increase of $693 million in short-term investments. Net cash used for financing activities includes cash generated by sales of investment contracts which was lower in 1994, 1993 and 1992 than cash paid for maturing investment contracts and other withdrawals. Since 1987, the company has paid annual dividends to shareholders of $2.76 per share, or approximately $300 million annually. (Please see "Debt and Short-Term Borrowing" on page 62.) 61 Liquidity and Capital Resources (Continued) 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. In recent years, financial strength has taken on added significance 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. During 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 8, 1994 and at February 7, 1995 follow:
Rating Agencies ____________________________________________________________ Moody's Investors Standard A.M. Best Duff & Phelps Service & Poor's ____________________________________________________________ Aetna Life and Casualty Company (senior debt) February 8, 1994 * AA- A1 AA- February 7, 1995 * A+ *** A2 A+ *** Aetna Life and Casualty Company (commercial paper) February 8, 1994 * Duff 1+ P-1 A-1+ February 7, 1995 * Duff 1 P-1 A-1 *** Aetna Life Insurance Company (claims paying) February 8, 1994 A AA Aa3 A+ February 7, 1995 A AA **** Aa3 A+ *** The Aetna Casualty and Surety Company (claims paying) February 8, 1994 A AA Aa2 AA- February 7, 1995 A- AA- *** A1 A+ *** Aetna Casualty and Surety Company of America (claims paying) February 8, 1994 ** ** ** ** February 7, 1995 A ** ** ** Aetna Life Insurance and Annuity Company (claims paying) February 8, 1994 A++ AAA Aa2 AAA February 7, 1995 A++ AA+ *** Aa2 AA *** * Not rated by the agency. ** Not rated on a separate company basis. *** Placed on credit watch or rating watch-down subsequent to February 7, 1995. **** On rating watch-down.
62 Liquidity and Capital Resources (Continued) Parent Company Cash Flow Cash flow needs at the parent company level include primarily shareholder dividends and debt service. The parent company also may fund growth or meet capital needs of the company's businesses with cash and/or other assets. 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. Efforts to simultaneously grow certain of the company's businesses to their full potential and meet capital requirements of other businesses may require significant future capital. The company has significant short-term liquidity supporting its businesses. At year-end 1994, cash and cash equivalents were $3.0 billion and short-term securities were $.5 billion. 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 and private bond investments or other assets, borrowing among affiliates and using external borrowing or other capital-raising capacity. The company has substantial external borrowing capacity. In July 1994, the company entered into two committed bank lines of $500 million each with a group of worldwide banks. One $500 million facility terminates in July 1995 and the other $500 million facility terminates in July 1999. The company intends to obtain an extension of the facility that terminates in July 1995. The facilities replaced the company's $800 million revolving credit facility which expired in July 1994. (Please see Note 9 of Notes to Financial Statements.) 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 at December 31, 1994 was $1.1 billion, of which $63 million was attributable to the company's international subsidiaries. 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 of $5 million on the early redemption. 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. 63 Liquidity and Capital Resources (Continued) 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 above. The remaining proceeds were used for general corporate purposes. 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 In 1994, 1993 and 1992, the company did not acquire any shares of its common stock. Sales of Subsidiaries On June 30, 1993, the company completed the sale of its U.K. life and investment management operations. The company realized an after-tax capital loss of $12 million on the sale, as well as $37 million of tax benefits from cumulative operating losses of the subsidiary not previously tax benefited. On September 30, 1992, the company completed the sale of Am Re, formerly a wholly owned subsidiary. The company realized a gain on the sale in 1992 of $38 million. No taxes were incurred on this transaction. As part of the sale, the company received 70,000 shares of American Re Corporation's (the new holding company) Preferred Stock, which were redeemed in the first quarter of 1993 resulting in an after-tax gain of $27 million. Dividend Restrictions Because Aetna Life and Casualty Company is a Connecticut insurance company, the amount of dividends that it may pay to shareholders in 1995 without prior approval by the Insurance Commissioner of the State of Connecticut is $399 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 1995 to approximately $608 million in the aggregate. 64 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, 1994 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. Among other things, risk-based capital standards can have the effect that as a company's liabilities increase, additional capital (determined by a formula) may be required if a company wants to maintain risk-based capital at its previous level for regulatory and rating agency purposes. As a result, significant future increases in liabilities (including reserves) of the company or its insurance subsidiaries may require significant future capital additions. 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. 65 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. Management is not currently able to predict how the decision will ultimately affect its businesses. New Accounting Pronouncements Accounting by Creditors for Impairment of a Loan The Financial Accounting Standards Board (FASB)issued FAS No. 114, Accounting by Creditors for Impairment of a Loan, in 1993. This statement requires that loans be impaired when it is probable that a creditor will be unable to collect all amounts (i.e., principal and interest) contractually due, and the impairment be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. The statement also allows impairments to be measured based on the loan's market price or the fair value of the collateral if the loan is collateral dependent. In October 1994, the FASB issued FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, which amends FAS No. 114 to allow a creditor to use existing methods for recognizing income on impaired loans. The company will adopt these standards effective January 1, 1995 and there is not expected to be a material impact on net income. 66 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 113. 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. 67 Consolidated Statements of Income For the years ended December 31,
(Millions, except per share data) 1994 1993 1992 ________________________________________________________________________________________________ Revenue: Premiums $ 11,292.1 $ 10,574.9 $ 10,793.9 Net investment income 4,463.5 4,919.0 5,069.0 Fees and other income 1,823.9 1,620.0 1,620.6 Net realized capital gains (losses) (54.8) 89.8 114.9 ______________________________________________ Total revenue 17,524.7 17,203.7 17,598.4 ________________________________________________________________________________________________ Benefits and Expenses: Current and future benefits 12,397.1 12,391.9 12,848.9 Operating expenses 3,719.3 3,644.8 3,925.7 Amortization of deferred policy acquisition costs 750.0 736.4 800.2 Loss on discontinuance of products - 1,270.0 - Severance and facilities charge - 308.0 145.0 ______________________________________________ Total benefits and expenses 16,866.4 18,351.1 17,719.8 ________________________________________________________________________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments 658.3 (1,147.4) (121.4) Income taxes (benefits) 190.8 (532.1) (116.1) ______________________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 467.5 (615.3) (5.3) Discontinued operations, net of tax: Income from operations - - 86.8 Gain on sale - 27.0 38.1 Cumulative effect adjustments - - 48.9 ______________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 467.5 (588.3) 168.5 Extraordinary loss on debenture redemption, net of tax - (4.7) - Cumulative effect adjustments, net of tax - 227.1 (112.5) ______________________________________________ Net income (loss) $ 467.5 $ (365.9) $ 56.0 ______________________________________________ ______________________________________________ Pro forma amounts assuming the discounting of workers' compensation life table indemnity reserves is applied retroactively: Income (Loss) from continuing operations $ 467.5 $ (615.3) $ (3.4) ______________________________________________ ______________________________________________ Net income (loss) $ 467.5 $ (615.9) $ 57.9 ______________________________________________ ______________________________________________ Pro forma amounts assuming the accounting for retrospectively rated reinsurance contracts is applied retroactively: Income (Loss) from continuing operations $ 467.5 $ (615.3) $ (26.7) ______________________________________________ ______________________________________________ Net income (loss) $ 467.5 $ (392.2) $ 34.6 ________________________________________________________________________________________________ ______________________________________________ See Notes to Financial Statements.
68 Consolidated Statements of Income (Continued) For the years ended December 31,
(Millions, except per share data) 1994 1993 1992 _____________________________________________________________________________________________ Results Per Common Share: Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments $ 4.14 $ (5.54) $ (.05) Discontinued operations, net of tax: Income from operations - - .79 Gain on sale - .24 .35 Cumulative effect adjustments - - .44 ___________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 4.14 (5.30) 1.53 Extraordinary loss on debenture redemption, net of tax - (.04) - Cumulative effect adjustments, net of tax - 2.05 (1.02) ___________________________________________ Net income (loss) $ 4.14 $ (3.29) $ .51 ___________________________________________ ___________________________________________ Pro forma amounts assuming the discounting of workers' compensation life table indemnity reserves is applied retroactively: Income (Loss) from continuing operations $ 4.14 $ (5.54) $ (.03) ___________________________________________ ___________________________________________ Net income (loss) $ 4.14 $ (5.55) $ .53 ___________________________________________ ___________________________________________ Pro forma amounts assuming the accounting for retrospectively rated reinsurance contracts is applied retroactively: Income (Loss) from continuing operations $ 4.14 $ (5.54) $ (.25) ___________________________________________ ___________________________________________ Net income (loss) $ 4.14 $ (3.53) $ .31 _____________________________________________________________________________________________ ___________________________________________ Weighted average common shares outstanding 112,848,653 111,062,954 110,101,861 _____________________________________________________________________________________________ See Notes to Financial Statements.
69 Consolidated Balance Sheets As of December 31,
(Millions, except share data) 1994 1993 __________________________________________________________________________________ Assets: Investments: Debt securities: Held for investment, at amortized cost (fair value $1,991.2 and $2,704.2) $ 2,000.8 $ 2,557.8 Available for sale, at fair value (amortized cost $36,984.2 and $36,933.6) 35,110.7 38,868.9 Trading securities, at fair value (1993 amortized cost, $119.0) - 117.8 Equity securities, at fair value (cost $1,326.9 and $1,238.1) 1,655.6 1,658.9 Short-term investments 450.4 669.9 Mortgage loans 11,843.6 14,839.2 Real estate 1,545.7 1,315.8 Policy loans 533.8 490.7 Other 1,152.7 936.8 ____________________________ Total investments 54,293.3 61,455.8 __________________________________________________________________________________ Cash and cash equivalents 2,953.6 1,557.8 Reinsurance recoverables and receivables 5,011.0 4,840.7 Accrued investment income 777.2 782.6 Premiums due and other receivables 1,722.9 1,664.9 Federal and foreign income taxes: Current 18.3 124.0 Deferred 1,266.7 1,282.9 Deferred policy acquisition costs 2,014.7 1,867.0 Other assets 1,992.2 1,756.3 Separate Accounts assets 24,122.6 24,704.7 ____________________________ Total assets $ 94,172.5 $ 100,036.7 __________________________________________________________________________________ __________________________________________________________________________________ Liabilities: Future policy benefits $ 17,979.2 $ 17,597.6 Unpaid claims and claim expenses 17,478.3 17,112.2 Unearned premiums 1,604.9 1,502.2 Policyholders' funds left with the company 23,223.1 27,592.2 ____________________________ Total insurance liabilities 60,285.5 63,804.2 Dividends payable to shareholders 77.7 77.4 Short-term debt 23.9 35.7 Long-term debt 1,114.7 1,160.0 Other liabilities 2,718.6 3,162.1 Participating policyholders' interests 170.5 172.5 Separate Accounts liabilities 24,003.6 24,581.7 ____________________________ Total liabilities 88,394.5 92,993.6 __________________________________________________________________________________ Minority interest in preferred securities of subsidiary 275.0 - __________________________________________________________________________________ Commitments and Contingent Liabilities (Notes 17, 18 and 19) Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding) - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding) - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding) - - Common Capital Stock (no par value; 250,000,000 shares authorized; 114,939,275 issued, and 112,657,758 and 112,200,567 outstanding) 1,419.2 1,422.0 Net unrealized capital gains (losses) (1,071.5) 648.2 Retained earnings 5,259.6 5,103.3 Treasury stock, at cost (2,281,517 and 2,738,708 shares) (104.3) (130.4) ____________________________ Total shareholders' equity 5,503.0 7,043.1 __________________________________________________________________________________ Total liabilities, minority interest and shareholders' equity $ 94,172.5 $ 100,036.7 __________________________________________________________________________________ __________________________________________________________________________________ Shareholders' equity per common share $ 48.85 $ 62.77 __________________________________________________________________________________ __________________________________________________________________________________ See Notes to Financial Statements.
