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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950123-01-001795.txt : 20010228
<SEC-HEADER>0000950123-01-001795.hdr.sgml : 20010228
ACCESSION NUMBER: 0000950123-01-001795
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010226
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AETNA INC /PA/
CENTRAL INDEX KEY: 0001122304
STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324]
IRS NUMBER: 232229683
STATE OF INCORPORATION: PA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-16095
FILM NUMBER: 1554463
BUSINESS ADDRESS:
STREET 1: 151 FARMINGTON AVENUE
CITY: HARTFORD
STATE: CT
ZIP: 06156
BUSINESS PHONE: 8602730123
MAIL ADDRESS:
STREET 1: 151 FARMINGTON AVENUE
CITY: HARTFORD
STATE: CT
ZIP: 06156
FORMER COMPANY:
FORMER CONFORMED NAME: AETNA U S HEALTHCARE INC
DATE OF NAME CHANGE: 20000822
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>y45723e10-k405.txt
<DESCRIPTION>AETNA INC
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the fiscal year ended DECEMBER 31,
2000
COMMISSION FILE NUMBER 001-16095
AETNA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2229683
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156 (860) 273-0123
(Address of principal executive offices) (ZIP Code) (Registrant's telephone number, including area code)
</TABLE>
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
- ------------------------- -----------------------------------------
<S> <C>
Common Stock, $.01 par value New York Stock Exchange
</TABLE>
Class A Voting Preferred Stock, $.01 par value, Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2001 was $5,492,564,159.
As of January 31, 2001, 143,820,179 shares of the registrant's Common Stock $.01
par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 2000 Annual Report to Shareholders (the "Annual
Report"). (Parts I, II and IV)
Portions of the registrant's proxy statement for its 2001 Annual Meeting to be
filed on or about March 23, 2001 (the "Proxy Statement"). (Parts III and IV)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
----
PART I
Item 1. Business.
A. Organization of Business. 3
B. Financial Information about Industry Segments. 3
C. Description of the Business.
1. Health Care. 4
2. Large Case Pensions. 12
3. Total Investments. 12
4. Other Matters.
a. Regulation. 14
b. NAIC IRIS Ratios. 14
c. Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividends. 14
d. Trademarks. 15
e. Ratings. 15
f. Miscellaneous. 15
Item 2. Properties. 16
Item 3. Legal Proceedings. 16
Item 4. Submission of Matters to a Vote of Security Holders. 20
Executive Officers of Aetna Inc. 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 21
Item 6. Selected Financial Data. 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. 21
Item 8. Financial Statements and Supplementary Data. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 22
PART III
Item 10. Directors and Executive Officers of the Registrant. 22
Item 11. Executive Compensation. 22
Item 12. Security Ownership of Certain Beneficial Owners and Management. 22
Item 13. Certain Relationships and Related Transactions. 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 22
Index to Financial Statement Schedules. 27
Signatures. 40
</TABLE>
Page 2
<PAGE> 3
PART I
Item 1. Business.
A. Organization of Business
Aetna Inc. (a Pennsylvania corporation) and its wholly owned subsidiaries
(collectively, the "Company") constitute the nation's largest health benefits
company, based on membership as of December 31, 2000. Prior to December 13,
2000, the Company (formerly Aetna U.S. Healthcare Inc.) was a subsidiary of a
Connecticut corporation named Aetna Inc. ("former Aetna"). On December 13, 2000,
former Aetna spun the Company off to its shareholders and, as part of the same
transaction, the remaining entity, which contained former Aetna's financial
services and international businesses, was merged into a subsidiary of ING Groep
N.V. ("ING") (collectively, the "Transaction"). Refer to Note 19 of Notes to
Consolidated Financial Statements for further information, which is incorporated
herein by reference to the Annual Report. Aetna Inc. was incorporated in
Pennsylvania in 1982 under the name of United States Health Care Systems, Inc.
At December 31, 2000, the Company's business operations were conducted in the
following segments: Health Care and Large Case Pensions. The principal products
included in these segments are:
Health Care:
Health and dental benefit products (including health maintenance
organization, point-of-service, preferred provider organization and
indemnity products)
Group insurance products (including life, disability and long-term care
insurance products)
Large Case Pensions:
Retirement products (including pension and annuity products) primarily for
defined benefit and defined contribution plans
As a result of initiatives and actions being implemented by the Company relating
to its strategic repositioning (refer to "Description of the Business" for more
information), the Company is reorganizing its internal organization for making
operating decisions and assessing performance. Accordingly, Group Insurance,
which currently is included in the Health Care segment under the product
grouping "Group Insurance and Other Health", will be reported as a separate
segment beginning in the first quarter of 2001. At that time, the Company will
report results in three business segments: Health Care, Group Insurance and
Large Case Pensions, consistent with the Company's internal organization.
In connection with the acquisition of The Prudential Insurance Company of
America's ("Prudential's") health care business ("PHC") on August 6, 1999 and in
accordance with agreements with the U.S. Department of Justice and the State of
Texas, on March 31, 2000, the Company completed the sale of certain Texas
HMO/POS and other related businesses ("NYLCare Texas"). The Company had acquired
New York Life Insurance Company's NYLCare health business ("NYLCare") on July
15, 1998.
B. Financial Information about Industry Segments
Required financial information by industry segment is set forth in Note 17 of
Notes to Consolidated Financial Statements, which is incorporated herein by
reference to the Annual Report. Revenue and income or loss from continuing
operations attributable to each industry segment are incorporated herein by
reference to the Selected Financial Data in the Annual Report. Refer to Note 2
of Notes to Consolidated Financial Statements in the Annual Report for
information concerning certain allocations used in preparing such information.
Certain reclassifications have been made to the 1999 and 1998 financial
information to conform to the 2000 presentation.
Page 3
<PAGE> 4
C. Description of the Business
1. Health Care
Products and Services
- ---------------------
Health Care consists of the following products: health and dental plans offered
on a full risk basis and Prudential's administrative services only ("ASO")
business (which includes certain supplemental fees) (included in the product
grouping Health Risk, which also includes the acquired PHC business). Health
plans include health maintenance organization ("HMO"), point-of-service ("POS"),
preferred provider organization ("PPO") and indemnity benefit products. Other
products included in Health Care are group life and disability insurance and
long-term care insurance, offered on both a full risk and employer-funded basis,
and all health and dental plans offered on an employer-funded basis, excluding
the Prudential ASO business (included in the product grouping Group Insurance
and Other Health). Under full risk 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 plan sponsor, and not the
Company, assumes all or a majority of these risks.
The following table summarizes premiums, ASO fees and other income for Health
Risk and PHC and Group Insurance and Other Health for the years ended December
31:
<TABLE>
<CAPTION>
(Millions) 2000 1999(1) 1998(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Health Risk and PHC $ 22,146.3 $17,467.2 $11,780.8
Group Insurance and Other Health 2,915.6 2,812.7 2,666.5
- -------------------------------------------------------------------------------------------------------------
Total Health Care $ 25,061.9 $20,279.9 $14,447.3
=============================================================================================================
</TABLE>
(1) Includes results of PHC since August 6, 1999.
(2) Includes results of NYLCare since July 15, 1998.
Under full risk plans, the Company charges a premium and under employer-funded
plans, the Company charges a fee for administrative and claim services.
During 2000, the Company announced, among other things:
- - Changes in certain states to provide physicians with additional choices in
product participation and financial compensation and to clarify how
medical necessity and coverage decisions are made, and that the Company
was continuing a state-by-state review of all of its provider
arrangements.
- - The exit, effective January 1, 2001, of a number of Medicare service areas
affecting approximately half of its Medicare membership, and plans to
improve or selectively discontinue offerings in certain commercial
markets.
Also, on December 18, 2000, the Company announced:
- - Expense-reduction initiatives associated with targeted membership
reductions;
- - The reorganization of its sales force to place greater emphasis on
higher-potential middle market business and to more efficiently serve
smaller cases, while enhancing the Company's customer relationships and
important national accounts franchise, and to result in a sales
organization that is designed to be smaller but more effective at both
selling and retaining business;
- - Initiatives to improve the efficiency of the claims payment and other
member services processes;
- - The continued integration of the acquired PHC business;
- - The integration and elimination of duplicate staff functions;
- - Significant price increases on health plan business renewing on January 1,
2001; and
- - An initiative to reform medical cost management practices designed to
eliminate unnecessary administrative practices and ineffective
requirements, while strengthening responsible and effective practices.
Page 4
<PAGE> 5
Refer to Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") in the Annual Report for further discussion of these
matters.
The principal commercial health products, offered both on a full risk and
employer-funded basis, are described below:
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 our 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 is emphasized in these plans. Commencing January 1, 2001, the
Company began offering an open access HMO plan in certain markets that provides
for the full range of benefits available to HMO members without the requirements
of PCP selection or PCP referrals. The Company offers HMO plans with varying
levels of copayments which result in different levels of premium rates.
Commercial HMO membership totaled 6.7 million as of December 31, 2000, 7.1
million as of December 31, 1999 and 4.4 million as of December 31, 1998. Refer
to MDA - Health Care - Outlook in the Annual Report for information concerning
anticipated declines in membership levels.
Point-of-Service ("POS") plans blend the characteristics of HMO and indemnity
plans. Members can have comprehensive HMO-style benefits through participating
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 membership totaled 5.6 million as of
December 31, 2000, 6.2 million as of December 31, 1999 and 4.1 million as of
December 31, 1998.
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 participating network provider. Coverage is subject to
copayments or deductibles and coinsurance, with member cost sharing limited by
out-of-pocket maximums. PPO membership totaled 4.0 million as of December 31,
2000, 1999 and 1998.
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 benefits for preventive
services. Coverage is subject to deductibles and coinsurance, with member cost
sharing limited by out-of-pocket maximums. Indemnity membership totaled 2.2
million as of December 31, 2000, 2.8 million as of December 31, 1999 and 2.5
million as of December 31, 1998.
In addition to Commercial health products, in select markets, the Company also
offers coverage for Medicare beneficiaries and individuals eligible for Medicaid
benefits and subsidized children's health insurance programs. Such coverages
include the following:
Through annual contracts with the Health Care Financing Administration ("HCFA"),
the Company's HMOs offer coverage for Medicare-eligible individuals in certain
geographic areas. Generally, services must be obtained through participating
network providers, with the exception of emergency and urgent care. Members
historically have received enhanced benefits over standard Medicare
fee-for-service coverage, including vision, hearing and pharmacy coverage. These
Medicare plans are offered on a full risk basis. Medicare membership totaled .5
million as of December 31, 2000, .7 million as of December 31, 1999 and .5
million as of December 31, 1998.
Page 5
<PAGE> 6
As of January 1, 2001, the Company exited a number of Medicare service areas
affecting approximately 260,000 members, or approximately 47% of the Company's
total Medicare membership at December 31, 2000. In addition, the Company had
exited certain unprofitable Medicare markets effective January 1, 2000 and 1999.
The Company continues to review the profitability of its Medicare business in
certain markets. Refer to MD&A - Medicare HMO in the Annual Report for
additional information.
The Company has contracts with some state and local agencies to offer coverage
for individuals eligible for Medicaid and subsidized children's health insurance
programs. Benefits are determined by the contracting agencies. This coverage is
offered on a full risk basis. Membership in these programs totaled .2 million as
of December 31, 2000 and 1999, and .1 million as of December 31, 1998.
The Company offers a variety of other health care coverages either as
supplements to health products or as stand-alone products. Such coverages, which
are offered on a full risk or employer-funded basis, include indemnity and
managed dental plans, and prescription drug, vision and behavioral health
programs. The Company is the nation's third largest provider of dental coverage,
at December 31, 2000. Dental membership totaled 14.3 million as of December 31,
2000, 15.3 million as of December 31, 1999 and 8.4 million as of December 31,
1998.
Group Insurance consists 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 9.4 million as of December 31, 2000 and 1999, and
9.8 million as of December 31, 1998.
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 is offered on both an insured
and employer-funded basis. Group disability insurance membership totaled 2.1
million as of December 31, 2000, 2.3 million as of December 31, 1999 and 2.6
million as of December 31, 1998.
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 primarily on an insured basis. Coverage is available on both a service
reimbursement and indemnity basis. Long-term care insurance membership totaled
.1 million as of December 31, 2000, 1999 and 1998.
Group insurance members may utilize more than one Company product and have been
counted in membership totals for each.
Provider Networks
- -----------------
General
The Company provides members of its managed care plans with access to health
care services through networks of independent health care providers, which the
Company contracts with. The participating providers in the Company's networks
are independent contractors and are neither employees nor agents of the Company.
The Company uses a variety of techniques designed to help contain the rate of
increase in the cost of medical services. In addition to contracts with health
care providers for negotiated rates, these techniques 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. The Company also has a variety of disease
management programs related to specific conditions such as asthma, diabetes,
congestive heart failure and lower back pain.
Page 6
<PAGE> 7
At December 31, 2000, the Company had approximately 467,000 health care
providers participating in its networks nationwide, including more than 294,000
physicians and more than 3,000 hospitals.
Contracting
Primary Care Physicians
Current compensation by the Company's HMOs to directly contracted PCPs is
principally on a capitated basis, although the Company also uses fee-for-service
payments and has eliminated or reduced the use of capitation in some areas.
Under a capitation arrangement, physicians receive a monthly fixed fee for each
HMO member, regardless of the medical services provided to the member. 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 typically enters into contracts that provide for all-inclusive per
diem and per case rates, with fixed rates for ambulatory surgery and emergency
room services. The Company has some hospital contracts that pay a percentage of
billed charges.
The Company's HMOs generally require precertification or notification of
elective admissions and monitoring of the length of hospital stays.
Participating physicians generally admit their HMO patients to participating
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.
The Company's HMOs have capitated payment arrangements for most mental health,
substance abuse and laboratory services.
Integrated Delivery Systems
In some locations, the Company has developed contractual relationships with
integrated delivery systems ("IDS") to provide comprehensive medical and
hospital services. Under these arrangements, the Company's HMOs contract with an
IDS for a fixed, per member fee or a percentage of premium. These arrangements
cover 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
The Company's quality assessment programs begin with the initial review of
providers. Each physician's license, education and work history is reviewed by
the Company or in some cases the physician's affiliated group or organization. A
Committee of participating physicians in each geographical area reviews this
information before physicians can participate in the network. Participating
physicians also periodically undergo a recredentialing process. Participating
hospitals are required to have HCFA and Joint Commission on Accreditation of
Healthcare Organizations accreditation.
Page 7
<PAGE> 8
Recredentialing of PCPs covers many aspects of patient care, which may include
an analysis of member grievances filed with the Company, on-site interviews,
member surveys and analysis of drug prescription patterns, and, for HMOs,
analysis of utilization patterns. Committees, composed of a peer group of
participating private physicians, review participating PCPs being considered for
recredentialing.
The Company also offers quality and outcome measurement programs, improvement
programs and health care data analysis systems to providers and purchasers of
health care.
The Company seeks accreditation for some of its HMO plans from the National
Committee for Quality Assurance (the "NCQA"), a national organization
established to review the quality and medical management systems of HMOs and
other managed care plans. NCQA accreditation is a nationally recognized
standard. As of December 31, 2000, approximately 88% of the Company's HMOs
members participated in HMOs that had received accreditation by the NCQA.
The Company seeks accreditation for its non-HMO products from the American
Accreditation Healthcare/ Commission/URAC ("URAC"), a national organization
founded in 1990 to establish standards for the managed care industry. Purchasers
and consumers look to URAC's accreditation as an indication that a managed care
organization has the necessary structures and processes to promote high quality
care and preserve patient rights. In addition, regulators in over half of the
states recognize URAC's accreditation standards in the regulatory process. Aetna
Inc. and Aetna Life Insurance Company ("ALIC") have received URAC accreditation
extending through May 1, 2002.
Principal Markets and Sales
- ---------------------------
Total Commercial, Medicare and Medicaid HMO, POS, PPO and Indemnity membership
("Health membership") is widely dispersed throughout the United States. The
Company offers a wide array of benefit plans, many of which are available in all
50 states.
Products offered by Group Insurance and Other Health are available in all 50
states. Depending on the product, the Company markets to a range of customers
from small employer groups to large, multi-site national accounts.
The following table presents total Health membership by region and funding
arrangement, at December 31:
<TABLE>
<CAPTION>
2000(1) 1999(2)(3) 1998(4)
------------------------- --------------------------- ---------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total Risk Nonrisk Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast 1,485 788 2,273 1,535 858 2,393 1,347 708 2,055
Mid-Atlantic 1,947 1,434 3,381 2,140 1,462 3,602 1,759 1,268 3,027
Capitol 730 1,008 1,738 900 1,107 2,007 791 984 1,775
Southeast 1,357 1,133 2,490 1,518 1,263 2,781 613 1,009 1,622
Mid-West 1,013 1,892 2,905 1,091 1,995 3,086 710 1,817 2,527
West Central 797 970 1,767 711 998 1,709 208 785 993
Southwest 1,230 1,187 2,417 1,785 1,286 3,071 997 910 1,907
Pacific Coast 1,324 978 2,302 1,437 969 2,406 878 881 1,759
- -------------------------------------------------------------------------------------------------------------------------------
Total Health
Membership 9,883 9,390 19,273 11,117 9,938 21,055 7,303 8,362 15,665
===============================================================================================================================
</TABLE>
(1) Membership in thousands includes 260 Medicare members affected by the
Company's exit of a number of Medicare service areas, effective January 1,
2001 and 878 Prudential ASO members, which Health Care agreed to service.
(2) Membership in thousands includes 509 Risk and 56 Nonrisk members of the
NYLCare Texas operations sold on March 31, 2000.
(3) Membership in thousands includes 5,093 PHC members, including 1,688
Prudential ASO members which Health Care agreed to service.
(4) Membership in thousands includes 1,975 NYLCare members.
For membership composition of Health Care's products by funding arrangement,
refer to MD&A - Health Care - Membership in the Annual Report.
Page 8
<PAGE> 9
For both Health Risk and PHC and Group Insurance and Other Health, 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. Employers pay all or a portion of the monthly premiums,
and employees, through payroll deductions, pay any premium not paid by their
employer.
Within Health Risk and PHC, Medicare coverage is sold on an individual basis as
well as through employer groups to their retirees. Medicaid and subsidized
children's health insurance programs are marketed to individuals rather than
employer groups.
Health Care products are sold primarily through the Company's 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 plan sponsors, 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 full risk 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.
For federally qualified HMOs and for other plans where required by law, the
Company establishes 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 the "traditional community rating"
method, a plan establishes premium rates based on its revenue requirements for
its entire enrollment in a given community. Under the "community rating by
class" method, a plan establishes premium rates based on its revenue
requirements for broad classes of membership distinguished by factors such as
age and sex. Under the "group specific community rating" method, a plan
establishes premium rates based in part on its revenue requirements for
providing services to the group. State laws, in some of the states in which the
Company operates plans, require the filing with and approval by the state of
plan premium rates, and some 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.
For non-federally qualified HMOs, "experience" rating methods are utilized.
Premium rates for "experience rated" plans give consideration to the plan
sponsors' historical and anticipated claim experience.
Under retrospective rating, a premium rate is determined at the beginning of the
policy period. After 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 may be 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 often used for non-HMO, employer-funded plans which cover more than
300 lives.
Page 9
<PAGE> 10
The Company has contracts with HCFA to provide HMO Medicare+Choice coverage to
Medicare beneficiaries who choose health care coverage through an HMO. Under
these annual contracts, HCFA pays the HMO at a capitated rate based on
membership and is 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 annual unilateral
revision by HCFA. In addition to premiums received from HCFA, most of the
Medicare products offered by the Company require a supplemental premium to be
paid by the member. Under Medicare risk arrangements, the Company assumes the
risk of higher than expected medical expenses. Medicare contracts generate
higher per member per month revenues, but also generate higher per member per
month medical expenses, than Commercial plans.
The Company 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.
The Company has contracts with state and local agencies in New Jersey,
Pennsylvania and Washington to provide full risk health benefits to persons
eligible for Medicaid and/or subsidized children's health insurance program
benefits. These contracts are generally for a period of one to three years. The
Company receives a fixed monthly payment based on membership in return for the
coverage of health care services. The rates are subject to periodic unilateral
revision by the contracting agencies. The Company assumes the risk of higher
than expected medical expenses.
Contracts with plan sponsors to provide administrative services for
employer-funded plans are generally for a period of one year. Some of the
Company's contracts include 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 plan sponsors will fall within a certain range. With any of these
guarantees, the Company is financially at risk if the conditions of the
arrangements are not met, although the maximum at risk is typically 10% - 30% of
fees for the customer involved.
Competition
- -----------
Competition in the health care industry is intense, primarily due to aggressive
marketing and pricing, 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
intense competitive environment.
The Company believes that the most significant factors which distinguish
competing health plans are quality of service, 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 and managed care programs (including NCQA
accreditation status). The Company believes that it is competitive in each of
these areas. The ability to increase the number of persons covered by the
Company's plans 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 health coverage. Competition may also affect the
availability of services from health care providers, including primary care
physicians, specialists and hospitals.
Within Health Risk and PHC, the Company 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, programs sponsored by the federal or state governments.
Within the Other Health component of Group Insurance and Other Health, the
Company competes primarily with other commercial insurance companies and third
party administrators.
Page 10
<PAGE> 11
For the group insurance industry, the Company 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 life and disability business. The
deeply penetrated group life market remains highly competitive.
Reserves
- --------
For Health Risk and PHC, health care costs payable reflect estimates of the
ultimate cost of claims that have been incurred but not yet reported or reported
but not yet paid. Health care costs payable are estimated periodically, and any
resulting adjustments are reflected in the current-period operating results
within health care costs. Health care costs payable are based on a number of
factors, including those derived from historical claim experience. An extensive
degree of judgment is used in this estimation process, considerable variability
is inherent in such estimates and the adequacy of the estimate is highly
sensitive to changes in medical claims payment patterns and changes in medical
cost trends. A worsening (or improvement) of medical cost trend or changes in
claim payment patterns from those assumed in estimating health care costs
payable would cause these estimates to change in the near term, and such change
could be material. Refer to the MD&A - Health Care - Health Risk and PHC in the
Annual Report for a discussion of certain factors relating to reserves at
December 31, 2000.
For Group Insurance and Other Health, unpaid claims consist primarily of
reserves associated with certain short-duration group disability and term life
insurance contracts, including an estimate for claims incurred but not reported
as of the balance sheet date. Such reserves are based upon the present value of
future benefits, which is based on assumed investment yields and assumptions
regarding mortality, morbidity and recoveries from government programs. Reserves
for claims incurred but not reported are developed using actuarial principles
and assumptions which consider, among other things, contractual requirements,
historical payment patterns, seasonality and other relevant factors. Future
policy benefits consist primarily of reserves for limited payment pension and
annuity contracts (in the Large Case Pensions business) and long-duration group
paid-up and supplemental life and long-term care insurance contracts in the
Health Care business. Reserves for limited payment contracts are computed in
accordance with actuarial principles and are based upon assumptions reflecting
anticipated mortality, retirement, expense and interest rate experience. Such
assumptions generally vary by plan, year of issue and policy duration. Reserves
for group paid-up and supplemental life and long-term care contracts represent
the present value of future benefits to be paid to or on behalf of policyholders
less the present value of future net premiums. Reserves are estimated
periodically and any resulting adjustments are reflected in current earnings.
Policyholders' funds consist primarily of reserves for pension and annuity
contracts in the Large Case Pensions business and customer funds associated with
group life and health contracts in the Health Care business. Reserves on such
contracts are equal to cumulative deposits less charges plus credited interest
thereon, net of adjustments for investment experience that the Company is
entitled to reflect in future credited interest. Reserves on contracts subject
to experience rating reflect the rights of policyholders, plan participants and
the Company.
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
- -----------
The Company uses reinsurance agreements with nonaffiliated insurers for Group
Insurance products 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 products, certain reinsurance arrangements have been established to
reflect the circumstances of the specific disability risks. These include an
excess individual amount arrangement for a particular market segment of
disability products, a quota share treaty for another market segment of
disability products, and facultative treaties on a case by case basis. In
addition, the Company carries excess medical malpractice professional liability
insurance.
Page 11
<PAGE> 12
In connection with the acquisition of PHC, the Company and Prudential entered
into a reinsurance agreement for which the Company paid a premium. This
reinsurance agreement ended on December 31, 2000, except that the agreement
provides for a period of time during which such medical cost reimbursements (as
calculated per the agreement) will be finalized, which is expected to be
completed by the end of 2001. Refer to Note 4 of Notes to Consolidated Financial
Statements in the Annual Report for further discussion.
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:
<TABLE>
<CAPTION>
(Dollars in Millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In force, end of year $ 391,734 $ 355,014 $378,727
- ---------------------------------------------------------------------------------------------------------------
Terminations (lapses and all other) $ 37,561 $ 77,648 $ 14,018
- ---------------------------------------------------------------------------------------------------------------
Number of policies and contracts in force, end of year:
Group Life Contracts(1) 14,354 14,519 14,044
Group Conversion Policies(2) 27,349 28,767 31,024
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(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
- ---------------------------------------------
Information regarding certain important factors that may materially affect
Health Care's business is incorporated by reference to the MD&A -
Forward-Looking Information/Risk Factors and the MD&A - Health Care - Outlook in
the Annual Report.
2. 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 risk. Large
Case Pensions earns a management fee on these separate accounts.
In 1993, the Company discontinued its fully guaranteed Large Case Pension
products. Information regarding these products is incorporated herein by
reference to the MD&A - Large Case Pensions - Discontinued Products in the
Annual Report.
Factors Affecting Forward-Looking Information
- ---------------------------------------------
Information regarding certain important factors that may materially affect Large
Case Pensions' business is incorporated herein by reference to the MD&A -
Forward-Looking Information/Risk Factors and the MD&A - Large Case Pensions -
Outlook in the Annual Report.
3. Total 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 the Company's investments, refer to
Notes 2, 5 and 8 of Notes to Consolidated Financial Statements and MD&A - Total
Investments in the Annual Report.
Page 12
<PAGE> 13
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)
<TABLE>
<CAPTION>
(Millions) 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bonds:
U.S. government and government agencies and authorities $ 867.4 $ 783.2
States, municipalities and political subdivisions 833.2 622.6
U.S. corporate securities:
Utilities 1,184.4 1,739.4
Financial 1,743.3 2,187.0
Transportation/Capital goods 1,120.2 1,448.1
Health care/Consumer products 584.3 1,779.7
Natural Resources 1,057.0 --
Other corporate securities 1,231.2 642.4
- ---------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 6,920.4 7,796.6
- ---------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 653.9 938.4
Utilities 99.9 182.5
Other 1,452.0 1,102.3
- ---------------------------------------------------------------------------------------------------------------
Total foreign securities 2,205.8 2,223.2
- ---------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,421.3 1,825.3
Collateralized mortgage obligations 69.9 53.9
- ---------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 1,491.2 1,879.2
- ---------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities 1,608.5 1,496.0
Other asset-backed securities 356.2 250.9
- ---------------------------------------------------------------------------------------------------------------
Total bonds 14,282.7 15,051.7
Redeemable preferred stocks 171.3 130.3
- ---------------------------------------------------------------------------------------------------------------
Total debt securities (3) 14,454.0 15,182.0
- ---------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks 196.4 247.7
Nonredeemable preferred stocks 43.7 38.7
- ---------------------------------------------------------------------------------------------------------------
Total equity securities 240.1 286.4
- ---------------------------------------------------------------------------------------------------------------
Other investment securities 31.1 216.4
Mortgage loans 2,201.2 2,377.0
Investment real estate 319.2 269.5
Other (4) 1,220.7 1,012.6
- ---------------------------------------------------------------------------------------------------------------
Total investments $18,466.3 $19,343.9
===============================================================================================================
Cash and cash equivalents $ 1,943.8 $ 1,628.7
===============================================================================================================
Accrued investment income $ 260.3 $ 267.4
===============================================================================================================
</TABLE>
(1) Excludes Separate Accounts.
(2) Includes $5.6 billion in 2000 and $5.9 billion in 1999 of investments
supporting discontinued products.
(3) Includes approximately $584.1 million of loaned securities at December 31,
2000.
(4) Includes debt securities on deposit as required by regulatory authorities
of $667.2 million at December 31, 2000 and $629.5 million at December 31,
1999.
The following table summarizes the Company's investment results: (1)
<TABLE>
<CAPTION>
Net Earned Net Net Realized
Investment Investment Capital Gains
(Dollar amounts in millions) Income (2) Income Rate (3) (Losses) (4)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the year:
2000 $1,631.6 7.7% $ (40.1)
1999 1,601.8 7.3 62.5
- ------------------------------------------------------------------------------------
</TABLE>
(1) Excludes Separate Accounts and investments in affiliates.
(2) Net investment income excludes net realized capital gains and losses, as
well as income taxes and includes investment expenses.
(3) The Earned Net Investment Income Rate for any given year is equal to (a)
net investment income divided by (b) the average amount of cash, invested
assets, excluding unrealized gains and losses, and accrued investment
income for the year.
(4) Net realized capital gains (losses) exclude income taxes and gains and
losses allocable to experience-rated pension contractholders.
Page 13
<PAGE> 14
4. Other Matters
a. Regulation
Information regarding significant regulations affecting the Company is
incorporated herein by reference to the MD&A - Regulatory Environment in the
Annual Report.
b. NAIC IRIS Ratios
The National Association of Insurance Commissioners' ("NAIC") Insurance
Regulatory Information System ("IRIS") ratios cover 12 categories of financial
data with defined usual ranges for each category. The ratios are intended to
provide insurance regulators with "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 2000, none of the Company's significant insurance subsidiaries had
more than three IRIS ratios that were outside of the NAIC usual ranges.
Management does not expect that any of the Company's significant insurance
subsidiaries will have more than three IRIS ratios outside of the NAIC usual
ranges for 2001.
Refer to MD&A - Liquidity and Capital Resources in the Annual Report for
additional discussion regarding solvency regulation.
c. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
The following table sets forth the Company's ratios of earnings to fixed charges
and ratios of earnings to combined fixed charges and preferred stock dividends
for the years ended December 31:
<TABLE>
<CAPTION>
Aetna Inc. 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 0.89 3.31 3.89 4.41 0.86
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends(1) 0.89 2.81 2.87 3.24 0.68
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Although the Company did not pay preferred stock dividends, preferred stock
dividends paid by former Aetna have been included for purposes of this
calculation for the years ending December 31, 1996, 1997, 1998 and 1999
(through the redemption date of July 19, 1999), as the preferred stock
issued of former Aetna was issued in connection with the acquisition of
U.S. Healthcare Inc. in 1996.
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. "Fixed charges" consists of interest expense (and the portion of rental
expense deemed representative of the interest factor).
Pretax loss from continuing operations used in calculating the ratio for 2000
reflects a goodwill write-off of $310 million, a severance and facilities charge
of $143 million and $58 million of change-in control related payments and other
costs required to effect the spin-off of the Company from former Aetna.
Additional pretax income from continuing operations necessary to achieve both a
ratio of earnings to fixed charges of 1.0 and a ratio of earnings to combined
fixed charges and preferred stock dividends of 1.0, was approximately $39
million in 2000.
Pretax loss from continuing operations used in calculating the ratio for 1996
reflects a severance and facilities charge of $802 million in 1996. Additional
pretax income from continuing operations necessary to achieve a ratio of
earnings to fixed charges of 1.0 was approximately $30 million in 1996.
Additional pretax income from continuing operations necessary to achieve a ratio
of earnings to combined fixed charges and preferred stock dividends of 1.0 was
approximately $81 million in 1996.
Page 14
<PAGE> 15
d. Trademarks
The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare (Registered
Trademark), and U.S. Healthcare (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 Aetna Inc. and its subsidiaries follow (3):
<TABLE>
<CAPTION>
Rating Agencies
---------------------------------------------------------------
Moody's
Investors Standard
A.M. Best Fitch** Service & Poor's
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Inc. (senior debt)
November 15, 2000 * A- Baa2 A-
February 22, 2001 (1) * A- Baa2 A-
Aetna Inc. (commercial paper)
November 15, 2000 * F2 P2 A2
February 22, 2001 (1) * F2 P2 A2
Aetna Life Insurance Company
(claims paying/financial strength)
November 15, 2000 A (2) AA- A2 A+
February 22, 2001 (1) A AA- A2 A+
</TABLE>
* Nonrated by the agency.
** Formerly known as Duff & Phelps.
(1) Moody's and Fitch have these ratings on outlook-stable. On February 2,
2001, Standard & Poor's removed ALIC's rating from CreditWatch and affirmed
it's A+ rating. Standard & Poor's has the Aetna Inc. senior debt and ALIC
ratings on outlook-negative.
(2) Rating as of December 14, 2000, the earliest date available. Also on this
date, A.M. Best removed ALIC from its "under review with developing
implications" status.
(3) All ratings provided in this table are reflective of the operations and
financial position of Aetna Inc., formerly Aetna U.S. Healthcare Inc., and
its subsidiaries.
f. Miscellaneous
The Company had approximately 40,700 domestic employees at December 31, 2000.
The federal government is a significant customer of the Health Care segment and
the Company, with their premiums and fees accounting for approximately 19% of
the Company's consolidated revenue in 2000. Contracts with HCFA for coverage of
Medicare-eligible individuals accounted for 79% of these premiums and fees, with
the balance from federal employee related benefit programs. Refer to
MD&A-Forward-looking Information/Risk Factors in the Annual Report for more
information concerning the repricing of these contracts. Revenue from Medicare
contracts is expected to substantially decline in 2001 due to the exit,
effective January 1, 2001, of a number of Medicare service areas, affecting
approximately half of the Company's Medicare membership. No other customer
accounted for 10% or more of the Company's consolidated revenues in 2000. The
Large Case Pensions segment is not dependent upon a single customer or a few
customers, the loss of which would have a significant effect on the earnings of
the segment. Refer to Note 17 of Notes to Consolidated 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.
Page 15
<PAGE> 16
Item 2. Properties.
The home office of the Company is a building complex located at 151 Farmington
Avenue, Hartford, Connecticut, with approximately 1.1 million square feet. The
Company and certain of its subsidiaries also own or lease other space in the
greater Hartford area; Blue Bell, Pennsylvania; Fairfield, New Jersey and
Roseland, 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. Legal Proceedings.
Shareholder Litigation
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 4, 1997 by Pamela Goodman and Michael J. Oring.
Other 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 Connecticut actions were transferred to the United States District Court for
the Eastern District of Pennsylvania (the "Court") for consolidated pretrial
proceedings with the cases pending there. The plaintiffs filed a Consolidated
and Amended Complaint (the "Complaint") seeking, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaint alleged that former Aetna and three of its former
officers or directors, Ronald E. Compton, Richard L. Huber and Leonard Abramson,
were liable for certain misrepresentations and omissions regarding, among other
matters, the integration of the merger with U.S. Healthcare and former Aetna's
medical claim reserves. On January 4, 2001, the Court entered an order granting
final approval to a settlement of the action. Under the terms of the settlement,
which does not involve any admission of wrongdoing, former Aetna and its
insurance carriers paid a total of approximately $83 million into a settlement
fund, which will be used to pay claims submitted by members of the class
certified by the Court and to pay fees of the plaintiffs' attorneys. A
substantial portion of the settlement was covered by insurance, but the
Company's earnings for the year ended December 31, 2000, reflected an after-tax
charge of approximately $5 million to cover its share of the settlement.
Four purported shareholder class action complaints were filed in the Superior
Court of Connecticut, Hartford County, alleging in substance that former Aetna
and its directors breached fiduciary duties to shareholders in responding to a
February 24, 2000 letter from Wellpoint Health Networks, Inc. and ING America
Insurance Holdings, Inc. which had invited discussions concerning a possible
transaction. These actions were filed on behalf of George Schore, Michael
Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on March 7,
2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on March 23,
2000. On July 26, 2000, the Connecticut court ordered consolidation of the four
Connecticut actions. On October 12, 2000, the plaintiffs in the four Connecticut
actions withdrew their complaints. A fifth, substantially similar complaint was
filed by Barnett Stepak on behalf of a purported class of former Aetna
shareholders on March 28, 2000 in the Supreme Court of New York, New York
County. The complaint in the New York action seeks various forms of relief,
including unspecified damages and equitable remedies. On February 9, 2001,
defendants moved to dismiss that complaint. The New York litigation is in the
preliminary stages. Defendants intend to defend the action vigorously.
