AETNA LIFE INSURANCE AND ANNUITY COMPANY
151 Farmington Avenue, Hartford, Connecticut 06156 Telephone: 1-800-531-4547
ALIAC GUARANTEED ACCOUNT
CREDITED INTEREST OPTION
Prospectus Dated: May 1, 1996
This Prospectus describes the ALIAC Guaranteed Account (the "Guaranteed
Account"), a credited interest funding option available to fund certain variable
annuity contracts ("Contracts") issued by Aetna Life Insurance and Annuity
Company ("Company"). This Prospectus and the prospectus describing the Contracts
("Contract Prospectus") should both be read thoroughly before investing.
The Contract Prospectus describes the terms and conditions related to an
investment in the Contract, including the charges and expenses that will be
deducted directly or indirectly from the available funding options, including
the Guaranteed Account (see "Contract Charges"). This Prospectus describes the
pertinent information required to evaluate the terms of the Guaranteed Account
(see "Description of the ALIAC Guaranteed Account").
Under the terms of the Guaranteed Account, the Company sets various rates of
interest ("Guaranteed Rates") for varying lengths of time ("Guaranteed Terms")
and designates the period of time during which investments can be made ("Deposit
Period") at those rates and for those terms. A Certificate Holder electing the
Guaranteed Account can designate amounts to be invested in any Guaranteed Term
during the Deposit Period and will receive the Guaranteed Rate for that term.
Amounts invested in the Guaranteed Account can come from the Certificate
Holder's Purchase Payments for the Contract or by transferring amounts
accumulated by the Certificate Holder under other funding options under the
Contract. There is no minimum amount required if investments come from Purchase
Payments; however, with respect to transfers, the Certificate Holder must meet
minimum amounts that are set forth in your Contract. The interest rate declared
for a Guaranteed Term is an annual effective yield; that is, it reflects a full
year's interest. Interest is credited daily at a rate that will provide the
guaranteed annual effective yield over the period of one year assuming
reinvestment of all interest (see "Guaranteed Rates"). THE COMPANY CANNOT
PREDICT FUTURE LEVELS OF GUARANTEED INTEREST RATES NOR GUARANTEE WHAT SUCH RATES
WILL BE UNTIL THEY ARE DECLARED FOR EACH GUARANTEED TERM.
WITHDRAWALS OR TRANSFERS FROM A GUARANTEED TERM PRIOR TO THE END OF THAT
GUARANTEED TERM MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. SURRENDER OF ALL OR
PART OF THE CONTRACT MAY ALSO BE SUBJECT TO A DEFERRED SALES CHARGE (SEE "MARKET
VALUE ADJUSTMENT" AND "CONTRACT CHARGES"). UNDER CERTAIN CONDITIONS, THESE
ADJUSTMENTS AND CHARGES COULD RESULT IN THE CERTIFICATE HOLDER RECEIVING AN
AMOUNT LESS THAN THE AMOUNT PAID INTO THE GUARANTEED ACCOUNT.
The Company intends generally to invest funds received for the Guaranteed
Account primarily in investment-grade fixed income securities. (See
"Investments.") All of the general assets of the Company, including amounts
deposited to the Guaranteed Account, are available to meet the guarantees under
the Guaranteed Account. These assets are chargeable with liabilities arising out
of other business of the Company.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT CONTRACT
PROSPECTUS AND THE CURRENT FUND PROSPECTUSES. ALL PROSPECTUSES SHOULD BE READ
AND RETAINED FOR FUTURE REFERENCE.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith, files
periodic reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information concerning the
Company may be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 50 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material also can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
TABLE OF CONTENTS
Page
GLOSSARY............................................................................................ 3
SUMMARY............................................................................................. 4
DESCRIPTION OF THE ALIAC GUARANTEED ACCOUNT
General....................................................................................... 6
Contributions to the Guaranteed Account....................................................... 6
Guaranteed Rates.............................................................................. 6
Maturity of a Guaranteed Term................................................................. 7
Maturity Value Transfer Provision............................................................. 7
TRANSFERS AND WITHDRAWALS
Transfers..................................................................................... 8
Withdrawals................................................................................... 8
Calculation of Transfer or Withdrawal Amounts................................................. 8
MARKET VALUE ADJUSTMENT............................................................................. 8
Deposit Period Yield.......................................................................... 9
Current Yield................................................................................. 9
MVA Formula................................................................................... 10
MISCELLANEOUS....................................................................................... 10
Contract Charges.............................................................................. 10
Withdrawals................................................................................... 10
Annuity Period................................................................................ 10
INVESTMENTS......................................................................................... 10
DISTRIBUTION........................................................................................ 11
TAX CONSIDERATIONS.................................................................................. 11
Taxation of the Company....................................................................... 11
Taxation of the Guaranteed Account............................................................ 12
THE COMPANY
History and Business.......................................................................... 12
Financial Services Segment.................................................................... 12
Life Insurance Segment........................................................................ 14
LIFE INSURANCE IN FORCE AND OTHER STATISTICAL DATA.................................................. 15
General Account Investments................................................................... 15
Other Matters................................................................................. 16
PROPERTIES.......................................................................................... 18
DIRECTORS AND EXECUTIVE OFFICERS.................................................................... 18
EXECUTIVE COMPENSATION.............................................................................. 20
SECURITY OWNERSHIP OF MANAGEMENT.................................................................... 22
INDEMNIFICATION..................................................................................... 22
EXPERTS............................................................................................. 23
LEGAL PROCEEDINGS................................................................................... 23
LEGAL MATTERS....................................................................................... 23
APPENDIX I--Examples of Market Value Adjustment Calculations........................................ 24
APPENDIX II--Examples of Market Value Adjustment Yields............................................. 26
SELECTED FINANCIAL DATA............................................................................. 27
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS.................................................. 27
FINANCIAL STATEMENTS OF THE COMPANY................................................................. F-1
2
GLOSSARY
In this Prospectus, the following terms have the meanings shown:
ACCOUNT: A record established for each Certificate Holder in a group Contract to
identify Purchase Payments and amounts accumulated that are attributable to the
Certificate Holder under the Contract during the Accumulation Period.
AGGREGATE MARKET VALUE ADJUSTMENT AMOUNT: The sum of all market value
adjustments calculated due to withdrawals or transfers from the Guaranteed
Account prior to the Maturity Date(s). This total may be a positive or negative
figure.
ANNUITY: A series of payments made for life, a definite period or a combination
of the two.
ANNUITY PERIOD: The period of time during which annuity payments are made.
CERTIFICATE: The document issued to a Certificate Holder to evidence a
Certificate Holder's Account established under a group Contract.
CERTIFICATE HOLDER: A person who has established an Account under a group
Contract or the individual Contract Holder of an individual Contract.
CONTRACT: A group or individual variable annuity contract issued by the Company
which offers the Guaranteed Account as a funding option.
CONTRACT HOLDER: A person who purchases a Contract.
CONTRACT PROSPECTUS: The prospectus for the Separate Account and the Contracts.
DEPOSIT PERIOD: The period of time during which Purchase Payments, transfers and
reinvestments are accepted for accumulation under the Guaranteed Account for one
or more Guaranteed Terms.
GUARANTEED RATE: The interest rate(s) applicable to a specific Guaranteed Term.
GUARANTEED TERM: The period of time specified by the Company for which
Guaranteed Rates are guaranteed on amounts invested during a specific Deposit
Period.
HOME OFFICE: The Company's principal executive offices located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
MARKET VALUE ADJUSTMENT (MVA): An adjustment that may be made to the amount
withdrawn or transferred from the Guaranteed Account before the Maturity Date.
The adjustment reflects the change in the value of the investment due to changes
in interest rates since the date of deposit and is computed using the formula
given in the Contract and Certificate. The adjustment is expressed as a
percentage of each dollar being withdrawn or transferred.
MARKET VALUE ADJUSTMENT AMOUNT (MVA AMOUNT): The amount by which the funds being
withdrawn or transferred from a Guaranteed Term is increased or decreased due to
the MVA.
MATURED TERM VALUE: The value of each Guaranteed Term on its Maturity Date.
MATURITY DATE: The last day of a Guaranteed Term.
MATURITY VALUE TRANSFER PROVISION: A provision that is available at maturity
when the Company automatically reinvests the total maturing Guaranteed Term
value into the open Deposit Period. This provision allows Certificate Holders to
transfer or surrender the automatically reinvested value, without an MVA, to a
new Guaranteed Term or to other available investment options until the last
business day of the month following the maturity of a Guaranteed Term. The last
business day of the month is defined as the last business day of the month when
the New York Stock Exchange is open.
PURCHASE PAYMENT: The gross payment made to an Account or to an individual
Contract.
3
SUMMARY
DESCRIPTION OF THE GUARANTEED ACCOUNT
The ALIAC Guaranteed Account is a guaranteed interest option available as a
funding option under certain variable annuity contracts issued by the Company.
Amounts invested in the Guaranteed Account are credited with interest rates
guaranteed by the Company for stated periods of time. Amounts must remain in the
Guaranteed Account for the full Guaranteed Term to receive the quoted interest
rates. Withdrawals or transfers from a Guaranteed Term before the end of the
Guaranteed Term may be subject to a Market Value Adjustment.
During a Deposit Period, Certificate Holders may direct some or all of their
Purchase Payment(s) to the Guaranteed Account. There is no minimum amount of
payment if the investment comes from a Purchase Payment. Transfers of
accumulated amounts from other funding options to the Guaranteed Account are
also allowed. If a transfer is made to the Guaranteed Account from other
Contract funding options, the transferred value may not be less than $500 (see
"Contributions to the Guaranteed Account").
GUARANTEED RATES AND GUARANTEED TERMS
Interest is credited daily at a rate that will provide the guaranteed annual
effective yield over the period of one year. The Company will declare the
Guaranteed Rate(s) for all available Guaranteed Terms at the start of the
Deposit Period for those Guaranteed Terms. These Guaranteed Rate(s) are
guaranteed for that Deposit Period and for the length of the Guaranteed Term.
Guaranteed Rates will never be less than the annual effective rate stated in the
Contract (see "Guaranteed Rates").
TRANSFERS AND WITHDRAWALS
Full or partial surrenders and transfers to other funding options under the
Contract are permitted from the Guaranteed Account; however, amounts invested
for a Guaranteed Term during a Deposit Period may not be transferred during that
Deposit Period or for 90 days after the close of that Deposit Period. This
restriction may not apply in all circumstances (see "Transfers and
Withdrawals").
MARKET VALUE ADJUSTMENT
Amounts withdrawn or transferred from the Guaranteed Account prior to the
Maturity Date may be subject to a Market Value Adjustment. The Market Value
Adjustment reflects the change in the value of the investment at the time of
withdrawal due to changes in interest rates since the date of deposit, and may
be positive or negative.
This provision does not apply to (1) amounts transferred on the Maturity Date;
(2) amounts transferred under the Maturity Value Transfer Provision; (3) amounts
transferred from the one-year Guaranteed Term in connection with the Dollar Cost
Averaging Program described in the Contract Prospectus; and (4) amounts
distributed under one of the Additional Withdrawal Options described in the
Contract Prospectus.
If amounts are withdrawn from the Guaranteed Account due to annuitization under
one of the lifetime Annuity options described in the Contract Prospectus, only
the positive Aggregate Market Value Adjustment, if any, is applied. When a
guaranteed death benefit is payable under the terms of the Contract, only a
positive Aggregate Market Value Adjustment amount, if any, is applied to amounts
withdrawn from the Guaranteed Account if withdrawn within the first six months
after the date of death (see "Market Value Adjustment").
MATURITY OF A GUARANTEED TERM
On or before the Maturity Date, a Certificate Holder may instruct the Company,
on the Maturity Date, to (a) reinvest the Matured Term Value in the Guaranteed
Account for a new Guaranteed Rate and Term available under the then current
Deposit Period; (b) transfer the Matured Term Value to one or more of the
variable funding options available under the
4
Contract; or (c) withdraw the Matured Term Value. In none of these circumstances
would a Market Value Adjustment be applicable to the Matured Term Value;
however, a deferred sales charge may be assessed on amounts withdrawn from the
Contract (see "Contract Charges" and the Contract Prospectus).
If the Company does not receive direction from the Certificate Holder by the
Maturity Date, the Matured Term Value will be reinvested in the Guaranteed
Account for a new Guaranteed Rate and Term under the then current Deposit
Period. The new Guaranteed Term will have the same length to maturity as the
Guaranteed Term that is maturing. If such a Guaranteed Term is not available,
the transfer will be to the next shortest available Guaranteed Term (see
"Maturity of a Guaranteed Term").
MATURITY VALUE TRANSFER PROVISION
The Maturity Value Transfer Provision is available at maturity when the Company
automatically reinvests the total maturing Guaranteed Term value into the open
Deposit Period. This provision allows Certificate Holders to transfer to other
funding options or withdraw, without a Market Value Adjustment, all or a portion
of the Matured Term Value that was transferred to a new Guaranteed Term by
default . A deferred sales charge may still be applied to any amounts withdrawn
from the Contract (see "Maturity Value Transfer Provision").
CONTRACT CHARGES
Certain charges such as the mortality and expense risk charge and administrative
charge are assessed under the Contract to compensate the Company for costs
associated with administering the Contract. These charges are not deducted from
the Guaranteed Account. Other charges, such as deferred sales charges,
maintenance fees, premium taxes and transfer fees, as well as any federal income
taxes and tax penalties, may be deducted from amounts held in or transferred
from the Guaranteed Account. For a description of all fees and charges deducted
under the Contract, see "Contract Charges" and the Contract Prospectus.
INVESTMENTS
The interest rate(s) credited during any Guaranteed Term does not necessarily
relate to investment performance. As in the case of all of the Company's general
account assets, deposits received under the Guaranteed Account will generally be
invested in federal, state and municipal obligations, corporate bonds, other
fixed income investments, and cash or cash equivalents. All of the general
assets of the Company are available to meet the guarantees under the general
account (see "Investments").
GUARANTEED ACCOUNT NOTIFICATIONS
At least 18 calendar days prior to the Maturity Date, the Company will notify
you of a Guaranteed Term's maturity. The notice will also include information
relating to the current Deposit Period's Guaranteed Rates and the available
Guaranteed Terms. At any time, you may obtain information concerning available
Deposit Periods, Guaranteed Rates, and Guaranteed Terms through the use of a
toll-free telephone number (1-800-531-4547) (see "Description of the ALIAC
Guaranteed Account--General" and "Maturity of a Guaranteed Term").
5
DESCRIPTION OF THE ALIAC GUARANTEED ACCOUNT
GENERAL
This Prospectus describes the material provisions of the ALIAC Guaranteed
Account (the "Guaranteed Account"), a credited interest option available to fund
certain variable annuity contracts issued by Aetna Life Insurance and Annuity
Company (the "Company"). Amounts allocated to the Guaranteed Account are held in
a noninsulated, nonunitized separate account (see "Investments").
Under the terms of the Guaranteed Account, the Company sets various rates of
interest ("Guaranteed Rates") for varying lengths of time ("Guaranteed Terms")
and designates the period of time during which investments can be made ("Deposit
Period"). Amounts must remain in the Guaranteed Account for the full Guaranteed
Term to receive the quoted interest rates. Withdrawals or transfers from a
Guaranteed Term before the end of the Guaranteed Term may be subject to a market
value adjustment ("MVA") (see "Market Value Adjustment").
Guaranteed Rates are annual effective yields, reflecting a full year's interest.
The interest is credited daily at a rate that will produce the guaranteed annual
effective yield over the period of one year. Guaranteed Terms are offered at the
Company's discretion for varying lengths of time ranging up to and including ten
years. The Deposit Period may be a week, a month, a calendar quarter or any
other period of time specified by the Company. A Deposit Period may also be
extended at the Company's discretion.
The Company maintains a toll-free telephone number (1-800-531-4547) that allows
Certificate Holders to obtain information concerning available Deposit Periods,
Guaranteed Rates and Guaranteed Terms. In addition, if you have amounts
allocated to a maturing Guaranteed Term, at least 18 calendar days prior to the
Maturity Date, the Company will send you information relating to the upcoming
Deposit Period dates as well as the current Guaranteed Rates, Guaranteed Terms
and projected Matured Term Values.
CONTRIBUTIONS TO THE GUARANTEED ACCOUNT
Amounts may be invested in the Guaranteed Account for the Guaranteed Terms and
at the Guaranteed Rates available during the then current Deposit Period by
allocating all or a portion of your Purchase Payment(s) to the Guaranteed
Account. You may also elect to transfer accumulated values from other funding
options available under the Contract or from other Guaranteed Terms of the
Guaranteed Account to the Guaranteed Account, subject to the transfer
limitations described in the Contract. There is no minimum amount required if
investments come from Purchase Payments; however, you must meet the minimum
amounts that are set forth in your Contract. There is a $500 minimum for
transfers from other funding options.
