Item 1. Business.
A. Organization of Business
Aetna Life and Casualty Company was organized in 1967 as a Connecticut insurance corporation. Aetna Life and Casualty Company and its subsidiaries (collectively, "Aetna" or the "company") constitute one of the nation's largest insurance/financial services organizations based on its assets at December 31, 1994. Based on 1994 premium rankings, the company also is one of the nation's largest stock insurers of property- casualty lines and one of the largest writers of health care products, and group life, annuity and pension products. Although the company offers insurance and financial services products in foreign countries, 90% of its total revenue (including Discontinued Operations - see below) in 1995 was derived from domestic sources.
The company entered into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc. for $4.0 billion in cash, subject to various closing adjustments. The sale is subject to state regulatory approval and other customary conditions and is expected to be completed no later than midyear 1996. In light of the sale agreement, the company's property-casualty operations have been classified as Discontinued Operations. (For additional information regarding Discontinued Operations, see MD&A - Overview - - Sale of Property-Casualty Operations in the 1995 Annual Report.)
The agreement to sell the company's property-casualty business reflects the company's strategic decision to focus its resources on pursuing growth opportunities in its managed care business and other remaining businesses. The company is considering a variety of strategic options, and is looking for opportunities to make managed care investments or acquisitions to further strengthen the company's overall market position. The company also expects to evaluate opportunities for growth of its financial services businesses and strengthen their competitive position, and opportunities to develop its current international operations and enter selected new markets where suitable opportunities exist.
The company's reportable segments are Aetna Health Plans, Aetna Life Insurance & Annuity, International, Large Case Pensions, Corporate and Discontinued Operations - Property-Casualty Operations. The principal products included in such segments (other than Corporate) are:
Aetna Health Plans: Health Specialty health Group insurance
Aetna Life Insurance & Annuity: Retirement and investment products (including individual and group annuities) Financial and administrative services Life insurance (including universal life, variable universal life, interest-sensitive whole life and term products)
International: Life insurance and financial services
Large Case Pensions: Group retirement and other savings products Investment management and advisory services
Discontinued Operations - Property-Casualty Operations: Automobile Fidelity and surety Fire and allied lines General liability Homeowners Marine Multiple peril Workers' compensation
B. Financial Information about Industry Segments
Revenue, income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect adjustments, income from Discontinued Operations, net of tax, net income (loss), and assets, by industry segment are set forth in Note 15 to the Financial Statements, which is incorporated herein by reference to the Annual Report. Revenue, income (loss) from continuing operations before extraordinary item and cumulative effect adjustments and income (loss) from Discontinued Operations, attributable to each industry segment are incorporated herein by reference to the Selected Financial Data in the Annual Report.
Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation.
C. Description of Business Segments
1. Aetna Health Plans
Principal Products __________________
The Aetna Health Plans ("AHP") segment consists of Health, Specialty Health and Group Insurance businesses. The Health business provides a full spectrum of managed care and traditional indemnity plans. Specialty Health products include behavioral health, pharmacy and dental plans, which provide managed care or indemnity features.
The Group Insurance business provides life insurance, disability, including managed disability, and long-term care plans. Group life insurance consists principally of renewable term coverage, the amounts of which frequently are linked to individual employee wage levels. The company also offers group universal life and whole life products. Group disability insurance includes coverage for disabled employees' income replacement benefits.
AHP products and services are marketed primarily to employers for the benefit of employees and their dependents. Plans may be insured (risk plans), whereby Aetna assumes all or a portion of health care cost and utilization risk, or self-funded (nonrisk plans), whereby employers assume all or a significant portion of such risks. AHP also provides administrative and claim services and, in many cases, partial insurance protection, for an appropriate fee or premium charge.
Continuing concern over the rising costs of health care and the need for quality assurance have resulted in a continuation of a market shift away from traditional forms of health benefit coverage to a variety of managed care products. The company offers the following Health products:
Health Maintenance Organization (HMO) plans offer the most comprehensive form of managed care. Health care for the member is coordinated by a personally selected primary care physician in AHP's HMO network, with minimal out-of-pocket costs for the member and an emphasis on preventative care. Typically, no benefits are provided if the member chooses to seek nonemergency care without referral from the primary care physician.
Preferred Provider Organization (PPO) plans offer the member a choice of any health care provider, but benefits are paid at a higher level when care is received from an AHP PPO network provider.
Point-of-Service (POS) plans blend PPO and HMO advantages. The member selects a primary care physician from AHP's POS network to provide or coordinate all necessary health care, including routine and preventative services. The member may also choose to seek care from any other provider, without referral from the primary care physician, at a reduced level of benefits.
Traditional indemnity plans allow freedom of provider choice for covered services with no in-network discounts available. These plans are not considered managed care, although they may include some medical management features, such as inpatient certification, reasonable and customary charges and benefits for preventative services (e.g. cancer screening).
At year end 1995, the company operated various types of managed care networks in approximately 241 Standard Metropolitan Statistical Areas with aggregate enrollment of approximately 8 million members. AHP contracts with approximately 200,000 physicians and more than 2,200 hospitals in all 50 states. As described above, managed care products differ from traditional indemnity products primarily through the use of health care networks (physicians, hospitals and other health care professionals and facilities) and the implementation of medical management procedures designed to enhance the quality and affordability of medical services. Such procedures, including negotiated contracts with health care providers, development and implementation of guidelines for appropriate utilization of health care resources and working with health care providers to review treatment patterns in order to improve consistency and quality, are designed to enable managed care companies and their customers to control medical costs more effectively.
With an emphasis on promoting high quality, as well as affordable health care, the company is seeking accreditation for its HMO plans from the National Committee for Quality Assurance (NCQA), a national organization established to review the quality and medical management systems of its HMOs and other managed care plans. Accreditation by NCQA is a nationally recognized standard. As of the end of 1995, eight of AHP's HMOs have received accreditation.
The company's health care network physicians and hospitals have traditionally been independent contractors. Beginning in 1993, the company, in an effort to further contain health care costs and to improve quality and network access, initiated a program to acquire or develop ownership or management interests in primary care physician practices. At the end of 1995, the company owned and managed 62 physician practices in eight cities. AHP expects to continue to invest in the acquisition or development of physician practices and in other programs which the company believes will improve its ability to control health care costs and enhance quality.
AHP continues to develop a wide range of products and services tailored to provide its members with choices to meet their individual needs and to help plan sponsors manage their benefit plan costs effectively. The number of AHP members covered under all managed and traditional indemnity health care plans was approximately 12.0 million at December 31, 1995. These members were distributed throughout all 50 states, with 3.8 million members in the northeast region of the country, 2.4 million in the southeast, 3.1 million in the central region and 2.7 million in the west.
For additional information regarding products offered by AHP, see Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Aetna Health Plans in the Annual Report.
