<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, 1998

                         Commission File Number 1-11913

                                   Aetna Inc.
             (Exact name of registrant as specified in its charter)

                Connecticut                                02-0488491
      (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)

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
Common Stock $.01 par value            New York Stock Exchange

6.25% Class C Voting Mandatorily Convertible             New York Stock Exchange
  Preferred Stock $.01 par value

9 1/2% Cumulative Monthly Income Preferred               New York Stock Exchange
  Securities, Series A (issued by a subsidiary)          
  
6 3/8% Notes due August 15, 2003                         New York Stock Exchange

        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 |X|                                              No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1999 was $13,571,092,504.

As of January 31, 1999, 141,437,390 shares of the registrant's Common Stock $.01
par value were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 1998 Annual Report to Shareholders (the "Annual
Report"). (Parts I, II and IV)

Portions of the registrant's proxy statement to be filed on or about March 15,
1999 (the "Proxy Statement"). (Parts III and IV)

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<PAGE>   2

                                TABLE OF CONTENTS

PART I                                                                      Page
                                                                            ----

Item 1.   Business.
          A.   Organization of Business.                                       3
          B.   Financial Information about Industry Segments.                  3
          C.   Description of Industry Segments.
               1.  Aetna U.S. Healthcare.                                      4
               2.  Aetna Retirement Services.                                 13
               3.  Aetna International.                                       17
               4.  Large Case Pensions.                                       18
               5.  General Account Investments.                               19
               6.  Other Matters.
                   a.  Regulation.                                            20
                   b.  NAIC IRIS Ratios.                                      23
                   c.  Ratios of Earnings to Fixed Charges and 
                       Earnings to Combined Fixed Charges and 
                       Preferred Stock Dividends.                             23
                   d.  Trademarks.                                            23
                   e.  Ratings.                                               24
                   f.  Miscellaneous.                                         24
Item  2.  Properties.                                                         25
Item  3.  Legal Proceedings.                                                  25
Item  4.  Submission of Matters to a Vote of Security Holders.                25
Executive Officers of Aetna Inc.                                              26

PART II

Item  5.  Market for Registrant's Common Equity and Related 
          Stockholder Matters.                                                28
Item  6.  Selected Financial Data.                                            28
Item  7.  Management's Discussion and Analysis of Financial 
          Condition and Results of Operations.                                28
Item 7A.  Quantitative and Qualitative Disclosure About 
          Market Risk.                                                        28
Item  8.  Financial Statements and Supplementary Data.                        28
Item  9.  Changes in and disagreements with Accountants 
          on Accounting and Financial Disclosure.                             28

PART III

Item 10.  Directors and Executive Officers of the Registrant.                 29
Item 11.  Executive Compensation.                                             29
Item 12.  Security Ownership of Certain Beneficial Owners and Management.     29
Item 13.  Certain Relationships and Related Transactions.                     29

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.    29
Index to Financial Statement Schedules.                                       37
Signatures.                                                                   51


                                     Page 2
<PAGE>   3

PART I

Item 1. Business.

A. Organization of Business

Aetna Inc. and its subsidiaries (collectively, the "Company") constitute one of
the nation's largest health benefits companies, based on membership, and one of
the nation's largest insurance and financial services organizations centered
around three core businesses: health care, retirement services and
international.

Aetna Inc., a Connecticut corporation, became the parent corporation of Aetna
Services, Inc. ("Aetna Services") and Aetna U.S. Healthcare Inc. (formerly U.S.
Healthcare, Inc.) as a result of a merger transaction on July 19, 1996. The
merger was accounted for as a purchase of U.S. Healthcare. (See Note 3 of Notes
to Consolidated Financial Statements in the Annual Report.) Aetna sold its
property-casualty operations on April 2, 1996. (See Note 4 of Notes to
Consolidated Financial Statements in the Annual Report for a discussion of
certain indemnifications and other information related to the property-casualty
sale.) Aetna acquired New York Life Insurance Company's NYLCare health business
("NYLCare") on July 15, 1998 and Aetna sold its domestic individual life
insurance business on October 1, 1998.

The Company's business operations are conducted in the following segments: Aetna
U.S. Healthcare, Aetna Retirement Services, Aetna International and Large Case
Pensions. The principal products included in these segments are:

Aetna U.S. Healthcare:

      Health products (including health maintenance organization,
       point-of-service, preferred provider organization and indemnity products)
      Group life and disability insurance
      Long-term care insurance

Aetna Retirement Services:

      Financial services (including annuity contracts, investment advisory
       services, financial planning and pension plan administrative services)

Aetna International:

      Primarily life and health insurance and financial retirement services

Large Case Pensions:

      Retirement products (including pension and annuity products) primarily for
       defined benefit and defined contribution plans

In addition, the Corporate segment includes interest expense and corporate
expenses not directly related to the Company's business segments, such as staff
area expenses, national advertising and contributions.

B. Financial Information about Industry Segments

Required financial information by industry segment is set forth in Notes 18, 19
and 20 of Notes to Consolidated Financial Statements, which is incorporated
herein by reference to the Annual Report. Revenue and income from continuing
operations attributable to each industry segment are incorporated herein by
reference to the Selected Financial Data in the Annual Report.

Certain reclassifications have been made to the 1997 and 1996 financial
information to conform to the 1998 presentation. 


                                     Page 3
<PAGE>   4

C. Description of Industry Segments

1. Aetna U.S. Healthcare

Products and Services

Aetna U.S. Healthcare provides a full spectrum of health products (managed care
and indemnity) and group insurance products (life, disability and long-term
care) on both an insured and an employer-funded basis. Under insured plans, the
Company assumes all or a majority of health care cost, utilization, mortality,
morbidity or other risk depending on the product. Under employer-funded plans,
the plan sponsor, and not the Company, assumes all or a majority of these risks.

Aetna U.S. Healthcare consists of the Health Risk business and the Group
Insurance and Other Health business.

Health products include health maintenance organization, point-of-service,
preferred provider organization and indemnity products. The Health Risk business
includes health products offered on an insured basis.

The Group Insurance and Other Health business includes group life and disability
insurance and long-term care insurance, offered on both an insured and
employer-funded basis, and all health products offered on an employer-funded
basis.

The following table summarizes premiums and fees and other income for the Health
Risk and Group Insurance and Other Health businesses:

<TABLE>
<CAPTION>
(Millions)                                            1998(1)         1997          1996
-------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>           <C>       
Health Risk                                         $ 11,815.8     $  9,735.0    $  6,749.5
Group Insurance and Other Health                       2,666.5        2,573.5       2,511.6
-------------------------------------------------------------------------------------------
Total Aetna U.S. Healthcare                         $ 14,482.3     $ 12,308.5    $  9,261.1*
===========================================================================================
U.S. Healthcare Pre Merger (historical amounts)         N/A***         N/A***    $  2,384.7**
===========================================================================================
</TABLE>

(1) Includes results for NYLCare since July 15, 1998.

*     Includes U.S. Healthcare premiums and fees and other income from July 19,
      1996 through December 31, 1996.
**    Reflects premiums and fees and other income from January 1, 1996 through
      July 18, 1996.
***   Not applicable.

Under insured plans, Aetna U.S. Healthcare charges a premium and under
employer-funded plans, Aetna U.S. Healthcare charges a fee for administrative
and claim services.

The principal Commercial health products offered by Aetna U.S. Healthcare are:

Health Maintenance Organization ("HMO") plans offer comprehensive managed care
benefits generally through participating network physicians, hospitals and other
providers. When an individual enrolls in one of the Company's HMOs, he or she
selects a primary care physician ("PCP") from among the physicians participating
in the Aetna U.S. Healthcare network. PCPs generally are family practitioners,
internists, general practitioners or pediatricians who provide necessary
preventive and primary medical care, and are generally responsible for
coordinating other necessary health care, including making referrals to
participating network specialists. Preventive care and quality improvement are
emphasized in these plans. The Company offers HMO plans with varying levels of
copayments which result in different levels of premium rates. HMO plans are
principally offered on an insured basis. Commercial HMO membership totaled 4.4
million as of December 31, 1998, 3.3 million as of December 31, 1997 and 3.0
million as of December 31, 1996.


                                     Page 4
<PAGE>   5

Point-of-Service ("POS") plans blend the characteristics of HMO and indemnity
plans. Members can have comprehensive HMO-style benefits through network
providers with minimum out-of-pocket expense (copayments) and also can go
directly, without a referral, to any provider they choose, subject to, among
other things, certain deductibles and coinsurance, with member cost sharing
limited by out-of-pocket maximums. POS plans are offered on both an insured and
employer-funded basis. Commercial POS membership totaled 4.1 million as of
December 31, 1998, 3.7 million as of December 31, 1997 and 3.5 million as of
December 31, 1996.

Preferred Provider Organization ("PPO") plans offer the member the ability to
select any health care provider, with benefits paid at a higher level when care
is received from a network provider. Coverage is subject to deductibles and
coinsurance, with member cost sharing limited by out-of-pocket maximums. PPO
plans are offered on both an insured and employer-funded basis. PPO membership
totaled 4.0 million as of December 31, 1998, 3.6 million as of December 31, 1997
and 3.7 million as of December 31, 1996.

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 plans are offered on both
an insured and employer-funded basis. Indemnity membership totaled 2.5 million
as of December 31, 1998, 2.6 million as of December 31, 1997 and 3.1 million as
of December 31, 1996.

In addition to Commercial health products, 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"),
Aetna U.S. Healthcare HMOs offer coverage for Medicare-eligible individuals in
certain geographic areas. Generally, services must be obtained through network
providers, with the exception of emergency and urgent care. Members generally
receive enhanced benefits over standard Medicare fee-for-service coverage,
including vision, hearing and pharmacy coverage. Such Medicare plans are offered
on an insured basis. Medicare membership totaled .5 million as of December 31,
1998, .4 million as of December 31, 1997 and .3 million as of December 31, 1996.

The Company exited certain unprofitable Medicare markets effective January 1,
1999. The Company will continue to review the profitability of its Medicare
business in certain markets.

The Company also served as an administrator of Medicare benefits in certain
states, providing claim services for physicians, hospitals, skilled nursing
facilities and home health agencies in exchange for a fee. The contract with
HCFA to provide these services expired on September 30, 1997.

The Company has contracts with certain state and local agencies to offer
coverage for individuals eligible for Medicaid and subsidized children's health
insurance programs. Benefits are determined by the contracting agencies. This
coverage is offered on an insured basis. This coverage membership totaled .1
million as of December 31, 1998, 1997 and 1996.

Aetna U.S. Healthcare offers a variety of specialty health care coverages
offered as either supplements to health products or as stand-alone products.
Such coverages include indemnity and managed dental plans and prescription drug
and vision programs.

These specialty health coverages and services are included in either Health Risk
or Group Insurance and Other Health business, with the exception of behavioral
health (including employee assistance programs) and network-based workers'
compensation case management services, which are included in Group Insurance and
Other Health.


                                     Page 5
<PAGE>   6

During 1997, the Company sold certain subsidiaries primarily to more effectively
focus its health business resources. On December 5, 1997, the Company sold Human
Affairs International ("HAI"), a behavioral health management business. Aetna
U.S. Healthcare continues to market HAI's behavioral health services, including
employee assistance programs, through a long-term strategic arrangement with the
acquiring company. During 1997, the Company also sold Healthcare Data
Interchange Corporation ("HDIC"), a provider of health care electronic data
interchange services, and Aetna Professional Management Corporation ("APMC"), a
physician practice management business.

Aetna U.S. Healthcare group insurance products consist primarily of the
following:

Group Life Insurance consists principally of renewable term coverage, the
amounts of which may be fixed or linked to individual employee wage levels.
Basic and supplemental term coverage and spouse and dependent coverages are
available. Group universal life and accidental death benefit coverages are also
available. Group life insurance is offered on an insured basis. Group life
insurance membership totaled 9.8 million as of December 31, 1998 and 1997 and
9.6 million as of December 31, 1996.

Group Disability Insurance provides coverage for disabled employees' income
replacement benefits for both short-term disability and long-term disability.
The Company also offers a managed disability product with additional case
management features. Group disability insurance coverages are offered on both an
insured and employer-funded basis. Group disability membership totaled 2.6
million as of December 31, 1998 and 1997 and 2.4 million as of December 31,
1996.

Long-Term Care Insurance provides coverage for long-term care expenses in a
nursing home, adult day care or home setting. Long-term care insurance is
offered on an insured basis. Long-term care membership totaled .1 million as of
December 31, 1998, 1997 and 1996.

Many group insurance members participate in more than one type of Aetna U.S.
Healthcare coverage and are counted in each.

Provider Networks

General

Aetna U.S. Healthcare provides members of its managed care plans with access to
health care services through networks of independent health care providers. The
Company contracts with providers to participate in its provider networks in
order to provide members with broad access to high quality, cost effective
medical care. The providers in the Company's networks are independent
contractors and are neither employees nor agents of the Company.

The HMOs operated by Aetna U.S. Healthcare most closely adhere to the individual
practice model. Under the individual practice model, the HMO contracts with
independent physicians who are broadly dispersed throughout a community and who
care for patients in their own offices. Participating physicians generally also
have patients who are not members of the Company's HMOs. In the Company's HMOs,
the primary care physician plays an important role in practicing preventive
medicine and acts on behalf of the HMO member to coordinate the care provided by
specialist physicians, hospitals, and other health care providers.


                                     Page 6
<PAGE>   7

Aetna U.S. Healthcare uses a variety of practices to help contain the rate of
increase in the cost of medical services. In addition to contracts with health
care providers, such procedures include the development and implementation of
standards for the appropriate utilization of health care resources and working
with health care providers to review data in order to help them improve
consistency and quality.

At December 31, 1998, Aetna U.S. Healthcare had approximately 385,000 providers
in its networks nationwide.

Contracting

Primary Care Physicians

Compensation by the Company's HMOs to directly contracted PCPs is principally on
a capitated basis, although fee-for-service contracts also exist. Under a
capitation arrangement, physicians receive a monthly fixed fee for each HMO
member, regardless of the medical services provided to the member. In some
instances, the capitation rate is subject to adjustment based on the attainment
of certain criteria including comprehensiveness of care, quality of care and
utilization. This quality-based incentive program is administered via the
Company's Quality Care Compensation System. In a fee-for-service arrangement,
network physicians are paid for health care services provided to the member
based upon a fee schedule.

