-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I4fgPKgM4xqo6xlXKjPZ+g3IawRbgxOQ6heATFzqac6ZNk5EioTCd8uLvap7xSaE B/MZ//wRfNb8moGt2fPIRg== 0000002648-95-000032.txt : 19951030 0000002648-95-000032.hdr.sgml : 19951030 ACCESSION NUMBER: 0000002648-95-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951027 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05704 FILM NUMBER: 95584740 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 8602730123 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: FINANCIAL YF8H CITY PLACE CITY: HARTFORD STATE: CT ZIP: 06156 10-Q 1 LIVE FILING 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1995 ____________________ Commission file number 1-5704 ________ Aetna Life and Casualty Company ___________________________________________________________________________ (Exact name of registrant as specified in its charter) Connecticut 06-0843808 ___________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 ___________________________________________________________________________ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (860) 273-0123 ______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class at September 30, 1995 ________________ _______________________ Common Capital Stock 114,314,806 without par value 2 TABLE OF CONTENTS _________________ Page ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Condensed Notes to Financial Statements 8 Independent Auditors' Review Report 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 47 Item 5. Other Information. 47 Item 6. Exhibits and Reports on Form 8-K. 48 Signatures 49 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, __________________________ _________________________ (Millions, except share and per share data) 1995 1994 1995 1994 ____ ____ ____ ____ Revenue: Premiums.................................. $ 2,856.0 $ 2,858.7 $ 8,610.7 $ 8,440.0 Net investment income..................... 1,118.4 1,111.2 3,344.9 3,358.7 Fees and other income..................... 495.3 454.7 1,478.0 1,381.1 Net realized capital losses............... (.5) (31.7) (32.8) (51.0) ___________ ___________ ____________ __________ Total revenue......................... 4,469.2 4,392.9 13,400.8 13,128.8 ___________ ___________ ____________ __________ Benefits and expenses: Current and future benefits............... 2,991.4 3,136.9 9,881.2 9,369.0 Operating expenses........................ 969.8 863.3 2,866.8 2,745.3 Amortization of deferred policy acquisition costs....................... 191.6 214.8 575.4 592.0 ___________ ___________ ____________ ___________ Total benefits and expenses........... 4,152.8 4,215.0 13,323.4 12,706.3 ___________ ___________ ____________ ___________ Income before income taxes.................. 316.4 177.9 77.4 422.5 Federal and foreign income taxes (benefits): Current................................... 106.7 (27.6) 80.3 (53.2) Deferred.................................. (2.4) 76.1 (78.9) 168.2 ___________ ___________ ____________ ___________ Total federal and foreign income taxes (benefits).......................... 104.3 48.5 1.4 115.0 ___________ ___________ ____________ ___________ Net income............................ $ 212.1 $ 129.4 $ 76.0 $ 307.5 ___________ ___________ ____________ ___________ ___________ ___________ ____________ ___________ Results per common share: Net income.............................. $ 1.86 $ 1.15 $ .67 $ 2.73 ___________ ___________ ____________ ___________ ___________ ___________ ____________ ___________ Dividends declared...................... $ .69 $ .69 $ 2.07 $ 2.07 ___________ ___________ ____________ ___________ ___________ ___________ ____________ ___________ Weighted average common shares outstanding............................. 114,370,702 112,854,480 113,522,029 112,899,393 ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ See Condensed Notes to Financial Statements.
4 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, (Millions) 1995 1994 _____________ ____________ Assets: Investments: Debt securities: Held for investment, at amortized cost (fair value $1,916.1 and $1,991.2)....................... $ 1,888.1 $ 2,000.8 Available for sale, at fair value (amortized cost $38,104.8 and $36,984.2)...................... 39,210.7 35,110.7 Equity securities, at fair value (cost $1,181.9 and $1,326.9)....... 1,652.1 1,655.6 Short-term investments.............. 866.7 450.4 Mortgage loans...................... 10,446.1 11,843.6 Real estate......................... 1,654.5 1,545.7 Policy loans........................ 593.7 533.8 Other............................... 1,026.6 1,152.7 ___________ __________ Total investments............... 57,338.5 54,293.3 Cash and cash equivalents............. 2,580.6 2,953.6 Reinsurance recoverables and receivables.......................... 5,226.3 5,011.0 Accrued investment income............. 775.9 777.2 Premiums due and other receivables.... 1,797.6 1,722.9 Federal and foreign income taxes: Current............................. 45.1 18.3 Deferred............................ 1,097.4 1,266.7 Deferred policy acquisition costs..... 2,175.1 2,014.7 Other assets.......................... 2,046.9 1,992.2 Separate Accounts assets.............. 28,569.6 24,122.6 ___________ __________ Total assets.................... $ 101,653.0 $ 94,172.5 ___________ __________ ___________ __________ See Condensed Notes to Financial Statements.
5 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
September 30, December 31, (Millions, except share and per share data) 1995 1994 _____________ ____________ Liabilities: Future policy benefits........................ $ 17,958.0 $ 17,979.2 Unpaid claims and claim expenses.............. 18,062.1 17,478.3 Unearned premiums............................. 1,642.3 1,604.9 Policyholders' funds left with the company.... 23,623.7 23,223.1 ___________ __________ Total insurance reserve liabilities....... 61,286.1 60,285.5 Dividends payable to shareholders............. 78.9 77.7 Short-term debt............................... 69.5 23.9 Long-term debt................................ 1,121.1 1,114.7 Other liabilities............................. 3,219.5 2,718.6 Participating policyholders' interests........ 192.4 170.5 Separate Accounts liabilities................. 28,509.5 24,003.6 ___________ __________ Total liabilities......................... 94,477.0 88,394.5 ___________ __________ Minority interest in preferred securities of subsidiary.................................. 275.0 275.0 ___________ __________ Shareholders' Equity: Class A Voting Preferred Stock (no par value; 10,000,000 shares authorized; no shares issued or outstanding)............. - - Class B Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Class C Non-Voting Preferred Stock (no par value; 15,000,000 shares authorized; no shares issued or outstanding)............. - - Common Capital Stock (no par value; 250,000,000 shares authorized; 114,939,275 issued; and 114,314,806 and 112,657,758 outstanding)................. 1,425.6 1,419.2 Net unrealized capital gains (losses)......... 401.4 (1,071.5) Retained earnings............................. 5,099.4 5,259.6 Treasury stock, at cost (624,469 and 2,281,517 shares)............................ (25.4) (104.3) ___________ __________ Total shareholders' equity................ 6,901.0 5,503.0 ___________ __________ Total liabilities, minority interest and shareholders' equity................. $ 101,653.0 $ 94,172.5 ___________ __________ ___________ __________ Shareholders' equity per common share......... $ 60.37 $ 48.85 ___________ __________ ___________ __________ See Condensed Notes to Financial Statements.
6 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions, except share data) Net Common Unrealized Capital Capital Retained Treasury Nine Months Ended September 30, 1995 Total Stock Gains (Losses) Earnings Stock __________________________________________________________________________________________________________ Balances at December 31, 1994 $ 5,503.0 $ 1,419.2 $(1,071.5) $ 5,259.6 $ (104.3) __________________________________________________________________________________________________________ Net Income............................ 76.0 76.0 Net change in unrealized capital gains and losses.......................... 1,472.9 1,472.9 Common stock issued for benefit plans (1,657,048 shares).................... 78.9 78.9 Gain on issuance of treasury stock.... 6.4 6.4 Common stock dividends declared....... (236.2) (236.2) ____________________________________________________________________ Balances at September 30, 1995 $ 6,901.0 $ 1,425.6 $ 401.4 $ 5,099.4 $ (25.4) __________________________________________________________________________________________________________ ____________________________________________________________________ Nine Months Ended September 30, 1994 __________________________________________________________________________________________________________ Balances at December 31, 1993 $ 7,043.1 $ 1,422.0 $ 648.2 $ 5,103.3 $ (130.4) __________________________________________________________________________________________________________ Net income............................ 307.5 307.5 Net change in unrealized capital gains and losses.......................... (1,280.3) (1,280.3) Common stock issued for benefit plans (441,338 shares)...................... 25.2 25.2 Loss on issuance of treasury stock.... (4.5) (4.5) Common stock dividends declared....... (233.3) (233.3) ____________________________________________________________________ Balances at September 30, 1994 $ 5,857.7 $ 1,417.5 $ (632.1) $ 5,177.5 $ (105.2) __________________________________________________________________________________________________________ ____________________________________________________________________ See Condensed Notes to Financial Statements.
7 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, _________________________ (Millions) 1995 1994 ____ ____ Cash Flows from Operating Activities: Net income........................................................ $ 76.0 $ 307.5 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Decrease in accrued investment income.......................... 2.9 42.4 Increase in premiums due and other receivables................. (32.3) (190.4) Increase in reinsurance recoverables and receivables........... (210.1) (94.4) Increase in deferred policy acquisition costs.................. (147.4) (132.9) Depreciation and amortization.................................. 140.9 142.9 (Decrease) Increase in federal and foreign income taxes........ 127.9 (7.2) Net decrease in other assets and other liabilities............. (103.4) (558.5) Increase in insurance reserve liabilities...................... 323.1 465.9 Net sales of debt trading securities........................... - 52.3 Decrease (Increase) in minority interest....................... 10.2 (18.6) Net realized capital losses.................................... 32.8 51.0 Amortization of net investment discount........................ (77.6) (66.3) Other, net..................................................... (29.8) (1.3) _________ _________ Net cash provided by (used for) operating activities......... 113.2 (7.6) _________ _________ Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale............................. 12,617.2 16,659.5 Debt securities held for investment............................ - 5.6 Equity securities.............................................. 1,083.9 496.7 Mortgage loans................................................. 113.6 123.2 Real estate.................................................... 208.7 449.7 Short-term investments......................................... 42,029.7 45,409.7 Investment repayments of: Debt securities available for sale............................. 2,358.3 2,804.6 Debt securities held for investment............................ 277.6 498.2 Mortgage loans................................................. 1,038.5 1,662.6 Cost of investments in: Debt securities available for sale............................. (15,935.3) (19,657.4) Debt securities held for investment............................ (144.8) (5.3) Equity securities.............................................. (674.0) (595.4) Mortgage loans................................................. (148.2) (211.9) Real estate.................................................... (124.1) (31.4) Short-term investments......................................... (42,463.1) (45,386.9) Increase in property, plant & equipment........................... (118.9) (97.2) Net decrease in Separate Accounts................................. 58.7 3.7 Other, net........................................................ (93.8) (189.1) _________ _________ Net cash provided by investing activities....................... 84.0 1,938.9 _________ _________ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........... 2,357.8 2,526.3 Withdrawals of investment contracts............................... (2,829.9) (3,220.9) Issuance of long-term debt........................................ 6.8 66.5 Stock issued under benefit plans.................................. 85.3 20.7 Repayment of long-term debt....................................... (1.9) (91.9) Net increase in short-term debt................................... 45.6 110.4 Dividends paid to shareholders.................................... (236.2) (233.3) _________ _________ Net cash used for financing activities.......................... (572.5) (822.2) _________ _________ Effect of exchange rate changes on cash and cash equivalents....................................................... 2.3 (2.0) _________ _________ Net (decrease) increase in cash and cash equivalents................. (373.0) 1,107.1 Cash and cash equivalents, beginning of period....................... 2,953.6 1,557.8 _________ _________ Cash and cash equivalents, end of period............................. $ 2,580.6 $ 2,664.9 _________ _________ _________ _________ Supplemental Cash Flow Information: Interest paid..................................................... $ 101.7 $ 81.4 _________ _________ _________ _________ Income taxes paid................................................. $ 84.1 $ 117.4 _________ _________ _________ _________ See Condensed Notes to Financial Statements.