The following table summarizes group Health and Specialty Health, and Group Insurance premiums for the years indicated:
Competition ___________
The markets in which AHP's products are sold are highly competitive. In addition to other insurance companies, AHP competes with local and regional HMOs and other types of medical and dental provider organizations, various specialty service providers, integrated health care delivery organizations and, in certain coverages, with programs sponsored by the federal or state governments. Additionally, in recent years, some large employers have moved to totally self-funded and self-administered benefit plans. Competition largely is based upon product features and prices and, in the case of managed health care plans, upon the quality of services provided, the geographic scope of the provider networks and the medical specialties available in such networks. Based on 1994 membership, Aetna is the third largest health care company in the United States and the fourth largest underwriter of group life insurance. In addition, Aetna is the largest commercial administrator of Medicare benefits, processing claims for over 7,300 hospitals, skilled nursing facilities and home health agencies, and for physicians in nine states.
Method of Distribution ______________________
Products are sold principally through salaried field representatives and home office marketing personnel who often work with independent consultants and brokers who assist in the production and servicing of business.
Reserves ________
For Group Insurance products, policy reserve liabilities are established as premiums are received to reflect the present value of expected future obligations net of the present value of expected future premiums. Policy reserves for group paid-up life insurance generally reflect long-term fixed obligations and are computed on the basis of assumed or guaranteed yield and benefit payments. Assumptions are based on Aetna's experience, which is periodically reviewed against published industry data. For long term disability products, reserves are established for (i) lives currently in payment status (using standard industry morbidity and interest rate assumptions), (ii) lives who have not satisfied the waiting period (using a percentage of premiums based on Aetna's experience) and (iii) claims that have been incurred but not reported. For Health and Specialty Health risk products, reserves reflect estimates of the ultimate cost of claims including (i) claims that have been reported but not settled, and (ii) claims that have been incurred but have not yet been reported. AHP claim reserves are based on factors derived from past experience. Reserves for most of these products reflect retrospective experience rating, except for smaller group insurance cases and HMOs, which generally are not retrospectively experience rated.
Reinsurance ___________
Aetna utilizes a variety of reinsurance agreements with nonaffiliated insurers to share insurance risks on Health, Specialty Health and Group Insurance businesses as directed by the insured and to control its exposure to large losses. Generally, these agreements are established on a case-by-case basis to reflect the circumstances of specific group insurance risks.
Group Life Insurance In Force and Other Statistical Data ________________________________________________________
The following table summarizes changes in group life insurance in force before deductions for reinsurance ceded to other companies for the years indicated:
2. Aetna Life Insurance & Annuity
Principal Products __________________
Aetna Life Insurance & Annuity ("ALIAC") markets and services two principal types of products: (1) financial services and (2) life insurance.
The financial services products include individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under IRC Sections 401, 403, 408 and 457, and individual and group nonqualified annuity contracts. These contracts may be immediate or deferred and are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, education (collectively "not-for-profit" organizations) and corporate markets. Financial services also include pension plan administrative services.
The life insurance products include universal life, variable universal life, interest-sensitive whole life and term insurance. These products are offered primarily to individuals, small businesses, employer-sponsored groups and executives of Fortune 2000 companies. ALIAC's universal life product accounted for approximately 92% of individual life sales in 1995.
Annuity products typically offer fixed (fully guaranteed and experience rated) investment options and variable investment options (discussed below). For fully guaranteed and experience rated options ALIAC earns a spread representing the difference between income on investments and interest credited to customer reserves.
The company's variable products (variable annuity and variable life contracts) utilize Separate Accounts to provide contractholders with a vehicle for investments under which the contractholders assume the investment risks as well as the benefit of favorable performance. Assets held under these products are invested, as designated by the contractholder or participant under a contract, in Separate Accounts which in turn invest in shares of mutual funds that are managed by ALIAC, where ALIAC receives fees for acting as investment advisor, or other selected mutual funds that are not managed by ALIAC.
ALIAC is compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable life and annuity contracts. ALIAC also receives fees for serving as investment advisor and providing administrative services, as well as sales charges on certain products. Various investment advisory services also are offered through a number of affiliates that are registered investment advisors.
Product retention is a key driver of profitability for annuity products. To encourage product retention, annuity contracts typically impose a surrender charge on policyholder balances withdrawn for a period of time after the contract's inception. The period of time and level of the charge vary by product. In addition, a new approach being incorporated into recent variable contracts with fixed interest account investment options allows contractholders to receive an incremental interest rate if withdrawals from the fixed account are spread over a period of five years. Further, more favorable credited rates may be offered after policies have been in force for a period of time. Existing tax penalties on annuity distributions prior to age 59-1/2 provide an additional disincentive to premature surrenders of annuity balances, but do not impede transfers of those balances to products of other competitors.
Universal life products include a cash value component that is credited with interest at competitive rates. ALIAC earns the spread between investment income and interest credited on customer cash values. Universal life cash values are charged for cost of insurance coverage and for administrative expenses.
Life insurance products typically require high costs to acquire business. Retention, an important driver of profitability, is encouraged through product features. For example, the company's universal and interest-sensitive whole life insurance contracts typically impose a surrender charge on policyholder balances withdrawn within 7 to 20 years of the contract's inception or for variable life within 10 years. The period of time and level of the charge vary by product. In addition, more favorable credited rates and policy loan terms may be offered after policies have been in force for a period of time. To further encourage retention, life insurance agents are typically paid renewal commissions or service fees.
Certain of the ALIAC life insurance and annuity products allow customers to borrow against their policies. At December 31, 1995, approximately 25% of outstanding policy loans were on individual annuity policies and had fixed interest rates ranging from 1% to 3%. Approximately 63% of outstanding policy loans at December 31, 1995 were on individual life policies and had fixed interest rates ranging from 5% to 9%. The remaining 12% of outstanding policy loans had variable interest rates averaging 8% at December 31, 1995. Investment income from policy loans was $25 million for the year ended December 31, 1995.
At December 31, assets under management, including Separate Accounts and assets held and managed by unaffiliated mutual funds, were $25.9 billion in 1995, $20.0 billion in 1994, $18.8 billion in 1993, $15.0 billion in 1992 and $13.2 billion in 1991. Under Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115), assets under management at December 31, 1995, 1994 and 1993 included net unrealized gains (losses) of approximately $800 million, $(390) million and $750 million, respectively.
The following table summarizes premiums and deposits for the years indicated:
Competition ___________
In the financial services products markets, competition arises from other insurance companies, banks, mutual funds and other investment managers. Principal competitive factors are cost, service, level of investment performance and the perceived financial strength of the investment manager or sponsor.
The markets for life insurance products are highly competitive among insurance companies. Competition largely is based upon product features and prices.
Competition in financial services and life insurance markets may affect, among other matters, both business growth and the pricing of the company's products and services.
Method of Distribution ______________________
Financial services products generally are sold through pension professionals, brokers, third party administrators, banks and dedicated career agents.
Life insurance products are marketed by independent agents and brokers and career agents.
Reserves ________
Reserves for limited payment contracts (immediate annuities with life contingent payout) are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation), which generally vary by plan, year of issue and policy duration. Reserves for investment contracts (deferred annuities and immediate annuities without life contingent payouts) are equal to cumulative deposits plus credited interest less charges thereon. Reserves for experience rated contracts reflect cumulative deposits, less withdrawals and charges, plus credited interest thereon, plus/less net realized capital gains/losses (which ALIAC reflects through credited rates on an amortized basis). These reserves also reflect unrealized capital gains/losses related to FAS No. 115.