Hospitals

The Company typically enters into contracts that provide for all-inclusive per
diem and per case, with fixed rates for ambulatory surgery and emergency room
services. Certain contracted hospitals' final compensation is based upon
attainment of agreed-upon quality and other measures. The Company has some
hospital contracts that pay a percentage of billed charges.

Aetna U.S. Healthcare HMOs generally require precertification of elective
admissions and monitoring of the length of hospital stays. Participating
physicians generally admit their HMO patients to 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.

Aetna U.S. Healthcare's HMOs have capitated payment arrangements for most mental
health, substance abuse, laboratory, radiology, diagnostic imaging, podiatric
and physical therapy services.

Integrated Delivery Systems

Aetna U.S. Healthcare 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.


                                     Page 7
<PAGE>   8

Quality Assessment

Quality assessment programs begin with the initial selection of providers.
Physicians wanting to participate in the Company's HMO networks must satisfy an
extensive set of criteria, including licensing, hospital admission privileges,
demonstrated proficiency, written references, patient access, office standards,
after-hours coverage and many other factors. Hospitals also have an extensive
set of criteria, including HCFA and the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") accreditation.

Participating physicians are recredentialed regularly. Recredentialing of PCPs
covers many aspects of patient care including an analysis of member grievances
filed with the Company, the transfer and termination rate of members from the
practice, on-site interviews, analysis of utilization patterns, extensive member
surveys and analysis of drug prescription patterns. Committees, each composed of
a peer group of participating private physicians, review participating PCPs
being considered for recredentialing.

The Company also offers quality and outcome measurement and improvement
programs, and health care data analysis systems for providers and purchasers of
health care.

The Company seeks accreditation for certain of its HMO plans from the National
Committee for Quality Assurance ("NCQA"), a national organization established to
review the quality and medical management systems of HMOs and other managed care
plans. Accreditation by NCQA is a nationally recognized standard. As of December
31, 1998, 20 of the Company's HMOs have received full 3 year accreditation by
NCQA.

Principal Markets and Sales

Total health membership is widely dispersed throughout the United States. The
Company offers a robust array of benefit plans, many of which are available in
all 50 states.

Products offered by the Group Insurance and Other Health business are available
in all 50 states. Depending on the product, the Company markets to small groups
up to National Accounts (i.e., those with at least 3,000 eligible lives).

The following table presents total health membership by region and funding
arrangement, for the years indicated:

<TABLE>
<CAPTION>
                                       1998 (1)                         1997                            1996
                            --------------------------       ---------------------------      ---------------------------
(Thousands)                 Risk     Nonrisk     Total       Risk    Nonrisk       Total      Risk     Nonrisk      Total
-------------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>       <C>        <C>        <C>         <C>       <C>         <C>        <C>  
Mid-Atlantic               1,759       1,268     3,027      1,863      1,159       3,022     1,911       1,115      3,026
Northeast                  1,347         708     2,055      1,089        735       1,824     1,127         776      1,903
Southeast                  1,320       1,723     3,043        752      1,717       2,469       594       1,784      2,378
Mid-West                     715       1,916     2,631        503      1,915       2,418       459       1,966      2,425
West Central               1,184       1,648     2,832        405      1,862       2,267       484       1,823      2,307
West                         978       1,099     2,077        723      1,011       1,734       730         969      1,699
-------------------------------------------------------------------------------------------------------------------------
Total Health
  Membership (2)           7,303       8,362    15,665      5,335      8,399      13,734     5,305       8,433     13,738
=========================================================================================================================
</TABLE>

(1)   Health membership for NYLCare at the date of acquisition was 2,117
      members.
(2)   Includes the following products: Commercial, Medicare and Medicaid HMO,
      POS, PPO and Indemnity.

For membership composition of Aetna U.S. Healthcare's products by funding
arrangement, see Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Aetna U.S. Healthcare - Membership in the
Annual Report.


                                     Page 8
<PAGE>   9

For both Health Risk and Group Insurance and Other Health businesses, products
and services are marketed primarily to employers for the benefit of employees
and their dependents. Frequently, employers offer employees a choice of
coverages, from which the employee makes his or her selection during a
designated annual open enrollment period. In some instances, Aetna U.S.
Healthcare is the only health care coverage offered. Employers pay all or a
portion of the monthly premiums, and employees, through payroll deductions, pay
any premium not provided as an employee benefit.

Within the Health Risk business, Medicare coverage is sold on an individual
basis as well as through employer groups to their retirees. Medicaid and
subsidized children's health insurance programs are marketed to individuals
rather than employer groups.

Aetna U.S. Healthcare products are sold primarily through Company sales
personnel who frequently work with independent consultants and brokers who
assist in the production and servicing of business. Sales representatives also
sell to employers on a direct basis.

For large customers, independent consultants and brokers are frequently involved
in employer health plan selection decisions and sales.

Marketing and sales efforts are promoted by an advertising program which
includes television, radio, billboards and print media, supported by market
research and direct marketing efforts.

Health Pricing

For insured Commercial plans, customer contracts are generally established in
advance of the policy period, for a duration of one year. In determining the
premium rates to be charged to the customer, prospective and retrospective
rating methodologies are used.

Under prospective rating, a fixed premium rate is determined at the beginning of
the policy period. Unanticipated increases in medical costs cannot be recovered
in the current policy year; however, prior experience for a product in the
aggregate is considered, among other factors, in determining premium rates for
future periods. Federally-qualified HMOs are required to set premiums in this
manner.

Aetna U.S. Healthcare Commercial HMO plans establish premium rates prior to
contract inception, without regard to actual utilization of services incurred by
individual members, using one of three approved community rating methods. These
rates may vary from account to account to reflect projected family size and
contract mix, benefit levels, renewal date, and other factors. Under one of
these methods, "traditional community rating", an HMO establishes premium rates
based on its revenue requirements for its entire enrollment in a given
community. Under "community rating by class", an HMO establishes premium rates
based on its revenue requirements for broad classes of membership distinguished
by factors such as age and sex. Under "group specific community rating", an HMO
establishes premium rates based on the HMO's revenue requirements for providing
services to the group. State laws, in certain of the states in which the Company
operates HMOs, require the filing with and approval by the state of HMO premium
rates, and certain states may prohibit the use of one or more of these rating
methods. In addition to reviewing anticipated medical costs, some states also
review anticipated administrative costs as part of the approval process. Future
results of the Company could be affected if the premium rates requested by the
Company are not approved or are adjusted downward by state regulators.


                                     Page 9
<PAGE>   10

Under retrospective rating, a preliminary premium rate is determined at the
beginning of the policy period. Once the policy period has ended, the actual
experience is reviewed. If the experience is positive (i.e., actual claim costs
and other expenses are less than those expected) then a refund is credited to
the policy. If the experience is negative, then the resulting deficit may, in
certain instances, be recovered through contractual provisions; otherwise the
deficit is considered in setting future premium levels. If a customer elects to
terminate coverage, these deficits generally cannot be recovered. Retrospective
rating is often used for non-HMO, employee funded plans which exceed 300 lives.

Aetna U.S. Healthcare has contracts with HCFA to provide HMO coverage to
Medicare beneficiaries who choose health care coverage through an HMO. Under
these annual contracts, HCFA pays the HMO at a capitated rate based on
membership and adjusted for demographic factors and a user fee. Inflation,
changes in utilization patterns and benefit plans, demographic factors such as
age and sex, and both local county and national fee for service average per
capita Medicare costs are considered in the rate calculation process. Amounts
payable under Medicare risk arrangements are subject to annual unilateral
revision by HCFA. In addition to premiums received from HCFA, some of the
Medicare products offered by Aetna U.S. Healthcare require a modest premium to
be paid by the member. Under Medicare risk arrangements, Aetna U.S. Healthcare
assumes the risk of higher than expected medical expenses. Medicare contracts
generate higher per member per month revenues, but also higher per member per
month medical expenses, than Commercial plans.

Aetna U.S. Healthcare also has HMO contracts with a variety of federal
government employee groups under the Federal Employees Health Benefit Program.
Premium rates are subject to federal government review and audit. Premium rates
for these contracts are set prospectively but are subject to retrospective
adjustments.

Premiums and fees from the federal government accounted for 21% of Aetna U.S.
Healthcare's revenue in 1998. Contracts with HCFA accounted for 84% of these
premiums and fees, with the balance from federal employee related benefit
programs.

The Company has contracts with state and local agencies to provide fully-insured
health benefits to persons eligible for Medicaid and subsidized children's
health insurance program benefits. These contracts are generally for a period of
one to three years. Aetna U.S. Healthcare receives a fixed monthly payment based
on membership in return for the coverage of health care services. The rates are
subject to periodic unilateral revision by the contracting agencies. Aetna U.S.
Healthcare assumes the risk of higher than expected medical expenses.

Contracts with the customer to provide administrative services for
employer-funded plans are generally for a period of one year. Aetna U.S.
Healthcare has entered into certain guarantees with respect to certain functions
such as customer service response time, claim processing accuracy and claim
processing turnaround time, as well as certain guarantees that claim expenses to
be incurred by the customer will fall within a certain range. With any of these
guarantees, Aetna U.S. Healthcare is financially at risk if the conditions of
the arrangements are not met, though the maximum at risk is typically 10% - 30%
of fees for the customer involved.

Competition

Competition in the health care industry has intensified in recent years,
primarily due to more aggressive marketing and pricing, a proliferation of
competing products, including new products developed in an effort to contain
health care costs, and increased quality and price sensitivity. New entrants
into the marketplace as well as significant consolidation within the industry
have also contributed to the more intense competitive environment.


                                     Page 10
<PAGE>   11

Aetna U.S. Healthcare believes that the most significant factors which
distinguish competing health plans are quality of service and managed care
programs (including NCQA accreditation status), comprehensiveness of coverage,
cost (including both premium and member out-of-pocket costs), product design,
financial stability and the geographic scope of provider networks and the
providers available in such networks. Aetna U.S. Healthcare believes that it is
competitive in each of these areas. The ability to increase the number of
persons covered by Aetna U.S. Healthcare benefits or to increase revenues is
affected by competition in any particular area. In addition, the ability to
increase the number of persons enrolled in Health Risk products is affected by
the desire and ability of employers to self fund their health coverage.
Competition may also affect the availability of services from health care
providers, including primary care physicians, specialists and hospitals.

Within the Health Risk business, Aetna U.S. Healthcare competes with local and
regional managed care plans, in addition to managed care plans sponsored by
large health insurance companies and Blue Cross/Blue Shield plans. Additional
competitors include other types of medical and dental provider organizations,
various specialty service providers, integrated health care delivery
organizations, and in certain plans, with programs sponsored by the federal or
state governments.

Within the Other Health component of the Group Insurance and Other Health
business, Aetna U.S. Healthcare competes primarily with other commercial
insurance companies and third party administrators.

For the Group Insurance industry, Aetna U.S. Healthcare believes that the most
significant factors which distinguish competing companies are price, quality of
service, comprehensiveness of coverage, and product array and design. Specialty
carriers have increased market penetration in the life and disability business.
The deeply-penetrated group life market remains highly competitive.

Reserves

For the Health Risk business, medical claims payable reflects estimates of the
ultimate cost of claims that have been incurred but not yet reported and
reported but not yet paid. Medical claims payable are based on a number of
factors including those derived from historical claim experience. Medical claims
payable are estimated periodically, and any resulting adjustments are reflected
in current period results.

For Group Insurance products, reserves are established as premiums become due to
reflect the present value of expected future obligations net of the present
value of expected future premiums. Policy reserves for group paid-up life
insurance generally reflect long-term fixed obligations and are computed on the
basis of assumed or guaranteed yield and benefit payments. Assumptions are based
on the Company's historical claim experience. For long-term disability products,
reserves are established for (i) lives currently in payment status (using both
standard industry, as well as the Company's own morbidity and interest rate
assumptions), (ii) lives who have not yet satisfied the waiting period, but are
expected to do so and (iii) claims that have been incurred but not reported.
Long-term care reserves are a long-term obligation calculated using industry
data for morbidity and mortality assumptions. Reserves for unpaid claims for
other group health products (including short duration contracts) are estimated
periodically and any resulting adjustments are reflected in current earnings.

Group health and group insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such premiums are recognized as
the related experience emerges.


                                     Page 11
<PAGE>   12

Reinsurance

Aetna U.S. Healthcare uses reinsurance agreements with nonaffiliated insurers
for Group Insurance businesses to control its exposure to large losses and
certain other risks. The Company maintains catastrophic life reinsurance which
provides protection against accidents involving five or more covered lives. For
disability business, 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 the
disability business, a quota share treaty for another market segment of the
disability business, and facultative treaties on a case by case basis. In
addition, the Company carries excess medical malpractice professional liability
insurance.

Group Life Insurance In Force and Other Statistical Data

The following table summarizes changes in group life insurance in force before
deductions for reinsurance ceded to other companies for the years indicated:

<TABLE>
<CAPTION>
(Dollars in Millions)                                             1998           1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>          <C>      
In force, end of year                                        $ 378,727      $ 316,478    $ 309,999
--------------------------------------------------------------------------------------------------
Terminations (lapses and all other)                          $  14,018      $  10,678    $  10,714
--------------------------------------------------------------------------------------------------
Number of policies and contracts in force, end of year:
   Group Life Contracts (1)                                     14,044         13,849       15,288
   Group Conversion Policies (2)                                31,024         32,660       33,538
--------------------------------------------------------------------------------------------------
</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

For information regarding certain important factors that may materially affect
Aetna U.S. Healthcare's business, see MD&A - Forward-Looking Information/Risk
Factors, Aetna U.S. Healthcare - Outlook and financial results discussions in
the Annual Report.