70 Consolidated Statements of Shareholders' Equity
Net Unrealized Three Years Ended December 31, 1994 Common Capital Retained Treasury (Millions, except share data) Total Stock Gains (Losses) Earnings Stock ______________________________________________________________________________________________________ Balances at December 31, 1991 $ 7,384.5 $ 1,420.1 $ 165.9 $ 6,026.0 $ (227.5) ______________________________________________________________________________________________________ Net income 56.0 56.0 Net change in unrealized capital gains and losses 93.7 93.7 Common stock issued for benefit plans (205,848 shares) 10.6 10.6 Loss on issuance of treasury stock (2.4) (2.4) Common stock dividends declared (304.1) (304.1) _____________________________________________________________ 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) ______________________________________________________________________________________________________ ______________________________________________________________________________________________________ See Notes to Financial Statements.
71 Consolidated Statements of Cash Flows For the years ended December 31,
(Millions) 1994 1993 1992 _____________________________________________________________________________________________________ Cash Flows from Operating Activities: Net income (loss) $ 467.5 $ (365.9) $ 56.0 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Cumulative effect adjustments - (227.1) 112.5 Extraordinary loss on debenture redemption - 4.7 - Discontinued operations - - (135.7) (Increase) decrease in accrued investment income (.6) (17.9) 51.4 (Increase) decrease in premiums due and other receivables (86.0) 1.3 765.4 Increase in reinsurance recoverables and receivables (155.2) (225.8) (4,619.3) Increase in deferred policy acquisition costs (187.7) (169.2) (71.4) Depreciation and amortization 190.1 199.4 205.6 Increase (decrease) in federal and foreign income taxes 124.8 (387.7) (128.0) Net decrease (increase) in other assets and other liabilities (506.6) 860.7 (256.7) Increase in other insurance liabilities 459.5 1,634.1 4,871.5 Net sales (purchases) of debt trading securities 52.3 (2,089.1) (1,222.6) Gain on sale of subsidiaries - (15.0) (38.1) Net realized capital (gains) losses 54.8 (101.8) (114.9) Amortization of net investment discounts (91.4) (153.1) (150.1) Other, net (67.4) (134.8) 96.3 __________________________________________ Net cash provided by (used for) operating activities 254.1 (1,187.2) (578.1) __________________________________________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 19,011.9 - - Debt securities held for investment 5.6 - - Debt securities, prior to adoption of FAS No. 115 - 6,300.9 3,862.1 Equity securities 675.9 929.9 836.7 Mortgage loans 195.2 211.9 82.6 Real estate 612.9 479.4 244.5 Short-term investments 59,375.3 65,500.1 94,739.4 Investment maturities and repayments of: Debt securities available for sale 3,424.6 - - Debt securities held for investment 853.4 - - Debt securities, prior to adoption of FAS No. 115 - 5,804.6 6,089.9 Mortgage loans 2,218.9 2,488.7 1,893.6 Cost of investment purchases in: Debt securities available for sale (22,437.3) - - Debt securities held for investment (350.3) - - Debt securities, prior to adoption of FAS No. 115 - (13,936.0) (9,637.3) Equity securities (774.1) (1,025.4) (879.8) Mortgage loans (257.6) (239.1) (417.3) Real estate (59.1) (91.4) (103.5) Short-term investments (59,222.1) (64,825.7) (95,432.4) Proceeds from disposal of subsidiaries - 93.1 1,325.5 Increase in property and equipment (135.3) (148.4) (198.9) Other, net (379.2) (745.9) (202.1) __________________________________________ Net cash provided by investing activities 2,758.7 796.7 2,203.0 __________________________________________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 3,063.7 3,909.5 4,134.6 Withdrawals of investment contracts (4,609.1) (4,358.3) (5,903.9) Issuance of long-term debt 62.5 689.6 8.2 Repayment of long-term debt (104.1) (489.8) (73.2) Issuance of preferred securities by subsidiary 275.0 - - Stock issued under benefit plans 23.3 90.8 8.2 Net (decrease) increase in short-term debt (13.1) 11.7 19.7 Dividends paid to shareholders (311.2) (308.7) (304.1) __________________________________________ Net cash used for financing activities (1,613.0) (455.2) (2,110.5) _____________________________________________________________________________________________________ Effect of exchange rate changes on cash and cash equivalents (4.0) (11.5) (18.9) _____________________________________________________________________________________________________ Net increase (decrease) in cash and cash equivalents 1,395.8 (857.2) (504.5) Cash and cash equivalents, beginning of year 1,557.8 2,415.0 2,919.5 __________________________________________ Cash and cash equivalents, end of year $ 2,953.6 $ 1,557.8 $ 2,415.0 _____________________________________________________________________________________________________ _____________________________________________________________________________________________________ See Notes to Financial Statements.
72 Notes to Financial Statements 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Certain reclassifications have been made to 1993 and 1992 financial information to conform to 1994 presentation. Accounting Changes Offsetting of Amounts Related to Certain Contracts Under certain insurance contracts with deductible features, the company is obligated to pay the claimant for the full amount of a claim. The company is subsequently reimbursed from the policyholder for the deductible. Prior to 1994, unpaid claim reserves were reported net of such deductibles. In 1994, the company implemented Financial Accounting Standards Board ("FASB") Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, which requires that unpaid claims under certain insurance contracts be reported on a gross basis. Deductible amounts recoverable from policyholders of $352 million are included in other assets at December 31, 1994, as a result of implementing FASB Interpretation No. 39. The Consolidated Balance Sheet as of December 31, 1993 has not been restated for this change. Accounting for Certain Investments in Debt and Equity Securities On December 31, 1993, the company adopted Financial Accounting Standard ("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 (i) 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, and (ii) a net increase of $313.5 million, net of taxes of $168.8 million, to net unrealized capital gains in shareholders' equity as of December 31, 1993. These amounts exclude gains and losses allocable to discontinued products and experienced rated contractholders. Adoption of FAS No. 115 did not have a material effect on deferred policy acquisition costs. Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts During 1993, the company adopted FAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, retroactive to December 31, 1992. Adoption of the income recognition provisions of FAS No. 113 had no impact on the 1993 net loss. 73 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) 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. Discounting of Workers' Compensation Life Table Indemnity Reserves In 1993, the company elected to change its accounting policy for reporting reserves for current and expected workers' compensation life table indemnity claims to a discounted basis. These reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality assumptions that reflect current company and industry experience. Management believes that this change better reflects the economic value of its obligations and improves the matching of revenues and expenses (i.e., investment earnings from underlying assets are matched with the accretion of the liability as those amounts occur over time). Additionally, it is consistent with the practice of the company's principal competitors and is permitted by state regulatory authorities. The company implemented discounting of reserves for workers' compensation life table indemnity claims retroactive to January 1, 1993, and reported a cumulative effect benefit of $250.0 million ($2.25 per common share), net of taxes of $134.7 million, 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 continuing operations before extraordinary item and cumulative effect adjustments of $78.0 million ($.70 per common share), net of taxes of $42.0 million. 74 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) 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. These contracts provided for amounts to be returned to the company based on favorable cumulative loss experience. The company reported a cumulative effect benefit related to the change in accounting for retrospectively rated reinsurance contracts of $26.3 million ($.24 per common share), net of taxes of $8.6 million, in the 1993 Consolidated Statement of Income. The effect of the change for the year ended December 31, 1993 was an increase to results from continuing operations before extraordinary item and cumulative effect adjustments of $3.3 million ($.03 per common share), net of taxes of $1.8 million. Pro forma amounts presented on the Consolidated Statements of Income exclude adjustments to results from discontinued operations for the effects of this change because the company sold and no longer controls the discontinued business. Accounting for Income Taxes The company adopted FAS No. 109, Accounting for Income Taxes, in 1992, retroactive to January 1, 1992. A cumulative effect benefit for continuing operations of $272.5 million ($2.48 per common share) related to adoption of this standard is reflected in the 1992 Consolidated Statement of Income. Postretirement Benefits Other Than Pensions FAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, required that employers accrue the cost and recognize the liability for providing non-pension benefits to retired employees. The company implemented FAS No. 106 in 1992, retroactive to January 1, 1992 on the immediate recognition basis. A cumulative effect charge to continuing operations of $385.0 million ($3.50 per common share), net of taxes of $198.3 million, related to adoption of this standard is reflected in the 1992 Consolidated Statement of Income. 75 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Future Application of Accounting Standards Accounting by Creditors for Impairment of a Loan The FASB issued FAS No. 114, Accounting by Creditors for Impairment of a Loan, in 1993. This statement requires that loans be impaired when it is probable that a creditor will be unable to collect all amounts (i.e., principal and interest) contractually due, and the impairment be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. The statement also allows impairments to be measured based on the loan's market price or the fair value of the collateral if the loan is collateral dependent. In October 1994, the FASB issued FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, which amends FAS No. 114 to allow a creditor to use existing methods for recognizing income on impaired loans. The company will adopt these standards effective January 1, 1995 and there is not expected to be a material impact on net income. 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 The company classifies investments in debt securities (including redeemable preferred stocks) in three categories: held for investment, available for sale and trading. 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. Debt securities which might 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. 76 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Investments (Continued) 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. Subsequent to adoption of FAS No. 115, changes in fair value related to the trading portfolio, after deducting amounts allocable to experience rated contractholders and discontinued products, are reflected in net realized capital gains in the Consolidated Statements of Income. 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 valuation reserves, and are generally secured. Valuation reserves for mortgage loans are established based on the fair value of the collateral for impairments considered probable of having been incurred, including those that management believes are likely to arise from the overall portfolio. Investment real estate, which the company has the intent to hold for the production of income, is carried at depreciated cost plus 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. The accumulated depreciation for real estate was $121.5 million and $166.9 million at December 31, 1994 and 1993, respectively. 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. 77 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Investments (Continued) The company utilizes foreign exchange forward contracts, futures and forward contracts, and swap agreements in order to manage investment returns and to align maturities, interest rates, currency rates and funds availability with its obligations. (Please refer to Note 18.) Realized and unrealized gains and losses from forward contracts hedging foreign translation exposures are reflected, net of tax, in shareholders' equity. Realized and unrealized gains and losses from forward contracts hedging foreign transaction exposures are reflected in the Consolidated Statements of Income. Futures contracts are carried at fair value. Realized and unrealized gains and losses on futures contracts which qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability, and amortized over the life of the related asset or liability as an adjustment to the yield. Realized and unrealized gains and losses on futures contracts which do not qualify as hedges are reflected in the Consolidated Statements of Income. The difference between amounts paid and received on swap agreements entered into to reduce the impact of changes in interest rates and currency exchange rates is reflected in the Consolidated Statements of Income. 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 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. 78 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) 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 at December 31, 1994 and 1993 was $668.1 million and $697.3 million, respectively, and was net of accumulated depreciation of $859.9 million and $833.1 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, was $148.8 million and $178.6 million at December 31, 1994 and 1993, 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. Insurance Liabilities Liabilities for unpaid property-casualty claims and claim expenses include, to the extent reasonably estimable, provisions for payments to be made on reported losses, and losses incurred but not reported and for associated claim adjustment expenses. (Please refer to Note 17.) Workers' compensation life table indemnity reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality assumptions which reflect current company and industry experience. Workers' compensation life table indemnity reserves totaled $768 million and $926 million at December 31, 1994 and 1993, respectively, which were 22% and 26% of the company's total workers' compensation reserves for unpaid claims and claim adjustment expenses at December 31, 1994 and 1993, respectively. 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. 79 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Insurance Liabilities (Continued) Reserve interest rates range from 2.25% to 10.50%. 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 include 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 2.91% to 17.74%) 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. Revenue Recognition Property-casualty premiums are generally recognized as revenue on a pro rata basis over the policy term. Certain policies allow the company to charge additional premiums as a result of recognizing additional claim and expense costs under the policies. Such premiums are recognized when the related losses are provided. For universal life and certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in fees and other income 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 and life 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 service only are recorded over the period the service is provided and are reflected in fees and other income. Federal and Foreign Income Taxes The company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Aetna Life and Casualty 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 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. 80 Notes to Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) 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 not a significant difference between primary and fully diluted earnings per share. 2. Discontinued Products As of December 31, 1993, the company discontinued its fully guaranteed large case pension products, which include guaranteed investment contracts ("GICs") and single-premium annuities ("SPAs"). As a result, the company recognized an after-tax loss on discontinuance of products of $825 million which is reflected in the 1993 Consolidated Statement of Income and a related reserve of $1,270 million at December 31, 1993. Losses on discontinued products for the year ended December 31, 1994 were charged to the reserve and did not affect the company's results of operations. Results of discontinued products included in the Consolidated Statement of Income for the year ended December 31, 1994, were as follows:
Guaranteed Single- Charged to Investment Premium Reserve for (Millions) Contracts Annuities Total Future Losses Net* ____________________________________________________________________________________________________________ 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 $ - ____________________________________________________________________________________________________________ ____________________________________________________________________________________________________________ * Amounts are reflected in the 1994 Consolidated Statement of Income, except for interest of $47.5 million earned on the receivable from continuing business which is eliminated in consolidation.