Reserves for universal life and interest-sensitive whole life products (which are all experience rated) are equal to cumulative deposits less withdrawals and charges plus credited interest thereon, plus/less net realized capital gains/losses (which ALIAC reflects through credited rates on an amortized basis). These reserves also reflect unrealized capital gains/losses related to FAS No. 115. Reserves for all other fixed individual life contracts are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation), which generally vary by plan, year of issue and policy duration.
The above-indicated reserves are computed amounts that, with additions from premiums and deposits to be received, and with interest on such reserves compounded annually at assumed rates, are expected to be sufficient to meet the company's policy obligations at their maturities or to pay expected death or retirement benefits or other withdrawal requests.
Reinsurance ___________
ALIAC retains no more than $10 million of risk per individual life insured. Amounts in excess of the retention limit are reinsured with unaffiliated companies.
Life Insurance In Force and Other Statistical Data __________________________________________________
The following table summarizes changes in life insurance in force before deductions for reinsurance ceded to other companies for the years indicated:
3. International
The International segment ("International"), through subsidiaries and joint venture operations, sells primarily life insurance and financial services products in non-U.S. markets including Canada, Mexico, Taiwan, Chile, Malaysia, Hong Kong, New Zealand, Peru, Argentina and Indonesia. International operations are subject to regulation in the various jurisdictions in which they do business. In most of the geographic areas and markets in which International has operations, the competition is extensive. Methods of distribution vary by country and by product, and include direct sales, sales through agents and brokers, and sales through joint venture-related enterprises.
On June 30, 1993, the company completed the sale of its U.K. life and investment management operations. The company realized an after-tax capital loss of $12 million on the sale, as well as $37 million of tax benefits from prior year operating losses of the subsidiary not previously available for tax benefits.
The company completed the sale of its 43% interest in La Estrella S.A. de Seguros, a Spanish insurance company, to Banco Hispano Americano in May 1991. The company realized a net capital gain of $33 million (after tax) on the sale.
Conducting business and investing in international markets pose unique risks which vary from country to country. Such risks include, but are not limited to, political developments, including tax changes, nationalization and changes in regulatory policy, currency restrictions, currency fluctuations, as well as the consequences of hostilities and unrest. Management believes that its continued focus on entering new markets where suitable opportunities exist and development of existing operations will help to reduce the exposure to these risks through further diversification of its operations.
The following table sets forth International's premium revenue, net investment income, other income and net realized capital gains/losses and life insurance in force, before deductions for reinsurance ceded to other companies:
Premium growth in 1995 resulted primarily from increases in the volume of business sold in the Pacific Rim and Latin American markets.
Premium reduction in 1994 resulted from the company's 1994 change in its accounting for an affiliate from the consolidated basis of accounting to the equity basis of accounting (recorded premiums were $79 million and $136 million in 1994 and 1993, respectively) which was substantially offset by growth in the Pacific Rim operations.
Premium growth in 1992 included $128 million from the second quarter consolidation of a previously unconsolidated subsidiary as a result of an increase in the company's ownership percentage.
4. Large Case Pensions
Principal Products __________________
The Large Case Pensions segment manages a variety of retirement and other savings products (including pension and annuity products), and offers investment management and advisory services to nonpension customers. Certain of these products provide a variety of investment guarantees, funding and benefit payment distribution options and other services. (For additional information regarding the products offered by Large Case Pensions, see MD&A - Large Case Pensions in the Annual Report.)
The majority of Large Case Pensions' products that utilize Separate Accounts provide contractholders with a vehicle for investments under which the contractholders assume the investment risks as well as the benefit of favorable performance. Large Case Pensions earns a management fee on these Separate Accounts. Various investment advisory services also are offered through a number of wholly owned subsidiaries that are registered investment advisors.
In January 1994, the company announced its decision to discontinue the sale of its fully guaranteed large case pension products. (For additional information, see MD&A - Large Case Pensions in the Annual Report.)
At December 31, assets under management, including Separate Accounts, were $46.4 billion in 1995, $46.3 billion in 1994, $52.8 billion in 1993, $53.4 billion in 1992 and $52.8 billion in 1991. Under FAS 115, assets under management at December 31, 1995, 1994 and 1993 included net unrealized gains (losses) of approximately $790 million, $(540) million and $750 million, respectively.
The following table summarizes premiums and deposits for the years indicated:
Competition ___________
In the pension and annuity markets, competition arises from other insurance companies, banks, bank trust departments, mutual funds and other investment managers. Principal competitive factors are cost, service, level of investment performance and the perceived financial strength of the investment manager.
Method of Distribution ______________________
Group pension products are sold principally through salaried field representatives and home office marketing personnel, who often work with independent consultants and brokers who assist in the production and servicing of business.
Reserves ________
As a result of discontinuing fully guaranteed large case pension products, the company established a reserve that represents the present value of anticipated net cash flow shortfalls as the liabilities from such products are run off. Such net cash flow shortfalls include anticipated losses from negative interest margins (i.e., the amount by which interest credited to holders of such contracts exceeds interest earned on investment assets supporting the contracts), future capital losses, and operating expenses and other costs expected to be incurred as the liabilities are run off. For additional information on this reserve, see Note 3 of Notes to Financial Statements in the Annual Report.
In addition to the reserve described above, the company maintains reserves for guaranteed investment contracts equal to the amount on deposit for such contracts plus credited interest thereon. Reserves for annuity contracts reflect the present value of benefits based on actuarial assumptions established at the time of contract purchase. Such assumptions are based on Aetna's experience, which is periodically reviewed against published industry data. Reserves for experience rated contracts reflect cumulative deposits, less withdrawals and charges, plus credited interest thereon, plus/less net realized capital gains/losses (which the company seeks to recover through credited rates) and net unrealized capital gains/losses.
5. Corporate
The Corporate segment includes interest expense and other net corporate expenses which are not directly related to the company's business segments. "Other net corporate expense" includes items such as corporate staff areas, advertising and contributions, partially offset by net investment income.
6. Discontinued Operations - Property-Casualty Operations
Principal Products __________________
For additional information regarding Discontinued Operations, see Organization of Business on page 3 and MD&A - Overview - Sale of Property-Casualty Operations in the Annual Report.
Discontinued Operations provides most types of commercial and personal property-casualty insurance, bonds, and insurance-related services for businesses, government units and associations and individuals.
Commercial and personal coverages accounted for 70% and 30%, respectively, of Aetna's 1995 property-casualty net written premiums. Commercial coverages are sold for risks of all sizes and include fire and allied lines, multiple peril, marine, workers' compensation, general liability (including product liability), commercial automobile, certain professional liability, and fidelity and surety bonds. In addition, Aetna offers various services to businesses that choose to self-insure certain exposures. Aetna also reinsures various property and liability risks, primarily through agreements with nonaffiliated insurers, on both a treaty and facultative basis. Personal coverages include auto and homeowners insurance.
Approximately 94% of Aetna's 1995 net property-casualty business written was voluntary. The remainder was written by various assigned risk plans, facilities and pools of which Aetna is a member. These organizations are formed to meet statutory requirements relating to the writing of certain types of property-casualty risks or to spread particularly large loss exposures among insurers pursuant to a prearranged allocation formula. Participation is mandatory, and underwriting decisions are made by such facilities independent of their membership.