                                     Page 12
<PAGE>   13

2. Aetna Retirement Services

Products and Services

Aetna Retirement Services ("ARS") offers financial services products primarily
through Aetna Life Insurance and Annuity Company ("ALIAC") and Aetna Insurance
Company of America ("AICA") indirect, wholly owned subsidiaries of the Company.
Prior to October 1, 1998, ARS also offered individual life insurance products
through ALIAC. Investment advisory services are offered through ALIAC and Aeltus
Investment Management Inc. ("Aeltus"), registered investment advisers and
indirect, wholly owned subsidiaries of the Company. Aeltus is also an adviser to
Aetna mutual funds. Financial planning services are offered through Financial
Network Investment Corporation ("FNIC"), a broker/dealer acquired in 1997, and
Aetna Financial Services, Inc. ("AFSI"), indirect wholly owned subsidiaries of
the Company.

Financial Services

Financial services products principally include annuity contracts that offer a
variety of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403, 408
and 457 (collectively, "qualified plans") and nonqualified annuity contracts.
These contracts may be deferred or immediate ("payout annuities"). Financial
services also include investment advisory services, financial planning and
pension plan administrative services.

Individual Life Insurance

Individual life insurance products include universal life and variable universal
life, which have both life insurance and investment characteristics, traditional
whole life and term insurance. ARS' domestic individual life insurance business
was sold on October 1, 1998. The transaction was generally in the form of an
indemnity reinsurance arrangement. See MD&A - Overview and Aetna Retirement
Services in the Annual Report for more information.

Investment Options

ARS products provide annuity and certain life insurance customers with variable
and/or fixed investment options. Variable ("nonguaranteed") options provide for
full assumption by the customer of investment risks. Assets supporting variable
options are held in separate accounts that invest in Aetna mutual funds and/or
unaffiliated mutual funds. Aetna mutual funds include funds managed by Aeltus
and, beginning in 1997, funds managed by outside investment advisors under
subadvisory arrangements. Separate account investment income and realized
capital gains and losses are not reflected in the Company's consolidated results
of operations. Fixed options can be either "fully guaranteed" or "experience
rated". Fully guaranteed options provide guarantees on investment return,
maturity values, and if applicable, benefit payments. Experience rated options
require the customer to assume investment (including realized capital gains and
losses) and other risks subject, among other things, to certain minimum
guarantees. The effect of investment performance (as long as minimum guarantees
are not triggered) does not impact the Company's consolidated results.


                                     Page 13
<PAGE>   14

Fees and Investment Margins

Insurance charges, investment management or other fees earned by ARS vary by
product and depend, among other factors, on the funding option selected by the
customer under the product. For variable annuities or life insurance products
where assets are allocated to variable funding options, ARS charges the separate
account an asset-based insurance fee and expense charge. In addition, where the
customer selects an Aetna mutual fund as a variable funding option, ARS receives
an asset-based investment management fee and, in the case of those funds
subadvised by outside managers, ARS pays a subadvisory fee to the fund manager.
For unaffiliated mutual funds, ARS receives distribution fees and/or expense
reimbursements. For fixed funding options, ARS derives an investment margin,
which is based on the difference between income earned on the investments
supporting the liability and interest credited to customers. Other fees or
charges, such as administrative fees, may be assessed depending on the nature of
the product.

ARS also provides direct investment advisory services to unaffiliated customers
through Aeltus and FNIC generally for fees based on assets under management.
FNIC provides financial planning services generally for fees which may or may
not be asset based.

Assets Under Management

The substantial portion of fees or other charges and investment margins are
based on assets under management. Assets under management are principally
affected by deposits, investment growth (i.e., interest credited to customer
accounts for fixed options or market performance for variable options) and
persistency (i.e., customer retention). Assets under management, excluding net
unrealized capital gains and losses on debt securities other than those held in
separate accounts, were $51.9 billion at December 31, 1998, $45.0 billion at
December 31, 1997 and $32.1 billion at December 31,1996. Approximately 95% of
assets under management at December 31, 1998 and 94% at December 31, 1997,
allowed for contractholder withdrawal. Approximately 84% at December 31, 1998
and 77% at December 31, 1997 are subject to market value adjustments and/or
deferred surrender charges.

To encourage customer retention and recover acquisition expenses, contracts
typically impose a surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception which may be waived at the
Company's discretion. The period of time and level of the charge vary by
product. In addition, an approach incorporated into recent variable annuity
contracts with fixed funding options allows contractholders to receive an
incremental interest rate if withdrawals from the fixed account are spread over
a period of five years. Further, more favorable credited rates may be offered
after policies have been in force for a period of time. Existing tax penalties
on annuity distributions prior to age 59-1/2 provide further disincentive to
customers for premature surrenders of annuity balances, but generally do not
impede transfers of those balances to products of competitors.


                                     Page 14
<PAGE>   15

Life Insurance In Force and Other Statistical Data

For individual life insurance products, life insurance in force is a key
determinant of earnings as contract charges for cost of insurance coverage are
typically based on amounts of coverage in force less accumulated policy
reserves. The key drivers of life insurance in force are new sales, surrenders
and mortality. The following table summarizes changes in life insurance in force
before deductions for reinsurance ceded to other companies:

(Amounts in millions, except number of policies and average size of policies in
force)

<TABLE>
<CAPTION>
(Millions)                                             1998 (1)         1997         1996
-----------------------------------------------------------------------------------------
<S>                                                    <C>          <C>         <C>      
Sales and additions:
  Permanent:
   Nonparticipating                                    $  3,522     $  4,281    $   4,357
   Participating                                             13           13           12
Term:
   Nonparticipating                                         513        1,586        1,382
   Participating                                             18           53          133
-----------------------------------------------------------------------------------------
       Total                                           $  4,066     $  5,933    $   5,884
=========================================================================================
Terminations:
  Surrenders and conversions                           $  1,807     $  1,865    $   1,646
    Lapses                                                2,046        2,126        2,098
    Other                                                   323        1,130          330
-----------------------------------------------------------------------------------------
       Total                                           $  4,176     $  5,121    $   4,074
=========================================================================================
In force, end of year:
  Permanent                                            $ 39,275     $ 36,614    $  35,883
  Term                                                   10,410       13,181       13,100
-----------------------------------------------------------------------------------------
      Total                                            $ 49,685     $ 49,795    $  48,983
=========================================================================================
Number of policies in force, end of year:
   Nonparticipating                                     554,776      597,221      627,233
   Participating                                         90,904       97,533      105,098
-----------------------------------------------------------------------------------------
      Total                                             645,680      694,754      732,331
=========================================================================================
Average size of policies in force, end of year:
   Nonparticipating                                    $ 79,357     $ 72,654    $  66,385
   Participating                                         62,266       65,664       69,883
-----------------------------------------------------------------------------------------
</TABLE>

(1)   As a result of the sale of the individual life business on October 1,
      1998, substantially all of the in force amounts are being ceded to an
      outside company.

See Note 13 of Notes to Consolidated Financial Statements in the Annual Report
for a discussion of participating life insurance contracts.

The following table summarizes premiums and deposits for ARS:

<TABLE>
<CAPTION>
(Millions)                                             1998 (1)         1997         1996
-----------------------------------------------------------------------------------------
<S>                                                    <C>          <C>         <C>      
Premiums                                               $  131.9     $  158.5    $   180.7
Deposits                                                5,142.5      4,969.0      4,564.8
-----------------------------------------------------------------------------------------
                                                       $5,274.4     $5,127.5    $ 4,745.5
=========================================================================================
</TABLE>

(1)   1998 amounts reflect the operations of the individual life business
      through the sale date of October 1, 1998.


                                     Page 15
<PAGE>   16

Principal Markets and Method of Distribution

ARS products and services are offered primarily to individuals, pension plans,
small businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate markets.
ARS products generally are sold through pension professionals, independent
agents and brokers, third party administrators, banks, dedicated career agents
and financial planners.

Competition

ARS competes with other insurance companies, as well as an array of financial
services companies including banks, mutual funds and other investment managers.
Principal competitive factors are reputation for investment performance, product
features, service, cost and the perceived financial strength of the investment
manager or sponsor.

Competition may affect, among other matters, both business growth and the
pricing of ARS' products and services.

Reserves

Reserves for limited payment contracts (annuities with life contingent payout)
are computed on the basis of assumed investment yield, mortality, morbidity and
expenses and include a margin for adverse deviation. The assumptions vary by
plan, year of issue and policy duration. Reserves for investment contracts
(deferred annuities and immediate annuities without life contingent payouts) are
equal to cumulative deposits plus credited interest less withdrawals and charges
thereon. Of those investment contracts which are experience rated, the reserves
also reflect net realized capital gains/losses (which ARS reflects through
credited rates on an amortized basis) and unrealized capital gains/losses
related to Financial Accounting Standard ("FAS") No. 115.

Prior to the sale of the individual life business on October 1, 1998, reserves
for universal life products were equal to cumulative deposits less withdrawals
and charges plus credited interest thereon, plus/less net realized capital
gains/losses (which were reflected through credited rates on an amortized
basis). These reserves also included unrealized capital gains/losses related to
FAS No. 115. As a result of the sale and transfer of assets supporting the
business, reserves for universal life products will no longer include net
realized capital gains/losses and unrealized gains/losses related to FAS No. 115
for the years ended December 31, 1998 and beyond. Reserves for all other fixed
individual life contracts are computed on a basis consistent with that described
above for limited payment contracts.

Because the sale was substantially in the form of an indemnity reinsurance
agreement, the Company reported an addition to its reinsurance receivable
approximating the total ARS individual life reserves at the sale date.

Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
ARS' business, see MD&A - Forward-Looking Information/Risk Factors, Aetna
Retirement Services - Outlook and financial results discussions in the Annual
Report.


                                     Page 16
<PAGE>   17

3.  Aetna International

Aetna International, through subsidiaries and joint venture affiliates, sells
primarily life and health insurance and financial retirement services products
in markets outside of the United States.

The Company continues to increase its investments in emerging international and
financial services markets, where it believes demographic and other
characteristics afford the opportunity for long-term business growth. The
Company seeks to enter new emerging markets in their early stages of
development, seeking to be among the first foreign entrants, and then to build
sufficient scale of operations to compete with local and other foreign
companies. The Company also explores opportunities for additional investments,
or divestitures where appropriate, in markets where it has established
operations.

The Company may invest in a new market or increase its position in a market
through a combination of acquisitions, joint ventures and de novo initiatives.
Over the past 5 years, the Company has invested $1.1 billion in its
international operations, of which $245 million was invested in 1998, a majority
of which related to the acquisition of a 74.5% ownership interest in Cruz
Blanca, a private health insurance company in Chile.

Aetna International conducts its business in several major geographic locations:

      o     Asia Pacific - Operations are conducted through majority-owned
            subsidiaries in Indonesia, Malaysia, New Zealand, the Philippines,
            Taiwan and Thailand as well as through equity affiliates in China
            and Hong Kong. The products and services sold by these businesses
            include individual and group life and health insurance, deposit
            administration and related financial products and services.

      o     Americas - Operations are conducted through wholly owned and
            majority-owned subsidiaries in Argentina, Canada, Chile and equity
            affiliates in Brazil, Mexico, Peru, and Venezuela. The products and
            services sold by these businesses include individual and group life
            and health insurance, annuities, personal and commercial
            property-casualty insurance, and pension fund administration
            services.

      o     Other - Includes general and other miscellaneous expenses.

Each of the affiliates through which Aetna International conducts business
operates within guidelines established by the Company. Methods of distributing
products vary by country and product depending on local laws, customs and the
needs of the particular customer segment. Distribution channels include career
agents, independent agents and brokers, financial institutions and direct sales.
Competition varies by country and includes well established local companies, as
well as foreign based companies with a strong international presence.


                                     Page 17
<PAGE>   18

The following table sets forth Aetna International's revenue and operating
earnings or losses by major geographic location (including its share of net
income in minority owned affiliates and excluding Year 2000 costs in 1998 and
net realized capital gains or losses in all three years) and premiums, before
deductions for reinsurance ceded to other companies:

<TABLE>
<CAPTION>
                                       Revenue                          Operating Earnings
                         -----------------------------------     -------------------------------
(Millions)                    1998         1997         1996        1998        1997        1996
------------------------------------------------------------------------------------------------
<S>                      <C>          <C>          <C>           <C>         <C>         <C>    
Asia Pacific (1)         $ 1,191.6    $ 1,092.6    $   869.9     $  65.2     $  55.7     $  53.8
Americas (2)                 982.5        863.1        742.7       112.9        83.0        59.1
Other (3)                      2.4          3.1         11.9       (12.4)      (10.0)       (7.4)
------------------------------------------------------------------------------------------------
                         $ 2,176.5    $ 1,958.8    $ 1,624.5     $ 165.7     $ 128.7     $ 105.5
================================================================================================
</TABLE>

(1)   Includes China, Hong Kong, Indonesia, Malaysia, New Zealand, Philippines,
      Taiwan and Thailand.
(2)   Includes Argentina, Brazil, Canada, Chile, Mexico, Peru and Venezuela.
(3)   Includes general and other miscellaneous expenses.

<TABLE>
--------------------------------------------------------------------------------
<S>                                <C>            <C>            <C>      
Premiums (included in
  revenue above)                   $ 1,578.5      $ 1,434.1      $ 1,166.1
--------------------------------------------------------------------------------
</TABLE>

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
Aetna International's business, see MD&A - Forward-Looking Information/Risk
Factors, Aetna International - Outlook and financial results discussions in the
Annual Report.

4. Large Case Pensions

Principal Products

Large Case Pensions manages a variety of retirement products (including pension
and annuity products) offered to IRC Section 401 qualified defined benefit and
defined contribution plans. Contracts provide nonguaranteed, partially
guaranteed (experience rated) and fully guaranteed investment options through
general and Separate Account products. The majority of Large Case Pensions'
products that use Separate Accounts provide contractholders with a vehicle for
investments under which the contractholders assume the investment risk as well
as the benefit of favorable performance. Large Case Pensions earns a management
fee on these Separate Accounts.

In 1993, the Company discontinued its fully guaranteed large case pension
products. (For additional information, see MD&A - Large Case Pensions in the
Annual Report.)

