Item 1. Business.
A. Organization of Business
Aetna Inc. and its subsidiaries (collectively, the "Company") constitute one of the nation's largest health benefits companies, based on membership, and one of the nation's largest insurance and financial services organizations centered around three core businesses: health care, retirement services and international.
Aetna Inc., a Connecticut corporation, became the parent corporation of Aetna Services, Inc. ("Aetna Services") and Aetna U.S. Healthcare, Inc. (formerly U.S. Healthcare, Inc.) as a result of a merger transaction on July 19, 1996. The merger was accounted for as a purchase of U.S. Healthcare. (See Note 2 of Notes to Financial Statements in the Annual Report.) Aetna sold its property-casualty operations on April 2, 1996. (See Note 3 of Notes to Financial Statements in the Annual Report for a discussion of certain indemnifications and other information related to the property-casualty sale.)
The Company's business operations are conducted in the following segments: Aetna U.S. Healthcare, Aetna Retirement Services, Aetna International and Large Case Pensions. The principal products included in these segments are:
Aetna U.S. Healthcare: Health products (including health maintenance organization, point-of-service, preferred provider organization and indemnity products) Group life and disability insurance Long-term care insurance
Aetna Retirement Services: Financial services Individual life insurance
Aetna International: Primarily life and health insurance and financial services
Large Case Pensions: Retirement products (including pension and annuity products) primarily for defined benefit and defined contribution plans
In addition, the Corporate segment includes interest expense and corporate expenses not directly related to the Company's business segments, such as staff area expenses, national advertising and contributions.
B. Financial Information about Industry Segments
Required financial information by industry segment is set forth in Note 17 to the Financial Statements, which is incorporated herein by reference to the Annual Report. Revenue and income from continuing 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 1996 and 1995 financial information to conform to 1997 presentation.
C. Description of Industry Segments
1. Aetna U.S. Healthcare
Products and Services
Aetna U.S. Healthcare provides a full spectrum of health products (managed care and indemnity) and group insurance products (life, disability and long-term care) on both an insured and an employer-funded basis. Under insured plans, the Company assumes all or a majority of health care cost, utilization, mortality, morbidity or other risk depending on the product. Under employer-funded plans, the customer, and not the Company, assumes all or a majority of these risks.
Aetna U.S. Healthcare consists of the Health Risk business and the Group Insurance and Other Health business.
Health products include health maintenance organization, point-of-service, preferred provider organization and indemnity products. The Health Risk business includes health products offered on an insured basis.
The Group Insurance and Other Health business includes group life and disability insurance and long-term care insurance, offered on both an insured and employer-funded basis, and all health products offered on an employer-funded basis.
The following table summarizes premiums and fees and other income for the Health Risk and Group Insurance and Other Health businesses:
* Includes U.S. Healthcare premiums and fees and other income from July 19, 1996 through December 31, 1996. ** Reflects premiums and fees and other income from January 1, 1996 through July 18, 1996. *** Not applicable.
Under insured plans, Aetna U.S. Healthcare charges a premium and under employer-funded plans, Aetna U.S. Healthcare charges a fee for administrative and claim services.
The principal Commercial health products offered by Aetna U.S. Healthcare are:
Health Maintenance Organization ("HMO") plans offer comprehensive managed care benefits generally through participating network physicians, hospitals and other providers. When an individual enrolls in one of the Company's HMOs, he or she selects a primary care physician ("PCP") from among the physicians participating in the Aetna U.S. Healthcare network. PCPs generally are family practitioners, internists, general practitioners or pediatricians who provide necessary preventive and primary medical care, and are generally responsible for coordinating other necessary health care, including making referrals to participating network specialists. Preventive care and quality improvement are emphasized in these plans. The Company offers HMO plans with varying levels of copayments which result in different levels of premium rates. HMO plans are principally offered on an insured basis. Commercial HMO membership totaled 3.3 million and 3.0 million as of December 31, 1997 and 1996, respectively.
Point-of-Service ("POS") plans blend the characteristics of HMO and indemnity plans. Members can have comprehensive HMO-style benefits through network providers with minimum out-of-pocket expense (copayments) and also can go directly, without a referral, to any provider they choose, subject to, among other things, certain deductibles and coinsurance, with member cost sharing limited by out-of-pocket maximums. POS plans are offered on both an insured and employer-funded basis. Commercial POS membership totaled 3.7 million and 3.5 million as of December 31, 1997 and 1996, respectively.
Preferred Provider Organization ("PPO") plans offer the member the ability to select any health care provider, with benefits paid at a higher level when care is received from a network provider. Coverage is subject to deductibles and coinsurance, with member cost sharing limited by out-of-pocket maximums. PPO plans are offered on both an insured and employer-funded basis. PPO membership totaled 3.6 million and 3.7 million as of December 31, 1997 and 1996, respectively.
Indemnity plans offer the member the ability to select any health care provider for covered services. Some managed care and medical cost containment features may be included in these plans, such as inpatient precertification, limiting payments to reasonable and customary charges and additional benefits for preventive services (e.g. cancer screening). Coverage is subject to deductibles and coinsurance, with member cost sharing limited by out-of-pocket maximums. Indemnity plans are offered on both an insured and employer-funded basis. Indemnity membership totaled 2.6 million and 3.1 million as of December 31, 1997 and 1996, respectively.
In addition to Commercial health products, the Company also offers coverage for Medicare beneficiaries and individuals eligible for Medicaid benefits. Such coverages include the following:
Through contracts with the Health Care Financing Administration ("HCFA"), Aetna U.S. Healthcare HMOs offer coverage for Medicare-eligible individuals in certain geographic areas. Generally, services must be obtained through network providers, with the exception of emergency and urgent care. Members generally receive enhanced benefits over standard Medicare fee-for-service coverage, including vision, hearing and pharmacy coverage. Such Medicare plans are offered on an insured basis. Medicare membership totaled .4 million and .3 million as of December 31, 1997 and 1996, respectively.
The Company also served as an administrator of Medicare benefits in certain states, providing claim services for physicians, hospitals, skilled nursing facilities and home health agencies in exchange for a fee. The contract with HCFA to provide these services expired on September 30, 1997.
The Company has contracts with certain state and local agencies to offer coverage for Medicaid-eligible individuals. Benefits are determined by the contracting agencies. Medicaid is offered on an insured basis. Medicaid membership totaled .1 million as of December 31, 1997 and 1996.
Aetna U.S. Healthcare offers a variety of specialty health care coverages offered as either supplements to health products or as stand-alone products. Such coverages include indemnity and managed dental plans, prescription drug and vision programs, and network-based workers' compensation case management services.
These specialty health coverages and services are included in either Health Risk or Group Insurance and Other Health business, with the exception of behavioral health (including employee assistance programs) and network-based workers' compensation case management services, which are included in Group Insurance and Other Health.
During 1997, the Company sold certain subsidiaries primarily to more effectively focus its health business resources. On December 5, 1997, the Company sold Human Affairs International ("HAI"), a behavioral health management business. Aetna U.S. Healthcare will continue to market HAI's behavioral health services, including employee assistance programs, through a long-term strategic arrangement with the acquiring company. During 1997, the Company also sold Healthcare Data Interchange Corporation, a provider of health care electronic data interchange services, and Aetna Professional Management Corporation, a physician practice management business.
In addition, the Company acquired Virginia Mason Health Plan, Inc., and Frontier Health Holdings, Inc., both of which are health maintenance organizations, during 1997. The purchase price of these acquisitions, both individually and in the aggregate, was not material.
Aetna U.S. Healthcare group insurance products consist primarily of the following:
Group Life Insurance consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Basic and supplemental term coverage and spouse and dependent coverages are available. Group universal life and accidental death benefit coverages are also available. Group life insurance is offered on an insured basis. Group life insurance membership totaled 9.9 million and 9.6 million as of December 31, 1997 and 1996, respectively.
Group Disability Insurance provides coverage for disabled employees' income replacement benefits for both short-term disability and long-term disability. The Company also offers a managed disability product with additional case management features. Group disability insurance coverages are offered on both an insured and employer-funded basis. Group disability membership totaled 2.6 million and 2.4 million as of December 31, 1997 and 1996, respectively.