Amounts invested in the Guaranteed Account during a Deposit Period may not be
transferred during that Deposit Period or for 90 days after the close of that
Deposit Period, except in connection with the Maturity Value Transfer Provision,
the Dollar Cost Averaging Program, or the selection of an Additional Withdrawal
Option available under the Contract for early or systematic distributions (see
"Transfers").
GUARANTEED RATES
Guaranteed Rates are the interest rates that are guaranteed by the Company to be
credited on amounts invested during a Deposit Period for a specific Guaranteed
Term. Guaranteed Rates are annual effective yields, reflecting a full year's
interest. The interest is credited daily at a rate that will produce the
guaranteed annual effective yield over the period of one year.
Guaranteed Rates are credited according to the length of the Guaranteed Term.
For Guaranteed Terms of one year or less, a Guaranteed Rate is credited from the
date of deposit to the last day of the Guaranteed Term. For Guaranteed Terms of
greater than one year (except for those Contracts or Certificates issued in the
State of New York), several different Guaranteed Rates may be applicable. The
initial Guaranteed Rate is credited from the date of deposit to the end of a
specified period within the Guaranteed Term. The remainder of the Guaranteed
Term may also have several
6
different Guaranteed Rates for subsequent specific periods of time. For example,
a 5-year Guaranteed Term may guarantee 7% for the first year, 6.75% for the next
two years, and 6.5% for the remaining two years. At the Company's option, there
may be one Guaranteed Rate for the entire Guaranteed Term.
In no event will the Company guarantee or credit a Guaranteed Rate that is less
than an annual effective rate specified in the Contract. In addition, the
Contract does not allow for the crediting of interest above the Guaranteed Rates
which are announced by the Company at the start of a Deposit Period.
The Company's determination of Guaranteed Rates is influenced by, but does not
necessarily correspond to, interest rates available on fixed-income investments
in which the Company may invest using amounts deposited into the Guaranteed
Account (see "Investments"). In addition, the Company will consider other
factors in determining Guaranteed Rates including regulatory and tax
requirements, sales commissions and administrative expenses borne by the
Company, general economic trends, and competitive factors.
THE COMPANY MAKES THE FINAL DETERMINATION REGARDING GUARANTEED RATES. THE
COMPANY CANNOT PREDICT THE LEVEL OF FUTURE GUARANTEED RATES.
MATURITY OF A GUARANTEED TERM
At least 18 calendar days before the Maturity Date, the Company will send
notification to the Certificate Holder of the upcoming Deposit Period, the
projected Matured Term Value for the amount maturing in the Guaranteed Account
and the Guaranteed Rate and Guaranteed Term for the current Deposit Period.
Certificate Holders may transfer amounts from any maturing Guaranteed Term to
new Guaranteed Terms. The amount in any maturing Guaranteed Term may also be
transferred into any other allowable option(s) available under the Contract.
There is no Market Value Adjustment applied to amounts transferred or
surrendered from a Guaranteed Term on the Maturity Date; however, a surrender
charge may be imposed for amounts surrendered under the Contract.
If no direction from the Certificate Holder is received by the Company at its
Home Office by the Maturity Date, the Company will automatically reinvest the
Matured Term Value in the Guaranteed Account during the new Deposit Period. The
Matured Term Value will be invested for a Guaranteed Term having the same length
to maturity as the Guaranteed Term that is maturing. If such a term is not
available, the transfer will be to the next shortest available Guaranteed Term.
The new Guaranteed Term may have a different length of time to maturity than the
maturing Guaranteed Term. For example, if a 3-year Guaranteed Term matures and
no direction is received, and a 3-year Guaranteed Term is not available in the
current Deposit Period, the Matured Term Value will be reinvested in a new
Guaranteed Term of less than 3 years, which is the next shortest Guaranteed Term
then available.
Once the Matured Term Value has been reinvested, the Certificate Holder will
receive a statement confirming the transfer, along with information on the new
Guaranteed Rate(s) and Guaranteed Term.
MATURITY VALUE TRANSFER PROVISION
For those Certificate Holders who allow the Company to automatically transfer
the total Matured Term Value on the Maturity Date into the open Deposit Period,
the Maturity Value Transfer Provision is available. This provision allows
Certificate Holders to transfer or withdraw, without a Market Value Adjustment,
the Matured Term Value that was automatically transferred by the Company to a
new Guaranteed Term. A deferred sales charge may be assessed on amounts
withdrawn from the Contract. Please see "Contract Charges" and the Contract
Prospectus for more information. If all of the Matured Term Value is transferred
or withdrawn under the Maturity Value Transfer Provision, any interest accrued
under the new Guaranteed Term will be credited through the date of transfer or
withdrawal. The right to make a transfer or withdrawal under the Maturity Value
Transfer Provision is available until the last business day (when the New York
Stock Exchange is open) of the month following the Maturity Date. THE MATURITY
VALUE TRANSFER PROVISION ONLY APPLIES TO THE FIRST REQUEST RECEIVED FROM THE
CERTIFICATE HOLDER, WITH RESPECT TO A PARTICULAR MATURED TERM VALUE.
7
TRANSFERS AND WITHDRAWALS
TRANSFERS
As described in the Contract Prospectus, all or any portion of accumulated
values under the Contract may be transferred to the Guaranteed Account or to
other funding options available under the Contract. The minimum amount that may
be transferred from other funding options to the Guaranteed Account is $500.
Amounts applied to a Guaranteed Term during a Deposit Period may not be
transferred to any other funding option or to another Guaranteed Term during
that Deposit Period or for 90 days after the close of that Deposit Period. This
90-day restriction does not apply to transfers relating to Dollar Cost Averaging
from the one-year Guaranteed Term or to the selection of an Additional
Withdrawal Option available under the Contract.
When a request is made to transfer a specific dollar amount, any applicable
Market Value Adjustment will be included in the determination of any amount
withdrawn from the Guaranteed Account to fulfill this request. Therefore, the
amount actually withdrawn from the Guaranteed Account may be more or less than
the requested dollar amount. A Market Value Adjustment may not be applied under
certain circumstances (see "Market Value Adjustment").
WITHDRAWALS
The Contract allows for full or partial withdrawals of amounts accumulated under
the Contract. To make a full or partial withdrawal, you must complete a
withdrawal request form (available from the Company) and submit it to the
Company's Home Office. Withdrawals under the Contract are generally subject to a
Deferred Sales Charge.
Withdrawals from the Guaranteed Account may also be subject to a Market Value
Adjustment. When a request for a partial withdrawal of a specific dollar amount
is made, any applicable Market Value Adjustment will be included in the
determination of any amount to be withdrawn from the Guaranteed Term to fulfill
this request. Therefore, the amount actually withdrawn from the Guaranteed
Term(s) may be more or less than the dollar amount requested (see "Market Value
Adjustment," "Contract Charges" and the Contract Prospectus).
CALCULATION OF TRANSFER OR WITHDRAWAL AMOUNTS
When you request a transfer or withdrawal from the Guaranteed Account, amounts
invested for Guaranteed Terms having the same lengths will be grouped together
and then withdrawn pro rata from the Guaranteed Term groups. From each
Guaranteed Term group, amounts will be withdrawn starting with the oldest
Deposit Period.
For example:
Deposit Period A = Five-Year Guaranteed Term 1/1/94 - 1/14/94
Deposit Period B = Five-Year Guaranteed Term 1/1/95 - 1/14/95
Deposit Period C = Five-Year Guaranteed Term 1/1/96 - 1/14/96
Within this five year Guaranteed Term group, amounts would be taken first from
amounts allocated to Deposit Period A (the oldest Guaranteed Term group), then
from Deposit Period B, and then from Deposit Period C.
MARKET VALUE ADJUSTMENT
A Market Value Adjustment ("MVA") is applied to amounts transferred or withdrawn
from the Guaranteed Account before the Maturity Date, including transfers made
in order to elect a nonlifetime Annuity Option, but excluding transactions under
the Maturity Value Transfer Provision, transfers made from the one-year
Guaranteed Term in connection with the Dollar Cost Averaging Program, and
amounts withdrawn under one of the Additional Withdrawal Options for systematic
or periodic distributions under the Contract.
8
If amounts are withdrawn from the Guaranteed Account due to annuitization under
one of the lifetime Annuity options described in the Contract Prospectus, only
the positive Aggregate Market Value Adjustment Amount, if any, is applied (see
"Annuity Period" in this Prospectus). Additionally, when a guaranteed death
benefit is payable under the terms of the Contract, only a positive Aggregate
Market Value Adjustment Amount, if any, is applied to amounts withdrawn from the
Guaranteed Account if withdrawn within the first six months after the date of
death. This provision does not apply at the death of a spousal beneficiary or
joint Certificate Holder who continued the Account in his or her own name after
the first death. If amounts are withdrawn after the six-month period, a positive
or negative Aggregate Market Value Adjustment Amount, as applicable, will be
applied.
In order to accommodate these withdrawals or transfers, the Company may need to
liquidate certain assets or use existing cash flows which would otherwise be
available to invest at current interest rates. The assets may be sold at a
profit or a loss depending upon market conditions. This profit or loss could
affect the determination of Guaranteed Rates (see "Guaranteed Rates").
Market Value Adjustments can be positive or negative and therefore the
imposition of an MVA may increase or decrease the amount withdrawn from a
Guaranteed Term to satisfy the withdrawal or transfer request. The MVA Amount
depends on the relationship of the deposit period yield of U.S. Treasury Notes
that mature in the last quarter of the Guaranteed Term, to the current yield of
such U.S. Treasury Notes at the time of withdrawal. In general, if the current
yield is the lesser of the two, the MVA will decrease the amount withdrawn from
the Guaranteed Account to satisfy the withdrawal or transfer request; if the
current yield is the higher of the two, the MVA will increase the amount
withdrawn from the Guaranteed Account to satisfy the withdrawal or transfer
request.
The MVA involves a deposit period yield and a current yield. An adjustment is
made in the formula of the MVA to reflect the period of time remaining in the
Guaranteed Term from the Wednesday of the week of withdrawal. To determine the
deposit period yield and the current yield, certain information must be obtained
about the prices of outstanding U.S. Treasury issues. This information may be
found each business day in publications such as THE WALL STREET JOURNAL. This
newspaper publishes the yield-to-maturity percentages for all Treasury Notes as
of the preceding business day. These percentages are used in determining the
deposit period yield and the current yield for the MVA calculation.
DEPOSIT PERIOD YIELD
Determining the deposit period yield in the MVA calculation involves
consideration of interest rates prevailing during the Deposit Period for the
Guaranteed Term from which the withdrawal will be made. First, the Treasury
Notes that mature in the last three months of the Guaranteed Term are
identified, and then, the yield-to-maturity percentages of these Treasury Notes
for the last business day of each week in the Deposit Period are determined. The
resulting percentages are then averaged to determine the deposit period yield.
CURRENT YIELD
To determine the current yield, use the same Treasury Notes identified for the
deposit period yield: Treasury Notes that mature in the last three months of the
Guaranteed Term. However, the yield-to-maturity percentages used are those for
the last business day of the week preceding the withdrawal. Average these
percentages to determine the current yield.
For example, assume the withdrawal will be processed on May 16, 1996. List the
yield-to-maturity percentage figures as of May 10, 1996 for the same Treasury
Notes that determined the deposit period yield. Average these yields to
determine the current yield.
9
MVA FORMULA
The mathematical formula used to determine the MVA is:
(1 + i) x
{ ----- } ----
(1 + j) 365
where "i" is the deposit period yield; "j" is the current yield; and "x" is the
number of days remaining (computed from Wednesday of the week of withdrawal) in
the Guaranteed Term. (For examples of how to calculate MVAs, please see Appendix
I.)
MISCELLANEOUS
CONTRACT CHARGES
Certain charges are deducted directly or indirectly from the funding options
available under the Contract. If amounts used for a full or partial surrender
are withdrawn from a Guaranteed Account, in addition to the Market Value
Adjustment, a deferred sales charge may be deducted from those amounts
withdrawn. Please see the Contract Prospectus.
Mortality and expense risk charges and the administrative charges that are
deducted from variable funding options are not deducted from the Guaranteed
Account. There may be other Contract charges such as maintenance fees or
transfer fees deducted from the Guaranteed Account. See the Contract Prospectus.
WITHDRAWALS
Under certain emergency conditions, the Company may defer payment of a
Guaranteed Account withdrawal request for a period of up to six months. Please
refer to the Contract Prospectus for further details.
ANNUITY PERIOD
The Guaranteed Account cannot be used as an option during the Annuity Period. At
annuitization, amounts in the Guaranteed Account must be transferred to one or
more of the funding options which allow for Annuity payments. The Aggregate
Market Value Adjustment Amount (positive or negative) will be applied to any
amount transferred from the Guaranteed Account before the Maturity Date to one
of the nonlifetime Annuity options available under the Contract. Only a positive
Aggregate Market Value Adjustment, if any, is applied due to annuitization under
a lifetime Annuity option. Please refer to the Contract Prospectus for a
discussion of the Annuity Period.
INVESTMENTS
Amounts applied to the Guaranteed Account will be deposited to, and accounted
for in, a noninsulated nonunitized separate account established by the Company
under Connecticut law. A nonunitized separate account is a separate account in
which the Certificate Holder does not participate in the performance of the
assets through unit values or any other interest. The assets of the
noninsulated, nonunitized separate account may be charged with liabilities
arising out of any other business of the Company.
Certificate Holders allocating amounts to the Guaranteed Account do not receive
a unit ownership of assets accounted for in this separate account. The assets
accrue solely to the benefit of the Company. Certificate Holders do not
participate in the investment gain or loss from assets accounted for in the
separate account. Such gain or loss is borne entirely by the Company.
Certificate Holders will not participate in any manner in the investment
performance of the nonunitized separate account. All benefits available to
Certificate Holders are Contract guarantees made by the Company and are
accounted for in the separate account.
10
The Company intends to invest in assets which, in the aggregate, have
characteristics, especially cash flow patterns, reasonably related to the
characteristics of the liabilities. Various investment techniques will be used
to achieve the objective of close aggregate matching of assets and liabilities.
The Company will primarily invest in investment-grade fixed income securities
including:
- Securities issued by the United States Government or its
agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government.
- Debt securities that are rated, at the time of purchase, within
the four highest grades assigned by Moody's Investors Services,
Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation (AAA,
AA, A or BBB) or any other nationally recognized rating
service.
- Other debt instruments, including, but not limited to, issues
of or guaranteed by banks or bank holding companies and of
corporations, which obligations, although not rated by Moody's,
Standard & Poor's, or other nationally recognized rating
service, are deemed by the Company's management to have an
investment quality comparable to securities which may be
purchased as stated above.
- Commercial paper, cash or cash equivalents, and other
short-term investments having a maturity of less than one year
which are considered by the Company's management to have
investment quality comparable to securities which may be
purchased as stated above.
In addition, the Company may invest in futures and options. Financial futures
and related options thereon and options on securities are purchased solely for
nonspeculative hedging purposes. In the event the securities prices are
anticipated to decline, the Company may sell a futures contract or purchase a
put option on futures or securities to protect the value of securities held in
or to be sold for the general account or the nonunitized separate account.
Similarly, if securities prices are expected to rise, the Company may purchase a
futures contract or a call option thereon against anticipated positive cash flow
or may purchase options on securities.
WHILE THE FOREGOING GENERALLY DESCRIBES THE INVESTMENT STRATEGY OF THE
GUARANTEED ACCOUNT, THE COMPANY IS NOT OBLIGATED TO INVEST THE ASSETS
ATTRIBUTABLE TO THE CONTRACTS ACCORDING TO ANY PARTICULAR STRATEGY, EXCEPT AS
MAY BE REQUIRED BY CONNECTICUT AND OTHER STATE INSURANCE LAWS, NOR WILL THE
GUARANTEED RATES THE COMPANY ESTABLISHES NECESSARILY RELATE TO THE PERFORMANCE
OF THE NONUNITIZED SEPARATE ACCOUNT.
DISTRIBUTION
The Company is the principal underwriter of the Contract. The Company is
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as a broker-dealer, and is a member of the National
Association of Securities Dealers, Inc. For additional information regarding
distribution, see the Contract Prospectus.
TAX CONSIDERATIONS
Certificate Holders should seek advice from their tax advisers concerning the
application of federal (and where applicable, state and local) tax laws to
amounts invested in the Guaranteed Account under the Contracts by them and by
their beneficiaries and payments from such investments. See also the Contract
Prospectus for other tax considerations.