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
Large Case Pension's business, see MD&A - Forward-Looking Information/Risk
Factors, Large Case Pensions - Outlook and financial results discussions in the
Annual Report.


                                     Page 18
<PAGE>   19

5. General Account Investments

Consistent with the nature of the contract obligations involved in the Company's
health, life, annuity and pension operations, the majority of general account
assets have been invested in intermediate and long-term, fixed-income
obligations such as treasury obligations, mortgage-backed securities, corporate
debt securities and mortgage loans.

For information concerning the valuation of investments, see Notes 1, 5, and 8
of Notes to Consolidated Financial Statements in the Annual Report.

The following table sets forth the distribution of invested assets, cash and
cash equivalents and accrued investment income of the Company's general account
portfolio (excluding Discontinued Operations) as of the end of the years
indicated: (1) (2)

<TABLE>
<CAPTION>
Millions                                                                 1998        1997        1996
-----------------------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>         <C>      
Debt securities:
  Bonds:
    U.S. government and government agencies and authorities         $ 1,998.6   $ 3,928.6   $ 3,773.1
    States, municipalities and political subdivisions                   550.1       206.6       355.3
  U.S. corporate securities:
    Utilities                                                         2,578.0     2,505.5     2,420.3
    Financial                                                         4,945.9     5,216.8     4,546.5
    Transportation/capital goods                                      2,501.9     2,589.4     2,492.8
    Health care/consumer products                                     2,656.3     1,735.3     1,803.7
    Natural resources                                                 1,550.7     1,559.9     1,317.9
    Other corporate securities                                        1,355.8     1,506.2     1,519.8
-----------------------------------------------------------------------------------------------------
      Total U.S. corporate securities                                15,588.6    15,113.1    14,101.0
-----------------------------------------------------------------------------------------------------
  Foreign:
    Government, including political subdivisions                      2,883.8     2,629.8     2,505.4
    Utilities                                                           676.6       689.1       790.2
    Other                                                             2,868.0     3,830.4     3,513.1
-----------------------------------------------------------------------------------------------------
      Total foreign securities                                        6,428.4     7,149.3     6,808.7
-----------------------------------------------------------------------------------------------------
  Residential mortgage-backed securities:
    Pass-throughs                                                     2,322.7     1,812.5     1,848.4
    Collateralized mortgage obligations                               2,041.2     2,710.4     2,764.7
-----------------------------------------------------------------------------------------------------
      Total residential mortgage-backed securities                    4,363.9     4,522.9     4,613.1
-----------------------------------------------------------------------------------------------------
  Commercial/Multifamily mortgage-backed securities                   2,123.2     1,622.0     1,144.3
  Other asset-backed securities                                         971.0     1,635.1     1,464.6
-----------------------------------------------------------------------------------------------------
      Total bonds                                                    32,023.8    34,177.6    32,260.1
  Redeemable preferred stocks                                           157.0        67.4        76.2
-----------------------------------------------------------------------------------------------------
      Total debt securities                                          32,180.8    34,245.0    32,336.3
-----------------------------------------------------------------------------------------------------
Equity securities:
  Common stocks                                                         566.9       866.4     1,185.3
  Nonredeemable preferred stocks                                        233.6       175.0       147.5
-----------------------------------------------------------------------------------------------------
      Total equity securities                                           800.5     1,041.4     1,332.8
-----------------------------------------------------------------------------------------------------
Short-term investments                                                  942.2     1,003.9       723.2
Mortgage loans                                                        3,553.0     4,207.8     6,700.9
Real estate                                                             270.3       369.5       850.2
Policy loans                                                            458.7       746.9       707.3
Other                                                                 1,264.5       947.4       835.5
-----------------------------------------------------------------------------------------------------
      Total investments                                             $39,470.0   $42,561.9   $43,486.2
=====================================================================================================
Cash and cash equivalents                                           $ 1,951.5   $ 1,805.8   $ 1,462.6
=====================================================================================================
Accrued investment income                                           $   537.1   $   545.8   $   598.6
=====================================================================================================
</TABLE>

(1)   Excludes Separate Accounts.
(2)   Includes $7.1 billion in 1998, $7.9 billion in 1997 and $8.7 billion in
      1996 of investments supporting discontinued products.


                                     Page 19
<PAGE>   20

The following table summarizes the Company's investment results:  (1)

<TABLE>
<CAPTION>
(Dollar amounts in millions)
------------------------------------------------------------------------------------------
                     Net           Earned Net         Net Realized    Change in Net
                     Investment    Investment         Capital         Unrealized Capital
                     Income (2)    Income Rate (3)    Gains (4)       Gains and Losses (5)
------------------------------------------------------------------------------------------
<S>                 <C>                <C>            <C>              <C>      
For the year:
1998                $ 3,190.9          7.6%           $ 211.8          $ (198.8)
1997                  3,377.5          7.7              334.2             (50.7)
1996                  3,565.2          8.0              134.4              10.8
------------------------------------------------------------------------------------------
</TABLE>

(1)   Excludes Separate Accounts, investments in affiliates and Discontinued
      Operations.
(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 exclude income taxes and gains and losses
      allocable to experience-rated pension contractholders.
(5)   Net unrealized capital gains (losses) exclude federal income taxes and
      changes in unrealized capital gains (losses) related to experience-rated
      contractholders and discontinued products.

6. Other Matters

a. Regulation

General

The Company's operations are subject to comprehensive regulation throughout the
United States and the foreign jurisdictions in which it does business. The laws
of these jurisdictions establish supervisory agencies, including state health,
insurance and securities departments, with broad authority to grant licenses to
transact business and regulate many aspects of the products and services offered
by the Company, as well as solvency and reserve adequacy. Many agencies also
regulate investment activities on the basis of quality, diversification, and
other quantitative criteria. The Company's operations and accounts are subject
to examination at regular intervals by certain of these regulators.

Health Care

The federal government and the states in which the Company conducts its HMO and
other health operations have adopted laws and regulations that govern the
business activities of the Company to varying degrees. These laws and
regulations may restrict how the Company conducts its businesses and may result
in additional burdens and costs to the Company. Areas of governmental regulation
include licensure, premium rates, benefits, service areas, quality assurance
procedures, plan design, eligibility requirements, provider rates of payment,
surcharges on provider payments, provider contract forms, underwriting,
financial arrangements, financial condition (including reserves) and corporate
governance. These laws and regulations are subject to amendments and changing
interpretations in each jurisdiction.

States generally require HMOs to obtain a certificate of authority prior to
commencing operations. To establish an HMO in any state where it does not
presently operate an HMO, the Company generally has to obtain such a
certificate. The time necessary to obtain such a certificate varies from state
to state. Each HMO must file periodic financial and operating reports with the
states in which it does business. In addition, the HMOs are subject to state
examination and periodic license renewal.


                                     Page 20
<PAGE>   21

The provision of services to certain employee health benefit plans is subject to
the Employee Retirement Income Security Act of 1974 ("ERISA"), a complex set of
laws and regulations subject to interpretation and enforcement by the Internal
Revenue Service and the Department of Labor ("DOL"). ERISA regulates certain
aspects of the relationships between the Company and employers who maintain
employee benefit plans subject to ERISA. Some of the administrative services and
other activities of the Company may also be subject to regulation under ERISA.
In addition, some states require licensure or registration of companies
providing third party claims administration services for benefit plans.

Many legislative and regulatory changes related to health products have recently
been enacted or are being seriously considered by the federal and state
governments. For a discussion of these matters see MD&A - Regulatory Environment
in the Annual Report. For information regarding regulation of pricing by the
Company's HMOs, see "Aetna U.S. Healthcare Health Pricing", on page 9.

Investment and Retirement Products and Services

Operations conducted by ARS and Large Case Pensions are subject to regulation by
various government agencies where the Company conducts business, in particular
the insurance departments of Connecticut and New York. Among other matters,
these agencies may regulate premium rates, trade practices, agent licensing,
policy forms, underwriting and claims practices, the maximum interest rates that
can be charged on life insurance policy loans, and the minimum rates that must
be provided for accumulation of surrender value.

The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of broker-dealer and
investment advisory subsidiaries of the Company. Regulations of the SEC, DOL and
Internal Revenue Service also impact certain of the Company's pension, annuity,
life insurance and other investment and retirement products. These products
involve Separate Accounts of ALIAC and AICA and mutual funds registered under
the Investment Company Act of 1940.

International

The nature and extent of regulations affecting the Company's international
operations varies by jurisdiction and line of business. Most operations are
subject to local insurance laws. These laws typically regulate the types of
business that can be written, policy forms and terms, currency, permitted
investments, reserves, taxation and other matters affecting the conduct of the
business. International operations are also subject to a variety of additional
investment and other controls that may be imposed by governments. Certain
jurisdictions may require that portions of the business be reinsured through
designated state-affiliated institutions. As a foreign investor, the Company is
also subject to a variety of restrictions regarding permitted levels of equity
ownership, remittance of foreign earnings, repatriation of capital, exchange of
currency, and entry into new lines of business. Regulation of international
operations may also be subject to other political factors not typically
associated with doing business in the United States, such as more rapid change
of regulatory policy, possible nationalization of businesses, hostilities and
unrest.


                                     Page 21
<PAGE>   22

Federal Employee Benefit Regulation

ARS and Large Case Pensions also provide a variety of products and services to
employee benefit plans that are covered by ERISA.

In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit contract" were
"plan assets" for purposes of ERISA and that the insurance company was an ERISA
fiduciary with respect to those assets. In reaching its decision, the Court
declined to follow a 1975 DOL interpretive bulletin that had suggested that
insurance company general account assets were not plan assets.

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 contracts based on claims that
those assets are plan assets. The relief afforded extends to conduct that
occurred before the date that is eighteen months after the DOL issues final
regulations required by the Act, except as provided in the anti-avoidance
portion of the regulations. The regulations, which were proposed by the DOL on
December 22, 1997, will address ERISA's application to the general account
assets of insurers attributable to contracts issued on or before December 31,
1998 that are not guaranteed benefit contracts. The conference report relating
to the Act states that contracts issued after December 31, 1998 that are not
guaranteed benefit contracts will be subject to ERISA's fiduciary obligations.
The Company is not currently able to predict how these matters may ultimately
affect its businesses.

HMO and Insurance Holding Company Laws

A number of states, including Connecticut, regulate affiliated groups of HMOs
and insurers such as the Company under holding company statutes. These laws may
require these companies to maintain certain levels of equity. For information
regarding restrictions on certain payments of dividends or other distributions
by HMO and insurance company subsidiaries of the Company, see MD&A - Liquidity
and Capital Resources in the Annual Report. Some of these laws also regulate
changes in control (as do Connecticut corporate laws), and other matters such as
transactions with affiliates. See also Note 17 of Notes to Consolidated
Financial Statements in the Annual Report.

Insurance Company Guaranty Fund Assessments

Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants. The
after-tax charges to earnings for guaranty fund obligations were $3 million as
of December 31, 1998, $5 million as of December 31, 1997 and $4 million as of
December 31, 1996. While the Company has historically recovered more than half
of guaranty fund assessments through statutorily permitted premium tax offsets,
significant increases in assessments could jeopardize future efforts to recover
such assessments. For information regarding certain other potential regulatory
changes relating to the Company's businesses, see MD&A - Regulatory Environment
and Forward-Looking Information/Risk Factors. (See Note 1 of Notes to
Consolidated Financial Statements for future accounting standards related to
guaranty fund assessments.)


                                     Page 22
<PAGE>   23

b. NAIC IRIS Ratios

The NAIC IRIS ratios cover 12 categories of financial data with defined usual
ranges for each category. The ratios are intended to provide insurance
regulators "early warnings" as to when a given company might warrant special
attention. An insurance company may fall out of the usual range for one or more
ratios and such variances may result from specific transactions that are in
themselves immaterial or eliminated at the consolidated level. In 1998, none of
Aetna Inc.'s significant insurance subsidiaries had more than two IRIS ratios
that were outside of the NAIC usual ranges.

Management does not expect that any of the Company's significant subsidiaries
will have more than two IRIS ratios outside of the NAIC usual ranges for 1999.

See MD&A - Liquidity and Capital Resources in the Annual Report for additional
discussion regarding solvency regulation.

c. Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends

The following table sets forth the Company's and Aetna Services' ratios of
earnings to fixed charges and ratios of earnings to combined fixed charges and
preferred stock dividends for the years indicated:

<TABLE>
<CAPTION>
(Millions)
Aetna Inc.                                           1998     1997     1996      1995     1994
----------------------------------------------------------------------------------------------
<S>                                                  <C>      <C>      <C>       <C>      <C> 
Ratio of Earnings to Fixed Charges                   4.96     5.74     2.45      4.97     4.74
Ratio of Earnings to Combined Fixed Charges
  and Preferred Stock Dividends                      3.94     4.46     2.10      4.97     4.74
</TABLE>

<TABLE>
<CAPTION>
(Millions)
Aetna Services, Inc.                                 1998     1997     1996
---------------------------------------------------------------------------
<S>                                                  <C>      <C>      <C> 
Ratio of Earnings to Fixed Charges                   4.31     5.78     2.44
Ratio of Earnings to Combined Fixed Charges
  and Preferred Stock Dividends                      4.31     5.78     2.44
</TABLE>

For purposes of computing both the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
"earnings" represent consolidated earnings from continuing operations before
income taxes, cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of interest (and the
portion of rental expense deemed representative of the interest factor) and
include the dividends paid to preferred shareholders of a subsidiary. (See Note
15 of Notes to Consolidated Financial Statements in the Annual Report.) During
1994 and 1995, there was no preferred stock outstanding. As a result, the ratios
of earnings to combined fixed charges and preferred stock dividends were the
same as the ratios of earnings to fixed charges.

d. Trademarks

The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare (Registered
Trademark), U.S. Healthcare (Registered Trademark), and Aetna Retirement
Services (Registered Trademark), together with the corresponding design logos
are owned by the Company. The Company considers these trademarks and its other
trademarks and trade names important in the operation of its business. However,
the business of the Company is not dependent on any individual trademark or
trade name.