Long-Term Care Insurance provides coverage for long-term care expenses in a nursing home, adult day care or home setting. Long-term care insurance is offered on an insured basis. Long-term care membership totaled .1 million as of December 31, 1997 and 1996.
Many group insurance members participate in more than one type of Aetna U.S. Healthcare coverage and are counted in each.
Provider Networks
General
Aetna U.S. Healthcare provides members of its managed care plans with access to health care services through networks of independent health care providers. The Company contracts with providers to participate in its provider networks as it expands into new geographic areas or as considered necessary in order to serve members. The providers in the Company's networks are independent contractors and are neither employees nor agents of the Company.
The HMOs operated by Aetna U.S. Healthcare most closely adhere to the individual practice model. Under the individual practice model, the HMO contracts with independent physicians who are broadly dispersed throughout a community and who care for patients in their own offices. Participating physicians generally also have patients who are not members of the Company's HMOs. In the Company's HMOs, the primary care physician plays an important role in practicing preventive medicine and acts on behalf of the HMO member to coordinate the care provided by specialist physicians, hospitals, and other health care providers.
Aetna U.S. Healthcare uses a variety of practices to help contain the rate of increase in the cost of medical services. In addition to contracts with health care providers, such procedures include the development and implementation of standards for the appropriate utilization of health care resources and working with health care providers to review data in order to help them improve consistency and quality.
At December 31, 1997, Aetna U.S. Healthcare had approximately 330,000 providers in its networks nationwide.
Contracting
Primary Care Physicians
Compensation by the Company's HMOs to PCPs is principally on a capitated basis, although fee-for-service contracts also exist. Under a capitation arrangement, physicians receive a monthly fixed fee for each HMO member, regardless of the medical services provided to the member. In some instances, the capitation rate is subject to adjustment based on the attainment of certain criteria including comprehensiveness of care, quality of care and utilization. This quality-based incentive program is administered via the Company's Quality Care Compensation System. In a fee-for-service arrangement, network physicians are paid for health care services provided to the member based upon a fee schedule.
Hospitals
The Company enters into contracts that provide for all-inclusive per diem, per case and capitated hospitalization rates, with fixed rates for ambulatory surgery and emergency room services. Certain contracted hospitals' final compensation is based upon attainment of agreed-upon quality and other measures.
Aetna U.S. Healthcare HMOs generally require precertification of elective admissions and monitoring of the length of hospital stays. Participating physicians generally admit their HMO patients to hospitals using referral procedures that direct the hospital to contact the Company's patient management unit, which confirms the patient's membership status while obtaining pertinent data. This unit also coordinates related activities, including the subsequent transition to the home environment and home care, if necessary. Case management assistance for complex or "catastrophic" cases is provided by a special case unit.
Specialist and Ancillary Services
Specialist physicians participating in the Company's networks are generally reimbursed at contracted rates per visit or procedure.
Aetna U.S. Healthcare's HMOs have fixed-fee capitated payment arrangements for most pharmacy, mental health, substance abuse, and laboratory services. In those HMO markets where the Company has a significant presence, most radiology, diagnostic imaging, podiatric and physical therapy services also have fixed-fee capitated payment arrangements.
Integrated Delivery Systems
Aetna U.S. Healthcare has developed and continues to develop contractual relationships with national and regional Integrated Delivery Systems ("IDS") to provide comprehensive medical services. Under these arrangements, the Company's HMOs contract with an IDS for a fixed, per member fee. This fee covers most or all of the care required by the member which is generally delivered by the IDS and its affiliated PCPs, hospitals and specialists.
Quality Assessment
Quality assessment programs begin with the initial selection of providers. Providers wanting to participate in the Company's HMO networks must satisfy an extensive set of criteria, including licensing, hospital admission privileges, demonstrated proficiency, written references, patient access, office standards, after-hours coverage and many other factors.
Participating physicians are recertified regularly. Recertification covers many aspects of patient care including an analysis of member grievances filed with the Company, the transfer and termination rate of members from the practice, on-site interviews, analysis of utilization patterns, extensive member surveys and analysis of drug prescription patterns. Committees, each composed of a peer group of participating private physicians, review participating PCPs being considered for recertification.
The Company also offers quality and outcome measurement and improvement programs, and health care data analysis systems for providers and purchasers of health care.
With an emphasis on quality improvement, the Company seeks accreditation for certain of its HMO plans from the National Committee for Quality Assurance ("NCQA"), a national organization established to review the quality and medical management systems of HMOs and other managed care plans. Accreditation by NCQA is a nationally recognized standard. As of December 31, 1997, a majority of the Company's HMO membership is serviced by health plans which have been granted full, three-year accreditation.
Principal Markets and Sales
Total health membership is widely dispersed throughout the United States. One or more products offered by the Health Risk business are available in all 50 states. Health Risk membership is concentrated in the Mid-Atlantic and Northeast regions where the majority of HMO members are located.
Products offered by the Group Insurance and Other Health business are available in all 50 states. This business consists primarily of large customers (i.e., those with at least 3,000 eligible lives).
The following table presents total health membership by region and funding arrangement, for the years indicated:
(1) Health membership as of December 31, 1997 reflects system and plan conversions. The conversions predominately affect Indemnity and PPO membership and have an immaterial impact on all other Health products. December 31, 1996 and 1995 reflects adjustments based on known corrected data from the conversions, as applied to December 31, 1996 and 1995 membership previously reported. (2) Excludes U.S. Healthcare membership of 2,433 thousand for 1995. U.S. Healthcare membership is primarily risk and concentrated in the Mid-Atlantic and Northeast regions. (3) Decreased membership as of December 31, 1996 resulted primarily from the award of a risk contract with the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS") to another contractor. The Company remained the primary provider through March 31, 1996. (4) Includes the following products: Commercial, Medicare and Medicaid HMO, POS, PPO and Indemnity.
For membership composition of Aetna U.S. Healthcare's products by funding arrangement, see Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Aetna U.S. Healthcare in the Annual Report.
For both Health Risk and Group Insurance and Other Health businesses, products and services are marketed primarily to employers for the benefit of employees and their dependents. Frequently, employers offer employees a choice of coverages, from which the employee makes his or her selection during a designated annual open enrollment period. In some instances, Aetna U.S. Healthcare is the only health care coverage offered. Employers pay all or a portion of the monthly premiums, and employees, through payroll deductions, pay any premium not provided as an employee benefit.
Within the Health Risk business, Medicare coverage is sold on an individual basis as well as through employer groups to their retirees. Medicaid is marketed to individuals rather than employer groups. Because these coverages are sold primarily on an individual basis, Medicare and Medicaid marketing costs are typically higher than for other products.
Aetna U.S. Healthcare products are sold primarily through Company sales personnel who frequently work with independent consultants and brokers who assist in the production and servicing of business. Sales representatives also sell to employers on a direct basis.
For large customers, independent consultants and brokers are frequently involved in employer health plan selection decisions and sales.
Marketing and sales efforts are promoted by an advertising program which includes television, radio, billboards and print media, supported by market research and direct marketing efforts.
Health Pricing
For insured Commercial plans, customer contracts are generally established in advance of the policy period, for a duration of one year. In determining the premium rates to be charged to the customer, prospective and retrospective rating methodologies are used.
Under prospective rating, a fixed premium rate is determined at the beginning of the policy period. Unanticipated increases in medical costs cannot be recovered in the current policy year; however, prior experience for a product in the aggregate is considered, among other factors, in determining premium rates for future periods. Federally-qualified HMOs are required to set premiums in this manner.
Aetna U.S. Healthcare Commercial HMO plans establish premium rates prior to contract inception, without regard to actual utilization of services incurred by individual members, using one of three approved community rating methods. These rates may vary from account to account to reflect projected family size and contract mix, benefit levels, renewal date, and other factors. Under one of these methods, "traditional community rating", an HMO establishes premium rates based on its revenue requirements for its entire enrollment in a given community. Under "community rating by class", an HMO establishes premium rates based on its revenue requirements for broad classes of membership distinguished by factors such as age and sex. Under "group specific community rating", an HMO establishes premium rates based on the HMO's revenue requirements for providing services to the group. State laws, in certain of the states in which the Company operates HMOs, require the filing with and approval by the state of HMO premium rates, and certain states may prohibit the use of one or more of these rating methods. In addition to reviewing anticipated medical costs, some states also review anticipated administrative costs as part of the approval process. Future results of the Company could be affected if the premium rates requested by the Company are not approved or are adjusted downward by state regulators.