Deposits of $212.3 million were received during 1994 under pre- existing GIC contracts. In accordance with FAS No. 97, such deposits are not included in premiums or revenue. 81 Notes to Financial Statements (Continued) 2. Discontinued Products (Continued) Assets and liabilities of discontinued products included in the Consolidated Balance Sheet at December 31, 1994 and 1993 were as follows:
December 31, 1994 December 31, 1993 ____________________________________________________________________________ Guaranteed Single- Guaranteed Single- Investment Premium Investment Premium (Millions) Contracts Annuities Total Contracts Annuities Total _________________________________________________________________________________________________________ Debt securities available for sale $ 2,978.5 $ 3,176.5 $ 6,155.0 $ 4,690.9 $ 3,578.1 $ 8,269.0 Mortgage loans 2,749.6 1,545.3 4,294.9 3,468.2 1,950.9 5,419.1 Real estate 555.0 175.0 730.0 534.5 - 534.5 Short-term and other investments 587.4 138.0 725.4 399.7 72.8 472.5 ___________________________________________________________________________ Total investments 6,870.5 5,034.8 11,905.3 9,093.3 5,601.8 14,695.1 Current and deferred income taxes 218.8 115.4 334.2 309.2 184.6 493.8 Receivable from continuing business 409.4 463.1 872.5 390.0 435.0 825.0 Other 90.7 92.9 183.6 7.6 1.3 8.9 ___________________________________________________________________________ Total Assets $ 7,589.4 $ 5,706.2 $13,295.6 $ 9,800.1 $ 6,222.7 $16,022.8 _________________________________________________________________________________________________________ _________________________________________________________________________________________________________ Future policy benefits $ - $ 5,032.6 $ 5,032.6 $ - $ 5,079.1 $ 5,079.1 Policyholders' funds left with the company 7,224.4 - 7,224.4 8,976.6 - 8,976.6 Reserve for future losses on discontinued products 345.6 651.4 997.0 600.0 670.0 1,270.0 Other 19.4 22.2 41.6 223.5 473.6 697.1 _________________________________________________________________________________________________________ Total Liabilities $ 7,589.4 $ 5,706.2 $13,295.6 $ 9,800.1 $ 6,222.7 $16,022.8 _________________________________________________________________________________________________________ _________________________________________________________________________________________________________
Net unrealized capital losses in 1994 and gains in 1993 on available for sale debt securities are included above in other assets and other liabilities, 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. 82 Notes to Financial Statements (Continued) 2. Discontinued Products (Continued) The reserve for anticipated future losses on discontinued products represents the present value of the difference between (a) the expected cash flows from the assets supporting discontinued products, and (b) the cash flows expected to be required to meet the obligations of the outstanding contracts. Calculation of the reserve for 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. The amounts of cash flows on the assets of the discontinued products projected to occur in each period are risk-adjusted such that the present value (at the risk- free rate at December 31, 1993, consistent with the duration of the liabilities) of those cash flows approximates the current fair value of the assets. 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. At December 31, 1994 and 1993, estimated future after-tax realized capital losses of approximately $127 million and $190 million ($196 million and $292 million, pretax), respectively, attributable to mortgage loans and real estate supporting GICs, and $47 million and $70 million ($73 million and $108 million, pretax), respectively, attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for anticipated future losses. Included in the $150 million and $59 million of net realized capital losses (pretax) on GICs and SPAs, respectively, for the year ended December 31, 1994, are losses from the sales of bonds of $54 million and $24 million, respectively. As a result of selling bonds and realizing losses, the anticipated future losses associated with negative interest margins is expected to be reduced in the future. The activity in the reserve for anticipated future losses on discontinued products for the year ended December 31, 1994 was as follows:
Guaranteed Single- Investment Premium (Millions) Contracts Annuities Total _____________________________________________________________________________ Reserve at December 31, 1993 $ 600.0 $ 670.0 $1,270.0 Loss on discontinued products 254.4 18.6 273.0 _____________________________________ Reserve at December 31, 1994 $ 345.6 $ 651.4 $ 997.0 _____________________________________________________________________________ _____________________________________________________________________________
The average contractual yields guaranteed on the contracts relating to the discontinued products exceed the average historical and expected future yields on assets supporting the products. The resulting anticipated negative cash flows will be funded from the cash flows of the company's continuing business. There was no funding from the company's continuing business in 1994. 83 Notes to Financial Statements (Continued) 2. Discontinued Products (Continued) Receivables of $872.5 million and $825.0 million to fund these negative cash flows (which accrue interest at the rates used to measure the loss for the two products) are included in the discontinued products' assets at December 31, 1994 and 1993, respectively. These receivables are fully offset by payables from the company's continuing business. These amounts are eliminated in the Consolidated Balance Sheets. The activity in the receivable from continuing business for the year ended December 31, 1994 was as follows:
Guaranteed Single- Investment Premium (Millions) Contracts Annuities Total ___________________________________________________________________________ Balance at December 31, 1993 $ 390.0 $ 435.0 $ 825.0 Interest earned 19.4 28.1 47.5 ___________________________________ Balance at December 31, 1994 $ 409.4 $ 463.1 $ 872.5 ___________________________________________________________________________ ___________________________________________________________________________
Pursuant to a segmentation plan approved in 1983 by the New York Insurance Department, the combined assets supporting discontinued products were segregated coincident with the receipt of premiums and deposits on the discontinued products. Assets of the discontinued products were distinguished physically, operationally and for financial reporting purposes, from the remaining assets of the company. Management believes the timing and amount of cash flows with respect to the discontinued products have been estimated with reasonable accuracy, and the financial statements reflect management's best estimate of the most likely cash flows that will occur. However, future periods may include a charge or benefit equal to the present value of the differences, if any, between future projected cash flows and current estimates. 3. Sales of Subsidiaries On June 30, 1993, the company completed the sale of its U.K. life and investment management operations. The company realized an after-tax 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. On September 30, 1992, the company completed the sale of American Re-Insurance Company ("Am Re"), formerly a wholly owned subsidiary. The company realized a gain on the sale of Am Re in 1992 of $38.1 million. No taxes were incurred on this transaction. As part of the sale, the company 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. 84 Notes to Financial Statements (Continued) 3. Sales of Subsidiaries (Continued) The operating results of Am Re were presented as a discontinued operation through the sale date of September 30, 1992. Results for the nine months ended September 30 were:
(Millions) 1992 _____________________________________________________ Total revenue $ 846.4 ________ Income before taxes $ 120.9 Income taxes 34.1 ________ Income from discontinued operations $ 86.8 _____________________________________________________
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. The planned actions included the elimination of approximately 4,000 positions. As a result of the planned elimination of these positions, the company determined that it would have excess office space. Accordingly, the severance and facilities charge also included costs related to vacating the excess leased office space, and costs related to abandoning and preparing for sale an owned property in Hartford, Connecticut. The 1993 severance and facilities charge included the following (pretax):
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 Large Case Pensions.................... 11.5 8.4 1.0 1.0 21.9 Aetna Life Insurance & Annuity......... 10.9 5.1 1.4 13.4 (1) 30.8 Property-Casualty...................... 96.8 24.2 20.7 5.6 147.3 International.......................... 4.6 2.9 2.0 1.5 11.0 Corporate: Other...................... 12.2 5.0 - - 17.2 _______ _______ _______ _______ _______ Total Company (3)...................... $ 180.4 $ 66.0 (2) $ 36.9 $ 24.7 $ 308.0 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ (1) Includes a charge of $13.0 million related to the cessation of a business providing administrative services to defined contribution pension plans. The charge includes broker buyout, direct losses on runoff of the existing contracts and other related costs. (2) Facility and asset write-off related charges include the write-down to net realizable value (based on an internally prepared appraisal) of a company property that will be abandoned. The charge does not include operating costs expected to be incurred prior to the date of abandonment of the property. Facility and asset write-off related charges also include costs to retire computer equipment used by employees whose positions were, or are expected to be, eliminated and other related costs. (3) Facility and asset write-off related charges are non-cash costs. All other items shown above required, or will require, cash outlays.
85 Notes to Financial Statements (Continued) 4. Severance and Facilities Charge (Continued) During 1994, the company charged costs of $224.1 million (pretax) to the 1993 severance and facilities reserve related to the cost reduction actions as follows:
Facility and Vacated Severance Asset Write- Leased (Millions) Related Off Related Property Other Total _________ ____________ ________ _______ _______ Severance and facilities reserve at December 31, 1993.................... $ 180.4 $ 66.0 $ 36.9 $ 24.7 $ 308.0 Charges against reserve................ 153.0 12.1 35.7 23.3 224.1 _______ _______ _______ _______ _______ Severance and facilities reserve at December 31, 1994.................... $ 27.4 $ 53.9 $ 1.2 $ 1.4 $ 83.9 _______ _______ _______ _______ _______ _______ _______ _______ _______ _______
Vacating the leased office space was substantially completed by December 31, 1994. The remaining lease payments (net of expected subrentals) on such vacated facilities are payable over approximately the next six years. Of the approximately 4,000 positions expected to be eliminated, approximately 3,300 had been eliminated by December 31, 1994. The remaining headcount reductions and other actions planned for under the restructuring actions are expected to be completed during the first half of 1995. In 1992, the company also undertook actions to reduce costs which resulted in an after-tax restructuring charge of $95.7 million ($145.0 million pretax) to 1992 earnings. Among the actions to reduce costs was the elimination of approximately 4,800 positions in the latter half of 1992 and through 1993. The 1992 severance and facilities charge included the following (pretax):
Vacated Pension Severance Leased Curtailment (Millions) Related Property Gain Total _________ ________ ___________ _______ Aetna Health Plans..................... $ 50.1 $ - $ (9.9) $ 40.2 Large Case Pensions.................... 4.2 - (1.1) 3.1 Aetna Life Insurance & Annuity......... 7.8 - (1.6) 6.2 Property-Casualty...................... 69.3 20.9 (14.8) 75.4 International.......................... .1 - (.1) - Corporate: Other....................... 20.1 - - 20.1 _______ _______ _______ _______ Total Company (1)...................... $ 151.6 $ 20.9 $ (27.5) $ 145.0 _______ _______ _______ _______ _______ _______ _______ _______ (1) The pension curtailment gain is a non-cash item. All other items shown above required cash outlays.