                                     Page 23
<PAGE>   24

e. Ratings

The ratings of certain of Aetna Inc.'s subsidiaries follow:

<TABLE>
<CAPTION>
                                                                              Rating Agencies
                                                           ---------------------------------------------------
                                                                                      Moody's
                                                                        Duff &        Investors       Standard
                                                           A.M. Best    Phelps        Service         & Poor's
                                                           ---------------------------------------------------
<S>                                                           <C>         <C>           <C>               <C>
Aetna Services, Inc. (senior debt)**                                   
   November 3, 1998                                           *           A             A3                A
   February 1, 1999 (1)                                       *           A             A3                A
                                                                       
Aetna Services, Inc. (commercial paper)**                              
   November 3, 1998                                           *           D-1           P-2               A-1
   February 1, 1999 (1)                                       *           D-1           P-2               A-1
                                                                       
Aetna Life Insurance Company (claims paying)                           
   November 3, 1998                                           A           AA-           A1                A+
   February 1, 1999 (1)                                       A           AA-           A1                A+
                                                                       
Aetna Life Insurance and Annuity Company (claims paying)               
   November 3, 1998                                           A           AA            Aa3               AA-
   February 1, 1999 (1)                                       A           AA            Aa3               AA-
</TABLE>

*     Nonrated by the agency.
**    Fully and unconditionally guaranteed by Aetna Inc.

(1)   These ratings are currently under review by certain rating agencies
      pending completion of their analysis of the pending Prudential health care
      acquisition. Duff and Phelps Credit Rating Company has the debt ratings of
      Aetna on credit watch negative. Standard and Poor's has the debt and
      claims paying ratings on credit watch negative. Moody's Investors Service
      has the debt and claims paying ratings on outlook negative.

f. Miscellaneous

The Company had approximately 33,500 domestic employees at December 31, 1998. In
addition, the Company had approximately 7,600 international employees at
December 31, 1998 in its majority and wholly owned non-U.S. subsidiaries.

Management believes that the Company's computer facilities, systems and related
procedures are adequate to meet its business needs. The Company's data
processing systems and backup and security policies, practices and procedures
are regularly evaluated by the Company's management and its internal auditors
and are modified as considered necessary. See MD&A for information regarding the
Company's efforts to prepare its systems, applications and facilities to
accommodate Year 2000 date-sensitive information.

The federal government is a significant customer of the Aetna U.S. Healthcare
segment and the Company, accounting for approximately 15% of the Company's
consolidated revenue in 1998. No other customer accounted for 10% or more of the
Company's consolidated revenues in 1998. No other segment of the Company's
business is dependent upon a single customer or a few customers, the loss of
which would have a significant effect on the earnings of the segment. See Notes
18, 19 and 20 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 24
<PAGE>   25

Item 2. Properties.

The home office of the Company is a building complex located at 151 Farmington
Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The
Company and certain of its subsidiaries also own or lease other space in the
greater Hartford area, Blue Bell, Pennsylvania and Fairfield, New Jersey, as
well as various field locations throughout the country. The Company believes its
properties are adequate and suitable for its business as presently conducted.

The foregoing does not include numerous investment properties held by the
Company in its general and Separate Accounts.

Item 3. Legal Proceedings.

Purported Class Action Complaints were filed in the United States District Court
for the Eastern District of Pennsylvania on November 5, 1997 by Eileen
Herskowitz and Michael Wolin, and on December 4, 1997 by Pamela Goodman and
Michael J. Oring. Other purported Class Action Complaints were filed in the
United States District Court for the District of Connecticut on November 25,
1997 by Evelyn Silvert, on November 26, 1997 by the Rainbow Fund, Inc., and on
December 24, 1997 by Terry B. Cohen. The 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 the Company
and three of its current or former officers or directors, Ronald E. Compton,
Richard L. Huber, and Leonard Abramson, are liable for certain
misrepresentations and omissions regarding, among other matters, the integration
of the merger with U.S. Healthcare and the Company's medical claim reserves. The
Company and the individual defendants filed a motion to dismiss the Complaint on
July 31, 1998. On February 2, 1999, the Court dismissed the Complaint, but
granted the plaintiffs leave to file a second amended complaint. On February 22,
1999, the plaintiffs filed a second amended complaint against the Company,
Ronald E. Compton and Richard L. Huber. The litigation is still in the
preliminary stages, and the Company is defending the actions vigorously.

The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice and other litigation in its health business. Aetna U.S.
Healthcare of California, Inc., an indirect subsidiary of the Company, is
currently a party to such an 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 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. Aetna U.S. Healthcare of
California, Inc. intends to appeal the verdict and will continue to vigorously
defend this matter. While the ultimate outcome of these other lawsuits cannot be
determined at this time, after consideration of the defenses available to the
Company and any related reserves established, they are not expected to result in
liability for amounts material to the financial condition of the Company,
although they may adversely affect results of operations in future periods.

Item 4. Submission of Matters to a Vote of Security Holders.

None.


                                     Page 25
<PAGE>   26

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>
                                                                         Business Experience
Name of Officer              Principal Position                Age *     During Past Five Years *
---------------              ------------------                ---       ----------------------
<S>                          <C>                               <C>           <C>
Richard L. Huber             Chairman, Chief Executive         62            (1)
                             Officer and President

Michael J. Cardillo          Executive Vice President,
                             Aetna U.S. Healthcare             55            (2)

Frederick C. Copeland, Jr.   Executive Vice President,
                             International                     57            (3)

Timothy A. Holt              Senior Vice President,
                             Aetna Investment Management       45            (4)
                             Group

Thomas J. McInerney          Executive Vice President,
                             Aetna Retirement Services         42            (5)

Alan J. Weber                Vice Chairman for Strategy
                             and Finance                       49            (6)
</TABLE>

* As of February 26, 1999.


                                     Page 26
<PAGE>   27

(1)   Mr. Huber was named Chairman on March 1, 1998 and Chief Executive Officer
      and President on July 28, 1997. He had served as Vice Chairman for
      Strategy and Finance since February 1995. He served as President and Chief
      Operating Officer of Grupo Wasserstein Perella from September 1994 to
      February 1995 and as Vice Chairman of Continental Bank from 1990 to
      September 1994.

(2)   Mr. Cardillo has served in his current position since July 19, 1996. He
      also serves as President of Aetna U.S. Healthcare Inc. a position he
      assumed in March 1997 after serving as Co-President since July 19, 1996.
      Mr. Cardillo had been Co-President of U.S. Healthcare, Inc. since 1995 and
      Principal Marketing Officer since 1989.

(3)   Mr. Copeland assumed his current position on July 19, 1996. He also serves
      as President and Chief Executive Officer of Aetna International, Inc., a
      position he assumed in April 1996, after having served as President of
      Aetna International since July 1995. From January 1993 to July 1995, he
      served as Chairman, President and Chief Executive Officer of Fleet Bank,
      N.A., Connecticut. From September 1987 to January 1993, he served as
      President and Chief Executive Officer of Citibank Canada.

(4)   Mr. Holt assumed his current position on January 29, 1999, having served
      as Vice President, Aetna Investment Management Group since September 1997.
      From 1996 to September 1997, he served as Vice President and Chief
      Financial Officer of Aetna Retirement Services. He served as Vice
      President, Portfolio Management Group, from 1992 to 1996.

(5)   Mr. McInerney assumed his current position on August 18, 1997, having
      served as Vice President, Strategic Planning, since March 1997. He also
      currently serves as President, Aetna Retirement Services, Inc. From 1996
      to 1997, he served as Vice President, National Accounts, for Aetna Health
      Plans and then as Vice President, National Accounts and Sales and
      Marketing, for the successor business, Aetna U.S. Healthcare. During 1995
      and 1996, he also served as Vice President, Corporate Strategy. From 1992
      to 1996, Mr. McInerney served as Vice President, Large Case Pensions.

(6)   Mr. Weber assumed his current position on August 1, 1998. From July 1994
      to July 1998 Mr. Weber served as Chairman of Citibank International and
      from October 1988 to July 1994, he served as Executive Vice President,
      Financial Institutions and Transaction Services, of Citibank, N.A.


                                     Page 27
<PAGE>   28

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Aetna Inc.'s common stock is listed on the New York Stock Exchange. Its symbol
is AET. As of January 31, 1999, there were 19,221 record holders of the common
stock.

The dividends declared and the high and low sales prices with respect to the
Company's common stock for each quarterly period for the past two years are
incorporated herein by reference from "Quarterly Data" in the Annual Report.

Information regarding restrictions on the Company's present and future ability
to pay dividends is incorporated herein by reference from Note 17 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report is incorporated herein
by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-General Account Investments" in the Annual
Report is incorporated herein by reference.

Item 8.  Consolidated Financial Statements and Supplementary Data.

The 1998 Consolidated Financial Statements and the report of the registrant's
independent auditors and the unaudited information set forth under the caption
"Quarterly Data" are incorporated herein by reference to the Annual Report.

Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure.

None.


                                     Page 28
<PAGE>   29

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 1998" 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 caption "Security Ownership of Certain Beneficial
Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

The information under the caption "Certain Transactions and Relationships" in
the Proxy Statement is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.*

(a) The following documents are filed as part of this report:

1. Financial statements:

The Consolidated Financial Statements and the report of the registrant's
independent auditors are incorporated herein by reference to the Annual Report.

2. Financial statement schedules:

The supporting schedules of the consolidated entity are included in this Item
14. See Index to Financial Statement Schedules on page 37.

3. Exhibits: *

(3) Articles of Incorporation and By-Laws.

Aetna Inc. Amended and Restated Certificate of Incorporation, incorporated
herein by reference to the Company's Registration Statement on Form S-4 (File
No. 333-5791) filed on June 12, 1996.

Aetna Inc. Bylaws, as amended, incorporated herein by reference to the Company's
Form 10-K filed on February 28, 1997.


                                     Page 29
<PAGE>   30

PART IV (Continued)

3. Exhibits: * (Continued)

(4) Instruments defining the rights of security holders, including indentures.

Senior Indenture, dated July 1, 1996, between the Company, Aetna Services, Inc.
(formerly Aetna Life and Casualty Company), and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, incorporated herein
reference to the Company's Form 10-Q filed on October 25, 1996.

Form of Subordinated Indenture, dated as of July 1, 1996, among the Company,
Aetna Services, Inc., and State Street Bank and Trust Company of Connecticut,
National Association, as Trustee (including the forms of Subordinated Debt
Securities and Subordinated Debt Guarantees), incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Amendment No. 1 to its Registration
Statement on Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02;
333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.

Form of Junior Subordinated Indenture among the Company, Aetna Services, Inc.,
and The First National Bank of Chicago, as Trustee, incorporated herein by
reference to the Company's and Aetna Services, Inc.'s Amendment No. 1 to its
Registration Statement on Form S-3 (File Nos. 333-52321; 333-52321-01;
333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.

Form of Supplemental Indenture to be used in connection with the issuance of
Junior Subordinated Debt Securities and Preferred Securities (including the
forms of the Junior Subordinated Debt Securities and Junior Subordinated Debt
Guarantees), incorporated herein by reference to the Company's and Aetna
Services, Inc.'s Amendment No. 1 to its Registration Statement on Form S-3 (File
Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on June 19, 1998.

Declaration of Trust of Aetna Capital Trust I, incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3
(File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on May 11, 1998.

Declaration of Trust of Aetna Capital Trust II, incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3
(File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on May 11, 1998.

Declaration of Trust of Aetna Capital Trust III, incorporated herein by
reference to the Company's and Aetna Services, Inc.'s Registration Statement on
Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03;
333-52321-04; 333-52321-05) filed on May 11, 1998.

Declaration of Trust of Aetna Capital Trust IV, incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3
(File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on May 11, 1998.

Certificate of Trust of Aetna Capital Trust I, incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3
(File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on May 11, 1998.

Certificate of Trust of Aetna Capital Trust II, incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3
(File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on May 11, 1998.


                                     Page 30
<PAGE>   31

PART IV (Continued)

3. Exhibits: * (Continued)

Certificate of Trust of Aetna Capital Trust III, incorporated herein by
reference to the Company's and Aetna Services, Inc.'s Registration Statement on
Form S-3 (File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03;
333-52321-04; 333-52321-05) filed on May 11, 1998.

Certificate of Trust of Aetna Capital Trust IV, incorporated herein by reference
to the Company's and Aetna Services, Inc.'s Registration Statement on Form S-3
(File Nos. 333-52321; 333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04;
333-52321-05) filed on May 11, 1998.

Form of Amended and Restated Declaration of Trust for each of Aetna Capital
Trust I, II, III, and IV (including the form of Preferred Securities),
incorporated herein by reference to the Company's and Aetna Services, Inc.'s
Amendment No. 1 to its Registration Statement on Form S-3 (File Nos. 333-52321;
333-52321-01; 333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05) filed on 
June 19, 1998.

Form of Guarantee Agreement among the Company, Aetna Services, Inc., and The
First National Bank of Chicago, as Trustee, with respect to each of Aetna
Capital Trust I, II, III and IV's Preferred Securities, incorporated herein by
reference to the Company's and Aetna Services, Inc.'s Amendment No. 1 to its
Registration Statement on Form S-3 (File Nos. 333-52321; 333-52321-01;
333-52321-02; 333-52321-03; 333-52321-04; 333-52321-05) filed on June 19, 1998.

Designations, Rights and Preferences of Class B Voting Preferred Stock; Class B
Voting Preferred Stock, Series A; and 6.25% Class C Voting Preferred Stock;
incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K filed 
on July 26, 1996.

Aetna Inc. Rights Agreement, incorporated herein by reference to the Company's 
Form 8-K filed on July 26, 1996.

Indenture, dated as of October 15, 1986, between Aetna Services, Inc. (formerly
Aetna Life and Casualty Company) and The First National Bank of Boston, Trustee.

First Indenture Supplement, dated as of August 1, 1996, to Indenture, dated as
of October 15, 1986, between Aetna Services, Inc. and State Street Bank and
Trust Company, as Successor Trustee, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.

Indenture, dated as of August 1, 1993, between Aetna Services, Inc. and State
Street Bank and Trust Company of Connecticut, National Association, as Trustee,
incorporated herein by reference to Aetna Services, Inc.'s Registration
Statement on Form S-3 (File No. 33-50427).