Under retrospective rating, a preliminary premium rate is determined at the beginning of the policy period. Once the policy period has ended, the actual experience is reviewed. If the experience is positive (i.e., actual claim costs and other expenses are less than those expected) then a refund is credited to the policy. If the experience is negative, then the resulting deficit may, in certain instances, be recovered through contractual provisions; otherwise the deficit is considered in setting future premium levels. If a customer elects to terminate coverage, these deficits generally cannot be recovered. Retrospective rating is generally used for non-HMO health customers which exceed 300 lives.
Aetna U.S. Healthcare has contracts with HCFA to provide HMO coverage to Medicare beneficiaries who choose health care coverage through an HMO. Under these contracts, which are typically executed annually, HCFA pays the HMO at a fixed, capitated rate based on membership and adjusted for demographic factors and a user fee. Inflation, changes in utilization patterns and benefit plans, demographic factors such as age and sex, and both local county and national fee for service average per capita Medicare costs are considered in the rate calculation process. Amounts payable under Medicare risk arrangements are subject to periodic unilateral revision by HCFA. In addition to premiums received from HCFA, some of the Medicare products offered by Aetna U.S. Healthcare require a modest premium to be paid by the member. Under Medicare risk arrangements, Aetna U.S. Healthcare assumes the risk of higher than expected medical expenses. Medicare contracts typically generate higher per member per month revenues, but also higher per member per month medical expenses, than Commercial plans.
Aetna U.S. Healthcare also has HMO contracts with a variety of federal government employee groups under the Federal Employees Health Benefit Program. Premium rates are subject to federal government review and audit. Premium rates for these contracts are set prospectively but are subject to retrospective adjustments.
Premiums and fees from the federal government accounted for 19% of Aetna U.S. Healthcare's revenue in 1997. Contracts with HCFA accounted for 82% of these premiums and fees, with the balance from federal employee related benefit programs.
The Company has contracts with state and local agencies to provide fully-insured health benefits to persons eligible for Medicaid benefits. These contracts are generally for a period of one to three years. Aetna U.S. Healthcare receives a fixed monthly payment based on membership in return for the coverage of health care services. The rates are subject to unilateral revision by the contracting agencies upon renewal. Aetna U.S. Healthcare assumes the risk of higher than expected medical expenses.
Contracts with the customer to provide administrative services for employer-funded plans are generally for a period of one to three years, frequently with built in inflation factors. Aetna U.S. Healthcare has entered into certain guarantees with respect to certain functions such as customer service response time, claim processing accuracy and claim processing turnaround time, as well as certain guarantees that claim expenses to be incurred by the customer will fall within a certain range. With any of these guarantees, Aetna U.S. Healthcare is financially at risk if the conditions of the arrangements are not met.
Competition
Competition in the health care industry has intensified in recent years, primarily due to more aggressive marketing and pricing, a proliferation of competing products, including new products developed in an effort to contain health care costs, and increased quality and price sensitivity. New entrants into the marketplace as well as significant consolidation within the industry have also contributed to the more intense competitive environment.
Aetna U.S. Healthcare believes that the most significant factors which distinguish competing health plans are quality of service and managed care programs (including NCQA accreditation status), comprehensiveness of coverage, cost (including both premium and member out-of-pocket costs), product design, financial stability and the geographic scope of provider networks and the providers available in such networks. Aetna U.S. Healthcare believes that it is competitive in each of these areas. The ability to increase the number of persons covered by Aetna U.S. Healthcare benefits or to increase revenues is affected by competition in any particular area. In addition, the ability to increase the number of persons enrolled in Health Risk products is affected by the desire and ability of employers to self fund their employees' insurance. Competition may also affect the availability of services from health care providers, including primary care physicians, specialists and hospitals.
Within the Health Risk business, Aetna U.S. Healthcare competes with local and regional managed care plans, in addition to managed care plans sponsored by large health insurance companies and Blue Cross/Blue Shield plans. Additional competitors include other types of medical and dental provider organizations, various specialty service providers, integrated health care delivery organizations, and in certain plans, with programs sponsored by the federal or state governments.
Within the Other Health component of the Group Insurance and Other Health business, Aetna U.S. Healthcare competes primarily with other commercial insurance companies and third party administrators.
For the Group Insurance industry, Aetna U.S. Healthcare believes that the most significant factors which distinguish competing companies are price, quality of service, comprehensiveness of coverage, and product array and design. Specialty carriers have increased market penetration in the disability business. The deeply-penetrated group life market remains highly competitive, while competition continues to intensify in the emerging long-term care market.
Reserves
For the Health Risk business, medical claims payable reflects estimates of the ultimate cost of claims that have been incurred but not yet reported and reported but not yet paid. Medical claims payable are based on a number of factors including those derived from historical claim experience. Medical claims payable are estimated periodically, and any resulting adjustments are reflected in current period results.
For Group Insurance products, reserves are established as premiums become due 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 the Company's historical claim experience. For long-term disability products, reserves are established for (i) lives currently in payment status (using both standard industry, as well as the Company's own morbidity and interest rate assumptions), (ii) lives who have not yet satisfied the waiting period, but are expected to do so and (iii) claims that have been incurred but not reported. Long-term care reserves are a long-term obligation calculated using industry data for morbidity and mortality assumptions.
Group health and group insurance premiums are generally recorded as premium revenue over the term of the coverage. Some group contracts allow for premiums to be adjusted to reflect emerging experience. Such premiums are recognized as the related experience emerges.
Reinsurance
Aetna U.S. Healthcare uses reinsurance agreements with nonaffiliated insurers for Group Insurance businesses to control its exposure to large losses and certain other risks. The Company maintains catastrophic life reinsurance which provides protection against accidents involving five or more covered lives. For disability business, reinsurance arrangements for excess coverage are established on a case-by-case basis to reflect the circumstances of the specific disability risks. In addition, the Company carries excess medical malpractice professional liability insurance.
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:
(1) Due to the diversity of coverages and size of covered groups, statistics are not provided for average size of policies in force.
(2) Reflects conversion privileges exercised by insureds under group life policies to replace those policies with individual life policies.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect Aetna U.S. Healthcare's business, see MD&A - Forward-Looking Information/Risk Factors and financial results discussions in the Annual Report.
2. Aetna Retirement Services
Products and Services
Aetna Retirement Services ("ARS") offers financial services and individual life insurance products. Primarily all products are offered through Aetna Life Insurance and Annuity Company ("ALIAC")and Aetna Insurance Company of America ("AICA") indirect, wholly owned subsidiaries of the Company. Investment advisory services are offered through ALIAC and Aeltus Investment Management Inc. ("Aeltus"), registered investment advisers and indirect, wholly owned subsidiaries of the Company. Aeltus has also served as subadviser to Aetna mutual funds. Financial planning services are offered through Financial Network Investment Corporation ("FNIC"), a broker/dealer acquired in 1997 and Aetna Financial Services, Inc. ("AFSI"), indirect wholly owned subsidiaries of the Company.
Financial Services
Financial services products principally include annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457 (collectively, "qualified plans") and nonqualified annuity contracts. These contracts may be deferred or immediate ("payout annuities"). Financial services also include investment advisory services, financial planning and pension plan administrative services.
Individual Life Insurance
Individual life insurance products include universal life and variable universal life, which have both life insurance and investment characteristics, traditional whole life and term insurance. Universal life and variable universal life products accounted for approximately 96% of life insurance new business premiums in 1997.
Investment Options
ARS products provide annuity and certain life insurance customers with variable and/or fixed investment options. Variable ("nonguaranteed") options provide for full assumption by the customer of investment risks. Assets supporting variable options are held in separate accounts that invest in Aetna mutual funds and/or unaffiliated mutual funds. Aetna mutual funds include funds managed by Aeltus and beginning in 1997, funds managed by outside investment advisors under subadvisory arrangements. Separate account investment income and realized capital gains and losses are not reflected in the Company's consolidated results of operations. Fixed options can be either "fully guaranteed" or "experience rated". Fully guaranteed options provide guarantees on investment return, maturity values, and if applicable, benefit payments. Experience rated options require the customer to assume investment (including realized capital gains and losses) and other risks subject, among other things, to certain minimum guarantees. The effect of such realized gains and losses (as long as minimum guarantees are not triggered) does not impact the Company's results.