TAXATION OF THE COMPANY
The Company is taxed as an insurance company under the Internal Revenue Code of
1986 as amended. All assets supporting the Annuity obligations of the Guaranteed
Account are owned by the Company. Any income earned on such assets is considered
income to the Company.
11
TAXATION OF THE GUARANTEED ACCOUNT
Generally, any income earned on the Guaranteed Account deposits is not taxable
to Certificate Holders until withdrawn or distributed to the Certificate Holder
under the Contract. For additional information concerning the tax treatment of
Purchase Payments and distributions from the Contract, please refer to the
Contract Prospectus.
THE COMPANY
HISTORY AND BUSINESS
Aetna Life Insurance and Annuity Company is a stock life insurance company
organized in 1976 under the insurance laws of Connecticut. Aetna Life Insurance
and Annuity Company, together with its two wholly owned subsidiaries, Aetna
Insurance Company of America and Aetna Private Capital, Inc., is hereafter
called the "Company". The Company is a wholly owned subsidiary of Aetna
Retirement Services, Inc. ("ARSI"). ARSI is a wholly owned subsidiary of Aetna
Life and Casualty Company ("Aetna") which, with Aetna's subsidiaries,
constitutes one of the nation's largest insurance/ financial services
organizations based on its assets at December 31, 1994. Two subsidiaries,
Systematized Benefits Administrators, Inc. ("SBA") and Aetna Investment
Services, Inc. ("AISI"), which were previously reported with the Company's
operations were distributed in the form of dividends to ARSI in December of
1995. The impact to the Company's operations of distributing these dividends was
immaterial. The Company's Home Office is located at 151 Farmington Avenue,
Hartford, Connecticut 06156.
The Company markets a variety of life insurance, retirement and other savings
and investment products including individual and group annuities, financial
services and mutual funds. The Company's products are designed for individuals,
pension plans, small businesses and employer-sponsored groups. The Company's
operations are reported through two major business segments: financial services
and life insurance.
FINANCIAL SERVICES SEGMENT
The financial services segment includes individual and group annuity products
which offer a variety of funding and distribution options for personal and
employer-sponsored retirement plans that qualify under Internal Revenue Code
Sections 401, 403, 408, and 457, and individual and group nonqualified annuity
contracts. These contracts may be immediate or deferred and are offered
primarily to individuals, pension plans, small businesses and employer-sponsored
groups in the health care, government, education (collectively "not-for-profit"
organizations) and corporate markets. The Company also offers life insurance
supplemental contracts. Financial services also include pension plan
administrative services. In 1995, the Company discontinued writing structured
settlements of certain liabilities.
Annuity products typically offer fixed (fully guaranteed and experience rated)
investment options and variable investment options (discussed below). For fully
guaranteed and experience rated options the Company earns a spread representing
the difference between income on investments and interest credited to customer
reserves.
The Company's variable products (variable annuity and variable life contracts)
utilize Separate Accounts to provide contractholders with a vehicle for
investments under which the contractholders assume the investment risks as well
as the benefit of favorable performance. Assets held under these products are
invested, as designated by the contractholder or participant under a contract,
in Separate Accounts, which in turn invest in shares of mutual funds that are
managed by the Company or other selected mutual funds that are not managed by
the Company. The Company acts as an investment adviser for its affiliated mutual
funds (a retail fund -- Aetna Series Fund, Inc. and variable products funds --
Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Aetna Get Fund Series B) and receives advisory fees
for its investment management services. The Company also receives from the Aetna
Series Fund, Inc. service fees for providing administrative and shareholder
services and distribution fees for promoting sales of the Adviser Class shares.
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable annuity contracts (actuarial margin) (see
Note 8 of the Notes to the Consolidated Financial Statements).
12
Product retention is a key driver of profitability for annuity products. To
encourage product retention, annuity contracts typically impose a surrender
charge on policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge vary by
product. In addition, a new approach being incorporated into recent variable
contracts with fixed interest account investment options allows contractholders
to receive an incremental interest rate if withdrawals from the fixed account
are spread over a period of five years. Further, more favorable credited rates
may be offered after policies have been in force for a period of time. Existing
tax penalties on annuity distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of annuity balances, but do not impede
transfers of those balances to products of other competitors.
Certain of the Company's annuity products allow customers to borrow against
their policies. Outstanding policy loans on annuity policies at December 31,
1995 were $181.3 million. Net investment income on annuity policy loans was $4.0
million for the year ended December 31, 1995.
In the financial services segment markets, competition arises from other
insurance companies, banks, mutual funds and other investment managers.
Principal competitive factors are cost, service, level of investment performance
and the perceived financial strength of the investment manager or sponsor.
Competition in financial services markets may affect, among other matters, both
business growth and the pricing of the Company's products and services.
Products sold in the corporate pensions market are sold through pension
professionals, stock brokers and third party administrators who work closely
with salaried field office employees. Products sold in the not-for-profit
organization market are distributed primarily through dedicated career agents,
registered life brokers and broker/dealers. Products sold in the individual
market are distributed primarily through dedicated career agents, registered
life brokers, banks and broker/dealers.
Reserves for limited payment contracts (immediate annuities with life contingent
payout) are computed on the basis of assumed investment yield, mortality,
morbidity and expenses (including a margin for adverse deviation), which
generally vary by plan, year of issue and policy duration. Reserves for
investment contracts (deferred annuities and immediate annuities without life
contingent payouts) are equal to cumulative deposits plus credited interest less
charges thereon. Of those investment contracts which are experience-rated, the
reserves also reflect net realized capital gains/ losses (which the Company
reflects through credited rates on an amortized basis) and unrealized capital
gains/losses related to Financial Accounting Standard ("FAS") No. 115 (see Note
1 of the Notes to the Consolidated Financial Statements).
The following table summarizes assets under management for the principal
customer groups of the financial services segment. Amounts reflected exclude
unrealized gains (losses) of $689.9 million and $(337.7) million at December 31,
1995 and 1994, respectively, related to market value adjustments required under
FAS 115. See Management's Analysis of the Results of Operations and Note 1 for
further discussion on assets under management and FAS 115, respectively.
1995 1994 1993
----------- ----------- -----------
(MILLIONS)
Corporate pensions....................................................................... $ 4,233.5 $ 3,217.4 $ 2,886.2
Not-for-profit organizations............................................................. 12,086.1 10,025.9 9,087.1
Individuals.............................................................................. 6,214.8 4,879.6 3,981.0
----------- ----------- -----------
Total.............................................................................. $ 22,534.4 $ 18,122.9 $ 15,954.3
----------- ----------- -----------
----------- ----------- -----------
13
Deposits, which are not included in premiums or revenue, are shown in the
following table for the years indicated:
1995 1994 1993
---------- ---------- ----------
(MILLIONS)
Corporate pensions........................................................................... $ 1,075.9 $ 890.3 $ 714.5
Not-for-profit organizations................................................................. 1,093.0 1,093.3 1,107.8
Individuals.................................................................................. 1,200.6 670.2 460.9
---------- ---------- ----------
Total.................................................................................. $ 3,369.5 $ 2,653.8 $ 2,283.2
---------- ---------- ----------
---------- ---------- ----------
LIFE INSURANCE SEGMENT
The life insurance segment includes universal life, variable universal life,
interest-sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer-sponsored groups and
executives of Fortune 2000 companies. The Company's universal life insurance
product accounted for approximately 92% of individual life insurance sales in
1995.
The Company's in-force block of insurance includes a sizable block of
traditional ordinary life insurance originally written by an affiliate, Aetna
Life Insurance Company ("Aetna Life"), and transferred to the Company via a
reinsurance agreement in 1988 (see Note 8 of the Notes to the Consolidated
Financial Statements). This closed book of business contributed 29% of the life
insurance segment's earnings in 1995.
Universal life products include a cash value component that is credited with
interest at competitive rates. The Company earns the spread between investment
income and interest credited on customer cash values. Universal life cash values
are charged for cost of insurance coverage and for administrative expenses. The
Company is also compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable universal life contracts.
Life insurance products typically require high costs to acquire business. As
with the financial services segment, retention is an important driver of
profitability and is encouraged through product features. For example, universal
and interest-sensitive whole life insurance contracts typically impose a
surrender charge on policyholder balances withdrawn within seven to twenty years
of the contract's inception or for variable life within ten years. The period of
time and level of the charge vary by product. In addition, more favorable
credited rates and policy loan terms may be offered after policies have been in
force for a period of time. To further encourage retention, life insurance
agents are typically paid renewal commissions or service fees.
Certain of the Company's life insurance products allow customers to borrow
against their policies. Outstanding policy loans on individual life policies at
December 31, 1995 were $157.3 million. Net investment income on individual life
policy loans was $9.7 million for the year ended December 31, 1995.
The markets for life insurance products are highly competitive among insurance
companies. Competition largely is based upon product features and prices.
Competition in life insurance markets may affect, among other matters, both
business growth and the pricing of the Company's products and services.
Life insurance products are marketed by managing general agents, regional
brokers, banks and broker/dealers.
Reserves for universal life and interest-sensitive whole life products (which
are all experience-rated) are equal to cumulative deposits less withdrawals and
charges, plus credited interest thereon, plus/less net realized capital gains/
losses (which the Company reflects through credited rates on an amortized
basis). These reserves also reflect unrealized capital gains/losses related to
FAS 115. Reserves for all other fixed individual life contracts are computed on
the basis of assumed investment yield, mortality, morbidity and expenses
(including a margin for adverse deviation), which generally vary by plan, year
of issue and policy duration. These reserves are computed amounts that, with
14
additions from premiums and deposits to be received, and with interest on such
reserves compounded annually at assumed rates, are expected to be sufficient to
meet the Company's policy obligations at their maturities or to pay expected
death or retirement benefits or other withdrawal requests.
Reinsurance arrangements with affiliated and non-affiliated insurance companies
are utilized to limit exposure to losses in excess of predetermined amounts per
individual life. The Company's retention limit per individual life is $2.0
million (see Notes 8 and 9 of the Notes to the Consolidated Financial
Statements).
LIFE INSURANCE IN FORCE AND OTHER STATISTICAL DATA*
The following table summarizes changes in individual life insurance in force
before deductions for reinsurance ceded to other companies for the years
indicated:
1995 1994 1993
----------- ----------- -----------
(MILLIONS, EXCEPT AS NOTED BELOW)
Sales and additions:
Direct:
Permanent............................................................................ $ 3,757.9 $ 3,369.4 $ 2,767.0
Term................................................................................. 2,600.4 559.9 237.2
Assumed:
Permanent............................................................................ 1,358.5 -- --
----------- ----------- -----------
Total.............................................................................. $ 7,716.8 $ 3,929.3 $ 3,004.2
----------- ----------- -----------
----------- ----------- -----------
Terminations:
Direct:
Surrenders and Conversions........................................................... $ 1,467.0 $ 1,316.4 $ 1,632.6
Lapses............................................................................... 891.4 860.9 816.7
Other................................................................................ 152.7 170.0 170.6
Assumed:
Surrenders and Conversions........................................................... 53.6 59.4 80.3
Lapses............................................................................... 331.8 303.9 376.2
Other................................................................................ 54.2 57.9 55.1
----------- ----------- -----------
Total.............................................................................. $ 2,950.7 $ 2,768.5 $ 3,131.5
----------- ----------- -----------
----------- ----------- -----------
In force:
Direct:
Permanent............................................................................ $ 32,333.2 $ 30,563.0 $ 29,507.1
Term................................................................................. 3,698.3 1,621.3 1,095.2
Assumed:
Permanent............................................................................ 2,392.9 1,244.8 1,344.9
Term................................................................................. 1,203.8 1,433.0 1,754.1
----------- ----------- -----------
Total.............................................................................. $ 39,628.2 $ 34,862.1 $ 33,701.3
----------- ----------- -----------
----------- ----------- -----------
Number of direct policies in force (thousands)........................................... 378.1 378.3 384.6
----------- ----------- -----------
----------- ----------- -----------
Average size of direct policy in force (thousands)....................................... $ 95.3 $ 85.1 $ 79.6
----------- ----------- -----------
----------- ----------- -----------
* Only nonparticipating business is written by the Company.
GENERAL ACCOUNT INVESTMENTS
Consistent with the nature of the contract obligations involved in the Company's
operations, the majority of the general account assets are invested in
long-term, debt securities such as corporate debt securities, residential
mortgage-
15
backed securities, commercial and multifamily mortgage-backed securities, other
asset-backed securities and government securities. It is management's objective
that the portfolios be of high quality while achieving competitive investment
yields and returns. Investment portfolios generally match the duration of the
insurance liabilities they support. The general account of the Company has been
segmented to improve the asset/liability matching process. The duration of
investments is monitored and security purchases and sales are executed with the
objective of having adequate funds available to satisfy the Company's maturing
liabilities.
Please see Investments in the Management's Analysis of the Results of Operations
for a further discussion of investments. For information concerning the
valuation of investments, see Notes 1, 2 and 3 of the Notes to Consolidated
Financial Statements.
OTHER MATTERS
REGULATION. The insurance business of the Company is subject to comprehensive,
detailed regulation throughout the United States. The laws of the various
jurisdictions establish supervisory agencies with broad authority to regulate,
among other things, the granting of licenses to transact business, trade
practices, agent licensing, policy forms, underwriting and claims practices,
reserve adequacy, insurer solvency, the maximum interest rates that can be
charged on life insurance policy loans, the minimum rates that must be provided
for accumulation of surrender values, the form and content of required financial
statements and the type and amounts of investments permitted. The Company is
required to file detailed reports with supervisory agencies in each of the
jurisdictions in which it does business, and its operations and accounts are
subject to examination by such agencies at regular intervals.
Although the federal government does not directly regulate the business of
insurance, many federal laws do affect the business. Existing or recently
proposed federal laws that may significantly affect or would affect, if passed,
the insurance business cover such matters as pensions and other employee
benefits, removal of barriers preventing banks from engaging in the insurance
and mutual fund businesses, the taxation of insurance companies, and the tax
treatment of insurance products.
Material changes in applicable federal and state laws and regulations could
adversely affect the Company's business operations, although the Company is
unable to predict whether any such changes will be implemented.
Several states, including Connecticut, regulate affiliated groups of insurers
such as the Company and its affiliates under insurance holding company statutes.
Under such laws, intercorporate asset transfers and dividend payments from
insurance subsidiaries may require prior notice to or approval of the insurance
regulators, depending on the size of such transfers and payments relative to the
financial position of the Company making the transfer. Changes in control also
are regulated under these laws. As a Connecticut-domiciled insurance company,
the Company is subject to comprehensive regulation under the Connecticut
insurance laws and by the Connecticut Insurance Department.
In recent years, state insurance regulators have been considering changes in
statutory accounting practices and other initiatives to strengthen solvency
regulation. The National Association of Insurance Commissioners (NAIC) has
adopted risk-based capital ("RBC") standards for life insurers. The RBC formula
is a regulatory tool designed to identify weakly capitalized companies by
comparing the adjusted surplus to the required surplus, which reflects the risk
profile of the Company (RBC ratio). Within certain ratio changes, regulators
have increasing authority to take action as the RBC ratio decreases. There are
four levels of regulatory action ranging from requiring insurers to submit a
comprehensive plan to the state insurance commissioner to when the state
insurance commissioner places the insurer under regulatory control. The
Company's RBC ratio at December 31, 1995 was significantly above the levels
which would require regulatory action. Rating agencies also use their own
risk-based capital standards as part of determining a company's rating.
The NAIC also is considering several other solvency-related regulations
including the development of a model investment law and amendments to the model
insurance holding company law which would limit types and amounts of
16
insurance company investments. In addition, in recent years there has been
growing interest among certain members of Congress concerning possible federal
roles in the regulation of the insurance industry. Because these other
initiatives are in a preliminary stage, management cannot assess the potential
impact of their adoption on the Company.
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants. The
after tax charges to earnings for guaranty fund obligations for the years ended
December 31, 1995, 1994 and 1993 were $1.4 million, $0.6 million and $0.9
million, respectively. The amounts ultimately assessed may differ from the
amounts charged to earnings thus far because such assessments may not be made
for several years and will depend upon the final outcome of regulatory
proceedings.
The Company provides a variety of products and services to employee benefit
plans that are covered by the Employee Retirement Income Security Act of 1974
("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 the non-guaranteed
portion of a group pension contract issued to the plan 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 Department of Labor ("DOL") interpretive bulletin that had suggested that
insurance company general account assets were not plan assets. The Company and
other insurers are seeking clarification from the DOL of the effects, if any, of
the decision on their businesses, as well as pursuing clarification of the
decision through Federal legislation. Management is not currently able to
predict how the decision, or the outcome of any legislative or regulatory
initiatives, will ultimately affect its business.