First Indenture Supplement, dated as of August 1, 1996, to the Indenture dated
as of August 1, 1993 between Aetna Services, Inc. and State Street Bank and
Trust Company of Connecticut, National Association, as Trustee, incorporated
herein by reference to the Company's Form 10-Q filed on October 25, 1996.

Written Action, dated as of November 15, 1994, establishing the terms of Series
A Preferred Securities of Aetna Capital L.L.C., incorporated herein by reference
to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.

Subordinated Indenture, dated as of November 1, 1994, between Aetna Services,
Inc. and The First National Bank of Chicago, as Trustee, incorporated herein by
reference to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.


                                     Page 31
<PAGE>   32

PART IV (Continued)

3. Exhibits: * (Continued)

First Indenture Supplement, dated as of August 1, 1996, to the Indenture, dated
as of November 1, 1994, between Aetna Services, Inc. and The First National Bank
of Chicago, as Trustee, incorporated herein by reference to the Company's Form
10-Q filed on October 25, 1996.

Payment and Guarantee Agreement, dated November 22, 1994, of Aetna Services,
Inc. with respect to Aetna Capital L.L.C., incorporated herein by reference to
Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.

Payment and Guarantee Agreement, dated as of August 1, 1996, of Aetna Inc. with
respect to Aetna Capital L.L.C., incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.

Amendment No. 1, dated as of August 1, 1996, to the Fiscal Agency Agreement,
dated as of July 17, 1986, between Aetna Services, Inc. and State Street Bank
and Trust Company, as successor Fiscal Agent, incorporated herein by reference
to the Company's Form 10-Q filed on October 25, 1996.

(10) Material contracts.

Employment Agreement, dated as of March 30, 1996, by and between U.S.
Healthcare, Inc. and Michael Cardillo, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.**

Stock Purchase Agreement, dated as of November 28, 1995, between The Travelers
Insurance Group Inc. and Aetna Services, Inc. relating to the purchase and sale
of 100% of the Common Stock of The Aetna Casualty and Surety Company and The
Standard Fire Insurance Company, incorporated herein by reference to Aetna
Services, Inc.'s 1995 Form 10-K.

Letter Agreement, dated as of January 19, 1995, between Aetna Services, Inc. and
Richard L. Huber, incorporated herein by reference to Aetna Services, Inc.'s
1995 Form 10-K.**

Employment Agreement, dated as of December 19, 1995, between Aetna Services,
Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Services,
Inc.'s 1995 Form 10-K.**

Letter Agreement, dated as of January 31, 1996, between Aetna Services, Inc. and
The Travelers Insurance Group Inc., incorporated herein by reference to Aetna
Services, Inc.'s Form 10-Q filed on April 26, 1996.

Amendment, dated as of April 2, 1996, to Stock Purchase Agreement, dated as of
November 28, 1995, between Aetna Services, Inc. and The Travelers Insurance
Group Inc., incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q
filed on April 26, 1996.

Registration Rights Agreement, dated as of March 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to Aetna Services, Inc.'s
Form 10-Q filed on April 26, 1996.

Amendment No. 1, dated as of May 30, 1996, to the Registration Rights Agreement,
dated as of March 30, 1996, between the Company and Leonard Abramson,
incorporated herein by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-5791) filed on June 12, 1996.

Amended and Restated Agreement, dated as of May 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12,
1996.


                                     Page 32
<PAGE>   33

PART IV (Continued)

3. Exhibits: * (Continued)

The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference to
the Company's Registration Statement on Form S-4 (Registration No. 333-5791)
filed on June 12, 1996.**

The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to the
Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed
on June 12, 1996.**

The Aetna Inc. Non-Employee Director Deferred Stock and Deferred Compensation
Plan, as amended, incorporated herein by reference to Company's Form 10-K filed
on February 28, 1997.**

The Supplemental Pension Benefit Plan for Certain Employees of Aetna Services,
Inc., incorporated herein by reference to the Company's Form 10-Q filed on
October 25, 1996.**

Amendment No. 1, dated March 1, 1996 to Letter Agreement, dated January 19,
1995, between Aetna Services, Inc. and Richard L. Huber, incorporated herein by
reference to the Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.**

Amended and Restated U.S. Healthcare, Inc. Savings Plan, incorporated herein by
reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**

Amended and Restated Pension Plan for Employees of U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed
on March 25, 1996.**

Split Dollar Insurance Agreement, dated as of February 1, 1990, among Madlyn K.
Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc., and the related
Collateral Assignment Agreement, dated as of February 1, 1990, among Madlyn K.
Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc., incorporated herein by
reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.

Split Dollar Insurance Agreement, dated as of January 21, 1991, among Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B.
Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., and the
related Collateral Assignment Agreement, dated as of January 21, 1991, among
Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson,
David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed
on March 25, 1996.

Description of Deferred Compensation Plan, incorporated herein by reference to
U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**

Voting Agreement, dated as of March 30, 1996, among Leonard Abramson, Aetna Life
Insurance Company and Aetna Life Insurance and Annuity Company, incorporated
herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.

Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Services,
Inc., U.S. Healthcare, Inc., the Company, Antelope Sub, Inc. and New Merger
Corporation, incorporated herein by reference to Aetna Services, Inc.'s Form
10-Q filed on April 26, 1996.


                                     Page 33
<PAGE>   34

PART IV (Continued)

3. Exhibits: * (Continued)

Amendment No. 1, dated as of May 30, 1996, to the Agreement and Plan of Merger,
dated as of March 30, 1996, among Aetna Services, Inc., U.S. Healthcare, Inc.,
the Company, Antelope Sub. Inc. and New Merger Corporation, incorporated herein
by reference to the Company's Registration Statement on Form S-4 (Registration
No. 333-5791) filed on June 12, 1996.

Aetna Services, Inc. Credit Facility, incorporated herein by reference to Aetna
Services, Inc.'s Form 8-K filed on July 16, 1996.

Notification from Aetna Services, Inc. dated October 22, 1996 electing to reduce
Credit Facility to $1.5 billion, incorporated herein by reference to the
Company's Form 10-K filed on February 28, 1997.

Amendment, dated as of September 4, 1997, to the Amended and Restated Agreement,
dated as of May 30, 1996, between the Company and Leonard Abramson, incorporated
herein by reference to the Company's Form 10-Q filed on November 4, 1997.

Amendment, dated as of September 8, 1997, to Employment Agreement, as of
December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to the Company's Form 10-Q filed on November 4,
1997.**

Amendment No. 1, dated as of December 31, 1996, to the Supplemental Pension
Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein
by reference to the Company's Form 10-Q filed on May 6, 1997.**

Amendment No. 2, dated as of February 28, 1997, to the Supplemental Pension
Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein
by reference to the Company's Form 10-Q filed on May 6, 1997.**

Employment Agreement, dated as of March 6, 1997, by and between the Company and
Joseph Sebastianelli, incorporated herein by reference to the Company's Form
10-Q filed on May 6, 1997.**

Amendment dated as of April 9, 1997, to the Amended and Restated Agreement,
dated as of May 10, 996, between the Company and Leonard Abramson, incorporated
herein by reference to the Company's Form 10-Q filed on May 6, 1997.

Amendment dated as of July 22, 1996, to Letter Agreement, dated as of January
19, 1995, between the Company and Richard L. Huber incorporated herein by
reference to the Company's Form 10-Q filed on May 6, 1997.**

Amendment dated as of July 22, 1996, to Employment Agreement, dated as of
January 19, 1995, between the Company and Ronald E. Compton, incorporated herein
by reference to the Company's Form 10-Q filed on May 6, 1997.**

Amendment dated as of July 22, 1996, to Employment Agreement, dated as of
December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to the Company's Form 10-Q filed on May 6,
1997.**


                                     Page 34
<PAGE>   35

PART IV (Continued)

3. Exhibits: * (Continued)

Employment Agreement, dated as of December 21, 1995, by and between Aetna
Services, Inc. and Frederick C. Copeland, Jr., as amended, incorporated herein
by reference to the Company's Form 10-K filed on March 3, 1998.**

Employment Agreement, dated as of December 21, 1995, by and between Aetna
Services, Inc. and Thomas McInerney, as amended, incorporated herein by
reference to the Company's Form 10-K filed on March 3, 1998.**

Description of certain arrangements not embodied in formal documents, as
described under the headings "Director Compensation" and "Executive
Compensation", are incorporated herein by reference to the Company's 1999
Proxy Statement.

Assignment dated June 29, 1998 of Credit Agreement dated as of June 28, 1996,
incorporated herein by reference to the Company's Form 10-Q filed on August 8,
1998.

The Aetna Inc. 1998 Stock Incentive Plan, incorporated herein by reference to
the Company's Registration Statement on Form S-8 (Registration No. 333-68881)
filed on December 14, 1998.

(11) Statement re: computation of per share earnings.

Incorporated herein by reference to Note 2 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 for the Company
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 and Aetna
Services for the years ended December 31, 1998, 1997 and 1996.

Statement re: computation of ratio of earnings to combined fixed charges and
preferred stock dividends for the Company for the years ended December 31, 1998,
1997, 1996, 1995 and 1994 and Aetna Services for the years ended December 31,
1998, 1997 and 1996.

(13) Annual Report to security holders.

Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Financial Statements and the
report of the Company's independent auditors, and unaudited Quarterly Data 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 to Incorporation by Reference in the
Registration Statements on Form S-3 and Form S-8.

(24) Powers of attorney.

(27) Financial data schedule.


                                     Page 35
<PAGE>   36

PART IV (Continued)

3. Exhibits: * (Continued)

(b) Reports on Form 8-K

The Company filed a report on Form 8-K on November 18, 1998 relating to the
Underwriting Agreement and Pricing Agreement for the Puttable Reset Securities
(PURS) issued by the Company. The Company also filed a report on Form 8-K on
December 9, 1998 related to the Prudential health care acquisition.

*     Exhibits other than those listed are omitted because they are not required
      or are not applicable. Copies of exhibits are available without charge by
      writing to the Office of the Corporate Secretary, Aetna Inc., 151
      Farmington Avenue, Hartford, Connecticut 06156.

**    Management contract or compensatory plan or arrangement.


                                     Page 36
<PAGE>   37

                     INDEX TO FINANCIAL STATEMENT SCHEDULES
                                   AETNA INC.

                                                                            Page
                                                                            ----

Independent Auditors' Report                                                 38

I     Summary of Investments - Other than Investments in Affiliates as of
      December 31, 1998                                                      39

II    Condensed Financial Information of the Registrant: 
        Balance sheet of Aetna Inc. as of December 31, 1998 and 
        1997 and the related  statements of income, shareholders' 
        equity and cash flows for the years ended December 31, 1998, 
        1997 and 1996.                                                       40

III   Supplementary Insurance Information as of and for the years ended
        December 31, 1998, 1997 and 1996.                                    46

IV    Reinsurance                                                            49

V     Valuation and Qualifying Accounts and Reserves for the years ended
        December 31, 1998, 1997 and 1996                                     50

Certain of the required information is shown in the Consolidated Financial
Statements or Notes thereto in the Annual Report. Certain information has been
omitted from the schedules filed because the information is not applicable.

Certain reclassifications have been made to the 1997 and 1996 financial
information to conform to the 1998 presentation.


                                     Page 37
<PAGE>   38

                          INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Directors
Aetna Inc.:

Under date of February 3, 1999, we reported on the consolidated balance sheets
of Aetna Inc. and Subsidiaries as of December 31, 1998 and 1997, 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, 1998, as contained in
the 1998 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 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.


                                  /s/ KPMG LLP

Hartford, Connecticut
February 3, 1999


                                     Page 38
<PAGE>   39

                           AETNA INC. AND SUBSIDIARIES
                                   SCHEDULE I
          Summary of Investments - Other than Investments in Affiliates
                             As of December 31, 1998

<TABLE>
<CAPTION>
                                                                                                 Amount
                                                                                               at which
                                                                                           shown in the
  (Millions)                                                       Cost         Value*    balance sheet
-------------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>              <C>      
Debt securities:                                                                          
  Bonds:                                                                                  
    U.S. government and government agencies and authorities   $ 1,863.8      $ 1,998.6        $ 1,998.6
    States, municipalities and political subdivisions             531.8          550.1            550.1
  U.S. corporate securities:                                                              
    Utilities                                                   2,454.8        2,578.0          2,578.0
    Financial                                                   4,739.1        4,945.9          4,945.9
    Transportation/capital goods                                2,313.7        2,501.9          2,501.9
    Health care/consumer products                               2,495.2        2,656.3          2,656.3
    Natural resources                                           1,494.3        1,550.7          1,550.7
    Other corporate securities                                  1,314.5        1,355.8          1,355.8
-------------------------------------------------------------------------------------------------------
      Total U.S. corporate securities                          14,811.6       15,588.6         15,588.6
-------------------------------------------------------------------------------------------------------
  Foreign:                                                                                
    Government, including political subdivisions                2,722.6        2,883.8          2,883.8
    Utilities                                                     589.8          676.6            676.6
    Other                                                       2,802.2        2,868.0          2,868.0
-------------------------------------------------------------------------------------------------------
      Total foreign securities                                  6,114.6        6,428.4          6,428.4
-------------------------------------------------------------------------------------------------------
  Residential mortgage-backed securities:                                                 
    Pass-throughs                                               2,248.8        2,322.7          2,322.7
    Collateralized mortgage obligations                         1,929.2        2,041.2          2,041.2
-------------------------------------------------------------------------------------------------------
      Total residential mortgage-backed securities              4,178.0        4,363.9          4,363.9
-------------------------------------------------------------------------------------------------------
  Commercial/Multifamily mortgage-backed securities             2,121.8        2,123.2          2,123.2
  Other asset-backed securities                                   954.9          971.0            971.0
-------------------------------------------------------------------------------------------------------
      Total bonds                                              30,576.5       32,023.8         32,023.8
  Redeemable preferred stocks                                     153.6          157.0            157.0
-------------------------------------------------------------------------------------------------------
      Total debt securities                                   $30,730.1      $32,180.8        $32,180.8
=======================================================================================================
Equity securities:                                                                        
  Common stocks:                                                                          
  Public utilities                                            $    16.3      $    20.4        $    20.4
  Banks, trust and insurance companies                             16.5           19.5             19.5
  Industrial, miscellaneous and all other                         500.3          527.0            527.0
-------------------------------------------------------------------------------------------------------
      Total common stocks                                         533.1          566.9            566.9
  Nonredeemable preferred stocks                                  229.5          233.6            233.6
-------------------------------------------------------------------------------------------------------
      Total equity securities                                 $   762.6      $   800.5        $   800.5
=======================================================================================================
Short-term investments                                        $   942.2                       $   942.2
Mortgage loans                                                  3,553.0                         3,553.0
Real estate                                                       270.3                           270.3
Policy loans                                                      458.7                           458.7
Other                                                             771.4(1)                      1,264.5(2)
-------------------------------------------------------------------------------------------------------
      Total investments                                       $37,488.3                       $39,470.0
=======================================================================================================
</TABLE>

*     See Notes 1 and 5 of Notes to Consolidated Financial Statements in the
      Company's 1998 Annual Report.