8 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation The consolidated financial statements include Aetna Life and Casualty Company and its majority-owned subsidiaries (collectively, the "company"). Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1994 financial information to conform to 1995 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. (2) Future Application of Accounting Standards In March 1995, the Financial Accounting Standards Board issued Financial Accounting Standard ("FAS") No. 121, Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires write down to fair value when long-lived assets to be held and used are impaired. The statement also requires long-lived assets to be disposed of (e.g., real estate held for sale) to be carried at the lower of cost or fair value less estimated selling costs and does not allow such assets to be depreciated. This statement will be effective for 1996 financial statements, although earlier adoption is permissible. The company has not yet determined the timing of adoption of this statement, however, the impact on earnings is not expected to be material. In October 1995, the Financial Accounting Standards Board issued FAS No. 123, Accounting for Stock-Based Compensation. This statement addresses the accounting for the cost of stock-based compensation, such as stock options. FAS No. 123 permits either expensing the cost of stock-based compensation over the vesting period or disclosing in the financial statement footnotes what this expense would have been. This cost would be measured at the grant date based upon estimated fair values, using option pricing models. The requirements of this statement will be effective for 1996 financial statements, although earlier adoption is permissible if an enterprise elects to expense the cost of stock-based compensation. The company is currently evaluating the disclosure and expense recognition alternatives as permitted by this statement. 9 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (3) Insurance Liabilities Workers' compensation life table indemnity reserves are discounted at 5% for voluntary business and 3.5% for involuntary business, with mortality assumptions that reflect current company and industry experience. Workers' compensation life table indemnity reserves totaled $713 million at September 30, 1995, which was 21% of the total workers' compensation reserves for unpaid claims and claim adjustment expenses. Certain other property-casualty reserves with fixed and determinable payment patterns over periods of up to 7 years, including reserves related to a small number of environmental and asbestos-related claim settlements with such payment patterns, have also been discounted. The risk free rates used in discounting such reserves range from 4% to 7%, and the amount of such discounted reserves was approximately $187 million at September 30, 1995. (4) Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three and nine months ended September 30, 1995 and 1994 were charged to the reserve for anticipated future losses 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. Management believes the reserve for anticipated losses at September 30, 1995 is adequate to provide for future losses associated with these products. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. (Please refer to the company's 1994 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) 10 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) Results of discontinued products were as follows (pretax, in millions):
Charged to (Added to) Guaranteed Single- Reserve for Investment Premium Future Three months ended September 30, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 121.2 $ 111.6 $ 232.8 $ - $ 232.8 Net realized capital gains (losses) (12.4) 16.2 3.8 (3.8) - Interest earned on receivable from continuing business 5.0 7.7 12.7 - 12.7 Other income 2.1 3.0 5.1 - 5.1 _____________________________________________________________ Total revenue 115.9 138.5 254.4 (3.8) 250.6 _____________________________________________________________ Current and future benefits 138.1 108.9 247.0 1.7 248.7 Operating expenses (.4) 2.3 1.9 - 1.9 _____________________________________________________________ Total benefits and expenses 137.7 111.2 248.9 1.7 250.6 _____________________________________________________________ Results of discontinued products $ (21.8) $ 27.3 $ 5.5 $ (5.5) $ - _____________________________________________________________________________________________________ _____________________________________________________________ Charged to (Added to) Guaranteed Single- Reserve for Investment Premium Future Three months ended September 30, 1994 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Premiums $ - $ 2.5 $ 2.5 $ - $ 2.5 Net investment income 155.9 107.7 263.6 - 263.6 Net realized capital losses (73.7) (19.5) (93.2) 93.2 - Interest earned on receivable from continuing business 4.8 7.1 11.9 - 11.9 Other income 2.8 6.0 8.8 - 8.8 _____________________________________________________________ Total revenue 89.8 103.8 193.6 93.2 286.8 _____________________________________________________________ Current and future benefits 190.0 110.3 300.3 (17.2) 283.1 Operating expenses 2.9 .8 3.7 - 3.7 _____________________________________________________________ Total benefits and expenses 192.9 111.1 304.0 (17.2) 286.8 _____________________________________________________________ Results of discontinued products $ (103.1) $ (7.3) $ (110.4) $ 110.4 $ - _____________________________________________________________________________________________________ ______________________________________________________________ * Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of $12.7 million and $11.9 million for the three months ended September 30, 1995 and 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
11 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued)
Charged to (Added to) Guaranteed Single- Reserve for Investment Premium Future Nine months ended September 30, 1995 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Net investment income $ 391.8 $ 333.9 $ 725.7 $ - $ 725.7 Net realized capital gains (losses) (43.5) 38.6 (4.9) 4.9 - Interest earned on receivable from continuing business 15.2 22.9 38.1 - 38.1 Other income 7.0 9.0 16.0 - 16.0 _____________________________________________________________ Total revenue 370.5 404.4 774.9 4.9 779.8 _____________________________________________________________ Current and future benefits 438.4 336.5 774.9 (4.1) 770.8 Operating expenses 1.2 7.8 9.0 - 9.0 _____________________________________________________________ Total benefits and expenses 439.6 344.3 783.9 (4.1) 779.8 _____________________________________________________________ Results of discontinued products $ (69.1) $ 60.1 $ (9.0) $ 9.0 $ - _____________________________________________________________________________________________________ _____________________________________________________________ Charged to (Added to) Guaranteed Single- Reserve for Investment Premium Future Nine months ended September 30, 1994 Contracts Annuities Total Losses Net* _____________________________________________________________________________________________________ Premiums $ - $ 47.2 $ 47.2 $ - $ 47.2 Net investment income 483.4 323.5 806.9 - 806.9 Net realized capital losses (130.8) (45.9) (176.7) 176.7 - Interest earned on receivable from continuing business 14.4 20.9 35.3 - 35.3 Other income 9.3 12.4 21.7 - 21.7 _____________________________________________________________ Total revenue 376.3 358.1 734.4 176.7 911.1 _____________________________________________________________ Current and future benefits 582.7 374.2 956.9 (53.6) 903.3 Operating expenses 5.1 2.7 7.8 - 7.8 _____________________________________________________________ Total benefits and expenses 587.8 376.9 964.7 (53.6) 911.1 _____________________________________________________________ Results of discontinued products $ (211.5) $ (18.8) $ (230.3) $ 230.3 $ - _____________________________________________________________________________________________________ _____________________________________________________________ * Amounts are reflected in the 1995 and 1994 Consolidated Statements of Income, except for interest of $38.1 million and $35.3 million for the nine months ended September 30, 1995 and 1994, respectively, earned on the receivable from continuing business which is eliminated in consolidation.