Aetna Life Insurance and Annuity Company is regulated by the Securities and
Exchange Commission ("SEC") and some state securities regulators as a
broker-dealer and investment adviser. The Company's variable products involve
investments through Separate Accounts, some of which are registered as
investment companies with the SEC, as are the retail mutual funds and the
variable mutual funds offered by the Company. Additionally, interests in some of
the Separate Accounts, the retail mutual funds, the variable product mutual
funds and certain other products used as funding vehicles for the Company's
variable products are registered with the SEC. Shares of the retail mutual funds
are also registered with all fifty of the state securities regulators.
MISCELLANEOUS. According to the Fortune Service 500, as of December 31, 1994,
the Company ranked 19th and 22nd among all United States domiciled life
insurance companies based upon total assets and premium income, respectively. As
of December 31, 1995, the Company had approximately 2,700 employees.
The Company's rating at February 6, 1996 by A.M. Best was A+ (Superior).
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 internal auditors and
are modified as considered necessary.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of revenue in 1995. In addition, neither segment of
the Company's business is dependent upon a single customer or a few customers,
the loss of which would have a significant impact on the segment. See Note 12 of
the Notes to the Consolidated Financial Statements regarding segment
information.
FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of
1995 ("the Act") provides a new "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about their companies, so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the statement.
The Company desires to take advantage of the new "safe harbor" provisions of the
Act. Certain information contained herein, particularly the information
appearing under the heading "Outlook" contained in Management's Analysis of the
Results of Operations, is forward-looking. Information regarding certain
important factors that could
17
cause actual results of operations or outcomes of other events to differ
materially from any such forward-looking statement appear together with such
statement within this section and within Management's Analysis of the Results of
Operations.
PROPERTIES
The Company occupies office space which is owned or leased by Aetna Life
Insurance Company or other affiliates. Expenses associated with these offices
are allocated on a direct and indirect basis to the Company and the other
subsidiaries of Aetna.
DIRECTORS AND EXECUTIVE OFFICERS
The following are the Directors and Executive Officers of the Company. The terms
of office for all Directors and Executive Officers will run until the Company's
next annual meeting and until their successors are duly elected and qualified.
PRINCIPAL OCCUPATION AND EMPLOYMENT DURING PAST FIVE
NAME, AGE CURRENT POSITION WITH THE COMPANY YEARS; OTHER DIRECTORSHIPS OF DIRECTORS
- ------------------------ ------------------------------------ -------------------------------------------------------
Daniel P. Kearney Director, President and Chief President (since December 1993), Aetna Life Insurance
Age 56 Executive Officer and Annuity Company; Executive Vice President (since
December 1993), and Group Executive, Financial Division
(February 1991-December 1993), Aetna Life and Casualty
Company. DIRECTOR: Aetna Investment Services, Inc.
(since November 1994); Aetna Insurance Company of
America (since May 1994); MBIA, Inc. (since 1992).
Christopher J. Burns Director and Senior Vice President Senior Vice President, Sales & Service (since February
Age 49 1996), and Senior Vice President, Life (March
1991-February 1996), Aetna Life Insurance and Annuity
Company. DIRECTOR: Aetna Financial Services, Inc.
(since January 1996), Aetna Investment Services, Inc.
(since July 1993).
Laura R. Estes Director and Senior Vice President Senior Vice President, Manage/Design Products and
Age 46 Services (since February 1996), and Senior Vice
President, Pensions (March 1991-February 1996). Aetna
Life Insurance and Annuity Company. DIRECTOR: Aetna
Financial Services, Inc. (since January 1996); Aetna
Investment Services, Inc. (since July 1993).
Timothy A. Holt Director, Senior Vice President and Senior Vice President, Strategy & Finance, and Chief
Age 43 Chief Financial Officer Financial Officer (since February 1996), Aetna Life
Insurance and Annuity Company; Vice President,
Portfolio Management/Investment Group (August
1992-February 1996), Aetna Life and Casualty Company;
Treasurer (February 1990-July 1991), Aetna Investment
Management, Inc.
18
PRINCIPAL OCCUPATION AND EMPLOYMENT DURING PAST FIVE
NAME, AGE CURRENT POSITION WITH THE COMPANY YEARS; OTHER DIRECTORSHIPS OF DIRECTORS
- ------------------------ ------------------------------------ -------------------------------------------------------
Gail P. Johnson Director and Vice President Vice President, Service and Retain Customers (since
Age 45 February 1996); Vice President, Defined Benefit
Services (September 1994-February 1996); Vice
President, Plan Services, Pensions and Financial
Services (December 1992-September 1994); Managing
Director, Business Strategy (July 1991-December 1992);
Assistant Vice President, Financial Division (June
1987-July 1991);--Aetna Life Insurance and Annuity
Company.
John Y. Kim Director and Senior Vice President President (since December 1995), Aetna Investment
Age 35 Management, Inc.; Chief Investment Officer (since May
1994), Aetna Life and Casualty Company; Managing
Director (September 1993-April 1994), Mitchell Hutchins
Institutional Investors (New York, New York); Vice
President and Senior Portfolio Manager (October
1991-August 1993), and Vice President, Investor
Relations (1990-1992), Aetna Life and Casualty Company.
Shaun P. Mathews Director and Vice President Vice President, Products Group (since February 1996);
Age 40 Senior Vice President, Strategic Markets and Products
(February 1993-February 1996); and Senior Vice
President, Mutual Funds (March 1991-February
1993)--Aetna Life Insurance and Annuity Company.
DIRECTOR: Aetna Investment Services, Inc. (since July
1993); Aetna Insurance Company of America (since
February 1993).
Glen Salow Director and Vice President Vice President, Information Technology (since February
Age 41 1996), Vice President, Information Technology,
Investments and Financial Services (February
1995-February 1996), Vice President, Investment Systems
(1992-1995), AIT-Aetna Life Insurance and Annuity
Company; Senior Vice President, (December 1986-August
1992), Lehman Brothers.
Creed R. Terry Director and Vice President Vice President, Select and Manage Markets (since
Age 52 February 1996), Market Strategist (August 1995-February
1996)--Aetna Life Insurance and Annuity Company;
President (1991-1995), Chemical Technology Corporation
(a subsidiary of Chemical Bank).
19
PRINCIPAL OCCUPATION AND EMPLOYMENT DURING PAST FIVE
NAME, AGE CURRENT POSITION WITH THE COMPANY YEARS; OTHER DIRECTORSHIPS OF DIRECTORS
- ------------------------ ------------------------------------ -------------------------------------------------------
Zoe Baird Senior Vice President and General Senior Vice President and General Counsel (since April
Age 43 Counsel 1992), Vice President and General Counsel (July
1990-April 1992), Aetna Life and Casualty Company.
DIRECTOR: Zurn Industries, Inc. (since April 1993);
Southern New England Telecommunication Corp. and
Southern New England Telephone Company (since November
1990).
Susan E. Schechter Corporate Secretary and Counsel Counsel (since November 1993), Aetna Life and Casualty
Age 43 Company; Associate Attorney (September 1986-October
1993), Steptoe & Johnson.
Eugene M. Trovato Vice President and Treasurer, Vice President and Treasurer, Corporate Controller
Age 45 Corporate Controller (since February 1996), Vice President and Controller
(February 1995-February 1996), Aetna Life Insurance and
Annuity Company; Vice President, Financial Reporting
(December 1991-February 1995), Assistant Vice
President, Financial Reporting (June 1989-December
1991), Aetna Life and Casualty Company.
Diane B. Horn Vice President and Chief Compliance Vice President and Chief Compliance Officer (since
Age 51 Officer February 1996), and Senior Compliance Officer (August
1993-February 1996), Aetna Life Insurance and Annuity
Company; Director of Compliance (May 1991-July 1993),
Kemper Life Insurance Company.
EXECUTIVE COMPENSATION
Executive officers of the Company may also serve one or more affiliated
companies of Aetna Life Insurance and Annuity Company. Allocations have been
made as to each individual's time devoted to his duties as an executive officer
of the Company. The following table shows the cash compensation paid, based on
these allocations, to the seven most highly compensated executive officers whose
allocated compensation exceeds $100,000, for services rendered in all capacities
to the Company during 1995. Such officers may also receive non-cash compensation
from other affiliated companies of the Company; however, none of such non-cash
compensation is allocated to the Company.
CASH COMPENSATION TABLE
NAME OF INDIVIDUAL CAPACITIES IN CASH
OR NUMBER IN GROUP WHICH SERVED COMPENSATION
- ------------------------- ------------------------- --------------
John Y. Kim Senior Vice President $ 776,353
Daniel P. Kearney President and CEO 588,196
Dominick J. Agostino Senior Vice President 543,678
Laura R. Estes Senior Vice President 342,904
Scott A. Striegel Senior Vice President 328,595
Christopher J. Burns Senior Vice President 290,557
Shaun P. Mathews Senior Vice President 263,607
20
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
------------------------
AWARDS PAYOUTS
----------- -----------
SECURITIES LONG-TERM
ANNUAL COMPENSATION (2) UNDERLYING INCENTIVE
NAME AND ------------------------ STOCK PLAN ALL OTHER
PRINCIPAL POSITION (1) YEAR SALARY BONUS OPTIONS PAYOUTS COMPENSATION
- ------------------------- --------- ----------- ----------- ----------- ----------- --------------
John Y. Kim 1995 $ 250,000 $ 542,300 4,000 $ 0
1994 250,000 521,400 7,500
1993 166,000 55,000 2,600
Daniel P. Kearney 1995 $ 518,269 $ 485,000 82,500 $ 761,750 $ 33,683
1994 300,000 200,000 16,500 33,820
1993 476,442 300,000 17,000 32,885
Dominick J. Agostino 1995 $ 250,000 $ 25,000 2,000 $ 78,114
1994 250,000 0 4,500
1993 0 0 0
Laura R. Estes 1995 $ 225,000 $ 135,000 8,000 $ 221,600
1994 210,000 120,000 6,000
1993 200,000 85,000 2,800
Scott A. Striegel 1995 $ 225,000 $ 105,000 8,000 $ 221,600
1994 210,000 64,000 6,000
1993 200,000 35,000 4,000 27,000
(1) See Cash Compensation Table above.
(2) Salary and bonus earned during the fiscal year for services rendered to the
Company and to other affiliated companies of the Company.
STOCK OPTION GRANTS TABLE
The following table sets forth certain information concerning stock options
granted during 1995 by Aetna to the CEO and each of the four most highly
compensated executive officers of the Company (other than the CEO) in 1995. The
hypothetical grant date present values of stock options granted in 1995 shown
below are presented pursuant to SEC rules and are calculated under the modified
Black-Scholes Model for pricing options. The gains, if any, realizable upon
exercise of stock options will depend upon the market price of Aetna's Common
Stock at the time the stock option is exercised. The individuals named below
will not be able to realize a gain from the stock options granted unless, during
the exercise period, the market price of Aetna's Common Stock increases above
the exercise price of the options. An increase in the market price of Aetna's
Common Stock would also benefit Aetna's other shareholders.
STOCK OPTION GRANTS IN 1995
INDIVIDUAL GRANTS (1)
PERCENT OF
NUMBER OF TOTAL STOCK
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING STOCK TO EMPLOYEES PRICE PER EXPIRATION GRANT DATE
NAME OPTIONS GRANTED IN 1995 SHARE DATE PRESENT VALUE (4)
- ------------------------- ----------------- ------------------- ----------- ------------ -----------------
John Y. Kim 4,000(2) .2% $ 53.50 2/24/2005 $ 39,703(5)
Daniel P. Kearney 17,500(2) .8% 53.50 2/24/2005 165,825(5)
65,000(3) 3.1% 57.00 4/28/2005 652,116(6)
Dominick J. Agostino 2,000(2) .1% 53.50 2/24/2005 18,951(5)
Laura R. Estes 8,000(2) .4% 53.50 2/24/2005 75,806(5)
Scott A. Striegel 8,000(2) .4% 53.50 2/24/2005 75,806(5)
(1) Granted under Aetna's 1994 Stock Incentive Plan (the Plan). The Plan permits
participants to use shares of Aetna's Common Stock to exercise options. The
Plan provides that the option price shall not be less than 100% of the fair
market value of the Common Stock at the time the option is granted. Under
the Plan, options may be granted until April 30, 2001.
(2) Date of grant was February 24, 1995; initial exercise date is February 25,
1996; options vest in installments over a period of three years.
21
(3) Date of grant was April 28, 1995; initial exercise date is April 29, 1997;
options vest over a period of three years provided certain performance
criteria have been met.
(4) Grant Date present values are calculated under the modified Black-Scholes
Model. The Black-Scholes Model is a mathematical formula used to value
options publicly traded in the securities markets and it assumes that
options are freely transferable. Because the employee stock options granted
above are not freely transferable, Aetna believes that the grant date
present values shown above may be overstated.
(5) The assumptions made and factors used by Aetna in the Black-Scholes Model
calculation for the options granted February 24, 1995 were as follows: (i) a
volatility factor of 0.226, representing the average of the three-year and
ten-year historical volatility factors for the Common Stock determined as of
the date of the option grant; (ii) a risk-free rate of return of 7.47%,
representing the 10-year U.S. Treasury bond rate in effect on the date of
the option grant; (iii) a dividend yield of 5.2%, representing Aetna's then
current annual dividend, divided by the Common Stock price on the date of
the option grant; and (iv) a ten-year option term, representing the full
term of the option granted. To give effect to the three-year vesting period
of the options, the value of each option was discounted by 20%, the
percentage of options estimated to expire due to turnover of all recipients
of options during the vesting period. No further discount to the option
value calculated was taken to give effect to the fact that the options are
not freely transferable or to the exercise or lapse of the options prior to
the end of the ten-year option period.
(6) The assumptions made and factors used by Aetna in the Black-Scholes Model
calculation for the options granted April 28, 1995 were as follows: (i) a
volatility factor of 0.229, representing the average of the three-year and
ten-year historical volatility factors for the Common Stock as of the date
of the option grant; (ii) a risk-free rate of return of 7.06%, representing
the 10-year U.S. Treasury bond rate in effect on the date of the option
grant; (iii) a dividend yield of 4.8%, representing Aetna's then current
annual dividend, divided by the Common Stock price on the date of the option
grant; and (iv) a ten-year option term, representing the full term of the
option granted. To give effect to the three-year vesting period and the risk
of forfeiture of the performance vested options, the value of each option
was discounted by 32.5%. No further discount to the option value calculated
was taken to give effect to the fact that the options are not freely
transferable or to the exercise or lapse of the options prior to the end of
the ten-year option period.
THERE IS NO ASSURANCE THAT THE HYPOTHETICAL PRESENT VALUES OF STOCK OPTIONS
PRESENTED IN THE TABLE ABOVE REPRESENT THE ACTUAL VALUES OF SUCH OPTIONS. THE
HYPOTHETICAL VALUES SHOWN SHOULD NOT BE CONSTRUED AS PREDICTIONS BY AETNA AS TO
THE FUTURE VALUE OF ITS COMMON STOCK.
DECEMBER 31, 1995 STOCK OPTION/SAR VALUE TABLE
----------------------------------------------------------------
AGGREGATED STOCK OPTION/
SAR EXERCISES IN 1995 NUMBER OF SECURITIES
--------------------------- UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS/SARS AT IN-THE-MONEY OPTIONS AT
ACQUIRED REALIZED DECEMBER 31, 1995 (2) DECEMBER 31, 1995 (3)
UPON UPON ------------------------------- -------------------------------
NAME EXERCISE (1) EXERCISE EXERCISABLE UNEXERCISABLE (4) EXERCISABLE UNEXERCISABLE (4)
- ------------------------- ------------- ------------ ------------ ----------------- ------------ -----------------
John Y. Kim 0 $ 0 $ 2,500 9,000 $ 56,875 $ 176,750
Daniel P. Kearney 8,264 246,012 34,236 93,500 742,638 1,225,875
Dominick J. Agostino 0 0 6,500 0 133,875 0
Laura R. Estes 5,200 84,425 8,800 12,000 200,750 182,000
Scott A. Striegel 4,300 59,425 9,550 12,000 152,975 182,000
(1) Includes 6,125 shares as to which Mr. Kearney received cash in lieu of
shares upon exercise of SARs.
(2) Tandem SARs are attached to exercisable stock options relating to 13,875
shares held by Mr. Kearney. No tandem SARs are attached to any unexercisable
stock options.
(3) Based on December 29, 1995 closing price of $69.25.
(4) Represents stock options which are not vested.