For a significant portion of the commercial lines, Aetna uses advisory or compulsory rate structures and, in some instances, forms that were developed by agencies and bureaus in which insurance companies are authorized to participate through state regulation. However, in recent years, Aetna has emphasized the development of independent coverages designed for sale to specific market segments.
The following table sets forth the premium revenue, underwriting results and net investment income, fees and other income and net realized capital gains of Discontinued Operations for the years indicated:
Discontinued Operations' underwriting profitability generally is expressed in terms of combined ratios. When the combined ratio is under 100%, underwriting results are considered profitable; when the ratio is over 100%, underwriting results are considered unprofitable. The combined ratio is the sum of (i) the percentage of earned premiums that is paid or reserved for losses and related loss adjustment expenses (the "loss ratio"), (ii) the percentage of earned premiums that is paid or reserved for dividends to policyholders, and (iii) the percentage of written premiums that is paid or reserved for sales commissions, premium taxes, administrative and other underwriting expenses (the "expense ratio"). The combined ratio does not reflect net investment income, fees and other income, net realized capital gains/losses or federal income taxes. The statutory combined ratio does not reflect adjustments to underwriting results in accordance with GAAP.
Adjusted underwriting loss reflects GAAP adjustments (primarily the establishment of a reserve for severance and facilities charges, deferred policy acquisition costs and pre-1992 salvage and subrogation) to underwriting results.
The following table sets forth for Discontinued Operations' major domestic coverages for the years indicated (a) the percentage of Discontinued Operations' statutory net written premiums (NWP) and (b) statutory combined ratios before policyholders' dividends:
PERCENTAGE DISTRIBUTION OF STATUTORY NET WRITTEN PREMIUMS AND COMBINED RATIOS
The following table summarizes Discontinued Operations' statutory net written premiums for the years indicated:
The following table sets forth Aetna's percentage distributions of Discontinued Operations' direct written premiums in various jurisdictions for the years indicated:
GEOGRAPHIC DISTRIBUTION OF DIRECT WRITTEN PREMIUMS
Competition ___________
Property-casualty insurance is highly competitive in the areas of price, service, agent relationships and, in the case of personal lines, method of distribution (i.e., use of independent agents, captive agents and/or employees). There are approximately 3,300 property-casualty insurance companies in the United States. Of those companies, approximately 900 operate in all or most states and write the vast majority of the business, while over 2,400 offer one or more property-casualty products similar to those marketed by Aetna. In addition, an increasing amount of commercial risks are covered by purchaser self-insurance, risk- purchasing groups, risk-retention groups and captive companies. Based on 1994 written premiums, Aetna was one of the largest underwriters of commercial and personal property-casualty coverages in the United States.
Method of Distribution ______________________
Aetna's property-casualty coverages are sold through approximately 4,800 independent agents and brokers supervised and serviced by 22 district offices with over 70 other points of service throughout the country.
Reserves ________
See Reserves Related to Discontinued Operations on pages 21 through 24.
Reinsurance ___________
Approximately one-third of the property-casualty reinsurance ceded by Aetna arises in connection with its servicing relationships with various pools (frequently involuntary pools). Aetna services or writes a portion of the pool's individual policies, handling all premium and loss transactions. These "service" premiums and losses are then 100% ceded (net of an expense reimbursement) to the pools, whose members are jointly liable to Aetna as a servicer.
In addition to the above, Aetna utilizes a variety of reinsurance agreements, primarily with nonaffiliated insurers, to control its exposure to large losses. These agreements, most of which are renegotiated annually as to coverage, limits and price, are structured either on a treaty basis (where all risks meeting prescribed criteria are automatically covered) or on a facultative basis (where the circumstances of specific individual insurance risks are reflected). The amount of risk retained by Aetna depends on the underwriter's evaluation of the specific risk, subject to maximum limits based on risk characteristics and the type of coverage. The principal catastrophe reinsurance agreement currently in force covers approximately 90% of specified property losses between $150 million and $325 million. The company also has in place an aggregate excess of loss arrangement with respect to all of its property-casualty lines for accident year 1995, providing up to approximately $250 million of additional net protection.
For additional information on reinsurance, see MD&A - Discontinued Operations' Reserves and Note 2 of Notes to Financial Statements in the Annual Report.
Aetna has internal property-casualty reinsurance arrangements under which the risks and premiums of virtually all coverages written by the company's Discontinued Operations' subsidiaries (other than fidelity and surety bonds) are redistributed among those subsidiaries on a percentage basis. The percentages are adjusted from time to time to reflect the relative underwriting capacities and other capital needs of participants in the reinsurance agreement.
7. Reserves Related to Discontinued Operations
Aetna establishes liabilities designed to reflect estimates of the ultimate cost, to the extent reasonably estimable, of claims (including claim adjustment expenses). Certain of these liabilities are recorded on a discounted basis (see Note 2 of Notes to Financial Statements in the Annual Report). Estimating the ultimate cost of claims is a complex and uncertain process that relies on actuarial and statistical methods of analysis. The company's reserves include: (i) claims that have been reported but not settled ("case" reserves), and (ii) claim costs that have been incurred but have not been reported ("IBNR" reserves). The establishment of case reserves is dependent upon, among other things, the extent to which coverage was provided, the extent of injury or damage, and, in the case of a contested claim, an estimate of the likely outcome of the adjudication process (to the extent such outcome is estimable). IBNR reserves, established to reflect events and occurrences that are not known to the company but, based on actuarial and historical data (adjusted for the effects of current social, economic and legal developments, trends and factors), are likely to result in claims, also include provision for development on case reserves. As claims are reported and valued by the company, IBNR reserves are reduced by the amount of the reported claim cost. IBNR reserves also are adjusted as the estimates of losses for a given accident year develop. The length of time between occurrence and settlement of a claim varies depending on the coverage and type of claim involved. Estimates become more difficult to make (and are, therefore, more subject to change) as the length of time increases. Actual claim costs are dependent upon a number of complex factors including social and economic trends and changes in doctrines of legal liability and damage awards.
Reserves for Discontinued Operations coverage are recomputed periodically using a variety of actuarial and statistical techniques for producing current estimates of actual claim costs, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claim costs is implicit since reliance is placed on both actual historical data that reflect past inflation and on other factors which are judged to be appropriate modifiers of past experience. Adjustments to reserves are reflected in the net income of the period in which such adjustments are made.
Aetna also establishes unearned premium reserves that are calculated on a pro rata basis and reserves for additional premiums or refunds on retrospectively rated policies based on experience. This means that when a loss which will produce an additional premium payment is incurred on a retrospectively rated policy, the premium is recorded at the same time. Likewise when loss experience is favorable, reserves for premium refunds are established.
For additional information on Discontinued Operations' reserves, including reserves for environmental-related claims, asbestos- related claims, and workers' compensation claims (including discounting), see MD&A - Discontinued Operations' Reserves in the Annual Report.