Managed Care Class Action Litigation
The Company is involved in several purported class action lawsuits that are part
of a wave of similar actions targeting the health care payor industry and, in
particular, the conduct of business by managed care companies.
Page 16
<PAGE> 17
On October 23, 2000, the Judicial Panel on Multidistrict Litigation transferred
a number of these actions to the United States District Court for the Southern
District of Florida (the "Florida Federal Court") for consolidated pretrial
proceedings. The actions so consolidated by this and subsequent orders,
including actions originally filed in the Florida District Court, include the
following actions brought by the named individuals on the indicated dates:
- Anthony Conte (October 4, 1999)
- Jo Ann O'Neill (October 7, 1999; by amendment dated November 9, 1999,
Lydia K. Rouse and Danny E. Waldrop joined as additional plaintiffs)
- Jeanne E. Curtright (October 28, 1999)
- Raymond D. Williamson, III (November 22, 1999, and a second case was
filed in the Florida Federal Court on June 23, 2000)
- Michael V. Amorosi (December 3, 1999)
- Eugene Mangieri, M.D. (January 19, 2000)
- H. Robert Harrison, M.D., Martin Moran, M.D., Lance R. Goodman, M.D.,
Sandy Springs Pediatrics & Adolescent Medicine, P.C., Pediatric
Infectious Disease Associates, LLC, American Medical Association, and
Medical Association of Georgia (February 16, 2000 naming Company
defendants, and April 18, 2000 naming Prudential defendants)
- Jennifer McCarron and Ira S. Schwartz (April 11, 2000)
- John Romero and Catherine Romero (May 22, 2000)
- Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop (June 23, 2000)
- Glenn O'Brien and Christopher Gallagher (August 7, 2000)
- Charles B. Shane, M.D., Edward L. Davis, D.O., Jeffrey Book, D.O.,
Manual Porth, M.D., Dennis Breen, M.D., Glenn L. Kelly, M.D. and
Michael Burgess, M.D. (August 11, 2000)
The plaintiffs in the Conte, O'Neill, Williamson, Amorosi, McCarron, Romero and
O'Brien cases (together with Curtright, the "Subscriber Cases") seek to
represent purported nationwide classes of current and former members of the
Company's health plans. The Subscriber Cases collectively seek various forms of
relief, including unspecified damages, treble damages, injunctive relief and
restitutionary relief for unjust enrichment, for alleged violations of the
Racketeering Influenced and Corrupt Organizations Act ("RICO") and the Employee
Retirement Income Security Act of 1974 ("ERISA"), and seek similar relief under
common law theories. In addition, the action by Jeanne E. Curtright seeks
similar relief on behalf of a class of California health plan members and
members of the California public for alleged violations of California Business
and Professions Code Sections 17200 and 17500 and under common law theories.
Each of former Aetna, Aetna Inc., Richard L. Huber and certain health
maintenance organizations that Aetna Inc. acquired from The Prudential Insurance
Company of America are named as defendants in one or more of these actions. The
complaints allege generally that defendants failed to adequately inform members
about defendants' managed care practices, including capitated payments to
providers and utilization management practices.
The plaintiffs in the Mangieri and Shane cases (together with Harrison, the
"Provider Cases") seek to represent purported nationwide classes of physicians
and other providers who currently or formerly provided services to members of
the Company and/or Prudential. The Harrison actions seek to represent a
purported class of Georgia physicians. The Mangieri action is brought against
Aetna Inc. The Shane action is brought against Aetna Inc. and a number of other
managed care companies. The Harrison actions are brought against Aetna Inc. and
Prudential. The Provider Cases seek various forms of relief, including
unspecified damages, treble damages, punitive damages and injunctive relief, for
alleged violations of RICO, ERISA and laws and regulations regarding the timely
payment of claims, and seek similar relief under common law theories. The
Provider Cases collectively allege that each managed care organization did not
adequately disclose utilization management and other reimbursement practices,
did not timely pay claims, and employed coercive economic power to force
physicians to enter into economically unfavorable contracts. Shane further
charges that Aetna Inc. and the other defendant managed care organizations
conspired and aided and abetted one another in the alleged wrongdoing.
Page 17
<PAGE> 18
On August 11, 2000, Aetna Inc. and former Aetna moved to dismiss the June 22,
2000 O'Neill Complaint. The motion to dismiss has been fully briefed, and the
Florida Federal Court heard oral argument on October 26, 2000. On September 29,
2000, plaintiffs moved for class certification. The motion has been fully
briefed, and the Florida Federal Court has scheduled oral argument for March 14,
2001.
The Curtright Subscriber Case was originally filed in the Superior Court of
California, County of Contra Costa. Defendants removed the action to the United
States District Court for the Northern District of California. Plaintiff moved
to remand the action to state court. Aetna Inc. moved to dismiss the action for
failure to state a claim upon which relief can be granted. The motions to remand
and dismiss were pending when the Curtright Subscriber Case was transferred to
the Florida Federal Court, which has not ruled on these motions.
On September 22, 2000 Aetna Inc. and the other defendants separately moved to
dismiss the Shane Provider Case. The motion to dismiss has been fully briefed,
and the Florida Federal Court heard oral argument on October 26, 2000. On
October 20, 2000 plaintiffs moved for class certification. The motion has been
fully briefed, and the Florida Federal Court has scheduled oral argument for
February 28, 2001.
Various motions to stay and dismiss have been filed and remain pending in the
other Subscriber Cases. They, along with the Harrison and Mangieri Provider
Cases, remain in the preliminary stages. The Company intends to continue to
vigorously defend the Subscriber Cases and the Provider Cases.
A purported class action complaint was filed by Douglas Chapman against Aetna
Inc. on September 7, 2000 in the United States District Court for the District
of Connecticut. This action is brought on behalf of participants in the
Company's PPO, indemnity and third-party payor plans and relates to the
disclosure and determination of usual, customary and reasonable charges for
claims and alleges an undisclosed policy of discounting procedures in order to
reduce reimbursements to ERISA plan members. The plaintiff seeks various forms
of relief, including unspecified damages, from Aetna Inc. for alleged violations
of ERISA. While the case currently is pending in the court in which it was
originally filed, on December 13, 2000 the Judicial Panel on Multidistrict
Litigation issued a conditional transfer order that would transfer this action
to the Florida Federal Court for consolidated pretrial proceedings with the
Subscriber Cases. The plaintiff has filed an objection to that order. The
Company intends to continue to vigorously defend this action, which is in the
preliminary stages.
In addition, a complaint was filed in the Superior Court of the State of
California, County of San Diego (the "California Superior Court") on November 5,
1999 by Linda Ross and The Stephen Andrew Olsen Coalition for Patients Rights,
purportedly on behalf of the general public of the State of California (the
"Ross Complaint"). The Ross Complaint, as amended, seeks various forms of
relief, including injunctive relief, restitution and disgorgement of amounts
allegedly wrongfully acquired, from former Aetna, Aetna Inc., Aetna U.S.
Healthcare of California Inc. and additional unnamed "John Doe" defendants for
alleged violations of California Business and Professions Code Sections 17200
and 17500. The Ross Complaint alleges that defendants are liable for alleged
misrepresentations and omissions relating to advertising, marketing and member
materials directed to the Company's HMO members and the general public and for
alleged unfair practices relating to contracting of doctors. On May 5, 2000, the
California Superior Court denied defendants' demurrer but granted in part their
motion to strike portions of the Ross Complaint and ordered plaintiffs to file
an amended complaint. The amended complaint was filed on May 15, 2000, and a
second amended complaint was filed on June 28, 2000. On August 15, 2000, the
California Superior Court denied defendants' demurrer but granted, in part,
their motion to strike portions of the second amended complaint and ordered the
plaintiffs to file a third amended complaint. The third amended complaint was
filed on August 25, 2000. Defendants have filed several motions to strike and
demurrers which have been granted in part. The court granted defendants' motion
to strike the request for restitution, and on November 17, 2000, the plaintiffs
filed a fourth amended complaint. On December 22, 2000, defendants filed a
motion to strike the request for restitution. Hearing on that motion is
scheduled for March 2, 2001. Defendants intend to continue to defend this action
vigorously.
Page 18
<PAGE> 19
On February 15, 2001, two complaints were filed in the Superior Court for New
Haven County, Connecticut against Aetna Health Plans of Southern New England,
Inc., an indirect subsidiary of Aetna Inc. One complaint was filed by the
Connecticut State Medical Society on behalf of its members. The other complaint
was filed by Sue McIntosh, M.D., J. Kevin Lynch, M.D., Karen Laugel, M.D. and
Stephen R. Levinson, M.D. on behalf of a purported class of Connecticut State
Medical Society members who provided services to the Company's members on or
after July 19, 1996. Each complaint alleges in substance that the Company
engages in unfair and deceptive acts and practices intended to delay and reduce
reimbursement to physicians, and that the Company has been able to force
physicians to enter into one-sided contracts that infringe upon the
doctor-patient relationship. The Connecticut State Medical Society complaint
seeks injunctive relief and attorneys' fees under the Connecticut Unfair Trade
Practices Act ("CUTPA"). The McIntosh complaint asserts claims under CUTPA and
various common law doctrines and seeks similar injunctive relief, along with
unspecified monetary damages, punitive damages and attorneys' fees. Each of
these actions is in the preliminary stages, and the Company intends to defend
each action vigorously.
Other Litigation and Regulatory Proceedings
The Company is involved in numerous other lawsuits arising, for the most part,
in the ordinary course of its business operations, including claims of bad
faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions. Aetna U.S. Healthcare of California Inc., an indirect subsidiary
of Aetna Inc., is currently a party to a bad faith and medical malpractice
action brought by Teresa Goodrich, individually and as successor in interest of
David Goodrich. The action was originally filed in March 1996 in Superior Court
for the State of California, County of San Bernardino. The action alleges
damages for unpaid medical bills, punitive damages and compensatory damages for
wrongful death based upon, among other things, alleged denial of claims for
services provided to David Goodrich by out-of-network providers without prior
authorization. On January 20, 1999, a jury rendered a verdict in favor of the
plaintiff for $750,000 for unpaid medical bills, $3.7 million for wrongful death
and $116 million for punitive damages. On April 12, 1999, the trial court
amended the judgment to include Aetna Services, Inc., a direct subsidiary of
former Aetna, as a defendant. On April 27, 1999, Aetna Services, Inc. and Aetna
U.S. Healthcare of California Inc. filed appeals with the California Court of
Appeal and will continue to defend this matter vigorously.
In addition, the Company's business practices are subject to review by various
state insurance and health care regulatory authorities and federal regulatory
authorities. Recently, there has been heightened review by these regulators of
the managed health care industry's business practices, including utilization
management and claim payment practices. As the largest national managed care
organization, the Company regularly is the subject of such reviews and several
such reviews currently are pending, some of which may be resolved during 2001.
These reviews may result in changes to or clarifications of the Company's
business practices, and may result in fines, penalties or other sanctions.
While the ultimate outcome of this other litigation and these regulatory
proceedings cannot be determined at this time, after consideration of the
defenses available to the Company, applicable insurance coverage 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.
Page 19
<PAGE> 20
Item 4. Submission of Matters to a Vote of Security Holders.
At a special shareholders meeting held on November 30, 2000, three matters were
submitted to a vote: a proposal to approve the Transaction (refer to
"Organization of Business" for more information); a proposal to adopt the
Company's 2000 Stock Incentive Plan; and a proposal to adopt the Company's 2001
Annual Incentive Plan.
The results of voting on these matters were as follows:
<TABLE>
<CAPTION>
Votes Votes
For Against Abstentions
------------- ----------- -------------
<S> <C> <C> <C>
Proposal to approve the Transaction 102,939,202 1,652,091 9,444,463
Proposal to adopt the Company's 2000 89,292,307 23,651,768 1,091,681
Stock Incentive Plan
Proposal to adopt the Company's 2001 108,509,076 4,550,377 976,303
Annual Incentive Plan
</TABLE>
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.
<TABLE>
<CAPTION>
Name of Officer Principal Position Age*
- --------------- ------------------ ---
<S> <C> <C>
William H. Donaldson Chairman 69
John W. Rowe, M.D. President and Chief Executive Officer 56
Frolly M. Boyd Vice President, Group Insurance 50
L. Edward Shaw, Jr. Executive Vice President and 56
General Counsel
Alan J. Weber Vice Chairman for Strategy 51
and Finance and Chief Financial Officer
</TABLE>
*As of February 23, 2001
EXECUTIVE OFFICERS' BUSINESS EXPERIENCE DURING PAST FIVE YEARS
WILLIAM H. DONALDSON became Chairman of the Company on May 30, 2000 and also
served as its President and Chief Executive Officer from May 30, 2000 to
September 15, 2000. He also served as Chairman, President and Chief Executive
Officer of former Aetna from February 25, 2000 to December 13, 2000. Prior to
assuming this position, Mr. Donaldson served as Co-Founder and Senior Advisor of
Donaldson, Lufkin & Jenrette, Inc. (investment banking) since September 1995.
Page 20
<PAGE> 21
JOHN W. ROWE, M.D. became President and Chief Executive Officer of the Company
on September 15, 2000, when the Company was former Aetna's health and related
benefits subsidiary, and continued in that role following the spin-off of the
Company as an independent, public company on December 13, 2000. Dr. Rowe also
served as an executive officer of former Aetna from September 15, 2000 until the
spin-off. Prior to joining Aetna, Dr. Rowe served as President and Chief
Executive Officer of Mount Sinai NYU Health, a position he assumed in 1998 after
overseeing the 1998 merger of the Mount Sinai and NYU Medical Centers. Dr. Rowe
joined The Mount Sinai Hospital and the Mount Sinai School of Medicine as
President in 1988.
FROLLY M. BOYD became Vice President, Group Insurance of the Company on December
8, 2000, having headed the Group Insurance business of former Aetna since April
1996. From 1993 to 1996, she served as Vice President, Group Products, for Aetna
Health Plans.
L. EDWARD SHAW, JR. became General Counsel of the Company on May 30, 2000 and
Executive Vice President of the Company on August 28, 2000, having served as
General Counsel of former Aetna since May 1999 and Senior Vice President from
May 24, 1999 to June 30, 2000, when he became Executive Vice President of former
Aetna. From January 1998 to May 1999, he served as Chief Corporate Officer for
North America of NatWest Group, from August 1997 to January 1998, as President
of NatWest Markets Group Inc. and from May 1996 to August 1997, he served as its
General Counsel. From 1985 to 1996, Mr. Shaw served as Executive Vice President
and General Counsel of The Chase Manhattan Corporation.
ALAN J. WEBER became Chief Financial Officer of the Company on August 28, 2000
and Vice Chairman for Strategy and Finance on October 30, 2000. He has served as
former Aetna's Vice Chairman for Strategy and Finance and Chief Financial
Officer since August 1, 1998. From July 1994 to July 1998, Mr. Weber served as
Chairman of Citibank International.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Aetna Inc.'s common shares are listed on the New York Stock Exchange. They trade
under the symbol AET. As of January 31, 2001, there were 15,845 record holders
of Aetna Inc.'s common shares.
Information regarding restrictions on the Company's present and future ability
to pay dividends is incorporated herein by reference to Note 13 and Note 15 of
Notes to Consolidated Financial Statements and MD&A - Liquidity and Capital
Resources in the Annual Report.
Item 6. Selected Financial Data.
The information contained in Selected Financial Data in the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained in the MD&A in the Annual Report is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information contained in MD&A-Total Investments in the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, Independent Auditors Report and unaudited Quarterly Data are
incorporated herein by reference to the Annual Report.
Page 21
<PAGE> 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning Executive Officers is included in Part I pursuant to
General Instruction G to Form 10-K.
Information concerning Directors and concerning compliance with Section 16(a) of
the Securities Exchange Act of 1934 is incorporated herein by reference to the
Proxy Statement.
Item 11. Executive Compensation.
The information under the captions "Director Compensation in 2000", "Other
Information Regarding Directors" and "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the captions "Security Ownership of Certain Beneficial
Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information under the captions "Other Information Regarding Directors" and
"Certain Transactions and Relationships" in the Proxy Statement is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.*
(a) The following documents are filed as part of this report:
1. Financial statements:
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors' Report 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. Refer to Index to Financial Statement Schedules on page 27.
3. Exhibits:*
(3) Articles of Incorporation and By-Laws.
3.1 Form of Amended and Restated Articles of Incorporation of Aetna Inc.
(formerly Aetna U.S. Healthcare Inc.), incorporated herein by reference
to Exhibit 3.1 to Aetna Inc.'s Amendment No. 2 to Registration
Statement on Form 10 filed on December 1, 2000.
Page 22
<PAGE> 23
3.2 Form of Amended and Restated By-laws of Aetna Inc., incorporated herein
by reference to Exhibit 3.2 to Aetna Inc.'s Amendment No. 2 to
Registration Statement on Form 10 filed on December 1, 2000.
(4) Instruments defining the rights of security holders, including indentures.
4.1 Form of Aetna Inc. Common Share certificate, incorporated herein by
reference to Exhibit 4.1 to Aetna Inc.'s Amendment No. 2 to
Registration Statement on Form 10 filed on December 1, 2000.
4.2 Form of Rights Agreement between Aetna Inc. and EquiServe Trust
Company, N.A., as Rights Agent, incorporated herein by reference to
Exhibit 4.2 to Aetna Inc.'s Amendment No. 2 to Registration Statement
on Form 10 filed on December 1, 2000.
4.3 Form of Senior Indenture between Aetna Inc. and State Street Bank and
Trust Company, incorporated herein by reference to Exhibit 4.1 to Aetna
Inc.'s Registration Statement on Form S-3 filed on January 19, 2001.
4.4 Form of Subordinated Indenture between Aetna Inc. and State Street Bank
and Trust Company, incorporated herein by reference to Exhibit 4.2 to
Aetna Inc.'s Registration Statement on Form S-3 filed on January 19,
2001.
(10) Material contracts.
10.1 Agreement and Plan of Restructuring and Merger dated as of July 19,
2000 among ING America Insurance Holdings, Inc., ANB Acquisition Corp.,
former Aetna and, for limited purposes only, ING Groep N.V.,
incorporated herein by reference to Exhibit 2.1 to former Aetna's Form
10-Q filed on August 4, 2000.
10.2 Form of Tax Sharing Agreement among former Aetna, Aetna Inc. and ING
America Insurance Holdings, Inc., incorporated herein by reference to
Exhibit 10.2 to Aetna Inc.'s Registration Statement on Form 10 filed on
September 1, 2000.
10.3 Form of Employee Benefits Agreement between former Aetna and Aetna
Inc., incorporated herein by reference to Exhibit 10.3 to Aetna Inc.'s
Registration Statement on Form 10 filed on September 1, 2000.
10.4 Term Sheet for Transition Services Agreement between former Aetna and
Aetna Inc., incorporated herein by reference to Exhibit 10.4 to Aetna
Inc.'s Registration Statement on Form 10 filed on September 1, 2000.
10.5 Form of Distribution Agreement between former Aetna and Aetna Inc.,
incorporated herein by reference to Annex C to former Aetna's
definitive proxy statement on Schedule 14A filed on October 18, 2000.
10.6 Trademark Assignment Agreement dated as of November 3, 2000 between
former Aetna and Aetna Inc., incorporated herein by reference to
Exhibit 10.6 to Aetna Inc.'s Amendment No.2 to Registration Statement
on Form 10 filed on December 1, 2000.
10.7 Form of Trademark License Agreement between Aetna Inc. and former
Aetna, incorporated herein by reference to Exhibit 10.7 to Aetna Inc.'s
Amendment No. 2 to Registration Statement on Form 10 filed on December
1, 2000.
10.8 Form of Software License Agreement between Aetna Inc. and former Aetna,
incorporated herein by reference to Exhibit 10.8 to Aetna Inc.'s
Amendment No. 2 to Registration Statement on Form 10 filed on December
1, 2000.
Page 23
<PAGE> 24
10.9 Term Sheet for Lease Agreement between former Aetna and Aetna Life
Insurance Company in respect of the property situated at 151 Farmington
Avenue, Hartford, Connecticut, 06156, incorporated herein by reference
to Exhibit 10.9 to Aetna Inc.'s Registration Statement on Form 10 filed
on September 1, 2000.
10.10 Term Sheet for Agreement between former Aetna and Aetna Inc. in respect
of the CityPlace property, situated at 185 Asylum Avenue, Hartford,
Connecticut, 06103, incorporated herein by reference to Exhibit 10.10
to Aetna Inc.'s Registration Statement on Form 10 filed on September 1,
2000.
10.11 Trademark Assignment Agreement dated as of November 2, 2000, between
Aetna Life Insurance Company and Aetna Life Insurance and Annuity
Company, incorporated herein by reference to Exhibit 10.26 to Aetna
Inc.'s Amendment No. 2 to Registration Statement on Form 10 filed on
December 1, 2000.
10.12 Trademark Assignment Agreement dated as of November 3, 2000, between
Aetna Life Insurance and Annuity Company and Aetna Inc., incorporated
herein by reference to Exhibit 10.27 to Aetna Inc.'s Amendment No. 2 to
Registration Statement on Form 10 filed on December 1, 2000.
10.13 Form of Bridge Credit Agreement among Aetna Inc., the Banks listed on
the signature pages thereto, and Morgan Guaranty Trust Company of New
York, as Administrative Agent, incorporated herein by reference to
Exhibit 10.28 to Aetna Inc.'s Amendment No. 2 to Registration Statement
on Form 10 filed on December 1, 2000.
10.14 Form of 364-Day Credit Agreement among Aetna Inc., the Banks listed on
the signature pages thereto, and Morgan Guaranty Trust Company of New
York, as Administrative Agent, incorporated herein by reference to
Exhibit 10.29 to Aetna Inc.'s Amendment No. 2 to Registration Statement
on Form 10 filed on December 1, 2000.
10.15 Form of Three-Year Credit Agreement among Aetna Inc., the Banks listed
on the signature pages thereto, and Morgan Guaranty Trust Company of
New York, as Administrative Agent, incorporated herein by reference to
Exhibit 10.30 to Aetna Inc.'s Amendment No. 2 to Registration Statement
on Form 10 filed on December 1, 2000.
10.16 Form of Aetna Inc. 2000 Stock Incentive Plan, incorporated herein by
reference to Annex G to former Aetna's definitive proxy statement on
Schedule 14A filed on October 18, 2000.**
10.17 Form of Aetna Inc. 2001 Annual Incentive Plan, incorporated herein by
reference to Annex H to former Aetna's definitive proxy statement on
Schedule 14A filed on October 18, 2000.**
10.18 Aetna U.S. Healthcare Inc. (to be renamed Aetna Inc.) Non-Employee
Director Compensation Plan, incorporated herein by reference to Exhibit
10.13 to Aetna Inc.'s Amendment No. 1 to Registration Statement on Form
10 filed on October 18, 2000.**
10.19 1999 Director Charitable Award Program, incorporated herein by
reference to Exhibit 10.1 to former Aetna's Form 10-Q filed on April
28, 1999.**
10.20 Employment Agreement dated as of May 31, 2000 by and between former
Aetna and William H. Donaldson, incorporated herein by reference to
Exhibit 10.2 to former Aetna's Form 10-Q filed on August 4, 2000.**
10.21 Tax Agreement dated as of May 31, 2000 by and between former Aetna and
William H. Donaldson, incorporated herein by reference to Exhibit 10.3
to former Aetna's Form 10-Q filed on August 4, 2000.**
Page 24
<PAGE> 25
10.22 Bonus Agreement dated as of May 31, 2000 by and between former Aetna
and William H. Donaldson, incorporated herein by reference to Exhibit
10.4 to former Aetna's Form 10-Q filed on August 4, 2000.**
10.23 Employment Agreement dated as of September 6, 2000 by and between
former Aetna and John W. Rowe, M.D., incorporated herein by reference
to Exhibit 10.23 to Aetna Inc.'s Amendment No. 1 to Registration
Statement on Form 10 filed on October 18, 2000.**
10.24 Employment Agreement dated as of May 7, 1996 between Aetna Life and
Casualty Company and Frolly M. Boyd.**
10.25 Memorandum Agreement dated as of June 7, 1996 between Aetna Life and
Casualty Company and Frolly M. Boyd.**
10.26 Letter from former Aetna to Frolly M. Boyd dated June 19, 2000.**
10.27 Letter Agreement dated April 28, 1999 between former Aetna and L.
Edward Shaw, Jr., incorporated herein by reference to Exhibit 10.20 to
Aetna Inc.'s Amendment No. 1 to Registration Statement on Form 10 filed
on October 18, 2000.**
10.28 Restrictive Covenant Agreement dated April 28, 1999 between former
Aetna and L. Edward Shaw, Jr., incorporated herein by reference to
Exhibit 10.21 to Aetna Inc.'s Amendment No. 1 to Registration Statement
on Form 10 filed on October 18, 2000.**
10.29 Letter Agreement dated November 17, 2000 between former Aetna and L.
Edward Shaw, Jr., incorporated herein by reference to Exhibit 10.24 to
Aetna Inc.'s Amendment No. 2 to Registration Statement on Form 10 filed
on December 1, 2000.**
10.30 Memorandum dated November 16, 2000 from James H. Gould to L. Edward
Shaw, Jr., incorporated herein by reference to Exhibit 10.25 to Aetna
Inc.'s Amendment No. 2 to Registration Statement on Form 10 filed on
December 1, 2000.**
10.31 Letter Agreement dated as of June 11, 1998 between former Aetna and
Alan J. Weber, incorporated herein by reference to Exhibit 10.2 to
former Aetna's Form 10-Q filed on April 28, 1999.**
10.32 Restrictive Covenant Agreement dated June 11, 1998 between former Aetna
and Alan J. Weber.**
10.33 Memorandum Agreement dated September 6, 2000 between former Aetna and
Alan J. Weber, incorporated herein by reference to Exhibit 10.22 to
Aetna Inc.'s Amendment No. 1 to Registration Statement on Form 10 filed
on October 18, 2000.**
10.34 Description of certain arrangements not embodied in formal documents,
as described under the headings "Director Compensation in 2000", "Other
Information Regarding Directors" and "Executive Compensation", are
incorporated herein by reference to the Proxy Statement.
* Exhibits other than those listed are omitted because they are not
required to be listed or are not applicable. Copies of exhibits will be
furnished without charge upon written request to the Office of the
Corporate Secretary, Aetna Inc., 151 Farmington Avenue, Hartford,
Connecticut 06156.
** Management contract or compensatory plan or arrangement.
Page 25
<PAGE> 26
(11) Statement re: computation of per share earnings.
Incorporated herein by reference to Note 3 of Notes to Consolidated Financial
Statements in the Annual Report.
(12) Statement re: computation of ratios.
Statement re: computation of ratio of earnings to fixed charges and ratio of
earnings to combined fixed charges and preferred stock dividends for the Company
for the years ended December 31, 2000, 1999, 1998, 1997 and 1996.
(13) Annual Report to security holders.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Selected Financial Data, Consolidated Financial Statements, Notes to
Consolidated Financial Statements, Independent Auditors' Report and unaudited
Quarterly Data are incorporated herein by reference to the Annual Report.
(21) Subsidiaries of the registrant.
A listing of subsidiaries of Aetna Inc.
(23) Consents of experts and counsel.
Consent of Independent Auditors for Incorporation by Reference in the
Registration Statements on Form S-3 and Form S-8.
(24) Power of attorney.
(b) Reports on Form 8-K.
The registrant filed a report on Form 8-K on February 14, 2001 concerning the
Company's fourth quarter 2000 results and other matters affecting future
performance, previously communicated in its January 30, 2001 press release and
conference calls with the public, which were held on January 30, 2001 and
December 18, 2000.
The registrant filed a report on Form 8-K on December 14, 2000 announcing that
the registrant had changed its name from "Aetna U.S. Healthcare Inc." to "Aetna
Inc." on December 13, 2000, in connection with its spin-off from former Aetna.
Page 26
<PAGE> 27
INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA INC. AND FORMER AETNA
<TABLE>
Page
----
<CAPTION>
<S> <C>
Independent Auditors' Report 28
I Condensed Financial Information of the Registrant:
Balance sheet of Aetna Inc. as of December 31, 2000 and the
related statements of income, shareholders' equity and cash
flows for the year ended December 31, 2000. 29
Balance Sheet of former Aetna as of December 31, 1999 and the
related statements of income, shareholders' equity and cash
flows for the years ended December 31, 1999 and 1998. 34
II Valuation and Qualifying Accounts and Reserves for the years ended
December 31, 2000, 1999 and 1998. 39
</TABLE>
Certain information has been omitted from the schedules filed because the
information is not applicable.
Page 27
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Aetna Inc.:
Under date of January 29, 2001, we reported on the consolidated balance sheets
of Aetna Inc. and Subsidiaries as of December 31, 2000 and 1999, 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, 2000, as contained in
the 2000 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 2000. In connection with our audits of the aforementioned
consolidated financial statements, we also 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 LLP
Hartford, Connecticut
January 29, 2001
Page 28
<PAGE> 29
AETNA INC.
SCHEDULE I
Condensed Statement of Income
<TABLE>
<CAPTION>
For the year ended
(Millions) December 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
Service fees - affiliates $ 1,531.5
Net investment income 27.7
Net realized capital gains 81.9
- ----------------------------------------------------------------------------------------
Total revenue 1,641.1
- ----------------------------------------------------------------------------------------
Operating expenses 1,793.9
Interest expense 248.2
- ----------------------------------------------------------------------------------------
Total expenses 2,042.1
- ----------------------------------------------------------------------------------------
Loss before income tax benefit and equity in earnings of affiliates, net (401.0)
Income tax benefit 211.7
Equity in earnings of affiliates, net(1) 316.4
- ----------------------------------------------------------------------------------------
Net income $ 127.1
========================================================================================
</TABLE>
(1) Includes parent company amortization of goodwill and other acquired
intangible assets of $423.6 million and a goodwill write-off of $266.1
million.
See Notes to Aetna Inc. Condensed Financial Statements.
Page 29
<PAGE> 30
AETNA INC.
SCHEDULE I
Condensed Balance Sheet
<TABLE>
<CAPTION>
(Millions, except share data) As of December 31, 2000
- ---------------------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents $ 244.0
Investment securities 203.4
Other receivables 387.9
Other assets 176.8
- ---------------------------------------------------------------------------------------
Total current assets 1,012.1
- ---------------------------------------------------------------------------------------
Long-term investments 2.3
Property and equipment 25.6
Investment in affiliates(1) 12,663.6
Other assets 72.4
- ---------------------------------------------------------------------------------------
Total assets $ 13,776.0
=======================================================================================
Short-term debt $ 1,592.2
Accrued expenses and other liabilities 1,233.8
- ---------------------------------------------------------------------------------------
Total current liabilities 2,826.0
- ---------------------------------------------------------------------------------------
Other liabilities 822.9
- ---------------------------------------------------------------------------------------
Total liabilities 3,648.9
- ---------------------------------------------------------------------------------------
Common stock ($.01 par value, 762,500,000 shares authorized,
142,618,551 issued and outstanding) 3,898.7
Accumulated other comprehensive income 35.1
Retained earnings 6,193.3
- ---------------------------------------------------------------------------------------
Total shareholders' equity 10,127.1
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 13,776.0
=======================================================================================
</TABLE>
(1) Includes parent company goodwill and other acquired intangible assets of
$7.6 billion.
See Notes to Aetna Inc. Condensed Financial Statements.
Page 30
<PAGE> 31
AETNA INC.
SCHEDULE I
Condensed Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Year ended December 31, 2000
----------------------------------------------------------------------
Accumulated Other
Comprehensive
Income (Loss)
-------------------------------
Unrealized
Retained Gains (Losses) Foreign Common
(Millions, except share data) Total Earnings on Securities Currency Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 $10,703.2 $ 7,639.5 $(206.1) $(449.5) $3,719.3
========================================================================================================================
Comprehensive income:
Net income 127.1 127.1
Other comprehensive loss, net of tax:
Unrealized gains on securities
($486.5 pretax) (1) 316.2 316.2
Foreign currency ($(50.9) pretax) (39.9) (39.9)
---------
Other comprehensive income 276.3
---------
Total comprehensive income 403.4
=========
Capital contributions from former Aetna 118.9 118.9
Dividends to former Aetna (216.0) (216.0)
Outstanding shares cancelled (1,100 shares) - -
Sale and spin-off related transaction
(141,670,551 shares issued) (904.2) (1,357.3) (80.7) 495.1 38.7
Stock options exercised (948,000 shares issued) 21.8 21.8
- -------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $10,127.1 $ 6,193.3 $ 29.4 $ 5.7 $3,898.7
========================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Notes to Aetna Inc. Condensed Financial Statements.
Page 31
<PAGE> 32
AETNA INC.
SCHEDULE I
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the year ended
(Millions) December 31, 2000
- ------------------------------------------------------------------------------------------------------
<S> <C>
Cash Flows from Operating Activities:
Net income $ 127.1
Adjustments to reconcile net income to net cash used for
operating activities:
Equity in earnings of affiliates, net(1) (316.4)
Net realized capital gains (81.9)
Changes in assets and liabilities:
Net decrease in other assets and other liabilities (499.6)
- ------------------------------------------------------------------------------------------------------
Net cash used for operating activities (770.8)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of investments 572.8
Increase in property and equipment (1.2)
Dividends received from affiliates, net 688.0
- ------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,259.6
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayment of short-term debt (279.7)
Stock options exercised 21.8
Net transfers to former Aetna (97.1)
- ------------------------------------------------------------------------------------------------------
Net cash used for financing activities (355.0)
- ------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 133.8
Cash and cash equivalents, beginning of year 110.2
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $244.0
======================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $333.4
Income taxes paid, net $195.5
======================================================================================================
</TABLE>
(1) Includes parent company amortization of goodwill and other acquired
intangible assets of $423.6 million and a goodwill write-off of $266.1
million
See Notes to Aetna Inc. Condensed Financial Statements.
Page 32
<PAGE> 33
AETNA INC.
SCHEDULE I
Notes to Condensed Financial Statements
1. Background of Organization
The condensed parent company only financial information reflects Aetna Inc. (a
Pennsylvania corporation) (the "Parent Company"). Prior to December 13, 2000,
the Parent Company (formerly Aetna U.S. Healthcare Inc. and Aetna Services,
Inc.) was a subsidiary of a Connecticut corporation, Aetna Inc. ("former
Aetna"). On December 13, 2000, former Aetna spun-off shares of the Parent
Company to shareholders of former Aetna as part of the same transaction which
also resulted in the sale of former Aetna's financial services business and
international business to ING Groep N.V. The Parent Company was renamed Aetna
Inc. Refer to "Item 1. Business - Organization of Business" for more details
regarding this transaction. The condensed financial information presented herein
includes the balance sheet of Aetna Inc. as of December 31, 2000 and the related
statements of income, shareholders' equity and cash flows for the year ended
December 31, 2000. The accompanying condensed financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
in the Annual Report. Prior to the spin-off, former Aetna was the parent
company. The condensed financial information of former Aetna as of December 31,
1999 and the two years then ended follows.
2. New Accounting Standards
Refer to Note 2 of Notes to Consolidated Financial Statements in the Annual
Report for a description of new accounting standards.
3. Acquisitions and Dispositions
Refer to Note 4 of Notes to Consolidated Financial Statements in the Annual
Report for a description of acquisitions and dispositions.
4. Discontinued Products
Refer to Note 10 of Notes to Consolidated Financial Statements in the Annual
Report for a description of discontinued products.
5. Income Taxes
Refer to Note 11 of Notes to Consolidated Financial Statements in the Annual
Report for a description of income taxes.
6. Debt
Refer to Note 13 of Notes to Consolidated Financial Statements in the Annual
Report for a description of debt and Note 2 for a discussion of the allocation
of interest expense to businesses presented as discontinued operations.
7. Service Arrangement
The Parent Company has a service arrangement with its affiliates, under which
the Parent Company provides certain administrative services, including
accounting and processing of premiums and claims.