SECURITY OWNERSHIP OF MANAGEMENT
The Company's directors and officers do not beneficially own any outstanding
shares of stock of the Company. All of the outstanding shares of stock of the
Company are beneficially owned by its parent, Aetna Retirement Holdings, Inc.,
which are indirectly held by Aetna Life and Casualty Company. The percentage of
shares of Aetna Life and Casualty Company beneficially owned by any director of
the Company, and by all directors and officers of the Company as a group, does
not exceed one percent (1%) of the class outstanding.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
22
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1995 and 1994, and for each of the years in the three-year period
ended December 31, 1995, have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing herein and elsewhere in the Registration
Statement and upon the authority of such firm as experts in accounting and
auditing.
The reports of KPMG Peat Marwick LLP on the above-mentioned consolidated
financial statements and consolidated financial statement schedules refer to a
change in 1993 in the Company's methods of accounting for certain investment in
debt and equity securities.
LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal proceedings
pending to which the Company is a party or which would materially affect the
Company.
LEGAL MATTERS
The validity of the securities offered by this Prospectus has been passed upon
by Susan E. Bryant, Esq., Counsel of the Company.
23
APPENDIX I
EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS
The following are examples of Market Value Adjustment ("MVA") calculations using
several hypothetical deposit period yields and current yields. These examples do
not include the effect of any deferred sales charge that may be assessed under
the Contract upon withdrawal.
EXAMPLE I
Assumptions:
i, the Deposit Period yield, is 8%
j, the current yield, is 10%
x, the number of days remaining (computed from
Wednesday of the week of withdrawal) in the
Guaranteed Term, is 927.
(1 + i) x
MVA = { ----- } --------
(1 + j) 365
1.08 927
= { ----- } ---
1.10 365
= .9545
In this example the Deposit Period yield of 8% is less than the current yield of
10%, therefore, the MVA is less than 1. The amount withdrawn from the Guaranteed
Term is multiplied by this MVA.
If a withdrawal or transfer of a stated percentage is requested, the value
withdrawn from a Guaranteed Term will reflect the deduction of the negative MVA
Amount. However, if a withdrawal or transfer request of a specific dollar amount
is requested, the amount withdrawn from a Guaranteed Term will be increased to
compensate for the negative MVA Amount. For example, a withdrawal request to
receive a check for $2,000 would result in a $2,095.34 withdrawal from the
Guaranteed Term.
Assumptions:
i, the Deposit Period yield, is 5%
j, the current yield, is 6%
x, the number of days remaining (computed from
Wednesday of the week of withdrawal) in the
Guaranteed Term, is 927.
(1 + i) x
MVA = { ----- } --------
(1 + j) 365
1.05 927
= { ----- } ---
1.06 365
= .9762
In this example the Deposit Period yield of 5% is less than the current yield of
6%, therefore, the MVA is less than 1. The amount withdrawn from the Guaranteed
Term is multiplied by this MVA.
If a withdrawal or transfer of a stated percentage is requested, the value
withdrawn from a Guaranteed Term will reflect the deduction of the negative MVA
Amount. However, if a withdrawal or transfer request of a specific dollar amount
is requested, the amount withdrawn from a Guaranteed Term will be increased to
compensate for the negative MVA Amount. For example, a withdrawal request to
receive a check for $2,000 would result in a $2,048.76 withdrawal from the
Guaranteed Term.
24
EXAMPLE II
Assumptions:
i, the Deposit Period yield, is 10%
j, the current yield, is 8%
x, the number of days remaining (computed from
Wednesday of the week of withdrawal) in the
Guaranteed Term, is 927.
(1 + i) x
MVA = { ----- } --------
(1 + j) 365
1.10 927
= { ----- } ---
1.08 365
= 1.0477
In this example the Deposit Period yield of 10% is greater than the current
yield of 8%, therefore, the MVA is greater than 1. The amount withdrawn from the
Guaranteed Term is multiplied by this MVA.
If a withdrawal or transfer of a stated percentage is requested, the value
withdrawn from a Guaranteed Term will reflect the addition of the positive MVA
Amount. However, if a withdrawal or transfer request of a specific dollar amount
is requested, the amount withdrawn from a Guaranteed Term will be decreased to
reflect the positive MVA Amount. For example, a withdrawal request to receive a
check for $2,000 would result in a $1,908.94 withdrawal from the Guaranteed
Term.
Assumptions:
i, the Deposit Period yield, is 5%
j, the current yield, is 4%
x, the number of days remaining (computed from
Wednesday of the week of withdrawal) in the
Guaranteed Term, is 927.
(1 + i) x
MVA = { ----- } --------
(1 + j) 365
1.05 927
= { ----- } ---
1.04 365
= 1.0246
In this example the Deposit Period yield of 5% is greater than the current yield
of 4%, therefore, the MVA is greater than 1. The amount withdrawn from the
Guaranteed Term is multiplied by this MVA.
If a withdrawal or transfer of a stated percentage is requested, the value
withdrawn from a Guaranteed Term will reflect the addition of the positive MVA
Amount. However, if a withdrawal or transfer request of a specific dollar amount
is requested, the amount withdrawn from a Guaranteed Term will be decreased to
reflect the positive MVA Amount. For example, a withdrawal request to receive a
check for $2,000 would result in a $1,951.98 withdrawal from the Guaranteed
Term.
25
APPENDIX II
EXAMPLES OF MARKET VALUE ADJUSTMENT YIELDS
The following hypothetical examples show the Market Value Adjustment based on a
given Current Yield at various times remaining in the Guaranteed Term. Table A
illustrates figures based on a deposit period yield of 10%; Table B illustrates
figures based on a deposit period yield of 5%. The Market Value Adjustment will
have either a positive or negative influence on the amount withdrawn from or
remaining in a Guaranteed Term. Also, the amount of the Market Value Adjustment
generally decreases as the end of the Guaranteed Term approaches.
TABLE A: Deposit Period Yield of 10%
CHANGE IN
DEPOSIT TIME REMAINING TO MATURITY OF GUARANTEED TERM
CURRENT PERIOD -----------------------------------------------------------------------------
YIELD YIELD 8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
15% +5% -29.9% -23.4% -16.3% -8.5% -4.3% -1.1%
13% +3% -19.4 -14.9 -10.2 -5.2 -2.7 -0.7
12% +2% -13.4 -10.2 -7.0 -3.5 -1.8 -0.4
11% +1% -7.0 -5.3 -3.6 -1.8 -0.9 -0.2
9% -1% 7.6 5.6 3.7 1.8 0.9 0.2
8% -2% 15.8 11.6 7.6 3.7 1.9 0.5
7% -3% 24.8 18.0 11.7 5.7 2.8 0.7
5% -5% 45.1 32.2 20.5 9.8 4.8 1.2
TABLE B: Deposit Period Yield of 5%
CHANGE IN
DEPOSIT TIME REMAINING TO MATURITY OF GUARANTEED TERM
CURRENT PERIOD -----------------------------------------------------------------------------
YIELD YIELD 8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
9% +4% -25.9% -20.1% -13.9% -7.2% -3.7% -0.9%
8% +3% -20.2 -15.6 -10.7 -5.5 -2.8 -0.7
7% +2% -14.0 -10.7 -7.3 -3.7 -1.9 -0.5
6% +1% -7.3 -5.5 -3.7 -1.9 -0.9 -0.2
4% -1% 8.0 5.9 3.9 1.9 1.0 0.2
3% -2% 16.6 12.2 8.0 3.9 1.9 0.5
2% -3% 26.1 19.0 12.3 6.0 2.9 0.7
1% -4% 36.4 26.2 16.8 8.1 4.0 1.0
26
SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Millions)
Total Revenue................................ $ 1,537.3 $ 1,332.2 $ 1,264.5 $ 1,176.1 $ 1,129.5
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income................................... $ 175.9 $ 145.3 $ 142.9 $ 122.8 $ 89.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total Assets................................. $27,144.9 $20,934.1 $20,135.7 $16,932.9 $15,154.0
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OPERATING SUMMARY 1995 1994 1993
- --------------------------------------------- --------- --------- ---------
(Millions)
Premiums..................................... $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders....... 318.9 279.0 251.5
Net investment income........................ 1,004.3 917.2 911.9
Net realized capital gains................... 41.3 1.5 9.5
Other income................................. 42.0 10.3 9.5
--------- --------- ---------
Total revenue.......................... 1,537.3 1,332.2 1,264.5
--------- --------- ---------
Current and future benefits.................. 915.3 854.1 818.4
Operating expenses........................... 318.7 235.2 207.2
Amortization of deferred policy acquisition
costs....................................... 43.3 26.4 19.8
--------- --------- ---------
Total benefits and expenses............ 1,277.3 1,115.7 1,045.4
--------- --------- ---------
Income before federal income taxes..... 260.0 216.5 219.1
Federal income taxes......................... 84.1 71.2 76.2
--------- --------- ---------
Net income............................. $ 175.9 $ 145.3 $ 142.9
--------- --------- ---------
--------- --------- ---------
Deposits not included in premiums above:
Fully guaranteed......................... $ 415.7 $ 249.0 $ 263.7
Experience-rated......................... 1,428.0 1,351.4 1,216.8
Non-guaranteed........................... 2,059.1 1,365.9 1,062.5
--------- --------- ---------
Total.................................. $ 3,902.8 $ 2,966.3 $ 2,543.0
--------- --------- ---------
Assets under management:(1)
Fully guaranteed......................... $ 3,399.6 $ 2,620.3 $ 2,423.5
Experience-rated......................... 10,999.9 9,272.0 9,241.5
Non-guaranteed........................... 11,522.9 8,064.6 7,111.0
--------- --------- ---------
Total.................................. $25,922.4 $19,956.9 $18,776.0
--------- --------- ---------
--------- --------- ---------
(1)Included above are net unrealized capital gains (losses) of $797.1 million,
$(386.4) million and $747.1 million at December 31, 1995, 1994 and 1993,
respectively.
27
OVERVIEW
The Company's adjusted earnings (after-tax) follow (in millions):
1995 1994 1993
------ ------ ------
Net Income................................... $175.9 $145.3 $142.9
Less:
Net realized capital gains............... 26.8 1.0 6.2
------ ------ ------
Adjusted earnings............................ $149.1 $144.3 $136.7
------ ------ ------
------ ------ ------
The Company's adjusted earnings increased 3% in 1995 following a 6% increase in
1994. Results in 1995 reflected improved earnings in the financial services
segment, while earnings in the life insurance segment were level with the prior
year. The improvement in earnings related to the financial services segment
reflected an increase in charges assessed against policyholders and increased
net investment income related to the growth in assets under management which
were partially offset by an increase in operating expenses. This increase in
operating expenses primarily reflects continued business growth. The improvement
in 1994 adjusted earnings reflected an increase in charges assessed against
policyholders, primarily due to an increase in the volume of business in force,
partially offset by increases in operating expenses, primarily related to the
implementation of a new contract administration system.
Assets under management, excluding the effect of FAS 115, at December 31, 1995
of $25.1 billion, were 24% above 1994 levels, primarily reflecting continued
business growth and overall improvement in the stock and bond markets.
The Company's contracts typically impose surrender fees which decline over the
duration of the contract. Assets held under experience rated general account
options have transfer and withdrawal limitations. Withdrawals from the fully
guaranteed accumulation options prior to maturity include an adjustment intended
to reflect the estimated fair value of the assets supporting the contract at the
time of withdrawal. Approximately 91% and 90% of assets under management at
December 31, 1995 and 1994, respectively, allowed for contractholder withdrawal,
63% and 57% of which, respectively, are subject to market value adjustments or
deferred surrender charges at December 31, 1995.
28
SEGMENT RESULTS
FINANCIAL SERVICES SEGMENT
OPERATING SUMMARY 1995 1994 1993
- --------------------------------------------- -------- -------- --------
(Millions)
Premiums..................................... $ 82.6 $ 70.2 $ 32.0
Charges assessed against policyholders....... 150.4 126.6 109.4
Net investment income........................ 823.3 745.9 739.2
Net realized capital gains................... 37.8 1.4 9.1
Other income................................. 35.4 2.0 3.1
-------- -------- --------
Total revenue.......................... 1,129.5 946.1 892.8
-------- -------- --------
Current and future benefits.................. 704.4 639.9 624.1
Operating expenses........................... 256.5 176.9 149.0
Amortization of deferred policy acquisition
costs....................................... 10.5 9.6 (1.4)
-------- -------- --------
Total benefits and expenses............ 971.4 826.4 771.7
-------- -------- --------
Income before federal income taxes..... 158.1 119.7 121.1
Federal income taxes......................... 44.3 34.2 34.3
-------- -------- --------
Net income............................. $ 113.8 $ 85.5 $ 86.8
-------- -------- --------
-------- -------- --------
Deposits not included in premiums above:
Fully guaranteed......................... $ 415.7 $ 249.0 $ 263.7
Experience-rated......................... 934.4 1,064.3 979.4
Non-guaranteed........................... 2,019.4 1,340.5 1,040.1
-------- -------- --------
Total.................................. $3,369.5 $2,653.8 $2,283.2
-------- -------- --------
Assets under management:(1)
Fully guaranteed......................... $2,789.4 $1,999.1 $1,758.0
Experience-rated......................... 9,034.5 7,803.2 7,801.1
Non-guaranteed........................... 11,400.4 7,982.9 7,041.4
-------- -------- --------
Total.................................. $23,224.3 $17,785.2 $16,600.5
-------- -------- --------
-------- -------- --------
(1)Included above are net unrealized capital gains (losses) of $689.9 million,
$(337.7) million and $646.2 million at December 31, 1995, 1994 and 1993,
respectively.
Adjusted earnings in the Financial Services segment (after-tax) follow (in
millions):
1995 1994 1993
------ ----- -----
Net Income................................... $113.8 $85.5 $86.8
Less:
Net realized capital gains................. 24.6 0.9 5.9
------ ----- -----
Adjusted earnings............................ $ 89.2 $84.6 $80.9
------ ----- -----
------ ----- -----
Effective January 1, 1995 the Company assumed responsibility for two service
organizations, a plan administration service organization and a payment and
retiree administration service organization, from an affiliate, with
year-to-date combined adjusted income of $0.2 million. As a result, other income
and operating expenses include $39.1 million and $38.8 million, respectively,
for the year ended December 31, 1995.
Adjusted earnings increased 5% in both 1995 and 1994. The 1995 improvement in
adjusted earnings reflected an increase in charges assessed against
policyholders and increased net investment income related to the growth in
29
assets under management which were partially offset by an increase in operating
expenses. The 1994 improvement in adjusted earnings reflected an increase in
assets under management offset in part by an increase in operating expenses.
Premiums, related to annuity contracts containing life contingencies, increased
by 18% in 1995, following a 119% increase in 1994. The 1995 and 1994 increases
resulted primarily from increases in immediate annuity sales. Deposits, related
to annuity contracts not containing life contingencies, reflected a 27% increase
in 1995 following a 16% increase in 1994. Deposits in 1995 included the
assumption of a $300.1 million variable annuity block of business from an
unaffiliated insurer. Deposits in 1994 included the $205.0 million acquisition
of a block of primarily individual annuity business from an unaffiliated
insurer.
Charges assessed against policyholders for certain annuity contracts increased
by 19% and 16% in 1995 and 1994, respectively, reflecting the increase in assets
under management.
Net investment income increased by 10% in 1995, reflecting the increase in
assets under management. Net investment income increased by 1% in 1994,
reflecting the increase in assets under management offset by a downward trend in
the net investment yield on the Company's portfolio of investments.
Current and future benefits increased by 10% and 3% in 1995 and 1994,
respectively, reflecting the increase in assets under management.
Operating expenses, excluding the impact of moving the two service organizations
into the Company as discussed above, increased by 23% in 1995 and 19% in 1994.
The 1995 increase primarily reflects continued business growth. The 1994
increase primarily reflected expenses associated with the implementation of the
new contract administration system.
Assets under management, excluding the effect of FAS 115, at December 31, 1995
of $22.5 billion, were 24% above 1994 levels, primarily reflecting continued
business growth and overall improvement in the stock and bond markets.
OUTLOOK
Sales of tax-qualified annuities are expected to continue to be strong in 1996.
Sales of non-qualified products are expected to significantly exceed 1995 levels
as relationships formed with broker/dealers and banks in 1995 build sales
momentum. The Company intends to expand its retirement planning capabilities.
The Company expects to evaluate opportunities for growth of its financial
services businesses and strengthen their competitive position.