Fees and Investment Margins
Insurance charges, investment management or other fees earned by ARS, vary by product and depend, among other factors, on the funding option selected by the customer under the product. For variable annuities or life insurance products where assets are allocated to variable funding options, ARS charges the separate account an asset-based insurance fee and expense charge. In addition, where the customer selects an Aetna mutual fund as a variable funding option, ARS receives an asset-based investment management fee and, in the case of those funds subadvised by outside managers, ALIAC pays a subadvisory fee to the fund manager. For unaffiliated mutual funds, ARS receives distribution fees and/or expense reimbursements. For fixed funding options, ARS derives an investment margin, which is based on the difference between income earned on the investments supporting the liability and interest credited to customers. Other fees or charges, such as administrative fees, may be assessed depending on the nature of the product.
ARS also provides direct investment advisory services to unaffiliated customers through Aeltus and FNIC generally for fees based on assets under management. FNIC and AFSI provide financial planning services generally for fees which may or may not be asset based.
Assets Under Management
The substantial portion of fees or other charges and investment margins are based on assets under management. Assets under management are principally affected by deposits, investment growth (i.e., interest credited to customer accounts for fixed options or market performance for variable options) and persistency (i.e., customer retention). Assets under management, excluding net unrealized capital gains and losses on debt securities other than those held in separate accounts, were $45.0 billion, $32.1 billion and $25.1 billion at December 31, 1997, 1996 and 1995, respectively. Approximately 94% and 93% of assets under management at December 31, 1997 and 1996, respectively, allowed for contractholder withdrawal, 77% and 75% of which, respectively, are subject to market value adjustments or deferred surrender charges at December 31, 1997.
To encourage customer retention and recover acquisition expenses, contracts typically impose a surrender charge on policyholder balances withdrawn within a period of time after the contract's inception which may be waived at the Company's discretion. The period of time and level of the charge vary by product. In addition, an approach incorporated into recent variable annuity contracts with fixed funding 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 further disincentive to customers for premature surrenders of annuity balances, but generally do not impede transfers of those balances to products of competitors.
Life Insurance In Force and Other Statistical Data
For individual life insurance products, life insurance in force is a key determinant of earnings as contract charges for cost of insurance coverage are typically based on amounts of coverage in force less accumulated policy reserves. The key drivers of life insurance in force are new sales, surrenders and mortality. The following table summarizes changes in life insurance in force before deductions for reinsurance ceded to other companies:
(Amounts in millions, except number of policies and average size of policies in force)
See Note 12 of Notes to Financial Statements in the Annual Report for a discussion of participating life insurance contracts.
The following table summarizes premiums and deposits for ARS:
Principal Markets and Method of Distribution
ARS products and services 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. ARS products generally are sold through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents and financial planners.
Competition
ARS competes with other insurance companies, as well as an array of financial services companies including banks, mutual funds and other investment managers. Principal competitive factors are reputation for investment performance, product features, service, cost and the perceived financial strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the pricing of ARS' products and services.
Reserves
Reserves for limited payment contracts (annuities with life contingent payout) are computed on the basis of assumed investment yield, mortality, morbidity and expenses and include a margin for adverse deviation. The assumptions 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 withdrawals and charges thereon. Of those investment contracts which are experience rated, the reserves also reflect net realized capital gains/losses (which ARS reflects through credited rates on an amortized basis) and unrealized capital gains/losses related to Financial Accounting Standard ("FAS") No. 115.
Reserves for universal 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 ARS 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 a basis consistent with that described above for limited payment contracts.
Reserves, as described above, 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
ARS retains no more than $10 million of risk per individual life insured. Amounts in excess of the retention limit are reinsured with unaffiliated companies.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect ARS' business, see MD&A - Forward-Looking Information/Risk Factors and financial results discussions in the Annual Report.
3. Aetna International
Aetna International, through subsidiaries and joint venture operations, sells primarily life and health insurance and financial services products in non-U.S. markets.
The Company continues to increase its investments in emerging international and financial services markets, primarily in Asia Pacific and Latin America, where it believes demographic and other characteristics afford the opportunity for long-term business growth. The Company seeks to enter new emerging markets in their early stages of development, seeking to be among the first foreign entrants, and then to build sufficient scale of operations to compete with local and other foreign companies. The Company also explores opportunities for additional investments, or divestitures where appropriate, in markets where it has established operations.
The Company may invest in a new market or increase its position in a market through a combination of acquisitions, joint ventures or by starting new independent operations. Over the past 5 years, the Company has invested $882 million in its international operations, of which $473 million was invested in 1997, a majority of which related to the acquisition of 49% of a joint venture in Brazil with Sul America Seguros, Brazil's largest insurance company.
In October 1997, the Company was granted approval to operate a joint venture insurance business in Shanghai. The approval was given by The People's Bank of China, a regulatory body for financial institutions in China. The joint venture, to be formed with China Pacific Insurance Company, the second largest insurer in China, will provide life insurance products to individual Chinese citizens and foreign nationals in the Shanghai region.
The Company classifies its operations in international regions as either "established" or "start-up", depending on the stage of their business developments.
Aetna International conducts its business in several geographic regions:
o Asia Pacific - Operations are conducted through majority owned subsidiaries in Taiwan and Malaysia, as well as through other equity subsidiaries (where the Company has between a 20% and 50% interest) in Hong Kong and New Zealand. The products and services sold by these subsidiaries include individual and group life and health insurance, deposit administration and related financial products and services.
o Latin America - Operations are conducted through wholly owned and majority-owned subsidiaries in Chile, and equity subsidiaries in Mexico, Peru and Brazil. The products and services sold by these subsidiaries include individual and group life and health insurance, annuities, personal and commercial property-casualty insurance, and pension fund administration services.
o Canada - Operations are conducted through wholly owned subsidiaries. The products and services sold by these subsidiaries include individual and group life, health and disability insurance and administration services to group plans.
o Other - Operations include primarily start-up operations (subsidiaries in the initial years of operation) in Argentina, the Philippines and Indonesia, as well as corporate overhead expenses. The products and services sold by these subsidiaries include individual and group life and health insurance, and health and pension fund administration services.
Each of the subsidiaries through which Aetna International conducts business operates within guidelines established by the Company. Methods of distributing products vary by country and product depending on local laws, customs and the needs of the particular market. Distribution channels include career agents, independent agents and brokers, financial institutions and direct sales. Competition varies by country and includes well established local companies, as well as companies based in North America, Europe, Australia and Japan that have a strong international presence.
The following table sets forth Aetna International's revenue (including only its share of net income for equity subsidiaries and excluding net realized capital gains or losses), and operating earnings or losses (i.e., net income or loss excluding net realized capital gains or losses) by region, premiums and life insurance in force, before deductions for reinsurance ceded to other companies:
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect Aetna International's business, see MD&A - Forward-Looking Information/Risk Factors and financial results discussions in the Annual Report.
4. Large Case Pensions
Principal Products
Large Case Pensions manages a variety of retirement products (including pension and annuity products) offered to IRC Section 401 qualified defined benefit and defined contribution plans. Contracts provide nonguaranteed, partially guaranteed (experience rated) and fully guaranteed investment options through General and Separate Account products. The majority of Large Case Pensions' products that use 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.
In 1993, the Company discontinued 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 and excluding net unrealized capital gains and losses on debt securities, were $29.7 billion in 1997, $35.3 billion in 1996 and $45.6 billion in 1995. The decline in assets under management is primarily attributable to the transfer of assets under management to the ARS segment, reflecting the consolidation of the Company's investment advisory services, the continuing runoff of the underlying liabilities and the sale of Insurance Company Investment Management, a specialized asset manager, in 1996.
The following table summarizes premiums and deposits:
Reserves
When the Company discontinued the fully guaranteed large case pension products, it established a reserve for expected future losses on the runoff of the business. For additional information on this reserve, see Note 9 of Notes to Financial Statements in the Annual Report.