The following represents changes in aggregate reserves, net of reinsurance, for the combined Discontinued Operations' experience:(1)
The following table reconciles, as of year end, reserves determined in accordance with accounting principles and practices prescribed or permitted by insurance regulatory authorities ("statutory basis reserves") to reserves determined in accordance with generally accepted accounting principles ("GAAP basis reserves"), for the Discontinued Operations unpaid claims and claim adjustment expenses: (1)
The following reserve runoff table represents Aetna's combined Discontinued Operations' loss and loss expense experience, net of reinsurance recoverables and deductible amounts recoverable from policyholders. Each column shows, for the year indicated:
the reserve held at year end;
cumulative data for payments made in each subsequent year for that reserve year;
liability reestimates made in each subsequent year for that reserve year;
the redundancy (deficiency) represented by the difference between the original reserve held at the end of that year and the reestimated liability as of the end of 1995; and
the change in redundancy (deficiency) from the end of each reserve year shown to the end of each subsequent reserve year.
The majority of increases to prior accident year reserves were for losses and related expenses for (i) workers' compensation claims; (ii) environmental-related liability risks; and (iii) asbestos and other product liability risks.
The table represents historical data; it would not be appropriate to use such data to project the company's future reserving activity or its future performance generally.
8. General Account Investments
The investment income and realized capital gains and losses from the investment portfolios of the company's insurance subsidiaries contribute to the results of the insurance operations described above. The company's investment objective for both continuing operations and Discontinued Operations is to fund policyholder and other liabilities in a manner which enhances shareholder and contractholder value, subject to appropriate risk constraints. It is the company's intention that this investment objective be met by a mix of investments which reflects the characteristics of the liabilities they support; diversifies the types of investment risks in its portfolios by interest rate, liquidity, credit and equity price risk; and achieves asset diversification by investment type, industry, issuer and geographic location. The company regularly projects duration and cash flow characteristics of its liabilities and makes appropriate adjustments in the asset portfolios.
Interest rate risk is managed within a tight duration band, and credit risk is managed by maintaining high average bond ratings and diversified sector exposure. In pursuing its investment and risk management objectives, the company utilizes assets whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. (See Note 16 of Notes to Financial Statements in the Annual Report for a discussion of the company's hedging activities).
Using financial modeling and other techniques, the company regularly evaluates the appropriateness of the investments relative to the company's management-approved investment guidelines and the business objectives of the portfolios (including evaluating the interest rate, liquidity, credit and equity price risk resulting from derivative and other portfolio activities). During 1995, the company operated within such investment guidelines by maintaining a mix of investments that diversifies its assets and reflects the characteristics of the liabilities which they support.
See MD&A - General Account Investments in the Annual Report for a further discussion of investments.
a. Investments Related to Continuing Operations
Consistent with the nature of the contract obligations involved in the company's continuing operations which include health care, group life and disability, individual life, annuity and pension operations, the majority of the general account assets attributable to such operations have been invested in intermediate and long-term, fixed-income obligations such as Treasury obligations, mortgage-backed securities, corporate debt securities and mortgage loans.
For information concerning the valuation of investments, see Notes 1, 5, and 6 of Notes to Financial Statements in the Annual Report.
The following table sets forth the distribution of invested assets, cash and cash equivalents and accrued investment income as of the end of the years indicated: (1)
The following table summarizes investment results of the company's continuing operations: (1)
b. Investments Related to Discontinued Operations
The investment strategies for assets related to Discontinued Operations are designed to maximize yield with appropriate liquidity and preservation of principal, and to permit periodic adjustment of the portfolio mix, in order to reflect changes in underwriting results and thus maximize after-tax income. In 1995, Discontinued Operations sold common stocks primarily due to the company's efforts to reduce volatility in its statutory surplus, and increase income, and in connection with the agreement to sell the property-casualty operations.
For information concerning the valuation of investments, see Notes 1, 5, and 6 of Notes to Financial Statements in the Annual Report.
The following table sets forth the distribution of invested assets, cash and cash equivalents and accrued investment income as of the end of the years indicated: (1)
The following table summarizes investment results of the company's Discontinued Operations: (1)
9. Other Matters
a. Regulation
General
Aetna's insurance businesses (including Discontinued Operations) are subject to comprehensive, detailed regulation throughout the United States and the foreign jurisdictions in which they do business. The laws of the various jurisdictions establish supervisory agencies with broad authority to regulate, among other things, the granting of licenses to transact business, premium rates for certain coverages, trade practices, agent licensing, policy forms, underwriting and claims practices, reserve adequacy, insurer solvency, the maximum interest rates that can be charged on life insurance policy loans, and the minimum rates that must be provided for accumulation of surrender value. Many agencies also regulate investment activities on the basis of quality, distribution and other quantitative criteria. Aetna's operations and accounts are subject to examination at regular intervals by insurance regulators.
Although the federal government does not directly regulate the business of insurance, many federal laws do affect that business. Existing or recently proposed federal laws that may significantly affect or would affect, if passed, the insurance business cover such matters as pensions and other employee benefits (including regulation of federally qualified HMOs), controls on medical care costs, medical entitlement programs (e.g., Medicare), environmental regulation and liability, product liability, civil justice procedural reform, earthquake insurance, removal of barriers preventing banks from engaging in the insurance and mutual fund businesses, the taxation of insurance companies (see Notes 1 and 10 of Notes to Financial Statements in the Annual Report), and the tax treatment of insurance products.
Material changes in applicable federal and state laws and regulations could adversely affect the company's business operations, although the company is unable to predict whether any such changes will be implemented.
Health Care
In addition to regulations applicable to insurance companies generally (described above), Aetna's managed health care products are subject to varying levels of state insurance, HMO and/or health department regulation. Among other things, these regulations address health care network composition, new product offerings, product and benefit contracts and the extent to which insurance companies and managed care plans may provide incentives to enrollees to use services from "preferred" health care service providers or pay contractual and noncontractual health care providers unequally for equivalent services. Some jurisdictions also regulate the extent to which managed health care plans may offer their enrollees the option of receiving health care services from noncontracting providers. Additionally, these plans are subject to state, and in some cases federal, regulation concerning solvency and other operational requirements.
Legislative efforts to change the health insurance system have received increased attention in recent years at both the state and national levels. (For additional discussion, see MD&A - Aetna Health Plans in the Annual Report.)
Insurance and Insurance Holding Company Laws
Several states, including Connecticut, regulate affiliated groups of insurers such as Aetna under insurance holding company statutes. Under such laws, intercorporate asset transfers and dividend payments from insurance subsidiaries may require prior notice to or approval of the insurance regulators, depending on the size of such transfers and payments relative to the financial position of the affiliate making the transfer. These laws also regulate changes in control, as do Connecticut corporate laws (which also apply to insurance corporations). See Note 8 of Notes to Financial Statements in the Annual Report.
As a licensed Connecticut-domiciled insurer, the company is subject to Connecticut insurance laws. These laws, among other things, enable insurers to redeem their stock from any shareholder who fails, in the good faith determination of the insurer's board of directors, to (i) meet the qualifications prescribed under Connecticut law for licensure, or (ii) to secure the regulatory approvals required under Connecticut law for ownership of such stock.
Securities Laws
The Securities and Exchange Commission ("SEC") and, to a lesser extent, the states regulate the sales and investment management activities and operations of broker-dealer and investment advisory subsidiaries of the company. The SEC also regulates certain of the company's pension, annuity, life insurance and other investment and retirement products. These products involve Separate Accounts of Aetna Life Insurance and Annuity Company and mutual funds registered under the Investment Company Act of 1940. As a stock company, Aetna also is subject to extensive reporting obligations under the Securities Exchange Act of 1934.