Deposits of $7.7 million and $30.9 million for the three months ended September 30, 1995 and 1994, respectively, and $24.5 million and $199.4 million for the nine months ended September 30, 1995 and 1994, respectively, were received under pre-existing GIC contracts. In accordance with FAS No. 97, such deposits are not included in premiums or revenue. 12 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) Assets and liabilities of discontinued products were as follows (in millions):
September 30, 1995 _______________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _______________________________________ Debt securities available for sale $ 2,472.5 $ 3,287.8 $ 5,760.3 Mortgage loans 2,433.5 1,497.5 3,931.0 Real estate 501.9 177.8 679.7 Short-term and other investments 259.2 350.5 609.7 _______________________________________ Total investments 5,667.1 5,313.6 10,980.7 Current and deferred income taxes 210.1 124.7 334.8 Receivable from continuing business 424.7 485.9 910.6 Other 72.3 - 72.3 ________________________________________ Total assets $ 6,374.2 $ 5,924.2 $12,298.4 ______________________________________________________________________________ ________________________________________ Future policy benefits $ - $ 4,950.5 $ 4,950.5 Policyholders' funds left with the company 5,930.9 - 5,930.9 Reserve for future losses on discontinued products 276.5 711.5 988.0 Other 166.8 262.2 429.0 ________________________________________ Total liabilities $ 6,374.2 $ 5,924.2 $12,298.4 ______________________________________________________________________________ ________________________________________
Net unrealized capital gains as of September 30, 1995 on available for sale debt securities are included above in other liabilities and are not reflected in consolidated shareholders' equity. The reserve for anticipated future losses on GICs is included in policyholders' funds left with the company and the reserve for anticipated future losses on SPAs is included in future policy benefits on the Consolidated Balance Sheet. At September 30, 1995, estimated future after-tax realized capital losses of approximately $103.5 million ($159.2 million, pretax), attributable to mortgage loans and real estate supporting GICs, and $39.6 million ($60.9 million, pretax), attributable to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Included in the ($43.5) million and $38.6 million of net realized capital (losses) gains (pretax) on GICs and SPAs, respectively, for the nine months ended September 30, 1995 are (losses) gains from the sale of bonds of ($6.4) million and $51.2 million, respectively. 13 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (4) Discontinued Products (Continued) The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Nine Months Ended September 30, 1995 ____________________________________ Guaranteed Single- Investment Premium Contracts Annuities Total _____________________________________________________________________________ Reserve at beginning of period $ 345.6 $ 651.4 $ 997.0 Results of discontinued products (69.1) 60.1 (9.0) ____________________________________ Reserve at end of period $ 276.5 $ 711.5 $ 988.0 _____________________________________________________________________________ ____________________________________
At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in continuing products. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At September 30, 1995, for GICs and SPAs, the receivables from continuing operations, net of the related deferred taxes payable on the accrued interest income of $12.2 million and $17.8 million, respectively, were $412.5 million and $468.1 million, respectively. As of September 30, 1995, no funding had taken place. These amounts are eliminated in consolidation and are therefore not reflected on the Consolidated Balance Sheets. 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. 14 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (5) Intent to Sell Subsidiary The company intends to sell its subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., and accordingly, the subsidiary has been written down to estimated fair market value. A loss of $22.5 million (after-tax) is included in net realized capital losses in the Consolidated Statements of Income for the nine months ended September 30, 1995. (6) Investments Net investment income includes amounts allocable to experience rated contractholders of $363.4 million and $350.8 million for the three months ended September 30, 1995 and 1994, respectively, and $1,092.1 million and $1,080.6 million for the nine months ended September 30, 1995 and 1994, respectively. Interest credited to contractholders is included in current and future benefits. Net realized capital gains (losses) allocable to experience rated contractholders of $62.9 million and ($26.1) million for the three months ended September 30, 1995 and 1994, respectively, and $74.2 million and ($136.2) million for the nine months ended September 30, 1995 and 1994, respectively, were deducted from net realized capital losses 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. As of January 1, 1995, the company adopted FAS No. 114, Accounting by Creditors for Impairment of a Loan and FAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. In accordance with these standards, a loan is considered impaired when it is probable that the company will be unable to collect amounts due according to the contractual terms of the loan agreement. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the mortgage loan and the fair value of the collateral. General reserves are established for losses management believes are likely to arise from the overall portfolio but cannot be attributed to specific loans. Prior to the adoption of FAS Nos. 114 and 118, the company included the reserve for estimated losses on potential problem loans (other than those allocable to experience rated products) which management believed were likely to become classified as problem or restructured in the next 12 months or so in the general reserve. 15 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Investments (continued) At September 30, 1995, the total recorded investment in loans that are considered to be impaired (which include problem loans, restructured loans and potential problem loans) under FAS No. 114 and related specific reserves are presented in the table below. Included in the total recorded investment are impaired loans of $347.3 million for which no specific reserves are considered necessary.
Total Recorded Specific (Millions) Investment Reserves _________________________________________________________________________ Supporting discontinued products $ 921.9 $ 234.2 Supporting experience rated products 607.8 169.2 Supporting remaining products 530.1 94.2 ___________________________ Total Impaired Loans $ 2,059.8 $ 497.6 _________________________________________________________________________ ___________________________
The activity in the specific and general reserves as of September 30, 1995 is summarized below:
General Reserve Allocated to Charged Balance Balance at Experience Balance at to net Charged at December 31, 1994 Rated December 31, 1994, realized to other Principal September 30, (Millions) as reported Products (1) as adjusted loss accounts(2) Write-offs 1995 (3) ____________________________________________________________________________________________________________ Supporting discontinued products $ 372.1 $ - $ 372.1 $ - $ 25.1 $ (89.0) $ 308.2 Supporting experience rated products 156.1 208.5 364.6 - (22.7) (68.5) 273.4 Supporting remaining products 255.9 - 255.9 8.8 - (89.1) 175.6 ______________________________________________________________________________________________ Total $ 784.1 $ 208.5 $ 992.6 $ 8.8 $ 2.4 $ (246.6) $ 757.2 ___________________________________________________________________________________________________________ ______________________________________________________________________________________________ (1) The general reserve at December 31, 1994 excluded reserves of $208.5 million related to experience rated products. (2) Reflects additions to (releases of) reserves related to assets supporting experience rated products and discontinued products which do not affect the company's results of operations. (3) Total reserves at September 30, 1995 included $497.6 million of specific reserves and $259.6 million of a general reserve. Note: $261.5 million of general reserve related to performing loans at December 31, 1994 were reclassified to specific reserves as a result of the adoption of FAS No. 114.
The company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured contractual terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. 16 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (6) Investments (Continued) Income earned (pretax) and received on the average recorded investment in impaired loans for the three and nine months ended September 30, 1995, was as follows:
Three Months Ended Nine Months Ended September 30, 1995 September 30, 1995 ______________________________ ______________________________ Average Average Impaired Income Income Impaired Income Income (Millions) Loans Earned Received Loans Earned Received _____________________________________________________________________________________________________ Supporting discontinued products $ 995.4 $ 22.1 $ 22.5 $ 1,026.2 $ 61.8 $ 61.6 Supporting experience rated products 790.6 14.9 13.8 805.3 41.1 40.4 Supporting remaining products 497.7 7.5 8.1 558.3 25.0 26.3 _______________________________________________________________ Total $ 2,283.7 $ 44.5 $ 44.4 $ 2,389.8 $ 127.9 $ 128.3 _____________________________________________________________________________________________________ _______________________________________________________________
(7) Federal and Foreign Income Taxes Net unrealized capital gains and losses are presented in shareholders' equity net of deferred taxes. During the nine months ended September 30, 1995, the company moved from a net unrealized capital loss position of $1,071.5 million at December 31, 1994, to a net unrealized capital gain position of $401.4 million at September 30, 1995, primarily due to decreases in interest rates. As a result, all valuation allowances previously established related to deferred tax assets on these capital losses were reversed, which had no impact on net income for the three and nine months ended September 30, 1995. (8) Reinsurance Ceded earned premiums were $.4 billion and $.3 billion for three months ended September 30, 1995 and 1994, respectively, and $.9 billion for both the nine months ended September 30, 1995 and 1994. Ceded current and future benefits were $.3 billion and $.2 billion for the three months ended September 30, 1995 and 1994, respectively, and $.9 billion for both the nine months ended September 30, 1995 and 1994. (9) Debt The company has credit facilities aggregating $1 billion with a group of worldwide banks. One $500 million facility terminates in July 1996. Another $500 million facility terminates in July 1999. Various interest rate options are available under each facility and any borrowings mature on the expiration date of the applicable credit commitment. The company pays facility fees ranging from .08% to .375% per annum under the short-term credit agreement and from .1% to .5% per annum under the medium-term credit agreement, depending upon the company's long-term senior unsecured debt rating. The commitments require the company to maintain shareholders' equity, excluding net unrealized capital gains and losses, of at least $5.0 billion. These facilities also support the company's commercial paper borrowing program. 17 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (9) Debt (Continued) 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. A subsidiary of the company may offer and sell up to an additional $225 million of preferred securities under a shelf registration statement declared effective by the SEC. (10) Off-Balance-Sheet Financial Instruments (Including Derivative Financial Instruments) The company engages in hedging activities to manage foreign exchange and interest rate risk. Such hedging activities have principally consisted of using off-balance-sheet instruments including foreign exchange forward contracts, futures and forward contracts, and interest rate swap agreements. (Please see General Account Investments - Use of Derivatives and Other Investments on pages 43 and 44 of the Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 18 of the company's 1994 Annual Report to Shareholders for a description of the company's hedging activities). The notional amounts, carrying values and estimated fair values of the company's off-balance- sheet financial instruments are as follows (in millions):
Carrying Value Notional Asset Fair September 30, 1995 Amount (Liability) Value _______________________________________________________________________________ Foreign exchange forward contracts - sell: Related to net investments in foreign affiliates $ 192.7 $ (5.6) $ (6.9) Related to investments in non-dollar denominated assets 235.5 (2.9) (3.0) Foreign exchange forward contracts - buy: Related to net investments in foreign affiliates 16.3 3.1 2.6 Related to investments in non-dollar denominated assets 26.1 0.4 0.4 Futures contracts to purchase investments 52.3 (0.2) (0.2) Futures contracts to sell investments 224.8 - - Interest rate swaps: Unrecognized gains 423.0 - 21.8 Unrecognized losses 380.0 - (13.9) Forward swap agreement 100.0 - 0.2
18 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) (11) Supplemental Cash Flow Information Significant non-cash investing and financing activities include acquisition of real estate through foreclosures (including in- substance foreclosures) of mortgage loans amounting to $227 million and $462 million for the nine months ended September 30, 1995 and 1994, respectively. (12) Earnings Per Share Earnings per share are computed using net income divided by the weighted average number of common shares outstanding, (including common share equivalents). The increase in the number of common shares outstanding for the three months ended September 30, 1995 is primarily due to options exercised in the period. There is not a significant difference between primary and fully diluted earnings per share. (13) Commitments and Contingent Liabilities Environmental and Asbestos-Related Claims The company added $750 million ($487.5 million, after-tax) to environmental-related claims reserves in the second quarter of 1995. In the opinion of management, the company's reserves for environmental-related claims at September 30, 1995 represent the company's best estimate of its ultimate environmental-related liability, based on currently known facts, current law (including Superfund), current technology, and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgment involved in estimating the company's environmental liability, no assurances can be given that the environmental reserve represents the amount that will ultimately be paid by the company for all environmental- related losses. The amount ultimately paid could differ materially from the company's currently recorded reserve as legal and factual issues are clarified, but any difference cannot be reasonably estimated at this time. 19 AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES CONDENSED NOTES TO FINANCIAL STATEMENTS (Continued) Reserving for asbestos-related claims is subject to significant uncertainties and management is currently unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all asbestos-related claims and related litigation expenses. However, reserves for asbestos liabilities are being evaluated by management as the company continues to gather and analyze new information and reassess its reserving techniques for these claims in order to determine whether it can better estimate its liability. Adjustments may be made to such reserves as loss patterns develop and other information is obtained. Environmental and asbestos-related loss and loss adjustment expense reserves, as reflected on the Consolidated Balance Sheet, were as follows (before reinsurance and net of discount on certain environmental and asbestos settlements, in millions):
September 30, 1995 ____________________________________________________ Environmental Liability $ 1,067.4 Asbestos Bodily Injury* 421.9 Asbestos Property Damage* 30.2 ___________ Total Environmental and Asbestos-Related Reserves $ 1,519.5 ____________________________________________________ ___________ * Includes $107.4 million and $12.6 million of property-casualty reserves transferred to asbestos bodily injury and asbestos property damage reserves, respectively.