Page 33
<PAGE> 34
AETNA INC. (FORMER AETNA)
SCHEDULE I
Condensed Statements of Income
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 2.2 $ 2.0
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in earnings of affiliates 2.2 2.0
Income taxes 1.8 .7
Equity in earnings of affiliates 716.5 846.8
- ------------------------------------------------------------------------------------------------------------
Net income $ 716.9 $ 848.1
============================================================================================================
</TABLE>
See Notes to former Aetna Condensed Financial Statements.
Page 34
<PAGE> 35
AETNA INC. (FORMER AETNA)
SCHEDULE I
Condensed Balance Sheet
<TABLE>
<CAPTION>
(Millions, except share data) As of December 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C>
Investment securities $ 4.0
Investments in affiliates 10,674.3
Cash and cash equivalents 11.7
Due from affiliates 3.4
Affiliate dividends receivable 70.0
Deferred income taxes 1.6
--------------------------------------------------------------------------------------------------
Total assets $ 10,765.0
==================================================================================================
Dividends payable to shareholders $ 28.5
Other liabilities 23.5
Current income taxes 22.6
--------------------------------------------------------------------------------------------------
Total liabilities 74.6
--------------------------------------------------------------------------------------------------
Common stock ($.01 par value; 500,000,000 shares authorized,
142,680,694 issued and outstanding) 3,719.3
Accumulated other comprehensive loss (655.6)
Retained earnings 7,626.7
--------------------------------------------------------------------------------------------------
Total shareholders' equity 10,690.4
--------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,765.0
==================================================================================================
</TABLE>
See Notes to former Aetna Condensed Financial Statements.
Page 35
<PAGE> 36
AETNA INC. (FORMER AETNA)
SCHEDULE I
Condensed Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Two years ended December 31, 1999
-------------------------------------------------------------------------------------
Accumulated Other Class C
Comprehensive Income(Loss) Voting
----------------------------- Mandatorily
Unrealized Foreign Convertible
Retained Gains (Losses) Currency Preferred Common
(Millions, except share data) Total Earnings on Securities Losses Stock Stock
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 11,195.4 $ 6,378.5 $ 483.9 $(176.8) $ 865.4 $3,644.4
==================================================================================================================================
Comprehensive income:
Net income 848.1 848.1
Other comprehensive loss, net of tax:
Unrealized losses on securities
(($156.0) pretax) (1) (101.4) (101.4)
Foreign currency (($43.3) pretax) (27.9) (27.9)
---------
Other comprehensive loss (129.3)
---------
Total comprehensive income 718.8
=========
Common stock issued for benefit
plans (576,387 shares) 39.6 39.6
Repurchase of common shares
(5,131,700 shares) (394.9) (394.9)
Conversion of preferred securities
(40,390 preferred shares converted
to 33,097 shares) - (3.3) 3.3
Common stock dividends (114.7) (114.7)
Preferred stock dividends (55.3) (55.3)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 11,388.9 $ 7,056.6 $ 382.5 $(204.7) $ 862.1 $3,292.4
==================================================================================================================================
Comprehensive loss:
Net income 716.9 716.9
Other comprehensive loss, net of tax:
Unrealized losses on securities
(($905.6) pretax) (1) (588.6) (588.6)
Foreign currency (($132.5) pretax) (244.8) (244.8)
----------
Other comprehensive loss (833.4)
----------
Total comprehensive loss (116.5)
==========
Common stock issued for benefit
plans (588,580 shares) 44.8 44.8
Issuance of stock appreciation rights 32.5 32.5
Repurchase of common shares
(8,700,00 shares) (512.5) (512.5)
Conversion of preferred securities
(11,614,816 preferred shares
converted to 9,519,486 shares) - (862.1) 862.1
Common stock dividends (116.3) (116.3)
Preferred stock dividends (30.5) (30.5)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $ 10,690.4 $ 7,626.7 $(206.1) $(449.5) $ - $3,719.3
==================================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Notes to former Aetna Condensed Financial Statements.
Page 36
<PAGE> 37
AETNA INC. (FORMER AETNA)
SCHEDULE I
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(Millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 716.9 $ 848.1
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Equity in earnings of affiliates (716.4) (846.7)
Other, net (4.1) 2.4
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (3.6) 3.8
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sales of short-term investments 540.4 431.6
Cost of investments in short-term investments (541.3) (431.5)
Capital contributions to affiliates (12.8) --
Dividends received from affiliates 634.7 520.0
Other, net (.3) (4.0)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 620.7 516.1
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Common stock issued under benefit plans 44.8 39.6
Common shares repurchased (512.5) (394.9)
Dividends paid to shareholders (153.5) (170.9)
- ------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (621.2) (526.2)
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4.1) (6.3)
Cash and cash equivalents, beginning of year 15.8 22.1
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 11.7 $ 15.8
============================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
Income taxes paid (received), net $ (9.8) $ (1.1)
============================================================================================================
</TABLE>
See Notes to former Aetna Condensed Financial Statements.
Page 37
<PAGE> 38
AETNA INC. (FORMER AETNA)
SCHEDULE I
Notes to Condensed Financial Statements
(1) Background of Organization
Former Aetna 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. The merger was
consummated on July 19, 1996. As a result, Aetna Services and Aetna U.S.
Healthcare are each direct wholly owned subsidiaries of Aetna Inc. The
accompanying condensed financial statements should be read in conjunction with
the Aetna Inc. condensed financial information and notes thereto and the
consolidated financial statements and notes thereto in the Annual Report.
(2) New Accounting Standards
Refer to Note 2 of Notes to Consolidated Financial Statements in the Annual
Report for a description of new accounting standards.
(3) Discontinued Products
Refer to Note 10 of Notes to Consolidated Financial Statements in the Annual
Report for a description of discontinued products.
(4) Acquisitions and Dispositions
Refer to Note 4 of Notes to Consolidated Financial Statements in the Annual
Report for a description of acquisitions and dispositions.
(5) Income Taxes
Refer to Note 11 of Notes to Consolidated Financial Statements in the Annual
Report for a description of income taxes.
Page 38
<PAGE> 39
AETNA INC. AND SUBSIDIARIES
SCHEDULE II
Valuation and Qualifying Accounts and Reserves
For the years ended December 31,
(Millions)
<TABLE>
<CAPTION>
Additions
------------------------------------
Charged
Balance at Charged (credited) to Balance
beginning (credited) to costs other accounts- Deductions- at end of
of period and expenses (1) describe (2) describe (3) period
--------- ------------------- --------------- ----------- ---------
2000
- ----
<S> <C> <C> <C> <C> <C>
Asset valuation
Reserves:
Mortgage loans $ 45.9 $ - $ - $ (1.9) $ 44.0
Real Estate 93.1 0.2 1.4 (11.2) 83.5
Other 2.8 - - (2.8) -
--------- ------------------- --------------- ----------- ---------
$ 141.8 $0.2 $ 1.4 $(15.9) $127.5
========= =================== =============== =========== =========
1999
- ----
Asset valuation
Reserves:
Mortgage loans $ 63.6 $ 0.4 $(0.4) $(17.7) $ 45.9
Real Estate 89.1 2.0 2.0 - 93.1
Other 2.8 - - - 2.8
--------- ------------------- --------------- ----------- ---------
$ 155.5 $ 2.4 $ 1.6 $(17.7) $141.8
========= =================== =============== =========== =========
1998
- ----
Asset valuation
Reserves:
Mortgage loans $ 114.5 $(8.0) $(39.0) $(3.9) $ 63.6
Real Estate 101.3 5.5 2.8 (20.5) 89.1
Other 2.8 - - - 2.8
--------- ------------------- --------------- ----------- ---------
$ 218.6 $(2.5) $(36.2) $(24.4) $155.5
========= =================== =============== =========== =========
</TABLE>
(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
and Future Policy Benefits in the Consolidated Balance Sheets,
respectively.
(3) Reduction in reserves is primarily a result of related asset
write-downs (including foreclosures of real estate) and sales.
Page 39
<PAGE> 40
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: February 26, 2001 AETNA INC.
By /s/ Alan M. Bennett
-----------------------------
Alan M. Bennett
Vice President and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on February 26, 2001.
*
- ---------------------------------- ------------------------------
William H. Donaldson Earl G. Graves, Sr., Director
Chairman and Director
* *
- ---------------------------------- ------------------------------
John W. Rowe, M.D. Gerald Greenwald, Director
President, Chief Executive
Officer and Director
(Principal Executive Officer)
* *
- ---------------------------------- ------------------------------
Betsy Z. Cohen, Director Ellen M. Hancock, Director
* *
- ---------------------------------- ------------------------------
Barbara Hackman Franklin, Director Michael H. Jordan, Director
* *
- ---------------------------------- ------------------------------
Jeffrey E. Garten, Director Jack D. Kuehler, Director
*
- ---------------------------------- ------------------------------
Jerome S. Goodman, Director Judith Rodin, Director
*
------------------------------
Alan J. Weber
/s/ Alan M. Bennett Vice Chairman for Strategy and
- ---------------------------------- Finance
Alan M. Bennett, Vice President (Principal Financial Officer)
and Corporate Controller
(Principal Accounting Officer)
*By /s/ Alan M. Bennett
----------------------------
(Attorney-in-Fact)
Page 40
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
- ------- ---------------------- -------
<S> <C> <C>
10.24 Employment Agreement dated as of May 7, 1996 between Aetna Life and Electronic
Casualty Company and Frolly M. Boyd.
10.25 Memorandum Agreement dated as of June 7, 1996 between Aetna Life and Electronic
Casualty Company and Frolly M. Boyd.
10.26 Letter from former Aetna to Frolly M. Boyd dated June 19, 2000. Electronic
10.32 Restrictive Covenant Agreement dated June 11, 1998 between former Electronic
Aetna and Alan J. Weber.
12 Statement re: computation of ratios. Electronic
Statement re: computation of ratio of earnings to fixed charges
and ratio of earnings to combined fixed charges and preferred
stock dividends for the Company for the years ended December 31,
2000, 1999, 1998, 1997 and 1996.
13 Annual Report to security holders. Electronic
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Selected Financial Data, Consolidated
Financial Statements, Notes to Consolidated Financial Statements,
Independent Auditors' Report, and unaudited Quarterly Data are
incorporated herein by reference to 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 for Incorporation by Reference in
the Registration Statements on Form S-3 and Form S-8.
24 Power of attorney. Electronic
</TABLE>
Page 41
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>2
<FILENAME>y45723ex10-24.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as May 7, 1996, by and between Aetna
Life and Casualty Company, a Connecticut corporation (the "Company"), and Frolly
M. Boyd ("Executive").
W I T N E S S E T H:
WHEREAS, the Company believes that Executive is a key health
care employee and that it is in the Company's best interests to retain the
services of Executive;
WHEREAS, the Company therefore desires to retain the services of
Executive and to enter into an agreement embodying the terms of such employment
(the "Agreement"); and
WHEREAS, Executive desires to accept such employment and enter
into such Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment. Except as provided in Paragraph 6(a), the
Company shall continue to employ Executive and Executive agrees to remain
employed by the Company under the terms of this Agreement for the period
commencing on the date first written above and ending December 31, 1998. The
period during which Executive is employed pursuant to this Agreement shall be
referred to as the "Contract Employment Period". The Contract Employment Period
shall automatically be extended for one additional year unless, not later than
180 days prior to the end of the Contract Employment Period, the Company or
Executive shall have given notice not to extend the Contract Employment Period.
The giving by the Company of a notice not to extend the Contract Employment
Period shall not constitute a Termination Without Cause or a Termination for
Good Reason (as defined below). Upon the expiration of the Contract Employment
Period, Executive's employment with the Company shall continue on an at-will
basis.
2. Position and Duties. During the Contract Employment
Period, Executive shall serve in Executive's current position or such other
comparable or better position or positions with the Company and its subsidiaries
as the Chief Executive Officer or the Board of Directors of the Company (the
"Board") shall specify from time to time. During the Contract Employment Period,
Executive shall have the duties, responsibilities and obligations customarily
assigned to individuals serving in the position or positions in which Executive
serves hereunder and such other duties, responsibilities and obligations as the
Chief Executive Officer or the Board shall from time to time specify. Executive
shall devote her full
1
<PAGE> 2
business time to the services required of her hereunder, except for vacation
time and reasonable periods of absence due to sickness, personal injury or other
disability, and shall use her best efforts, judgment, skill and energy to
perform such services in a manner consistent with the duties of her position and
to improve and advance the business and interests of the Company and its
subsidiaries. Nothing contained herein shall preclude Executive from (i) serving
on any corporate or governmental board of directors on which she currently
serves or, if the Board consents to such service, on any other board of
directors, (ii) serving on the board of, or working for, any charitable, not-for
profit or community organization, (iii) pursuing any other activity to which the
Board consents or (iv) pursuing her personal, financial and legal affairs, so
long as such activities, individually or collectively, do not interfere with the
performance of Executive's duties hereunder,
3. Cash Compensation.
a. Base Salary. During the Contract Employment Period, the
Company shall pay Executive a base salary at the annual rate of $300,000. The
Board shall periodically review Executive's base salary and the Company may, in
its discretion, increase such base salary by an amount it determines to be
appropriate. Any such increase shall not reduce or limit any other obligation of
the Company hereunder. Executive's annual base salary payable hereunder, as it
may be increased from time to time and without reduction for any amounts
deferred as described above, is referred to herein as "Base Salary". Executive's
Base Salary, as in effect from time to time, may not be reduced by the Company
without Executive's consent, provided that the Base Salary payable under this
paragraph shall be reduced to the extent Executive elects to defer or reduce
such salary under the terms of any deferred compensation or savings plan or
other employee benefit arrangement maintained or established by the Company. The
Company shall pay Executive the portion of her Base Salary not deferred in
accordance with its customary periodic payroll practices.
b. Incentive Compensation. During the term of the Contract
Employment Period, Executive shall remain eligible for participation in the
Company's existing and future annual and long term incentive compensation
programs at a level consistent with her position at the Company and the
Company's then current policies and practices; provided that following any
assignment of this Agreement in accordance with the provisions of Paragraph 9(c)
or a Change in Control of the Company (as defined in Paragraph 7(e)), the
calculation of the amount payable as annual incentive compensation and the
conditions upon which such bonus shall be payable shall be no less favorable to
the Executive (taking into account reasonable changes in the Company's goals and
objectives) than the annual bonus opportunity that had been made available to
the Executive for the fiscal year ended immediately prior to such assignment or
Change in Control. Without limiting the generality of the foregoing, beginning
with the performance year 1997, for each performance year ending during the term
hereof, Executive shall receive the opportunity to receive an annual bonus of at
least 80% of her Base Salary (the "Minimum Bonus Percentage"), subject to
satisfaction of such reasonable performance criteria as shall be established
with respect to such year.
2
<PAGE> 3
4. Performance Vested Stock Option Grant. Contingent upon
the execution of this Agreement by the Executive, the Company has granted
Executive an option, having a ten-year term, to purchase 29,600 shares of the
Company's Common Stock at an exercise price per share equal to $71 a share (the
"Option"). Except to the extent specified below, the terms of the Option shall
be determined in accordance with the terms of the 1994 Stock Incentive Plan (the
"1994 Plan") and shall be set forth in the separate agreement embodying the
grant of such Option (the "Option Agreement").
5. Benefits, Perquisites and Expenses.
a. Benefits. During the Contract Employment Period,
Executive shall be eligible to participate in (i) each welfare benefit plan
sponsored or maintained by the Company, including, without limitation, each
group life, hospitalization, medical, dental, health, accident or disability
insurance or similar plan or program of the Company, and (ii) each pension,
profit sharing, retirement, deferred compensation or savings plan sponsored or
maintained by the Company, in each case, whether now existing or established
hereafter, to the extent that Executive is eligible to participate in any such
plan under the generally applicable provisions thereof. Nothing in this
Paragraph 5(a) shall be construed to limit the ability of the Company to amend
or terminate any particular plan, program or arrangements, provided that,
following the occurrence of a Change in Control (as defined in Paragraph 7(e))
or the assignment of this Agreement to a New Entity (as defined in Paragraph
6(a)) pursuant to Paragraph 9(b), the benefits made available to the Executive
thereafter shall be at least substantially comparable, in the aggregate, to the
benefits made available to the Executive immediately prior to such Change in
Control or assignment.
With respect to the pension or retirement benefits payable to
Executive, Executive's service credited for purposes of determining Executive's
benefits and vesting shall be determined in accordance with the terms of the
applicable plan or program or, if applicable, pursuant to any written agreement
between Executive and the Company (whether now existing or hereafter adopted)
that provides Executive a more favorable method of crediting service for any
purpose thereunder.
b. Perquisites. During the Contract Employment Period,
Executive shall be entitled to receive such perquisites as are generally
provided to other senior officers of the Company in accordance with the then
current policies and practices of the Company.
c. Business Expenses. During the Contract Employment
Period, the Company shall pay or reimburse Executive for all reasonable expenses
incurred or paid by Executive in the performance of Executive's duties
hereunder, upon presentation of expense statements or vouchers and such other
information as the Company may require and in accordance with the generally
applicable policies and procedures of the Company.
3
<PAGE> 4
6. Termination of Employment.
a. Early Termination of the Contract Employment Period.
Notwithstanding Paragraph 1, the Contract Employment Period shall end upon the
earliest to occur of (i) a termination of Executive's employment on account of
Executive's death, (ii) a Termination due to Disability, (iii) a Termination for
Cause, (iv) a Termination Without Cause, (v) a Termination for Good Reason or
(vi) a termination of Executive's employment by Executive other than a
Termination for Good Reason. For purposes of this Agreement, a transfer of
Executive's employment (i)to any other entity controlled by or under common
control with the Company shall not be treated as a termination unless and until
such entity ceases to be controlled by or under common control with the Company
or (ii) as a result of the implementation of any restructuring of the Company
(whether occurring by spin-off or otherwise) shall not be treated as a
termination of employment, provided that, in either case, the successor employer
(the "New Entity") expressly assumes and agrees to perform all of the Company's
obligations under this Agreement.
b. Benefits Payable Upon Termination. Following the end of
the Contract Employment Period pursuant to Paragraph 6(a), Executive (or, in the
event of her death, her surviving spouse, if any, or her estate) shall be paid
the type or types of compensation determined to be payable in accordance with
the following table at the times established pursuant to Paragraph 6(c):
<TABLE>
<CAPTION>
Earned Vested Severance
Salary Benefits Accrued Bonus Benefit
------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Termination due Payable Payable Payable Not Payable
to death
Termination due to Payable Payable Payable Not Payable
Disability
Termination for Payable Payable Not Payable Not Payable
Cause
Termination Without Payable Payable Payable Payable
Cause
Termination for Payable Payable Payable Payable
Good Reason
Termination by Payable Payable Not Payable Not Payable
Executive other than
for Good Reason
</TABLE>
4
<PAGE> 5
c. Timing of Payments. Earned Salary and Accrued Bonus
shall be paid in a single lump sum as soon as practicable, but in no event more
than 30 days, following the end of the Contract Employment Period. Vested
Benefits shall be payable in accordance with the terms of the plan, policy,
practice, program, contract or agreement under which such benefits have accrued.
Severance Benefits shall be paid in approximately equal
installments, at the same intervals at which Executive was receiving her salary
payments hereunder, for the greater of (i) one year, (ii) the period over which
such benefits would be payable if paid to Executive under the Company's
otherwise applicable plans, policies or procedures as currently in effect or
(iii) the period over which such benefits would be payable if paid to Executive
under the Company's otherwise applicable plans, policies or procedures, as in
effect at the time of Executive's termination of employment. Notwithstanding the
foregoing, Executive may elect, by written notice given to the Company prior to
the first periodic payment and within ten business days after such termination,
that, instead of periodic installments, Severance Benefits shall be paid in
either a single lump sum, payable within ten business days of receipt by the
Company of such election, or in two equal installments, the first payable within
ten business days of receipt by the Company of such election, and the second
payable on the first business day of the following calendar year.
d. Definitions. For purposes of this Paragraph 6,
capitalized terms have the following meanings:
"Accrued Bonus" means a pro-rated amount equal to the product of
(i) the annual incentive compensation Executive would have been entitled to
receive under Paragraph 3(b) for the calendar year in which her active service
for the Company terminates pursuant to Paragraph 6(a) had she remained employed
for the entire year and assuming that all targets for such year had been met,
multiplied by (ii) a fraction, the numerator of which is equal to the number of
days in such calendar year occurring on or prior to the termination of
Executive's active service for the Company (including any period of absence due
to disability) and the denominator of which is 365.
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Contract
Employment Period ends (other than Base Salary deferred pursuant to Executive's
election, as provided in Paragraph 3(a) hereof).
"Severance Benefit" means an amount equal to the greater of:
(i) the sum of
(A) the annual Base Salary payable to Executive immediately
prior to the end of the Contract Employment Period; and
5
<PAGE> 6
(B) an amount (the "Bonus Severance Amount") equal to the
product of Executive's Base Salary times the greater of
(1) the Minimum Bonus Percentage and (2) the percentage
of Base Salary that would have been payable to Executive
for the year of such termination assuming achievement of
target levels of performance and Executive's continued
employment for the entire year, or
(ii) the amount otherwise payable to Executive under the Company's
otherwise applicable severance plans, policies or programs as in
effect on the date hereof (or, if more favorable to Executive,
as in effect on the date of Executive's termination), assuming
for purposes of determining the amount payable thereunder that
Executive's employment was terminated as a result of the
elimination of her position, but calculated by including the
Bonus Severance Amount as part of Executive's eligible
compensation for purposes of calculating the benefits payable
under such plans, policies or programs;
except that, in the event that Executive becomes entitled to receive Severance
Benefits hereunder following a Change in Control, the Severance Benefit payable
to Executive shall be determined under Paragraph 7(c). Additionally, while
Executive is receiving payment of Severance Benefits in periodic installments,
Executive shall also be eligible to continue to participate in the welfare
benefit plans and programs (excluding the long-term disability plan, the
sick-pay plan and vacation accruals) generally made available to employees of
the Company and in which she participated immediately prior to the termination
of her employment on the same terms and conditions as would have applied had
Executive continued to be employed. Upon an election to receive Severance
Benefits in either a single lump sum payment or in two installments, Executive
will forfeit any right to continue to receive any coverage under the Company's
welfare benefit plans, other than COBRA coverage (determined from the original
date of termination) at Executive's expense as required by applicable law;
provided that, if Executive elects to receive Severance Benefits in two
installments instead of periodic installments, the Company shall pay one-half of
the cost of Executive's COBRA coverage from the date the first installment
payment is made until the date the second installment payment is made.
Notwithstanding the foregoing, receipt of a lump sum payment or two installment
payments hereunder shall not cause Executive to cease to be eligible for any
retiree benefit programs for which she is otherwise eligible under the terms of
the Company's employee benefit plans, policies or programs.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) the willful failure by Executive to perform
substantially Executive's duties as an employee of the Company (other than due
to physical or mental illness) after reasonable notice to Executive of such
failure, (ii) Executive's engaging in misconduct that is materially injurious to
the Company or any subsidiary or any affiliate of the Company, (iii) Executive's
having been convicted of, or entered a plea of nolo contendere to, a crime that
constitutes a felony, (iv) the material breach by Executive of any written
covenant or agreement not to compete with the Company or any subsidiary or any
affiliate or (v) the breach by Executive of her duty of loyalty to the Company
which shall include, without limitation, (A) the disclosure
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by Executive of any confidential information pertaining to the Company or any
subsidiary or any affiliate of the Company, other than (x) in the ordinary
course of the performance of her duties on behalf of the Company or (y) pursuant
to a judicial or administrative subpoena from a court or governmental authority
with jurisdiction over the matter in question, (B) the harmful interference by
Executive in the business or operations of the Company or any subsidiary or any
affiliate of the Company, (C) any attempt by Executive directly or indirectly to
induce any employee, insurance agent, insurance broker or broker-dealer of the
Company or any subsidiary or any affiliate to be employed or perform services
elsewhere, other than actions taken by Executive that are intended to benefit
the Company or any subsidiary or affiliate and do not benefit Executive
financially other than as an employee or stockholder of the Company, (D) any
attempt by Executive directly or indirectly to solicit the trade of any customer
or supplier, or prospective customer or supplier, of the Company on behalf of
any person other than the Company or a subsidiary thereof, other than actions
taken by Executive that are intended to benefit the Company or any subsidiary or
affiliate and do not benefit Executive financially other than as an employee or
stockholder of the Company, provided, however that this provision shall only
apply to any product or service which is in competition with a product or
service of the Company or any subsidiary or affiliate thereof or (E) any breach
or violation of the Company's Code of Conduct, as amended from time to time
sufficient to warrant a for cause termination consistent with the Company's past
practice. Notwithstanding the foregoing, a breach of Executive's duty of loyalty
to the Company as described in subclause (A) or a breach of the Company's Code
of Conduct as described in subclause (E) of clause (v) of the preceding sentence
shall not be grounds for a Termination for Cause unless such breach has had or
could reasonably be expected to have a significant adverse effect on the
business or reputation of the Company.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable, with
or without reasonable accommodation, of substantially fulfilling the positions,
essential duties, responsibilities and obligations of Executive's positions set
forth in this Agreement because of physical, mental or emotional incapacity
resulting from injury, sickness or disease for a period of (i) at least four
consecutive months or (ii) more than six months in any twelve month period. Any
question as to the existence, extent or potentiality of Executive's disability
shall be made by a qualified, independent physician selected by the chief or
assistant chief (or the equivalent position) of the department which treats the
condition giving rise to Executive's absence at a nationally or regionally
recognized teaching hospital chosen by the Company. The determination of any
such physician shall be final and conclusive for all purposes of this Agreement.
Notwithstanding the foregoing, (i) a Termination for Disability shall not affect
Executive's right to receive any amount that would otherwise have been payable
to Executive under the Company's plans, policies, practices or programs
pertaining to short-term or long-term disability had Executive's employment
continued and (ii) if it is determined, at the time Executive is first eligible
to receive long-term disability benefits under the Company's plans, policies,
practices or programs, that Executive is not entitled to receive such long-term
disability benefits (other than due to Executive's failure to cooperate),
Executive shall, for purposes of this Paragraph 6, be deemed to have been
terminated as of the date of such determination pursuant to a
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Termination Without Cause and to be entitled to receive any additional benefits
payable hereunder in respect of a Termination Without Cause.
"Termination for Good Reason" means a termination of Executive's
employment by Executive within 90 days following actual knowledge of (i) a
reduction in Executive's annual Base Salary or incentive compensation
opportunity as provided under Paragraph 3(b), (ii) a material reduction in
Executive's positions, duties and responsibilities from those described in
Paragraph 2 hereof, (iii) the relocation of Executive's principal place of
employment to a location more than 50 miles from the location at which she
performed her principal duties on the date immediately prior to such relocation,
(iv) a breach of the obligation to provide Executive with the benefits required
to be provided in accordance with Paragraph 5(a), (v) a failure by the Company
to pay any amounts due and owing to Executive within 10 days following written
notice from Executive of such failure to pay, or (vi) any other material breach
of the Company's obligations to Executive hereunder that materially affects the
compensation or benefits payable to Executive or materially impairs Executive's
ability to perform the duties and responsibilities of her position.
Notwithstanding the foregoing, a termination shall not be treated as a
Termination for Good Reason (i) if Executive shall have consented in writing to
the occurrence of the event giving rise to the claim of Termination for Good
Reason or (ii) unless Executive shall have delivered a written notice to the
Chief Executive Officer of the Company within 60 days of her having actual
knowledge of the occurrence of one of such events stating that she intends to
terminate her employment for Good Reason and specifying the factual basis for
such termination, and such event shall not have been cured within 30 days of the
receipt of such notice.
"Termination Without Cause" means any termination of Executive's
employment by the Company other than (i) a Termination due to Disability or (ii)
a Termination for Cause. Subject to the Company's obligations to make the
payments, if any, required pursuant to this paragraph 6, nothing in this
Agreement shall be construed to limit the right of the Company to terminate
Executive's employment at any time for any reason or without reason.
"Vested Benefits" means amounts payable under the terms of or in
accordance with any plan, policy or practice or program of, or any contract or
agreement with, the Company or any of its subsidiaries (including, without
limitation, any supplemental pension plan, supplemental savings plan or other
deferred compensation arrangement, the 1994 Plan and the Company's 1984 Stock
Option Plan (the "1984 Plan") with respect to which Executive's rights to such
amounts (i) have become vested and nonforfeitable on or before Executive's
termination of employment or (ii) otherwise have or will become nonforfeitable
at or subsequent to her termination of employment without regard to the
performance by Executive of further services or the resolution of a contingency
that is not satisfied at or after such termination, provided that, at any time
during which Executive is entitled to receive the Severance Benefits hereunder,
Executive shall not also be entitled to receive any benefits under the Company's
generally applicable severance or other termination plans, policies or programs.
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e. Full Discharge of Company Obligations. Except to the
extent provided in this Paragraph 6, the amounts payable to Executive pursuant
to this Paragraph 6 following termination of her employment shall be in full and
complete satisfaction of Executive's rights under this Agreement and, except to
the extent prohibited by law, any other claims she may have in respect of her
employment by the Company or any of its subsidiaries. Such amounts shall
constitute liquidated damages with respect to any and all such rights and claims
and shall not be subject to any offset or mitigation. Notwithstanding anything
else contained herein to the contrary, unless the Company shall waive its rights
to any such release, the Company's obligations under this Paragraph 6 are
expressly conditioned upon Executive's execution simultaneously with or
immediately following such termination of employment, of a release and waiver in
the form acceptable to the Company, of any claims she may have in connection
with the termination of, or arising out of, her employment with the Company,
provided that such release shall not be construed to waive, release or otherwise
limit any amounts required to be paid hereunder or any benefits due and payable
to Executive under the terms of any employee pension benefit plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended,
any other Vested Benefit or any right of Executive to be indemnified by the
Company pursuant to its applicable policies and practices from and against any
third party claims arising out of or relating to Executive's employment with or
other services on behalf of the Company or any subsidiary of the Company.
f. Outplacement Services. In addition to any other benefits
described in this Paragraph 6, in the event Executive is eligible to receive
Severance Benefits, the Company shall also provide to Executive, at its expense,
individual outplacement services from a qualified outplacement firm selected by
the Company. The outplacement services to be provided to Executive shall be no
less favorable to Executive than those made available to other executives prior
to the date hereof under the Company's generally applicable policies, programs
or arrangements.
7. Change in Control of the Company.
a. Accelerated Vesting and Payment. Unless the Board (or
the appropriate committee thereof) shall otherwise determine in the manner set
forth in Paragraph 7(b), the Option shall become fully exercisable upon the
occurrence of a Change in Control (as defined below) and shall remain
exercisable for a period of one year thereafter regardless of whether Executive
continues to be employed by the Company or, if longer, for the period during
which such Option would otherwise be exercisable in accordance with its terms or
the generally applicable provisions of the 1994 Plan. If no Alternative Option
is provided as set forth in Paragraph 7(b) below, and the Company does not
survive as a publicly traded corporation following a Change in Control, the
Company shall pay Executive, in full settlement of all rights with respect to
the Option, an aggregate amount in cash equal to the product of (i) (A) the Fair
Market Value of a Share of the Company's Common Stock on the date the Change in
Control occurs minus (B) the per share exercise price for the Option times (ii)
the number of shares as to which such Option has not been exercised at the time
of the Change in Control. Any amount payable pursuant to the preceding sentence
shall be paid within 30 days following such Change in Control.
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b. Alternative Options. Notwithstanding Paragraph 7(a), no
acceleration of exercisability shall occur with respect to any Option if the
Board (or the appropriate committee thereof) reasonably determines in good
faith, prior to the occurrence of a Change in Control, that such Option shall be
honored or assumed, or new rights substituted therefor (such honored, assumed or
substituted Option being hereinafter referred to as an "Alternative Option") by
the successor in interest to the Company, provided that any such Alternative
Option must:
(i) provide Executive with rights and entitlements substantially
equivalent to or better than the rights, terms and conditions
applicable under the Option, including, but not limited to, an
identical or better exercise and vesting schedule and identical
or better timing and methods of payment;
(ii) have substantially equivalent economic value to such Option
(determined at the time of the Change in Control); and
(iii) have terms and conditions which provide that, in the event that
Executive's employment is terminated by the Company for any
reason or is terminated by Executive pursuant to a Termination
for Good Reason within two years following a Change in Control,
(A) any conditions on Executive's rights under, or any
restrictions on exercisability applicable to, each such
Alternative Option shall be waived or shall lapse, as the case
may be and (B) the Alternative Option shall remain exercisable
until the second anniversary of the Change in Control or, if
longer, for the period during which such Alternative Option
would otherwise be exercisable in accordance with its terms or
the provisions of the plan under which it is granted that permit
the longest post-termination exercise period for involuntary
terminations (other than due to death, disability or
retirement).
c. Enhanced Severance Payments. If Executive's employment
is terminated following a Change in Control pursuant to a Termination for Good
Reason or a Termination Without Cause, the Severance Benefit payable to
Executive pursuant to Paragraph 6 shall be equal to two times the sum of
Executive's annual Base Salary and the Bonus Severance Amount.
d. Additional Payments by the Company.
(i) Application of Paragraph 7(d). In the event that any amount or
benefit paid or distributed to Executive pursuant to this
Agreement, taken together with any amounts or benefits otherwise
paid or distributed to Executive by the Company or any
affiliated company (collectively, the "Covered Payments"), would
be an "excess parachute payment" as defined in Section 280G of
the Code and would thereby subject Executive to the tax (the
"Excise Tax") imposed under Section 4999 of the Code (or any
similar tax that may hereafter be imposed), the
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provisions of this Paragraph 7(d) shall apply to determine the
amounts payable to Executive pursuant to this Agreement.
(ii) Calculation of Benefits. Immediately following delivery of any
notice of termination, the Company shall notify Executive of the
aggregate present value of all termination benefits to which she
would be entitled under this Agreement and any other plan,
program or arrangement as of the projected date of termination,
together with the projected maximum payments, that could be paid
without Executive being subject to the Excise Tax.
(iii) Imposition of Payment Cap. If the aggregate value of all
compensation payments or benefits to be paid or provided to
Executive under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which can be
paid to Executive without Executive incurring an Excise Tax by
less than 105%, then the amounts payable to Executive under this
Agreement may, in the discretion of the Company, be reduced (but
not below zero) to the maximum amount which may be paid
hereunder without Executive becoming subject to such an Excise
Tax (such reduced payments to be referred to as the "Payment
Cap"). In the event that Executive receives reduced payments and
benefits hereunder, Executive shall have the right to designate
which of the payments and benefits otherwise provided for in
this Agreement that she will receive in connection with the
application of the Payment Cap.
(iv) Further Payments by the Company. If the aggregate value of all
compensation payments or benefits to be paid or provided to
Executive under this Agreement and any other plan, agreement or
arrangement with the Company exceeds the amount which can be
paid to Executive without Executive incurring an Excise Tax by
more than 105%, the Company shall pay to Executive immediately
following Executive's termination of employment an additional
amount (the "Tax Reimbursement Payment") such that the net
amount retained by Executive with respect to such Covered
Payments, after deduction of any Excise Tax on the Covered
Payments and any Federal, state and local income tax and Excise
Tax on the Tax Reimbursement Payment provided for by this
Paragraph 7(d)(iv), but before deduction for any Federal, state
or local income or employment tax withholding on such Covered
Payments, shall be equal to the amount of the Covered Payments.
(v) Application of Section 280G. For purposes of determining whether
any of the Covered Payments will be subject to the Excise Tax
and the amount of such Excise Tax,
(A) such Covered Payments will be treated as "parachute
payments" within the meaning of Section 280G of the
Code, and all "parachute payments" in excess of the
"base amount" (as defined under Section 280G(b)(3) of
the Code) shall be treated as subject to the Excise Tax,
unless, and
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except to the extent that, in the good faith judgment of
the Company's independent certified public accountants
appointed prior to the Effective Date or tax counsel
selected by such Accountants (the "Accountants"), the
Company has a reasonable basis to conclude that such
Covered Payments (in whole or in part) either do not
constitute "parachute payments" or represent reasonable
compensation for personal services actually rendered
(within the meaning of Section 280G(b)(4)(B) of the
Code) in excess of the "base amount," or such "parachute
payments" are otherwise not subject to such Excise Tax,
and
(B) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by the
Accountants in accordance with the principles of Section
280G of the Code.