(1)   Excludes investments in affiliates of $493.1 million.
(2)   Includes investments in affiliates of $493.1 million.


                                     Page 39
<PAGE>   40

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                              Statements of Income

<TABLE>
<CAPTION>
                                                                     For the year ended December 31,
(Millions)                                                                1998       1997       1996
----------------------------------------------------------------------------------------------------
<S>                                                                  <C>        <C>        <C>      
Net investment income                                                $     2.0  $      .5  $     1.2
----------------------------------------------------------------------------------------------------
     Total revenue                                                         2.0         .5        1.2
Operating expenses                                                          --         --         .2
----------------------------------------------------------------------------------------------------
     Total expenses                                                         --         --         .2
----------------------------------------------------------------------------------------------------
Income before income taxes and equity in earnings of affiliates            2.0         .5        1.0
Income taxes                                                                .6         .1         .5
Equity in earnings of affiliates                                         846.7      900.7      204.6
----------------------------------------------------------------------------------------------------
Income from continuing operations                                        848.1      901.1      205.1
Discontinued Operations, net of tax:                                                       
  Income from operations                                                    --         --      182.2
  Gain on sale                                                              --         --      263.7
----------------------------------------------------------------------------------------------------
Net income                                                           $   848.1  $   901.1  $   651.0
====================================================================================================
</TABLE>

See Notes to Condensed Financial Statements.


                                     Page 40
<PAGE>   41

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                         As of December 31,
 (Millions, except share data)                                              1998        1997
--------------------------------------------------------------------------------------------
<S>                                                                    <C>         <C>      
Assets:
Investments:
  Short-term investments                                               $     3.1   $     3.2
  Investments in affiliates                                             11,400.7    11,049.2
--------------------------------------------------------------------------------------------
Total investments                                                       11,403.8    11,052.4
  Cash and cash equivalents                                                 15.8        22.1
  Due from affiliates                                                        2.2         5.4
  Affiliate dividends receivable                                            50.0       200.0
  Deferred income taxes                                                      1.5         1.1
--------------------------------------------------------------------------------------------
Total assets                                                           $11,473.3   $11,281.0
============================================================================================

Liabilities:
  Dividends payable to shareholders                                    $    35.2   $    36.1
  Other liabilities                                                         29.0        29.3
  Current income taxes                                                      20.2        20.2
--------------------------------------------------------------------------------------------
Total liabilities                                                           84.4        85.6
--------------------------------------------------------------------------------------------
Shareholders' Equity:
 Class C Voting Mandatorily Convertible Preferred Stock
   ($.01 par value; 15,000,000 shares authorized;
   11,614,816 in 1998 and 11,655,206 in 1997 issued and outstanding)       862.1       865.4
 Common stock ($.01 par value; 500,000,000 shares authorized,
   141,272,628 in 1998 and 145,794,844 in 1997 issued and
   outstanding)                                                          3,292.4     3,644.4
 Accumulated other comprehensive income                                    177.8       307.1
 Retained earnings                                                       7,056.6     6,378.5
--------------------------------------------------------------------------------------------
Total shareholders' equity                                              11,388.9    11,195.4
--------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                             $11,473.3   $11,281.0
============================================================================================
</TABLE>

See Notes to Condensed Financial Statements.


                                     Page 41
<PAGE>   42

                           AETNA INC. AND SUBSIDIARIES
                                   SCHEDULE II
                         Condensed Financial Information
                                   AETNA INC.
                       Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                      For the three years ended December 31, 1998
                                                       -----------------------------------------------------------------------------
                                                                                        Accumulated Other        Class C
                                                                                     Comprehensive Income         Voting
                                                                                     --------------------    Mandatorily
                                                                                 Unrealized        Foreign   Convertible
                                                                    Retained  Gains(Losses)       Currency     Preferred     Common
(Millions, except share data)                              Total    Earnings  on Securities  Gains(Losses)         Stock      Stock
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>         <C>            <C>           <C>          <C>          <C>      
Balances at December 31, 1995                          $ 7,272.8   $ 5,195.6      $   797.0     $  (155.9)   $        --  $ 1,436.1
====================================================================================================================================
Comprehensive income:                                                                                       
   Net income                                              651.0       651.0                                
   Other comprehensive loss, net of tax:                                                                    
     Unrealized losses on securities (($527.6)                                                              
       pretax)                                            (342.8)                    (342.8)                
     Foreign currency ($64.2 pretax)                        41.7                                     41.7   
                                                       ---------
   Other comprehensive loss                               (301.1)                                           
                                                       ---------
        Total comprehensive income                         349.9                                            
                                                       =========                                            
Issued for U.S. Healthcare merger:                                                                          
   Class C voting mandatorily convertible preferred                                                         
     stock (11,655,546 shares)                             865.4                                                 865.4
   Common shares (34,988,615 shares)                     2,580.1                                                            2,580.1
   Stock options                                            24.8                                                               24.8
   Common stock issued for benefit plans                    
    (1,563,491 shares)                                      75.1                                                               75.1
Repurchase of common shares (1,194,400 shares)             (83.3)                                                             (83.3)
Common stock dividends                                    (170.0)     (170.0)                               
Preferred stock dividends                                  (25.1)      (25.1)                               
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996                          $10,889.7   $ 5,651.5      $   454.2     $  (114.2)   $   865.4    $ 4,032.8
===================================================================================================================================
Comprehensive income:                                                                                       
   Net income                                              901.1       901.1                                
   Other comprehensive loss, net of tax:                                                                    
     Unrealized gains on securities ($81.8 pretax)          49.9                      49.9                  
     Foreign currency (($127.3) pretax)                    (82.8)                                   (82.8)  
                                                       ---------
   Other comprehensive loss                                (32.9)                                           
                                                       ---------
        Total comprehensive income                         868.2                                            
                                                       =========                                            
Common stock issued for benefit                                                                             
  plans (1,883,945 shares)                                 134.7                                                              134.7
Repurchase of common shares (6,173,900 shares)            (523.1)                                                            (523.1)
Common stock dividends                                    (118.6)     (118.6)                               
Preferred stock dividends                                  (55.5)      (55.5)                               
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997                          $11,195.4   $ 6,378.5      $   504.1     $  (197.0)   $   865.4    $ 3,644.4
===================================================================================================================================
Comprehensive income:                                                                                       
   Net income                                              848.1       848.1                                
   Other comprehensive loss, net of tax:                                                                    
     Unrealized losses on securities (($179.8) pretax)    (116.9)                    (116.9)                
     Foreign currency (($19.1) pretax)                     (12.4)                                   (12.4)  
                                                       ---------
   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          --                                                  (3.3)         3.3
  shares converted to 33,097 shares)                                                                          
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      $   387.2     $  (209.4)   $   862.1    $ 3,292.4
===================================================================================================================================
</TABLE>

See Notes to the Condensed Financial Statements.

                                     Page 42
<PAGE>   43

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                            For the year ended December 31,
                                                                           --------------------------------
 (Millions)                                                                    1998        1997        1996
-----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>         <C>         <C>     
Cash Flows from Operating Activities:
  Net income                                                               $  848.1    $  901.1    $  651.0
  Adjustments to reconcile net income to net cash (used for) provided by
    operating activities:
      Equity in earnings of affiliates                                       (846.7)     (900.7)     (204.6)
      Income from Discontinued Operations                                        --          --      (182.2)
      Gain on sale of Discontinued Operations                                    --          --      (263.7)
      Other, net                                                                2.4        (8.4)       27.7
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities                            3.8        (8.0)       28.2
-----------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
    Proceeds from sales of short-term investments                             431.6       619.4       184.4
    Cost of investments in short-term investments                            (431.5)     (613.8)     (193.2)
    Cost of investment in U.S. Healthcare                                        --          --    (5,243.9)
    Capital contributions to affiliates                                          --      (160.0)     (500.0)
    Dividends received from affiliates                                        520.0       746.2     5,938.0
    Other, net                                                                 (4.0)      (25.3)       35.2
-----------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                                     516.1       566.5       220.5
-----------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
    Common stock issued under benefit plans                                    39.6       134.7        75.1
    Common shares repurchased                                                (394.9)     (523.1)      (83.3)
    Dividends paid to shareholders                                           (170.9)     (174.9)     (237.3)
-----------------------------------------------------------------------------------------------------------
Net cash used for financing activities                                       (526.2)     (563.3)     (245.5)
-----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                           (6.3)       (4.8)        3.2
Cash and cash equivalents, beginning of year                                   22.1        26.9        23.7
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                     $   15.8    $   22.1    $   26.9
===========================================================================================================
Supplemental disclosure of cash flow information:
    Interest paid                                                          $     --    $     --    $     --
    Income taxes received, net                                             $    1.0    $    1.0    $     .5
===========================================================================================================
</TABLE>

See Notes to Condensed Financial Statements.


                                     Page 43
<PAGE>   44

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                     Notes to Condensed Financial Statements

1. Background of Organization

Aetna Inc. was incorporated under the Stock Corporation Act of the state of
Connecticut on March 25, 1996 for the purpose of effecting the combination of
Aetna Services, Inc. ("Aetna Services") (formerly Aetna Life and Casualty
Company) and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare") (formerly U.S.
Healthcare, Inc. ("U.S. Healthcare")) in accordance with the terms of the
Agreement and Plan of Merger dated as of March 30, 1996. 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 include for 1996, the results of
operations of Aetna Services from January 1, 1996 and of Aetna U.S. Healthcare
from July 19, 1996 which are reflected as Equity in Earnings of Affiliates on
the Statement of Income. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto in the
Annual Report.

2. Guarantee of Debt Securities

Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a
wholly owned subsidiary of Aetna Services. ACLLC has issued $275 million of
redeemable preferred stock and the Subordinated Debentures represent
substantially all of the assets of ACLLC. See Note 15 of Notes to Consolidated
Financial Statements in the Annual Report for a description of outstanding debt.

3. Dividends

Cash dividends paid to Aetna Inc. by Aetna Services were $.5 billion, $.4
billion and $5.3 billion in 1998, 1997 and 1996. Cash dividends paid to Aetna
Inc. by Aetna U.S. Healthcare were $.3 billion and $.6 billion in 1997 and 1996,
respectively. No dividends were paid by Aetna U.S. Healthcare in 1998. Also, in
1997 Aetna U.S. Healthcare made a non-cash dividend of $.3 billion to Aetna Inc.
The 1996 dividends included the dividend by Aetna Services of the net proceeds
from the sale of the property-casualty operations. The 1996 dividends from Aetna
Services were used to finance the cash portion of the U.S. Healthcare merger
consideration. See Note 17 of Notes to Consolidated Financial Statements in the
Annual Report for a description of dividend restrictions.


                                     Page 44
<PAGE>   45

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

               Notes to Condensed Financial Statements (Continued)

4. New Accounting Standards

See Note 1 of Notes to Consolidated Financial Statements in the Annual Report
for a description of new accounting standards.

5. Discontinued Products

See Note 10 of Notes to Consolidated Financial Statements in the Annual Report
for a description of discontinued products.

6. Other Acquisitions and Dispositions

See Note 4 of Notes to Consolidated Financial Statements in the Annual Report
for a description of other acquisitions and dispositions.

7. Severance and Facilities Charges

See Note 9 of Notes to Consolidated Financial Statements in the Annual Report
for a description of the severance and facilities charges.

8. Income Taxes

See Note 11 of Notes to Consolidated Financial Statements in the Annual Report
for a description of income taxes.


                                     Page 45
<PAGE>   46

                           AETNA INC. AND SUBSIDIARIES

                                  SCHEDULE III

                       Supplementary Insurance Information

                 As of and for the year ended December 31, 1998

<TABLE>
<CAPTION>
                                     Deferred                           Unpaid                   Policyholders'
                                       policy            Future         claims                       funds left
                                  acquisition            policy     and claims        Unearned         with the         Premium
Segment                                 costs          benefits       expenses        premiums          Company         revenue
-------------------------------------------------------------------------------------------------------------------------------
(Millions)                                        
<S>                                 <C>              <C>            <C>               <C>             <C>            <C>       
Aetna U.S. Healthcare               $     3.6        $  1,165.8     $  3,807.1        $  306.3        $   608.5      $ 13,006.2
Aetna Retirement Services               893.1           4,178.0           14.4              --         11,473.9           131.9
Aetna International                     871.9           4,429.3          131.0           122.6            343.7         1,578.5
Large Case Pensions                        --           8,768.0            1.4              --          5,206.4           122.7
-------------------------------------------------------------------------------------------------------------------------------
   Total                            $ 1,768.6        $ 18,541.1     $  3,953.9        $  428.9        $17,632.5      $ 14,839.3
===============================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Amortization
                                                   Other income                    of deferred
                                            (including realized        Current          policy            Other
                               Net investment     capital gains     and future     acquisition        operating        Premiums
Segment                            income (1)       and losses)       benefits           costs     expenses (3)     written (4)
-------------------------------------------------------------------------------------------------------------------------------
(Millions)                                        
<S>                                 <C>              <C>            <C>               <C>             <C>            <C>       
Aetna U.S. Healthcare               $   537.2        $  1,551.0     $ 11,161.5        $     .6        $ 3,133.3      $ 12,058.7
Aetna Retirement Services             1,024.5             731.0          918.2           128.3            408.6              --
Aetna International                     459.8             109.3        1,336.6            86.4            532.7           594.7
Large Case Pensions                   1,152.5              76.0        1,054.4(2)           --             24.4              --
Corporate                                16.9             106.6             --              --            410.8              --
-------------------------------------------------------------------------------------------------------------------------------
   Total                            $ 3,190.9        $  2,573.9     $ 14,470.7        $  215.3        $ 4,509.8      $ 12,653.4
===============================================================================================================================
</TABLE>

(1)   The allocation of net investment income is based upon the investment year
      method or specific identification of certain portfolios within specific
      segments.
(2)   Includes reductions of the loss on discontinued products.
(3)   Includes operating expenses, interest expense, amortization of goodwill
      and other acquired intangible assets and severance and facilities charges
      (reserve reductions).
(4)   Excludes life insurance business pursuant to Regulation S-X.