Discontinued Operations - Property-Casualty Operations
Over the past several years, the company's insurance businesses, particularly personal auto and property insurance and workers' compensation coverage, have been the target of various regulatory and legislative initiatives that management believes have limited the basis upon which the company conducts its activities. Such initiatives have, among other things, sought to (1) freeze or reduce rates that may be charged for certain insurance products, (2) force the company to issue and renew insurance in markets where the company cannot achieve an acceptable rate of return, and (3) restructure residual or involuntary markets. Many jurisdictions compel participation in, and regulate composition of, various residual market mechanisms. Residual or involuntary markets are established to provide coverage to insureds unable to obtain policies in the private marketplace. As state-mandated rates are frequently inadequate, these markets are in effect often subsidized by the insurance industry.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The after-tax charges to earnings for guaranty fund obligations for the year ended December 31, 1995 was $13 million (of which $5 million related to Discontinued Operations) and for the year ended December 31, 1993 was $17 million (all of which related to Discontinued Operations). There were no such charges in 1994. The amounts ultimately assessed may differ from the amounts charged to earnings because such assessments may not be made for several years and will depend upon the final outcome of regulatory proceedings.
While the company has historically recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets and policy surcharges, significant increases in assessments could jeopardize future efforts to recover such assessments.
The company has actively supported improved insurer solvency regulation, including measures that would facilitate earlier identification of troubled insurers, and amendments to guaranty fund laws that would reduce the costs of such insolvencies to solvent insurers such as Aetna.
See MD&A - Regulatory Environment in the Annual Report for additional discussion of regulatory matters.
b. NAIC IRIS Ratios
The NAIC IRIS ratios cover 12 categories of financial data with defined usual ranges for each category. The ratios are intended to provide insurance regulators "early warnings" as to when a given company might warrant special attention. An insurance company may fall out of the usual range for one or more ratios and such variances may result from specific transactions that are in themselves immaterial or eliminated at the consolidated level. In 1994, two of Aetna Life and Casualty Company's significant subsidiaries had more than two IRIS ratios that were outside of the NAIC usual ranges, as discussed below.
Aetna Life Insurance Company ("ALIC") fell outside the usual ranges in 1994 for: (i) the Net Gain to Total Income Ratio which is calculated by dividing the net gain from operations (including realized capital gains and losses) by total income (including realized capital gains and losses); (ii) the Adequacy of Investment Income Ratio which compares investment income to credited interest; (iii) the Total Real Estate and Total Mortgage Loans to Cash and Invested Assets Ratio which measures the relative size of the real estate and mortgage loan portfolios; (iv) the Change in Premium Ratio which is calculated by dividing the current year change in total premiums, annuity considerations and other fund deposits by total premiums, annuity considerations and other fund deposits for the prior year; and (v) the Change in Reserving Ratio which represents the number of percentage points of difference between the reserving ratio for current and prior year. The reserving ratio is equal to the aggregate increase in reserves for individual life insurance taken as a percentage of renewal and single premiums for individual life insurance. The regulators were satisfied, after analysis, that ALIC did not warrant special attention.
The Aetna Casualty & Surety Company of America ("ACSCA") fell outside of the usual ranges in 1994 for: (i) the Two-year Overall Operating Ratio, which is a combination of a two-year combined ratio minus a two-year investment income ratio; (ii) the Change in Surplus which measures the improvement or deterioration in a company's financial condition during the year; and (iii) the Two-Year Reserve Development to Surplus Ratio which measures the change in prior years' estimates calculated as a percentage of policyholders' surplus two years previous. The regulators were satisfied that ACSCA did not warrant special attention.
Management expects that certain of the company's significant subsidiaries will have more than two IRIS ratios outside of the NAIC usual ranges for 1995, but expects to be able to satisfy the regulators that further attention is not warranted.
c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth Aetna's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the years ended December 31:
For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges and minority interest. "Fixed charges" consist of interest (and the portion of rental expense deemed representative of the interest factor) and includes the dividends paid to preferred shareholders of a subsidiary. (See Note 11 of Notes to Financial Statements in the Annual Report.) For the years ended December 31, 1995, 1994, 1993, 1992 and 1991 there was no preferred stock outstanding. As a result, the ratios of earnings to combined fixed charges and preferred stock dividends were the same as the ratios of earnings to fixed charges.
d. Miscellaneous
Aetna had approximately 40,200 domestic employees (approximately 11,300 of whom support Discontinued Operations) at December 31, 1995.
Management believes that the company's computer facilities, systems and related procedures are adequate to meet its business needs. The company's data processing systems and backup and security policies, practices and procedures are regularly evaluated by the company's management and its internal auditors and are modified as considered necessary.
Portions of Aetna's insurance business are seasonal in nature. Reported claims under group health and certain property-casualty products are generally higher in the first quarter. Sales, particularly of individual life products, are generally lowest in the first quarter and highest in the fourth quarter.
No customer accounted for 10% or more of Aetna's consolidated revenues in 1995. In addition, no segment of Aetna's business is dependent upon a single customer or a few customers, the loss of which would have a significant effect on the segment. See Note 15 of Notes to Financial Statements regarding segment information in the Annual Report.
The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the company or any of its segments. In general, the company is not contractually obligated or committed to accept a fixed portion of business submitted by any of its property-casualty agents or brokers. The company generally reviews all of its policy applications, both new and renewal, for approval and acceptance. There are cases where the company has delegated limited underwriting authority to select agents generally for smaller business for specific classes of risks. The risks accepted by the company under these conditions are reviewed by company underwriters. This authority generally can be rescinded at any time at the discretion of the company and without prior notice to the agents.
Item 2.
Item 2. Properties.
The home office of Aetna, owned by Aetna Life Insurance Company, is a building complex located at 151 Farmington Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The company also owns or leases other space in the greater Hartford area as well as various field locations throughout the country. (Please see MD&A - Overview in the Annual Report.)
The foregoing does not include numerous investment properties held by Aetna in its general and separate accounts.
Item 3.
Item 3. Legal Proceedings.
The company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against itself, including lawsuits related to issues of policy coverage and judicial interpretation. One such area of coverage litigation involves legal liability for environmental and asbestos-related claims. These lawsuits and other factors make reserving for these claims subject to significant uncertainties. See MD&A - Discontinued Operations' Reserves in the Annual Report.
While the ultimate outcome of such litigation cannot be determined at this time, such litigation, net of reserves established therefore and giving effect to reinsurance probable of recovery, is not expected to result in judgments for amounts material to the financial condition of the company, although it may adversely affect results of operations in future periods.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE OFFICERS OF AETNA LIFE AND CASUALTY COMPANY*
The Chairman of Aetna Life and Casualty Company is elected and all other executive officers listed below are appointed by the Board of Directors of the company at its Annual Meeting each year to hold office until the next Annual Meeting of the Board or until their successors are elected or appointed. None of these officers have family relationships with any other executive officer or Director.
(1) Mr. Compton has served as Chairman since March 1, 1992. He is also President, a position he has held since July 1988.