(vi) Applicable Tax Rates. For purposes of determining whether
Executive would receive a greater net after-tax benefit were the
amounts payable under this Agreement reduced in accordance with
Paragraph 7(d)(iii), Executive shall be deemed to pay:
(A) Federal income taxes at the highest applicable marginal
rate of Federal income taxation for the calendar year in
which the first amounts are to be paid hereunder, and
(B) any applicable state and local income taxes at the
highest applicable marginal rate of taxation for such
calendar year, net of the maximum reduction in Federal
incomes taxes which could be obtained from the deduction
of such state or local taxes if paid in such year;
provided, however, that Executive may request that such
determination be made based on her individual tax
circumstances, which shall govern such determination so
long as Executive provides to the Accountants such
information and documents as the Accountants shall
reasonably request to determine such individual
circumstances.
(vii) Adjustments in Respect of the Payment Cap. If Executive receives
reduced payments and benefits under this Paragraph 7(d) (or this
Paragraph 7(d) is determined not to be applicable to Executive
because the Accountants conclude that Executive is not subject
to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service
proceeding (a "Final Determination") that, notwithstanding the
good faith of Executive and the Company in applying the terms of
this Agreement, the aggregate "parachute payments" within the
meaning of Section 280G of the Code paid to Executive or for her
benefit are in an amount that would have resulted in the
imposition of a Payments Cap under Paragraph 7(d)(iii) and
result in Executive being subject an Excise Tax, then the amount
equal to such excess parachute payments shall
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be deemed for all purposes to be a loan to Executive made on the
date of receipt of such excess payments, which Executive shall
have an obligation to repay to the Company on demand, together
with interest on such amount at the applicable Federal rate (as
defined in Section 1274(d) of the Code) from the date of the
payment hereunder to the date of repayment by Executive. If the
Payment Cap was applied, and it is established pursuant to a
Final Determination that the aggregate "parachute payments'
payable to Executive equals or exceeds 105% of the amount which
could be paid to Executive without Executive incurring an Excise
Tax, Executive shall be entitled to receive the benefits
available under Paragraph 7(d)(iv). If this Paragraph 7(d) is
not applied to reduce Executive's entitlements under this
Paragraph 7 because the Accountants determine that Executive
would not receive a greater net-after tax benefit by applying
this Paragraph 7(d) and it is established pursuant to a Final
Determination that, notwithstanding the good faith of Executive
and the Company in applying the terms of this Agreement,
Executive would have received a greater net after tax benefit by
subjecting her payments and benefits hereunder to the Payment
Cap, then the aggregate "parachute payments" paid to Executive
or for her benefit in excess of the Payment Cap shall be deemed
for all purposes a loan to Executive made on the date of receipt
of such excess payments, which Executive shall have an
obligation to repay to the Company on demand, together with
interest on such amount at the applicable Federal rate (as
defined in Section 1274(d) of the Code) from the date of the
payment hereunder to the date of repayment by Executive. If
Executive receives reduced payments and benefits by reason of
this Paragraph 7(d) and it is established pursuant to a Final
Determination that Executive could have received a greater
amount without exceeding the Payment Cap, then the Company shall
promptly thereafter pay Executive the aggregate additional
amount which could have been paid without exceeding the Payment
Cap, together with interest on such amount at the applicable
Federal rate (as defined in Section 1274(d) of the Code) from
the original payment due date to the date of actual payment by
the Company.
(viii) Adjustments in Respect of the Tax Reimbursement Payments. In the
event that the Excise Tax is subsequently determined by the
Accountants or pursuant to any proceeding or negotiations with
the Internal Revenue Service to be less than the amount taken
into account hereunder in calculating the Tax Reimbursement
Payment made, Executive shall repay to the Company, at the time
that the amount of such reduction in the Excise Tax is finally
determined, the portion of such prior Tax Reimbursement Payment
that would not have been paid if such Excise Tax had been
applied in initially calculating such Tax Reimbursement Payment,
plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. Notwithstanding
the foregoing, in the event any portion of the Tax Reimbursement
Payment to be refunded to the Company has been paid to any
Federal, state or local tax authority, repayment thereof shall
not be required until actual refund or credit
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of such portion has been made to Executive, and interest payable
to the Company shall not exceed interest received or credited to
Executive by such tax authority for the period it held such
portion. Executive and the Company shall mutually agree upon the
course of action to be pursued (and the method of allocating the
expenses thereof) if Executive's good faith claim for refund or
credit is denied.
In the event that the Excise Tax is later determined by the
Accountants or pursuant to any proceeding or negotiations with
the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Tax Reimbursement Payment is
made (including, but not limited to, by reason of any payment
the existence or amount of which cannot be determined at the
time of the Tax Reimbursement Payment), the Company shall make
an additional Tax Reimbursement Payment in respect of such
excess (plus any interest or penalty payable with respect to
such excess) at the time that the amount of such excess is
finally determined.
(ix) Timing of Payment. Any Tax Reimbursement Payment (or portion
thereof) provided for in Paragraph 7(d)(iv) above shall be paid
to Executive not later than 10 business days following the
payment of the Covered Payments; provided, however, that if the
amount of such Tax Reimbursement Payment (or portion thereof)
cannot be finally determined on or before the date on which
payment is due, the Company shall pay to Executive by such date
an amount estimated in good faith by the Accountants to be the
minimum amount of such Tax Reimbursement Payment and shall pay
the remainder of such Tax Reimbursement Payment (together with
interest at the rate provided in Section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined, but in no
event later than 45 calendar days after payment of the related
Covered Payment. In the event that the amount of the estimated
Tax Reimbursement Payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan
by the Company to Executive, payable on the fifth business day
after written demand by the Company for payment (together with
interest at the rate provided in Section 1274(b)(2)(B) of the
Code).
e. Definition of "Change in Control". For purposes of this
Paragraph 7, a "Change in Control" means the happening of any of the
following:
(i) When any "person" as defined in Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and as
used in Sections 13(d) and 14(d) thereof, including a "group" as defined
in Section 13(d) of the Exchange Act but excluding the Company and any
subsidiary thereof and any employee benefit plan sponsored or maintained
by the Company or any Subsidiary (including any trustee of such plan
acting as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from
time to time), of
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securities of the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months after
the date of this Agreement, the individuals who, at the beginning of
such period, constitute the Board (the "Incumbent Directors") cease for
any reason other than death to constitute at least a majority thereof,
provided that a director who was not a director at the beginning of such
24-month period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director was elected
by, or on the recommendation of or with the approval of, at least
two-thirds of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning of such
24-month period) or by prior operation of this Paragraph 7(e)(ii); or
(iii) The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other than the
Company or a subsidiary through purchase of assets, or by merger, or
otherwise.
8. Noncompetition and Confidentiality.
a. Noncompetition. During the Contract Employment Period
and for a period of one year following Executive's termination of employment
during the Contract Employment Period other than due to a Termination Without
Cause or a Termination for Good Reason, Executive shall not become associated,
whether as a principal, partner, employee, consultant or shareholder (other than
as a holder of not in excess of 1% of the outstanding voting shares of any
publicly traded company), with any entity that is actively engaged in any
geographic area in any business which is in substantial and direct competition
with the business or businesses of the Company for which Executive provides
substantial services or for which Executive has substantial responsibility,
provided that nothing in this Paragraph 8(a) shall preclude Executive from
performing services solely and exclusively for a division or subsidiary of such
an entity that is engaged in a non-competitive business.
b. Nondisclosure, Nonsolicitation and Cooperation.
(i) Executive shall not (except to the extent required by an
order of a court having competent jurisdiction or under subpoena from an
appropriate government agency) disclose to any third person, whether
during or subsequent to the Executive's employment with the Company, any
trade secrets; customer lists; product development and related
information; marketing plans and related information; sales plans and
related information; operating policies and manuals; business plans;
financial records; or other financial, commercial, business or technical
information related to the Company or any subsidiary or affiliate
thereof unless such information has been previously disclosed to the
public by the Company or has become public knowledge other than by a
breach of this Agreement; provided, however, that this limitation shall
not apply to any such disclosure made while Executive is employed by the
Company, or any
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subsidiary or affiliate thereof in the ordinary course of the
performance of Executive's duties;
(ii) during the Contract Employment Period and for two years
after the termination of such Period, Executive shall not attempt,
directly or indirectly, to induce any employee or Insurance Agent (as
defined below) of the Company, or any subsidiary or any affiliate
thereof to be employed or perform services elsewhere provided that this
covenant shall not preclude Executive from taking any actions during the
Contract Employment Period that (x) are intended to benefit the Company
or any subsidiary or affiliate and (y) do not benefit Executive
financially other than as an employee or stockholder of the Company;
(iii) during the Contract Employment Period and for two years
after the termination of such Period, Executive shall not attempt,
directly or indirectly, to induce any insurance agent or agency,
insurance broker, broker-dealer or supplier of the Company, or any
subsidiary or affiliate thereof to cease providing services to the
Company, or any subsidiary or affiliate thereof provided that this
covenant shall not preclude Executive from taking any actions during the
Contract Employment Period that (x) are intended to benefit the Company
or any subsidiary or affiliate and (y) do not benefit Executive
financially other than as an employee or stockholder of the Company;
(iv) during the Contract Employment Period and for two years
after the termination of such Period, Executive shall not attempt,
directly or indirectly, to solicit, on behalf of any person or entity
other than the Company or any of its subsidiaries, the trade of any
individual or entity which, at the time of the solicitation, is a
customer of the Company, or any subsidiary or affiliate thereof, or
which the Company, or any subsidiary or affiliate thereof is undertaking
reasonable steps to procure as a customer at the time of or immediately
preceding termination of the Contract Employment Period; provided,
however, that this limitation shall only apply to (x) any product or
service which is in competition with a product or service of the Company
or any subsidiary or affiliate thereof and (y) with respect to any
customer or prospective customer with whom Executive has or had (by
virtue of Executive's position or otherwise) a personal relationship;
and
(v) following the termination of the Contract Employment
Period, Executive shall provide assistance to and shall cooperate with
the Company or any subsidiary or affiliate thereof, upon its reasonable
request, with respect to matters within the scope of Executive's duties
and responsibilities during the Contract Employment Period. (The Company
agrees and acknowledges that it shall, to the maximum extent possible
under the then prevailing circumstances, coordinate (or cause a
subsidiary or affiliate thereof to coordinate) any such request with
Executive's other commitments and responsibilities to minimize the
degree to which such request interferes with such commitments and
responsibilities). The Company agrees that it
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will reimburse Executive for reasonable travel expenses (i.e., travel,
meals and lodging) that Executive may incur in providing assistance to
the Company hereunder.
Solely for purposes of Paragraph 8(b)(ii) above, the term "Insurance Agent"
shall mean those insurance agents or agencies representing the Company or any
subsidiary or affiliate thereof, that are exclusive or career agents or agencies
of the Company or any subsidiary or affiliate thereof, or any insurance agents
or agencies which derive 50% or more of their business revenue from the Company
or any subsidiary or affiliate thereof (calculated on an aggregate basis for the
12-month period prior to the date of determination or such other similar period
for which such information is more readily available).
c. Company Property. Promptly following Executive's
termination of employment, Executive shall return to the Company all property of
the Company, and all copies thereof in Executive's possession or under her
control.
d. Intention of the Parties. If any provision of
Paragraph 8 is determined by an arbitrator (or a court of competent jurisdiction
asked to enforce the decision of the arbitrator) not to be enforceable in the
manner set forth in this Agreement, the Company and Executive agree that it is
the intention of the parties that such provision should be enforceable to the
maximum extent possible under applicable law and that such arbitrator (or court)
shall reform such provision to make it enforceable in accordance with the intent
of the parties. Executive acknowledges that a material part of the inducement
for the Company to provide the salary and benefits evidenced hereby is
Executive's covenants set forth in Paragraph 8(a), (b) and (c) and that the
covenants and obligations of Executive with respect to nondisclosure and
nonsolicitation relate to special, unique and extraordinary matters and that a
violation of any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies are not available at law.
Therefore, Executive agrees that, if Executive shall materially breach any of
those covenants following termination of employment, the Company shall have no
further obligation to pay Executive any benefits otherwise payable hereunder and
the Company shall be entitled to an injunction, restraining order or such other
equitable relief (without the requirement to post a bond) restraining Executive
from committing any violation of the covenants and obligations contained in
Paragraph 8(a), (b) and (c). The remedies in the preceding sentence are
cumulative and are in addition to any other rights and remedies the Company may
have at law or in equity as an arbitrator (or court) shall reasonably determine.
e. Waiver. Without limiting the generality of the
foregoing, upon request of Executive prior to engaging in any conduct otherwise
prohibited by this Paragraph 8, the Company may, in its sole discretion, waive
in writing, on such terms and conditions as it may deem appropriate, any
violation of this Paragraph 8 which would otherwise occur due to such conduct.
17
<PAGE> 18
9. Miscellaneous.
a. Survival. Paragraph 7 (relating to a Change in Control),
8 (relating to noncompetition, nonsolicitation and confidentiality) and 9
(relating, among other things, to survival, assignment and governing law) shall
survive the termination hereof, whether such termination shall be by expiration
of the Contract Employment Period or an early termination pursuant to Paragraph
6 hereof. Paragraph 6 (relating to early termination) shall survive the
termination hereof to the extent that, prior thereto, or at the time of
termination, Executive (or her beneficiary) has become or becomes entitled to
receive any of the benefits payable thereunder.
b. Binding Effect. This Agreement shall be binding on, and
shall inure to the benefit of, the Company and any person or entity that
succeeds to the interest of the Company (regardless of whether such succession
does or does not occur by operation of law) by reason of the sale of all or a
portion of the Company's stock, a merger, consolidation or reorganization
involving the Company or, unless in the case of a sale involving less than all
or substantially all of the Company's assets the Company otherwise elects in
writing, a sale of the assets of the business of the Company (or portion
thereof) in which Executive performs a majority of her services. Any successor
in interest to the Company shall acknowledge in writing to Executive that it has
assumed this Agreement and is responsible to Executive for the performance of
the Company's obligations under this Agreement. Without limiting the generality
of the foregoing, the Company shall have the right, without the consent of
Executive, to assign this Agreement and its obligations hereunder to any New
Entity or any subsidiary of any New Entity by which Executive becomes employed,
at the discretion of the Company, by reason of the implementation of any
restructuring of the Company, and, following any such assignment, such New
Entity or subsidiary shall be treated as the Company for all purposes of this
Agreement. This Agreement shall also inure to the benefit of Executive's heirs,
executors, administrators and legal representatives.
c. Assignment. Except as provided under Paragraph 9(b),
neither this Agreement nor any of the rights or obligations hereunder shall be
assigned or delegated by any party hereto without the prior written consent of
the other party. In the event the Company assigns this Agreement pursuant to
Paragraph 9(b), the Company shall guarantee payment to Executive of any amounts
at any time due and payable hereunder in the event (and only to the extent) that
the assignee has become a debtor in bankruptcy, is the subject of a receivership
or similar preceding or has become insolvent, provided that Executive shall be
required to assign her rights against the assignee through subrogation as a
condition of receiving any payment under the Company's guarantee. In
consideration of such guarantee, Executive agrees that following such
assignment, the covenants of Executive in Paragraphs 8(b)(i) and (v) and the
obligation to provide a release as set forth in Paragraph 6(e) shall continue to
inure to the benefit of the Company, as well as the assignee. The Company and
Executive agree that following any assignment all other covenants described
herein in favor of the Company shall, from and after the date of such
assignment, inure solely to the benefit of the assignee.
18
<PAGE> 19
d. Entire Agreement. Except as expressly provided below,
this Agreement, the Option Agreement and the portion, if any, of any other
agreement relating to pension service or credits referred to in Paragraph 5(a)
shall constitute the entire agreement between the parties hereto with respect to
the matters referred to herein and any other agreement or any portion of any
such other agreement not expressly preserved hereby shall cease to be effective
upon the execution hereof and shall not become reinstated upon the expiration or
other termination of this Agreement. There are no promises, representations,
inducements or statements between the parties other than those that are
expressly contained herein. Executive acknowledges that she is entering into
this Agreement of her own free will and accord, and with no duress, that she has
read this Agreement and that she understands it and its legal consequences.
Other than the provisions of Paragraph 6 which limit Executive's eligibility to
receive severance benefits under the Company's generally applicable plans,
programs or agreements, nothing in this Agreement shall be construed to limit or
otherwise supersede Executive's rights or entitlements under any compensatory
plan, program or arrangement made available generally to all employees or all
officers of the Company or under the 1994 Plan or the 1984 Plan and this
Paragraph 9(d) shall not preclude reference to the documents governing any such
plan, program or arrangement to determine such rights and entitlements.
e. Severability; Reformation. In the event that one or more
of the provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby. In the
event any of Paragraph 8(a), (b) or (c) is not enforceable in accordance with
its terms, Executive and the Company agree that such Paragraph shall be reformed
to make such Paragraph enforceable in a manner which provides the Company the
maximum rights permitted at law.
f. Waiver. Waiver by any party hereto of any breach or
default by the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether similar to or
different from the breach or default waived. No waiver of any provision of this
Agreement shall be implied from any course of dealing between the parties hereto
or from any failure by either party hereto to assert its or her rights hereunder
on any occasion or series of occasions.
g. Notices. Any notice required or desired to be delivered
under this Agreement shall be in writing and shall be delivered personally, by
courier service, by registered mail, return receipt requested, or by telecopy
and shall be effective upon actual receipt by the party to which such notice
shall be directed, and shall be addressed as follows (or to such other address
as the party entitled to notice shall hereafter designate in accordance with the
terms hereof):
19
<PAGE> 20
If to the Company:
Aetna Life and Casualty Company
151 Farmington Avenue
Hartford, Connecticut
Attention: Corporate Secretary
If to Executive:
Frolly M. Boyd
149 4th Avenue
Milford, Connecticut 06460
h. Arbitration. The Company and Executive agree that any
claim, dispute or controversy arising under or in connection with this
Agreement, or otherwise in connection with Executive's employment by the Company
(including, without limitation, any such claim, dispute or controversy arising
under any federal, state or local statute, regulation or ordinance or any of the
Company's employee benefit plans, policies or programs) shall be resolved solely
and exclusively by binding arbitration. The arbitration shall be held in the
city of Hartford, Connecticut (or at such other location as shall be mutually
agreed by the parties). The arbitration shall be conducted in accordance with
the Expedited Employment Arbitration Rules (the "Rules") of the American
Arbitration Association (the "AAA") in effect at the time of the arbitration,
except that the arbitrator shall be selected by alternatively striking from a
list of five arbitrators supplied by the AAA. All fees and expenses of the
arbitration, including a transcript if either requests, shall become equally by
the parties. If Executive prevails as to any material issue presented to the
arbitrator, the entire cost of such proceedings (including, without limitation,
Executive's reasonable attorneys fees) shall become by the Company. If Executive
does not prevail as to any material issue, each party will pay for the fees and
expenses of its own attorneys, experts, witnesses, and preparation and
presentation of proofs and post-hearing briefs (unless the party prevails on a
claim for which attorney's fees are recoverable under the Rules). Any action to
enforce or vacate the arbitrator's award shall be governed by the Federal
Arbitration Act, if applicable, and otherwise by applicable state law. If either
the Company or Executive pursues any claim, dispute or controversy against the
other in a proceeding other than the arbitration provided for herein, the
responding party shall be entitled to dismissal or injunctive relief regarding
such action and recovery of all costs, losses and attorney's fees related to
such action.
i. Amendments. This Agreement may not be altered, modified
or amended except by a written instrument signed by each of the parties hereto.
j. Headings. Headings to paragraphs in this Agreement are
for the convenience of the parties only and are not intended to be part of or to
affect the meaning or interpretation hereof.
20
<PAGE> 21
k. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
l. Withholding. Any payments provided for herein shall be
reduced by any amounts required to be withheld by the Company from time to time
under applicable Federal, State or local income or employment tax laws or
similar statutes or other provisions of law then in effect.
m. Governing Law. This Agreement shall be governed by the
laws of the State of Connecticut, without reference to principles of conflicts
or choice of law under which the law of any other jurisdiction would apply.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and Executive has hereunto set her hand
as of the day and year first above written.
Aetna Life and Casualty Company
/s/ Ronald E. Compton
---------------------------------------
Ronald E. Compton
Chairman
/s/ Frolly Boyd
---------------------------------------
Frolly M. Boyd
Date: 6/21/96
---------------
Page 21
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>3
<FILENAME>y45723ex10-25.txt
<DESCRIPTION>MEMORANDUM AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.25
INTEROFFICE COMMUNICATION
[AETNA LOGO]
MARY ANN CHAMPLIN
Senior Vice President
Aetna Human Resources, RC3A
(860) 273-8371
Fax: (860) 560-8721
To Frolly M. Boyd
Date June 7, 1996
Subject Employment Agreement
This memorandum is to confirm that with respect to the employment agreement
between you and Aetna dated as of May 7, 1996, Aetna hereby agrees to extend the
60 day written notice requirement set forth in Section 6(d), "Termination for
Good Reason", until May 7, 1997.
In addition, in the event Aetna terminates your employment under circumstances
which call for the payment of Severance Benefits under your employment
agreement, you will be eligible to elect into retiree medical and/or retiree
dental benefits one time after you reach age 50. Your one-time election must be
done prior to age 65 and will be in force on the next January 1 or July 1 for
the plans then in effect. No evidence of insurability will be required. You will
be required to pay 100% of the monthly medical and/or dental premium each month
(i.e., without any contribution of premium by Aetna). If you die before electing
coverage, your spouse and eligible dependents may enroll under the same
conditions. Please note that Aetna reserves the right to amend or eliminate
retiree health and/or retiree dental benefits at anytime.
If the foregoing is acceptable to you, please sign both of the original copies
of this agreement in the space indicated below and return one of the signed
originals to me.
/s/ Mary Ann Champlin
Agreed to and Accepted:
/s/ Frolly Boyd 6/21/96
- ---------------------------------- -----------------------------
Frolly M. Boyd
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>4
<FILENAME>y45723ex10-26.txt
<DESCRIPTION>LETTER TO FROLLY M BOYD FROM FORMER AETNA
<TEXT>
<PAGE> 1
EXHIBIT 10.26
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156-3124
ELEASE E. WRIGHT
Senior Vice President
Aetna Human Resources, RC3A
June 19, 2000 (860) 273-8371
Fax: (860) 560-8721
VIA HAND DELIVERY
Frolly M. Boyd
149 4th Avenue
Milford, CT 06460
Re: EMPLOYMENT AGREEMENT
Dear Frolly:
This letter is to confirm the discussions we have had regarding the status of
your employment agreement with Aetna Inc. (the "Company") dated as of May 7,
1996 (the "Employment Agreement"). This letter shall constitute the Company's
notice not to extend the Contract Employment Period. On December 31, 2000, the
Contract Employment Period shall expire and your employment with the Company
shall continue thereafter on an at-will basis. As provided in the Employment
Agreement, the Company's non-renewal of the Contract Employment Period shall not
be considered a Termination Without Cause or a Termination for Good Reason. All
terms not defined herein shall have the same meanings as set forth in the
Employment Agreement.
Respectfully,
AETNA INC.
By: /s/ Elease E. Wright
---------------------------------------
Elease E. Wright
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.32
<SEQUENCE>5
<FILENAME>y45723ex10-32.txt
<DESCRIPTION>RESTRICTIVE COVENANT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.32
RESTRICTIVE COVENANT AGREEMENT
I, Alan J. Weber, an executive of Aetna Inc. and one or more of its subsidiaries
and affiliates (collectively, the "Company"), in consideration for the
compensation arrangements outlined in the employment offer letter dated June 11,
1998 from Richard L. Huber, and other good and sufficient consideration, and
acknowledging the Company's reliance upon my commitments and obligations herein,
hereby agree as follows:
1. I covenant and agree that so long as I am employed with the Company and
for a period of one year after my resignation, the termination of my
employment with the Company or my negotiated departure from employment
with the Company, I shall not become associated, whether as a principal,
partner, employee, consultant or shareholder (other than as a holder of
not in excess of 1% of the outstanding voting shares of any publicly
traded company), with any entity that is actively engaged in any
geographic area in any business which is in substantial and direct
competition with the business or businesses of the Company for which I
provided substantial services or for which I had substantial
responsibility within the previous 24 months, provided that nothing in
this paragraph shall preclude me from performing services solely and
exclusively for a division or subsidiary of such entity that is engaged in
a non-competitive business.
2. Notwithstanding the foregoing, in the event my employment is terminated by
the Company under circumstances entitling me to either salary continuance
or severance payments by the Company, Paragraph 1 shall not apply.
3. I covenant and agree that during my employment and for a period of two
years after my employment with the Company has been terminated for any
reason, whether with or without cause and whether voluntarily or
involuntarily, I shall not attempt, directly or indirectly, (i) to induce
any employee, insurance agent, broker dealer, financial planner,
registered principal or representative, health care provider, or other
supplier of the Company, or any subsidiary or any affiliate thereof to be
employed or perform services elsewhere; (ii) to induce any insurance agent
or agency, broker-dealer, financial planner, registered principal or
representative, health care provider, or other supplier of the Company, or
any subsidiary or affiliate thereof to cease providing services to the
Company, or any subsidiary or affiliate thereof; and (iii) to solicit, on
behalf of any person or entity other than the Company or any of its
subsidiaries or affiliates, the trade of any individual or entity which,
at the time of the solicitation, is a customer of the Company, or any
subsidiary or affiliate thereof, or which the Company, or any subsidiary
or affiliate thereof is undertaking reasonable steps to procure as a
customer at the time of or immediately preceding termination of
employment; provided, however, that this
Page 1
<PAGE> 2
limitation in (iii) shall only apply to any product or service which is in
competition with a product or service of the Company or any subsidiary or
affiliate thereof.
4. I acknowledge and agree that, during the course of my employment with the
Company, I will learn and have access to the Company's trade secrets,
confidential information, and proprietary materials which may include but
is not limited to methods, procedures, computer programs, databases,
customer lists and identities, provider lists and identities, employee
lists and identities, processes, premium and other pricing information,
research, payment rates, methodologies, contractual forms, and other
information which is not publicly available generally and which has been
developed or acquired by the Company with considerable effort and expense.
I covenant and agree to hold all of the foregoing trade secrets,
confidential information and proprietary materials in the strictest
confidence and shall not disclose, divulge or reveal the same to any
person or entity during the term of my employment with the Company or at
any time thereafter.
5. I understand that either I or the Company may terminate our employment
relationship at any time, with or without cause. Upon such termination, I
shall immediately return to the Company all Company property,
documentation, trade secrets, confidential information and proprietary
materials in my possession, custody or control, and shall return any
copies thereof. After termination of my employment with the Company, I
further agree to cooperate reasonably with all matters requested by the
Company within the scope of my employment with the Company. The Company
agrees and acknowledges that it shall, to the maximum extent possible
under the then prevailing circumstances, coordinate, or cause a subsidiary
or affiliate thereof to coordinate any such request with my other
commitments and responsibilities to minimize the degree to which such
request interferes with such commitments and responsibilities and agrees
that it will reimburse me for reasonable travel expenses (i.e., travel,
meals and lodging) that I may incur in providing assistance to the Company
hereunder.
6. The purpose of this Agreement, among other things, is to protect the
Company from unfair or inappropriate competition and to protect its trade
secrets and confidential information.
7. I acknowledge that compliance with this agreement is necessary to protect
the business and good will of the Company and that any actual or
prospective breach will irreparably cause damage to the Company for which
money damages may not be adequate. I therefore agree that if I breach or
attempt to breach this Agreement, the Company shall be entitled to obtain
temporary, preliminary and permanent equitable relief, without bond, to
prevent irreparable harm or injury, and to money damages, together with
any and all other remedies available under applicable law. I understand
that I shall be liable to pay the Company's reasonable attorneys' fees and
costs in any successful action to enforce this agreement. I further agree
that a temporary restraining order and preliminary injunction can be
obtained without personal service on me if I cannot be located at the last
address I have provided to the Company. I acknowledge that in the event my
employment with the Company terminates, I will still be able to earn a
livelihood without violating this agreement.
Page 2
<PAGE> 3
8. This Agreement shall be construed in accordance with the laws of
Connecticut.
9. This Agreement constitutes the entire understanding and agreement between
the parties with respect to the subject matter hereof, and no verbal or
other statements, inducements or representations have been made or relied
upon by any party. No modifications or change hereby shall be binding upon
any party unless in writing executed by all parties.
10. I acknowledge that the Company is relying upon my foregoing commitments
and obligations in revealing trade secrets and confidential information to
me and in making salary, bonus and/or any other payments to me.
IN WITNESS WHEREOF, the parties, intending to be legally bound, state that they
understand this agreement, enter into it freely, and have duly executed it
below.
Executed by: Accepted by:
EXECUTIVE AETNA INC.
/s/ Alan J. Weber By /s/ Richard L. Huber
- ------------------------- -----------------------------
Alan J. Weber
6/13/98 6/11/98
- ------------------------- ---------------------------------
(Date) (Date)
Page 3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>6
<FILENAME>y45723ex12.txt
<DESCRIPTION>STATEMENT RE COMPUTATION OF RATIOS
<TEXT>
<PAGE> 1
Exhibit 12
AETNA INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------------------------
(Millions) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pretax income (loss) from
continuing operations $ (39.0)(1) $ 744.8 $ 842.0 $ 979.6 $ (29.6)(2)
Add back fixed charges 360.9 322.3 291.7 287.5 204.7
- --------------------------------------------------------------------------------------------------------------------------
Income as adjusted $ 321.9 $1,067.1 $1,133.7 $1,267.1 $ 175.1
==========================================================================================================================
Fixed charges:
Interest on indebtedness $ 248.2 $ 232.7 $ 206.2 $ 213.9 $ 141.0
Portion of rents representative
of interest factor 112.7 89.6 85.5 73.6 63.7
- --------------------------------------------------------------------------------------------------------------------------
Total fixed charges $ 360.9 $ 322.3 $ 291.7 $ 287.5 $ 204.7
==========================================================================================================================
Preferred stock dividend
Requirements (3) - 56.9 103.4 103.4 51.2
- --------------------------------------------------------------------------------------------------------------------------
Total combined fixed charges
and preferred stock dividend
requirements (3) $ 360.9 $ 379.2 $ 395.1 $ 390.9 $ 255.9
==========================================================================================================================
Ratio of earnings to fixed
charges 0.89(1) 3.31 3.89 4.41 0.86(2)
==========================================================================================================================
Ratio of earnings to combined
fixed charges and preferred
stock dividends 0.89(1) 2.81 2.87 3.24 0.68(2)
==========================================================================================================================
</TABLE>
(1) Pretax loss from continuing operations reflects a goodwill write-off of
$310.2 million, a severance and facilities charge of $142.5 million and
$57.8 million of change-in control related payments and other costs
required to effect the spin-off of the Company from former Aetna.
Additional pretax income from continuing operations necessary to achieve
both a ratio of earnings to fixed charges of 1.0 and a ratio of earnings
to combined fixed charges and preferred stock dividends of 1.0, was
approximately $39.0 million.
(2) Pretax loss from continuing operations reflects a severance and
facilities charge of $801.7 million. Additional pretax income from
continuing operations necessary to achieve a ratio of earnings to fixed
charges of 1.0 was approximately $29.6 million. Additional pretax income
from continuing operations necessary to achieve a ratio of earnings to
combined fixed charges and preferred stock dividends of 1.0 was
approximately $80.8 million.
(3) Although the Company did not pay preferred stock dividends, preferred
stock dividends paid by former Aetna have been included for purposes of
this calculation for the years ending December 31, 1996, 1997, 1998 and
1999 (through the redemption date of July 19, 1999), as the preferred
stock issued by former Aetna was issued in connection with the
acquisition of U.S. Healthcare Inc. in 1996.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>7
<FILENAME>y45723ex13.txt
<DESCRIPTION>ANNUAL REPORT TO SECURITYHOLDERS
<TEXT>
<PAGE> 1
Exhibit 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses the financial condition of Aetna Inc. and its subsidiaries
as of December 31, 2000 and 1999, and its results of operations for 2000, 1999
and 1998. This Management's Discussion and Analysis should be read in its
entirety, since it contains detailed information that is important to understand
Aetna Inc. and its subsidiaries' results and financial condition.
OVERVIEW
General
The consolidated financial statements include Aetna Inc. (a Pennsylvania
corporation) and its wholly owned subsidiaries (collectively, the "Company").
Prior to December 13, 2000, the Company (formerly Aetna U.S. Healthcare Inc.)
was a subsidiary of a Connecticut corporation named Aetna Inc. ("former Aetna").
On December 13, 2000, former Aetna spun the Company off to its shareholders and,
as part of the same transaction, the remaining entity, which contained former
Aetna's financial services and international businesses, was merged into a
subsidiary of ING Groep N.V. ("ING") (collectively, the "Transaction"). (Refer
to Note 19 of Notes to Consolidated Financial Statements.) The financial
services and international businesses are reflected as discontinued operations,
since the Company is the successor of former Aetna for accounting purposes.
Refer to "Results of Discontinued Operations" for additional details.
The Company's core business is now its Health Care operations. Health Care
consists of the following products: health and dental plans offered on a full
risk basis and The Prudential Insurance Company of America's ("Prudential")
administrative services only ("ASO") business (which includes certain
supplemental fees) (included in the product grouping Health Risk, which also
includes the acquired Prudential health care business ("PHC")). Health plans
include health maintenance organization ("HMO"), point-of-service ("POS"),
preferred provider organization ("PPO") and indemnity benefit products. Other
products included in Health Care are group life and disability insurance and
long-term care insurance, offered on both a full risk and employer-funded basis,
and all health plans offered on an employer-funded basis, excluding the
Prudential ASO business (included in the product grouping Group Insurance and
Other Health). Refer to "Acquisitions and Dispositions" for more information on
the acquisition of PHC.
The Company also has a Large Case Pensions business that manages a variety of
retirement products (including pension and annuity products) primarily for
defined benefit and defined contribution plans. These products provide a variety
of funding and benefit payment distribution options and other services.
Strategic Repositioning
On February 25, 2000, William H. Donaldson became Chairman, President and Chief
Executive Officer of former Aetna. At that time, former Aetna began a
comprehensive review of its health care business model and began to implement a
number of strategic and operational initiatives and other actions focused on,
among other things, strengthening management of the business, improving
relations with health care providers, exiting certain product markets,
addressing rising medical costs and improving the efficiency of operations.
Also, as described above, former Aetna spun the Company off to its shareholders
and as part of the same transaction, the remaining entity, which contained
former Aetna's financial services and international businesses, was merged into
a subsidiary of ING. On September 15, 2000, John W. Rowe, M.D. became the new
President and Chief Executive Officer of the Company's Health Care business and
a member of its board of directors. Upon consummation of the Transaction on
December 13, 2000, Mr. Donaldson became Chairman of the Company and Dr. Rowe
became its President and Chief Executive Officer.
Page 1
<PAGE> 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
OVERVIEW (CONTINUED)
As a result of this business review, during 2000 the Company announced, among
other things:
- - Changes in certain states to provide physicians with additional choices in
product participation and financial compensation and to clarify how
medical necessity and coverage decisions are made, and that the Company
was continuing a state-by-state review of all of its provider
arrangements.
- - The exit, effective January 1, 2001, of a number of Medicare service areas
affecting approximately half of its Medicare membership, and plans to
improve or selectively discontinue offerings in certain commercial
markets.
Also, on December 18, 2000, the Company announced:
- - Expense-reduction initiatives associated with targeted membership
reductions;
- - The reorganization of its sales force to place greater emphasis on
higher-potential middle-market business and to more efficiently serve
smaller cases, while enhancing the Company's customer relationships and
important national accounts franchise, and to result in a sales
organization that is designed to be smaller but more effective at both
selling and retaining business;
- - Initiatives to improve the efficiency of the claims payment and other
member services processes;
- - The continued integration of the acquired PHC business;
- - The integration and elimination of duplicate staff functions;
- - Significant price increases on health plan business renewing on January 1,
2001; and
- - An initiative to reform medical cost management practices designed to
eliminate unnecessary administrative practices and ineffective
requirements, while strengthening responsible and effective practices.