By year-end 1993, all expected actions under the 1992 restructuring had been completed. 86 Notes to Financial Statements (Continued) 5. Investments
Debt securities at December 31, 1994 were as follows: Gross Gross Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value _______________________________________________________________________________________________ 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 275.3 1.5 9.6 267.2 Utilities 136.0 .1 1.6 134.5 Financial 224.1 2.1 1.6 224.6 Transportation/Capital Goods 221.5 3.8 1.7 223.6 Other corporate securities 99.6 .9 .6 99.9 Mortgage-backed securities 10.5 - .6 9.9 Other loan-backed securities 15.0 - .6 14.4 Foreign governments 623.4 1.4 .4 624.4 Other 388.9 4.3 7.5 385.7 ______________________________________________________ Total Held for Investment $ 2,000.8 $ 14.6 $ 24.2 $ 1,991.2 _______________________________________________________________________________________________ ______________________________________________________ Available for Sale: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 8,343.9 $ 13.6 $ 630.3 $ 7,727.2 Obligations of states and political subdivisions 1,401.1 11.2 53.9 1,358.4 Utilities 2,604.4 52.1 136.3 2,520.2 Financial 5,155.8 28.7 256.2 4,928.3 Transportation/Capital Goods 2,714.2 61.1 114.7 2,660.6 Other corporate securities 3,039.8 28.8 170.2 2,898.4 Mortgage-backed securities 7,013.5 123.1 425.3 6,711.3 Other loan-backed securities 1,691.2 .2 56.5 1,634.9 Foreign governments 2,820.6 13.2 268.3 2,565.5 Other 2,199.7 26.9 120.7 2,105.9 ______________________________________________________ Total Available for Sale $ 36,984.2 $ 358.9 $ 2,232.4 $ 35,110.7 _______________________________________________________________________________________________ ______________________________________________________ Available for sale securities of discontinued products (included above) $ 6,349.8 $ 137.9 $ 332.7 $ 6,155.0 _______________________________________________________________________________________________ ______________________________________________________
87 Notes to Financial Statements (Continued) 5. Investments (Continued)
Debt securities at December 31, 1993 were as follows: Gross Gross Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value ______________________________________________________________________________________________ Held for Investment: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 20.7 $ .9 $ - $ 21.6 Obligations of states and political subdivisions 398.7 5.9 6.7 397.9 Utilities 277.9 20.4 - 298.3 Financial 355.2 27.8 - 383.0 Transportation/Capital Goods 255.1 21.2 .8 275.5 Other corporate securities 792.9 67.6 2.8 857.7 Mortgage-backed securities 10.6 .1 - 10.7 Foreign governments 318.7 7.2 - 325.9 Other 128.0 7.5 1.9 133.6 _____________________________________________________ Total Held for Investment $ 2,557.8 $ 158.6 $ 12.2 $ 2,704.2 ______________________________________________________________________________________________ _____________________________________________________ Available for Sale: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 7,943.1 $ 200.5 $ 57.6 $ 8,086.0 Obligations of states and political subdivisions 2,016.7 80.0 2.6 2,094.1 Utilities 3,013.2 207.4 31.1 3,189.5 Financial 4,893.1 200.1 16.7 5,076.5 Transportation/Capital Goods 1,745.0 239.0 15.1 1,968.9 Other corporate securities 4,862.9 377.4 48.6 5,191.7 Mortgage-backed securities 9,632.3 686.3 16.9 10,301.7 Other loan-backed securities 49.1 .2 .2 49.1 Foreign governments 2,651.9 130.9 9.9 2,772.9 Other 126.3 12.5 .3 138.5 _____________________________________________________ Total Available for Sale $36,933.6 $ 2,134.3 $ 199.0 $38,868.9 ______________________________________________________________________________________________ ______________________________________________________ Available for sale securities of discounted products (included above) $ 7,659.4 $ 695.1 $ 85.5 $ 8,269.0 ______________________________________________________________________________________________ _____________________________________________________
At December 31, 1994 and 1993, net unrealized appreciation (depreciation) of $(1,873.5) million and $1,935.3 million, respectively, on available for sale debt securities included $(607.3) million and $717.4 million, respectively, related to experience rated contractholders and $(194.8) million and $609.6 million, respectively, related to discontinued products, which were not reflected in shareholders' equity. 88 Notes to Financial Statements (Continued) 5. Investments (Continued) The carrying and fair value of debt securities held for investment and available for sale are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid.
1994 Amortized Fair (Millions) Cost Value ____________________________________________________________________ Held for Investment: Due to mature: One year or less $ 166.3 $ 167.0 After one year through five years 1,456.1 1,453.8 After five years through ten years 172.1 169.9 After ten years 180.8 176.2 Mortgage-backed securities 10.5 9.9 Other loan-backed securities 15.0 14.4 ____________________________________________________________________ Total Held for Investment $ 2,000.8 $ 1,991.2 ____________________________________________________________________ ________________________ Available for Sale: Due to mature: One year or less $ 1,707.4 $ 1,677.1 After one year through five years 10,405.3 9,951.1 After five years through ten years 7,482.2 7,071.4 After ten years 8,684.6 8,064.9 Mortgage-backed securities 7,013.5 6,711.3 Other loan-backed securities 1,691.2 1,634.9 ____________________________________________________________________ Total Available for Sale $36,984.2 $35,110.7 ____________________________________________________________________ ________________________
Investments in available for sale equity securities were as follows:
Gross Gross Unrealized Unrealized Fair (Millions) Cost Gains Losses Value ________________________________________________________________________________ 1994 ________________________________________________________________________________ Equity securities $ 1,326.9 $ 399.5 $ 70.8 $ 1,655.6 ________________________________________________________________________________ 1993 ________________________________________________________________________________ Equity securities $ 1,238.1 $ 455.2 $ 34.4 $ 1,658.9 ________________________________________________________________________________
Real Estate holdings at December 31 were as follows:
(Millions) 1994 1993 ____________________________________________________________________ Properties held for sale $ 1,297.1 $ 1,122.2 Investment real estate 394.3 461.3 ______________________ 1,691.4 1,583.5 Valuation reserve 145.7 267.7 ______________________ Net carrying value $ 1,545.7 $ 1,315.8 ____________________________________________________________________ ______________________ Net carrying value of real estate of discontinued products (included above) $ 730.0 $ 534.5 ____________________________________________________________________ ______________________
89 NOTES TO FINANCIAL STATEMENTS (Continued) 5. Investments (Continued) Total real estate write-downs included in the net carrying value of the company's real estate holdings on the Consolidated Balance Sheets at December 31, 1994 and 1993 were $616.5 million and $501.8 million, respectively, (including $315.8 million and $218.5 million, respectively, attributable to assets of discontinued products). Impairment reserves at December 31 were as follows:
(Millions) 1994 1993 ____________________________________________________________________ Mortgage loans $ 784.1 $ 1,308.3 Real estate 145.7 267.7 Other 6.0 6.0 ______________________ Total impairment reserves $ 935.8 $ 1,582.0 ____________________________________________________________________ ______________________ Impairment reserves of discontinued products (included above) $ 432.3 $ 727.0 ____________________________________________________________________ ______________________
The carrying values of investments that were non-income producing for the twelve months preceding the balance sheet date were as follows:
(Millions) 1994 1993 ____________________________________________________________________ Debt securities $ 7.9 $ 76.9 Equity securities 20.3 14.9 Mortgage loans 80.1 342.1 Real estate 159.8 188.0 ______________________ Total non-income producing assets 268.1 $ 621.9 ____________________________________________________________________ ______________________ Non-income producing assets of discontinued products (included above) $ 68.0 $ 248.0 ____________________________________________________________________ ______________________
Significant non-cash investing and financing activities include acquisition of real estate through foreclosures (including in- substance foreclosures in 1994) of mortgage loans amounting to $708 million in 1994, $295 million in 1993 and $306 million in 1992. In 1992, the company completed an equal exchange of pooled multi-family mortgages for mortgage-backed securities from the Federal National Mortgage Association ("FNMA") totaling $325 million. No gain was recorded on this exchange. 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 44 through 53. 90 Notes to Financial Statements (Continued) 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 losses allocable to experience rated contractholders of $195.0 million, $180.1 million and $59.7 million for the years ended December 31, 1994, 1993 and 1992, 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. Net realized capital gains (losses) on investments were as follows:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Debt securities $ (32.6) $ 606.3 $ 315.1 Equity securities 31.5 91.3 184.2 Mortgage loans (91.8) (435.7) (358.5) Real estate 42.2 (151.5) (43.9) Sales of subsidiaries 16.9 (18.2) - Other (21.0) (2.4) 18.0 __________________________________ Pretax realized capital gains (losses) $ (54.8) $ 89.8 $ 114.9 ________________________________________________________________________________ __________________________________ After-tax realized capital gains (losses) $ (42.6) $ 59.0 $ 78.6 ________________________________________________________________________________
Proceeds from sales of investments in debt securities available for sale during 1994 were $19.0 billion. Gross gains of $128.8 million and gross losses of $158.7 million were realized on those sales. Proceeds from sales of investments in debt securities held for investment and available for sale during 1993 and 1992 were $6,300.9 million and $3,862.1 million, respectively. Gross gains of $250.6 million and $262.3 million, and gross losses of $30.1 million and $7.0 million, were realized on those sales. 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) 1994 1993 1992 ______________________________________________________________________________________ Equity securities $ (90.7) $ 94.2 $ 127.6 Debt trading securities - (134.8) 66.4 Debt securities available for sale (1,679.7) 608.3 - Foreign exchange and other, net (119.4) 14.6 (51.8) ________________________________________ (1,889.8) 582.3 142.2 Increase (Decrease) in deferred federal income taxes (170.1) 193.7 48.5 ________________________________________ Net changes in unrealized capital gains (losses) $ (1,719.7) $ 388.6 $ 93.7 ______________________________________________________________________________________ ________________________________________
91 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 and at lower of amortized cost or fair value. The unrecorded appreciation (depreciation) for debt securities carried at amortized cost is the difference between estimated market and carrying values, and amounted to approximately $(9.6) million, $146.4 million and $1.7 billion at December 31, 1994, 1993 and 1992, respectively. Such unrecorded appreciation (depreciation) includes amounts allocable to experience rated contractholders. The change in unrecorded appreciation and depreciation was $(156.0) million, $(1,528.2) million and $(719.3) million in 1994, 1993 and 1992, 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) 1994 1993 1992 _________________________________________________________________________________ Equity securities: Gross unrealized capital gains $ 398.2 $ 455.2 $ 366.3 Gross unrealized capital losses (68.1) (34.4) (39.7) ___________________________________ 330.1 420.8 326.6 Debt trading securities: Gross unrealized capital gains - - 172.0 Gross unrealized capital losses - - (37.2) ___________________________________ - - 134.8 Debt securities available for sale: Gross unrealized capital gains 89.0 671.1 - Gross unrealized capital losses (1,160.4) (62.8) - ___________________________________ (1,071.4) 608.3 - Foreign exchange and other, net (176.1) (56.7) (71.3) Deferred federal income taxes 154.1 324.2 130.5 ___________________________________ Net unrealized capital gains (losses) $(1,071.5) $ 648.2 $ 259.6 _________________________________________________________________________________ ___________________________________
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. (Please refer to Note 10 for discussion of the tax treatment for unrealized capital losses on available for sale debt and equity securities.) 92 Notes to Financial Statements (Continued) 7. Net Investment Income Net investment income includes amounts allocable to experience rated contractholders of $1.4 billion, $1.6 billion and $1.7 billion for the years ended December 31, 1994, 1993 and 1992, respectively. Interest credited to contractholders is included in current and future benefits. Sources of net investment income were as follows:
(Millions) 1994 1993 1992 ___________________________________________________________________________________ Debt securities $ 2,882.1 $ 3,003.4 $ 2,948.8 Equity securities 56.9 55.8 56.5 Short-term investments 14.0 55.3 76.9 Mortgage loans 1,301.2 1,586.8 1,885.5 Real estate 361.2 378.5 335.7 Policy loans 28.0 29.9 26.7 Other 96.3 160.2 52.7 Cash equivalents 135.1 76.7 134.6 _______________________________________ Gross investment income 4,874.8 5,346.6 5,517.4 Less investment expenses 411.3 427.6 448.4 _______________________________________ Net investment income $ 4,463.5 $ 4,919.0 $ 5,069.0 ___________________________________________________________________________________ _______________________________________