(2) Mr. Huber has served in his current position since February 1995. From September 1994 to February 1995, he served as President and Chief Operating Officer of Grupo Wasserstein Perella. From 1990 to September 1994, he served as Vice Chairman of Continental Bank. From 1988 to 1990, he served as Executive Vice President and Head of Capital Markets and Foreign Exchange Sector, Chase Manhattan Bank.
(3) Ms. Baird has served in her current position since April 1992. From July 1990 to April 1992 she served as Vice President and General Counsel.
(4) Mr. Benanav has served in his current position since December 1993. From April 1992 to December 1993 he served as Group Executive responsible for International, individual life insurance, annuities, mutual funds, and small case pensions. From April 1990 through April 1992, he served as Senior Vice President, International Insurance.
(5) Mr. Bolton has served in his current position since July 1995. He was with International Business Machines Corporation from March 1991 to June 1995, serving as Director of Communications, IBM Software Group, from March 1994 to June 1995, and as Director of Corporate Media Relations from March 1991 to March 1994. From February 1989 to March 1991, he served as Assistant Secretary for Public Affairs and Public Liaison, U.S. Department of Treasury.
(6) Mrs. Champlin has served in her current position since November 1992. From February 1991 through November 1992 she served as Vice President, Aetna Human Resources. From June 1989 through January 1991 she served as Assistant Vice President, Corporate Management, Office of the Chairman.
(7) Mr. Kearney has served in his current position since December 1993. From February 1991 to December 1993 he served as Group Executive responsible for investments and large case pensions. From 1990 to February 1991 he served as the principal of Daniel P. Kearney, Inc.
(8) Mr. McLane has served in his current position since December 1993. From April 1992 to December 1993, he served as Group Executive responsible for group health and life insurance including managed care operations. From February 1991 through April 1992 he served as Chief Executive Officer, Aetna Health Plans; from 1985 through 1991 he served as Senior Vice President, Global Insurance Division, Citicorp.
(9) Mr. McMurtry has served in his current position since November 1992. From February 1989 through November 1992 he served as Staff Director and Chief Counsel, Committee on Finance, United States Senate.
(10) Mr. Broatch has served in his current position since December 1993. He also served as Corporate Controller from May 1988 to July 1995 and was a Vice President from May 1988 to December 1993.
(11) Mr. Price was appointed to his current position on July 3, 1995, having served as Vice President and Deputy Controller since May 1989.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Aetna Life and Casualty Company's common stock is listed on the New York and Pacific Stock Exchanges, with unlisted trading privileges on other regional exchanges. Its symbol is AET. The common stock also is listed on the Swiss Stock Exchanges at Basel, Geneva and Zurich. Call and put options on the common stock are traded on the American Stock Exchange. As of January 31, 1996, there were 22,939 record holders of the common stock.
The dividends declared and the high and low sales prices with respect to Aetna Life and Casualty Company's common stock for each quarterly period for the past two years are incorporated herein by reference from "Quarterly Data" in the Annual Report.
Information regarding restrictions on the company's present and future ability to pay dividends is incorporated herein by reference from Note 8 of Notes to Financial Statements in the Annual Report.
Item 6.
Item 6. Selected Financial Data.
The information contained in "Selected Financial Data" in the Annual Report is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The 1995 Consolidated Financial Statements and the report of the registrant's independent auditors and the unaudited information set forth under the caption "Quarterly Data" is incorporated herein by reference to the Annual Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information concerning Executive Officers is included in Part I pursuant to General Instruction G to Form 10-K.
Information concerning Directors and concerning compliance with Section 16 (a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Proxy Statement.
Item 11.
Item 11. Executive Compensation.
The information under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the caption "Security Ownership of Certain Beneficial Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Certain Transactions and Relationships" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements:
The Consolidated Financial Statements and the report of the registrant's independent auditors are incorporated herein by reference to the Annual Report.
2. Financial statement schedules:
The supporting schedules of the consolidated entity are included in this Item 14. See Index to Financial Statement Schedules on page 42.
3. Exhibits: *
(3) Articles of Incorporation and By-Laws.
Certificate of Incorporation of Aetna Life and Casualty Company, incorporated herein by reference to the company's 1992 Form 10- K, filed on March 17, 1993 (the "1992 Form 10-K").
By-Laws of Aetna Life and Casualty Company, incorporated by reference to the company's 1993 Form 10-K filed on March 18, 1994 (the "1993 Form 10-K").
(4) Instruments defining the rights of security holders, including indentures.
Conformed copy of Indenture, dated as of October 15, 1977, between Aetna Life and Casualty Company and Morgan Guaranty Trust Company of New York, Trustee, incorporated herein by reference to the 1992 Form 10-K.
Conformed copy of Indenture, dated as of October 15, 1986, between Aetna Life and Casualty Company and The First National Bank of Boston, Trustee, incorporated herein by reference to the 1992 Form 10-K.
Conformed copy of Indenture, dated as of August 1, 1993, between Aetna Life and Casualty Company and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, incorporated herein by reference to the company's Registration Statement on Form S-3 (File No. 33-50427).
Conformed copy of Rights Agreement dated as of October 27, 1989, between Aetna Life and Casualty Company and First Chicago Trust Company of New York, incorporated herein by reference to the 1992 Form 10-K.
Conformed copy of Summary of Rights to Purchase Preferred Stock, incorporated herein by reference to the 1992 Form 10-K.
Conformed copy of Written Action dated as of November 15, 1994, establishing the terms of Series A Preferred Securities of Aetna Capital L.L.C., incorporated herein by reference to the company's Form 8-K filed on November 22, 1994.
Conformed copy of Subordinated Indenture dated as of November 1, 1994, between the company and The First National Bank of Chicago, as Trustee, incorporated herein by reference to the company's Form 8-K filed on November 22, 1994.
Conformed copy of Payment and Guarantee Agreement dated November 22, 1994, of the company with respect to Aetna Capital L.L.C., incorporated herein by reference to the company's Form 8-K filed on November 22, 1994.
(10) Material contracts.
Stock Purchase Agreement dated as of November 28, 1995 between The Travelers Insurance Group Inc. and Aetna Life and Casualty Company relating to the purchase and sale of 100% of the Common Stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance Company.