As a result of certain of these actions, the Company recorded a severance and
facilities charge of $93 million after tax in the fourth quarter of 2000. (Refer
to "Severance and Facilities Charge" for more information.) In addition, the
Company recorded a charge of $238 million after tax in the fourth quarter of
2000 related to the write-off of goodwill, primarily associated with the
Medicare service area exits. Refer to "Health Care - Medicare HMO" for more
details on the Medicare exit and related write-off of goodwill and "Health Care
- - Outlook" and "Forward-Looking Information/ Risk Factors" for information
regarding other important factors relating to the strategic repositioning that
may materially affect the Company.
Consolidated Results
The Company reported net income of $127 million in 2000, $717 million in 1999
and $847 million in 1998. The Company reported a loss from continuing operations
of $127 million in 2000 and income from continuing operations of $399 million in
1999 and $450 million in 1998. Loss from continuing operations per common share
was $.90 in 2000, and income from continuing operations per diluted common share
was $2.54 in 1999 and $2.72 in 1998. Net income includes income from
discontinued operations of $255 million in 2000, $317 million in 1999 and $396
million in 1998. (Refer to "Results of Discontinued Operations" for more
information.)
Loss from continuing operations in 2000 includes the charge of $238 million
related to the write-off of goodwill, the severance and facilities charge of $93
million and costs of $38 million resulting from change in control-related
payments and other costs required to effect the spin-off of the Company from
former Aetna. Income or loss from continuing operations also includes a
reduction of the reserve for anticipated future losses on discontinued products
for Large Case Pensions of $95 million in 2000, $50 million in 1999 and $44
million in 1998. Excluding these items and net realized capital gains or losses
in all three years, results from continuing operations would have been income of
$161 million in 2000, $328 million in 1999 and $217 million in 1998.
Page 2
<PAGE> 3
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
OVERVIEW (CONTINUED)
The consolidated financial statements have been prepared using the historical
basis of the assets and liabilities and historical results of operations of the
Health Care and Large Case Pensions businesses. Additionally, the consolidated
financial statements include allocations of certain assets and liabilities
(including prepaid pension assets, debt and benefit obligations, pension and
post-retirement benefits) and expenses (including interest), previously recorded
by former Aetna, to the Health Care and Large Case Pensions businesses of the
Company, as well as those businesses presented as discontinued operations.
Management believes these allocations are reasonable. Accordingly, the financial
information included herein may not necessarily be indicative of the
consolidated results of operations, financial position, changes in shareholders'
equity and cash flows of the Company had it been a separate, independent company
during the periods presented.
Certain reclassifications have been made to the 1999 and 1998 financial
information to conform to the 2000 presentation.
Acquisitions and Dispositions
Sale of NYLCare Texas
In connection with the PHC acquisition discussed below, the Company agreed with
the U.S. Department of Justice and the State of Texas to divest NYLCare Texas,
which was acquired by the Company as part of the 1998 acquisition of NYLCare
also discussed below. Pursuant to this agreement, on March 31, 2000, the Company
completed the sale of NYLCare Texas to Blue Cross and Blue Shield of Texas, a
division of Health Care Service Corporation, for approximately $420 million in
cash. The sale included approximately 463,000 Commercial HMO risk members;
52,000 Commercial HMO nonrisk members; and 5,000 PPO members in the Houston,
Austin, San Antonio, Corpus Christi, Beaumont, Dallas-Fort Worth, San Angelo,
Texarkana and Amarillo areas. The Company retained approximately 127,000 NYLCare
Medicare members in Texas through a reinsurance and administrative services
agreement. The sale resulted in a capital loss of approximately $35 million
after tax, which was recognized in the fourth quarter of 1999. The results of
operations of NYLCare Texas were not material to the Company's consolidated
results of operations.
Acquisition of Prudential Health Care Business
On August 6, 1999, the Company acquired PHC from Prudential for approximately $1
billion. Included in the acquisition were PHC's risk HMO, POS, PPO and Indemnity
health lines, as well as its dental risk business. The transaction was financed
by issuing $500 million of three-year senior notes to Prudential and by using
funds made available from the issuance of commercial paper. Refer to "Liquidity
and Capital Resources" for further information. The Company also agreed to
service Prudential's ASO business following the PHC closing. Since the closing,
the Company's results have been affected by, among other things, the operating
results of PHC, the costs of financing the transaction and the amortization of
goodwill and other acquired intangible assets created as a result of the
transaction. The operations and related amortization of intangible assets of PHC
are reflected in the Health Care segment, while the financing costs of the
acquisition are reflected in Corporate. Refer to "Health Care", "Corporate" and
Note 4 of Notes to Consolidated Financial Statements for further discussion.
Page 3
<PAGE> 4
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
OVERVIEW (CONTINUED)
Acquisition of NYLCare Health Business
In July 1998, the Company acquired NYLCare. The total purchase price was
approximately $1.1 billion. Since the closing, the Company's results have been
affected by, among other things, the operating results of NYLCare, the costs of
financing the transaction and the amortization of intangible assets (primarily
goodwill) created as a result of the transaction. The operations and related
amortization of intangible assets of NYLCare are reflected in the Health Care
segment, while the financing costs of the acquisition are reflected in
Corporate. Refer to "Health Care" and "Corporate" for further discussion.
Other
As a result of the previously discussed initiatives and actions being
implemented by the Company relating to its strategic repositioning, the Company
is reorganizing its internal organization for making operating decisions and
assessing performance. Accordingly, Group Insurance, which currently is included
in the Health Care segment under the product grouping "Group Insurance and Other
Health", will be reported as a separate segment beginning in the first quarter
of 2001. At that time, the Company will report results in three business
segments: Health Care, Group Insurance and Large Case Pensions, consistent with
the Company's internal organization.
HEALTH CARE
Operating Summary
<TABLE>
<CAPTION>
(Millions) 2000 1999(1) 1998(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Health care premiums $ 21,746.6 $ 17,145.7 $ 11,691.1
Other premiums 1,328.6 1,376.9 1,315.1
Administrative services only fees 1,925.9 1,674.5 1,270.7
Net investment income 712.2 612.8 537.2
Other income 60.8 82.8 170.4
Net realized capital gains (losses) (41.8) (4.7) 134.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 25,732.3 20,888.0 15,119.4
- ------------------------------------------------------------------------------------------------------------------------------------
Health care costs 18,884.1 14,641.0 10,012.9
Current and future benefits 1,216.2 1,249.7 1,173.6
Salaries and related benefits 2,232.0 1,796.8 1,251.5
Other operating expenses 2,442.8 1,977.7 1,501.1
Amortization of goodwill and other acquired intangible assets 435.6 420.4 381.3
Goodwill write-off 310.2 - -
Severance and facilities charge 127.3 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 25,648.2 20,085.6 14,320.4
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 84.1 802.4 799.0
Income taxes 126.7 365.1 368.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (42.6) $ 437.3 $ 431.0
====================================================================================================================================
Net realized capital gains (losses), net of tax (included above) $ (15.6) $ (22.4) $ 88.2
====================================================================================================================================
</TABLE>
(1) Results include PHC since August 6, 1999, including results from servicing
Prudential's ASO contracts following the acquisition.
(2) Results include NYLCare since July 15, 1998, including NYLCare Texas,
which the Company sold on March 31, 2000.
Results
Health Care's net loss for 2000 decreased $480 million from 1999 net income,
which increased $6 million from 1998.
Page 4
<PAGE> 5
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HEALTH CARE (CONTINUED)
The table presented below identifies certain items excluded from net income or
loss to arrive at operating earnings, which management believes provides a
comparison more reflective of Health Care's performance.
<TABLE>
<CAPTION>
(Millions) 2000 1999(1) 1998(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (42.6) $ 437.3 $ 431.0
Other items included in net income (loss):
Amortization of goodwill and other acquired intangible assets 350.4 339.5 311.9
Goodwill write-off 238.3 -- --
Severance and facilities charge 82.7 -- --
Change in control-related costs 27.3 -- --
Realized capital (gains) losses 15.6 22.4 (88.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 671.7 $ 799.2 $ 654.7
====================================================================================================================================
Health Risk and PHC $ 355.3 $ 505.1 $ 334.2
Group Insurance and Other Health 316.4 294.1 320.5
- ------------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 671.7 $ 799.2 $ 654.7
====================================================================================================================================
Commercial HMO Premium PMPM $ 150.14 $ 138.58 $ 134.68
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial HMO Medical Cost PMPM $ 129.58(3) $ 115.77(3) $ 111.08
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial HMO Medical Cost Ratio 86.3%(3) 83.5%(3) 82.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Medicare HMO Premium PMPM $ 535.44 $ 491.21 $ 474.67
- ------------------------------------------------------------------------------------------------------------------------------------
Medicare HMO Medical Cost PMPM $ 519.25(3) $ 453.30(3) $ 441.63
- ------------------------------------------------------------------------------------------------------------------------------------
Medicare HMO Medical Cost Ratio 97.0%(3) 92.3%(3) 93.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Results include PHC since August 6, 1999, including results from servicing
Prudential's ASO contracts following the acquisition.
(2) Results include NYLCare since July 15, 1998, including NYLCare Texas,
which the Company sold on March 31, 2000.
(3) Does not include recoveries under a reinsurance agreement with Prudential
or the net amortization of certain fair value amounts established as part
of the PHC purchase accounting. The reinsurance agreement does not cover
periods following December 31, 2000. Refer to "PHC Agreement" below.
Health Risk and PHC
Health Risk and PHC operating earnings decreased $150 million in 2000 and
increased $171 million in 1999. The decrease in 2000 reflects significantly
higher medical costs in both Commercial and Medicare HMO products, severance
costs of $46 million relating to actions completed prior to the severance and
facilities charge announced on December 18, 2000 (primarily related to PHC) and
the New Jersey assessment discussed below. The decrease in 2000 also reflects
unfavorable development in the Medicare HMO business related to the resolution
or termination of certain provider contracts, which was more than offset by a
favorable development related to a government plan arrangement. Partially
offsetting the decrease in 2000 results was an increase in net investment
income, primarily due to a larger portfolio resulting from the inclusion of PHC
for a full year, as well as a higher average yield on the investment portfolio.
The increase in 1999 earnings primarily reflects HMO membership growth, improved
Medicare HMO results due to the exiting of several Medicare markets as of
January 1, 1999, and the addition of PHC since August 6, 1999, including the
benefit of supplemental fees for servicing Prudential's ASO customers and net
recoveries under a reinsurance agreement with Prudential discussed below,
partially offset by increased medical costs. The 1999 results also include a
full year of NYLCare results.
Page 5
<PAGE> 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HEALTH CARE (CONTINUED)
Health Care Costs Payable
For Health Risk and PHC, health care costs payable reflect estimates of the
ultimate cost of claims that have been incurred but not yet reported or reported
but not yet paid. Health care costs payable are estimated periodically, and any
resulting adjustments are reflected in the current-period operating results
within health care costs. Health care costs payable are based on a number of
factors, including those derived from historical claim experience. An extensive
degree of judgment is used in this estimation process, considerable variability
is inherent in such estimates, and the adequacy of the estimate is highly
sensitive to changes in medical claims payment patterns and changes in medical
cost trends. A worsening (or improvement) of medical cost trend or changes in
claim payment patterns from those that were assumed in estimating health care
costs payable at December 31, 2000 would cause these estimates to change in the
near term, and such change could be material.
Commercial HMO
Commercial HMO premium per member per month ("PMPM") increased 8.3% in 2000,
when compared to 1999, and 2.9% in 1999, when compared to 1998. These increases
were due to premium rate increases on renewing business, offset in part by a
shift in the geographic mix of membership and customers selecting lower premium
plans.
Commercial HMO medical costs PMPM increased 11.9% in 2000, when compared to
1999, and 4.2% in 1999, when compared to 1998. The increase in 2000 reflects
higher medical costs primarily due to higher utilization. While the specific
factors vary in importance by local market, the major drivers of the increase in
utilization include an increase in inpatient utilization and more emergency room
visits and outpatient diagnostic procedures as well as increased costs for
physician-administered injectables. The increase in 1999 reflects higher medical
costs, primarily pharmacy, due to medical cost inflation and increased
utilization, partially offset by medical cost initiatives.
The Commercial HMO medical cost ratio was 86.3% for 2000, compared to 83.5% for
1999 and 82.5% for 1998. The increases in 2000 and 1999 were the result of the
increased medical costs outpacing premium increases, as discussed above.
Medicare HMO
Medicare HMO premiums PMPM increased by 9.0% in 2000, when compared to 1999, and
3.5% in 1999, when compared to 1998. These increases were due to increases in
supplemental premiums and Health Care Financing Administration ("HCFA") rate
increases partially offset, in 1999, by a shift in the geographic mix of
membership.
Medicare HMO medical costs PMPM increased by 14.5% in 2000, when compared to
1999, and 2.6% in 1999, when compared to 1998. The increase in 2000 reflects
higher medical costs resulting primarily from increased inpatient utilization.
The increase in 1999 reflects higher medical costs partially offset by the
favorable impact of exiting several markets as of January 1, 1999. The higher
medical costs in 1999 primarily were due to higher pharmacy, physician and
outpatient utilization and medical cost inflation.
The Medicare HMO medical cost ratio was 97.0% in 2000, compared to 92.3% for
1999 and 93.0% for 1998. The increase in 2000 reflects the increased medical
costs discussed above outpacing supplemental premiums and HCFA rate increases,
primarily in the markets the Company exited, effective January 1, 2001. The
medical cost ratio for the exited service areas was approximately 102.5% in 2000
and 97.1% in 1999. The medical cost ratio for the remaining Medicare service
areas, which the Company did not exit, was approximately 91.4% in 2000 and 88.7%
in 1999. The decrease in 1999, when compared to 1998, reflects the favorable
impact of exiting several markets, effective January 1, 1999.
Page 6
<PAGE> 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HEALTH CARE (CONTINUED)
The Company's Medicare+Choice contracts with the federal government are renewed
for a one-year period each January 1. In June 2000, the Company notified HCFA of
its intent to exit a number of Medicare service areas. The Company subsequently
monitored legislative or regulatory changes that might have increased payments
under applicable Medicare+Choice contracts sufficient to encourage the Company
to remain in these services areas within six months following its notification,
as allowed under HCFA regulations. As a result of insufficient increases in
payments, the Company made a final determination within the six-month period
(specifically the fourth quarter of 2000), as permitted under HCFA regulations,
to exit a number of Medicare service areas. The Medicare+Choice contracts in
such service areas were terminated on December 31, 2000. Accordingly, as of
January 1, 2001, the Company exited a number of Medicare service areas,
affecting approximately 260,000 members, or approximately 47 percent of the
Company's total Medicare membership at December 31, 2000. In the fourth quarter
of 2000, the Company recorded a charge of approximately $194 million after tax
($266 million pretax) for the write-off of goodwill that was still separately
identifiable with such service areas. Refer to "Severance and Facilities Charge"
for discussion of other charges associated with, among other matters, the exit
of these Medicare service areas.
PHC Agreement
Effective August 6, 1999, the Company and Prudential entered into a reinsurance
agreement for which the Company paid a premium. Under the agreement, Prudential
agreed to indemnify the Company from certain health insurance risks that arise
following the closing by reimbursing the Company for 75% of medical costs (as
calculated under the agreement) of PHC in excess of certain threshold medical
costs ratio levels through 2000 for substantially all the acquired medical and
dental risk business. The medical costs ratio threshold was 83.5% for August 6,
1999 through December 31, 1999 and 84% for January 1, 2000 through December 31,
2000. For the year ended December 31, 2000 and the period August 6, 1999 through
December 31, 1999, reinsurance recoveries under this agreement were $135 million
pretax and $74 million pretax, respectively. Results were negatively impacted by
$15 million pretax for the year ended December 31, 2000 and $16 million pretax
for the period August 6, 1999 through December 31, 1999 related to the net
amortization of: the reinsurance premium paid as part of the acquisition, the
fair value adjustment of the reinsurance agreement and the fair value adjustment
of the unfavorable component of the contracts underlying the acquired medical
risk business recorded as part of the acquisition. Such reinsurance recoveries
and net amortization were reflected in health care costs. This reinsurance
agreement ended on December 31, 2000, except that the agreement provides for a
period of time during which such medical cost reimbursements (as calculated per
the agreement) will be finalized, which is expected to be completed by the end
of 2001. Refer to Note 4 of Notes to Consolidated Financial Statements for
further discussion.
The Company also agreed to service Prudential's ASO contracts following the
closing. Prudential is terminating its ASO business and retained the Company to
service these contracts during the run off period, generally no later than June
30, 2001. Prudential ASO customers will remain Prudential members as long as the
contracts remain in force. The Company is maintaining personnel, systems and
other resources necessary to service the ASO business during the run off period,
as it was not feasible to segregate these operating assets from those purchased
in the PHC transaction. In exchange for servicing the ASO business, Prudential
is remitting fees received from its ASO members to the Company, as well as
paying certain supplemental fees. The supplemental fees are fixed in amount and
decline over a period ending 18 months following the closing. For the year ended
December 31, 2000, the Company recorded total fees for servicing the Prudential
ASO business of approximately $370 million pretax, including supplemental fees
of approximately $134 million pretax. Included in these supplemental fees is
amortization, related to the above-market compensation component of the ASO
supplemental fee arrangement, of $15 million pretax for the year ended December
31, 2000. During the period August 6, 1999 through December 31, 1999, the
Company recorded total fees for servicing the Prudential ASO business of
approximately $230 million pretax, including supplemental fees of approximately
$106 million pretax. Refer to Note 4 of Notes to Consolidated Financial
Statements.
Page 7
<PAGE> 8
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HEALTH CARE (CONTINUED)
Group Insurance and Other Health
Results for 2000, compared to 1999, reflect improved margins and higher
membership levels in the ASO business, partially offset by lower life results.
Results for 1999, compared to 1998, reflect higher operating expenses and
unfavorable life experience, partially offset by a full year of NYLCare results
and higher net investment income.
Membership
Health Care's membership was as follows:
<TABLE>
<CAPTION>
December 31, 2000(1) December 31, 1999 (1)
----------------------------- -----------------------------------
(Thousands) Risk Nonrisk Total Risk Nonrisk Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HMO
Commercial (2)(3) 7,759 869 8,628 8,716 727 9,443
Medicare (4) 549 - 549 703 - 703
Medicaid 150 94 244 172 75 247
- ------------------------------------------------------------------------------------------------------------------------------------
Total HMO 8,458 963 9,421 9,591 802 10,393
POS 341 3,397 3,738 397 3,528 3,925
PPO (3) 854 3,100 3,954 870 3,112 3,982
Indemnity 230 1,930 2,160 259 2,496 2,755
- ------------------------------------------------------------------------------------------------------------------------------------
Total Health Membership 9,883 9,390 19,273 11,117 9,938 21,055
====================================================================================================================================
Dental 14,251 15,253
- ------------------------------------------------------------------------------------------------------------------------------------
Group Insurance
Group Life 9,421 9,415
Disability 2,149 2,258
Long-Term Care 114 108
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Health membership at December 31, 1999 in thousands includes 5,093 PHC
members, including 1,688 (878 at December 31, 2000) Prudential ASO members
which Health Care agreed to service, and 8,000 PHC Dental members. There
were no Group Insurance PHC members.
(2) Commercial HMO in thousands includes POS members who access primary care
physicians and referred care through an HMO network of 1,892 at December
31, 2000 and 2,323 at December 31, 1999.
(3) Membership in thousands at December 31, 1999 includes 553 Commercial HMO
members and 12 PPO members of the NYLCare Texas operations sold on March
31, 2000.
(4) Membership in thousands at December 31, 2000 includes 260 Medicare members
affected by the Company's exit of a number of Medicare service areas,
effective January 1, 2001.
Total Health membership as of December 31, 2000 decreased by approximately 1.8
million members when compared to December 31, 1999, due to attrition in PHC
membership and the sale of NYLCare Texas.
Total Revenue and Expense
Revenue, excluding net realized capital gains or losses, increased $4.9 billion,
or 23% in 2000, and $5.9 billion, or 39%, in 1999. The 2000 revenue growth was
primarily due to the acquisition of PHC on August 6, 1999 and an increase in
rates, partially offset by PHC membership reductions. The 1999 revenue growth
was primarily due to the acquisition of PHC on August 6, 1999 and the
acquisition of NYLCare on July 15, 1998. Revenues in 1999 also grew as a result
of Commercial HMO membership growth and premium rate increases.
Page 8
<PAGE> 9
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HEALTH CARE (CONTINUED)
Net realized capital gains or losses for all periods presented includes capital
gains of approximately $39 million after tax resulting from contingent
consideration following the Company's 1997 sale of its behavioral health
subsidiary, Human Affairs International, Incorporated ("HAI"). The Company
records these amounts as they become realizable. Also during 2000, the Company
incurred capital losses resulting from the rebalancing of its investment
portfolio in a rising interest rate environment and the write down of certain
bonds, which together, more than offset the HAI capital gain. In 1999, the HAI
capital gain was more than offset by the recording of the estimated loss on the
sale of NYLCare Texas of $35 million and net realized capital losses from the
Company's rebalancing of its investment portfolio in a rising interest rate
environment. Net realized capital gains in 1998 reflects the HAI capital gain as
well as capital gains from the sale of bonds and equity securities. Refer to
"Overview" for further discussion of NYLCare Texas.
Operating expenses, including salaries and related benefits, increased $900
million, or 24%, in 2000 and $1.0 billion, or 37%, in 1999. The 2000 increase
reflects a full year of PHC operating expenses, severance costs of $82 million
relating to actions completed prior to the severance and facilities charge
announced on December 18, 2000 (primarily related to PHC) and change in
control-related amounts of $42 million. The 1999 increase reflects the
acquisition of PHC and NYLCare and increased costs to support the Commercial HMO
membership growth. Operating expenses, including salaries and related benefits,
as a percentage of revenue, excluding net realized capital gains or losses, was
18% for each of 2000, 1999 and 1998.
On April 6, 2000, the State of New Jersey enacted the New Jersey Insolvent
Health Maintenance Organization Assistance Fund Act of 2000 (the "Act"). The Act
is designed to reimburse individuals who were covered by and providers that had
contracts with two New Jersey HMOs prior to their insolvency. The total amount
to be assessed to all HMOs in New Jersey is $50 million. The Act requires that
HMOs in the New Jersey market be assessed a charge based on each HMO's
proportionate share of premiums written in New Jersey relative to all HMO
premiums written in New Jersey. The Company recorded an estimate of its share of
this assessment, based on its HMO market share in New Jersey, of $23 million
pretax ($15 million after tax) in the second quarter of 2000, included in
operating expenses.
Outlook
As discussed above, the Company has been undertaking a strategic repositioning
of its business and is taking significant actions designed to, among other
things, improve relations with providers, address medical costs (which rose
significantly in 2000) and improve the efficiency of its operations. As a
result, certain key actions and the Company's success in implementing them, and
other matters discussed below, are expected to be significant drivers of the
Company's 2001 financial performance.
Medical Costs/Pricing Actions. The Company is taking certain actions designed to
improve its medical cost ratios, while also undertaking initiatives to improve
relations with providers. The Company attempts to improve profitability through
price increases and, where appropriate, through utilization management
techniques. Premiums for full risk health plans are generally fixed for one-year
periods and, accordingly, cost levels in excess of future medical cost
projections reflected in pricing cannot be recovered in the contractual year
through higher premiums. The Company is seeking significant price increases for
2001 renewals to improve profitability. Slightly more than half of the Company's
Health Risk business renews on January 1, 2001 and a significant portion renews
on July 1, 2001. As a result, the Company cannot increase prices for a
significant portion of its 2001 business until later in the year. Medical cost
trend (the rate of increase in medical costs) rose significantly in 2000,
particularly in the later half of the year. For purposes of setting these price
increases, the Company projected that medical costs would continue to increase,
but at a rate of increase less than the rate of increase experienced recently.
There can be no assurances regarding the accuracy of medical cost projections
assumed for pricing purposes and if the rate of increase in medical costs
recently experienced were to continue in 2001, the Company's results would be
materially adversely affected.
Page 9
<PAGE> 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HEALTH CARE (CONTINUED)
Membership/Market Withdrawals. As a result of several actions the Company is
taking, it expects that total Health membership levels by year end 2001 will
decline approximately 10% from the December 31, 2000 level. Primarily as a
result of premium and fee increases, the Company expects attrition of
approximately 1.5 million Prudential health care members during 2001, including
administrative services only customers that it has agreed to service for
Prudential. Also, the Company is expecting reduced membership levels during
2001, as a result of its exit of certain Medicare service areas affecting
approximately 260,000 members and the anticipated exit of underperforming HMO
commercial products in certain markets, which is expected to affect
approximately 300,000 to 350,000 members. The membership reductions will affect
revenue, but also are expected to help reduce medical cost ratios as membership
expected to be lost generally have relatively high medical cost ratios.
Expense Initiatives. The Company is taking actions to reduce its work force by
approximately 5,000 positions, while at the same time attempting to improve
customer service and comply with important new privacy and other regulations.
Approximately half of this reduction is expected to be achieved through
attrition and approximately 2,400 employee positions (primarily regional sales
personnel, customer service, information technology and other staff-area
personnel) will be eliminated. (Refer to "Severance and Facilities Charge" for
additional details relating to employee positions to be eliminated.) The Company
also began to implement other cost-savings initiatives in 2000. As a result, the
Company projects that its overall selling, general and administrative expenses
for the health business (which include technology-related expenses discussed
below) will decline in 2001 as compared to 2000 levels. Due to anticipated
declines in membership and associated revenue, these expenses are projected to
increase as a percentage of revenue.
The United States Department of Health and Human Services has issued a series of
proposed regulations under the Health Insurance Portability and Accountability
Act ("HIPAA") relating to, among other things, standardized transaction formats
and the privacy of member health information. These regulations, only some of
which have been finalized, and any corresponding state legislation, will affect
the Company's administration of health and related benefit plans. The Company is
currently reviewing the potential impact of the proposed regulations on its
operations, including its information technology systems. The Company projects
that it will incur incremental technology related expenses of approximately $30
million pretax in connection with these regulations during 2001. The Company
expects that it will incur additional expenses and that its business could also
be adversely affected by these regulations in future periods. These additional
expenses and the impact on the Company's business could be material.
Group Insurance. The Company projects earnings in 2001 from Group Insurance
products to be approximately 10% to 15% lower than 2000 due to lower net
investment income and slightly lower disability results.
Refer to "Forward-Looking Information/Risk Factors" for information regarding
other important factors that may materially affect the Company.
Page 10
<PAGE> 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS
Operating Summary
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other premiums $ 139.7 $ 118.9 $ 122.7
Net investment income 902.2 982.5 1,152.5
Other income 25.8 46.2 31.2
Net realized capital gains 6.3 24.2 57.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,074.0 1,171.8 1,363.9
- ------------------------------------------------------------------------------------------------------------------------------------
Current and future benefits 937.3 981.3 1,122.4
Salaries and related benefits 16.8 19.8 19.6
Other operating expenses 8.2 11.5 17.5
Reductions of reserve for anticipated future losses on
discontinued products (146.0) (77.2) (68.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 816.3 935.4 1,091.5
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 257.7 236.4 272.4
Income taxes 92.3 85.4 102.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 165.4 $ 151.0 $ 169.9
====================================================================================================================================
Net realized capital gains, net of tax (included above) $ 4.5 $ 15.8 $ 37.4
====================================================================================================================================
Deposits (not included in premiums above):
Fully guaranteed discontinued products $ 7.8 $ 12.5 $ 17.7
Experience-rated 55.0 191.9 251.3
Nonguaranteed 509.8 579.2 950.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 572.6 $ 783.6 $ 1,219.2
====================================================================================================================================
Assets under management: (1)
Fully guaranteed discontinued products $ 5,490.0 $ 5,990.8 $ 6,737.9
Experience-rated 7,008.5 7,932.1 9,546.9
Nonguaranteed 11,294.1 12,028.7 12,120.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets under management $ 23,792.6 $ 25,951.6 $ 28,404.8
====================================================================================================================================
</TABLE>
(1) Excludes net unrealized capital gains of $108.1 million at December 31,
2000, net unrealized capital losses of $254.4 million at December 31, 1999
and net unrealized capital gains of $621.0 million at December 31, 1998.
Results
Large Case Pensions' net income increased $14 million in 2000 and decreased $19
million in 1999. As further discussed under "Discontinued Products", net income
includes discontinued products reserve releases of $95 million in 2000, $50
million in 1999 and $44 million in 1998 primarily due to favorable investment
performance. Excluding the discontinued products reserve releases and net
realized capital gains, results decreased $19 million in 2000 and $3 million in
1999. The 2000 and 1999 decreases continue to reflect the redeployment of
capital supporting this business. Assets under management decreased during 2000
and 1999. These decreases reflect the continuing run off of liabilities
underlying the business.
General account assets supporting experience-rated products (where the
contractholder, not the Company, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scheduled contract maturities and benefit payments (1) $ 870.7 $ 961.7 $935.5
Contractholder withdrawals other than scheduled contract maturities
and benefit payments (2) 220.4 489.2 431.8
Participant-directed withdrawals (2) 44.1 78.1 98.3
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes payments made upon contract maturity and other amounts
distributed in accordance with contract schedules.
(2) At December 31, 2000, approximately $741.0 million of experience-rated
pension contracts allowed for unscheduled contractholder withdrawals,
subject to timing restrictions and formula-based market value adjustments.
Further, approximately $1.7 billion of experience-rated contracts
supported by general account assets could be withdrawn or transferred to
other plan investment options at the direction of plan participants,
without market value adjustment, subject to plan, contractual and income
tax provisions.
Page 11
<PAGE> 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
Outlook
Large Case Pensions earnings are projected to decline in 2001 as a result of the
continuing run off of underlying liabilities.
Refer to "Forward-Looking Information/Risk Factors" for information regarding
other important factors that may materially affect Large Case Pensions.
Discontinued Products
The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. The Company established a reserve for anticipated future
losses on these products based on the present value of the difference between
the expected cash flows from the assets supporting these products and the cash
flows expected to be required to meet the product obligations.
Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that future losses on the products are greater than anticipated and positively
affected to the extent future losses are less than anticipated.
The factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss, realized capital gains or losses and mortality
gains or losses. Operating income or loss is equal to revenue less expenses.
Realized capital gains or losses reflect the excess (deficit) of sales price
over (below) the carrying value of assets sold. Mortality gains or losses
reflect the mortality and retirement experience related to SPAs. A mortality
gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than
expected. A retirement gain will occur on some contracts if an annuitant retires
later than expected (a loss if an annuitant retires earlier than expected).
The results of discontinued products were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest deficit (1) $ (10.2) $ (18.3) $ (22.7)
Net realized capital gains (losses) (18.3) (7.8) 75.8
Interest earned on receivable from continuing products 19.6 21.3 22.4
Other, net 9.7 12.4 3.6
- ------------------------------------------------------------------------------------------------------------------------------------
Results of discontinued products, after tax $ 0.8 $ 7.6 $ 79.1
====================================================================================================================================
Results of discontinued products, pretax $ (2.2) $ 10.7 $ 130.4
====================================================================================================================================
Net realized capital gains (losses) from sales of bonds, after tax (included above) $ (58.3) $ (21.5) $ 52.5
====================================================================================================================================
</TABLE>
(1) The interest deficit is the difference between earnings on invested assets
and interest credited to contractholders.
The interest deficit for 2000 improved compared to 1999 primarily as a result of
higher investment income on equity securities. The interest deficit for 1999
remained relatively level compared to 1998. The 2000 and 1999 net realized
capital losses primarily are due to losses on bonds resulting from the higher
interest rate environment, partially offset by gains on the sale of equities.
The 1998 net realized capital gains reflect gains of $28 million related to
continued favorable developments in real estate markets, as well as gains of $53
million from the sale of bonds.
At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $389 million at December 31, 2000 and
$464 million at December 31, 1999, net of related deferred taxes payable.
Page 12
<PAGE> 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates, as well as the
cost of asset management and customer service. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.
The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. Since 1997, a
bond default assumption has been included to reflect historical default
experience, since the bond portfolio increased as a percentage of the overall
investment portfolio and reflected more bond credit risk, concurrent with the
decline in the commercial mortgage loan and real estate portfolios.
The previous years' actual participant withdrawal experience is used for the
current-year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's Mortality table,
which has been used since then.
The Company's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liability has run off.
The activity in the reserve for anticipated future losses on discontinued
products was as follows (pretax):
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
Reserve at December 31, 1997 $ 1,151.7
Operating loss (6.6)
Net realized capital gains 116.6
Mortality and other 20.4
Reserve reduction (68.0)
- --------------------------------------------------------------------------------
Reserve at December 31, 1998 1,214.1
Operating income 10.1
Net realized capital losses (11.9)
Mortality and other 12.5
Reserve reduction (77.2)
- --------------------------------------------------------------------------------
Reserve at December 31, 1999 1,147.6
Operating income 16.1
Net realized capital losses (31.1)
Mortality and other 12.8
Reserve reduction (146.0)
- --------------------------------------------------------------------------------
Reserve at December 31, 2000 $ 999.4
================================================================================
</TABLE>
Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $95 million ($146 million pretax) of the reserve was released
in 2000 primarily due to favorable performance related to certain equity
investments, favorable mortality and retirement experience and the decrease in
size of the overall bond portfolio, which decreased default risk. Primarily due
to favorable investment performance, $50 million ($77 million pretax) of the
reserve was released in 1999, and $44 million ($68 million pretax) of the
reserve was released in 1998. The current reserve reflects management's best
estimate of anticipated future losses.
Page 13
<PAGE> 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The anticipated run off of the December 31, 2000 reserve balance is as follows:
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
2001 $ 28.1
2002 28.5
2003 29.1
2004 29.7
2005 30.3
2006 - 2010 161.7
2011 - 2015 167.0
2016 - 2020 152.1
2021 - 2025 124.8
Thereafter 248.1
- --------------------------------------------------------------------------------
</TABLE>
The above table assumes that assets are held until maturity and that the reserve
run off is proportional to the liability run off.
The expected liability (as of December 31, 1993) and actual balances for the GIC
and SPA liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
Expected Actual
--------------------- -----------------------
(Millions) GIC SPA GIC SPA
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 2,029.6 $4,581.3 $1,546.0 $4,653.5
1999 1,214.5 4,472.1 902.1 4,566.0
2000 690.7 4,357.9 548.8 4,462.5
- --------------------------------------------------------------------------------
</TABLE>
The GIC balances were lower than expected in each period, as several
contractholders redeemed their contracts prior to contract maturity. The SPA
balances in each period were higher than expected because of additional amounts
received under existing contracts.
The discontinued products investment portfolio is as follows:
<TABLE>
<CAPTION>
(Millions) December 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------
Class Amount Percent Amount Percent
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities available for sale (1) $3,953.9 70.8% $4,533.0 77.2%
Loaned securities (2) 121.1 2.2 - -
Mortgage loans 784.1 14.0 768.8 13.1
Investment real estate 129.2 2.3 112.7 1.9
Equity securities 205.5 3.7 239.7 4.1
Other 389.6 7.0 214.2 3.7
- --------------------------------------------------------------------------------
Total $5,583.4 100.0% $5,868.4 100.0%
================================================================================
</TABLE>
(1) Amount includes restricted debt securities of $55.9 million at December
31, 2000 and $42.7 million at December 31, 1999 included in long-term
investments on the Consolidated Balance Sheets.
(2) Refer to Note 2 of Notes to Consolidated Financial Statements for further
discussion of the Company's securities lending program.
The investment portfolio has declined from 1999, as assets were used to pay off
contractual liabilities. As mentioned above, the investment portfolio has
changed since inception. Mortgage loans have decreased from $5.4 billion (37% of
the investment portfolio) at December 31, 1993 to their current level. This was
a result of maturities, prepayments and the securitization and sale of
commercial mortgages. Also, real estate decreased from $.5 billion (4% of the
investment portfolio) at December 31, 1993 to its current level, primarily as a
result of sales. The resulting proceeds were reinvested in debt and equity
securities.