30
LIFE INSURANCE SEGMENT
OPERATING SUMMARY 1995 1994 1993
- --------------------------------------------- -------- -------- --------
(Millions)
Premiums..................................... $ 48.2 $ 54.0 $ 50.1
Charges assessed against policyholders....... 168.5 152.4 142.1
Net investment income........................ 181.0 171.3 172.7
Net realized capital gains................... 3.5 0.1 0.4
Other income................................. 6.6 8.3 6.4
-------- -------- --------
Total revenue.......................... 407.8 386.1 371.7
-------- -------- --------
-------- -------- --------
Current and future benefits.................. 210.9 214.2 194.3
Operating expenses........................... 62.2 58.3 58.2
Amortization of deferred policy acquisition
costs....................................... 32.8 16.8 21.2
-------- -------- --------
Total benefits and expenses............ 305.9 289.3 273.7
-------- -------- --------
Income before federal income taxes..... 101.9 96.8 98.0
Federal income taxes......................... 39.8 37.0 41.9
-------- -------- --------
Net income............................. $ 62.1 $ 59.8 $ 56.1
-------- -------- --------
-------- -------- --------
Deposits not included in premiums above:
Experience-rated......................... $ 493.6 $ 287.1 $ 237.4
Non-guaranteed........................... 39.7 25.4 22.4
-------- -------- --------
Total.................................. $ 533.3 $ 312.5 $ 259.8
-------- -------- --------
Assets under management:(1)
Fully guaranteed......................... $ 610.2 $ 621.2 $ 665.5
Experience-rated......................... 1,965.4 1,468.8 1,440.4
Non-guaranteed........................... 122.5 81.7 69.6
-------- -------- --------
Total.................................. $2,698.1 $2,171.7 $2,175.5
-------- -------- --------
-------- -------- --------
(1)Included above are net unrealized capital gains (losses) of $107.2 million,
$(48.7) million and $100.9 million at December 31, 1995, 1994 and 1993,
respectively.
Adjusted earnings in the Life Insurance segment (after-tax) follow (in
millions):
1995 1994 1993
-------- -------- --------
Net Income................................... $ 62.1 $ 59.8 $ 56.1
Less:
Net realized capital gains................. 2.2 0.1 0.3
-------- -------- --------
Adjusted earnings............................ $ 59.9 $ 59.7 $ 55.8
-------- -------- --------
-------- -------- --------
Adjusted earnings in 1995 remained level with the prior year adjusted earnings,
reflecting an increase in the volume of business in force as a result of strong
sales offset by an increase in operating expenses. Adjusted earnings in 1994
increased 7% when compared to 1993 adjusted earnings. The 1994 adjusted earnings
improvement reflected higher business in force offset in part by lower net
investment income.
Premiums, related to term and whole life insurance, decreased by 11% in 1995
following an 8% increase in 1994. The decrease in premiums in 1995 is primarily
due to lower whole life insurance premiums. Deposits, related to universal life
and interest-sensitive whole life insurance, grew by 71% and 20% in 1995 and
1994, respectively. Deposits in 1995
31
included the assumption of a $172.4 million universal life block of business
from an unaffiliated insurer and also reflected strong first year sales and
retention. The increase in premiums and deposits in 1994 reflected strong first
year sales and retention.
Charges assessed against policyholders for universal life and interest-sensitive
whole life insurance increased 11% in 1995 and 7% in 1994 reflecting an increase
in the volume of business in force.
Net investment income increased by 6% in 1995, reflecting an increase in
universal life assets under management offset in part by the downward trend in
the net investment yield on the Company's portfolio of investments. Net
investment income decreased 1% in 1994, reflecting the downward trend in the net
investment yield on the Company's portfolio of investments, offset by the
increase in universal life assets under management.
Current and future benefits decreased 2% in 1995 following a 10% increase in
1994, reflecting improved mortality experience related to universal life
insurance. The increase in 1994 reflected higher mortality related to universal
life insurance. Amortization of deferred policy acquisition costs increased by
95% in 1995, reflecting the growth in current and estimated future gross profit
margins related to universal life insurance. Amortization of deferred policy
acquisition costs decreased 21% in 1994, primarily reflecting lower mortality
margins related to universal life insurance.
Operating expenses increased 7% in 1995, reflecting continued business growth.
Operating expenses were level in 1994, reflecting savings from previous
restructurings.
Assets under management, excluding the effect of FAS 115, at December 31, 1995
of $2.6 billion, were 17% above 1994 levels, primarily reflecting continued
business growth and overall improvement in the stock and bond markets.
OUTLOOK
Sales of life products through traditional channels (managing general agents and
regional brokers) are expected to continue to be strong in 1996. Sales of life
products through non-traditional distribution channels (banks, broker/ dealers,
worksite), are expected to significantly exceed 1995 levels as the Company's
retirement planning emphasis begins to build momentum.
GENERAL ACCOUNT INVESTMENTS
The Company's investment strategies and portfolios are intended to match the
duration of the related liabilities and provide sufficient cash flow to meet
obligations while maintaining a competitive rate of return. The duration of
these
32
investments is monitored, and investment purchases and sales are executed with
the objective of having adequate funds available to satisfy the Company's
maturing liabilities. The risks associated with investments supporting
experience-rated products are assumed by those customers subject to, among other
things, certain minimum guarantees.
1995 1994
--------- ---------
(Millions)
Debt securities.............................. $12,720.8 $10,191.4
Equity securities:
Non-redeemable preferred stock........... 57.6 47.2
Investment in affiliated mutual funds.... 191.8 181.9
Common stock............................. 8.2 --
Short-term investments....................... 15.1 98.0
Mortgage loans............................... 21.2 9.9
Policy loans................................. 338.6 248.7
Limited partnership.......................... -- 24.4
--------- ---------
Total Investments........................ 13,353.3 10,801.5
Cash and cash equivalents.................... 568.8 623.3
--------- ---------
Total Investments and Cash and Cash
Equivalents............................. $13,922.1 $11,424.8
--------- ---------
--------- ---------
At December 31, 1995 and 1994, the Company's carrying value of investments in
debt securities were $12.7 billion and $10.2 billion, 95% and 94%, respectively,
of total general account invested assets. At December 31, 1995 and 1994, $10.0
billion and $8.0 billion, 79% and 78%, respectively, of total debt securities
supported experience-rated products.
It is management's objective that the portfolio of debt securities be of high
quality and be well-diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies, and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio was AA- at December 31, 1995 and AA at December 31,
1994.
DEBT SECURITIES QUALITY RATINGS 12/31/95 DEBT SECURITIES INVESTMENTS BY MARKET SECTOR 12/31/95
- ---------------------------------------------- ----------------------------------------------------------------
AAA .............................. 46.0% U.S. Corporate Securities .......................... 44.7%
AA ............................... 11.7 Residential Mortgage-Backed Securities ............. 25.2
A ................................ 25.4 Foreign Securities-U.S. Dollar Denominated ......... 11.1
BBB .............................. 11.7 Asset-Backed Securities ............................ 7.9
Commercial/Multifamily Mortgage-Backed
BB ............................... 4.0 Securities ......................................... 6.1
B and Below ...................... 1.2 U.S. Treasuries/Agencies ........................... 4.6
-----
100.0% Other .............................................. 0.4
----- -----
-----
100.0%
-----
-----
DEBT SECURITIES QUALITY RATINGS 12/31/94 DEBT SECURITIES INVESTMENTS BY MARKET SECTOR 12/31/94
- ---------------------------------------------- ----------------------------------------------------------------
AAA .............................. 56.7% U.S. Corporate Securities .......................... 34.2%
AA ............................... 8.3 Residential Mortgage-Backed Securities ............. 32.1
A ................................ 23.3 U.S. Treasuries/Agencies ........................... 12.9
BBB .............................. 8.5 Foreign Securities-U.S. Dollar Denominated ......... 9.7
BB ............................... 2.5 Asset-Backed Securities ............................ 6.7
Commercial/Multifamily Mortgage-Backed
B and Below ...................... 0.7 Securities ......................................... 4.0
-----
100.0% Other .............................................. 0.4
----- -----
-----
100.0%
-----
-----
33
In 1995, as a result of a change in investment strategy, the Company reduced its
investments in U.S. Treasuries/ Agencies and residential mortgage-backed
securities and increased its investments in U.S. Corporate securities (see Note
2 of the Notes to the Consolidated Financial Statements). Investments in U.S.
dollar denominated foreign corporations and governments, asset-backed, and
commercial/multifamily mortgage-backed securities also increased.
Asset-backed securities (securities backed by auto loans, credit card
receivables, etc.) and commercial/multifamily mortgage-backed securities
(securitized pools of mortgages) are predominantly AAA rated, and are not
subject to the prepayment risk of residential mortgage-backed securities.
OUTLOOK
In 1996, the Company does not anticipate any major changes in market sector
weightings, but will continue to marginally increase exposure to diversifying
asset classes, such as securitized commercial mortgage-backed securities. The
average quality rating of the Company's portfolio is not expected to change
significantly. Duration is anticipated to remain fairly constant and will be
monitored and maintained in line with liability duration to minimize interest
rate risk.
LIQUIDITY AND CAPITAL RESOURCES
1995 1994 1993
--------- --------- ---------
(Millions)
Assets....................................... $27,144.9 $20,934.1 $20,135.7
--------- --------- ---------
--------- --------- ---------
Shareholder's Equity......................... $ 1,583.0 $ 1,088.5 $ 1,246.7
--------- --------- ---------
--------- --------- ---------
Net Cash provided by Operating Activities.... $ 309.1 $ 206.6 $ 179.5
--------- --------- ---------
--------- --------- ---------
Net Cash used for Investing Activities....... $(1,135.6) $ (908.5) $(1,151.5)
--------- --------- ---------
--------- --------- ---------
Net Cash provided by Financing Activities.... $ 772.0 $ 789.1 $ 1,117.5
--------- --------- ---------
--------- --------- ---------
Cash and Cash Equivalents.................... $ 568.8 $ 623.3 $ 536.1
--------- --------- ---------
--------- --------- ---------
The consolidated assets and shareholder's equity amounts for the years ended
December 31, 1995, 1994 and 1993 reflect the implementation of FAS 115. See
Notes 1 and 3 of Notes to Consolidated Financial Statements.
Liquidity needs of the Company's businesses have generally been met by cash
provided by premiums, deposits, asset maturities and income received on
investments. Cash provided from these sources is used primarily for benefit
payments, fund withdrawals and operating expenses.
Bonds, redeemable preferred stocks and mortgage loans have durations that were
selected to approximate the durations of the liabilities they support. The
general account of the Company has been segmented to improve the asset/
liability matching process. The duration of these investments is monitored, and
investment purchases and sales are executed with the objective of having
adequate funds available to satisfy the Company's maturing liabilities.
As the Company's investment strategy focuses on matching asset and liability
durations, and not specific cash flows, and additionally, since these duration
assessments are dependent on numerous cash flow assumptions, asset sales may be
required, from time to time, to satisfy liability obligations and/or rebalance
asset portfolios. The investment portfolios are closely monitored to assess
asset and liability matching in order to rebalance the portfolios as conditions
warrant. The Company has several alternatives available to meet any such
unanticipated demands should they occur. These include liquidating the Company's
substantial cash and cash equivalents or selling liquid, high quality mortgage-
backed securities and corporate bonds.
34
The Company's cash flow requirements for 1995 and 1994 were met by funds
provided from operations and from the maturity and sale of investments.
The Company has no debt. There were no capital contributions in 1995, 1994 or
1993. (See Note 8 of Notes to Consolidated Financial Statements).
The amount of dividends that may be paid to the shareholder without prior
approval by the Insurance Commissioner of the State of Connecticut is subject to
various restrictions. Based upon these restrictions, the Company is permitted a
maximum of $70.0 million in dividend distributions in 1996. Liquidity needs of
the Company's businesses have generally been met by cash provided by premiums,
deposits, asset maturities and income received on investments. Cash provided
from these sources is used primarily for benefit payments, fund withdrawals and
operating expenses.
35
CONSOLIDATED FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
Index
PAGE
---
Independent Auditors' Report..................................... F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993.............................. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994... F-4
Consolidated Statements of Changes in Shareholder's Equity for
the Years Ended
December 31, 1995, 1994 and 1993.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993.............................. F-6
Notes to Consolidated Financial Statements....................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life Insurance
and Annuity Company and Subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
F-2
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Revenue:
Premiums............................................. $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders............... 318.9 279.0 251.5
Net investment income................................ 1,004.3 917.2 911.9
Net realized capital gains........................... 41.3 1.5 9.5
Other income......................................... 42.0 10.3 9.5
-------- -------- --------
Total revenue...................................... 1,537.3 1,332.2 1,264.5
-------- -------- --------
Benefits and expenses:
Current and future benefits.......................... 915.3 854.1 818.4
Operating expenses................................... 318.7 235.2 207.2
Amortization of deferred policy acquisition costs.... 43.3 26.4 19.8
-------- -------- --------
Total benefits and expenses........................ 1,277.3 1,115.7 1,045.4
-------- -------- --------
Income before federal income taxes..................... 260.0 216.5 219.1
Federal income taxes................................. 84.1 71.2 76.2
-------- -------- --------
Net income............................................. $ 175.9 $ 145.3 $ 142.9
-------- -------- --------
-------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Balance Sheets
(millions)
DECEMBER 31,
--------------------
1995 1994
--------- ---------
ASSETS
- -------------------------------------------------------
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8)........... $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3 and
$43.3)............................................ 57.6 47.2
Investment in affiliated mutual funds (cost: $173.4
and $187.1)....................................... 191.8 181.9
Common stock (cost: $6.9 at December 31, 1995)..... 8.2 --
Short-term investments............................... 15.1 98.0
Mortgage loans....................................... 21.2 9.9
Policy loans......................................... 338.6 248.7
Limited partnership.................................. -- 24.4
--------- ---------
Total investments................................ 13,353.3 10,801.5
Cash and cash equivalents.............................. 568.8 623.3
Accrued investment income.............................. 175.5 142.2
Premiums due and other receivables..................... 37.3 75.8
Deferred policy acquisition costs...................... 1,341.3 1,164.3
Reinsurance loan to affiliate.......................... 655.5 690.3
Other assets........................................... 26.2 15.9
Separate Accounts assets............................... 10,987.0 7,420.8
--------- ---------
Total assets..................................... $27,144.9 $20,934.1
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------------------------
Liabilities:
Future policy benefits............................... $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses..................... 27.2 23.8
Policyholders' funds left with the Company........... 10,500.1 8,949.3
--------- ---------
Total insurance reserve liabilities.............. 14,121.9 11,885.8
Other liabilities.................................... 259.2 302.1
Federal income taxes:
Current............................................ 24.2 3.4
Deferred........................................... 169.6 233.5
Separate Accounts liabilities........................ 10,987.0 7,420.8
--------- ---------
Total liabilities................................ 25,561.9 19,845.6
--------- ---------
--------- ---------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized;
55,000 shares issued and outstanding)............... 2.8 2.8
Paid-in capital...................................... 407.6 407.6
Net unrealized capital gains (losses)................ 132.5 (189.0)
Retained earnings.................................... 1,040.1 867.1
--------- ---------
Total shareholder's equity....................... 1,583.0 1,088.5
--------- ---------
Total liabilities and shareholder's equity..... $27,144.9 $20,934.1
--------- ---------
--------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- ---------
Shareholder's equity, beginning of year................ $ 1,088.5 $ 1,246.7 $ 990.1
Net change in unrealized capital gains (losses)........ 321.5 (303.5) 113.7
Net income............................................. 175.9 145.3 142.9
Common stock dividends declared........................ (2.9) -- --
--------- --------- ---------
Shareholder's equity, end of year...................... $ 1,583.0 $ 1,088.5 $ 1,246.7
--------- --------- ---------
--------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows
(millions)
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Cash Flows from Operating Activities:
Net income........................................... $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income.............. (33.3) (17.5) (11.1)
Decrease (increase) in premiums due and other
receivables....................................... 25.4 1.3 (5.6)
Increase in policy loans........................... (89.9) (46.0) (36.4)
Increase in deferred policy acquisition costs...... (177.0) (105.9) (60.5)
Decrease in reinsurance loan to affiliate.......... 34.8 27.8 31.8
Net increase in universal life account balances.... 393.4 164.7 126.4
Increase in other insurance reserve liabilities.... 79.0 75.1 86.1
Net increase in other liabilities and other
assets............................................ 15.0 53.9 7.0
Decrease in federal income taxes................... (6.5) (11.7) (3.7)
Net accretion of discount on bonds................. (66.4) (77.9) (88.1)
Net realized capital gains......................... (41.3) (1.5) (9.5)
Other, net......................................... -- (1.0) 0.2
---------- ---------- ----------
Net cash provided by operating activities........ 309.1 206.6 179.5
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale................. 4,207.2 3,593.8 473.9
Equity securities.................................. 180.8 93.1 89.6
Mortgage loans..................................... 10.7 -- --
Limited partnership................................ 26.6 -- --
Investment maturities and collections of:
Debt securities available for sale................. 583.9 1,289.2 2,133.3
Short-term investments............................. 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities.................................... (6,034.0) (5,621.4) (3,669.2)
Equity securities.................................. (170.9) (162.5) (157.5)
Short-term investments............................. (24.7) (106.1) (41.3)
Mortgage loans..................................... (21.3) -- --
Limited partnership................................ -- (25.0) --
---------- ---------- ----------
Net cash used for investing activities........... (1,135.6) (908.5) (1,151.5)
---------- ---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment
contracts........................................... 1,884.5 1,737.8 2,117.8
Withdrawals of investment contracts.................. (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder........................ (2.9) -- --
---------- ---------- ----------
Net cash provided by financing activities........ 772.0 789.1 1,117.5
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents... (54.5) 87.2 145.5
Cash and cash equivalents, beginning of year........... 623.3 536.1 390.6
---------- ---------- ----------
Cash and cash equivalents, end of year................. $ 568.8 $ 623.3 $ 536.1
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information:
Income taxes paid, net............................... $ 90.2 $ 82.6 $ 79.9
---------- ---------- ----------
---------- ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business segments,
financial services and life insurance.