The Company also maintains reserves for guaranteed investment contracts equal to amounts deposited plus credited interest thereon. Reserves for single premium annuity contracts reflect the present value of benefits based on actuarial assumptions established at the time of contract purchase. Such assumptions are based on the Company's experience, which is periodically reviewed against published industry data. These products provide guarantees on investment return, maturity values, and if applicable, benefit payments. The interest credited on these contracts during 1997 ranged from 3.5% to 17.7% with an average rate of 8.6% (compared with 8.7% in 1996). For the contracts in force at December 31, 1997, the average credited rate was 8.5%. None of these contracts allow for contractholder withdrawal, except in extraordinary circumstances.
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 intends to reflect in credited rates) and net unrealized capital gains/losses related to FAS No. 115.
Factors Affecting Forward-Looking Information
For information regarding certain important factors that may materially affect Large Case Pension's business, see MD&A - Forward-Looking Information/Risk Factors and financial results discussions in the Annual Report.
5. General Account Investments
Consistent with the nature of the contract obligations involved in the Company's health, life, annuity and pension operations, the majority of general account assets 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, 4, and 7 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 of the Company's general account portfolio (excluding Discontinued Operations) as of the end of the years indicated: (1) (2)
(1) Excludes Separate Accounts. (2) Includes $7.9 billion, $8.7 billion and $10.3 billion of investments supporting discontinued products in 1997, 1996 and 1995, respectively.
The following table summarizes the Company's investment results: (1)
(Dollar amounts in millions)
(1) Excludes Separate Accounts, investments in affiliates and Discontinued Operations. (2) Net investment income excludes net realized capital gains and losses and is after deduction of investment expenses, but before deduction of income taxes. (3) The Earned Net Investment Income Rate for any given year is equal to (a) net investment income divided by (b) the average of cash, invested assets excluding unrealized, and investment income due and accrued at the beginning and end of the year. (4) Net realized capital gains are before income taxes and exclude gains and losses allocable to experience rated pension contractholders in all years. (5) Net unrealized capital gains (losses) are before federal income taxes and exclude changes in unrealized capital gains (losses) related to experience rated contractholders and discontinued products.
6. Other Matters
a. Regulation
General
The Company's operations are subject to comprehensive regulation throughout the United States and the foreign jurisdictions in which it does business. The laws of these jurisdictions establish supervisory agencies, including state health, insurance and securities departments, with broad authority to grant licenses to transact business and regulate many aspects of the products and services offered by the Company, as well as solvency and reserve adequacy. Many agencies also regulate investment activities on the basis of quality, diversification, and other quantitative criteria. The Company's operations and accounts are subject to examination at regular intervals by certain of these regulators.
Health Care
The federal government and the states in which the Company conducts its HMO and other health operations have adopted laws and regulations that govern the business activities of the Company to varying degrees. These laws and regulations may restrict how the Company conducts its businesses and may result in additional burdens and costs to the Company. Areas of governmental regulation include licensure, premium rates, benefits, service areas, quality assurance procedures, plan design, eligibility requirements, provider rates of payment, surcharges on provider payments, provider contract forms, underwriting, financial arrangements, financial condition (including reserves) and corporate governance. These laws and regulations are subject to amendments and changing interpretations in each jurisdiction.
States generally require HMOs to obtain a certificate of authority prior to commencing operations. To establish an HMO in any state where it does not presently operate an HMO, the Company generally has to obtain such a certificate. The time necessary to obtain such a certificate varies from state to state. Each HMO must file periodic financial and operating reports with the states in which it does business. In addition, the HMOs are subject to state examination and periodic license renewal.
The provision of services to certain employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor ("DOL"). ERISA regulates certain aspects of the relationships between the Company and employers who maintain employee benefit plans subject to ERISA. Some of the administrative services and other activities of the Company may also be subject to regulation under ERISA. In addition, some states require licensure or registration of companies providing third party claims administration services for benefit plans.
Certain legislative and regulatory changes related to health products have recently been enacted or proposed, and a variety of other potential legislative and regulatory changes are receiving a high level of attention at both the state and federal level. For a discussion of these matters see MD&A - Regulatory Environment in the Annual Report. For information regarding regulation of pricing by the Company's HMOs, see "Aetna U.S. Healthcare - Health Pricing", on page 10.
Investment and Retirement Products and Services
Operations conducted by ARS and Large Case Pensions are subject to regulation by various insurance agencies where the Company conducts business, in particular the insurance departments of Connecticut and New York. Among other matters, these agencies may regulate premium rates, trade practices, agent licensing, policy forms, underwriting and claims practices, 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.
The Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD") 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. Regulations of the SEC, Department of Labor and Internal Revenue Service also impact 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 Aetna Insurance Company of America and mutual funds registered under the Investment Company Act of 1940.
International
The nature and extent of regulations affecting the Company's international operations varies by jurisdiction and line of business. Most operations are subject to local insurance laws. These laws typically regulate the types of business that can be written, policy forms and terms, currency, permitted investments, reserves, taxation and other matters affecting the conduct of the business. International operations are also subject to a variety of additional investment and other controls that may be imposed by governments. Certain jurisdictions may require that portions of the business be reinsured through designated state-affiliated institutions. As a foreign investor, the Company is also subject to a variety of restrictions regarding permitted levels of equity ownership, remittance of foreign earnings, repatriation of capital, exchange of currency, and entry into new lines of business. Regulation of international operations may also be subject to other political factors not typically associated with doing business in the United States, such as more rapid change of regulatory policy, possible nationalization of businesses, hostilities and unrest.
Federal Employee Benefit Regulation
ARS and Large Case Pensions also provide a variety of products and services to employee benefit plans that are covered by ERISA.
In December 1993, in a case involving an employee benefit plan and an insurance company, the United States Supreme Court ruled that assets in the insurance company's general account that were attributable to a portion of a group pension contract issued to the plan that was not a "guaranteed benefit contract" were "plan assets" for purposes of ERISA and that the insurance company was an ERISA fiduciary with respect to those assets. In reaching its decision, the Court declined to follow a 1975 DOL interpretive bulletin that had suggested that insurance company general account assets were not plan assets.
Congress recently enacted the Small Business Job Protection Act (the "Act"), which, among other matters, created a framework for resolving potential issues raised by the Supreme Court decision. The Act provides that, absent criminal conduct, insurers generally will not have liability with respect to general account assets held under contracts that are not guaranteed benefit contracts based on claims that those assets are plan assets. The relief afforded extends to conduct that occurred before the date that is eighteen months after the DOL issues final regulations required by the Act, except as provided in the anti-avoidance portion of the regulations. The regulations, which were proposed by the DOL on December 22, 1997, will address ERISA's application to the general account assets of insurers attributable to contracts issued on or before December 31, 1998 that are not guaranteed benefit contracts. The conference report relating to the Act states that contracts issued after December 31, 1998 that are not guaranteed benefit contracts will be subject to ERISA's fiduciary obligations. The Company is not currently able to predict how these matters may ultimately affect its businesses.
HMO and Insurance Holding Company Laws
A number of states, including Connecticut, regulate affiliated groups of HMOs and insurers such as the Company under holding company statutes. These laws may require these companies to maintain certain levels of equity. For information regarding restrictions on certain payments of dividends or other distributions by HMO and insurance company subsidiaries of the Company, see MD&A - Liquidity and Capital Resources in the Annual Report. Some of these laws also regulate changes in control (as do Connecticut corporate laws), and other matters such as transactions with affiliates. See also Note 16 of Notes to Financial Statements in the Annual Report.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The after-tax charges to earnings for guaranty fund obligations for the years ended December 31, 1997, 1996 and 1995 were $5 million, $4 million and $8 million, respectively. While the Company has historically recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future efforts to recover such assessments. For information regarding certain other potential regulatory changes relating to the Company's businesses, see MD&A - Forward-Looking Information/Risk Factors.
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 1997, none of Aetna Inc.'s significant insurance subsidiaries had more than two IRIS ratios that were outside of the NAIC usual ranges.
Management does not expect that any of the Company's significant subsidiaries will have more than two IRIS ratios outside of the NAIC usual ranges for 1998.
See MD&A - Liquidity and Capital Resources in the Annual Report for additional discussion regarding solvency regulation.
c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
The following table sets forth the Company's and Aetna Services' ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred stock dividends for the years indicated:
(a) The Company reported a pretax loss from continuing operations in 1993 which was inadequate to cover fixed charges by $1.0 billion.