Page 14
<PAGE> 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LARGE CASE PENSIONS (CONTINUED)
The change in the composition of the overall investment portfolio resulted in a
change in the quality of the portfolio since 1993. As the Company's exposure to
commercial mortgage loans and real estate has diminished, additional investment
return has been achieved by increasing the risk in the bond portfolio. At
December 31, 1993, 60% of the debt securities had a quality rating of AAA or AA,
and at December 31, 2000, 33% of the debt securities had a quality rating of AAA
or AA. However, management believes the level of risk in the total portfolio of
assets supporting discontinued products was lower at December 31, 2000 when
compared to December 31, 1993 due to the reduction of the portfolio's exposure
to mortgage loan and real estate investments.
Distributions on discontinued products were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scheduled contract maturities, settlements and benefit payments $ 917.8 $ 1,246.9 $ 1,433.5
Participant-directed withdrawals 9.6 14.9 21.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash required to fund these distributions was provided by earnings and scheduled
payments on, and sales of, invested assets.
At December 31, 2000, scheduled maturities, future benefit payments and other
expected payments, including future interest, were as follows:
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
2001 $ 842.1
2002 698.9
2003 554.8
2004 498.5
2005 484.2
2006 -- 2010 2,280.4
2011 -- 2015 1,958.4
2016 -- 2020 1,568.3
2021 -- 2025 1,169.4
Thereafter 1,938.9
- --------------------------------------------------------------------------------
</TABLE>
Refer to Note 10 of Notes to Consolidated Financial Statements and "Total
Investments" for additional information.
CORPORATE
Operating Summary
<TABLE>
<CAPTION>
(Millions, after tax) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $ 161.3 $ 151.3 $ 134.1
- --------------------------------------------------------------------------------
Salaries and related benefits 51.9 28.2 31.8
Other operating expenses, net 24.0 37.4 48.0
Severance and facilities charge 9.9 - -
Net realized capital losses (gains) 3.1 (28.0) (63.4)
- --------------------------------------------------------------------------------
Total other expense $ 88.9 $ 37.6 $ 16.4
================================================================================
</TABLE>
Corporate represents an allocation of former Aetna's corporate overhead costs
for all periods presented. Corporate overhead costs include interest expense and
other expenses that are not currently recorded in the Company's business
segments. "Other operating expenses, net" includes net corporate expenses such
as staff expenses and advertising and contributions, partially offset by net
investment income.
Page 15
<PAGE> 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
CORPORATE (CONTINUED)
Results
The 2000 increase in interest expense primarily results from additional debt
incurred in connection with the PHC acquisition in August 1999 and an increase
in interest rates. Salaries and related benefits increased due primarily to
expenses associated with the implementation of the previously discussed
strategic and operational initiatives, as well as change in control-related
costs. Other operating expenses, net decreased approximately $13 million
resulting from continued cost-reduction initiatives and an increase in net
investment income. Refer to "Severance and Facilities Charge" for more details
relating to this charge.
The 1999 increase in interest expense primarily reflects a full year of interest
on the debt incurred in connection with the NYLCare acquisition in July 1998, as
well as the additional debt incurred in connection with the PHC acquisition.
Salaries and related benefits and other operating expenses decreased during 1999
due to continued cost-reduction initiatives.
Net realized capital losses in 2000 primarily consist of losses on the sale of
certain corporate real estate. Net realized capital gains in 1999 include
various gains on common stock sales and $14 million from the recognition of a
deferred hedge gain. Net realized capital gains in 1998 include gains of $74
million related to the sale of the Company's remaining investment in Travelers
Property Casualty Corporation.
Outlook
As of January 1, 2001, overhead costs previously included in Corporate will be
integrated into the business segments and reported as such in the first quarter
Form 10-Q. However, interest expense will continue to be recorded in Corporate,
as such amounts will not be allocated to business segments. Refer to "Overview"
for a discussion on business segments in 2001.
Interest expense is expected to decrease in 2001, due to lower levels of debt
expected to be outstanding in 2001 compared to 2000. Salaries and related
benefits and other operating expenses are also expected to decrease in 2001 due
to decreased staffing levels resulting from the actions announced in the fourth
quarter of 2000 relating to the integration and elimination of duplicate staff
functions.
Refer to "Overview - General" for additional details relating to the Transaction
and "Forward-Looking Information/Risk Factors" for information regarding other
important factors that may materially affect the Company.
SEVERANCE AND FACILITIES CHARGE
In December 2000, the Company recorded a severance and facilities charge of $93
million after tax in connection with the implementation of the following
strategic initiatives intended to strengthen the Company's competitiveness,
improve its profitability and concentrate its resources on its core mission as a
health care and related benefits company (the "Plan"):
- - The elimination of targeted unprofitable membership and a reduction in
associated expenses;
- - The reorganization of the sales force to place greater emphasis on
higher-potential middle-market business and to more efficiently serve
smaller cases while enhancing the Company's customer relationships and
important national accounts franchise, and to result in a sales
organization that is designed to be smaller but more effective at both
selling and retaining business;
- - Reductions in personnel due to re-engineering of processes and systems
used in the claim payment and member services area;
- - The continued integration of PHC; and
- - The integration and elimination of duplicate staff functions.
Page 16
<PAGE> 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
SEVERANCE AND FACILITIES CHARGE (CONTINUED)
This charge included $80 million after tax for severance activities relating to
the elimination of approximately 2,400 employee positions (primarily regional
sales personnel, customer service, information technology and other staff-area
personnel) and $13 million after tax representing the present value of the
difference between rent required to be paid by the Company and future sublease
rentals expected to be received by the Company relating to certain leased
facilities, or portions of such facilities, which will be vacated, primarily
related to the continued integration of the PHC business. Implementation of the
Plan began in December 2000 and will be completed by December 31, 2001. Refer to
"Overview - Strategic Repositioning" for identification of all the strategic
initiatives being implemented by the Company, including initiatives not related
to the severance and facilities charge discussed herein, and details relating to
the events and decisions giving rise to their implementation.
The Company eliminated 75 positions from December 18, 2000 through December 31,
2000, resulting in a reduction of the severance and facilities reserve of
approximately $3 million. Refer to Note 9 of Notes to Consolidated Financial
Statements for more details on the severance and facilities reserve.
The Company expects to make severance payments for employee positions eliminated
prior to December 31, 2001 of approximately $71 million after tax in 2001 and
approximately $9 million after tax in 2002. Rental payments on facilities to be
partially or fully vacated prior to December 31, 2001, net of anticipated
sublease rentals, is expected to be approximately $4 million after tax in 2001
and approximately $12 million after tax in 2002 through 2008.
The Plan is expected to result in a reduction in salaries and related benefits
of approximately $154 million after tax in 2001 and approximately $206 million
after tax in 2002 and annually thereafter, as well as a reduction in other
operating expenses due to reduced rent expense of approximately $3 million after
tax in 2001 and approximately $9 million after tax in 2002 through 2008.
The expected impact on future cash flows as a result of employee positions to be
eliminated and facilities to be vacated under the Plan is an increase in cash
flows from operating activities of approximately $83 million in 2001,
approximately $197 million in 2002 and approximately $206 million annually
thereafter, reflecting expected cost savings, net of the termination payments.
RESULTS OF DISCONTINUED OPERATIONS
The Company is the successor of former Aetna for accounting purposes and,
accordingly, the account balances and activities of the financial services and
international businesses have been segregated and reported as discontinued
operations. The Company reported income from discontinued operations of $255
million in 2000, $317 million in 1999 and $396 million in 1998. The Company
incurred net costs associated with the Transaction of approximately $174 million
after tax. These costs, which are directly associated with the sale of the
financial services and international businesses, have been included in the
results of discontinued operations for 2000 and relate to certain
compensation-related arrangements, costs for outside financial and legal
advisors, income taxes related to legal entity realignment, payments for the
settlement of certain former Aetna employee stock options held by employees of
the sold businesses and various other expenses related to the change in control
of former Aetna. Included in these costs is the release of approximately $53
million of previously established reserves in connection with prior dispositions
of businesses reflected as discontinued operations. Refer to Note 19 of Notes to
Consolidated Financial Statements for more details on the results of
discontinued operations and "Forward-Looking Information/Risk Factors" for
information regarding the Company's agreement to indemnify ING for certain
former Aetna liabilities, including liabilities not related to the Health Care
business.
Page 17
<PAGE> 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
TOTAL INVESTMENTS
Investments disclosed in this section relate to the Company's total portfolio
(including assets supporting discontinued products and experience-rated
products).
The Company's investment objective is to fund policyholder and other liabilities
in a manner that enhances shareholder and contractholder value, subject to
appropriate risk constraints. The Company seeks to meet this investment
objective through a mix of investments that reflect the characteristics of the
liabilities they support; diversify the types of investment risks by interest
rate, liquidity, credit and equity price risk; and achieve asset diversification
by investment type and industry. The Company regularly projects duration and
cash flow characteristics of its liabilities and makes appropriate adjustments
in its investment portfolios.
Total investments at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale (1) $ 14,537.1 $ 15,811.5
Loaned securities (2) 584.1 -
- --------------------------------------------------------------------------------
Total debt securities 15,121.2 15,811.5
Mortgage loans 2,201.2 2,377.0
Equity securities 240.1 286.4
Other investment securities 31.1 216.4
Investment real estate 319.2 269.5
Other 553.5 383.1
- --------------------------------------------------------------------------------
Total investments $ 18,466.3 $ 19,343.9
================================================================================
</TABLE>
(1) Amount includes debt securities on deposit as required by regulatory
authorities of $667.2 million at December 31, 2000 and $629.5 million at
December 31, 1999 included in long-term investments on the Consolidated
Balance Sheets.
(2) Refer to Note 2 of Notes to Consolidated Financial Statements for further
discussion of the Company's securities lending program.
Debt Securities
Debt securities represented 82% of the Company's total general account invested
assets at December 31, 2000 and 1999 and supported the following types of
products:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 4,075.0 $ 4,533.0
Supporting experience-rated products 2,346.8 3,001.3
Supporting remaining products 8,699.4 8,277.2
- --------------------------------------------------------------------------------
Total debt securities $ 15,121.2 $ 15,811.5
================================================================================
</TABLE>
Debt securities reflect net unrealized capital gains of $97 million at December
31, 2000 compared with net unrealized capital losses of $516 million at December
31, 1999. Of the net unrealized capital gains at December 31, 2000, $93 million
relate to assets supporting discontinued products and $17 million relate to
experience-rated products.
The debt securities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company on a
basis believed to be similar to that used by the rating agencies. The Company's
investments in debt securities had an average quality rating of A+ at December
31, 2000 and 1999 (35% were AAA at December 31, 2000 and 33% were AAA at
December 31, 1999). "Below investment grade" debt securities carry a rating of
below BBB-/Baa3 and represented 7% of the portfolio at December 31, 2000 and 9%
of the portfolio at December 31, 1999, of which 20% at December 31, 2000 and 27%
at December 31, 1999 support discontinued and experience-rated products. Refer
to Note 5 of Notes to Consolidated Financial Statements for disclosures related
to debt securities by market sector.
Page 18
<PAGE> 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
TOTAL INVESTMENTS (CONTINUED)
Mortgage Loans
The Company's mortgage loan investments, net of impairment reserves, supported
the following types of products:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Supporting discontinued products $ 784.1 $ 768.8
Supporting experience-rated products 660.4 923.4
Supporting remaining products 756.7 684.8
- --------------------------------------------------------------------------------
Total mortgage loans $ 2,201.2 $ 2,377.0
================================================================================
</TABLE>
During 2000 and 1999, the Company managed its mortgage loan portfolio to
maintain the balance, relative to invested assets, by selectively pursuing
refinance and new loan opportunities. The mortgage loan portfolio balance
represented 12% of the Company's total invested assets at December 31, 2000 and
1999.
Problem, restructured and potential problem loans included in mortgage loans
were $194 million at December 31, 2000 and $274 million at December 31, 1999, of
which 84% at December 31, 2000 and 82% at December 31, 1999 support discontinued
and experience-rated products. Specific impairment reserves on these loans were
$30 million at December 31, 2000 and $32 million at December 31, 1999. Refer to
Note 5 of Notes to Consolidated Financial Statements for additional information.
At December 31, 2000 scheduled mortgage loan principal repayments were as
follows:
<TABLE>
<CAPTION>
(Millions)
- --------------------------------------------------------------------------------
<S> <C>
2001 $ 145.0
2002 123.2
2003 630.9
2004 158.4
2005 66.7
Thereafter 1,121.0
- --------------------------------------------------------------------------------
</TABLE>
Risk Management and Market-Sensitive Instruments
The Company manages interest rate risk by seeking to maintain a tight duration
band where appropriate, while credit risk is managed by seeking to maintain high
average quality ratings and diversified sector exposure within the debt
securities portfolio. In connection with its investment and risk management
objectives, the Company also uses financial instruments whose market value is at
least partially determined by, among other things, levels of or changes in
interest rates (short-term or long-term), duration, prepayment rates, equity
markets or credit ratings/spreads. The Company's use of derivatives is generally
limited to hedging purposes and has principally consisted of using interest rate
swap agreements and futures contracts. These instruments, viewed separately,
subject the Company to varying degrees of interest rate, equity price and credit
risk. However, when used for hedging, the expectation is that these instruments
would reduce overall risk. Refer to Note 6 of Notes to Consolidated Financial
Statements for additional information.
The Company regularly evaluates the risk of market-sensitive instruments by
examining, among other things, levels of or changes in interest rates
(short-term or long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. The Company also regularly evaluates the appropriateness of
investments relative to its management-approved investment guidelines (and
operates within those guidelines) and the business objective of the portfolios.
Page 19
<PAGE> 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
TOTAL INVESTMENTS (CONTINUED)
The risks associated with investments supporting experience-rated pension,
annuity and life products in the Large Case Pensions business are assumed by
those contractholders and not by the Company (subject to, among other things,
certain minimum guarantees). Anticipated future losses associated with
investments supporting discontinued fully guaranteed large case pension products
are provided for in the reserve for anticipated future losses (refer to "Large
Case Pensions -- Discontinued Products").
Management also reviews, on a quarterly basis, the impact of hypothetical net
losses in the Company's consolidated near-term financial position, results of
operations and cash flows assuming certain changes in market rates and prices
were to occur. The potential effect of interest rate risk on near-term net
income, cash flow and fair value was determined based on commonly used models.
The models project the impact of interest rate changes on a wide range of
factors, including duration, prepayment, put options and call options. Fair
value was estimated based on the net present value of cash flows or duration
estimates using a representative set of likely future interest rate scenarios.
The assumptions used were as follows: an immediate increase of 100 basis points
in interest rates (which the Company believes represents a moderately adverse
scenario and is approximately equal to the historical annual volatility of
interest rate movements for the Company's intermediate-term available-for-sale
debt securities) and an immediate decrease of 10% in prices for domestic equity
securities.
Based on the Company's overall exposure to interest rate risk and equity price
risk, the Company believes that these changes in market rates and prices would
not materially affect the consolidated near-term financial position, results of
operations or cash flows of the Company as of December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. Overall
cash flows are used primarily for claim and benefit payments, contract
withdrawals and operating expenses.
The Company monitors the duration of its debt securities portfolio (which is
highly marketable) and mortgage loans, and executes its purchases and sales of
these investments with the objective of having adequate funds available to
satisfy the Company's maturing liabilities.
Dividends
Upon completion of the Transaction, the Company announced a new dividend policy
under which it intends to pay an annual dividend of $.04, payable in the fourth
quarter beginning in 2001. The Board of Directors (the "Board") will review the
Company's common stock dividend annually. Among the factors to be considered by
the Board in determining the amount of each dividend are the Company's results
of operations and the capital requirements, growth and other characteristics of
its businesses.
Page 20
<PAGE> 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Financings, Financing Capacity and Capitalization
The Company has significant short-term liquidity supporting its businesses. The
Company uses short-term borrowings from time to time to address timing
differences between cash receipts and disbursements. Also, in 1999 and 1998, the
Company used these borrowings to finance an increased amount of disbursements
since an increased amount of its other funds were used in connection with
acquisitions. The maximum amount of domestic short-term borrowings outstanding
after December 13, 2000 was $1.6 billion. Prior to the spin-off, former Aetna
had revolving credit facilities in an aggregate amount of $2.0 billion. These
facilities did not continue following the spin-off and the Company entered into
new revolving credit facilities that provide for an aggregate borrowing capacity
of approximately $2.5 billion. (Refer to Note 13 of Notes to Consolidated
Financial Statements for additional information.) The Company's total debt to
capital ratio (total debt divided by total debt and shareholders' equity,
adjusted for unrealized gains or losses on available-for-sale investment
securities) was 13.6% at the end of 2000, although the Company has incurred
additional borrowings since year end. The Company expects to manage its debt to
capital ratio to 20% or less. Refer to "Goodwill and Other Acquired Intangible
Assets" for additional information relating to an exposure draft issued by the
Financial Accounting Standards Board, which could have a future impact on the
Company's debt to capital ratio.
The acquisition of PHC was financed by issuing $500 million of three-year senior
notes to Prudential and by using funds made available from issuing commercial
paper. The acquisition of NYLCare was financed with funds made available from
issuing commercial paper. The Company issued $300 million of debt in the fourth
quarter of 1998. At the time of the acquisition, the Company hedged a portion of
the anticipated issuance of fixed-income securities against interest rate risk
using futures contracts, with unrealized gains or losses on these contracts
deferred under hedge accounting. While the Company expected to issue
fixed-income securities, continued unfavorable market conditions delayed this
issuance from the original probable expected time frame. Accordingly, the
Company ceased hedge accounting under its policies and recognized the deferred
hedge gain of $14 million in the third quarter of 1999 as a realized capital
gain, included in Corporate.
The Company continually monitors existing and alternative financing sources to
support its capital and liquidity needs, including, but not limited to, debt
issuance, preferred or common stock issuance and pledging or selling of assets.
On February 14, 2001, the Company filed a shelf registration statement to sell
debt securities, from time to time, up to a total of $2 billion, with the
amount, price and terms to be determined at the time of the sale. Proceeds from
such a sale would be used for general corporate purposes, including debt
repayment.
Common Stock Transactions
The Company's Board has authorized the repurchase of up to 5 million shares of
common stock (not to exceed an aggregate purchase price of $200 million),
subject to periodic reauthorization by the Board. The Company did not repurchase
any shares of common stock subsequent to the Transaction and prior to December
31, 2000, pursuant to this authorization. The Company plans to repurchase shares
in the open market primarily to seek to mitigate any dilution resulting from
employee option exercises and expects to fund share repurchases by using net
proceeds available from these option exercises.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Restrictions on Certain Payments by the Company
In addition to general state law restrictions on payments of dividends and other
distributions to shareholders applicable to all corporations, HMOs and insurance
companies are subject to further state regulations that, among other things, may
require those companies to maintain certain levels of equity, and restrict the
amount of dividends and other distributions that may be paid to their parent
corporations. These regulations generally are not directly applicable to Aetna
Inc., as a holding company, since it is not an HMO or insurance company. The
additional regulations applicable to Aetna Inc.'s HMO and insurance company
subsidiaries are not expected to affect the ability of Aetna Inc. to service
its debt or pay dividends, or the ability of any of Aetna Inc.'s subsidiaries to
service its debt, if any, or to pay dividends to Aetna Inc.
Solvency Regulation
State insurance regulators have adopted changes in statutory accounting
practices and other initiatives to strengthen solvency regulation. The National
Association of Insurance Commissioners ("NAIC") adopted risk-based capital
("RBC") standards for life insurance companies that are designed to identify
weakly capitalized companies by comparing each company's adjusted surplus to its
required surplus ("RBC ratio"). The RBC ratio is designed to reflect the risk
profile of life insurance companies. Within certain ratio ranges, regulators
have increasing authority to take action as the RBC ratio decreases. There are
four levels of regulatory action, ranging from requiring insurers to submit a
comprehensive plan to the state insurance commissioner to requiring the state
insurance commissioner to place the insurer under regulatory control. At
December 31, 2000, the RBC ratio of each of the Company's primary life insurance
subsidiaries was above the level that would require regulatory action. The RBC
framework described above for life insurers has been extended by the NAIC to
health organizations, including HMOs. Although not all states had adopted these
rules at December 31, 2000, at February 20, 2001, each of the Company's active
HMOs had a surplus that exceeded either the applicable state net worth
requirements or, where adopted, the levels that would require regulatory action
under the NAIC's RBC rules. Refer to Note 15 of Notes to Consolidated Financial
Statements for information relating to the recently issued rules on codification
of statutory accounting principles. External rating agencies use their own RBC
standards as part of determining a company's rating.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangible assets were $7.7 billion at December 31,
2000, or approximately 76% of consolidated shareholders' equity. The
amortization of goodwill and other acquired intangible assets was $436 million
in 2000. The amortization of other acquired intangible assets reflects
management's estimate of the useful life of acquired intangible assets
(primarily customer lists, health provider networks, work force and computer
systems), generally over various periods not exceeding 25 years. Management's
estimate of the useful life of goodwill, which represents the excess of cost
over the fair value of net assets acquired, is over periods not exceeding 40
years. The risk associated with the carrying value of goodwill and other
acquired intangible assets is whether undiscounted projected operating income
(before amortization of goodwill and other acquired intangible assets) will be
sufficient to recover the carrying value. The Company regularly evaluates the
recoverability of goodwill and other acquired intangible assets and believes
such amounts are currently recoverable. However, any significant change in the
useful lives of goodwill or other acquired intangible assets, as estimated by
management, could have a material adverse effect on the Company's results of
operations and financial condition.
The Company wrote off goodwill of approximately $310 million ($238 million after
tax) in the fourth quarter of 2000 under its accounting policy for goodwill
recoverability, primarily related to the previously discussed Medicare exit, as
well as to an investment in a medical information services business, given a
re-evaluation of its strategy for this business. Refer to Note 2 of Notes to
Consolidated Financial Statements for more information on the Company's
accounting policy for goodwill recoverability.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS (CONTINUED)
In December 2000, the Financial Accounting Standards Board ("FASB") issued a
tentative decision to eliminate the amortization of goodwill from a company's
income statement, however, such goodwill would remain on the balance sheet and
would be subjected to a periodic impairment test. Goodwill impairment, if any,
would be calculated based on an implied fair value approach, which utilizes a
discounted cash flow analysis. The FASB has also indicated that intangible
assets that meet certain criteria would qualify for recording on the balance
sheet and would continue to be amortized in the income statement. On February
14, 2001, the FASB issued an exposure draft related to this tentative decision,
with comments due on March 16, 2001. The final standard is currently expected to
be issued in June 2001. The Company is currently evaluating this exposure draft.
The Company cannot currently predict whether the FASB will ultimately change the
current accounting standards, what form any final standard may take or the
ultimate impact to its recorded amount of goodwill and intangible assets or
related amortization. After-tax goodwill and intangible asset amortization
included in results from continuing operations for 2000 were $200 million and
$150 million, respectively. The Company cannot currently predict whether any of
these changes, if adopted, would materially affect the Company's results of
operations or financial condition, or have any corresponding effect upon its
debt ratings or other matters. While a change in these accounting standards
could increase the Company's net income in the future, and any impairment would
result in a charge against income and affect the Company's recorded assets and
ratio of debt to total capitalization, the Company's cash flow from operating
activities would not be affected directly.
NEW ACCOUNTING STANDARDS
Refer to Note 2 of Notes to Consolidated Financial Statements for a discussion
of recently issued accounting standards.
REGULATORY ENVIRONMENT
General
Our operations are subject to comprehensive regulation throughout the United
States. Supervisory agencies, including (depending on the state) state health,
insurance, corporation and securities departments, have broad authority to grant
licenses to transact business and regulate many aspects of the products and
services we offer, as well as solvency and reserve adequacy. Many agencies also
regulate our investment activities on the basis of quality, diversification, and
other quantitative criteria. Our operations and accounts are subject to
examination at regular intervals by certain of these regulators.
In addition, the federal and state governments continue to enact and seriously
consider many legislative and regulatory proposals that have or would materially
impact various aspects of the health care system. Many of these changes are
described below. While certain of these measures would adversely affect us, at
this time we cannot predict the extent of this impact.
Health Care
The federal government and the states in which we conduct our HMO and other
health operations have adopted laws and regulations that govern our business
activities to varying degrees. These laws and regulations may restrict how we
conduct our businesses and may result in additional burdens and costs to us.
Areas of governmental regulation include licensure, premium rates, benefits,
service areas, quality assurance procedures, plan design and disclosures,
eligibility requirements, privacy, 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.
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<PAGE> 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REGULATORY ENVIRONMENT (CONTINUED)
States generally require HMOs to obtain a certificate of authority prior to
commencing operations. To establish an HMO in any state where we do not
presently operate an HMO, we generally would have 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, our HMOs are subject to state examination and
periodic license renewal.
Medicare Premiums
In 1997, the federal government passed legislation related to Medicare that
changed the method for determining premiums that the government pays to HMOs for
Medicare members. In general, the new method has reduced the premiums payable to
us compared to the old method, although the level and extent of the reductions
varies by geographic market and depends on other factors. The legislation also
requires us to pay a "user fee." The changes began to be phased in on January 1,
1998 and will continue to be phased in through 2002. The federal government also
began to phase in risk adjustments to its premium payments over a five-year
period commencing January 1, 2000. We anticipate that the net impact of the risk
adjustments will be to reduce the premiums payable to us. While the phase-in
provisions provide us with an opportunity to offset some of the premium
reductions, the risk adjustments and the user fee by adjusting the supplemental
premiums that members pay to us and by adjusting the benefits included in our
products, because of competition and other factors, the adjustments we can make
may not fully offset the reductions in premiums from the government. Because of
these reduced premiums and the user fee, as well as other factors including new
Medicare+Choice regulations issued by HCFA, we decided not to renew our Medicare
HMO contracts (or to reduce contract service areas) in certain areas effective
January 1, 1999, January 1, 2000 and January 1, 2001. Refer to "Health Care -
Health Risk and PHC - Medicare HMO."
HIPAA
The federal government enacted HIPAA in 1997. The legislation has three main
effects:
- it limits pre-existing condition exclusions that apply to
individuals changing jobs or moving to individual coverage;
- it guarantees that employees in the small group market have
available health coverage; and
- it prevents exclusion of individuals from coverage under group plans
based on health status.
In addition, regulations were recently proposed, and certain of them finalized,
under HIPAA relating to the privacy of health information and certain other
matters affecting the administration of health and related plan benefits.
Refer to "Health Care - Outlook - Expense Initiatives" for more information.
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<PAGE> 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REGULATORY ENVIRONMENT (CONTINUED)
Other Recent Matters
The federal government or many states, or both, including states in which we
have substantial health care membership, have enacted or are considering
legislation or regulation related to health care plans, including, among other
things, the following:
- - Eliminating or reducing the scope of pre-emption by the Employee
Retirement Income Security Act of 1974 ("ERISA") of medical and bad faith
claims under state law, which would expose health plans to expanded
liability to punitive and other extra-contractual damages
- - Extending malpractice and other liability for medical and other decisions
from providers to health plans
- - Imposing liability for negligent denials or delays in coverage
- - Mandating coverage of experimental procedures and drugs
- - Mandating direct access to specialists for patients with chronic
conditions
- - Mandating direct access to specialists (including OB/GYNs) and
chiropractors
- - Mandating expanded consumer disclosures and notices
- - Mandating expanded coverage for emergency services
- - Mandating liberalized definitions of medical necessity
- - Mandating liberalized internal and external grievance and appeal
procedures (including expedited decision making)
- - Mandating maternity and other lengths of hospital inpatient stay
- - Mandating point-of-service benefits for HMO plans
- - Prohibiting so-called "gag" and similar clauses in physician agreements
- - Prohibiting incentives based on utilization
- - Prohibiting or limiting arrangements designed to manage medical costs and
improve quality of care, such as capitated arrangements with providers or
provider financial incentives
- - Regulating and restricting utilization management and review
- - Regulating the composition of provider networks, such as any willing
provider and pharmacy laws
- - Requiring payment levels for out-of-network care
- - Requiring the application of lifetime limits to mental health benefits
with parity
- - Exempting physicians from the antitrust laws that prohibit price fixing,
group boycotts and other horizontal restraints on competition
- - Restricting health plan claim and related procedures
- - Regulating procedures designed to protect the confidentiality of medical
records
- - Mandating third-party review of denials of benefits (including denials
based on a lack of medical necessity)
- - Restricting or eliminating the use of formularies for prescription drugs
It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or other increased costs
caused by potential legislation or regulation.
The Health Care business also may be adversely impacted by court and regulatory
decisions that expand the interpretations of existing statutes and regulations,
impose medical or bad faith liability, increase our responsibilities under
ERISA, or reduce the scope of ERISA pre-emption of state law claims.
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<PAGE> 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REGULATORY ENVIRONMENT (CONTINUED)
Texas Agreement
On April 11, 2000, our Texas HMOs entered into an assurance of voluntary
compliance with the Office of the Attorney General of Texas to settle, with
prejudice and without admission, litigation commenced by the Office of the
Attorney General of Texas in December 1998 regarding certain alleged business
practices and to make additional commitments. The agreement provides for, among
other things, allowing directly contracted Texas physicians in small group or
individual practice to choose whether to participate in either or both of our
HMO/HMO-based and PPO/PPO-based product lines; paying directly contracted
capitated primary care physicians with fewer than 100 HMO members on a
fee-for-service basis rather than a capitated basis; expanding independent
external review of coverage denials to include disputes regarding experimental
and investigational coverage, emergency coverage, prescription drug coverage and
standing referrals to specialists; and the creation of an Office of the
Ombudsman that will act as an advocate for members and assist them with appeals
or complaints. The agreement does not include any finding of fault and does not
include any fines or penalties. We do not expect the agreement to have a
material adverse effect on our financial condition or results of operations, and
the agreement provides for potential relief should such unexpected impact occur.
ERISA
The provision of services to certain employee benefit plans, including both
certain health and large case pensions benefit plans, is subject to 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 us and employers who
maintain employee benefit plans subject to ERISA. Some of our administrative
services and other activities 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.
Large Case Pensions' products and services are also subject to potential issues
raised by certain judicial interpretations. 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 policy" were "plan assets" for purposes of
ERISA and that the insurance company had fiduciary responsibility with respect
to those assets. In reaching its decision, the Supreme Court declined to follow
a 1975 DOL interpretive bulletin that had suggested that insurance company
general account assets were not plan assets.
The Small Business Job Protection Act (the "Act") was signed into law in 1996.
The Act 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 policies based on claims that
those assets are plan assets. The relief afforded extends to conduct that occurs
before the date that is 18 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 issued on January 5, 2000, 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
policies. The conference report relating to the Act states that policies issued
after December 31, 1998 that are not guaranteed benefit policies will be subject
to ERISA's fiduciary obligations. We are not currently able to predict how these
matters may ultimately affect our businesses.
Health and Insurance Laws of Particular States
In particular the insurance or health departments of Connecticut, Pennsylvania,
Florida and New York may regulate, among other matters, our premium rates, trade
practices, agent licensing, policy forms, underwriting and claims practices.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REGULATORY ENVIRONMENT (CONTINUED)
A number of states, including Pennsylvania and Connecticut, regulate affiliated
groups of HMOs and insurers such as us under holding company statutes. These
laws may require us and our subsidiaries 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 our company, refer to
"Liquidity and Capital Resources." Some of these laws also regulate changes in
control (as do Pennsylvania and Connecticut corporate laws), and other matters
such as transactions with affiliates. Refer to Note 15 of Notes to Consolidated
Financial Statements.
Guaranty Fund Assessments
Under 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. While we
historically have recovered more than half of guaranty fund assessments through
statutorily permitted premium tax offsets, significant increases in assessments
could jeopardize future efforts to recover these assessments. Some states have
similar laws relating to HMOs. On April 6, 2000, the State of New Jersey enacted
the New Jersey Insolvent Health Maintenance Organization Assistance Fund Act of
2000. The act is designed to reimburse individuals who were covered by and
providers that had contracts with two New Jersey HMOs prior to their insolvency.
The total amount to be assessed to all HMOs in New Jersey is $50 million. The
act requires that HMOs in the New Jersey market be assessed a charge calculated
based on each HMO's proportionate share of premiums written in New Jersey
relative to all HMO premiums written in New Jersey. We recorded an estimate of
our share of this assessment, based on our HMO market share in New Jersey, of
$23 million pretax ($15 million after tax) in the second quarter of 2000. There
were no material charges to earnings for guaranty fund obligations during 1999
or 1998.
FORWARD-LOOKING INFORMATION/RISK FACTORS
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a
"safe harbor" for forward-looking statements, so long as (1) those statements
are identified as forward-looking, and (2) the statements are accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from those discussed in the statement.
We want to take advantage of these safe harbor provisions.
Certain information contained in this Management's Discussion and Analysis is
forward-looking within the meaning of the 1995 Act or Securities and Exchange
Commission rules. This information includes, but is not limited to: (1) the
information that appears under the headings "Outlook" in the discussion of
results of operations of each of our businesses and (2) "Total Investments -
Risk Management and Market-Sensitive Instruments". In writing this Management's
Discussion and Analysis, we also used the following words, or variations of
these words and similar expressions, where we intended to identify
forward-looking statements:
- Expects
- Projects
- Anticipates
- Intends
- Plans
- Believes
- Seeks
- Estimates
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of significant uncertainties and
other factors, many of which are outside our control, that could cause actual
results to differ materially from these statements. You should not put undue
reliance on these forward-looking statements. We disclaim any intention or
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise.
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<PAGE> 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Risk Factors
You should carefully consider each of the following risks and all of the other
information set forth in this Management's Discussion and Analysis or elsewhere
in this Report. These risks and other factors may affect the forward-looking
statements in this Management's Discussion and Analysis or elsewhere in this
Report and/or our business generally. The risks and uncertainties described
below are not the only ones facing our Company. Additional risks and
uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events, this
could have a material adverse effect on our business, financial condition or
results of operations. In that case, the trading price of our common stock could
decline materially.
Risk factors relating to our business
WE ARE SEEKING TO IMPROVE THE PERFORMANCE OF OUR HEALTH CARE BUSINESS BY
IMPLEMENTING A NUMBER OF INITIATIVES; IF THESE INITIATIVES DO NOT ACHIEVE THEIR
OBJECTIVES, OUR RESULTS COULD CONTINUE TO BE MATERIALLY ADVERSELY AFFECTED.
Substantially increasing medical costs have caused our financial results in 2000
to decline significantly, and we cannot assure you that these cost increases
will not continue or worsen. In 2000 we began to implement a number of strategic
and operational initiatives with the goal of improving the performance of our
business. These initiatives include, among other things, strengthening the
management of the business, improving relations with health care providers,
exiting certain product markets, addressing rising medical costs and improving
the efficiency of operations. The future performance of our business will depend
in large part on our ability to design and implement these strategic
initiatives. If these initiatives do not achieve their objectives or result in
increased medical costs, our results could continue to be adversely affected.
Refer to "Overview - Strategic Repositioning" for more information.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
OUR PREMIUMS ARE GENERALLY SET IN ONE-YEAR CONTRACTS AND LARGER-THAN-EXPECTED
INCREASES IN MEDICAL COSTS DURING THE CONTRACT TERM (SUCH AS THOSE EXPERIENCED
IN 2000) MAY MATERIALLY IMPACT OUR PROFITABILITY UNDER THESE CONTRACTS; WE HAVE
TARGETED PREMIUM INCREASES AND COST SAVINGS IN OUR HEALTH RISK BUSINESS TO
IMPROVE PROFITABILITY; HOWEVER, WE CANNOT ASSURE YOU THAT THESE INCREASES AND
SAVINGS WILL BE SUFFICIENT TO OFFSET INCREASES IN MEDICAL AND OTHER OPERATING
COSTS; THEY ARE ALSO EXPECTED TO AFFECT OUR MEMBERSHIP LEVELS.
We experienced significantly higher Medicare and commercial HMO medical costs in
2000. We have taken and are taking several actions to address this situation. We
exited a significant number of our Medicare service areas, effective January 1,
2001. We also plan to exit underperforming commercial HMO products in certain
markets. With respect to our commercial HMO business, we are increasing premiums
for business renewing in 2001. However, premiums in the Health Risk business are
generally fixed for one-year periods and, accordingly, cost levels in excess of
future medical cost projections reflected in pricing, cannot be recovered in the
contract year through higher premiums. Slightly more than half of the Company's
Health Risk business renew on January 1, 2001, and a significant portion renews
on July 1, 2001. As a result, the Company cannot increase prices for a
significant portion of its 2001 business until later in the year. Medical cost
trend (the rate of increase in medical costs) rose significantly in 2000,
particularly in the later half of the year. For purposes of setting these price
increases we projected that medical costs would continue to increase, but at a
rate of increase less than the rate of increase experienced recently. There can
be no assurances regarding the accuracy of medical cost projections assumed for
pricing purposes and if the rate of increase in medical costs recently
experienced were to continue in 2001, our results would be materially adversely
affected. Anticipated premium increases are expected to reduce membership. If
membership declines more than expected or we lose accounts with favorable
medical cost experience while retaining accounts with unfavorable medical cost
experience, our business and results of operations may be materially adversely
affected. Refer to "Health Care - Outlook" for more information.