8. Dividend Restrictions and Shareholders' Equity The amount of dividends that may be paid to shareholders in 1995 without prior approval by the Insurance Commissioner of the State of Connecticut is $398.9 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 1995 to approximately $607.7 million in the aggregate. During 1994, these subsidiaries paid no dividends to Aetna Life and Casualty Company. The amounts of statutory net income (loss) for the years ended and shareholders' equity as of December 31, were as follows:
(Millions) 1994 1993 1992 ___________________________________________________________________________________ Statutory net income: Life companies $ (147.2) $ 87.7 $ 123.8 Property-casualty companies (242.5) (125.1) 688.0 Consolidating eliminations (.1) (3.3) 5.9 _______________________________________ Total $ (389.8) $ (40.7) $ 817.7 ___________________________________________________________________________________ _______________________________________ Statutory shareholders' equity: Life companies $ 2,492.4 $ 2,332.8 Property-casualty companies 3,988.9 4,336.8 Consolidating eliminations (2,484.8) (2,323.9) ________________________ Total $ 3,996.5 $ 4,345.7 ____________________________________________________________________ ________________________
As of December 31, 1994, 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. 93 Notes to Financial Statements (Continued) 9. Debt
(Millions) 1994 1993 ____________________________________________________________________________ Long-term debt: Domestic: Eurodollar Notes, 9 1/2% due 1995 $ 100.2 $ 100.4 Notes, 8 5/8% due 1998 99.8 99.8 Notes, 6 3/8% due 2003 198.9 198.7 Debentures, 6 3/4% due 2013 198.4 198.3 Eurodollar Notes, 7 3/4% due 2016 63.5 63.5 Debentures, 8% due 2017 199.1 198.6 Mortgage Notes and Other Notes, 3%-11 1/2% due in varying amounts to 2018 41.4 56.7 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 15.1 45.7 ______________________ Total $ 1,114.7 $ 1,160.0 ____________________________________________________________________________ ______________________
At December 31, 1994, $23.9 million of short-term borrowings were outstanding. Total unused committed bank lines available to the company at December 31, 1994 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 1995 and the other $500 million facility terminates in July 1999. Various interest rate options are available under each facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .08% to .375% per annum under the short-term credit agreement and from .1% to .5% per annum under the medium-term credit agreement, depending upon the company's long-term senior unsecured debt rating. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5 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. 94 Notes to Financial Statements (Continued) 9. Debt (Continued) The 8% Debentures due 2017 are subject to various redemption options beginning on January 15, 1997. Aggregate maturities of long-term debt and sinking fund requirements for 1995 through 1999 are $102.3 million, $10.9 million, $.2 million, $129.4 million and $1.3 million, respectively, and $870.6 million thereafter. Total interest expense was $98.6 million, $77.4 million and $87.1 million in 1994, 1993 and 1992, respectively. The company paid interest of $98.7 million, $74.1 million and $94.9 million in 1994, 1993 and 1992, respectively. 10. Federal and Foreign Income Taxes As discussed in Note 1, the company adopted FAS No. 109 as of January 1, 1992, resulting in a cumulative effect benefit for continuing operations of $272.5 million. 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 in the company's deferred tax asset at December 31, 1993. Income tax expense (benefits) attributable to income (loss) from continuing operations consists of:
(Millions) 1994 1993 1992 ___________________________________________________________________________________ Current taxes (benefits): Income - federal taxes $ 274.2 $ 47.3 $ (18.1) Income - foreign taxes 8.6 8.8 11.6 Realized capital gains (losses) (340.0) 18.6 74.4 _______________________________________ (57.2) 74.7 67.9 Deferred taxes (benefits): Income - federal taxes (81.4) (617.7) (147.4) Income - foreign taxes 1.5 (1.3) 1.5 Realized capital gains (losses) 327.9 12.2 (38.1) _______________________________________ 248.0 (606.8) (184.0) _______________________________________ Total $ 190.8 $ (532.1) $ (116.1) ___________________________________________________________________________________ _______________________________________
95 Notes to Financial Statements (Continued) 10. Federal and Foreign Income Taxes (Continued) Income tax expense (benefits)on income (loss) from continuing operations 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) 1994 1993 1992 ___________________________________________________________________________________ Income (Loss) from U.S. operations $ 533.0 $(1,211.9) $ (151.4) Income from non-U.S. operations 125.3 64.5 30.0 ______________________________________ Income (Loss) before taxes 658.3 (1,147.4) (121.4) Tax rate 35% 35% 34% ______________________________________ Application of the tax rate 230.4 (401.7) (41.3) Tax effect of: Tax-exempt interest (36.7) (54.9) (68.6) Foreign operations (1.7) (46.9) 12.7 Excludable dividends (15.5) (20.5) (12.8) Tax rate change on deferred assets and liabilities - (24.0) - Goodwill 8.6 6.8 3.5 Other, net 5.7 9.1 (9.6) ______________________________________ Income taxes (benefits) on income (loss) $ 190.8 $ (532.1) $ (116.1) ___________________________________________________________________________________ ______________________________________
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities under FAS No. 109 at December 31 are presented below:
(Millions) 1994 1993 ____________________________________________________________________ Deferred tax assets: Insurance reserves $ 1,142.1 $ 1,013.2 Reserve for loss on discontinued products 344.1 445.0 Reserve for severance and facilities expenses 57.6 108.0 Impairment reserves 113.2 274.0 Other postretirement benefits 230.6 235.6 Net unrealized capital losses 601.6 - Net operating loss carryforward 225.0 152.8 Other 7.7 52.1 ______________________ Total gross assets 2,721.9 2,280.7 Less valuation allowance 546.6 70.2 ______________________ Assets net of valuation 2,175.3 2,210.5 Deferred tax liabilities: Deferred policy acquisition costs 557.0 519.7 Unrealized losses allocable to experience rated contracts 213.0 - Net unrealized capital gains - 331.3 Market discount 91.0 72.8 Other 47.6 3.8 ______________________ Total gross liabilities 908.6 927.6 ______________________ Net deferred tax asset $ 1,266.7 $ 1,282.9 ____________________________________________________________________ ______________________
The 1994 valuation allowance relates to future tax benefits of $22.9 million on purchased domestic net operating loss carryforwards, $48.5 million on foreign net operating loss carryforwards, and of $475.2 million on unrealized capital losses, the realization of which are uncertain. The 1993 valuation allowance relates to future tax benefits of $47.3 million on foreign net operating loss carryforwards and $22.9 million on purchased domestic net operating loss carryforwards. 96 Notes to Financial Statements (Continued) 10. Federal and Foreign Income Taxes (Continued) 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. For federal income tax purposes, capital losses are deductible only against capital gains in the year of sale or during the carryback and carryforward periods (three and five years, respectively). Due to the expected full utilization of capital gains in the carryback period and the uncertainty of future capital gains, a valuation allowance of $262 million related to the net unrealized capital losses has been reflected in shareholders' equity. In addition, $609 million of net unrealized capital losses related to experience rated contracts are not reflected in shareholders' equity since such losses, if realized, will be charged to contractholders. However, the potential loss of tax benefits on such losses is the risk of the company and therefore would adversely affect the company rather than the contractholder. Accordingly, an additional valuation allowance of $213 million has been reflected in shareholders' equity as of December 31, 1994. Any reversals of the valuation allowance are contingent upon the recognition of future capital gains in the company's federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. Non- recognition of the deferred tax benefits on net unrealized losses described above had no impact on net income for 1994, but has the potential to adversely affect future results if such losses are realized. Potential losses of tax benefits related to net unrealized losses on assets supporting the discontinued products are not expected to adversely affect the company's future results. Management believes that it is more likely than not that the company will realize the benefit of the net deferred tax asset of $1,266.7 million. The company's election of special estimated tax payments in years 1989 through 1993 assures realizability of a substantial portion of deferred tax assets arising from the discounting of property-casualty reserves. 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 $153.6 million related to the company's expected utilization of its current U.S. net operating loss carryforward of $438.9 million, $161.2 million of which expires in the year 2008 and $277.7 million of which expires in the year 2009. The company generally has not recognized any deferred tax liabilities attributable to the undistributed earnings of its controlled foreign corporations because the company does not expect repatriation. Such amounts are not material. 97 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, 1994. 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. However, management believes there are adequate defenses against, or sufficient reserves to provide for, such adjustments. The Service has commenced its examination for the years 1987 through 1990. The company received net federal income tax refunds for continuing operations of $74.1 million in 1994 and made net federal income tax payments of $101.6 million and $55.3 million in 1993 and 1992, 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 on November 22, 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 November 22, 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 1994 Consolidated Balance Sheet. ACLLC may offer and sell up to an additional $225 million of preferred securities under a shelf registration statement declared effective by the SEC. 12. Common Stock At December 31, 1994 and 1993, 3,802,256 common shares were reserved for issuance under the dividend reinvestment plan, 13,036,958 and 6,702,878 common shares were reserved for the stock option plans, and 946,675 common shares were reserved for other benefit plans, respectively. In 1994 and 1993, the company did not acquire any shares of its common stock. 98 Notes to Financial Statements (Continued) 12. Common Stock (Continued) On October 27, 1989, the Board of Directors of Aetna Life and Casualty Company adopted a Share Purchase Rights Plan. Pursuant to the 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 20% 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 30% 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. 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) 1994 1993 1992 ______________________________________________________________________________ Premiums $ 52.0 $ 52.4 $ 54.0 ______________________________________________________________________________ Assets $ 700.8 $ 704.8 $ 686.1 ______________________________________________________________________________
99 Notes to Financial Statements (Continued) 14. Benefit Plans Pension Plans - The company has non-contributory 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 Entry Age Normal Cost 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 income (cost) were as follows:
(Millions) 1994 1993 1992 ________________________________________________________________________________ Return on plan assets $ 8.2 $ 178.7 $ 78.9 Service cost - benefits earned during the period (92.7) (82.2) (82.3) Interest cost on projected benefit obligation (175.2) (169.3) (153.1) Net amortization and deferral 202.3 31.3 160.5 ________________________________________________________________________________ Net periodic pension income (cost) $ (57.4) $ (41.5) $ 4.0 ________________________________________________________________________________
As a result of restructuring activities, a curtailment gain of approximately $27.5 million is reflected in net periodic pension cost for the year ended December 31, 1992. Actions related to the 1993 severance and facilities charge did not result in a curtailment gain or loss. The measurement dates used to determine the funded status of the plans were September 30, 1994 and 1993. The funded status of plans for which assets exceeded accumulated benefits was as follows:
(Millions) 1994 1993 ____________________________________________________________________ Actuarial present value of vested benefit obligation $ 1,930.3 $ 1,868.8 ____________________________________________________________________ Actuarial present value of accumulated benefit obligation $ 1,952.1 $ 1,898.9 ____________________________________________________________________ Plan assets at fair value $ 2,176.4 $ 2,259.0 Actuarial present value of projected benefit obligation 2,333.3 2,221.7 ______________________ Plan assets in excess of (less than) projected benefit obligation (156.9) 37.3 Unrecognized net loss 216.7 98.5 Unrecognized service cost - prior period 9.1 (7.7) Unrecognized net asset at date of adoption of FAS No. 87 (58.2) (87.9) ______________________ Prepaid pension cost $ 10.7 $ 40.2 ____________________________________________________________________