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 include the dividends paid to preferred shareholders of a subsidiary. (See Note 14 of Notes to Financial Statements in the Annual Report.) During 1993, 1994 and 1995, 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. Trademarks
The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare (Trademark application pending), U.S. Healthcare (Registered Trademark), and Aetna Retirement Services (Registered Trademark), together with the corresponding design logos are owned by the Company. The Company considers these trademarks and its other trademarks and trade names important in the operation of its business. However, the business of the Company is not dependent on any individual trademark or trade name.
e. Ratings
The ratings of certain of Aetna Inc.'s subsidiaries follow:
* Nonrated by the agency. ** Fully and unconditionally guaranteed by Aetna Inc.
In addition, certain of the Company's HMO subsidiaries are rated on their claims paying ability by A.M. Best. All such ratings are in the "Excellent" or "Superior" categories.
f. Miscellaneous
The Company had approximately 27,100 domestic employees at December 31, 1997. In addition, the Company had approximately 13,200 international employees at December 31, 1997 in its majority and wholly owned non-U.S. subsidiaries.
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. See MD&A for information regarding the Company's efforts to prepare its systems, applications and facilities to accommodate Year 2000 date-sensitive information.
The federal government is a significant customer of the Aetna U.S. Healthcare segment and the Company, accounting for approximately 13% of the Company's consolidated revenue in 1997. No other customer accounted for 10% or more of the Company's consolidated revenues in 1997. No other segment of the Company's business is dependent upon a single customer or a few customers, the loss of which would have a significant effect on the earnings of the segment. See Note 17 of Notes to Financial Statements in the Annual Report regarding segment information.
The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the earnings of the Company or any of its segments.
Item 2.
Item 2. Properties.
The home office of the Company is a building complex located at 151 Farmington Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The Company and certain of its subsidiaries also own or lease other space in the greater Hartford area, Blue Bell, Pennsylvania and Fairfield, New Jersey, as well as various field locations throughout the country. The Company believes its properties are adequate and suitable for its business as presently conducted.
The foregoing does not include numerous investment properties held by the Company in its general and separate accounts.
Item 3.
Item 3. Legal Proceedings.
Purported Class Action Complaints were filed in the United States District Court for the Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and Michael Wolin, and on December 2, 1997 by Pamela Goodman and Michael J. Oring. Other purported Class Action Complaints were filed in the United States District Court for the District of Connecticut on November 25, 1997 by Evelyn Silvert, on November 26, 1997 by The Rainbow Fund, Inc., and on December 24, 1997 by Terry B. Cohen. The Complaints seek, among other remedies, unspecified damages resulting from defendants' alleged violations of federal securities laws. The Complaints allege that the Company and three of its current or former officers or directors, Ronald E. Compton, Richard L. Huber, and Leonard Abramson, are liable for certain misrepresentations and omissions regarding, among other matters, the integration of the merger with U.S. Healthcare and the Company's medical claim reserves. The litigation is still in the preliminary stages, and the Company is defending the actions vigorously.
The Company also is involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations including litigation in its health business concerning benefit plan coverage and other decisions made by the Company, and alleged medical malpractice by participating providers. While the ultimate outcome of these other lawsuits cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, they are not expected to result in liability for amounts material to the financial condition of the Company, although they 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 INC.*
The Chairman of the 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.
* As of March 2, 1998.
** Executive Vice Presidents, in conjunction with certain other senior officers, are responsible for assisting the Chief Executive Officer in setting policy and overall direction for the Company.
(1) Mr. Huber was named Chairman on March 1, 1998 and Chief Executive Officer and President on July 28, 1997. He had served as Vice Chairman for Strategy and Finance since February 1995. He served as President and Chief Operating Officer of Grupo Wasserstein Perella from September 1994 to February 1995 and as Vice Chairman of Continental Bank from 1990 to September 1994.
(2) Mr. Calvocoressi assumed his current position on January 1, 1997. From March 1996 to January 1997, he served as Vice President and Deputy General Counsel of Aetna. He served as Vice President and Corporate Counsel from August 1994 to March 1996, as Vice President and Counsel from July 1993 to August 1994 and as Counsel, Office of General Counsel, from July 1991 to July 1993.
(3) Mr. Cardillo has served in his current position since July 19, 1996. He also serves as President of Aetna U.S. Healthcare Inc. a position he assumed in March 1997 after serving as Co-President since July 19, 1996. Mr. Cardillo had been Co-President of U.S. Healthcare, Inc. since 1995 and Principal Marketing Officer since 1989.
(4) Mr. Copeland assumed his current position on July 19, 1996. He also serves as President and Chief Executive Officer of Aetna International, Inc., a position he assumed in April 1996, after having served as President of Aetna International since July 1995. From January 1993 to July 1995, he served as Chairman, President and Chief Executive Officer of Fleet Bank, N.A., Connecticut. From September 1987 to January 1993, he served as President and Chief Executive Officer of Citibank Canada.
(5) Mr. Holt assumed his current position on September 26, 1997, having served as Vice President and Chief Financial Officer of Aetna Retirement Services since 1996. He served as Vice President, Portfolio Management Group, from 1992 to 1996.
(6) Mr. McInerney assumed his current position on August 18, 1997, having served as Vice President, Strategic Planning, since March 1997. He also currently serves as President, Aetna Retirement Services, Inc. From 1996 to 1997, he served as Vice President, National Accounts, for Aetna Health Plans and then as Vice President, National Accounts and Sales and Marketing, for the successor business, Aetna U.S. Healthcare. During 1995 and 1996, he also served as Vice President, Corporate Strategy. From 1992 to 1996, Mr. McInerney served as Vice President, Guaranteed Products.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Aetna Inc.'s common stock is listed on the New York Stock Exchange. Its symbol is AET. As of January 31, 1998, there were 20,910 record holders of the common stock.
The dividends declared and the high and low sales prices with respect to the 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 16 of Notes to Financial Statements and MD&A - Liquidity and Capital Resources 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 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations-General Account Investments" in the Annual Report is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The 1997 Consolidated Financial Statements and the report of the registrant's independent auditors and the unaudited information set forth under the caption "Quarterly Data" are 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 captions "Director Compensation in 1997" and "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 40.
3. Exhibits:
(3) Articles of Incorporation and By-Laws.
Aetna Inc. Amended and Restated Certificate of Incorporation, incorporated herein by reference to the Company's Registration Statement on Form S-4 (File No. 333-5791) filed on June 12, 1996.
Aetna Inc. Bylaws, as amended, incorporated herein by reference to the Company's Form 10-K filed on February 28, 1997.
(4) Instruments defining the rights of security holders, including indentures.
Senior Indenture, dated July 1, 1996, between the Company, Aetna Services, Inc. (formerly Aetna Life and Casualty Company), and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, incorporated herein reference to the Company's Form 10-Q filed on October 25, 1996.
Form of Subordinated Indenture between Aetna Services, Inc., Aetna Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (including the forms of Subordinated Debt Securities and Subordinated Debt Guarantees), incorporated herein by reference to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3 (File No. 333-07167) filed on June 28, 1996.
Designations, Rights and Preferences of 6.25% Class C Voting Preferred Stock, incorporated herein by reference to the Company's 8-K filed on July 26, 1996.
Aetna Inc. Rights Agreement, incorporated herein by reference to the Company's 8-K filed on July 26, 1996.
Indenture, dated as of October 15, 1986, between Aetna Services, Inc. and The First National Bank of Boston, Trustee, incorporated herein by reference to Aetna Services, Inc.'s 1992 Form 10-K.
First Indenture Supplement, dated as of August 1, 1996, to Indenture, dated as of October 15, 1986, between Aetna Services, Inc. and State Street Bank and Trust Company, as Successor Trustee, incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.
Indenture, dated as of August 1, 1993, between Aetna Services, Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, incorporated herein by reference to Aetna Services, Inc.'s Registration Statement on Form S-3 (File No. 33-50427).
First Indenture Supplement, dated as of August 1, 1996, to the Indenture dated as of August 1, 1993 between Aetna Services, Inc. and State Street Bank and Trust Company of Connecticut, National Association, as Trustee, incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.