WE ARE WORKING TO CONTINUE INTEGRATING AND IMPROVING THE PRUDENTIAL HEALTH CARE,
OR PHC BUSINESS, BUT IF WE ARE UNSUCCESSFUL, OUR RESULTS MAY BE MATERIALLY
ADVERSELY AFFECTED.
In connection with our acquisition of the PHC business from Prudential on August
6, 1999, Prudential agreed to indemnify us from certain health insurance risks.
This agreement does not cover periods following December 31, 2000, except that
the agreement provides for a period of time during which such medical cost
reimbursements (as calculated per the agreement) will be finalized which is
expected to be completed by the end of 2001. Medical cost ratios for the PHC
business in 2000 were higher than for the rest of our health risk business, and
the effect of these higher ratios is no longer offset, in part, by the
indemnification agreement with Prudential. We are seeking to improve the medical
cost ratios of the PHC business through underwriting and pricing discipline and
medical cost management initiatives. Also, we converted a significant number of
PHC members to Aetna products as of January 1, 2001. If we are unable to make
sufficient improvements to the medical cost ratios for this business, our
results of operations for 2001 and beyond may be materially adversely affected.
We continue working on integrating the PHC business into our health care
business. Factors that can affect the success of our continuing integration
include, but are not limited to:
- integrating management, products, legal entities, networks and
information systems on a timely basis,
- applying managed care expertise and techniques throughout a broader
membership base, and
- eliminating duplicative administrative and customer service
functions.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
WE ARE PARTY TO A SUBSTANTIAL AMOUNT OF LITIGATION; THESE CASES AND FUTURE CASES
MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
We are party to a number of purported class action lawsuits and other
litigation. The majority of these cases relate to the conduct of our health care
business and allege various violations of law. Many of these cases seek
substantial damages (including punitive damages) and far-ranging changes in our
practices. We may also be subject to additional litigation in the future. This
litigation could materially adversely affect us, because of the costs of
defending these cases, costs of settlement or judgments against us, or because
of changes in our operations that could result from this litigation. Refer to
Note 18 of Notes to Consolidated Financial Statements.
WE HOLD RESERVES FOR EXPECTED CLAIMS, AND THESE ESTIMATES ARE HIGHLY JUDGMENTAL;
IF ACTUAL CLAIMS EXCEED RESERVE ESTIMATES (AS THEY HAVE IN PRIOR PERIODS), OUR
RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
For Health Risk and PHC, health care costs payable reflects estimates of the
ultimate cost of claims that have been incurred but not yet reported or reported
but not yet paid. Health care costs payable are estimated periodically, and any
resulting adjustments are reflected in the current-period operating results
within health care costs. Health care costs payable are based on a number of
factors, including those derived from historical claim experience. An extensive
degree of judgment is used in this estimation process, considerable variability
is inherent in such estimates, and the adequacy of the estimate is highly
sensitive to changes in medical claims payment patterns and changes in medical
cost trends. A worsening (or improvement) of medical cost trend or changes in
claim payment patterns from those that were assumed in estimating health care
costs payable as of a particular date would cause these estimates to change in
the near term, and such change could be material.
OUR BUSINESS ACTIVITIES ARE HIGHLY REGULATED AND THERE ARE A NUMBER OF CURRENT
AND PLANNED INITIATIVES BEING CONSIDERED BY FEDERAL AND STATE GOVERNMENTS;
GOVERNMENT REGULATION LIMITS US IN THE CONDUCT OF OUR BUSINESS AND ALSO SUBJECTS
US TO ADDITIONAL COSTS IN COMPLYING WITH THE REQUIREMENTS OF GOVERNMENTAL
AUTHORITIES; FURTHER REGULATION COULD ALSO MATERIALLY ADVERSELY AFFECT OUR
BUSINESS.
Our business is subject to extensive regulation by state and federal
governmental authorities. For example, there are a number of federal and state
requirements restricting operations of health care plans (particularly HMOs).
The federal and many state governments have enacted or are actively considering
legislative and regulatory changes related to health products. At this time, we
are unable to predict the impact of future changes, although we anticipate that
some of these measures, if enacted, could adversely affect health operations
through:
- affecting premium rates,
- reducing our ability to manage medical costs,
- increasing medical costs and operating expenses,
- increasing our exposure to lawsuits,
- regulating levels and permitted lines of business,
- imposing financial assessments, and
- regulating business practices.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Recently, there has been heightened review by these regulators of the managed
health care industry's business practices, including utilization management and
claim payment practices. As one of the largest national managed care
organizations, we are regularly the subject of such reviews and several such
reviews currently are pending, some of which may be resolved during 2001. These
regulatory reviews could result in changes to or clarifications of our business
practices, and also could result in material fines, penalties or other
sanctions. Our business also may be adversely impacted by court and regulatory
decisions that expand the interpretations of existing statutes and regulations,
impose medical or bad faith liability, increase our responsibilities under
ERISA, or reduce the scope of ERISA pre-emption of state law claims.
It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or the other increased costs
that may be caused by this legislation or regulation, or by court and regulatory
decisions.
In addition, the United States Department of Health and Human Services has
issued a series of proposed regulations under the Health Insurance Portability
and Accountability Act relating to, among other things, standardized transaction
formats and the privacy of member health information. These regulations, only
some of which have been finalized, and any corresponding state legislation, will
affect our administration of health and related benefit plans. We are currently
reviewing the potential impact of the proposed regulations on our operations,
including our information technology systems. We expect that we will incur
additional expenses in connection with, and that our business could otherwise be
adversely affected by, these regulations. These expenses and the impact on our
business could be material.
For more information, refer to "Regulatory Environment" and "Health Care -
Outlook."
IN CONNECTION WITH THE SPIN-OFF OF OUR COMPANY FROM FORMER AETNA, WE HAVE AGREED
TO BE LIABLE FOR, AND TO INDEMNIFY ING FOR, CERTAIN FORMER AETNA LIABILITIES,
INCLUDING LIABILITIES NOT RELATED TO OUR HEALTH CARE BUSINESS.
In connection with the spin-off, we generally assumed all liabilities related to
former Aetna's health care and large case pensions businesses. In addition, we
generally are responsible for former Aetna's liabilities other than those
arising out of former Aetna's financial services or international businesses.
These liabilities generally include the post-retirement pension and other
benefits payable to all previous employees of former Aetna, liabilities arising
out of significant litigation to which former Aetna is a party, all liabilities
arising out of certain divestiture transactions consummated by former Aetna
before the spin-off and tax liabilities relating to, or resulting from the
treatment of, the spin-off. We have agreed to indemnify ING for all of these
liabilities. Although management believes that it has established reserves
and/or obtained insurance sufficient to cover such liabilities as we consider
appropriate, we cannot assure you that these liabilities will not be materially
in excess of these reserves and insurance. In that case, these liabilities may
be materially adverse to our business and results of operations.
OUR BUSINESS IS SUBJECT TO A VARIETY OF OTHER RISKS.
In addition to the risks described above, our business is subject to a number of
other risks, including, but not limited to, those described below:
Adverse publicity regarding managed care can hurt our sales. Adverse publicity
of the kind currently occurring regarding managed care may negatively influence
members' or employers' decisions to select managed care plans generally or our
health plans specifically. This may cause membership to decline, which could
materially adversely affect our business or results of operations.
Page 31
<PAGE> 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)
Government payors can determine premiums. Although we have withdrawn from
certain Medicare markets, we will still have operations in a number of Medicare
markets. In government-funded health programs such as Medicare and Medicaid, the
government payor determines the premium levels. If the government payor reduces
the premium levels or increases premiums by less than our costs increase and we
cannot offset these with supplemental premiums and changes in benefit plans,
then we could be materially adversely affected. In addition, premiums for
certain federal government employee groups are subject to retroactive
adjustments by the federal government. These adjustments could materially
adversely affect us.
Changes in accreditation of our health plans could affect our competitiveness.
Accreditation by independent quality accrediting agencies, such as the National
Committee for Quality Assurance, is an important competitive factor for certain
of our HMO plans. If our plans were to lose or be denied accreditation, it could
adversely affect customer selection of our health products, and, in some
jurisdictions, could affect our licensure status.
Success of our Internet initiatives depends on developing and implementing new
and enhanced systems and processes. Development and implementation of our
Internet initiatives will require significant investments over the next several
years. In addition, we may not achieve the new product development, increases in
sales and reductions in expenses that we expect from these initiatives unless we
are able to efficiently and cost effectively develop and implement new and
enhanced information systems and redesigned business processes.
Decreases in ratings could adversely impact our business. Certain of our
businesses would experience some run off of existing business or have the level
of new business negatively impacted if the major rating agencies do not give a
financial strength rating to the relevant subsidiary in the "A" rating category.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The financial information included in this Report may not be representative of
our results of operations, financial position and cash flows had we operated as
a separate, stand-alone entity during the periods presented or of our results of
operations, financial position and cash flows in the future. We cannot assure
you that the adjustments, allocations and estimates we have made in preparing
our historical consolidated financial statements appropriately reflect our
operations during those periods as if we had in fact operated as a stand-alone
entity, although management believes such adjustments, allocations and estimates
to be reasonable.
Page 32
<PAGE> 33
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------
(Millions, except per common share data) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $26,818.9 $22,109.7 $16,589.0 $14,674.4 $11,820.8
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations:
Health Care $ (42.6) $ 437.3 $ 431.0 $ 453.8 $ 58.7
Large Case Pensions 165.4 151.0 169.9 234.2 258.4
Corporate: Interest (161.3) (151.3) (134.1) (138.7) (92.0)
Other (88.9) (37.6) (16.4) (23.6) (269.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (127.4) $ 399.4 $ 450.4 $ 525.7 $ (44.7)
===================================================================================================================================
Net income $ 127.1 $ 716.5 $ 846.8 $ 899.5 $ 650.1
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses), net of tax (included above) (14.2) 21.4 189.0 160.5 63.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 47,445.7 52,667.6 53,355.2 53,354.5 54,795.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt -- 2,093.9 1,593.3 1,892.1 1,991.1
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna-obligated mandatorily redeemable preferred
securities of subsidiary limited liability company
holding primarily debentures guaranteed by former Aetna -- -- 275.0 275.0 275.0
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 10,127.1 10,703.2 11,429.5 11,082.0 10,901.6
- -----------------------------------------------------------------------------------------------------------------------------------
Per common share data: (1)
Earnings (loss) per common share: (2)
Income (loss) from continuing operations:
Basic $ (.90) $ 2.56 $ 2.74 $ 3.15 $ (.53)
Diluted (3) -- 2.54 2.72 3.12 --
Net income:
Basic .90 4.76 5.49 5.66 4.76
Diluted (3) -- 4.72 5.40 5.59 --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per common share data is based on former Aetna common shares and share
equivalents through December 13, 2000 and Aetna Inc., thereafter. (Refer
to Notes 1, 3 and 19.)
(2) For 1999 (through the redemption date of July 19, 1999), 1998, 1997 and
1996, preferred stock dividends of former Aetna are deducted from income
from continuing operations and net income as the preferred stock issued by
former Aetna was for the acquisition of U.S. Healthcare in 1996.
(3) Since the Company reported a loss from continuing operations in 2000 and
1996, the effect of dilutive securities has been excluded from earnings
per common share computations in those years because including such
securities would result in an anti-dilutive per common share amount.
See Notes to Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations for significant events
affecting the comparability of current year results with 1999 and 1998 results.
Page 33
<PAGE> 34
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
(Millions, except per common share data) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Health care premiums $21,746.6 $17,145.7 $11,691.1
Other premiums 1,468.3 1,495.8 1,437.8
Administrative services only fees 1,925.9 1,674.5 1,270.7
Net investment income 1,631.6 1,601.8 1,696.6
Other income 86.6 129.4 202.9
Net realized capital gains (losses) (40.1) 62.5 289.9
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue 26,818.9 22,109.7 16,589.0
- --------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Health care costs 18,884.1 14,641.0 10,012.9
Current and future benefits 2,153.5 2,231.0 2,296.0
Operating expenses:
Salaries and related benefits 2,328.7 1,866.2 1,320.0
Other 2,501.1 2,050.8 1,598.6
Interest expense 248.2 232.7 206.2
Amortization of goodwill and other acquired intangible assets 435.6 420.4 381.3
Goodwill write-off 310.2 -- --
Severance and facilities charge 142.5 -- --
Reductions of reserve for anticipated future losses on discontinued products (146.0) (77.2) (68.0)
- --------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 26,857.9 21,364.9 15,747.0
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes (benefits) (39.0) 744.8 842.0
Income taxes (benefits):
Current 242.1 268.5 379.2
Deferred (153.7) 76.9 12.4
- --------------------------------------------------------------------------------------------------------------------------------
Total income taxes 88.4 345.4 391.6
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (127.4) 399.4 450.4
Discontinued operations, net of tax:
Income from operations 428.5 317.1 396.4
Sale and spin-off related costs (174.0) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 127.1 $ 716.5 $ 846.8
================================================================================================================================
Results per common share:
Income (loss) from continuing operations:
Basic $ (.90) $ 2.56 $ 2.74
Diluted (1) -- 2.54 2.72
Income from discontinued operations:
Basic 1.80 2.20 2.75
Diluted (1) -- 2.18 2.73
Net income:
Basic .90 4.76 5.49
Diluted (1) -- 4.72 5.40
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Since the Company reported a loss from continuing operations in 2000, the
effect of dilutive securities has been excluded from earnings per common
share computations for that year because including such securities would
result in an anti-dilutive per common share amount.
See Notes to Consolidated Financial Statements.
Page 34
<PAGE> 35
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
------------------------
(Millions, except share data) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,943.8 $ 1,628.7
Investment securities 14,017.5 15,549.6
Other investments 374.6 509.0
Premiums receivable, net 838.6 916.3
Other receivables, net 735.8 746.4
Accrued investment income 260.3 267.4
Collateral received under securities loan agreements 596.8 805.0
Loaned securities 584.1 --
Deferred income taxes 112.3 157.8
Other assets 303.7 318.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 19,767.5 20,898.3
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term investments 1,344.3 1,143.4
Mortgage loans 1,826.6 1,877.2
Investment real estate 319.2 264.7
Reinsurance recoverables 1,318.5 1,349.4
Goodwill and other acquired intangible assets, net 7,703.4 8,655.0
Property and equipment, net 390.0 473.0
Deferred income taxes 295.0 353.4
Other assets 128.7 224.2
Separate Accounts assets 14,352.5 14,639.5
Net assets of discontinued operations -- 2,789.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $47,445.7 $52,667.6
===================================================================================================================================
Liabilities and shareholders' equity
Current liabilities:
Health care costs payable $ 3,171.1 $ 3,238.7
Future policy benefits 832.0 1,106.0
Unpaid claims 528.2 442.0
Unearned premiums 269.3 473.6
Policyholders' funds 1,094.4 901.4
Collateral payable under securities loan agreements 596.8 805.0
Short-term debt 1,592.2 1,725.0
Income taxes payable 297.8 285.6
Accrued expenses and other liabilities 1,621.6 1,529.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 10,003.4 10,506.4
- -----------------------------------------------------------------------------------------------------------------------------------
Future policy benefits 8,684.8 9,008.3
Unpaid claims 1,211.6 1,268.6
Policyholders' funds 2,649.6 3,529.7
Long-term debt -- 2,093.9
Other liabilities 416.7 918.0
Separate Accounts liabilities 14,352.5 14,639.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 37,318.6 41,964.4
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 4, 6 and 18)
Shareholders' equity:
Common stock and additional paid-in capital ($.01 par value, 762,500,000 shares authorized,
142,618,551 issued and outstanding in 2000; $.01 par value, 250,000,000 shares authorized,
1,000 shares issued and outstanding in 1999 and $.005 par value, 275,000,000 shares authorized,
100 shares issued and outstanding in 1999) 3,898.7 3,719.3
Accumulated other comprehensive income (loss) 35.1 (655.6)
Retained earnings 6,193.3 7,639.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,127.1 10,703.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $47,445.7 $52,667.6
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 35
<PAGE> 36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Common Income (Loss)
Stock and ------------------------
Additional Unrealized
Paid-in Gains (Losses) Foreign Retained
(Millions, except share data) Total Capital on Securities Currency Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $11,082.0 $3,674.0 $ 483.9 $(176.8) $7,100.9
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 846.8 846.8
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(156.0) pretax)(1) (101.4) (101.4)
Foreign currency ($(43.3) pretax) (27.9) (27.9)
---------
Other comprehensive loss (129.3)
---------
Total comprehensive income 717.5
=========
Dividends to former Aetna (370.0) (370.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 11,429.5 3,674.0 382.5 (204.7) 7,577.7
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net income 716.5 716.5
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(905.6) pretax)(1) (588.6) (588.6)
Foreign currency ($(132.5) pretax) (244.8) (244.8)
---------
Other comprehensive loss (833.4)
---------
Total comprehensive loss (116.9)
=========
Capital contributions from former Aetna 45.3 45.3
Dividends to former Aetna (654.7) (654.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 10,703.2 3,719.3 (206.1) (449.5) 7,639.5
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 127.1 127.1
Other comprehensive income, net of tax:
Unrealized gains on securities
($486.5 pretax)(1) 316.2 316.2
Foreign currency ($(50.9) pretax) (39.9) (39.9)
---------
Other comprehensive income 276.3
---------
Total comprehensive income 403.4
=========
Capital contributions from former Aetna 118.9 118.9
Dividends to former Aetna (216.0) (216.0)
Outstanding shares cancelled (1,100 shares) -- --
Sale and spin-off related transaction
(141,670,551 shares issued) (904.2) 38.7 (80.7) 495.1 (1,357.3)
Stock options exercised (948,000 shares issued) 21.8 21.8
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $10,127.1 $3,898.7 $ 29.4 $ 5.7 $6,193.3
==================================================================================================================================
</TABLE>
(1) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements.
Page 36
<PAGE> 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
(Millions) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 127.1 $ 716.5 $ 846.8
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations (254.5) (317.1) (396.4)
Severance and facilities charge 142.5 -- --
Goodwill write--off 310.2 -- --
Depreciation and amortization (including investment discounts and premiums) 587.9 488.4 466.9
Net realized capital (gains) losses 40.1 (62.5) (289.9)
Changes in assets and liabilities:
Decrease in accrued investment income 9.2 79.7 8.3
(Increase) decrease in premiums due and other receivables 115.2 (46.6) 35.4
Increase (decrease) in income taxes (13.9) 124.9 (160.1)
Net (increase) decrease in other assets and other liabilities (230.4) 495.4 (417.8)
Increase (decrease) in health care and insurance liabilities (762.3) (83.4) 211.6
Other, net (1.5) 16.2 (27.3)
Discontinued operations, net 1,457.0 254.5 529.9
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,526.6 1,666.0 807.4
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale 12,430.9 13,007.4 13,721.4
Equity securities 358.8 177.2 445.6
Mortgage loans 20.1 20.9 60.9
Investment real estate 29.5 33.7 123.9
Other investments 14,846.8 16,601.4 17,330.1
NYLCare Texas 420.0 -- --
Investment maturities and repayments of:
Debt securities available for sale 663.0 1,128.6 1,450.0
Mortgage loans 514.5 459.9 883.1
Cost of investments in:
Debt securities available for sale (12,081.3) (13,526.7) (14,113.2)
Equity securities (235.7) (145.5) (90.2)
Mortgage loans (364.8) (157.1) (2.6)
Investment real estate (15.7) (33.5) (25.5)
Other investments (15,103.8) (15,884.5) (17,995.3)
Acquisitions:
NYLCare health care business -- (48.8) (1,080.6)
Prudential health care business -- (512.5) --
Increase in property and equipment (36.9) (58.1) (85.9)
Other, net 7.3 (186.2) (377.8)
Discontinued operations, net (445.1) (1,031.3) (374.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 1,007.6 (155.1) (130.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits and interest credited for investment contracts 237.2 332.4 474.8
Withdrawals of investment contracts (931.9) (1,607.2) (1,720.2)
Repayment of long--term debt -- (26.7) (128.7)
Net increase (decrease) in short--term debt (132.8) 528.4 1,119.5
Redemption of mandatorily redeemable preferred securities -- (275.0) --
Stock options exercised 21.8 -- --
Capital contributions from former Aetna 118.9 45.3 --
Dividends paid to former Aetna (216.0) (634.7) (520.0)
Other, net (304.4) (384.1) 225.6
Discontinued operations, net (296.4) 811.7 (83.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (1,503.6) (1,209.9) (632.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents of discontinued operations (715.5) (34.9) (72.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 315.1 266.1 (27.6)
Cash acquired from the NYLCare health care business -- -- 108.8
Cash acquired from the Prudential health care business -- 261.6 --
Cash and cash equivalents, beginning of year 1,628.7 1,101.0 1,019.8
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,943.8 $ 1,628.7 $ 1,101.0
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The accompanying consolidated financial statements include Aetna Inc. (a
Pennsylvania corporation) and its wholly-owned subsidiaries (collectively, the
"Company"). The Company, through its subsidiaries, provides health care benefits
and related services, group life and disability insurance and retirement
benefits. As of December 31, 2000, the Company had two reportable segments:
Health Care and Large Case Pensions. Health Care provides a full spectrum of
health plans which include health maintenance organizations ("HMOs"),
point-of-service ("POS") plans, preferred provider organizations ("PPOs") and
traditional indemnity plans. Such plans are generally offered on both a full
risk and an employer-funded basis. Under full risk 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 plan
sponsor, and not the Company, assumes all or a majority of these risks. Health
Care also provides group life and disability insurance, long-term care insurance
and dental products, as well as various specialty products and services
including pharmacy, vision and behavioral health. Large Case Pensions manages a
variety of retirement products for defined benefit and defined contribution
plans. The Large Case Pensions business includes certain discontinued products.
(Refer to Note 10.)
The two segments are distinct businesses that offer different products and
services. During the reporting period, they were managed separately as each
business required different market strategies, technology and capital
allocation. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance of these business segments based on operating earnings
(net income excluding net realized capital gains and losses and any other items,
such as severance and facilities charges and reductions of the reserve for
anticipated future losses on discontinued products).
Prior to December 13, 2000, the Company (formerly Aetna U.S. Healthcare Inc. and
its wholly-owned subsidiaries) was a subsidiary of a Connecticut corporation
named Aetna Inc. ("former Aetna"). On December 13, 2000, former Aetna spun off
shares of the Company to shareholders (of former Aetna) as part of the same
transaction (more fully described in Note 19) which also resulted in the sale of
former Aetna's financial services and international businesses to ING Groep N.V.
("ING"), accomplished by the merger of former Aetna into a subsidiary of ING.
The businesses sold to ING are reflected as discontinued operations, since the
Company is the successor of former Aetna for accounting purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany balances
have been eliminated. Certain reclassifications have been made to the 1999 and
1998 financial information to conform to the 2000 presentation.
The consolidated financial statements have been prepared using the historical
basis in the assets and liabilities and historical results of operations related
to the Health Care and Large Case Pensions businesses as if the Company were a
separate entity for all periods presented. Changes in shareholders' equity prior
to December 13, 2000 represented the net income of the Company plus (less) net
cash transfers from (to) former Aetna. Additionally, the consolidated financial
statements include allocations of certain assets and liabilities (including
prepaid pension assets, debt and benefit obligations and pension and
post-retirement benefits) and expenses (including interest), previously recorded
by former Aetna, to the Health Care and Large Case Pensions businesses of the
Company, as well as to those businesses presented as discontinued operations.
Management believes these allocations are reasonable.
Page 38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION (CONTINUED)
The costs of services allocated to the Company by former Aetna are not
necessarily indicative of the costs that would have been incurred if the Company
had previously performed these functions as an independent entity. Since the
spin-off, the Company performs these functions using its own resources or
purchased services and will be responsible for the costs and expenses associated
with the management of a public company. Further, the Company has a capital
structure different from the capital structure in the consolidated financial
statements of prior periods presented and, accordingly, interest expense is not
necessarily indicative of the interest expense that the Company would have
incurred during the periods presented had it been a separate, independent
company.
Income tax expense was calculated as if the Company filed separate income tax
returns. As former Aetna managed its tax position on a consolidated basis, which
took into account the results of all its businesses, the Company's effective tax
rate in the future could vary from its historical effective tax rate. The
Company's future effective tax rate will depend largely on its structure and
strategies as a separate, independent company.
Accordingly, the financial information included herein may not necessarily
reflect the consolidated results of operations, financial position, changes in
shareholders' equity and cash flows of the Company had it been a separate,
independent entity during all periods presented.
NEW ACCOUNTING STANDARD
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which replaces
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This standard revises the accounting for
securitizations, other financial asset transfers and collateral associated with
securities lending transactions and requires certain additional disclosures. FAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. However, for
recognition and disclosure of collateral and for additional disclosures related
to securitization transactions, FAS No. 140 was effective for the Company's
December 31, 2000 financial statements. With respect to loaned securities
disclosures, previous financial statements need not be reclassified. The
adoption of those provisions effective in 2000 did not have a material effect on
the Company's financial position or results of operations. The Company does not
expect the adoption of those provisions effective after March 31, 2001 to have a
material effect on its financial position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
As of January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments,
issued by the American Institute of Certified Public Accountants ("AICPA"). SOP
97-3 provides guidance for determining when an insurance or other enterprise
should recognize a liability for guaranty-fund and other insurance-related
assessments and guidance for measuring the liability. The adoption of this
standard did not have a material effect on the Company's financial position or
results of operations, as the Company had previously accounted for guaranty-fund
and other insurance-related assessments in a manner consistent with this
standard.
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk
As of January 1, 2000, the Company adopted SOP 98-7, Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk, issued by the AICPA. SOP 98-7 provides guidance on how to
account for all insurance and reinsurance contracts that do not transfer
insurance risk, except for long-duration life and health insurance contracts.
The adoption of this standard did not have a material effect on the Company's
financial position or results of operations.
Page 39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE APPLICATION OF ACCOUNTING STANDARD
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. In June 2000, the FASB provided further guidance related
to accounting for derivative instruments and hedging activities when it issued
FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133. This standard, as amended,
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and to measure those instruments at fair value. The manner
in which companies are to record gains or losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. As amended by FAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, this standard is effective for the Company's
financial statements beginning January 1, 2001. The Company has evaluated its
derivative and hedging instruments and has determined that, due to its limited
use of derivatives, the adoption of this standard will not have a material
effect on the Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt securities with a maturity of 90 days or less when purchased. The
carrying value of cash equivalents approximates fair value due to the short-term
maturity of these instruments.
INVESTMENTS
Investment Securities
Investment securities consist primarily of U.S. Treasury and agency securities,
mortgage-backed securities, corporate and foreign bonds, and other debt and
equity securities. The Company has determined that its investment securities are
available for use in current operations and, accordingly, has classified such
securities as current without regard to contractual maturity dates. Cost for
mortgage-backed securities is adjusted for unamortized premiums and discounts,
which are amortized using the interest method over the estimated remaining term
of the securities, adjusted for anticipated prepayments. The Company does not
accrue interest on problem debt securities when management believes the
collection of interest is unlikely.
Long-Term Investments
Long-term investments consist primarily of equity securities subject to
restrictions on disposition, limited partnerships and restricted assets. Limited
partnerships are carried on an equity basis. Restricted assets consist of debt
securities on deposit as required by various regulatory authorities.
Fair Value of Investments
The Company has classified its investment securities as available for sale and
carries them at fair value. Fair values for such securities are based on quoted
market prices or dealer quotes. Where quoted market prices or dealer quotes are
not available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods.
Page 40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Securities Lending
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Such
securities are classified as loaned securities on the December 31, 2000
Consolidated Balance Sheet. The market value of the loaned securities is
monitored on a daily basis, with additional collateral obtained or refunded as
the market value of the loaned securities fluctuates. Initial collateral,
primarily cash, is required at a rate of 102% of the market value of a loaned
domestic security and 105% of the market value of a loaned foreign security. The
collateral is deposited by the borrower with an independent lending agent, and
retained and invested by the lending agent according to the Company's guidelines
to generate additional income.
Mortgage Loans
Mortgage loans are carried at unpaid principal balances, net of impairment
reserves. A mortgage loan is considered impaired when it is probable that the
Company will be unable to collect amounts due according to the contractual terms
of the loan agreement (delays of up to 60 days may not result in a loan being
considered impaired). The Company accrues interest income on impaired loans to
the extent it is deemed collectible and the loan continues to perform under its
original or restructured terms. Interest income on problem loans is generally
recognized on a cash basis. Cash payments on loans in the process of foreclosure
are generally treated as a return of principal. For impaired loans, a specific
impairment reserve is established for the difference between the recorded
investment in the loan and the estimated fair value of the collateral. The
Company applies its loan impairment policy individually to all loans in the
portfolio and does not aggregate loans for the purpose of applying such
policy. The Company records full or partial charge-offs of loans at the time
an event occurs affecting the legal status of the loan, typically at the time of
foreclosure (actual or in-substance) or upon a loan modification giving rise to
forgiveness of debt. A general reserve is established for losses that management
believes are likely to arise from loans in the portfolio, other than for those
losses that have been specifically reserved. The Company does not accrue
interest on impaired loans when management believes the collection of interest
is unlikely. Mortgage loans with a maturity date of less than one year from the
balance sheet date are reported in other investments on the Consolidated Balance
Sheets.
Mortgage Securitizations
The Company may, from time to time, securitize and sell certain mortgage loans
and retain an interest in the securitized mortgage loans. Gains or losses on the
sale of these loans would depend on the previous carrying amount of the
transferred loans, allocated between the portion of the loans sold and the
retained interests based on their relative fair value at the date of transfer.
Fair values are based on quoted market prices or dealer quotations.
Investment Real Estate
Investment real estate, which the Company intends to hold for the production of
income, is carried at depreciated cost, including capital additions, net of
write-downs for other than temporary declines in fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful life of each asset. Properties held for sale (primarily acquired through
foreclosure) are carried at the lower of cost or fair value less estimated
selling costs. Adjustments to the carrying value of properties held for sale are
recorded in a valuation reserve when the fair value less estimated selling costs
is below cost. Fair value is generally estimated using a discounted future cash
flow analysis in conjunction with comparable sales information. Property
valuations are reviewed by the Company's investment management group. At the
time of the sale, the difference between the sales price and the carrying value
is recorded as a realized capital gain or loss.
Page 41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Net Investment Income and Realized Capital Gains and Losses
Net investment income and realized capital gains and losses on investments
supporting Health Care's liabilities and Large Case Pensions'
non-experience-rated products are reflected in the Company's results of
operations. Realized capital gains and losses are determined on a specific
identification basis. Unrealized capital gains and losses are computed on a
specific identification basis and are reflected in shareholders' equity, net of
related income taxes. Purchases and sales of debt and equity securities are
recorded on the trade date. Sales of mortgage loans and investment real estate
are recorded on the closing date.
Realized and unrealized capital gains and losses on investments supporting
experience-rated products in the Company's Large Case Pensions business are
reflected in policyholders' funds and are determined on a specific
identification basis. Experience-rated products are products in the Company's
Large Case Pensions business where the customer, not the Company, assumes
investment (including realized capital gains and losses) and other risks,
subject to, among other things, minimum guarantees provided by the Company in
some instances. The effect of investment performance (as long as minimum
guarantees are not triggered) is allocated to participants' accounts daily,
based on the underlying investment's experience and, therefore, does not impact
the Company's results of operations.
When the Company discontinued the sale of its fully guaranteed large case
pensions products, it established a reserve for anticipated future losses from
these products and segregated the related investments. These investments are
managed as a separate portfolio. Investment income and net realized capital
gains and losses on this separate portfolio are credited/charged to the reserve
and, therefore, do not impact the Company's results of operations. Unrealized
capital gains or losses on this separate portfolio are reflected in other assets
or other liabilities on the Consolidated Balance Sheets. (Refer to Note 10.)
DERIVATIVE INSTRUMENTS
The Company utilizes futures contracts, interest rate swap agreements and
warrants for other than trading purposes in order to manage interest rate and
price risk (collectively, market risk). (Refer to Note 6.)
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
Deferred gains or losses on such futures contracts are amortized over the life
of the acquired asset or liability as a yield adjustment or through net realized
capital gains or losses upon disposal of an asset. Changes in the fair value of
futures contracts that do not qualify as hedges are recorded in net realized
capital gains or losses.
Interest rate swap agreements, which are designated as risk management
instruments at inception, are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such agreements
is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets of changes in the fair value of these agreements.
Warrants represent the right, but not the obligation, to purchase specific
securities and are accounted for as hedges. Upon exercise, the cost of the
warrants is added to the basis of the securities purchased.
Hedge designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying the
hedge, and that such high correlation be maintained throughout the hedge period.
If a hedging instrument ceases to be highly correlated with the position
underlying the hedge, hedge accounting ceases at that date and excess gains and
losses on the hedging instrument are reflected in net realized capital gains or
losses. The Company may enter into contracts to hedge anticipated transactions.
If it is subsequently determined that an anticipated transaction will not occur,
any gain or loss related to the hedge instrument will be recognized as a net
realized capital gain or loss.
Page 42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Goodwill (which represents the excess of cost over the fair value of net assets
acquired) and other acquired intangibles are amortized using the straight-line
method over the estimated useful life of the related asset. The Company
regularly evaluates the recoverability of goodwill and other acquired intangible
assets and the related amortization periods. If it is probable that undiscounted
projected operating income (before amortization of goodwill and other acquired
intangible assets) will not be sufficient to recover the carrying value of the
asset, the carrying value is written down through results of operations and, if
necessary, the amortization period is adjusted. Operating income considered in
such an analysis is either that of the entity acquired, if separately
identifiable, or the business segment that acquired the entity.
Goodwill and other acquired intangible assets at December 31, 2000 and 1999 were
as follows:
<TABLE>
<CAPTION>
Accumulated Amortization
2000 (Millions) (1) Cost Amortization Net Balance Period (Years)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $7,705.5 $ 923.6 $6,781.9 40
Other acquired intangible assets:
Customer lists 919.0 628.4 290.6 5-7
Provider networks 677.2 113.6 563.6 20-25
Work force 88.0 50.2 37.8 3-6
Computer systems 60.0 53.4 6.6 3-5
Other 69.2 46.3 22.9 4-5
- -------------------------------------------------------------------------------------------------------------
Total goodwill and other acquired intangible assets $9,518.9 $1,815.5 $7,703.4
=============================================================================================================
1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $ 8,231.7 $ 751.5 $7,480.2 40
Other acquired intangible assets:
Customer lists 933.0 474.7 458.3 5-7
Provider networks 683.0 86.2 596.8 20-25
Work force 92.0 34.7 57.3 3-6
Computer systems 79.1 43.8 35.3 3-5
Other 57.3 30.2 27.1 4-5
- -------------------------------------------------------------------------------------------------------------
Total goodwill and other acquired intangible assets $10,076.1 $1,421.1 $8,655.0
=============================================================================================================
</TABLE>
(1) In the fourth quarter of 2000, in accordance with its accounting policy
relative to goodwill recoverability, the Company wrote off $310.2 million
of goodwill, primarily related to its exit from a number of Medicare service
areas (refer to Note 4), as well as its investment in a medical information
services business, upon re-evaluation of its strategy for such business.
REINSURANCE
The Company utilizes reinsurance agreements primarily to reduce its exposure to
large losses in certain aspects of its insurance business. These reinsurance
agreements permit recovery of a portion of losses from reinsurers, although they
do not discharge the Company's primary liability as direct insurer of the risks
reinsured. Only those reinsurance recoverables deemed probable of recovery are
reflected as assets. In the normal course of business, the Company enters into
agreements with other insurance companies to assume reinsurance, primarily
related to its health and group life products. (Refer to Notes 4 and 16.)