Letter Agreement, dated January 19, 1995, between Aetna Life and Casualty Company and Richard L. Huber. **
Employment Agreement, dated as of October 27, 1995, between Aetna Life and Casualty Company and Gary G. Benanav. **
Employment Agreement, dated as of January 29, 1996, between Aetna Life and Casualty Company and Ronald E. Compton. **
Employment Agreement, dated as of December 19, 1995, between Aetna Life and Casualty Company and Daniel P. Kearney. **
Employment Agreement, dated as of January 19, 1996, between Aetna Life and Casualty Company and James W. McLane. **
The 1984 Stock Option Plan of Aetna Life and Casualty Company and amendments thereto, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company's Supplemental Incentive Savings Plan, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company's Supplemental Pension Benefit Plan, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company's 1986 Management Incentive Plan, as amended effective February 25, 1994, incorporated herein by reference to the 1993 Form 10-K. **
Aetna Life and Casualty Company Directors' Deferred Compensation Plan, incorporated herein by reference to the 1992 Form 10-K. **
Aetna Life and Casualty Company 1994 Non-Employee Director Deferred Stock Plan, incorporated herein by reference to the company's 1994 proxy statement, filed on March 18, 1994 (the "1994 Proxy Statement"). **
Aetna Life and Casualty Company 1994 Stock Incentive Plan, incorporated herein by reference to the 1994 Proxy Statement. **
Letter Agreement, dated December 18, 1993, between Aetna Life and Casualty Company and David A. Kocher, incorporated herein by reference to the 1993 Form 10-K. **
Letter Agreement, dated September 20, 1994, between Aetna Life and Casualty Company and Patrick W. Kenny, incorporated by reference to the company's Form 10-Q filed on October 28, 1994. **
The Aetna Life and Casualty Company 1990 Non-Employee Director Deferred Stock Plan, incorporated herein by reference to the 1992 Form 10-K. **
Extension Notice, dated July 17, 1995 of $500,000,000 Short-Term Credit Agreement dated July 27, 1994 among Aetna Life and Casualty Company, the banks listed therein, Deutsche Bank AG, as Co- Arranger, and Morgan Guaranty Trust Company of New York, incorporated by reference to the company's Form 10-Q filed on July 28, 1995.
$500,000,000 Medium-Term Credit Agreement dated as of July 27, 1994 among Aetna Life and Casualty Company, the banks listed on the signature pages thereof, Morgan Guaranty Trust Company of New York, as Managing Agent, Deutsche Bank AG, as Co-Arranger, and The Chase Manhattan Bank, N.A., Citibank, N.A., and Credit Suisse, as Co- Agents, incorporated by reference to the company's Form 10-Q filed on August 15, 1994.
Description of certain arrangements not embodied in formal documents, as described with respect to Directors' fees and benefits, and under the caption "Executive Compensation," are incorporated herein by reference to the Proxy Statement.
(11) Statement re computation of per share earnings.
Incorporated herein by reference to Note 1 of Notes to Financial Statements in the Annual Report.
(12) Statement re computation of ratios.
Statement re: computation of ratio of earnings to fixed charges.
Statement re: computation of ratio of earnings to combined fixed charges and preferred stock dividends.
(13) Annual Report to security holders.
Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements and the report of the company's independent auditors, and unaudited Quarterly Data from the Annual Report.
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Life and Casualty Company.
(23) Consents of experts and counsel.
Consent of Independent Auditors to Incorporation by Reference in the Registration Statements on Form S-3 and Form S-8.
(24) Powers of attorney.
(27) Financial data schedule.
(28) Information from reports furnished to state insurance regulatory authorities.
1995 Consolidated Schedule P of Annual Statements provided to state regulatory authorities. ***
(b) Reports on Form 8-K
The company filed a report on Form 8-K filed on November 29, 1995, relating to the company entering into a definitive agreement, dated November 28, 1995, to sell its property-casualty operations to The Travelers Insurance Group Inc.
* Exhibits other than those listed are omitted because they are not required or are not applicable. Copies of exhibits are available without charge by writing to the Office of the Corporate Secretary, Aetna Life and Casualty Company, 151 Farmington Avenue, Hartford, Connecticut 06156.
** Management contract or compensatory plan or arrangement.
*** Filed under cover of Form SE.
INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
Independent Auditors' Report Page ____
I Summary of Investments - Other than 44 Investments in Affiliates as of December 31, 1995
II Condensed Financial Information of the 45 Registrant as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993
III Supplementary Insurance Information as of 51 and for the years ended December 31, 1995, 1994 and 1993
IV Reinsurance 54
V Valuation and Qualifying Accounts and Reserves 55 for the years ended December 31, 1995, 1994 and 1993
VI Supplemental Information Concerning 58 Property-Casualty Operations for the years ended December 31, 1995, 1994 and 1993
Certain of the required information is shown in the Financial Statements or Notes thereto in the Annual Report. Certain information has been omitted from the schedules filed because the information is not applicable.
Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation.
INDEPENDENT AUDITORS' REPORT ____________________________
The Shareholders and Board of Directors Aetna Life and Casualty Company:
Under date of February 6, 1996, we reported on the consolidated balance sheets of Aetna Life and Casualty Company and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 2 to the consolidated financial statements, in 1993 the company changed its methods of accounting for certain investments in debt and equity securities, postemployment benefits, workers' compensation life table indemnity reserves and retrospectively rated reinsurance contracts.
By /s/ KPMG Peat Marwick LLP _________________________ (Signature)
KPMG PEAT MARWICK LLP
Hartford, Connecticut February 6, 1996
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1995
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Statements of Income
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Balance Sheets
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Statements of Shareholders' Equity
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Statements of Cash Flows
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Annual Report. Certain reclassifications have been made to 1994 and 1993 financial information to conform to 1995 presentation.
1. Long-Term Debt
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 1996 to 2000 and thereafter.
2. Dividends
The amounts of cash dividends paid to Aetna Life and Casualty Company by insurance affiliates for the years ended December 31, 1995, 1994 and 1993 were as follows:
See Note 8 to the Consolidated Financial Statements in the Annual Report for a description of dividend restrictions from the consolidated insurance subsidiaries to the company.
3. Due to Affiliates
See Note 11 to the Consolidated Financial Statements in the Annual Report for a description of amounts due to Aetna Capital L.L.C., a subsidiary of the company.
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA LIFE AND CASUALTY COMPANY
Notes to Condensed Financial Statements (Continued)
4. Accounting Changes
See Notes 1 and 2 to the Consolidated Financial Statements in the Annual Report for a description of accounting changes.
5. Discontinued Products
See Note 3 to the Consolidated Financial Statements in the Annual Report for a description of discontinued products.
6. Sales of Subsidiaries
See Note 2 to the Consolidated Financial Statements in the Annual Report for a description of the sales of subsidiaries.
7. Severance and Facilities Charge
See Note 4 to the Consolidated Financial Statements in the Annual Report for a description of the severance and facilities charges.
8. Federal and Foreign Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of federal and foreign income taxes.
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1995
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1994
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1993
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE IV
Reinsurance*
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
AETNA LIFE AND CASUALTY COMPANY AND SUBSIDIARIES
SCHEDULE VI
Supplemental Information Concerning Property-Casualty Operations (1)
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 26, 1996 AETNA LIFE AND CASUALTY COMPANY (Registrant)
By /s/ Robert J. Price _______________________________ (Signature) Robert J. Price Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 26, 1996.
Signature Title * Chairman, President and Director ________________________ Ronald E. Compton (Principal Executive Officer)
* ________________________ Wallace Barnes Director
* ________________________ William H. Donaldson Director
* ________________________ Barbara Hackman Franklin Director
* ________________________ Earl G. Graves Director
* ________________________ Gerald Greenwald Director
* ________________________ Ellen M. Hancock Director
* ________________________ Michael H. Jordan Director
* ________________________ Jack D. Kuehler Director
* ________________________ Frank R. O'Keefe, Jr. Director
* ________________________ Judith Rodin Director
* ________________________ Richard L. Huber Vice Chairman for Strategy and Finance (Principal Financial Officer)
/s/ Robert J. Price ________________________ Robert J. Price Vice President and Corporate Controller (Controller)
* By /s/ Robert J. Price ________________________ Robert J. Price (Attorney-in-Fact)
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