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 Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
3. Exhibits (Continued):
Subordinated Indenture, dated as of November 1, 1994, between Aetna Services, Inc. and The First National Bank of Chicago, as Trustee, incorporated herein by reference to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
First Indenture Supplement, dated as of August 1, 1996, to the Indenture, dated as of November 1, 1994, between Aetna Services, Inc. and The First National Bank of Chicago, as Trustee, incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.
Payment and Guarantee Agreement, dated November 22, 1994, of Aetna Services, Inc. with respect to Aetna Capital L.L.C., incorporated herein by reference to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
Payment and Guarantee Agreement, dated as of August 1, 1996, of Aetna Inc. with respect to Aetna Capital L.L.C., incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.
Amendment No. 1, dated as of August 1, 1996, to the Fiscal Agency Agreement, dated as of July 17, 1986, between Aetna Services, Inc. and State Street Bank and Trust Company, as successor Fiscal Agent, incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.
(10) Material contracts.
Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and Joseph Sebastianelli, incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.**
Employment Agreement, dated as of March 30, 1996, by and between U.S. Healthcare, Inc. and Michael Cardillo, incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.**
Stock Purchase Agreement, dated as of November 28, 1995, between The Travelers Insurance Group Inc. and Aetna Services, Inc. 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, incorporated herein by reference to Aetna Services, Inc.'s 1995 Form 10-K.
Letter Agreement, dated as of January 19, 1995, between Aetna Services, Inc. and Richard L. Huber, incorporated herein by reference to Aetna Services, Inc.'s 1995 Form 10-K.**
Employment Agreement, dated as of January 29, 1996, between Aetna Services, Inc. and Ronald E. Compton, incorporated herein by reference to Aetna Services, Inc.'s 1995 Form 10-K.**
Employment Agreement, dated as of December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Services, Inc.'s 1995 Form 10-K.**
The 1984 Stock Option Plan of Aetna Life and Casualty Company and amendments thereto, incorporated herein by reference to the 1992 Form 10-K. **
Letter Agreement, dated as of January 31, 1996, between Aetna Services, Inc. and The Travelers Insurance Group Inc., incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
3. Exhibits (Continued):
Amendment, dated as of April 2, 1996, to Stock Purchase Agreement, dated as of November 28, 1995, between Aetna Services, Inc. and The Travelers Insurance Group Inc., incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
Registration Rights Agreement, dated as of March 30, 1996, between the Company and Leonard Abramson, incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
Amendment No. 1, dated as of May 30, 1996, to the Registration Rights Agreement, dated as of March 30, 1996, between the Company and Leonard Abramson, incorporated herein by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.
Amended and Restated Agreement, dated as of May 30, 1996, between the Company and Leonard Abramson, incorporated herein by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.
The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.**
The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.**
The Aetna Inc. Non-Employee Director Deferred Stock and Deferred Compensation Plan, as amended, incorporated herein by reference to Company's Form 10-K filed on February 28, 1997.**
The Supplemental Pension Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein by reference to the Company's Form 10-Q filed on October 25, 1996.**
Amendment No. 1, dated March 1, 1996 to Letter Agreement, dated January 19, 1995, between Aetna Services, Inc. and Richard L. Huber, incorporated herein by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.**
Amended and Restated U.S. Healthcare, Inc. Savings Plan, incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**
Amended and Restated Pension Plan for Employees of U.S. Healthcare, Inc., incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**
Split Dollar Insurance Agreement, dated as of February 1, 1990, among Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson and David B. Soll, and U.S. Healthcare, Inc., and the related Collateral Assignment Agreement, dated as of February 1, 1990, among Madlyn K. Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson and David B. Soll, and U.S. Healthcare, Inc., incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.
3. Exhibits (Continued):
Split Dollar Insurance Agreement, dated as of January 21, 1991, among Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., and the related Collateral Assignment Agreement, dated as of January 21, 1991, among Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.
Description of Deferred Compensation Plan, incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**
Voting Agreement, dated as of March 30, 1996, among Leonard Abramson, Aetna Life Insurance Company and Aetna Life Insurance and Annuity Company, incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Services, Inc., U.S. Healthcare, Inc., the Company, Antelope Sub, Inc. and New Merger Corporation, incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.
Amendment No. 1, dated as of May 30, 1996, to the Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Services, Inc., U.S. Healthcare, Inc., the Company, Antelope Sub. Inc. and New Merger Corporation, incorporated herein by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.
Aetna Services, Inc. Credit Facility, incorporated herein by reference to Aetna Services, Inc.'s Report on Form 8-K filed on July 16, 1996.
Notification from Aetna Services, Inc. dated October 22, 1996 electing to reduce Credit Facility to $1.5 billion, incorporated herein by reference to the Company's Form 10-K filed on February 28, 1997.
Amendment, dated as of September 4, 1997, to the Amended and Restated Agreement, dated as of May 30, 1996, between the Company and Leonard Abramson, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on November 4, 1997.
Amendment, dated as of September 8, 1997, to Employment Agreement, as of December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on November 4, 1997.**
Amendment No. 1, dated as of December 31, 1996, to the Supplemental Pension Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment No. 2, dated as of February 28, 1997, to the Supplemental Pension Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
3. Exhibits (Continued):
Employment Agreement, dated as of March 6, 1997, by and between the Company and Joseph Sabastianelli, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment dated as of April 9, 1997, to the Amended and Restated Agreement, dated as of May 10, 1996, between the Company and Leonard Abramson, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.
Amendment dated as of July 22, 1996, to Letter Agreement, dated as of January 19, 1995, between the Company and Richard L. Huber incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment dated as of July 22, 1996, to Employment Agreement, dated as of January 19, 1995, between the Company and Ronald E. Compton, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Amendment dated as of July 22, 1996, to Employment Agreement, dated as of December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
Employment Agreement, dated as of December 21, 1995, by and between Aetna Services, Inc. and Frederick C. Copeland, Jr., as amended.**
Employment Agreement, dated as of December 21, 1995, by and between Aetna Services, Inc. and Thomas McInerney, as amended.**
Description of certain arrangements not embodied in formal documents, as described under the headings "Director Compensation" and "Executive Compensation", incorporated herein by reference to the Aetna Services, Inc. 1997 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 for the Company for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and Aetna Services for the years ended December 31, 1997 and 1996.
Statement re: computation of ratio of earnings to combined fixed charges and preferred stock dividends for the Company for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and Aetna Services for the years ended December 31, 1997 and 1996.
(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.
3. Exhibits (Continued):
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Inc.
(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.
(b) Reports on Form 8-K
None
* 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 Inc., 151 Farmington Avenue, Hartford, Connecticut 06156.
** Management contract or compensatory plan or arrangement.
INDEX TO FINANCIAL STATEMENT SCHEDULES AETNA INC.
Page ----
Independent Auditors' Report 41
I Summary of Investments - Other than Investments in Affiliates as of December 31, 1997 42
II Condensed Financial Information of the Registrant:
Aetna Inc. as of and for the years ended December 31, 1997 and 1996 43
Aetna Services, Inc. (formerly Aetna Life and Casualty Company) for the year ended December 31, 1995 49
III Supplementary Insurance Information as of and for the years ended December 31, 1997, 1996 and 1995 53
IV Reinsurance 56
V Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1997, 1996 and 1995 57
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 1996 and 1995 financial information to conform to 1997 presentation.
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors Aetna Inc.:
Under date of February 3, 1998, we reported on the consolidated balance sheets of Aetna Inc. and Subsidiaries as of December 31, 1997 and 1996, 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, 1997, as contained in the 1997 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 1997. 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.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut February 3, 1998
AETNA INC. AND SUBSIDIARIES
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1997
- ----------
* See Notes 1 and 4 of Notes to Financial Statements in the Company's 1997 Annual Report.
(1) Excludes investments in affiliates of $372.6 million. (2) Includes investments in affiliates of $372.6 million.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Income
- ----------
See Notes to Condensed Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Balance Sheets
- ----------
See Notes to Condensed Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Shareholders' Equity
See Notes to Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Statements of Cash Flows
- ----------
See Notes to Condensed Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements
1. Background of Organization
Aetna Inc. was incorporated under the Stock Corporation Act of the state of Connecticut on March 25, 1996 for the purpose of effecting the combination of Aetna Services, Inc. ("Aetna Services")(formerly Aetna Life and Casualty Company) and Aetna U.S. Healthcare, Inc. ("Aetna U.S. Healthcare") (formerly U.S. Healthcare, Inc. ("U.S. Healthcare")) in accordance with the terms of the Agreement and Plan of Merger dated as of March 30, 1996. Aetna's merger with Aetna U.S. Healthcare was consummated on July 19, 1996. As a result of the merger, Aetna Services and Aetna U.S. Healthcare are each direct wholly owned subsidiaries of Aetna Inc.