PROPERTY AND EQUIPMENT
Property and equipment are reported at historical cost net of accumulated
depreciation. At December 31, 2000 and 1999, historical cost was approximately
$1.0 billion and $1.3 billion, respectively, and the related accumulated
depreciation was approximately $.6 billion and $.8 billion, respectively.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets ranging from three to 40 years.
Page 43
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
The Company regularly evaluates whether events or changes in circumstances
indicate that the carrying amount of property and equipment may not be
recoverable. If it is determined that an asset may not be recovered, the Company
estimates the future undiscounted cash flows (grouped at the company-wide level)
expected to result from future use of the asset and its eventual disposition. If
the sum of the expected undiscounted future cash flows is less than the carrying
amount of the asset, an impairment loss will be recognized for the amount by
which the carrying amount of the asset exceeds its fair value thereby reducing
carrying amount to fair value.
SEPARATE ACCOUNTS
Separate Accounts assets and liabilities in the Large Case Pensions business
generally represent funds maintained to meet specific investment objectives of
contractholders who bear the investment risk. Investment income and investment
gains and losses generally accrue directly to such contractholders. The assets
of each account are legally segregated and are not subject to claims that arise
out of any other business of the Company. These assets and liabilities are
carried at market value. Deposits, net investment income and realized capital
gains and losses on Separate Accounts assets are not reflected on the
Consolidated Statements of Income. Management fees charged to contractholders
are included in other income.
HEALTH CARE AND INSURANCE LIABILITIES
Health care costs payable consist principally of unpaid health care claims,
capitation costs and other amounts due to health care providers pursuant to
risk-sharing arrangements related to Health Care's HMO, POS, PPO and indemnity
plans. Unpaid health care claims include estimates of payments to be made on
claims reported but not yet paid and health care services rendered but not yet
reported to the Company as of the balance sheet date. Also included in these
estimates is the cost of services that will continue to be rendered after the
balance sheet date if the Company is obligated to pay for such services in
accordance with contractual or regulatory requirements. Such estimates are
developed using actuarial principles and assumptions which consider, among other
things, contractual requirements, historical utilization trends and payment
patterns, medical inflation, product mix, seasonality, membership and other
relevant factors. Changes in estimates are recorded in health care costs on the
Consolidated Statements of Income in the period they are determined. Capitation
costs represent contractual monthly fees paid to participating physicians and
other medical providers for providing medical care. Amounts due under
risk-sharing arrangements are based on the terms of the underlying contracts
with the providers and consider experience under the contracts through the
balance sheet date.
Unpaid claims consist primarily of reserves associated with certain
short-duration group disability and term life insurance contracts, including an
estimate for claims incurred but not reported as of the balance sheet date. Such
reserves are based upon the present value of future benefits, which is based on
assumed investment yields and assumptions regarding mortality, morbidity and
recoveries from government programs. Reserves for claims incurred but not
reported are developed using actuarial principles and assumptions which
consider, among other things, contractual requirements, historical payment
patterns, seasonality and other relevant factors. The Company discounts certain
claim liabilities related to group long-term disability and premium waiver
contracts. Generally, the discount rates reflect the expected investment returns
for the asset portfolios that support these liabilities and ranged from 2.5% to
7.0% in 2000 (except for experience-rated contracts where the discount rates are
set at contractually specified levels). The estimates of unpaid claims are
subject to change due to changes in the underlying experience of the contracts,
changes in investment yields or other factors and these changes are recorded in
current and future benefits on the Consolidated Statements of Income in the
period they are determined.
Page 44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEALTH CARE AND INSURANCE LIABILITIES (CONTINUED)
Future policy benefits consist primarily of reserves for limited payment pension
and annuity contracts in the Large Case Pensions business and long-duration
group paid-up and supplemental life and long-term care insurance contracts in
the Health Care business. Reserves for limited payment contracts are computed in
accordance with actuarial principles and are based upon assumptions reflecting
anticipated mortality, retirement, expense and interest rate experience. Such
assumptions generally vary by plan, year of issue and policy duration. Assumed
interest rates on such contracts ranged from 2.0% to 10.5% in 2000. Mortality
assumptions are periodically reviewed against both industry standards and
experience. Reserves for group paid-up and supplemental life and long-term care
contracts represent the present value of future benefits to be paid to or on
behalf of policyholders less the present value of future net premiums. Assumed
interest rates on such contracts ranged from 2.5% to 7.0% in 2000. The present
value of future benefits is based upon mortality, morbidity and interest
assumptions.
Policyholders' funds consist primarily of reserves for pension and annuity
investment contracts in the Large Case Pensions business and customer funds
associated with group life and health contracts in the Health Care business.
Reserves on such contracts are equal to cumulative deposits less charges plus
credited interest thereon, net of adjustments for investment experience that the
Company is entitled to reflect in future credited interest. In 2000, interest
rates for pension and annuity investment contracts ranged from 5.83% to 17.69%
and rates for group life and health contracts ranged from 4.81% to 9.89%.
Reserves on contracts subject to experience rating reflect the rights of
policyholders, plan participants and the Company.
Health care and insurance liabilities are reviewed periodically, with any
necessary adjustments reflected during the current period in results of
operations. While the ultimate amount of claims and related expenses are
dependent on future developments, it is management's opinion that the
liabilities that have been established are adequate to cover such costs. The
health care and insurance liabilities that are expected to be paid within one
year from the balance sheet date are classified as current liabilities on the
Consolidated Balance Sheets.
PREMIUM DEFICIENCY
The Company evaluates its health care and insurance contracts to determine if it
is probable that a loss will be incurred. A premium deficiency loss is
recognized when it is probable that expected future claims, including
maintenance costs, will exceed anticipated future premiums and reinsurance
recoveries on existing contracts. Anticipated investment income is considered in
the calculation of premium deficiency losses for short-duration contracts. For
purposes of determining premium deficiency losses, contracts are grouped in a
manner consistent with the Company's method of acquiring, servicing and
measuring the profitability of such contracts.
REVENUE RECOGNITION
Health care premiums associated with the Company's prepaid and other health care
plans are recognized as income in the month in which the enrollee is entitled to
receive health care services. Health care premiums are reported net of an
allowance for estimated terminations and uncollectible amounts. Other premium
revenue for group life and disability products is recognized as income, net of
allowances for uncollectible accounts, over the term of the coverage. Premiums
related to unexpired contractual coverage periods are reported as unearned
premiums on the Consolidated Balance Sheets.
Page 45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The balance of the allowance for estimated terminations and uncollectible
accounts on premiums receivable was $220 million, $216 million and $71 million
at December 31, 2000, 1999 and 1998, respectively, and is included in premiums
receivable on the Consolidated Balance Sheets. The balance of the allowance for
uncollected accounts on other receivables was $99 million, $137 million and $82
million at December 31, 2000, 1999 and 1998, respectively, and is included in
other receivables on the Consolidated Balance Sheets.
Some group contracts allow for premiums to be adjusted to reflect actual
experience. Such premium adjustments are reasonably estimable (based on actual
experience of the customer emerging under the contract and the terms of the
underlying contract) and are recognized as the experience emerges.
Administrative services only ("ASO") fees in the Health Care business are
received in exchange for performing certain claims processing and member
services for self-insured health and disability members and are recognized as
revenue over the period the service is provided.
Other income includes charges assessed against policyholders' funds for contract
fees, participant fees and asset charges related to pension and annuity products
in the Large Case Pensions business. Other amounts received for these contracts
are reflected as deposits and are not recorded as revenue. When annuities with
life contingencies are purchased under contracts that were initially investment
contracts, the accumulated balance related to the purchase is treated as a
single premium and reflected as an offsetting amount in both other premiums and
current and future benefits on the Consolidated Statements of Income.
ALLOCATIONS OF EXPENSES
Former Aetna allocated centrally incurred costs associated with specific
internal goods or services provided to the Company, such as employee services,
technology services and rent, based on a reasonable method for each specific
cost (such as usage, headcount, compensation or square footage occupied).
Interest expense on third-party borrowings is not allocated to the reporting
segments since it is not used as a basis for measuring the operating performance
of the segments. Such amounts are reflected in Corporate. (Refer to Note 17.)
INCOME TAXES
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. The Company will be included
in the consolidated federal income tax return of former Aetna through December
13, 2000. The consolidated group is segregated into subgroups of (1) life
insurance companies and (2) nonlife insurance and other companies. Consolidation
of these subgroups for tax purposes is subject to statutory restrictions on the
percentage of eligible nonlife insurance and other companies' tax losses that
can be applied to offset life insurance company taxable income.
Deferred income tax assets and liabilities are recognized for the differences
between the financial and income tax reporting basis of assets and liabilities
based on enacted tax rates and laws. Deferred income tax expense or benefit
reflects the net change in deferred income tax assets and liabilities during the
year. The current income tax provision reflects the tax results of revenues and
expenses currently taxable or deductible.
Page 46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") is as follows:
<TABLE>
<CAPTION>
Per Common
Income Shares Share
(Millions, except per common share data) (Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 (1)
Basic EPS:
Loss from continuing operations (2) $(127.4) 141.3 $(.90)
=================================================================================================================================
1999 (1)
Income from continuing operations $ 399.4
Less: Preferred stock dividends (3) 30.5
-------
Basic EPS:
Income from continuing operations applicable to common ownership $ 368.9 144.1 $2.56
======= =====
Effect of dilutive securities:
Stock options and other 1.2
-----
Diluted EPS
Income from continuing operations applicable to common ownership
and assumed conversions $ 368.9 145.3 $2.54
=================================================================================================================================
1998 (1)
Income from continuing operations $ 450.4
Less: Preferred stock dividends (3) 55.3
-------
Basic EPS:
Income from continuing operations applicable to common ownership $ 395.1 144.1 $2.74
======= =====
Effect of dilutive securities:
Stock options and other 1.1
-----
Diluted EPS
Income from continuing operations applicable to common ownership
and assumed conversions $ 395.1 145.2 $2.72
=================================================================================================================================
</TABLE>
(1) Basic earnings per common share related to discontinued operations were
$1.80, $2.20 and $2.75 for 2000, 1999 and 1998, respectively. Diluted
earnings per common share related to discontinued operations were $2.18
and $2.73 for 1999 and 1998, respectively.
(2) Since the Company reported a loss from continuing operations in 2000, the
effect of diluted securities has been excluded from earnings per common
share computations, since including such securities would result in an
anti-dilutive per share amount.
(3) For 1999 (through the redemption date of July 19, 1999) and 1998,
preferred stock dividends of former Aetna are deducted from income from
continuing operations as the preferred stock issued by former Aetna was
for the acquisition of U.S. Healthcare in 1996.
On December 13, 2000, former Aetna sold its financial services and international
businesses to ING and spun off to its shareholders the shares of the Company.
(Refer to Note 19.) The former Aetna stock options held by employees of the
Company and existing retirees of former Aetna were converted into options to
purchase shares of the Company with adjustments made to both the number of
options and the exercise prices to maintain the intrinsic in- or
out-of-the-money value immediately before the spin-off. The in-the-money former
Aetna stock options held by employees of the sold businesses were settled for
cash while the out-of-the-money former Aetna stock options for such employees
were cancelled. (Refer to Note 12.)
For all periods presented through December 13, 2000, the common stock
outstanding and the dilutive effect of all outstanding stock options, where
appropriate, of former Aetna are reflected in the weighted average share
calculation. For the period from December 14, 2000 through December 31, 2000,
only the common stock outstanding of the Company is reflected in the weighted
average share calculation.
Page 47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EARNINGS PER COMMON SHARE (CONTINUED)
Options to purchase shares of former Aetna common stock and stock appreciation
rights ("SARs") in 1999 and 1998 of 6.4 million shares (with exercise prices
ranging from $74.31 to $112.63) and 3.0 million shares (with exercise prices
ranging from $76.24 to $112.63), respectively, were not included in the
calculation of diluted earnings per common share because the options' and SARs'
exercise price was greater than the average market price of former Aetna common
shares.
4. ACQUISITIONS AND DISPOSITIONS
On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion. The acquisition was accounted for as a purchase. In
addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at the acquisition date included: (1) an asset of $130
million, representing the fair value adjustment of a reinsurance agreement
(discussed below), primarily reflecting the net benefits to be received from
Prudential over the life of the agreement; (2) a liability of $129 million,
representing a fair value adjustment for the unfavorable component of the
contracts underlying the acquired medical risk business; and (3) an asset of $21
million, representing the above-market compensation component related to
supplemental fees to be received under the Company's agreement to service
Prudential's administrative services only ("ASO") contracts (discussed below).
During the first quarter 2000, a liability of $15 million was recorded as part
of the purchase price allocation related to the Company's plan to exit certain
leased facilities of the acquired PHC businesses, expected to be completed by
March 31, 2001. The purchase price does not reflect any employee termination
benefits for positions that may be eliminated.
For the year ended December 31, 2000, the Company recorded asset amortization of
$26 million pretax related to the fair value adjustment of the reinsurance
agreement ($104 million pretax in 1999 (from August 6, 1999 through December 31,
1999)); liability amortization of $25 million pretax related to the fair value
adjustment of the unfavorable component of the contracts underlying the acquired
medical risk business ($94 million pretax in 1999 (from August 6, 1999 through
December 31, 1999)); and asset amortization of $15 million pretax related to the
above-market compensation component related to the supplemental fees under the
ASO contracts.
The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Premium expense recognized for the year ended December
31, 2000 was $14 million pretax ($6 million pretax in 1999 (from August 6, 1999
through December 31, 1999)). Under the agreement, Prudential has agreed to
indemnify the Company from certain health insurance risks that arise following
the PHC closing by reimbursing the Company for 75% of medical costs (as
calculated under the agreement) of PHC in excess of certain threshold medical
cost ratio levels through 2000 for substantially all the acquired medical and
dental risk business. The medical cost ratio threshold was 83.5% for August 6,
1999 through December 31, 1999 and 84% for January 1, 2000 through December 31,
2000. During the year ended December 31, 2000, reinsurance recoveries under this
agreement (reflected as a reduction of current and future benefits) were $135
million pretax ($74 million pretax in 1999 (from August 6, 1999 through December
31, 1999)). The premium would have been subject to adjustment if medical costs
of PHC were below these threshold medical cost ratio levels. This reinsurance
agreement ended on December 31, 2000, except that the agreement provides for a
period of time during which such medical cost reimbursements (as calculated per
the agreement) will be finalized, which is expected to be completed by the end
of 2001.
Page 48
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The Company also agreed to service Prudential's ASO contracts following the PHC
closing. Prudential is terminating its ASO business and has retained the Company
to service these contracts during the run off period, but generally no later
than June 30, 2001. In exchange for servicing the ASO business, Prudential is
remitting fees received from its ASO members to the Company, as well as paying
certain supplemental fees. The supplemental fees are fixed in amount and decline
over a period ending 18 months following the PHC closing. During the year ended
December 31, 2000, the Company recorded total fees for servicing the Prudential
ASO business of approximately $370 million pretax ($230 million pretax in 1999
(from August 6, 1999 through December 31, 1999)) including supplemental fees of
approximately $134 million pretax ($106 million pretax in 1999 (from August 6,
1999 through December 31, 1999)) which were net of the asset amortization
related to the above-market compensation component related to the supplemental
fees under the ASO contracts described above (reflected as fees and other
income).
In connection with the PHC acquisition, the Company agreed with the U.S.
Department of Justice and the State of Texas to divest certain Texas HMO/POS and
other related businesses ("NYLCare Texas") acquired by the Company as part of
the 1998 acquisition of New York Life Insurance Company's health care business.
Pursuant to this agreement, on March 31, 2000, the Company completed the sale of
NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of Health Care
Service Corporation, for approximately $420 million in cash. The sale resulted
in an after-tax capital loss of $35 million, which was recognized in the fourth
quarter of 1999. The after-tax loss included operating losses from October 1,
1999 through closing. The results of operations of NYLCare Texas were not
material to the Health Care segment or to the Company's consolidated results of
operations.
The Company's Medicare+Choice contracts with the federal government are renewed
for a one-year period each January 1. In June 2000, the Company notified the
Health Care Financing Administration ("HCFA") of its intent to exit a number of
Medicare service areas. The Company subsequently monitored legislative or
regulatory changes that might have increased payments under applicable
Medicare+Choice contracts sufficient to encourage the Company to remain in these
service areas within six months following its notification, as allowed under
HCFA regulations. As a result of insufficient increases in payments, the Company
made a final determination within the six-month period (specifically, the fourth
quarter of 2000), as permitted under HCFA regulations, to exit a number of
Medicare service areas. Effective January 1, 2001, the Company exited a number
of Medicare service areas affecting approximately 260,000 members, or
approximately 47 percent of the Company's total Medicare membership prior to
this exit. In the fourth quarter of 2000, the Company recorded an after-tax
charge of approximately $194 million ($266 million pretax) for the write-off of
goodwill that was still separately identifiable with such service areas.
During 2000, the Company acquired the remaining minority ownership interest in
InteliHealth Inc., which distributes health care information principally through
its internet web site and sells health products to consumers. The aggregate
purchase price was not material.
5. INVESTMENTS
Investment securities at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Debt securities available for sale $13,869.9 $15,182.0
Equity securities 116.5 151.2
Other investment securities 31.1 216.4
- --------------------------------------------------------------------------------
Total investment securities $14,017.5 $15,549.6
================================================================================
</TABLE>
Page 49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
Debt securities available for sale at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
2000 (Millions) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds:
U.S. government and government agencies and authorities $ 831.5 $ 36.8 $ .9 $ 867.4
States, municipalities and political subdivisions 806.1 28.4 1.3 833.2
U.S. corporate securities:
Utilities 1,178.5 30.7 24.8 1,184.4
Financial 1,764.6 34.3 55.6 1,743.3
Transportation/Capital goods 1,083.4 65.4 28.6 1,120.2
Health care/Consumer products 587.8 26.4 29.9 584.3
Natural resources 1,041.6 33.6 18.2 1,057.0
Other corporate securities 1,297.9 24.5 91.2 1,231.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 6,953.8 214.9 248.3 6,920.4
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 653.7 11.9 11.7 653.9
Utilities 102.8 1.3 4.2 99.9
Other 1,431.8 53.1 32.9 1,452.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total foreign securities 2,188.3 66.3 48.8 2,205.8
- -----------------------------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,409.8 19.8 8.3 1,421.3
Collateralized mortgage obligations 67.5 2.5 .1 69.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 1,477.3 22.3 8.4 1,491.2
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities (1)(2) 1,596.0 38.8 26.3 1,608.5
Other asset-backed securities 350.5 6.5 .8 356.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total bonds 14,203.5 414.0 334.8 14,282.7
Redeemable preferred stocks 170.9 4.8 4.4 171.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale debt securities (3) $14,374.4 $418.8 $339.2 $14,454.0
===================================================================================================================================
1999
- -----------------------------------------------------------------------------------------------------------------------------------
Bonds:
U.S. government and government agencies and authorities $ 794.0 $ 7.2 $ 18.0 $ 783.2
States, municipalities and political subdivisions 628.6 3.5 9.5 622.6
U.S. corporate securities:
Utilities 1,788.8 19.5 68.9 1,739.4
Financial 2,292.8 8.5 114.3 2,187.0
Transportation/Capital goods 1,456.6 42.8 51.3 1,448.1
Health care/Consumer products 1,860.5 14.8 95.6 1,779.7
Other corporate securities 680.5 5.0 43.1 642.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 8,079.2 90.6 373.2 7,796.6
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign:
Government, including political subdivisions 941.2 26.4 29.2 938.4
Utilities 189.1 3.4 10.0 182.5
Other 1,120.3 24.6 42.6 1,102.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total foreign securities 2,250.6 54.4 81.8 2,223.2
- -----------------------------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,891.1 1.0 66.8 1,825.3
Collateralized mortgage obligations 54.0 .5 .6 53.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 1,945.1 1.5 67.4 1,879.2
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed securities (1)(2) 1,589.6 1.3 94.9 1,496.0
Other asset-backed securities 253.7 .8 3.6 250.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total bonds 15,540.8 159.3 648.4 15,051.7
Redeemable preferred stocks 139.3 -- 9.0 130.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale debt securities $15,680.1 $159.3 $657.4 $15,182.0
===================================================================================================================================
</TABLE>
(1) Includes approximately $162.9 million and $158.7 million of subordinate
and residual certificates at December 31, 2000 and 1999, respectively,
from a 1997 commercial mortgage loan securitization which were retained by
the Company.
(2) Includes approximately $83.1 million and $81.1 million of subordinate and
residual certificates at December 31, 2000 and 1999, respectively, from a
1995 commercial mortgage loan securitization which were retained by the
Company.
(3) Includes approximately $584.1 million of loaned securities at December 31,
2000.
Page 50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
At December 31, 2000 and 1999, net unrealized appreciation (depreciation) on
debt securities included $93 million and $(122) million, respectively, related
to discontinued products (refer to Note 10) and $17 million and $(104) million,
respectively, related to experience-rated contracts, which were not reflected in
shareholders' equity.
The carrying and fair value of debt securities are shown below by contractual
maturity. Actual maturities may differ from contractual maturities because
securities may be restructured, called or prepaid.
<TABLE>
<CAPTION>
Amortized Fair
2000 (Millions) Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 1,131.0 $ 1,176.0
After one year through five years 2,514.7 2,515.9
After five years through ten years 3,007.5 3,033.1
After ten years 4,297.4 4,273.1
Mortgage-backed securities 3,073.3 3,099.7
Other asset-backed securities 350.5 356.2
- -------------------------------------------------------------------------------
Total $14,374.4 $14,454.0
===============================================================================
</TABLE>
At December 31, 2000 and 1999, debt securities carried at $667 million and $630
million, respectively, were on deposit as required by regulatory authorities.
These securities are considered restricted assets and were included in long-term
investments on the Consolidated Balance Sheets.
Investments in equity securities at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Cost $199.9 $216.4
Gross unrealized capital gains 49.7 83.9
Gross unrealized capital losses (9.5) (13.9)
- -------------------------------------------------------------------------------
Fair value 240.1 286.4
Less: amount included in long-term investments 123.6 135.2
- -------------------------------------------------------------------------------
Equity securities (included in investment securities) $116.5 $151.2
===============================================================================
</TABLE>
Investment real estate holdings at December 31 were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Properties held for sale $204.8 $200.7
Investment real estate 197.9 161.9
- -------------------------------------------------------------------------------
402.7 362.6
Valuation reserve (83.5) (93.1)
- -------------------------------------------------------------------------------
Net carrying value of real estate 319.2 269.5
Less: amounts included in other investments -- 4.8
- -------------------------------------------------------------------------------
Investment real estate $319.2 $264.7
===============================================================================
</TABLE>
Accumulated depreciation for investment real estate was $56 million and $58
million at December 31, 2000 and 1999, respectively.
Total real estate write-downs included in the net carrying value of the
Company's real estate holdings at December 31, 2000 and 1999 were $120 million
and $127 million, respectively (including $102 million and $106 million,
respectively, attributable to assets supporting discontinued products).
Page 51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
At December 31, 2000 and 1999, the Company's mortgage loan balances net of
specific impairment reserves by geographic region and property type were as
follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 (Millions) 2000 1999
- ----------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <S> <C> <C>
South Atlantic $ 324.6 $ 468.2 Office $1,230.4 $1,301.6
Middle Atlantic 786.5 786.7 Retail 464.7 492.7
New England 254.5 280.0 Apartment 70.4 91.6
South Central 66.2 32.0 Hotel/Motel 150.4 137.7
North Central 210.7 253.6 Industrial 232.2 202.8
Pacific and Mountain 572.1 569.6 Mixed Use 36.8 158.8
Non-U.S. .6 .7 Other 30.3 5.6
- ----------------------------------------------------------------- ----------------------------------------------------------
Total 2,215.2 2,390.8 Total 2,215.2 2,390.8
Less: general impairment reserve 14.0 13.8 Less: general impairment reserve 14.0 13.8
- ----------------------------------------------------------------- ----------------------------------------------------------
Net mortgage loan balance 2,201.2 2,377.0 Net mortgage loan balance 2,201.2 2,377.0
Less: amount included in other Less: amount included in other
investments 374.6 499.8 investments 374.6 499.8
- ----------------------------------------------------------------- ----------------------------------------------------------
Mortgage loans $1,826.6 $1,877.2 Mortgage loans $1,826.6 $1,877.2
================================================================= ==========================================================
</TABLE>
At December 31, 2000 and 1999, the total recorded investment in mortgage loans
that are considered to be impaired (including problem loans, restructured loans
and potential problem loans) and related specific reserves were as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------- -----------------------
Total Total
Recorded Specific Recorded Specific
(Millions) Investment Reserves Investment Reserves
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Supporting discontinued products $124.6 $22.2 $158.9 $22.2
Supporting experience-rated products 39.1 6.0 66.9 8.8
Supporting remaining products 30.3 1.8 48.4 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $194.0(1) $30.0 $274.2(1) $32.1
====================================================================================================================================
</TABLE>
(1) Includes impaired loans at December 31, 2000 and 1999 of $28.8 million and
$109.0 million, respectively, for which no specific reserves are
considered necessary.
The activity in the specific and general mortgage loan impairment reserves for
the periods indicated is summarized below:
<TABLE>
<CAPTION>
Supporting
Supporting Experience- Supporting
Discontinued Rated Remaining
(Millions) Products Products Products Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $29.5 $ 27.6 $ 6.5 $ 63.6
Principal write-offs (.6) (14.0) (3.1) (17.7)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 (1) 28.9 13.6 3.4 45.9
Principal write-offs (.5) (.8) (.6) (1.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 (1) $28.4 $ 12.8 $ 2.8 $ 44.0
=================================================================================================================================
</TABLE>
(1) Total reserves at December 31, 2000 and 1999 include $30.0 million and
$32.1 million, respectively, of specific reserves and $14.0 million and
$13.8 million, respectively, of general reserves.
Income earned (pretax) and cash received on the average recorded investment in
impaired loans for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------
Average Average
Impaired Income Cash Impaired Income Cash
(Millions) Loans Earned Received Loans Earned Received
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supporting discontinued products $149.9 $ 9.4 $ 8.7 $159.3 $12.0 $11.8
Supporting experience-rated products 65.3 6.0 6.0 87.2 8.1 8.1
Supporting remaining products 42.1 9.6 9.8 34.5 7.6 7.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total $257.3 $25.0 $24.5 $281.0 $27.7 $27.4
====================================================================================================================================
</TABLE>
Significant noncash investing and financing activities include the acquisition
of real estate through foreclosures of mortgage loans amounting to $15 million
and $24 million for 2000 and 1999, respectively. There were also certain
significant noncash activities related to the sale and spin-off transaction.
(Refer to Note 19.)
Page 52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------- ------------------------------
Carrying Estimated Fair Carrying Estimated Fair
(Millions) Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C>
Debt securities $15,024.4 $15,121.2 $16,327.2 $15,811.5
Equity securities 199.9 240.1 216.4 286.4
Mortgage loans 2,201.2 2,250.9 2,377.0 2,391.0
Liabilities:
Investment contract liabilities:
With a fixed maturity 1,999.1 2,009.8 2,579.0 2,596.8
Without a fixed maturity 856.6 698.9 986.2 853.0
Long-term debt -- -- 2,093.9 2,012.7
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about a given financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, and do
not consider the tax impact of the realization of unrealized capital gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, and the disclosed value cannot be realized in
immediate settlement of the instrument. In evaluating the Company's management
of interest rate, price and liquidity risks, the fair values of all financial
instruments should be taken into consideration.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the financial instruments included in the table
above:
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotes. Where quoted market prices or dealer quotes are not available,
fair values are measured utilizing quoted market prices for similar securities
or by using discounted cash flow methods. Cost for mortgage-backed securities is
adjusted for unamortized premiums and discounts, which are amortized using the
interest method over the estimated remaining term of the securities, adjusted
for anticipated prepayments.
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates that reflect the rates at which similar loans would
be made to similar borrowers. These rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimates
of mortgage loans of lower credit quality, including problem and restructured
loans, are based on the estimated fair value of the underlying collateral.
Investment contract liabilities:
- - With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
- - Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals that may ultimately result in
paying an amount different than that determined to be payable on demand.
Long-term debt: The Company had no long-term debt outstanding as of December 31,
2000. As of December 31, 1999, fair value was based on quoted market prices for
the same or similar issued debt or, if no quoted market prices were available,
on the current rates estimated to be available to former Aetna for debt of
similar terms and remaining maturities.
Page 53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL INSTRUMENTS
OFF-BALANCE-SHEET AND OTHER FINANCIAL INSTRUMENTS
The notional amounts, carrying values and estimated fair values of the Company's
off-balance-sheet and other financial instruments at December 31 were as
follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------- -----------------------------------------
Carrying Carrying
Value Estimated Value Estimated
Notional Asset Fair Notional Asset Fair
(Millions) Amount (Liability) Value Amount (Liability) Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Futures contracts to purchase securities $40.0 $(.1) $ (.1) $ 95.3 $(3.1) $(3.1)
Futures contracts to sell securities 16.0 -- -- 220.2 3.6 3.6
Interest rate swaps 43.0 -- 4.9 43.0 -- 3.7
Warrants to purchase securities -- -- -- 30.0 .1 .1
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The notional amounts of these instruments do not represent the Company's risk of
loss. The fair value of these instruments was estimated based on quoted market
prices, dealer quotations or internal price estimates believed to be comparable
to dealer quotations. These fair value amounts reflect the estimated amounts
that the Company would have to pay or would receive if the contracts were
terminated.
The Company engages in hedging activities to manage interest rate and price
risks. Such hedging activities have principally consisted of using
off-balance-sheet instruments that involve, to varying degrees, elements of
market risk and credit risk in excess of the amounts recognized in the
Consolidated Balance Sheets. The Company evaluates the risks associated with
these instruments in a manner similar to that used to evaluate the risks
associated with on-balance-sheet financial instruments. Unlike on-balance-sheet
financial instruments, where credit risk is generally represented by the
notional or principal amount, the off-balance-sheet financial instruments' risk
of credit loss generally is significantly less than the notional value of the
instrument and is represented by the positive fair value of the instrument. The
Company generally does not require collateral or other security to support the
financial instruments discussed below. However, the Company controls its credit
risk exposure through credit approvals, credit limits and regular monitoring
procedures. There were no material concentrations of off-balance-sheet financial
instruments at December 31, 2000 or 1999.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell securities at
a specified future date and at a specified price or yield. Futures contracts
trade on organized exchanges and, therefore, have minimal credit risk.
Interest Rate Swaps:
The Company utilizes interest rate swaps to manage certain exposures related to
changes in interest rates primarily by exchanging variable-rate returns for
fixed-rate returns.
Warrants:
Warrants are instruments giving the Company the right, but not the obligation,
to buy a security at a given price during a specified period.
Page 54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $1,161.6 $1,253.1 $1,253.0
Equity securities 6.8 4.0 5.2
Other investment securities 104.7 33.1 50.6
Mortgage loans 208.2 242.9 292.4
Investment real estate (1) 63.8 63.2 69.5
Other 189.9 121.7 194.4
Cash equivalents 26.7 13.7 18.3
- -------------------------------------------------------------------------------
Gross investment income 1,761.7 1,731.7 1,883.4
Less: investment expenses 130.1 129.9 186.8
- -------------------------------------------------------------------------------
Net investment income (2) $1,631.6 $1,601.8 $1,696.6
===============================================================================
</TABLE>
(1) Includes $14.0 million, $11.8 million and $10.1 million from real
estate held for sale during 2000, 1999 and 1998, respectively.
(2) Includes amounts related to experience-rated contractholders of
$293.6 million, $350.4 million and $418.5 million during 2000, 1999
and 1998, respectively. Interest credited to contractholders is
included in current and future benefits.
8. CAPITAL GAINS AND LOSSES ON INVESTMENTS AND OTHER
Net realized capital gains (losses), excluding amounts related to
experience-rated contractholders and discontinued products, on investments were
as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $(108.8) $(43.7) $ 46.8
Equity securities (1) 14.2 49.5 191.4
Mortgage loans .7 .4 19.8
Investment real estate (.2) 3.0 1.5
Sales of subsidiaries (2) 78.8 36.0 60.0
Other (3) (24.8) 17.3 (29.6)
- -------------------------------------------------------------------------------
Pretax realized capital gains (losses) $ (40.1) $ 62.5 $289.9
===============================================================================
After-tax realized capital gains (losses) $ (14.2) $ 21.4 $189.0
===============================================================================
</TABLE>
(1) Includes pretax realized capital gains of $114.6 million in 1998,
related to the sale of the Company's investment in Travelers
Property Casualty Corporation.
(2) Includes a pretax realized capital gain of $60.0 million in 2000,
1999 and 1998 related to contingent payments following the sale of
the Company's behavioral health management subsidiary, Human Affairs
International, in 1997 and a pretax realized capital loss of $35.0
million in 1999 related to the sale of NYLCare Texas. (Refer to
Note 4.)
(3) Includes in 1999, $21.1 million of previously deferred hedge gains related
to an anticipated debt issuance.
Net realized capital gains (losses) of $(44) million, $(11) million and $122
million for 2000, 1999 and 1998, respectively, related to experience-rated
contractholders were deducted from net realized capital gains and an offsetting
amount was reflected in policyholders' funds.
Proceeds from the sale of debt securities and the related gross gains and losses
were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $12,430.9 $13,007.4 $13,721.4
Gross gains 70.2 97.6 120.4
Gross losses 179.0 141.3 73.6
- --------------------------------------------------------------------------------
</TABLE>
Page 55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL GAINS AND LOSSES ON INVESTMENTS AND OTHER (CONTINUED)
Changes in shareholders' equity related to changes in accumulated other
comprehensive income (loss) (unrealized capital gains and losses on securities
and foreign currency) (excluding those related to experience-rated
contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 543.4 $ (845.4) $ 27.6
Equity securities and other (152.8) (60.2) (183.6)
Foreign exchange (39.9) (132.5) (43.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 350.7 (1,038.1) (199.3)
Less: increase (decrease) in deferred income taxes 74.4 (204.7) (70.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 276.3 (833.4) (129.3)
Sale and spin-off transaction 414.4 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net changes in accumulated other comprehensive income (loss) $ 690.7 $ (833.4) $(129.3)
===================================================================================================================================
</TABLE>
Shareholders' equity included the following accumulated other comprehensive
income (loss) (excluding amounts related to experience-rated contractholders and
discontinued products) at December 31:
<TABLE>
<CAPTION>
(Millions) 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Debt securities:
Gross unrealized capital gains $ 166.5 $ 205.6
Gross unrealized capital losses (180.3) (537.4)
- -------------------------------------------------------------------------------
Net unrealized capital losses on debt securities (13.8) (331.8)
- -------------------------------------------------------------------------------
Equity securities and other:
Gross unrealized capital gains 77.5 71.8
Gross unrealized capital losses (18.4) (56.5)
- -------------------------------------------------------------------------------
Net unrealized capital gains on equity securities and other 59.1 15.3
- -------------------------------------------------------------------------------
Foreign exchange 5.7 (449.5)
Deferred income taxes (15.9) 110.4
- -------------------------------------------------------------------------------
Net accumulated other comprehensive income (loss) $ 35.1 $(655.6)
===============================================================================
</TABLE>
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized gains on securities (excluding those related to experience-rated
contractholders and discontinued products) were as follows:
<TABLE>
<CAPTION>
(Millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $293.0 $(560.8) $ 123.1
Less: reclassification adjustment for gains (losses) and other items
included in net income (2) (23.2) 27.8 224.5
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $316.2 $(588.6) $(101.4)
===================================================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$450.8 million, $(862.8) million and $189.4 million for 2000, 1999 and
1998, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $(35.7) million, $42.8 million and $345.4 million for
2000, 1999 and 1998, respectively.
9. SEVERANCE AND FACILITIES CHARGE
In December 2000, the Company recorded an after-tax severance and facilities
charge of $93 million ($143 million pretax) related to actions taken or expected
to be taken with respect to initiatives that are intended to strengthen the
Company's competitiveness, improve its profitability and concentrate its
resources on its core mission as a health care and related benefits company.
These initiatives include the elimination of targeted unprofitable membership
and a reduction in associa