At 1994 and 1993, non-funded plans had projected benefit obligations of $130.1 million and $163.8 million, respectively. The accumulated benefit obligations at 1994 and 1993 related to these plans were $105.3 million and $127.6 million, respectively, and the related accrued pension cost was $107.9 million and $89.7 million, respectively. 100 Notes to Financial Statements (Continued) 14. Benefit Plans (Continued) The weighted average discount rate was 8.0% for 1994, 7.5% for 1993 and 8.0% for 1992. The expected long-term rate of return on plan assets was 8.5% for 1994 and 9.0% for 1993 and 1992. The rate of increase in future compensation was 5.0% for 1994, 4.5% for 1993, and 5.0% for 1992. The future annual cost-of-living adjustment was 3.0% for 1994, 1993 and 1992. 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. This modification resulted in a $30.7 million after-tax increase to earnings for the year ended December 31, 1994. The impact of adopting FAS No. 106 in 1992 was a cumulative effect charge of $385.0 million (after-tax) for continuing operations. Adoption of FAS No. 106 does not affect the company's cash flows. Components of the net periodic postretirement benefit cost were as follows:
(Millions) 1994 1993 1992 ______________________________________________________________________________ Service cost - benefits earned during the period $ (8.6) $ (19.0) $ (28.8) Interest cost (34.2) (42.9) (50.9) Net amortization 31.2 11.7 - Return on plan assets 3.2 3.1 2.9 __________________________________ Net periodic postretirement benefit cost $ (8.4) $ (47.1) $ (76.8) _________________________________________________________________________________ ___________________________________
The measurement dates used to determine the funded status of the postretirement benefit plans were September 30, 1994 and 1993. The funded status of the plans was as follows:
(Millions) 1994 1993 ____________________________________________________________________ Actuarial present value of accumulated postretirement benefit obligation: Retirees $ 285.2 $ 234.6 Fully eligible active employees 64.3 102.7 Active employees not eligible to retire 97.2 229.8 ______________________ Total 446.7 567.1 Plan assets at fair value 48.1 45.8 ______________________ Accumulated postretirement benefit obligation in excess of plan assets 398.6 521.3 Unrecognized net gain 43.9 75.5 Prior service cost 204.3 63.7 ____________________________________________________________________ Accrued postretirement benefit cost $ 646.8 $ 660.5 ____________________________________________________________________ ______________________
101 Notes to Financial Statements (Continued) 14. Benefit Plans (Continued) The weighted average discount rates were 8.0% for 1994, 7.5% for 1993 and 8.0% for 1992. The health care cost trend rate for the 1994 valuation decreased gradually from 11.5% for 1995 to 5.5% by the year 2005. For the 1993 valuation, the rates decreased gradually from 12.5% for 1994 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 1994 by $34.6 million and would increase the net periodic postretirement benefit cost for 1994 by $2.7 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 1994, 1993 and 1992. 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 for the incentive savings plan were $59.9 million, $58.9 million and $58.8 million for 1994, 1993 and 1992, respectively. The Plan trustee held 6,380,355 shares, 5,996,806 shares and 6,925,145 shares of Aetna Life and Casualty Company's common stock for Plan participants at the end of 1994, 1993 and 1992, respectively. 1994 Stock Incentive Plan - The company's 1994 stock incentive plan (approved by shareholder vote on April 29, 1994) replaced the 1984 stock option plan. No new options will be granted under the 1984 plan, however, options currently outstanding will continue to be in effect. The 1994 plan provides for stock options (see (1) Stock Option Plans), 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 Stock Option Plans and Incentive Units is 8 million, of which options and units to receive 1,502,900 shares were granted during 1994. The total amount charged to operations for the 1994 Stock Incentive Plan, which was determined from factors relating to various performance measures, was $19.2 million, after-tax, for the year ended December 31, 1994. (1) Stock Option Plans - Executive and middle management employees may be granted options to purchase common stock of the company at 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, 1991 5,529,341 $29.50-$61.50 Granted 912,675 $40.75-$45.63 Exercised (228,942) $29.50-$46.50 Canceled or expired (423,425) $29.50-$61.50 ____________________________________________________________________ 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 ____________________________________________________________________ Range of expiration dates 6/95-10/2004 ____________________________________________________________________ Options exercisable at December 31, 1994 3,967,608 ____________________________________________________________________
102 Notes to Financial Statements (Continued) 14. Benefit Plans (Continued) (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) 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. 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 _______ _______
15. Segment Information (1)(2)(3)(4)(5)(6) Summarized financial information for the company's principal operations was as follows:
(Millions) 1994 1993 1992 _________________________________________________________________________________ Revenue: Aetna Health Plans $ 7,139.1 $ 6,106.0 $ 5,932.1 Large Case Pensions 2,355.2 2,566.0 2,751.3 Aetna Life Insurance & Annuity 1,404.2 1,358.4 1,241.8 Property-Casualty 5,338.9 5,900.9 6,513.5 International 1,297.0 1,279.3 1,202.4 Corporate: Other (9.7) (6.9) (42.7) ___________________________________ Total revenue $17,524.7 $17,203.7 $17,598.4 _________________________________________________________________________________ ___________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments: Aetna Health Plans $ 538.1 $ 414.9 $ 412.0 Large Case Pensions 81.1 (1,274.2) (54.1) Aetna Life Insurance & Annuity 235.0 173.3 147.1 Property-Casualty 30.8 (132.7) (266.9) International 98.8 2.2 42.9 Corporate: Interest (94.8) (69.3) (82.3) Other (230.7) (261.6) (320.1) ___________________________________ Total income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments $ 658.3 $(1,147.4) $ (121.4) _________________________________________________________________________________ ___________________________________ Net income (loss): Aetna Health Plans $ 341.7 $ 272.2 $ 274.3 Large Case Pensions 54.4 (822.3) (17.3) Aetna Life Insurance & Annuity 159.1 111.4 99.0 Property-Casualty 58.1 (13.0) (106.3) International 71.2 55.0 25.1 Corporate: Interest (60.5) (44.7) (50.9) Other (156.5) (173.9) (229.2) ____________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 467.5 (615.3) (5.3) Discontinued operations, net of tax - 27.0 173.8 ___________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 467.5 (588.3) 168.5 Extraordinary loss on debenture redemption - (4.7) - Cumulative effect adjustments - 227.1 (112.5) ___________________________________ Net income (loss) $ 467.5 $ (365.9) $ 56.0 _________________________________________________________________________________ ___________________________________
103 Notes to Financial Statements (Continued) 15. Segment Information (1)(2)(3)(4)(5)(6)(Continued)
(Millions) 1994 1993 __________________________________________________________________ Assets: Aetna Health Plans $ 6,184.7 $ 5,767.5 Large Case Pensions 40,525.1 46,571.5 Aetna Life Insurance & Annuity 21,318.2 20,508.8 Property-Casualty 21,593.8 22,361.5 International 4,532.9 4,801.9 Corporate 17.8 25.5 ________________________ Total assets $ 94,172.5 $100,036.7 __________________________________________________________________ ________________________ (1) In 1994, the company changed its external reporting segments to better align the segments with the way the businesses are managed. Prior periods have been restated to reflect these changes. (2) 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. (3) Assets at December 31, 1994 and 1993 include $12.4 billion and $15.2 billion, respectively, of assets attributable to discontinued products. Discontinued products are included in the Large Case Pensions segment. (4) The 1993 results from continuing operations before extraordinary item and cumulative effect adjustments were increased by $78.0 million ($120.0 million pretax) related to the current year impact of discounting certain workers' compensation indemnity reserves. This benefit affected the Property-Casualty segment only. (5) 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, $22.7 million increased Property-Casualty results, $.6 million increased International results and $7.6 million increased Corporate results. (6) The 1993 and 1992 results reflect after-tax severance and facilities charges of $200.0 million ($308.0 million pretax) and $95.7 million ($145.0 million pretax), respectively. Of the total 1993 charge, $51.9 million ($79.8 million pretax) was allocated to Aetna Health Plans, $14.2 million ($21.9 million pretax) to Large Case Pensions, $20.0 million ($30.8 million pretax) to Aetna Life Insurance & Annuity, $95.6 million ($147.3 million pretax) to Property-Casualty, $7.1 million ($11.0 million pretax) to International, and $11.2 million ($17.2 million pretax) to Corporate. Of the total 1992 charge, $26.7 million ($40.2 million pretax) was allocated to Aetna Health Plans, $2.1 million ($3.1 million pretax) to Large Case Pensions, $3.9 million ($6.2 million pretax) to Aetna Life Insurance & Annuity, $49.7 million ($75.4 million pretax) to Property-Casualty and $13.3 million ($20.1 million pretax) to Corporate.
16. Reinsurance The company utilizes reinsurance agreements to reduce its 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. 104 Notes to Financial Statements (Continued) 16. Reinsurance (Continued) Prepaid reinsurance premiums were $.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:
Ceded to Assumed Direct Other from Other Net (Millions) Amount Companies Companies Amount _______________________________________________________________________________________________ 1994 _______________________________________________________________________________________________ Life insurance $ 2,082.9 $ 64.6 $ 37.8 $ 2,056.1 Accident and health insurance 4,852.3 63.0 17.1 4,806.4 Property-casualty insurance 5,192.9 1,266.5 503.2 4,429.6 _______________________________________________________ Total earned premiums $ 12,128.1 $ 1,394.1 $ 558.1 $ 11,292.1 _______________________________________________________________________________________________ _______________________________________________________ 1993 _______________________________________________________________________________________________ Life insurance $ 1,966.1 $ 78.0 $ 63.9 $ 1,952.0 Accident and health insurance 3,885.2 47.5 28.0 3,865.7 Property-casualty insurance 5,577.8 1,312.8 492.2 4,757.2 _______________________________________________________ Total earned premiums $ 11,429.1 $ 1,438.3 $ 584.1 $ 10,574.9 _______________________________________________________________________________________________ _______________________________________________________ 1992 _______________________________________________________________________________________________ Life insurance $ 2,044.4 $ 144.2 $ 52.6 $ 1,952.8 Accident and health insurance 3,708.5 53.6 25.1 3,680.0 Property-casualty insurance 6,153.4 1,530.4 538.1 5,161.1 _______________________________________________________ Total earned premiums $ 11,906.3 $ 1,728.2 $ 615.8 $ 10,793.9 _______________________________________________________________________________________________ _______________________________________________________
There is not a material difference in premiums on a written versus an earned basis. Ceded current and future benefits were $1.3 billion for both the years ended December 31, 1994 and 1993 and $1.7 billion for the year ended December 31, 1992. A property-casualty subsidiary of the company acts as a servicing carrier for several involuntary pools. This business is ceded completely to the pools, and the company has no direct underwriting risk associated with it. Reinsurance recoverables for this business were approximately $1.8 billion, $1.9 billion and $2.0 billion in 1994, 1993 and 1992, respectively. The company also participates as a member in a number of the involuntary pools, and as a result assumes its share of premiums and losses associated with these pools. 105 Notes to Financial Statements (Continued) 17. Property-Casualty Reserves The following represents changes in aggregate reserves for the property-casualty operations: (1)(2)
(Millions) 1994 1993 1992 __________________________________________________________________________________________ Gross unpaid claims and claim adjustment expenses at beginning of year $ 15,848 $ 15,980 $ 15,408 Less reinsurance recoverables 4,410 4,233 4,001 __________________________________ Net unpaid claims and claim adjustment expenses at beginning of year 11,438 11,747 11,407 Incurred claims and claim adjustment expenses: Provision for insured events of the current year 3,631 3,724 4,407 Increases in provision for insured events of prior years 252 60 (3) 466 __________________________________________________________________________________________ Total incurred claims and claim adjustment expenses 3,883 3,784 4,873 __________________________________________________________________________________________ Payments: Claims and claim adjustment expenses attributable to insured events of the current year 1,375 1,204 1,560 Claims and claim adjustment expenses attributable to insured events of prior years 2,783 2,889 2,973 __________________________________________________________________________________________ Total payments 4,158 4,093 4,533 __________________________________________________________________________________________ Net unpaid claims and claim adjustment expenses at end of the year 11,163 11,438 11,747 Plus: Reinsurance recoverables 4,629 4,410 4,233 Deductible amounts recoverable from policyholders 352 - - __________________________________________________________________________________________ Gross unpaid claims and claim adjustment expenses at end of the year $ 16,144 $ 15,848 $ 15,980 __________________________________________________________________________________________ __________________________________ (1) Excludes accident and health and group life businesses, for which there was not a material impact on results for 1994, 1993 and 1992 from emerging claim experience on prior year events. (2) Includes International. (3) Includes increases in provision for insured events of prior years of $674 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.