(14) Litigation The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefore and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. 20 Independent Auditors' Review Report The Board of Directors Aetna Life and Casualty Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of September 30, 1995, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1995 and 1994, and the related condensed consolidated statements of shareholders' equity and cash flows for the nine-month periods ended September 30, 1995 and 1994. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 7, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1994, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG Peat Marwick LLP Hartford, Connecticut October 26, 1995 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations __________________________________
Operating Summary (Millions, except per share data) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................. $ 2,856.0 $ 2,858.7 (.1)% $ 8,610.7 $ 8,440.0 2.0% Net investment income................ 1,118.4 1,111.2 .6 3,344.9 3,358.7 (.4) Fees and other income................ 495.3 454.7 8.9 1,478.0 1,381.1 7.0 Net realized capital losses.......... (.5) (31.7) 98.4 (32.8) (51.0) 35.7 _________ _________ _________ _________ Total revenue.................... 4,469.2 4,392.9 1.7 13,400.8 13,128.8 2.1 Current and future benefits.......... 2,991.4 3,136.9 (4.6) 9,881.2 9,369.0 5.5 Operating expenses................... 969.8 863.3 12.3 2,866.8 2,745.3 4.4 Amortization of deferred policy acquisition costs................... 191.6 214.8 (10.8) 575.4 592.0 (2.8) _________ _________ _________ _________ Total benefits and expenses...... 4,152.8 4,215.0 (1.5) 13,323.4 12,706.3 4.9 _________ _________ _________ _________ Income before income taxes........... 316.4 177.9 77.9 77.4 422.5 (81.7) Income taxes......................... 104.3 48.5 115.1 1.4 115.0 (98.8) _________ _________ _________ _________ Net income....................... $ 212.1 $ 129.4 63.9 $ 76.0 $ 307.5 (75.3) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax (included above)......... $ (.5) $ (20.2) 97.5 $ (20.0) $ (35.7) 44.0 _________ _________ _________ _________ _________ _________ _________ _________ Net income per common share.......... $ 1.86 $ 1.15 61.7 $ .67 $ 2.73 (75.5) _________ _________ _________ _________ _________ _________ _________ _________
Overview ________ The company reported net income of $212 million and $76 million for the three and nine months ended September 30, 1995, respectively, compared with net income of $129 million and $308 million for the same periods a year ago. The company's earnings (after-tax) adjusted for additions to environmental-related claims reserves and net realized capital losses follow (in millions):
Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Net income................................... $ 212.1 $ 129.4 $ 76.0 $ 307.5 Less: Additions to environmental-related claims reserves (1)..................... - (30.2) (505.7) (127.8) Net realized capital losses............... (.5) (20.2) (20.0) (35.7) _______ _______ _______ _______ Adjusted earnings............................ $ 212.6 $ 179.8 $ 601.7 $ 471.0 _______ _______ _______ _______ _______ _______ _______ _______ (1) Please see the company's Form 10-Q for the quarter ended June 30, 1995 for discussions of additions to environmental-related claims reserves.
The company's adjusted earnings increased $33 million and $131 million for the three and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. The following significant factors impact the comparison of adjusted earnings: Catastrophe losses (after-tax and net of reinsurance) for the three and nine months ended September 30, 1995 were $13 million and $51 million, respectively, compared with $28 million and $181 million, respectively, for the same periods a year ago. Catastrophe losses for the nine months ended September 30, 1994 related primarily to the Los Angeles earthquake and the severe winter weather. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Overview (Continued) ____________________ Reductions of prior year loss reserves in the personal auto business of $61 million (after-tax) for the nine months ended September 30, 1994. Results in 1995 also reflected increased operating expenses in the health care business as a result of the migration of customers from traditional health care products to the more resource- intensive managed care business and the company's increased investment in managed care, and in the Aetna Life Insurance & Annuity segment as a result of continued business growth and costs associated with the implementation of a new contract administration system. Partially offsetting these increases in operating expenses are overall reductions due to actions taken by management in prior years to lower costs. Net Realized Capital Gains and Losses Net realized after-tax capital gains and losses included in net income, supporting discontinued products, and allocable to experience rated pension contractholders were as follows (in millions):
Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Net realized capital gains (losses) from sales................................. $ (.5) $ (1.4) $ (22.6) $ 26.0 Realized capital gains (losses) from changes in reserves for mortgage loans and real estate...................... - (17.9) 2.6 (59.9) Realized capital losses from write-downs of debt and equity securities.............. - (.9) - (1.8) _______ _______ ________ _______ Net realized capital losses included in net income.............................. $ (.5) $ (20.2) $ (20.0) $ (35.7) _______ _______ ________ _______ _______ _______ ________ _______ Net realized capital gains (losses) on assets supporting discontinued products (excluded above).................. $ 2.3 $ (60.5) $ (3.3) $(114.8) _______ _______ ________ _______ _______ _______ ________ _______ Net realized capital gains (losses) allocable to experience rated pension contractholders (excluded above)........... $ 40.9 $ (16.9) $ 48.2 $ (88.5) _______ _______ ________ _______ _______ _______ ________ _______
Net realized capital losses from sales for the nine months ended September 30, 1995 include $23 million resulting from the write- down to estimated fair market value of the company's investment in a consolidated subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., which it intends to sell. Net realized capital gains from sales for the nine months ended September 30, 1994 include a $14 million gain resulting from the sale of a portion of an unconsolidated subsidiary. Strategic Outlook The company continues to review strategic options for all of its businesses, which may result in acquisitions, sales or spinoffs. As of the date hereof, the company is exploring all of these options, including having discussions concerning the possible sale of its property-casualty business. No assurances can be made that there will be any transaction. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans __________________
Operating Summary (Millions) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,501.3 $ 1,476.4 1.7% $ 4,457.8 $ 4,233.0 5.3% Net investment income............... 95.5 86.2 10.8 276.7 255.6 8.3 Fees and other income............... 318.0 296.7 7.2 961.6 894.5 7.5 Net realized capital losses......... (5.0) (6.2) 19.4 (15.1) (23.6) 36.0 _________ _________ _________ _________ Total revenue.................... 1,909.8 1,853.1 3.1 5,681.0 5,359.5 6.0 Current and future benefits......... 1,271.6 1,257.4 1.1 3,818.0 3,569.3 7.0 Operating expenses.................. 525.1 451.2 16.4 1,509.0 1,360.0 11.0 Amortization of deferred policy acquisition costs.................. 5.4 14.9 (63.8) 18.6 29.6 (37.2) _________ _________ _________ _________ Total benefits and expenses...... 1,802.1 1,723.5 4.6 5,345.6 4,958.9 7.8 _________ _________ _________ _________ Income before income taxes.......... 107.7 129.6 (16.9) 335.4 400.6 (16.3) Income taxes........................ 39.1 47.3 (17.3) 123.7 146.9 (15.8) _________ _________ _________ _________ Net income.......................... $ 68.6 $ 82.3 (16.6) $ 211.7 $ 253.7 (16.6) _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax (included above)........ $ (3.3) $ (4.2) 21.4 $ (9.6) $ (15.4) 37.7 _________ _________ _________ _________ _________ _________ _________ _________ Self-funded benefit payments administered for customers other than Medicare...................... $ 3,053.3 $ 3,206.0 (4.8) $ 9,466.2 $ 9,243.7 2.4 _________ _________ _________ _________ _________ _________ _________ _________ Benefit payments administered for Medicare........................... $ 3,531.6 $ 3,381.9 4.4 $10,444.2 $ 9,899.2 5.5 _________ _________ _________ _________ _________ _________ _________ _________
Aetna Health Plans' net income for the three and nine months ended September 30, 1995 decreased by $14 million and $42 million, respectively, compared with the same periods a year ago. Excluding net realized capital losses, results for the three and nine months ended September 30, 1995 decreased $15 million and $48 million, respectively, from the prior year. Third quarter and year-to-date 1995 results reflected increased operating expenses and unfavorable medical claim experience (included in current and future benefits) reflecting an increase in medical trend (utilization and costs of medical care) in indemnity and preferred provider lines of business. The growth in operating expenses is primarily attributable to the migration of customers from traditional health care products to the more resource-intensive managed care business, investments in managed care-related systems and the development of primary care physician practices. These increased expenses are consistent with the company's continued focus on a strategy for investing in managed care. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Health Plans (Continued) ______________________________ Premiums and fees and other income increased 3% and 6% during the three and nine months ended September 30, 1995 compared with the same periods in 1994, primarily resulting from growth in managed care members, modest price increases and a movement toward higher revenue products, such as point-of-service and health maintenance organizations. The number of members covered under health care arrangements was 15.6 million at September 30, 1995 and December 31, 1994. The number of managed care members was 7.9 million and 7.0 million at September 30, 1995 and December 31, 1994, respectively. Included in the number of members at September 30, 1995 and December 31, 1994 were approximately .7 million members covered under a contract with the Civilian Health and Military Program of the Uniformed Services ("Champus"). Champus has awarded renewal of the contract to another provider. The company has commenced litigation challenging such renewal, based on issues related to the process by which renewal of the contract was awarded. Even if such litigation is unsuccessful, the company would remain the primary provider under the contract until March 31, 1996. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Aetna Life Insurance & Annuity ______________________________
Operating Summary (Millions) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 37.7 $ 37.0 1.9% $ 129.7 $ 111.7 16.1% Net investment income............... 259.5 233.5 11.1 763.1 714.1 6.9 Fees and other income............... 86.9 76.9 13.0 258.0 233.3 10.6 Net realized capital gains (losses). 8.7 2.7 - 17.9 (2.0) - _________ _________ _________ ________ Total revenue.................... 392.8 350.1 12.2 1,168.7 1,057.1 10.6 Current and future benefits......... 245.6 220.5 11.4 723.6 667.2 8.5 Operating expenses.................. 70.1 59.2 18.4 213.8 178.4 19.8 Amortization of deferred policy acquisition costs.................. 6.9 12.0 (42.5) 27.9 32.5 (14.2) _________ _________ _________ _________ Total benefits and expenses...... 322.6 291.7 10.6 965.3 878.1 9.9 _________ _________ _________ _________ Income before income taxes.......... 70.2 58.4 20.2 203.4 179.0 13.6 Income taxes........................ 23.9 18.3 30.6 67.1 58.1 15.5 ________ _________ _________ _________ Net income.......................... $ 46.3 $ 40.1 15.5 $ 136.3 $ 120.9 12.7 ________ _________ _________ _________ ________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)........ $ 5.6 $ 1.5 - $ 11.6 $ (1.5) - _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above (1).......................... $ 966.9 $ 777.4 24.4 $ 2,817.1 $ 2,447.5 15.1 _________ _________ _________ _________ _________ _________ _________ _________ (1) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue.