The financial services products include individual and group annuity contracts
which offer a variety of funding and distribution options for personal and
employer-sponsored retirement plans that qualify under Internal Revenue Code
Sections 401, 403, 408 and 457, and individual and group non-qualified annuity
contracts. These contracts may be immediate or deferred and are offered
primarily to individuals, pension plans, small businesses and employer-sponsored
groups in the health care, government, education (collectively "not-for-profit"
organizations) and corporate markets. Financial services also include pension
plan administrative services.
The life insurance products include universal life, variable universal life,
interest sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer sponsored groups and
executives of Fortune 2000 companies.
BASIS OF PRESENTATION
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiaries, Aetna Insurance Company of America
and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a
wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a
wholly owned subsidiary of Aetna Life and Casualty Company ("Aetna"). Two
subsidiaries, Systematized Benefits Administrators, Inc. ("SBA"), and Aetna
Investment Services, Inc. ("AISI"), which were previously reported in the
consolidated financial statements were distributed in the form of dividends to
ARSI in December of 1995. The impact to the Company's financial statements of
distributing these dividends was immaterial.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Intercompany transactions have been
eliminated. Certain reclassifications have been made to 1994 and 1993 financial
information to conform to the 1995 presentation.
ACCOUNTING CHANGES
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the Company adopted Financial Accounting Standard ("FAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities, which
requires the classification of debt securities into three categories: "held to
maturity", which are carried at amortized cost; "available for sale", which are
carried at fair value with changes in fair value recognized as a component of
shareholder's equity; and "trading", which are carried at fair value with
immediate recognition in income of changes in fair value.
Initial adoption of this standard resulted in a net increase of $106.8 million,
net of taxes of $57.5 million, to net unrealized gains in shareholder's equity.
These amounts exclude gains and losses allocable to experience-rated (including
universal life) contractholders. Adoption of FAS No. 115 did not have a material
effect on deferred policy acquisition costs.
F-7
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
CASH AND CASH EQUIVALENT
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of ninety days or less when purchased.
INVESTMENTS
Debt Securities
At December 31, 1995 and 1994, all of the Company's debt securities are
classified as available for sale and carried at fair value. These securities are
written down (as realized losses) for other than temporary decline in value.
Unrealized gains and losses related to these securities, after deducting amounts
allocable to experience-rated contractholders and related taxes, are reflected
in shareholder's equity.
Fair values for debt securities are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not available,
fair values are measured utilizing quoted market prices for similar securities
or by using discounted cash flow methods. Cost for mortgage-backed securities is
adjusted for unamortized premiums and discounts, which are amortized using the
interest method over the estimated remaining term of the securities, adjusted
for anticipated prepayments.
Purchases and sales of debt securities are recorded on the trade date.
Equity Securities
Equity securities are classified as available for sale and carried at fair value
based on quoted market prices or dealer quotations. Equity securities are
written down (as realized losses) for other than temporary declines in value.
Unrealized gains and losses related to such securities are reflected in
shareholder's equity. Purchases and sales are recorded on the trade date.
The investment in affiliated mutual funds represents an investment in the Aetna
Series Fund, Inc., a retail mutual fund which has been seeded by the Company,
and is carried at fair value.
Mortgage Loans and Policy Loans
Mortgage loans and policy loans are carried at unpaid principal balances net of
valuation reserves, which approximates fair value, and are generally secured.
Purchases and sales of mortgage loans are recorded on the closing date.
F-8
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Limited Partnership
The Company's limited partnership investment was carried at the amount invested
plus the Company's share of undistributed operating results and unrealized gains
(losses), which approximates fair value. The Company disposed of the limited
partnership during 1995.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of over ninety days and
less than one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring insurance business have been deferred. These costs,
all of which vary with and are primarily related to the production of new
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods. For
universal life and certain annuity contracts, such costs are amortized in
proportion to estimated gross profits and adjusted to reflect actual gross
profits. These costs are amortized over twenty years for annuity pension
contracts, and over the contract period for universal life contracts.
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
would not be adequate to cover related losses and expenses.
INSURANCE RESERVE LIABILITIES
The Company's liabilities include reserves related to fixed ordinary life, fixed
universal life and fixed annuity contracts. Reserves for future policy benefits
for fixed ordinary life contracts are computed on the basis of assumed
investment yield, assumed mortality, withdrawals and expenses, including a
margin for adverse deviation, which generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 10.00%. Assumed
investment yield is based on the Company's experience. Mortality and withdrawal
rate assumptions are based on relevant Aetna experience and are periodically
reviewed against both industry standards and experience.
Reserves for fixed universal life (included in Future Policy Benefits) and fixed
deferred annuity contracts (included in Policyholders' Funds Left With the
Company) are equal to the fund value. The fund value is equal to cumulative
deposits less charges plus credited interest thereon, without reduction for
possible future penalties assessed on premature withdrawal. For guaranteed
interest options, the interest credited ranged from 4.00% to 6.38% in 1995 and
4.00% to 5.85% in 1994. For all other fixed options, the interest credited
ranged from 5.00% to 7.00% in 1995 and 5.00% to 7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the 1971
Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality Table,
the
F-9
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1983 Group Annuity Mortality Table and, in some cases, mortality improvement
according to scales G and H, at assumed interest rates ranging from 3.5% to
9.5%. Reserves relating to contracts with life contingencies are included in
Future Policy Benefits. For other contracts, the reserves are reflected in
Policyholders' Funds Left With the Company.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
PREMIUMS, CHARGES ASSESSED AGAINST POLICYHOLDERS, BENEFITS AND EXPENSES
Premiums are recorded as revenue when due for fixed ordinary life contracts.
Charges assessed against policyholders' funds for cost of insurance, surrender
charges, actuarial margin and other fees are recorded as revenue for universal
life and certain annuity contracts. Policy benefits and expenses are recorded in
relation to the associated premiums or gross profit so as to result in
recognition of profits over the expected lives of the contracts.
SEPARATE ACCOUNTS
Assets held under variable universal life, variable life and variable annuity
contracts are segregated in Separate Accounts and are invested, as designated by
the contractholder or participant under a contract, in shares of Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers
Fund, Inc., Aetna GET Fund, or The Aetna Series Fund Inc., which are managed by
the Company or other selected mutual funds not managed by the Company. Separate
Accounts assets and liabilities are carried at fair value except for those
relating to a guaranteed interest option which is offered through a Separate
Account. The assets of the Separate Account supporting the guaranteed interest
option are carried at an amortized cost of $322.2 million for 1995 (fair value
$343.9 million) and $149.7 million for 1994 (fair value $146.3 million), since
the Company bears the investment risk where the contract is held to maturity.
Reserves relating to the guaranteed interest option are maintained at fund value
and reflect interest credited at rates ranging from 4.5% to 8.38% in both 1995
and 1994. Separate Accounts assets and liabilities are shown as separate
captions in the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains (losses) of the Separate Accounts are not
reflected in the Consolidated Statements of Income (with the exception of
realized capital gains (losses) on the sale of assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
FEDERAL INCOME TAXES
The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax benefits
result from changes during the year in cumulative temporary differences between
the tax basis and book basis of assets and liabilities.
F-10
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS
Investments in debt securities available for sale as of December 31, 1995 were
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(MILLIONS)
U.S. Treasury securities and obligations of
U.S. government agencies and corporations... $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states and political
subdivisions................................ 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial.................................. 2,764.4 110.3 2.1 2,872.6
Utilities.................................. 454.4 27.8 1.0 481.2
Other...................................... 2,177.7 159.5 1.2 2,336.0
--------- ---------- ----- ---------
Total U.S. Corporate securities............ 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government................................. 316.4 26.1 2.0 340.5
Financial.................................. 534.2 45.4 3.5 576.1
Utilities.................................. 236.3 32.9 -- 269.2
Other...................................... 215.7 15.1 -- 230.8
--------- ---------- ----- ---------
Total Foreign securities................... 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Residential pass-throughs.................. 556.7 99.2 1.8 654.1
Residential CMOs........................... 2,383.9 167.6 2.2 2,549.3
--------- ---------- ----- ---------
Total Residential mortgage-backed
securities................................ 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily mortgage-backed
securities.................................. 741.9 32.3 0.2 774.0
--------- ---------- ----- ---------
Total Mortgage-backed securities........... 3,682.5 299.1 4.2 3,977.4
Other asset-backed securities................ 961.2 35.5 0.5 996.2
--------- ---------- ----- ---------
Total debt securities available for sale..... $11,923.7 $811.6 $14.5 $12,720.8
--------- ---------- ----- ---------
--------- ---------- ----- ---------
F-11
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
Investments in debt securities available for sale as of December 31, 1994 were
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(MILLIONS)
U.S. Treasury securities and obligations of
U.S. government agencies and corporations... $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states and political
subdivisions................................ 37.9 1.2 -- 39.1
U.S. Corporate securities:
Financial.................................. 2,216.9 3.8 109.4 2,111.3
Utilities.................................. 100.1 -- 7.9 92.2
Other...................................... 1,344.3 6.0 67.9 1,282.4
--------- ---------- ---------- ---------
Total U.S. Corporate securities............ 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government................................. 434.4 1.2 33.9 401.7
Financial.................................. 368.2 1.1 23.0 346.3
Utilities.................................. 204.4 2.5 9.5 197.4
Other...................................... 46.3 0.8 1.5 45.6
--------- ---------- ---------- ---------
Total Foreign securities................... 1,053.3 5.6 67.9 991.0
Residential mortgage-backed securities:
Residential pass-throughs.................. 627.1 81.5 5.0 703.6
Residential CMOs........................... 2,671.0 32.9 139.4 2,564.5
--------- ---------- ---------- ---------
Total Residential mortgage-backed
securities.................................. 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily mortgage-backed
securities.................................. 435.0 0.2 21.3 413.9
--------- ---------- ---------- ---------
Total Mortgage-backed securities............. 3,733.1 114.6 165.7 3,682.0
Other asset-backed securities................ 696.1 0.2 16.8 679.5
--------- ---------- ---------- ---------
Total debt securities available for sale..... $10,577.8 $133.4 $519.8 $10,191.4
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of
$797.1 million and $(386.4) million, respectively, on available for sale debt
securities included $619.1 million and $(308.6) million, respectively, related
to experience-rated contractholders, which were not included in shareholder's
equity.
F-12
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of debt securities for the year ended December
31, 1995 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be restructured, called, or
prepaid.
AMORTIZED FAIR
COST VALUE
--------- ---------
(MILLIONS)
Due to mature:
One year or less..................................... $ 348.8 $ 351.1
After one year through five years.................... 2,100.2 2,159.5
After five years through ten years................... 2,516.0 2,663.4
After ten years...................................... 2,315.0 2,573.2
Mortgage-backed securities........................... 3,682.5 3,977.4
Other asset-backed securities........................ 961.2 996.2
--------- ---------
Total................................................ $11,923.7 $12,720.8
--------- ---------
--------- ---------
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities, is
deposited by the borrower with a lending agent, and retained and invested by the
lending agent to generate additional income for the Company. The market value of
the loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value fluctuates. At December 31, 1995, the
Company had loaned securities (which are reflected as invested assets on the
Consolidated Balance Sheets) with a market value of approximately $264.5
million.
At December 31, 1995 and 1994, debt securities carried at $7.4 million and $7.0
million, respectively, were on deposit as required by regulatory authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31, 1994.
There was no valuation reserve for mortgage loans at December 31, 1995. The
carrying value of non-income producing investments was $0.1 million and $0.2
million at December 31, 1995 and 1994, respectively.
F-13
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
Investments in a single issuer, other than obligations of the U.S. government,
with a carrying value in excess of 10% of the Company's shareholder's equity at
December 31, 1995 are as follows:
AMORTIZED
DEBT SECURITIES COST FAIR VALUE
---------- ----------
(MILLIONS)
General Electric Corporation........................... $ 314.9 $ 329.3
General Motors Corporation............................. 273.9 284.5
Associates Corporation of North America................ 230.2 239.1
Society National Bank.................................. 203.5 222.3
Ciesco, L.P............................................ 194.9 194.9
Countrywide Funding.................................... 171.2 172.7
Baxter International................................... 168.9 168.9
Time Warner............................................ 158.6 166.1
Ford Motor Company..................................... 156.7 162.6
The portfolio of debt securities at December 31, 1995 and 1994 included $662.5
million and $318.3 million, respectively, (5% and 3%, respectively, of the debt
securities) of investments that are considered "below investment grade". "Below
investment grade" securities are defined to be securities that carry a rating
below BBB-/Baa3, by Standard & Poors/ Moody's Investor Services, respectively.
The increase in below investment grade securities is the result of a change in
investment strategy, which has reduced the Company's holdings in residential
mortgage-back securities and increased the Company's holdings in corporate
securities. Residential mortgage-back securities are subject to higher
prepayment risk and lower credit risk, while corporate securities earning a
comparable yield are subject to higher credit risk and lower prepayment risk. We
expect the percentage of below investment grade securities will increase in
1996, but we expect that the overall average quality of the portfolio of debt
securities will remain at AA-. Of these below investment grade assets, $14.5
million and $31.8 million, at December 31, 1995 and 1994, respectively, were
investments that were purchased at investment grade, but whose ratings have
since been downgraded.
Included in residential mortgage-back securities are collateralized mortgage
obligations ("CMOs") with carrying values of $2.5 billion and $2.6 billion at
December 31, 1995 and 1994, respectively. The principal risks inherent in
holding CMOs are prepayment and extension risks related to dramatic decreases
and increases in interest rates whereby the CMOs would be subject to repayments
of principal earlier or later than originally anticipated. At December 31, 1995
and 1994, approximately 79% and 85%, respectively, of the Company's CMO holdings
consisted of sequential and planned amortization class debt securities which are
subject to less prepayment and extension risk than other CMO instruments. At
December 31, 1995 and 1994, approximately 81% and 82%, respectively, of the
Company's CMO holdings were collateralized by residential mortgage loans, on
which the timely payment of principal and interest was backed by specified
government agencies (e.g., GNMA, FNMA, FHLMC).
If due to declining interest rates, principal was to be repaid earlier than
originally anticipated, the Company could be affected by a decrease in
investment income due to the reinvestment of these funds at a lower interest
rate. Such prepayments may result in a duration mismatch between assets and
liabilities which could be corrected as cash from prepayments could be
reinvested at an appropriate duration to adjust the mismatch.
F-14
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
Conversely, if due to increasing interest rates, principal was to be repaid
slower than originally anticipated, the Company could be affected by a decrease
in cash flow which reduces the ability to reinvest expected principal repayments
at higher interest rates. Such slower payments may result in a duration mismatch
between assets and liabilities which could be corrected as available cash flow
could be reinvested at an appropriate duration to adjust the mismatch.
At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of the
Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs receive
payments of principal on the underlying pool of mortgages. The risk inherent in
holding POs is extension risk related to dramatic increases in interest rates
whereby the future payments due on POs could be repaid much slower than
originally anticipated. The extension risks inherent in holding POs was
mitigated somewhat by offsetting positions in IOs. During dramatic increases in
interest rates, IOs would generate more future payments than originally
anticipated.
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much less than
originally anticipated and in some cases could be less than the original cost of
the IO. The risks inherent in IOs are mitigated somewhat by holding offsetting
positions in POs. During dramatic decreases in interest rates POs would generate
future cash flows much quicker than originally anticipated.