Environmental and Asbestos-Related Claims Reserving for environmental and asbestos-related claims is subject to significant uncertainties. Because of these significant uncertainties, management is currently unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all environmental and asbestos-related claims and related litigation expenses. To the extent that such liabilities are not reasonably estimable, no reserve has been provided. However, reserves for these liabilities are evaluated by management regularly, and, subject to the significant uncertainties, adjustments have been and are expected to be made to such reserves as developing loss patterns and other information appear to warrant. Environmental and asbestos-related loss and loss adjustment expense reserves, as reflected on the Consolidated Balance Sheets at December 31, were as follows (before reinsurance):
(Millions) 1994 1993 _____________________________________________________________ Environmental Liability $ 436 $ 234 Asbestos Bodily Injury 296 248 Asbestos Property Damage 30 29 ______________________ Total Environmental and Asbestos-Related Reserves $ 762 $ 511 _____________________________________________________________ ______________________
106 Notes to Financial Statements (Continued) 18. Financial Instruments Estimated Fair Value The carrying values and estimated fair values of the company's financial instruments at December 31, 1994 and 1993 were as follows:
(Millions) 1994 1993 _______________________________________________________________________________________ Carrying Fair Carrying Fair Value Value Value Value ________ _____ ________ _____ Assets: Cash and cash equivalents $ 2,953.6 $ 2,953.6 $ 1,557.8 $ 1,557.8 Short-term investments 450.4 450.4 669.9 669.9 Debt securities 37,111.5 37,101.9 41,544.5 41,690.9 Equity securities 1,655.6 1,655.6 1,658.9 1,658.9 Mortgage loans 11,843.6 11,525.9 14,839.2 14,940.6 Liabilities: Investment contract liabilities: With a fixed maturity $11,562.3 $11,555.1 $13,738.0 $15,005.0 Without a fixed maturity 11,250.6 10,927.9 12,188.0 12,224.0 Short-term debt 23.9 23.9 35.7 35.7 Long-term debt 1,114.7 1,009.4 1,160.0 1,202.7
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. 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. 107 Notes to Financial Statements (Continued) 18. Financial Instruments (Continued) 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. 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, 1994 and 1993 were as follows:
Carrying Value Notional Asset Fair (Millions) Amount (Liability) Value ____________________________________________________________________________ 1994 ____________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $497.8 $ .9 $ 4.7 Related to investments in non-dollar denominated assets 266.9 .3 1.6 Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 48.5 2.0 4.8 Related to investments in non-dollar denominated assets 40.9 (.3) .2 Futures contracts 122.5 .1 .1 Forward contracts to purchase investments 5.6 - - Interest rate swaps: Unrecognized gains 429.4 - 20.7 Unrecognized losses 386.4 - (18.3)
108 Notes to Financial Statements (Continued) 18. Financial Instruments (Continued)
Carrying Value Notional Asset Fair (Millions) Amount (Liability) Value __________________________________________________________________________ 1993 __________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $534.0 $ 4.2 $ 1.6 Related to investments in non-dollar denominated assets 442.9 5.1 (2.6) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 99.9 3.6 5.0 Related to investments in non-dollar denominated assets 27.9 (1.6) (.3) Futures contracts 141.2 .1 .1 Forward contracts to purchase investments 273.6 - (1.4) Interest rate swaps: Unrecognized gains 386.4 - 18.3 Unrecognized losses 529.4 - (29.7)
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. 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 pages 56 and 57 of the 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, 1994. 109 Notes to Financial Statements (Continued) 18. Financial Instruments (Continued) 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, Great Britain and Malaysia) and non-dollar denominated investment securities. The company generally utilizes foreign currency contracts with terms of up to three months. At December 31, 1994, the company had unhedged foreign currency exposures of $238.1 million and $154.6 million related to net investments in foreign affiliates (primarily Taiwan, Mexico and Chile) and investments in non-dollar denominated assets, respectively, for which effective markets for hedging vehicles do not currently exist. Futures and Forward Contracts: Futures and forward 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. This swap activity includes 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 19.) Interest rate swap activity also includes exchanging variable rate asset returns for fixed rate returns. 110 Notes to Financial Statements (Continued) 19. 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 which release the company from its obligations in the event of a material adverse change in the counterparty's financial condition. At December 31, 1994 and 1993, the company had $139.6 million and $130.2 million, respectively, in commitments to fund partnerships and $4.0 million and $64.0 million, respectively, in commitments to fund commercial mortgage loans. 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. The Aetna Casualty and Surety Company, a subsidiary of Aetna Life and Casualty Company, also was a writer of financial guarantees on obligations secured by real estate, corporate debt obligations, and of municipal and non-municipal 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, 1994 and 1993 was $728.3 million and $930.3 million, respectively. Future runoff of financial guarantees as of December 31, 1994 is estimated to be $205.1 million for 1995, $29.2 million for 1996, $136.5 million for 1997, $277.5 million for 1998, $5.1 million for 1999 and $74.9 million thereafter. It is not practicable to estimate a fair value for the company's financial guarantees because the company 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 $47.7 million and $80.2 million at December 31, 1994 and 1993, respectively. Premium income received from such guarantees is recognized pro rata over the contract coverage period. 111 Notes to Financial Statements (Continued) 19. Commitments and Contingent Liabilities (Continued) Reinsurance Agreement In connection with the sale of Am Re (please see Note 3), Am Re and the company 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 company has an 80% participation in payments on those losses up to a maximum payment by the company of $500 million. The company has not yet been required to make any payments under this agreement, though it is reasonably possible that it may be required to do so in the future. Leases The company has entered into operating leases for office space and certain computer and other equipment. Rental expenses for these items were $250.1 million, $267.4 million and $312.0 million for 1994, 1993 and 1992, respectively. Future net minimum payments under non-cancelable leases as of December 31, 1994 are estimated to be $190.9 million for 1995, $161.7 million for 1996, $134.7 million for 1997, $103.4 million for 1998, $86.5 million for 1999 and $663.2 million thereafter. Included in these future payments are $131.7 million and $369.4 million, attributable to the next five and subsequent nine years, respectively, of a subordinated master lease for office space. The company, as the major subleasee, is obligated to pay $53.9 million for its own space during the next five years. Litigation Beginning in 1988, the attorneys general of 20 states each filed separate antitrust suits against The Aetna Casualty and Surety Company ("Aetna") and over 30 other insurers, reinsurers, trade associations and brokers. The suits are on behalf of the states themselves and, in most cases, alleged classes of their political subdivisions. Additionally, 20 class actions were filed in various courts on behalf of private plaintiffs. The attorneys general suits and the private plaintiff actions all were consolidated for pretrial proceedings in the United States District Court for the Northern District of California ("U.S. District Court"). All of the suits allege that the defendants violated various federal or state antitrust laws (or laws related to business trade practices) by, among other things, conspiring to restrict the terms and coverages of commercial general liability insurance and also reinsurance. The state suits seek civil penalties, unspecified damages and extensive injunctive relief. The private suits seek unspecified treble damages and broad injunctive relief. In September 1989, the U.S. District Court dismissed with prejudice all federal antitrust claims in all of the complaints before it. The court declined to exercise jurisdiction over the state claims in the attorneys general complaints. The U.S. Court of Appeals for the Ninth Circuit subsequently reversed the District Court's dismissal of the federal antitrust claims and, after further proceedings, the U.S. Supreme Court agreed to review the Court of Appeals' decision. 112 Notes to Financial Statements (Continued) 19. Commitments and Contingent Liabilities (Continued) Litigation (Continued) In June 1993, the Supreme Court returned the suit to the Court of Appeals. The Supreme Court held unanimously that Aetna and the other defendant insurers did not forfeit their otherwise available McCarran-Ferguson Act immunity when they acted with reinsurers to produce acceptable policy terms. The Supreme Court also held that Aetna and the other defendant insurers could lose their immunity under the "boycott" exception to the McCarran exemption only if the plaintiffs could prove that the defendant insurers attempted to coerce acceptance of insurance policy terms by means of refusals to deal in separate and unrelated transactions. After further proceedings the District Court ordered the parties to undertake discovery on the remaining issues. On October 5, 1994, all of the plaintiffs signed a letter evidencing a settlement in principle of the litigation with all the defendants, including Aetna. The agreement provides that the defendants will pay plaintiffs an aggregate of $36 million plus the costs of class notice (currently estimated at $2 million). Aetna's share of the settlement is not material. The settlement has received preliminary court approval, and notice of the settlement terms has been sent to class members. The settlement is subject to final court approval, and a hearing regarding such approval is scheduled to occur in the first half of 1995. Aetna is continuously involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of the litigation described herein cannot be determined at this time, such litigation (other than that related to environmental and asbestos-related claims, which is subject to significant uncertainties), net of reserves established therefor and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. The company is expected to be affected adversely in the future by losses for environmental and asbestos-related claims and related litigation expenses and such effect could be material to the company's future results, liquidity and/or capital resources. 113 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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1993 the company changed its methods of accounting for certain investments in debt and equity securities, reinsurance of short- duration and long-duration contracts, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts. In 1992, the company changed its methods of accounting for income taxes and postretirement benefits other than pensions. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 7, 1995 114 Quarterly Data (Unaudited)
(Millions, except per share data) First Second Third Fourth ________________________________________________________________________________________________ 1994 (1)(2)(3) ________________________________________________________________________________________________ Total revenue $ 4,313.6 $ 4,405.0 $ 4,385.1 $ 4,421.0 ________________________________________________________________________________________________ Income from continuing operations before income taxes $ 56.4 $ 188.2 $ 177.9 $ 235.8 Federal and foreign income taxes 10.7 55.8 48.5 75.8 ______________________________________________________ Net income $ 45.7 $ 132.4 $ 129.4 $ 160.0 ________________________________________________________________________________________________ Per Share Results: 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 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.