Aetna Life Insurance & Annuity's net income for the three and nine months ended September 30, 1995 increased $6 million and $15 million, respectively, from the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months ended September 30, 1995 increased $2 million as compared to the same periods a year ago. Third quarter and year-to-date results in 1995 reflected an increase in fees assessed against policyholders and increased net investment income related to the growth in assets under management offset by an increase in operating expenses. The increase in operating expenses primarily reflects continued business growth. Operating expenses for the nine months ended September 30, 1995 also include increased costs associated with the implementation of a new contract administration system. Assets under management were $24.3 billion and $19.3 billion, at September 30, 1995 and 1994, respectively. Included in assets under management are net unrealized capital gains of approximately $460 million and net unrealized capital losses of approximately $230 million at September 30, 1995 and 1994, respectively. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions ___________________
Operating Summary (Millions) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 16.4 $ 47.1 (65.2)% $ 199.6 $ 147.3 35.5% Net investment income............... 450.6 514.2 (12.4) 1,396.1 1,528.9 (8.7) Fees and other income............... 32.7 29.9 9.4 100.8 93.2 8.2 Net realized capital gains (losses). 1.4 (7.5) - 7.3 (21.5) - _________ _________ _________ _________ Total revenue.................... 501.1 583.7 (14.2) 1,703.8 1,747.9 (2.5) Current and future benefits......... 449.7 537.8 (16.4) 1,550.0 1,636.2 (5.3) Operating expenses.................. 18.7 20.8 (10.1) 61.8 65.2 (5.2) _________ _________ _________ _________ Total benefits and expenses...... 468.4 558.6 (16.1) 1,611.8 1,701.4 (5.3) _________ _________ _________ _________ Income before income taxes.......... 32.7 25.1 30.3 92.0 46.5 97.8 Income taxes........................ 10.9 6.9 58.0 30.2 10.3 193.2 _________ _________ _________ _________ Net income.......................... $ 21.8 $ 18.2 19.8 $ 61.8 $ 36.2 70.7 _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital gains (losses), net of tax (included above)....... $ .8 $ (4.8) - $ 4.6 $ (13.7) - _________ _________ _________ _________ _________ _________ _________ _________ Deposits not included in premiums above (1)......................... $ 351.2 $ 447.4 (21.5) $ 1,260.9 $ 1,430.3 (11.8) _________ _________ _________ _________ _________ _________ _________ _________ (1) Under Financial Accounting Standard No. 97, certain deposits are not included in premiums or revenue.
Large Case Pensions' net income for the three and nine months ended September 30, 1995 increased by $4 million and $26 million, respectively, compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months ended September 30, 1995 decreased $2 million and increased $7 million, respectively, from the prior year. Results for the three and nine months ended September 30, 1995 primarily reflected an increase in fees and other income and in net interest margins and a reduction in operating expenses. Such favorable results for the three months ended September 30, 1995 were more than offset by the effects of reducing net investment income as a result of returning capital to the parent company. Assets under management were $47.0 billion and $47.8 billion, at September 30, 1995 and 1994, respectively. Included in assets under management are net unrealized capital gains of approximately $400 million and net unrealized capital losses of approximately $400 million at September 30, 1995 and 1994, respectively. The increase in year-to-date 1995 premiums primarily related to additional premiums from existing contractholders and did not have a material effect on results. 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ Experience rated contractholder and participant withdrawals and transfers were as follows (excluding contractholder transfers to other company products) (in millions):
Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Scheduled contract maturities and benefit payments: (1)......... $ 228.6 $ 274.6 $ 734.6 $ 776.5 ________ ________ ________ ________ ________ ________ ________ ________ Contractholder withdrawals other than scheduled contract maturities and benefit payments.............. $ 55.8 $ 70.0 $ 244.4 $ 382.0 ________ ________ ________ ________ ________ ________ ________ ________ Participant withdrawals............ $ 36.1 $ 96.6 $ 133.7 $ 205.2 ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity and other amounts distributed in accordance with contract schedules.
The company is exploring sale or other alternatives for certain portions of its large case pension investment management and advisory business conducted through its subsidiary, Aeltus Investment Management. Such business contributed $4 million and $11 million to Large Case Pensions' net income for the three and nine months ended September 30, 1995, respectively, as compared to $3 million and $12 million for the same periods a year ago. Discontinued Products Results of discontinued fully guaranteed large case pension products (guaranteed investment contracts ("GICs") and single- premium annuities ("SPAs")) for the three and nine months ended September 30, 1995 and 1994 were charged to the reserve for anticipated future losses 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. Management believes the reserve for anticipated losses at September 30, 1995 is adequate to provide for future losses associated with these products. To the extent that actual future losses differ from anticipated future losses, the company's results of operations would be affected. (Please refer to the company's 1994 Annual Report to Shareholders for a more complete discussion of the reserve for anticipated future losses on discontinued products.) 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ At the time of discontinuance, a receivable from continuing products was established for each discontinued product equivalent to the net present value of the anticipated cash flow shortfalls. The receivables, on which interest is accrued at the discount rates used to calculate the loss on discontinuance, will be funded, net of taxes on the accrued interest, from invested assets supporting Large Case Pensions. The offsetting payable, on which interest is similarly accrued, was established in continuing products. The interest on such payable generally offsets the investment income on the assets available to fund the shortfall. At September 30, 1995, for GICs and SPAs, the receivables from continuing operations, net of the related deferred taxes payable on the accrued interest income of $12 million and $18 million, respectively, were $413 million and $468 million, respectively. As of September 30, 1995, no funding had taken place. Results of discontinued products were as follows (in millions):
Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1995 ________________________________ _______________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ (Negative) Positive interest margin (1).......................... $ (11.0) $ 1.8 $ (9.2) $ (30.3) $ (1.6) $ (31.9) Net realized capital gains (losses)... (8.2) 10.5 2.3 (28.4) 25.1 (3.3) Interest earned on receivable from continuing operations............... 3.3 5.0 8.3 9.9 14.9 24.8 Other, net............................ .8 .9 1.7 1.5 2.6 4.1 ________ ________ ________ ________ ________ ________ Results of discontinued products, after-tax........................... $ (15.1) $ 18.2 $ 3.1 $ (47.3) $ 41.0 $ (6.3) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax............................... $ (21.8) $ 27.3 $ 5.5 $ (69.1) $ 60.1 $ (9.0) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net realized capital gains (losses) from sales of bonds, after-tax, included above....................... $ 4.8 $ 10.2 $ 15.0 $ (4.2) $ 33.3 $ 29.1 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1994 1994 ________________________________ _______________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Negative interest margin (1).......... $ (22.2) $ (.1) $ (22.3) $ (64.6) $ (2.3) $ (66.9) Net realized capital losses........... (47.8) (12.7) (60.5) (85.0) (29.8) (114.8) Interest earned on receivable from continuing operations............... 3.1 4.6 7.7 9.3 13.6 22.9 Other, net............................ (.6) 1.2 .6 2.9 6.2 9.1 ________ ________ ________ ________ ________ ________ Results of discontinued products, after-tax........................... $ (67.5) $ (7.0) $ (74.5) $ (137.4) $ (12.3) $ (149.7) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Results of discontinued products, pretax.............................. $ (103.1) $ (7.3) $ (110.4) $ (211.5) $ (18.8) $ (230.3) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Net realized capital losses from sales of bonds, after-tax, included above....................... $ (17.6) $ (3.1) $ (20.7) $ (26.3) $ (11.3) $ (37.6) ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Represents the amount by which interest credited to holders of fully guaranteed large case pension contracts exceeds or is less than interest earned on invested assets supporting such contracts.
29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Large Case Pensions (Continued) _______________________________ The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax, in millions):
Nine Months Ended September 30, 1995 ________________________________________ GICs SPAs Total ____ ____ ________ Reserve at December 31, 1994...... $ 345.6 $ 651.4 $ 997.0 Results of discontinued products.. (69.1) 60.1 (9.0) ________ ________ ________ Reserve at September 30, 1995..... $ 276.5 $ 711.5 $ 988.0 ________ ________ ________ ________ ________ ________
At September 30, 1995 and December 31, 1994, estimated future after-tax capital losses of $104 million and $128 million ($159 million and $196 million, pretax), respectively, attributable primarily to mortgage loans and real estate supporting GICs, and $40 million and $48 million ($61 million and $73 million, pretax), respectively, attributable primarily to mortgage loans and real estate supporting SPAs were expected to be charged to the reserve for future losses. Distributions on GICs and SPAs were as follows (in millions):
Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1995 ________________________________ _______________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Scheduled contract maturities, GIC settlements and benefit payments (1)...................... $ 411.2 $ 135.7 $ 546.9 $1,670.5 $ 397.9 $2,068.4 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 24.6 $ - $ 24.6 $ 73.9 $ - $ 73.9 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1994 1994 ________________________________ _______________________________ GICs SPAs Total GICs SPAs Total ____ ____ ________ ____ ____ ________ Scheduled contract maturities and benefit payments (1).......... $ 424.0 $ 135.6 $ 559.6 $1,507.7 $ 399.5 $1,907.2 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Participant directed withdrawals... $ 29.8 $ - $ 29.8 $ 155.9 $ - $ 155.9 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ (1) Includes payments made upon contract maturity, early settlement of GIC liabilities in 1995 and other amounts distributed in accordance with contract schedules.