The accompanying condensed financial statements include for 1996 the results of operations of Aetna Services from January 1, 1996 and of U.S. Healthcare from July 19, 1996 which are reflected as Equity in Earnings of Affiliates on the Statement of Income. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Annual Report.
2. Guarantee of Debt Securities
Aetna Inc. has fully and unconditionally guaranteed the payment of all principal, premium, if any, and interest on all outstanding debt securities of Aetna Services, including the $348 million 9 1/2% Subordinated Debentures due 2024 (the "Subordinated Debentures") issued to Aetna Capital L.L.C., a wholly owned subsidiary of Aetna Services. Aetna Capital L.L.C. has issued $275 million of redeemable preferred stock and the Subordinated Debentures represent substantially all of the assets of Aetna Capital L.L.C. See Note 13 to the Consolidated Financial Statements in the Annual Report for a description of outstanding debt.
3. Dividends
Cash dividends paid to Aetna Inc. by Aetna Services and Aetna U.S. Healthcare for the year ended December 31, 1997 were $.8 billion and $.3 billion, respectively, and for the year end December 31, 1996 were $5.3 billion and $.6 billion, respectively. The 1996 dividends included the dividend by Aetna Services of the net proceeds from the sale of the property-casualty operations. The 1996 dividends from Aetna Services were used to finance the cash portion of the U.S. Healthcare merger consideration. See Note 16 to the Consolidated Financial Statements in the Annual Report for a description of dividend restrictions.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA INC.
Notes to Condensed Financial Statements (Continued)
4. New Accounting Standards
See Note 1 to the Consolidated Financial Statements in the Annual Report for a description of new accounting standards.
5. Discontinued Products
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of discontinued products.
6. Other Acquisitions and Dispositions
See Note 3 to the Consolidated Financial Statements in the Annual Report for a description of other acquisitions and dispositions.
7. Severance and Facilities Charges
See Note 8 to the Consolidated Financial Statements in the Annual Report for a description of the 1996 severance and facilities charges.
8. Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of income taxes.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statement of Income
- ----------
See Notes to Condensed Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statement of Shareholders' Equity
See Notes to Condensed Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
Statement of Cash Flows
- ----------
See Notes to Condensed Financial Statements.
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information
AETNA SERVICES, INC.
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.
1. Merger with U.S. Healthcare, Inc.
The merger between Aetna Services, Inc. ("Aetna Services") (formerly Aetna Life and Casualty Company) and Aetna U.S. Healthcare, Inc. ("Aetna U.S. Healthcare") (formerly U.S. Healthcare, Inc. ("U.S. Healthcare")) was consummated on July 19, 1996. As a result of the merger, Aetna Services and Aetna U.S. Healthcare are each direct, wholly owned subsidiaries of Aetna Inc. (See pages 43 through 48 for condensed financial information of Aetna Inc. for the years ended December 31, 1997 and 1996.)
2. Dividends
The amounts of cash dividends paid to Aetna Services by insurance affiliates for the year ended December 31, 1995 were $451.7 million. See Note 16 to the Consolidated Financial Statements in the Annual Report for a description of dividend restrictions from the consolidated insurance subsidiaries to Aetna Services.
3. New Accounting Standards
See Note 1 to the Consolidated Financial Statements in the Annual Report for a description of new accounting standards.
4. Other Acquisitions and Dispositions
See Note 3 to the Consolidated Financial Statements in the Annual Report for a description of other acquisitions and dispositions.
5. Income Taxes
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of income taxes.
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1997
(1) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, interest expense, amortization of goodwill and other acquired intangible assets and severance and facilities charges (reserve reductions).
(4) Excludes life insurance business pursuant to Regulation S-X.
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1996
(1) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments.
(2) Includes reductions of the loss on discontinued products.
(3) Includes operating expenses, interest expense, amortization of goodwill and other acquired intangible assets and severance and facilities charges.
(4) Excludes life insurance business pursuant to Regulation S-X.
AETNA INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
As of and for the year ended December 31, 1995
(1) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments.
(2) Includes operating expenses, interest expense and amortization of goodwill and other acquired intangible assets.
(3) Excludes life insurance business pursuant to Regulation S-X.
AETNA INC. AND SUBSIDIARIES
SCHEDULE IV
Reinsurance*
* Excludes intercompany transactions.
** Net life insurance in force was $387.8 billion, $381.4 billion and $362.8 billion at December 31, 1997, 1996 and 1995, respectively.
AETNA INC. AND SUBSIDIARIES
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
(1) Charged (credited) to net realized capital (gains) losses in the Consolidated Statements of Income. (2) Reflects additions to (reductions of) reserves related to assets supporting experience rated contracts and discontinued products for which a corresponding reduction was included in Policyholders' Funds Left with the Company in the Consolidated Balance Sheets and the reserve for future losses, respectively. (3) Reduction in reserves is primarily a result of related asset write-downs (including foreclosures of real estate) and sales. (4) As a result of the adoption of FAS No. 121, valuation reserves at January 1, 1996 were increased by $52.9 million in connection with the reversal of previously recorded accumulated depreciation related to properties held for sale. (5) The general reserve at December 31, 1997 excluded reserves of approximately $208.5 million related to experience rated products.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 2, 1998 AETNA INC. (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 March 2, 1998.
* * - ----------------------------------- -------------------------------------- Richard L. Huber, Gerald Greenwald, Director Chairman, Chief Executive Officer, President and Director (Principal Executive Officer and Principal Financial Officer)
* * - ----------------------------------- -------------------------------------- Leonard Abramson, Director Ellen M. Hancock, Director
* * - ----------------------------------- -------------------------------------- Betsy Z. Cohen, Director Michael H. Jordan, Director
* * - ----------------------------------- -------------------------------------- William H. Donaldson, Director Jack D. Kuehler, Director
* * - ----------------------------------- -------------------------------------- Barbara Hackman Franklin, Director Frank R. O'Keefe, Jr., Director
* * - ----------------------------------- -------------------------------------- Jerome S. Goodman, Director Judith Rodin, Director
* - ----------------------------------- Earl G. Graves, Director
/s/ Robert J. Price - ----------------------------------- Robert J. Price, Vice President and Corporate Controller (Controller)
* By /s/ Robert J. Price ------------------------------ Robert J. Price (Attorney-in-Fact)
INDEX TO EXHIBITS
Exhibit Filing Number Description of Exhibit Method
(10) Material contracts.
(10.1) Employment Agreement, dated as of December 21, 1995, Electronic by and between Aetna Services, Inc. and Frederick C. Copeland, Jr., as amended.
(10.2) Employment Agreement, dated as of December 19, 1995, by Electronic and between Aetna Services, Inc. and Thomas McInerney, as amended.
(12) Statement re computation of ratios. Electronic
Statement re: computation of ratio of earnings to fixed charges for the Company for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and Aetna Services for the year ended December 31, 1997 and 1996.
Statement re: computation of ratio of earnings to combined fixed charges and preferred stock dividends for the Company for the years ended December 31, 1997, 1996, 1995, 1994, and 1993 and Aetna Services for the year ended December 31, 1997 and 1996.
(13) Annual Report to security holders. Electronic
Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements and the report of the Company's independent auditors, and unaudited Quarterly Data from the Annual Report.
(21) Subsidiaries of the registrant. Electronic
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel. Electronic
Consent of Independent Auditors to Incorporation by Reference in the Registration Statements on Form S-3 and Form S-8.
(24) Powers of attorney. Electronic
(27) Financial data schedule.
(27.1) Financial data schedule for December 31, 1997. Electronic
(27.2) Financial data schedule for March 31, 1997, June 30, Electronic 1997, September 30, 1997 and December 31, 1996.
(27.3) Financial data schedule for March 31, 1996, June 30, Electronic 1996, September 30, 1996 and December 31, 1995.