                                     Page 46
<PAGE>   47

                           AETNA INC. AND SUBSIDIARIES

                                  SCHEDULE III

                       Supplementary Insurance Information

                 As of and for the year ended December 31, 1997

<TABLE>
<CAPTION>
                                     Deferred                           Unpaid                   Policyholders'
                                       policy            Future         claims                       funds left
                                  acquisition            policy     and claims        Unearned         with the         Premium
Segment                                 costs          benefits       expenses        premiums          Company         revenue
-------------------------------------------------------------------------------------------------------------------------------
(Millions)
<S>                                 <C>              <C>            <C>               <C>             <C>            <C>       
Aetna U.S. Healthcare               $    19.5        $  1,166.5     $  3,163.5        $  254.2        $   556.9      $ 10,844.6
Aetna Retirement Services             1,645.3           4,111.9           40.4              --         11,339.5           158.5
Aetna International                     702.5           3,430.7           89.0           105.0            384.1         1,434.1
Large Case Pensions                        --           9,128.0            1.5              --          6,480.7           155.0
-------------------------------------------------------------------------------------------------------------------------------
   Total                            $ 2,367.3        $ 17,837.1     $  3,294.4        $  359.2        $18,761.2      $ 12,592.2
===============================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Amortization
                                                   Other income                    of deferred
                                            (including realized        Current          policy            Other
                               Net investment     capital gains     and future     acquisition        operating        Premiums
Segment                            income (1)       and losses)       benefits           costs     expenses (3)     written (4)
-------------------------------------------------------------------------------------------------------------------------------
(Millions)                                        
<S>                                 <C>              <C>            <C>               <C>             <C>            <C>       
Aetna U.S. Healthcare               $  451.2         $ 1,605.6      $   9,239.2       $    20.3       $ 2,797.1      $ 10,001.9
Aetna Retirement Services            1,114.7             629.3          1,034.1           110.6           385.6              --
Aetna International                    384.4             157.0          1,206.3            86.6           486.1           465.0
Large Case Pensions                  1,408.7              58.8          1,199.9(2)           --            34.8              --
Corporate                               18.5             119.8               --              --           428.4              --
-------------------------------------------------------------------------------------------------------------------------------
   Total                            $3,377.5         $ 2,570.5      $  12,679.5       $   217.5       $ 4,132.0      $ 10,466.9
===============================================================================================================================
</TABLE>

(1)   The allocation of net investment income is based upon the investment year
      method or specific identification of certain portfolios within specific
      segments.
(2)   Includes reductions of the loss on discontinued products.
(3)   Includes operating expenses, interest expense, amortization of goodwill
      and other acquired intangible assets and severance and facilities charges
      (reserve reductions).
(4)   Excludes life insurance business pursuant to Regulation S-X.


                                     Page 47
<PAGE>   48

                           AETNA INC. AND SUBSIDIARIES

                                  SCHEDULE III

                       Supplementary Insurance Information

                 As of and for the year ended December 31, 1996

<TABLE>
<CAPTION>
                                     Deferred                           Unpaid                   Policyholders'
                                       policy            Future         claims                       funds left
                                  acquisition            policy     and claims        Unearned         with the         Premium
Segment                                 costs          benefits       expenses        premiums          Company         revenue
-------------------------------------------------------------------------------------------------------------------------------
(Millions)
<S>                                 <C>              <C>            <C>               <C>             <C>            <C>       
Aetna U.S. Healthcare               $    39.2        $  1,309.2     $  2,924.2        $  252.8        $   579.9      $  7,765.2
Aetna Retirement Services             1,488.1           3,935.8           30.1              --         10,868.1           180.7
Aetna International                     699.6           3,370.1           73.5            80.8            434.0         1,166.1
Large Case Pensions                        --           9,168.3            1.4              --          8,019.7           214.1
-------------------------------------------------------------------------------------------------------------------------------
   Total                            $ 2,226.9        $ 17,783.4     $  3,029.2        $  333.6        $19,901.7      $  9,326.1
===============================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Amortization
                                                   Other income                    of deferred
                                            (including realized        Current          policy            Other
                               Net investment     capital gains     and future     acquisition        operating        Premiums
Segment                            income (1)       and losses)       benefits           costs     expenses (3)     written (4)
-------------------------------------------------------------------------------------------------------------------------------
(Millions)                                        
<S>                                 <C>              <C>            <C>               <C>             <C>            <C>       
Aetna U.S. Healthcare               $   414.6        $  1,553.9     $  6,622.4        $   11.9        $ 2,973.9      $  6,982.8
Aetna Retirement Services             1,086.7             494.8        1,035.9            74.3            386.5              --
Aetna International                     334.2             130.7          996.8            73.9            388.4           292.0
Large Case Pensions                   1,649.2             112.3        1,521.3(2)           --             58.6              --
Corporate                                80.5              17.5             --              --            717.9              --
-------------------------------------------------------------------------------------------------------------------------------
   Total                            $  3,565.2       $  2,309.2     $ 10,176.4        $  160.1        $ 4,525.3      $  7,274.8
===============================================================================================================================
</TABLE>

(1)   The allocation of net investment income is based upon the investment year
      method or specific identification of certain portfolios within specific
      segments.
(2)   Includes reductions of the loss on discontinued products.
(3)   Includes operating expenses, interest expense, amortization of goodwill
      and other acquired intangible assets and severance and facilities charges.
(4)   Excludes life insurance business pursuant to Regulation S-X.


                                     Page 48
<PAGE>   49

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE IV

                                  Reinsurance*

<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
--------------------------------------------------------------------------------------------------------
                                                                                              Percentage
                                                            Ceded to     Assumed               of amount
                                                   Gross       other  from other         Net     assumed
                                                  amount   companies   companies      amount      to net
--------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>         <C>               <C> 
1998 **
Premiums:
Life insurance                                 $ 2,486.7   $   299.6   $    68.6   $ 2,255.7         3.0%
Accident and health insurance                   12,344.3        78.0       279.0    12,545.3         2.2
Property-casualty insurance                         75.3        38.9         1.9        38.3         5.0
--------------------------------------------------------------------------------------------------------
    Total premiums                             $14,906.3   $   416.5   $   349.5   $14,839.3         2.4%
========================================================================================================
1997**
Premiums:
Life insurance                                 $ 2,209.5   $    88.2   $    29.5   $ 2,150.8         1.4%
Accident and health insurance                   10,441.5        62.6         5.5    10,384.4          .1
Property-casualty insurance                         82.5        30.9         5.4        57.0         9.5
--------------------------------------------------------------------------------------------------------
     Total premiums                            $12,733.5   $   181.7   $    40.4   $12,592.2          .3%
========================================================================================================

1996**
Premiums:
Life insurance                                 $ 2,285.5   $    85.6   $    42.8   $ 2,242.7         1.9%
Accident and health insurance                    7,073.2        62.1        23.5     7,034.6          .3
Property-casualty insurance                         95.1        50.1         3.8        48.8         7.8
--------------------------------------------------------------------------------------------------------
     Total premiums                            $ 9,453.8   $   197.8   $    70.1   $ 9,326.1          .8%
========================================================================================================
</TABLE>

*     Excludes intercompany transactions.

**    Net life insurance in force was $445.2 billion at December 31, 1998,
      $387.8 billion at December 31, 1997 and $381.4 billion at December 31,
      1996.


                                     Page 49
<PAGE>   50

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE V

                 Valuation and Qualifying Accounts and Reserves

For the years ended December 31,
(Millions)

<TABLE>
<CAPTION>
                                                                                   Additions
                                                                     -----------------------------------
                                                                                                 Charged
                   Balance at                           Balance at               Charged   (credited) to                    Balance
                    beginning                         beginning of   (credited) to costs  other accounts-   Deductions-   at end of
                    of period    Adjustments    period as adjusted      and expenses (1)     describe (2)   describe (3)     period
-----------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>            <C>                   <C>                  <C>               <C>            <C>        <C>    
1998
Asset valuation
reserves:
  Mortgage loans      $ 114.5        $    --               $ 114.5              $  (8.0)          $ (34.3)       $  (5.3)   $  66.9
  Real Estate           101.3             --                 101.3                  5.5               2.8          (18.5)      91.1
  Other                   2.8             --                   2.8                   --                --             --        2.8
-----------------------------------------------------------------------------------------------------------------------------------
                      $ 218.6        $    --               $ 218.6              $  (2.5)          $ (31.1)       $ (24.4)   $ 160.6
===================================================================================================================================
                                                                                                                          
1997                                                                                                                      
Asset valuation                                                                                                           
reserves:                                                                                                                 
  Mortgage loans      $ 247.0        $    --               $ 247.0              $ (10.6)          $ (45.0)       $ (76.9)   $ 114.5
  Real Estate           142.1             --                 142.1                  6.1              14.8          (61.7)     101.3
  Other                   2.8             --                   2.8                   --                --             --        2.8
-----------------------------------------------------------------------------------------------------------------------------------
                      $ 391.9        $    --               $ 391.9              $  (4.5)          $ (30.2)       $(138.6)   $ 218.6
===================================================================================================================================

1996                                                                                                                      
Asset valuation                                                                                                           
reserves:                                                                                                                 
  Mortgage loans      $ 604.9        $    --               $ 604.9              $ (33.0)          $ (67.6)       $(257.3)   $ 247.0
  Real Estate           130.6           52.9(4)              183.5                 27.1               1.9          (70.4)     142.1
  Other                   2.8             --                   2.8                   --                --             --        2.8
-----------------------------------------------------------------------------------------------------------------------------------
                      $ 738.3        $  52.9               $ 791.2              $  (5.9)          $ (65.7)       $(327.7)   $ 391.9
===================================================================================================================================
</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 Left with
      the Company in the Consolidated Balance Sheets and the reserve for future
      losses, respectively.
(3)   Reduction in reserves is primarily a result of related asset write-downs
      (including foreclosures of real estate) and sales.
(4)   As a result of the adoption of FAS No. 121, valuation reserves at January
      1, 1996 were increased by $52.9 million in connection with the reversal of
      previously recorded accumulated depreciation related to properties held
      for sale.


                                     Page 50
<PAGE>   51

                                   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, 1999                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, 1999.


*                                        *
------------------------------------     ---------------------------------------
Richard L. Huber,                        Gerald Greenwald, Director
Chairman, Chief Executive Officer,
President and Director                   *
(Principal Executive Officer)            ---------------------------------------
                                         Ellen M. Hancock, Director

*                                        *
------------------------------------     ---------------------------------------
Leonard Abramson, Director               Michael H. Jordan, Director

*                                        *
------------------------------------     ---------------------------------------
Betsy Z. Cohen, Director                 Jack D. Kuehler, Director

*                                        *
------------------------------------     ---------------------------------------
William H. Donaldson, Director           Frank R. O'Keefe, Jr., Director

*                                        *
------------------------------------     ---------------------------------------
Barbara Hackman Franklin, Director       Judith Rodin, Director

*                                        *
------------------------------------     ---------------------------------------
Jerome S. Goodman, Director              Alan J. Weber
                                         Vice Chairman for Strategy and Finance
*                                        (Principal Financial Officer)
------------------------------------
Earl G. Graves, Director



/s/ Alan M. Bennett
------------------------------------
Alan M. Bennett, Vice President
  and Corporate Controller


*By /s/ Alan M. Bennett
    --------------------------------
    Alan M. Bennett
    (Attorney-in-Fact)


                                     Page 51
<PAGE>   52

                               INDEX TO EXHIBITS

Exhibit                                                               Filing
Number    Description of Exhibit                                      Method
------    ----------------------                                      ------

    4     Instruments defining the rights of security holders,
          including indentures.                                       Electronic

          Indenture, dated as of October 15, 1986, between Aetna
          Services, Inc. (formerly Aetna Life and Casualty
          Company) and The First National Bank of Boston,
          Trustee.

   12     Statement re: computation of ratios.                        Electronic

          Statement re: computation of ratio of earnings to fixed
          charges for the Company for the years ended December
          31, 1998, 1997, 1996, 1995 and 1994 and Aetna Services
          for the year ended December 31, 1998, 1997 and 1996.

          Statement re: computation of ratio of earnings to
          combined fixed charges and preferred stock dividends
          for the Company for the years ended December 31, 1998,
          1997, 1996, 1995, and 1994 and Aetna Services for the
          year ended December 31, 1998, 1997 and 1996.

   13     Annual Report to security holders.                          Electronic

          Selected Financial Data, Management's Discussion and
          Analysis of Financial Condition and Results of
          Operations, Consolidated Financial Statements and the
          report of the Company's independent auditors, and
          unaudited Quarterly Data from the Annual Report.

   21     Subsidiaries of the registrant.                             Electronic

          A listing of subsidiaries of Aetna Inc.

   23     Consents of experts and counsel.                            Electronic

          Consent of Independent Auditors to Incorporation by
          Reference in the Registration Statements on Form S-3
          and Form S-8.

   24     Powers of attorney.                                         Electronic

   27     Financial data schedule for December 31, 1998.              Electronic


                             Page 52