Cash required to meet the above payments was provided by earnings on, sales of, and scheduled payments on, invested assets. (Please see "General Account Investments" on page 35 for a discussion of investments supporting discontinued products.) 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty _________________
Operating Summary (Millions) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 1,025.6 $ 1,078.3 (4.9)% $ 3,075.7 $ 3,289.7 (6.5)% Net investment income............... 234.4 209.7 11.8 671.4 631.6 6.3 Fees and other income............... 22.0 26.6 (17.3) 65.0 89.1 (27.0) Net realized capital losses......... (3.8) (21.1) 82.0 (38.8) (4.9) - _________ _________ ________ _________ Total revenue.................... 1,278.2 1,293.5 (1.2) 3,773.3 4,005.5 (5.8) Current and future benefits......... 783.2 915.2 (14.4) 3,132.1 2,881.4 8.7 Operating expenses.................. 195.2 185.2 5.4 589.9 659.4 (10.5) Amortization of deferred policy acquisition costs.................. 159.4 173.0 (7.9) 474.9 488.9 (2.9) _________ _________ ________ _________ Total benefits and expenses...... 1,137.8 1,273.4 (10.6) 4,196.9 4,029.7 4.1 _________ _________ ________ _________ Income (loss) before income taxes... 140.4 20.1 - (423.6) (24.2) - Income taxes (benefits)............. 40.9 (5.9) - (173.5) (44.0) - _________ _________ _________ _________ Net income (loss)................... $ 99.5 $ 26.0 - $ (250.1) $ 19.8 - _________ _________ _________ _________ _________ _________ _________ _________ Net realized capital losses, net of tax (included above)........ $ (2.0) $ (10.8) 81.5 $ (20.3) $ (2.1) - _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio...................... 109.6% 125.7% - 134.6% 125.2% - _________ _________ _________ _________ _________ _________ _________ _________ Statutory combined loss and expense ratio (1).................. 109.6% 121.2% - 109.4% 119.1% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio.............................. 107.8% 113.9% - 133.8% 119.7% - _________ _________ _________ _________ _________ _________ _________ _________ GAAP combined loss and expense ratio (1).......................... 107.8% 109.6% - 108.6% 113.6% - _________ _________ _________ _________ _________ _________ _________ _________ Catastrophe loss ratio (included in combined ratios above) 1.9% 4.1% - 2.5% 8.2% - _________ _________ _________ _________ _________ _________ _________ _________ (1) Excludes the effect of additions to environmental-related claims reserves.
Property-Casualty's earnings (after-tax) adjusted for additions to environmental-related claims reserves and net realized capital losses follow (in millions):
Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 1995 1994 ____ ____ ____ ____ Net income (loss)............................ $ 99.5 $ 26.0 $(250.1) $ 19.8 Less: Additions to environmental-related claims reserves (1)..................... - (30.2) (505.7) (127.8) Net realized capital losses............... (2.0) (10.8) (20.3) (2.1) _______ _______ _______ _______ Adjusted earnings............................ $ 101.5 $ 67.0 $ 275.9 $ 149.7 _______ _______ _______ _______ _______ _______ _______ _______ (1) Please see the company's Form 10-Q for the quarter ended June 30, 1995 for discussions of additions to environmental-related claims reserves.
31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Property-Casualty's adjusted earnings for the three and nine months ended September 30, 1995 increased $35 million and $126 million, respectively, as compared with the same periods in 1994. The following significant factors impact the comparison of adjusted earnings: Catastrophe losses (after-tax and net of reinsurance) for the three and nine months ended September 30, 1995 were $13 million and $51 million ($31 million and $148 million pretax and before reinsurance), respectively, compared with $28 million and $181 million ($58 million and $446 million pretax and before reinsurance), respectively, for the same periods a year ago. Catastrophe losses for the nine months ended September 30, 1994 included $171 million ($434 million pretax and before reinsurance) from the Los Angeles earthquake and the severe winter weather. Reductions of prior year loss reserves in the personal auto business of $61 million (after-tax) for the nine months ended September 30, 1994. Results in 1995 also reflected a reduction in the level of ongoing operating expenses, primarily due to actions taken by management in prior years to lower costs, a reduction in losses due to the transfer of additional risk through restructured and expanded reinsurance programs and higher net investment income. Results for the three and nine months ended September 30, 1994 reflected a reduction in operating expenses of $13 million from non-recurring items. Premium revenue for the three and nine months ended September 30, 1995 was approximately 5% and 7%, respectively, lower than in the same periods a year ago, due primarily to the transferring of additional risk through restructured and expanded reinsurance programs, and reductions in residual market business assumed as a result of exiting certain markets. Net realized capital losses (after-tax) for the nine months ended September 30, 1995 include $23 million resulting from the write- down to estimated fair market value of the company's investment in a consolidated subsidiary, Aetna Re-Insurance Company (U.K.) Ltd., which it intends to sell. Management continues to evaluate personal auto market conditions in each state and attempts to maintain or increase the company's presence in those states that offer acceptable returns and reduce its presence in those remaining states where the company is unable to earn acceptable returns. Catastrophe losses (pretax and before reinsurance) associated with Hurricane Opal, which occurred subsequent to September 30, 1995, are currently estimated to be approximately $27 million. The related losses (after-tax and net of reinsurance) are not expected to be material to the company. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Property-Casualty (Continued) _____________________________ Property-Casualty Reserves For a full discussion of property-casualty reserves, including environmental and asbestos-related reserves, please see the company's 1994 Annual Report to Shareholders and Form 10-K for the year ended December 31, 1994, and Forms 10-Q for the quarters ended March 31, 1995 and June 30, 1995. See also Notes 3 and 13 of the Condensed Notes to Financial Statements on pages 9 and 18 herein. 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. Over the last few years, asbestos bodily injury claims also have been filed by plaintiffs against entities (including insureds of the company) that installed 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 on product liability claims. As described in the company's 1994 Annual Report to Shareholders, a case involving one such major producer that had exhausted applicable policy limits on asbestos products claims and asserted coverage under policy provisions for other types of liability had been submitted to binding arbitration. That case was settled in the third quarter, and the company obtained a release from the insured for all current and future asbestos bodily injury claims and certain asbestos property damage claims (along with all environmental claims) under existing policies in exchange for fixed, scheduled cash payments over time, which were recorded on a discounted basis. In connection with this settlement, $120 million of property-casualty reserves not previously classified as covering asbestos-related claims were transferred to asbestos reserves. No amounts were transferred from environmental reserves, and the environmental-related portion of the settlement was covered by existing environmental reserves. As a result, this settlement did not affect results of operations in the third quarter of 1995. As part of the settlement, the company also agreed, among other things, to make insurance coverage available to the insured in the year 2000 (on a one-time basis), for a percentage of all asbestos defense and indemnity claim payments made by the insured during the years 2000 through 2007. The company's payment obligations would be subject to annual dollar caps. Given the uncertainty as to whether the insured will elect to purchase this additional insurance, no related premiums or losses have been recorded by the company at this time. Although there is inadequate history from which the company can estimate its ultimate liability for all non-products asbestos claims, the company believes that the settlement of this major case has materially reduced its exposure to such claims. Reserving for asbestos-related claims is subject to significant uncertainties and management is currently unable to make a reasonable estimate as to the ultimate amount of losses or a reasonable range of losses for all asbestos-related claims and related litigation expenses. However, reserves for asbestos liabilities are being evaluated by management as the company continues to gather and analyze new information and reassess its reserving techniques for these claims in order to determine whether it can better estimate its liability. Adjustments may be made to such reserves as loss patterns develop and other information is obtained. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International _____________
Operating Summary (Millions) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Premiums............................ $ 275.0 $ 219.9 25.1% $ 747.9 $ 658.3 13.6% Net investment income............... 76.1 68.7 10.8 231.5 225.3 2.8 Fees and other income............... 35.2 24.1 46.1 90.9 69.2 31.4 Net realized capital gains (losses). (1.8) - - (3.5) 5.9 - _________ _________ _________ _________ Total revenue.................... 384.5 312.7 23.0 1,066.8 958.7 11.3 Current and future benefits......... 241.3 200.8 20.2 657.5 599.4 9.7 Operating expenses.................. 89.0 72.0 23.6 269.4 247.8 8.7 Amortization of deferred policy acquisition costs.................. 19.9 14.9 33.6 54.0 41.0 31.7 _________ _________ _________ _________ Total benefits and expenses...... 350.2 287.7 21.7 980.9 888.2 10.4 _________ _________ _________ _________ Income before income taxes.......... 34.3 25.0 37.2 85.9 70.5 21.8 Income taxes........................ 11.8 7.3 61.6 25.7 22.5 14.2 _________ _________ _________ ________ Net income.......................... $ 22.5 $ 17.7 27.1 $ 60.2 $ 48.0 25.4 _________ _________ _________ _________ _________ _________ _________ __________ Net realized capital gains (losses), net of tax (included above)........ $ (1.5) $ .7 - $ (4.0) $ 3.5 - _________ _________ _________ _________ _________ _________ _________ _________
International's net income for the three and nine months ended September 30, 1995 increased $5 million and $12 million compared with the same periods a year ago. Excluding net realized capital gains and losses, results for the three and nine months ended September 30, 1995 increased $7 million and $20 million, respectively, from the same periods a year ago. The improvement in results primarily reflected increased earnings in the Pacific Rim and Chile. During the third quarter of 1994, the company changed its accounting for its Korean affiliate from the consolidated basis of accounting to the equity basis of accounting. The company recognized revenue of $98 million and benefits and expenses of $98 million for the nine months ended September 30, 1994 from the affiliate. During the first quarter of 1995, the company sold its interest in the affiliate at book value. During the first quarter of 1995, the company increased its ownership in several of its Chilean operating subsidiaries. The effects of this increased ownership are not expected to materially impact the results of the segment. 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Corporate _________
Operating Summary (Millions, after-tax) Three Months Ended September 30, Nine Months Ended September 30, ________________________________ _______________________________ 1995 1994 % Change 1995 1994 % Change ____ ____ ________ ____ ____ ________ Interest expense............. $ 18.0 $ 15.5 16.1% $ 53.9 $ 43.1 25.1% Other expense................ 28.6 39.4 (27.4) 90.0 128.0 (29.7)
The increase in interest expense of $3 million and $11 million for the three and nine months ended September 30, 1995 compared to the same periods a year ago resulted from the issuance by a subsidiary of $275 million of 9 1/2 % cumulative monthly income preferred securities in November 1994. Other expense for the nine months ended September 30, 1995 included after-tax capital losses of $2 million. After-tax capital losses were less than $1 million for the three months ended September 30, 1995. Included in other expenses for the three and nine months ended September 30, 1994 were after-tax capital losses of $3 million and $7 million, respectively. Excluding net realized capital losses, the decrease in other expenses in 1995 resulted from a reduction of corporate staff area expenses associated with the company's 1994 restructuring. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments ___________________________ The company's invested assets were comprised of the following, net of impairment reserves:
September 30, December 31, (Millions) 1995 1994 _________________________________________________________________________________ Debt securities: Held for investment, at amortized cost (fair value $1,916.1 and $1,991.2) $ 1,888.1 $ 2,000.8 Available for sale, at fair value (amortized cost $38,104.8 and $36,984.2) 39,210.7 35,110.7 Equity securities, at fair value (cost $1,181.9 and $1,326.9) 1,652.1 1,655.6 Short-term investments 866.7 450.4 Mortgage loans 10,446.1 11,843.6 Real estate 1,654.5 1,545.7 Policy loans 593.7 533.8 Other 1,026.6 1,152.7 ________________________________________________________________________________ Total invested assets $ 57,338.5 $ 54,293.3 ________________________________________________________________________________ ______________________________
Please refer to the company's 1994 Annual Report to Shareholders for a description of the company's investment objectives and policies. The change in invested assets from December 31, 1994 to September 30, 1995 primarily reflected appreciation of debt securities due to a decrease in interest rates, partially offset by a decrease in mortgage loans. Debt securities included net unrealized capital gains of $1.1 billion at September 30, 1995, compared with net unrealized capital losses of $1.9 billion at December 31, 1994. Of such net unrealized capital gains at September 30, 1995, net gains of $266 million and $461 million related to assets supporting discontinued products and experience rated pension contractholders, respectively. The decrease in mortgage loans principally reflected prepayments, payments at maturity on mortgage loans, foreclosures and the company's adoption of FAS Nos. 114 and 118 on January 1, 1995. 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 reserve on discontinuance of products. 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Debt Securities As of September 30, 1995 and December 31, 1994, the company's investments in debt securities represented 72% and 68%, respectively, of total general account invested assets and were as follows:
September 30, December 31, (Millions) 1995 1994 ____________________________________________________________________________ Supporting discontinued products $ 5,760.3 $ 6,155.0 Supporting experience rated products 13,339.9 11,770.5 Supporting remaining products 21,998.6 19,186.0 _____________________________ Total $41,098.8 $37,111.5 _____________________________ _____________________________
Included in the company's total debt security balances were the following categories of debt securities:
(Millions) September 30, 1995 _______________________________________________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Debt Securities Securities Debt Securities ______________________ ______________ ___________________ Total $1,727.9 $ 52.9 $ 142.1 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 26.7% 8.7% 48.8% Supporting experience rated products 35.3 23.1 28.7 Supporting remaining products 38.0 68.2 22.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ December 31, 1994 ________________________________________________________________ "Below Investment "Problem" Debt "Potential Problem" Grade" Debt 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% ________ ________ ________ ________ ________ ________
"Below investment grade" debt 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. 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Management defines "problem" debt securities to be securities for which payment is in default, securities of issuers which are currently in bankruptcy or in out-of-court reorganizations, or securities of issuers for which bankruptcy or reorganization within six months is considered likely. "Potential problem" debt securities are currently performing debt securities for which neither payment default nor debt restructuring is anticipated within six months, but whose issuers are experiencing significant financial difficulties. Identifying such potential problem debt securities requires significant judgment as to likely future market conditions and developments specific to individual debt securities. The company does not accrue interest on problem debt securities when management believes the likelihood of collection of interest is doubtful. Lost investment income on problem debt securities was as follows:
Three Months Ended Nine Months Ended September 30, September 30, __________________ _________________ (Millions) 1995 1994 1995 1994 __________________________________________________________________________________ Allocable to discontinued products $ .4 $ 1.0 $ 1.2 $ 2.9 Allocable to experience rated products .2 .2 .9 .6 Allocable to remaining products 1.1 .9 2.5 3.6
At September 30, 1995 and December 31, 1994, the carrying value (fair value) of collateralized mortgage obligations ("CMOs") was $3.4 billion. 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 September 30, 1995 and December 31, 1994, approximately 75% and 82%, 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 September 30, 1995 and December 31, 1994, approximately 70% and 74%, respectively, of the company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest is backed by specified government agencies (e.g., GNMA, FNMA, FHLMC). Z-tranches, which amounted to approximately 13% and 8% of the company's CMO holdings at September 30, 1995 and December 31, 1994, respectively, receive principal payments from the underlying mortgage pool only after all other priority classes have been retired. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Mortgage Loans During the first nine months of 1995, the mortgage loan portfolio was reduced 12% to $10.4 billion, net of impairment reserves. The company's mortgage loan investments, net of impairment reserves, supported the following types of business:
September 30, December 31, (Millions) 1995 1994 _______________________________________________________________________ Supporting discontinued products $ 3,931.0 $ 4,294.9 Supporting experience rated products 2,966.1 3,652.1 Supporting remaining products 3,549.0 3,896.6 _____________________________ Total $10,446.1 $11,843.6 _____________________________ _____________________________
During the first nine months of 1995, 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. Mortgage loans, net of impairment reserves, now represent 18% of total general account invested assets, down from 38% in 1990. During this period, the principal balance of the mortgage portfolio was reduced by 52%. The principal balance of mortgage loans decreased $1.4 billion since December 31, 1994 primarily reflecting the effect of repayments of maturing loans and loan prepayments and foreclosures. During 1994, 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 possess 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 $247 million and collateral with a fair market value of $169 million were foreclosed upon in the first nine months of 1995. 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 September 30, 1995 and December 31, 1994, there were $211 million and $193 million, respectively, of in-substance foreclosures (net of write-offs of $177 million and $136 million, respectively). 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Included in the company's total mortgage loan balances were the following categories of mortgage loans:
(Millions) September 30, 1995 ____________________________________________________________________________________________________________ Restructured Potential Problem Loans Loans Problem Loans* Total _____________ ____________ ______________ _____ Total $ 382.1 $ 576.2 $1,101.5 $2,059.8 ________ ________ ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 22.8% 49.3% 50.0% Supporting experience rated products 42.2 26.7 26.5 Supporting remaining products 35.0 24.0 23.5 ________ ________ ________ 100.0% 100.0% 100.0% ________ ________ ________ ________ ________ ________ Impairment reserves (1) $ 757.2** ________ ________ Impairment reserves as a percentage of total 36.8% ________ ________ 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% ________ ________ (1) Please see Note 6 of Condensed Notes to Financial Statements for composition of impairment reserves between specific and general impairment reserves. * In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (Please see Note 6 of Condensed Notes to Financial Statements), management has revised the definition of "potential problem loans". (Please see "potential problem loans" on page 40.) ** The general reserve at December 31, 1994 excluded reserves of approximately $208.5 million related to experience rated products. Had such reserves been included, total reserves would have been $992.6 million. In connection with the company's adoption of FAS Nos. 114 and 118, the general reserve at September 30, 1995 included such reserves, related to experience rated products. The inclusion of these reserves did not impact earnings or shareholders' equity.
"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 decreased to $286 million at September 30, 1995 from $422 million at December 31, 1994. 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ "Restructured loans" are loans whose original contract terms have been modified to grant concessions to the borrower and are currently performing pursuant to such modified terms. Restructured loans that have a market rate of interest at the time of the restructure (which represents the interest rate the company would charge for a new loan with comparable risk) and demonstrate sustainable performance (as generally evidenced by six months of pre- or post-restructuring payment performance in accordance with the restructured terms) may be returned to performing status. (Please see the company's 1994 Annual Report to Shareholders for a complete description of the company's restructuring program.) During the three and nine months ended September 30, 1995, a loan which had been restructured, with a carrying value of $11 million (net of write-offs of $3 million) and with a current yield of 9% was classified as performing. In connection with the company's adoption of FAS Nos. 114 and 118 on January 1, 1995 (please see Note 6 of Condensed Notes to Financial Statements), management has revised the definition of "potential problem loans" to include all loans which are performing pursuant to existing terms and are considered likely to become classified as problem or restructured loans. Prior to January 1, 1995, potential problem loans were performing loans which management believed were likely to become classified as problem or restructured loans in the next 12 months or so. As a result of the revised definition, potential problem loans at September 30, 1995 are approximately $346 million higher than they would have been had the definition not been changed. Potential problem loans are identified through the portfolio review process on the basis of known information about the ability of borrowers to comply with present loan terms. Identifying such potential problem loans requires significant judgment as to likely future market conditions and developments specific to individual properties and borrowers. Provision for losses that management believes are likely to arise from such potential problem loans is included in the specific impairment reserves. (Please see Note 6 of Condensed Notes to Financial Statements for a discussion of mortgage loan impairment reserves.) 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ The company does not accrue interest on problem loans or restructured loans when management believes the collection of interest is unlikely. The amount of pretax investment income required by the original terms of such problem and restructured loans outstanding at September 30 and the portion thereof actually recorded as income were as follows:
Three Months Ended Nine Months Ended September 30, September 30, __________________ _________________ (Millions) 1995 1994 1995 1994 ___________________________________________________________________________________ Income which would have been recorded under original terms of loans $ 24.7 $ 59.2 $ 75.2 $ 166.5 Income recorded 14.4 22.9 44.1 83.4 _______ _______ _______ _______ Lost investment income $ 10.3 $ 36.3 $ 31.1 $ 83.1 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting discontinued products (included above) $ 3.8 $ 12.2 $ 10.3 $ 29.7 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting experience rated pension products (included above) $ 3.5 $ 12.4 $ 11.5 $ 25.4 _______ _______ _______ _______ _______ _______ _______ _______ Lost investment income allocated to investments supporting remaining products (included above) $ 3.0 $ 11.7 $ 9.3 $ 28.0 _______ _______ _______ _______ _______ _______ _______ _______
42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Real Estate The company's equity real estate balances, net of write-downs and reserves, were as follows:
(Millions) September 30, 1995 ________________________________________________________________________________________________ Investment Properties Total Equity Real Estate Held for Sale Real Estate ___________ _____________ ____________ Total $ 398.2 $1,256.3 (1) $1,654.5 ________ ________ ________ ________ ________ ________ Percentage of total: Supporting discontinued products 16.7% 48.9% Supporting experience rated products 6.8 22.7 Supporting remaining products 76.5 28.4 ________ ________ 100.0% 100.0% ________ ________ ________ ________ 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% ________ ________ ________ ________ (1) Includes $210.6 million and $193.4 million of in-substance foreclosures at September 30, 1995 and December 31, 1994, respectively. (Please see "Mortgage Loans" on page 38 for discussion of in-substance foreclosures.)