115 Quarterly Data (Unaudited) - (Continued)
(Millions, except per share data) First Second Third Fourth ________________________________________________________________________________________________ 1993 (1)(2)(3)(4)(5) ________________________________________________________________________________________________ Total revenue $ 4,319.9 $ 4,349.9 $ 4,328.1 $ 4,205.8 ________________________________________________________________________________________________ Income (Loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments $ 191.3 $ 151.1 $ 285.2 $ (1,775.0) Federal and foreign income taxes (benefits) 52.0 .3 59.6 (644.0) ____________________________________________________ Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments 139.3 150.8 225.6 (1,131.0) Discontinued operations, net of tax 27.0 - - - ____________________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 166.3 150.8 225.6 (1,131.0) Extraordinary loss on debenture redemption - (4.7) - - Cumulative effect adjustments 227.8 - - (.7) ____________________________________________________ Net income (loss) $ 394.1 $ 146.1 $ 225.6 $ (1,131.7) ________________________________________________________________________________________________ Proforma amounts assuming the discounting of workers' compensation life table indemnity reserves is applied retroactively: Income (Loss) from continuing operations $ 139.3 $ 150.8 $ 225.6 $ (1,131.0) Net income (loss) $ 144.1 $ 146.1 $ 225.6 $ (1,131.7) ________________________________________________________________________________________________ ____________________________________________________ Proforma amounts assuming the accounting for retrospectively rated reinsurance contracts is applied retroactively: Income (Loss) from continuing operations $ 139.3 $ 150.8 $ 225.6 $ (1,131.0) Net income (loss) $ 367.8 $ 146.1 $ 225.6 $ (1,131.7) ________________________________________________________________________________________________ ____________________________________________________ Per Share Results: Income (Loss) from continuing operations before extraordinary item and cumulative effect adjustments $ 1.26 $ 1.36 $ 2.03 $ (10.09) Discontinued operations, net of tax .25 - - - ____________________________________________________ Income (Loss) before extraordinary item and cumulative effect adjustments 1.51 1.36 2.03 (10.09) Extraordinary loss on debenture redemption - (.04) - - Cumulative effect adjustments 2.06 - - (.01) ____________________________________________________ Net income (loss) $ 3.57 $ 1.32 $ 2.03 $ (10.10) ________________________________________________________________________________________________ Proforma amounts assuming the discounting of workers' compensation life table indemnity reserves is applied retroactively: Income (Loss) from continuing operations $ 1.26 $ 1.36 $ 2.03 $ (10.09) Net income (loss) $ 1.31 $ 1.32 $ 2.03 $ (10.10) ________________________________________________________________________________________________ ____________________________________________________ Proforma amounts assuming the accounting for retrospectively rated reinsurance contracts is applied retroactively: Income (Loss) from continuing operations $ 1.26 $ 1.36 $ 2.03 $ (10.09) Net income (loss) $ 3.33 $ 1.32 $ 2.03 $ (10.10) ________________________________________________________________________________________________ ____________________________________________________ Common Stock Data: Dividends Declared $ .69 $ .69 $ .69 $ .69 Common Stock Prices, High 53.00 55.75 60.00 65.88 Common Stock Prices, Low 44.00 48.63 54.25 58.63 ________________________________________________________________________________________________ The sum of quarterly earnings per share amounts does not necessarily equal the full year's amount, since they are calculated independently. Common stock prices are as reported on the NYSE-Composite Tape. See Notes to Financial Statements. (1) The 1993 net loss includes net 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 $70.3 million, $94.8 million, $79.2 million and $173.3 million for the first, second, third and fourth quarters of 1993, respectively. (2) First quarter 1993 net income includes a charge of $48.5 million related to the cumulative effect of adopting FAS No. 112, Employers' Accounting for Postemployment Benefits, and a benefit of $26.3 million related to the cumulative effect of the change in accounting for retrospectively rated reinsurance contracts. (3) Third quarter 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%. (4) First quarter 1993 net income includes a benefit of $250.0 million related to the cumulative effect of adopting discounting of workers' compensation life table indemnity reserves. The current year impact of this change was an increase to after-tax results of $78.0 million in the fourth quarter of 1993. The current year impact did not have an effect on results for the first three quarters of 1993. Fourth quarter 1993 results include an after-tax charge of $259.0 million for reserve additions for certain workers' compensation exposures. (5) The 1993 fourth quarter results reflect the following: a loss of $825.0 million ($1.3 billion pretax) on the discontinuance of fully guaranteed large case pension products; an after-tax severance and facilities charge of $200.0 million ($308.0 million pretax); and a charge of $.7 million related to the cumulative effect of adopting FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
116 Appendix to Exhibit 13 The following information, which is presented in tabular form in this exhibit, is presented in the form of pie charts in the printed 1994 annual report to shareholders of Aetna Life and Casualty Company:
Page No. in this Exhibit Description ________________________ ______________________________________________________ 46 Debt Securities Quality Ratings 46 Debt Securities Investments by Market Sector 51 Problem, Potential Problem and Restructured Mortgage Loans by Property Type 51 Geographic Distribution of Problem, Potential Problem and Restructured Mortgage Loans 54 Equity Real Estate by Property Type 54 Geographic Distribution of Equity Real Estate
EX-21 4 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 Life Insurance and Annuity Company CT 100% owned by Aetna Life and Casualty Company Aetna Re-Insurance Company, (U.K.) Ltd. United Kingdom 100% owned by Aetna Life and Casualty Company Aetna International (N.Z.) Limited New Zealand 100% owned by Aetna Life and Casualty Company Aetna Canada Holdings Limited Canada 100% owned by Aetna Life and Casualty Company Aetna International, Inc. CT 100% owned by Aetna Life and Casualty Company Aeltus Investment Management, Inc CT 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 Aetna Life & Casualty (Bermuda), Ltd. Bermuda 100% owned by Aetna Life Insurance Company Human Affairs International, Incorporated UT 100% owned by Aetna Life Insurance Company The Automobile Insurance Company 100% owned by The Standard Fire Insurance of Hartford, Connecticut CT Company Aetna Personal Security Insurance 100% owned by The Standard Fire Insurance Company CT 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 Series Fund MD 7% owned by Aetna Life Insurance and Annuity Company(3) Aetna Investment Advisers Fund, Inc. MD 100% owned by Aetna Life Insurance and Annuity Company Aetna Variable Encore Fund MA 100% owned by Aetna Life Insurance and Annuity Company Aetna Variable Fund MA 96% owned by Aetna Life Insurance and Annuity Company(4) Aetna Income Shares MA 99% owned by Aetna Life Insurance and Annuity Company Aetna Insurance Company of America CT 100% owned by Aetna Life Insurance and Annuity Company Aetna Life Insurance Company of 100% owned by Aetna Canada Holdings Canada Canada Limited 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 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 40% owned by Aeltus Investment Management, 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. (3) Aetna Life Insurance Company owns 10% and The Aetna Casualty and Surety Company owns 1%. (4) Aetna Life Insurance Company owns 4% of the outstanding total stock of Aetna Variable Fund.
2
State of Subsidiary Incorporation Ownership (1) _____________________________________ ______________ __________________________________________ Aetna Health Management, Inc. TX 100% owned by AHP Holdings, Inc. Aetna Health Plans of Texas, Inc. TX 100% owned by AHP Holdings, 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 96% owned by AHP Holdings, Inc. Aetna Health Plans of Illinois, Inc. IL 100% owned by AHP Holdings, Inc. Aetna Health Plans of the Carolinas, Inc. NC 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. Med Southwest, Inc. TX 55% owned by AHP Holdings, Inc. 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 Health Plans of Arizona, Inc. AZ 100% owned by AHP Holdings, Inc. Human Affairs International of 100% owned by Human Affairs California CA International, Incorporated 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 100% owned by The Aetna Casualty Company CT and Surety Company Aetna Lloyds of Texas Insurance 100% owned by The Aetna Casualty Company TX and Surety Company Aetna Casualty & Surety Company 100% owned by The Aetna Casualty of Illinois IL and Surety Company Aetna Casualty & Surety Company of 100% owned by The Aetna Casualty Canada Canada and Surety Company Aetna Casualty & Surety Company of 100% owned by The Aetna Casualty America CT 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 Partners Acquisition Company, Inc. DE 100% owned by Aetna Health Management, Inc. Aetna Health Plans of Western 100% owned by Partners Health Plan of Pennsylvania, Inc. PA Pennsylvania, Inc. Southwest Physicians Life Insurance Company TX 100% owned by Med Southwest, Inc. Southwest Health Plan, Inc. TX 100% owned by Med Southwest, Inc. Executive Re, Inc. DE 100% owned by Executive Risk, Inc. Aetna Health Plans of California, 100% owned by Partners Acquisition Inc. CA Company, Inc. Aetna Government Health Plans, Inc. CA 100% owned by Parters Acquisition Company, Inc. Executive Re Indemnity, Inc. DE 100% owned by Executive Re, Inc. 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. Executive Re Specialty Insurance Company CT 100% owned by Executive Re Indemnity, Inc. (1) Percentages are rounded to the nearest whole percent and are based on ownership of voting rights.
EX-23 5 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) of Aetna Life and Casualty Company of our reports dated February 7, 1995, relating to the consolidated balance sheets of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1994 and 1993 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, 1994, which reports appear in or are incorporated by reference in the December 31, 1994 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, reinsurance of short- duration and long-duration contracts, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts and to changes in 1992 in the Company's accounting for income taxes and postretirement benefits other than pensions. By /s/ KPMG Peat Marwick LLP _____________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut March 17, 1995 EX-24 6 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, Robert E. Broatch 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 1994 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 24th day of February, 1995.
/s/ Ronald E. Compton /s/ Gerald Greenwald _____________________________ ______________________________ Ronald E. Compton Gerald Greenwald Chairman, President and Director Director (Principal Executive Officer) /s/ Wallace Barnes /s/ Michael H. Jordan _____________________________ ______________________________ Wallace Barnes Michael H. Jordan Director Director /s/ John F. Donahue _____________________________ ______________________________ John F. Donahue Jack D. Kuehler Director Director /s/ William H. Donaldson /s/ Frank R. O'Keefe, Jr. _____________________________ ______________________________ William H. Donaldson Frank R. O'Keefe, Jr. Director Director /s/ Barbara Hackman Franklin /s/ David M. Roderick _____________________________ ______________________________ Barbara Hackman Franklin David M. Roderick Director Director /s/ Richard L. Huber _____________________________ ______________________________ Earl G. Graves 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, Robert E. Broatch 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 1994 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 3rd day of March, 1995.
_____________________________ ______________________________ Ronald E. Compton Gerald Greenwald Chairman, President and Director Director (Principal Executive Officer) _____________________________ ______________________________ Wallace Barnes Michael H. Jordan Director Director /s/ Jack D. Kuehler _____________________________ ______________________________ John F. Donahue Jack D. Kuehler Director Director _____________________________ ______________________________ William H. Donaldson Frank R. O'Keefe, Jr. Director Director _____________________________ ______________________________ Barbara Hackman Franklin David M. Roderick Director Director /s/ Earl G. Graves _____________________________ ______________________________ Earl G. Graves Richard L. Huber Director Vice Chairman for Strategy and Finance (Principal Financial Officer)
EX-27 7 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, 1994 for Aetna Life and Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 YEAR DEC-31-1994 DEC-31-1994 35,111 2,001 1,991 1,656 11,844 1,546 54,293 2,954 5,011 2,015 94,173 17,979 1,605 17,478 23,223 1,115 1,419 0 0 4,084 94,173 11,292 4,464 (55) 1,824 12,397 750 0 658 191 467 0 0 0 467 4.14 0 11,438 3,631 252 1,375 2,783 11,163 (252) There is not a significant difference between primary and fully diluted earnings per share. Amounts are net of reinsurance recoverables. Reserve-close is also net of deductible amounts recoverable from policyholders.
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