All real estate acquired through foreclosure, including in- substance foreclosures, is classified as properties held for sale. These properties were carried at 62% and 60% of the company's cash investment (unpaid mortgage balance plus capital additions) at September 30, 1995 and December 31, 1994, respectively. Investment real estate, which is generally carried at depreciated cost, is written down to fair value to reflect other than temporary declines in market value. The fair value of assets acquired through foreclosure is established as the cost basis at the time of foreclosure. Subsequent to acquisition, properties classified as held for sale are carried at the lower of cost or fair value less estimated selling costs. Adjustments to the carrying value of properties held for sale resulting from changes in fair value are recorded in a valuation reserve. Property valuations are reviewed regularly by investment management. Capital additions and asset improvements increase the cost basis of the asset while depreciation reduces the cost basis. 43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General Account Investments (Continued) _______________________________________ Total real estate write-downs and valuation reserves on properties included in the company's equity real estate balances were as follows:
September 30, December 31, (Millions) 1995 1994 ___________________________________________________________________________ Allocable to discontinued products $ 364.5 $ 376.0 Allocable to experience rated products 206.9 179.6 Allocable to remaining products 227.7 206.6 ________ ________ Total $ 799.1 $ 762.2 ________ ________ ________ ________
For the periods shown below, total after-tax net realized capital (gains) losses from real estate write-downs and changes in the valuation reserves were as follows:
Three Months Ended Nine Months Ended September 30, September 30, __________________ _________________ (Millions) 1995 1994 1995 1994 _____________________________________________________________________________________ Allocable to discontinued products (1) $ 13.0 $ - $ 13.0 $ 13.8 Allocable to experience rated products (2) - (.1) - 4.5 Allocable to remaining products - .1 (10.8) (*) (.3) (1) Write-downs and impairment expense allocable to discontinued products are charged against the reserve for future losses and do not affect the company's results of operations. (2) Write-downs and impairment expense allocable to experience rated products do not affect the company's results of operations. (*) Includes a $12.8 million realized capital gain related to the reversal of valuation reserves in the second quarter of 1995 on a foreclosed property that appreciated in value.
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, viewed separately, subject the company to varying degrees of market and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall market risk. Market risk is the possibility that future changes in market prices may decrease the market value of one or all of these financial instruments. Credit risk arises from the potential inability of counterparties to perform under the terms of the contracts. Management does not believe that the current level of hedging activity will have a material effect on the company's liquidity or results of operations. (Please see Note 10 of Condensed Notes to Financial Statements for a discussion of the company's hedging activities.) 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 $41.1 billion debt securities portfolio, as of September 30, 1995 were as follows:
Amortized Fair (Millions) Cost Value _____________________________________________________________________________ Collateralized mortgage obligations:............ $ 3,260.6 $ 3,378.6 Interest-only strips (included above)......... 15.6 26.8 Principal-only strips (included above)........ 49.4 62.2 Treasury and agency strips: Principal..................................... 694.3 701.6 Interest...................................... 104.8 108.5 Structured notes (1)............................ 95.0 98.9 Warrants to purchase debt securities (2)........ 2.8 3.1 Mandatorily convertible preferred stock......... 3.7 3.7 (1) Represents non-leveraged instruments whose fair values and credit risk are based on underlying securities, including fixed income securities and interest rate swap agreements. (2) Represents the right to purchase specific debt securities and is accounted for as a hedge. Upon exercise, the cost of the warrants will be added to the basis of the debt securities purchased and amortized over their lives.
45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources _______________________________ As a result of the addition by the company of $750 million ($488 million, after-tax) to the environmental-related claims reserves in the second quarter of 1995, the company intends to contribute additional capital to the company's property- casualty subsidiaries in order to restore capital levels (including risk-based capital), to appropriate levels for regulatory and other purposes, consistent with year-end 1994. Such infusion of capital of up to $450 million will be made by year-end 1995. The company currently expects to generate the funding for such capital contributions initially through short- term parent company borrowings. Cash and cash equivalents at September 30, 1995 and December 31, 1994 were $2.6 billion and $3.0 billion, respectively. For the nine months ended September 30, 1995, net cash provided by operating activities was $113 million. Net cash used for operating activities was $8 million during the first nine months of 1994. For the first nine months of 1995, net cash provided by investing activities was $84 million and included a net increase in debt securities of $827 million, offset by $1.0 billion from maturities and repayments of mortgage loans. Net cash provided by investing activities of $1.9 billion for nine months ended September 30, 1994 included a net decrease in debt securities of $305 million and $1.7 billion from maturities and repayments of mortgage loans. Short-term borrowings are used from time to time to provide for timing differences between receipts and disbursements in various portfolios. The maximum amount of domestic short-term borrowings outstanding during the first nine months of 1995 was $185 million. The company has extended the maturity of, and adjusted interest rates to current market on, certain maturing mortgage loans where the borrower was unable to obtain financing elsewhere due to tight lending practices by banks and other financial institutions over the past several years. Of the $907 million of mortgage loans scheduled to mature during the first nine months of 1995, $489 million were not paid as scheduled, a substantial portion of which supported large case pension liabilities. Of the loans not paid as scheduled, $260 million were extended at interest rates at least equal to current market (average rate of 10% over an average extension period of 5 years), $214 million were under forbearance (continuing to make payments under original loan terms) or under discussion with borrowers at September 30, 1995 and $15 million were foreclosed upon. Of the $214 million of loans under forbearance or under discussion with borrowers, $92 million were classified as problem or restructured loans at September 30, 1995. Despite various indications that liquidity is returning to certain real estate markets, the company expects it will continue to extend or refinance maturing loans in the portfolio. Pursuant to shelf registration statements declared effective by the Securities and Exchange Commission, the company may offer and sell up to $550 million of various types of securities, and Aetna Capital L.L.C., a subsidiary of the company, may offer and sell up to an additional $225 million of preferred securities. 46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) ___________________________________________ Dividends Declared On September 29, 1995, the Board of Directors declared a quarterly dividend of $.69 per share of common capital stock for shareholders of record at the close of business on October 27, 1995, payable November 15, 1995. New Accounting Pronouncements _____________________________ Please see Note 2 of Condensed Notes to Financial Statements for a discussion of recently issued accounting pronouncements. 47 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations 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 such litigation cannot be determined at this time, such litigation, net of reserves established therefore and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods. Item 5. Other Information. (a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends The following table sets forth the company's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the periods indicated.
Nine Months Ended Years ended December 31 ____________________________________ September 30, 1995 1994 1993 1992 1991 1990 __________________ ____ ____ ____ ____ ____ Ratio of Earnings to Fixed Charges.... 1.59 4.60 (a) .42(b) 2.13 3.03 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 1.59 4.60 (a) .42(b) 2.13 3.03 (a) The company 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 company's 1994 Annual Report to Shareholders.) For the nine months ended September 30, 1995 and 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. 48 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (12) Statement Re Computation of Ratios. (12.1) Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the nine months ended September 30, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990. (15) Letter Re Unaudited Interim Financial Information. (15.1) Letter from KPMG Peat Marwick LLP acknowledging awareness of the use of a report on unaudited interim financial information, dated October 27, 1995. (27) Financial Data Schedule. (b) Reports on Form 8-K None. 49 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Aetna Life and Casualty Company _______________________________ (Registrant) Date October 27, 1995 By /s/ Robert J. Price ________________________ (Signature) Robert J. Price Vice President and Corporate Controller (Chief Accounting Officer) 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
Nine Months Ended Years Ended December 31, ______________________________________________________ (Millions) September 30, 1995 1994 1993 1992 1991 1990 __________________ ____ ____ ____ ____ ________ Pretax income (loss) from continuing operations........... $ 77.4 $ 658.3 $(1,147.4) $ (121.4) $ 243.5 $ 459.6 Add back fixed charges........... 150.2 186.1 171.0 194.3 221.5 229.0 Minority interest................ 11.4 11.4 7.0 8.6 5.9 4.9 ________ _________ _________ ________ ________ ________ Income (loss) as adjusted..... $ 239.0 $ 855.8 $ (969.4) $ 81.5 $ 470.9 $ 693.5 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Fixed charges: Interest on indebtedness....... $ 88.5(1) $ 98.6(1)$ 77.4 $ 81.4 $ 110.9 $ 119.9 Portion of rents representative of interest factor............ 61.7 87.5 93.6 112.9 110.6 109.1 ________ _________ _________ ________ ________ ________ Total fixed charges........... $ 150.2 $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Preferred stock dividend requirements.................... - - - - - - ________ _________ _________ ________ ________ ________ Total combined fixed charges and preferred stock dividend requirements.................... $ 150.2 $ 186.1 $ 171.0 $ 194.3 $ 221.5 $ 229.0 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ Ratio of earnings to fixed charges......................... 1.59 4.60 (5.67) 0.42 2.13 3.03 ________ _________ _________ ________ ________ ________ ________ _________ _________ _________ ________ ________ Ratio of earnings to combined fixed charges and preferred stock dividends................. 1.59 4.60 (5.67) 0.42 2.13 3.03 ________ _________ _________ ________ ________ ________ ________ _________ _________ ________ ________ ________ (1) Includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the company's 1994 Annual Report to Shareholders.)
EX-15 3 LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION 1 Letter Re: Unaudited Interim Financial Information ___________________________________________________ Aetna Life and Casualty Company Hartford, Connecticut Gentlemen: Re: Registration Statements No. 2-73911, 2-91514, 33-12993, 33-49543, 33-50427, 33-52819, 33-52819-01 and 33-62893 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 26, 1995 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. By /s/ KPMG PEAT MARWICK LLP ___________________________ (Signature) KPMG Peat Marwick LLP Hartford, Connecticut October 27, 1995 EX-27 4 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended September 30, 1995 for Aetna Life and Casualty Company and is qualified in its entirety by reference to such statements. 1,000,000 9-MOS DEC-31-1995 SEP-30-1995 39,211 1,888 1,916 1,652 10,446 1,655 57,339 2,581 5,226 2,175 101,653 17,958 1,642 18,062 23,624 1,121 1,426 0 0 5,475 101,653 8,611 3,345 (33) 1,478 9,881 575 0 77 1 76 0 0 0 76 .67 0 0 0 0 0 0 0 0 There is not a significant difference between primary and fully diluted earnings per share.
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