Investments in available for sale equity securities were as follows:
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------ ---------- ---------- ----------
(MILLIONS)
1995
Equity Securities................ $231.6 $ 27.2 $ 1.2 $ 257.6
------ ----- --- ----------
1994
Equity Securities................ $230.5 $ 6.5 $ 7.9 $ 229.1
------ ----- --- ----------
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between proceeds received
from investments sold or prepaid, and amortized cost. Net realized capital gains
as reflected in the Consolidated Statements of Income are after deductions for
net realized capital gains (losses) allocated to experience-rated contracts of
$61.1 million, $(29.1) million and $(54.8) million for the years ended December
31, 1995, 1994, and 1993, respectively. Net realized capital gains (losses)
allocated to experience-rated contracts are deferred and subsequently reflected
in credited rates on an amortized basis. Net unamortized gains (losses),
reflected as a component of Policyholders' Funds Left With the Company, were
$7.3 million and $(50.7) million at the end of December 31, 1995 and 1994,
respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt securities
are included in net realized capital gains (losses) and amounted to $3.1
million, $1.1 million and $(98.5) million, of which $2.2 million, $0.8 million
and $(91.5) million were allocable to experience-rated contractholders, for the
years ended December 31, 1995, 1994 and 1993, respectively. The 1993 losses were
primarily related to writedowns of interest-only mortgage-backed securities to
their fair value.
F-15
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
Net realized capital gains (losses) on investments, net of amounts allocated to
experience-rated contracts, were as follows:
1995 1994 1993
----- ----- ------
(MILLIONS)
Debt securities........................................ $32.8 $ 1.0 $ 9.6
Equity securities...................................... 8.3 0.2 0.1
Mortgage loans......................................... 0.2 0.3 (0.2)
----- ----- ------
Pretax realized capital gains.......................... $41.3 $ 1.5 $ 9.5
----- ----- ------
After-tax realized capital gains....................... $25.8 $ 1.0 $ 6.2
----- ----- ------
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross losses
of $11.8 million, $25.6 million and $23.7 million were realized from the sales
of investments in debt securities in 1995, 1994 and 1993, respectively.
Changes in unrealized capital gains (losses), excluding changes in unrealized
capital gains (losses) related to experience-rated contracts, for the years
ended December 31, were as follows:
1995 1994 1993
------ -------- ------
(MILLIONS)
Debt securities........................................ $255.9 $ (242.1) $164.3
Equity securities...................................... 27.3 (13.3) 10.6
Limited partnership.................................... 1.8 (1.8) --
------ -------- ------
285.0 (257.2) 174.9
Deferred federal income taxes (See Note 6)............. (36.5) 46.3 61.2
------ -------- ------
Net change in unrealized capital gains (losses)........ $321.5 $ (303.5) $113.7
------ -------- ------
------ -------- ------
Net unrealized capital gains (losses) allocable to experience-rated contracts of
$515.0 million and $104.1 million at December 31, 1995 and $(260.9) million and
$(47.7) million at December 31, 1994 are reflected on the Consolidated Balance
Sheet in Policyholders' Funds Left With the Company and Future Policy Benefits,
respectively, and are not included in shareholder's equity.
F-16
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
Shareholder's equity included the following unrealized capital gains (losses),
which are net of amounts allocable to experience-rated contractholders, at
December 31:
1995 1994 1993
------ ------- -------
(MILLIONS)
Debt securities
Gross unrealized capital gains....................... $179.3 $ 27.4 $ 164.3
Gross unrealized capital losses...................... (1.3) (105.2) --
------ ------- -------
178.0 (77.8) 164.3
Equity securities
Gross unrealized capital gains....................... 27.2 6.5 12.0
Gross unrealized capital losses...................... (1.2) (7.9) (0.1)
------ ------- -------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains....................... -- -- --
Gross unrealized capital losses...................... -- (1.8) --
------ ------- -------
Deferred federal income taxes (See Note 6)............. 71.5 108.0 61.7
------ ------- -------
Net unrealized capital gains (losses).................. $132.5 $(189.0) $ 114.5
------ ------- -------
------ ------- -------
4. NET INVESTMENT INCOME
Sources of net investment income were as follows:
1995 1994 1993
-------- ------ ------
(MILLIONS)
Debt securities........................................ $ 891.5 $823.9 $828.0
Preferred stock........................................ 4.2 3.9 2.3
Investment in affiliated mutual funds.................. 14.9 5.2 2.9
Mortgage loans......................................... 1.4 1.4 1.5
Policy loans........................................... 13.7 11.5 10.8
Reinsurance loan to affiliate.......................... 46.5 51.5 53.3
Cash equivalents....................................... 38.9 29.5 16.8
Other.................................................. 8.4 6.7 7.7
-------- ------ ------
Gross investment income................................ 1,019.5 933.6 923.3
Less investment expenses............................... (15.2) (16.4) (11.4)
-------- ------ ------
Net investment income.................................. $1,004.3 $917.2 $911.9
-------- ------ ------
-------- ------ ------
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Interest credited to
contractholders is included in Current and Future Benefits.
F-17
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
The amount of dividends that may be paid to the shareholder in 1996 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.0 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts determined in
conformity with statutory accounting practices prescribed or permitted by the
Department, which differ in certain respects from generally accepted accounting
principles. Statutory net income was $70.0 million, $64.9 million and $77.6
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Statutory shareholder's equity was $670.7 million and $615.0 million as of
December 31, 1995 and 1994, respectively.
At December 31, 1995 and December 31, 1994, the Company does not utilize any
statutory accounting practices which are not prescribed by insurance regulators
that, individually or in the aggregate, materially affect statutory
shareholder's equity.
6. FEDERAL INCOME TAXES
The Company is included in the consolidated federal income tax return of Aetna.
Aetna allocates to each member an amount approximating the tax it would have
incurred were it not a member of the consolidated group, and credits the member
for the use of its tax saving attributes in the consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted
which resulted in an increase in the federal corporate tax rate from 34% to 35%
retroactive to January 1, 1993. The enactment of OBRA resulted in an increase in
the deferred tax liability of $3.4 million at date of enactment, which is
included in the 1993 deferred tax expense.
Components of income tax expense (benefits) were as follows:
1995 1994 1993
----- ----- -------
(MILLIONS)
Current taxes (benefits):
Income from operations............................... $82.9 $78.7 $ 87.1
Net realized capital gains........................... 28.5 (33.2) 18.1
----- ----- -------
111.4 45.5 105.2
----- ----- -------
Deferred taxes (benefits):
Income from operations............................... (14.4) (8.0) (14.2)
Net realized capital gains........................... (12.9) 33.7 (14.8)
----- ----- -------
(27.3) 25.7 (29.0)
----- ----- -------
Total................................................ $84.1 $71.2 $ 76.2
----- ----- -------
----- ----- -------
F-18
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
6. FEDERAL INCOME TAXES (CONTINUED)
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the following
reasons:
1995 1994 1993
------ ------ ------
(MILLIONS)
Income before federal income taxes..................... $260.0 $216.5 $219.1
Tax rate............................................... 35% 35% 35%
------ ------ ------
Application of the tax rate............................ 91.0 75.8 76.7
------ ------ ------
Tax effect of:
Excludable dividends................................. (9.3) (8.6) (8.7)
Tax reserve adjustments.............................. 3.9 2.9 4.7
Reinsurance transaction.............................. (0.5) 1.9 (0.2)
Tax rate change on deferred liabilities.............. -- -- 3.7
Other, net........................................... (1.0) (0.8) --
------ ------ ------
Income tax expense................................... $ 84.1 $ 71.2 $ 76.2
------ ------ ------
------ ------ ------
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
1995 1994
------ ------
(MILLIONS)
Deferred tax assets:
Insurance reserves................................... $290.4 $211.5
Net unrealized capital losses........................ -- 136.3
Unrealized gains allocable to experience-rated
contracts........................................... 216.7 --
Investment losses not currently deductible........... 7.3 15.5
Postretirement benefits other than pensions.......... 7.7 8.4
Other................................................ 32.0 28.3
------ ------
Total gross assets..................................... 554.1 400.0
Less valuation allowance............................... -- 136.3
------ ------
Deferred tax assets, net of valuation.................. 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs.................... 433.0 385.2
Unrealized losses allocable to experience-rated
contracts........................................... -- 108.0
Market discount...................................... 4.4 3.6
Net unrealized capital gains......................... 288.2 --
Other................................................ (1.9) 0.4
------ ------
Total gross liabilities................................ 723.7 497.2
------ ------
Net deferred tax liability............................. $169.6 $233.5
------ ------
------ ------
F-19
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
6. FEDERAL INCOME TAXES (CONTINUED)
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized
capital losses were reflected in shareholder's equity without deferred tax
benefits. As of December 31, 1995, no valuation allowance was required for
unrealized capital gains and losses. The reversal of the valuation allowance had
no impact on net income in 1995.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was
approximately $17.2 million at December 31, 1995. This amount would be taxed
only under certain conditions. No income taxes have been provided on this amount
since management believes the conditions under which such taxes would become
payable are remote.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions are
being held with the Service with respect to proposed adjustments. However,
management believes there are adequate defenses against, or sufficient reserves
to provide for, such challenges. The Service has commenced its examinations for
the years 1987 through 1990.
7. BENEFIT PLANS
Employee Pension Plans--The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over sixty consecutive months of highest
earnings in a 120 month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are currently deductible for tax
reporting purposes. The accumulated benefit obligation and plan assets are
recorded by Aetna. The accumulated plan assets exceed accumulated plan benefits.
There has been no funding to the plan for the years 1993 through 1995, and
therefore, no expense has been recorded by the Company.
Agent Pension Plans--The Company, in conjunction with Aetna, has a non-qualified
pension plan covering certain agents. The plan provides pension benefits based
on annual commission earnings. The accumulated plan assets exceed accumulated
plan benefits. There has been no funding to the plan for the years 1993 through
1995, and therefore, no expense has been recorded by the Company.
Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna also provides certain postretirement health care and life insurance
benefits, subject to certain caps, for retired employees. Medical and dental
benefits are offered to all full-time employees retiring at age 50 with at least
15 years of service or at age 65 with at least 10 years of service. Retirees are
required to contribute to the plans based on their years of service with Aetna.
The cost to the Company associated with the Aetna postretirement plans for 1995,
1994 and 1993 were $1.4 million, $1.0 million and $0.8 million, respectively.
Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postemployment health care and life insurance benefits for
certain agents.
F-20
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
7. BENEFIT PLANS (CONTINUED)
The cost to the Company associated to the agents' postretirement plans for 1995,
1994 and 1993 were $0.8 million, $0.7 million and $0.6 million, respectively.
Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested in
common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $4.9 million, $3.3 million and $3.1 million in 1995, 1994 and 1993,
respectively.
Stock Plans--Aetna has a stock incentive plan that provides for stock options
and deferred contingent common stock or cash awards to certain key employees.
Aetna also has a stock option plan under which executive and middle management
employees of Aetna may be granted options to purchase common stock of Aetna at
the market price on the date of grant or, in connection with certain business
combinations, may be granted options to purchase common stock on different
terms. The cost to the Company associated with the Aetna stock plans for 1995,
1994 and 1993, was $6.3 million, $1.7 million and $0.4 million, respectively.
8. RELATED PARTY TRANSACTIONS
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which, on
an annual basis, ranges, depending on the product, from .25% to 1.80% of their
average daily net assets. The Company also receives fees from the variable life
and annuity mutual funds and The Aetna Series Fund for serving as investment
adviser. Under the advisory agreements, the Funds pay the Company a daily fee
which, on an annual basis, ranges, depending on the fund, from .25% to 1.00% of
their average daily net assets. The advisory agreements also call for the
variable funds to pay their own administrative expenses and for The Aetna Series
Fund to pay certain administrative expenses. The Company also receives fees
(expressed as a percentage of the average daily net assets) from The Aetna
Series Fund for providing administration, shareholder services and promoting
sales. The amount of compensation and fees received from the Separate Accounts
and Funds, included in Charges Assessed Against Policyholders, amounted to
$128.1 million, $104.6 million and $93.6 million in 1995, 1994 and 1993,
respectively. The Company may waive advisory fees at its discretion.
The Company may, from time to time, make reimbursements to a Fund for some or
all of its operating expenses. Reimbursement arrangements may be terminated at
any time without notice.
Since 1981, all domestic individual non-participating life insurance of Aetna
and its subsidiaries has been issued by the Company. Effective December 31,
1988, the Company entered into a reinsurance agreement with Aetna Life Insurance
Company ("Aetna Life") in which substantially all of the non-participating
individual life and annuity business written by Aetna Life prior to 1981 was
assumed by the Company. A $108.0 million commission, paid by the Company to
Aetna Life in 1988, was capitalized as deferred policy acquisition costs. The
Company maintained insurance reserves of $655.5 million and $690.3 million as of
December 31, 1995 and 1994, respectively, relating to the business assumed. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance reserves.
The loan is being reduced in accordance with the decrease in the reserves. The
fair value of this loan was $663.5 million and $630.3 million as of December 31,
1995 and 1994, respectively, and is based upon the fair value of the underlying
assets. Premiums of $28.0 million, $32.8 million and $33.3 million and current
and future benefits of $43.0 million, $43.8 million and $55.4 million were
assumed in 1995, 1994 and 1993, respectively.
F-21
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
8. RELATED PARTY TRANSACTIONS (CONTINUED)
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and $13.6
million resulted from this agreement in 1995, 1994 and 1993, respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue from
Aetna Life for the purchase and administration of a life contingent single
premium variable payout annuity contract. In addition, the Company also is
responsible for administering fixed annuity payments that are made to annuitants
receiving variable payments. Reserves of $28.0 million and $24.2 million were
maintained for this contract as of December 31, 1995 and 1994, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement with
Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0
million on any new individual life business, on a yearly renewable term basis.
Premium amounts related to this agreement were $3.2 million, $1.3 million and
$0.6 million for 1995, 1994 and 1993, respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
Premiums due and other receivables include $5.7 million and $27.6 million due
from affiliates in 1995 and 1994, respectively. Other liabilities include $12.4
million and $27.9 million due to affiliates for 1995 and 1994, respectively.
Substantially all of the administrative and support functions of the Company are
provided by Aetna and its affiliates. The financial statements reflect allocated
charges for these services based upon measures appropriate for the type and
nature of service provided.
9. REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets.
F-22
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
9. REINSURANCE (CONTINUED)
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.
CEDED TO ASSUMED
DIRECT OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
--------- ------------- ------------- ---------
(MILLIONS)
1995
Premiums:
Life Insurance....................................... $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance........................ 7.5 7.5 -- --
Annuities............................................ 82.1 -- 0.5 82.6
--------- ----- ----- ---------
Total earned premiums................................ $ 118.4 $ 16.1 $ 28.5 $ 130.8
--------- ----- ----- ---------
--------- ----- ----- ---------
1994
Premiums:
Life Insurance....................................... $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance........................ 9.3 9.3 -- --
Annuities............................................ 69.9 -- 0.2 70.1
--------- ----- ----- ---------
Total earned premiums................................ $ 106.5 $ 15.3 $ 33.0 $ 124.2
--------- ----- ----- ---------
--------- ----- ----- ---------
1993
Premiums:
Life Insurance....................................... $ 22.4 $ 5.6 $ 33.3 $ 50.1
Accident and Health Insurance........................ 12.9 12.9 -- --
Annuities............................................ 31.3 -- 0.7 32.0
--------- ----- ----- ---------
Total earned premiums................................ $ 66.6 $ 18.5 $ 34.0 $ 82.1
--------- ----- ----- ---------
--------- ----- ----- ---------
F-23
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
10. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
1995 1994
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(MILLIONS)
Assets:
Cash and cash equivalents................................. $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments.................................... 15.1 15.1 98.0 98.0
Debt securities........................................... 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities......................................... 257.6 257.6 229.1 229.1
Limited partnership....................................... -- -- 24.4 24.4
Mortgage loans............................................ 21.2 21.9 9.9 9.9
Liabilities:
Investment contract liabilities:
With a fixed maturity................................... 989.1 1,001.2 826.7 833.5
Without a fixed maturity................................ 9,511.0 9,298.4 8,122.6 7,918.2
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument, nor
do they consider the tax impact of the realization of unrealized gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Company's management
of interest rate and liquidity risk, the fair values of all assets and
liabilities should be taken into consideration, not only those above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
SHORT-TERM INSTRUMENTS: Fair values are based on quoted market prices or dealer
quotations. Where quoted market prices are not available, the carrying amounts
reported in the Consolidated Balance Sheets approximates fair value. Short-term
instruments have a maturity date of one year or less and include cash and cash
equivalents, and short-term investments.
DEBT AND EQUITY SECURITIES: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair value is estimated by using quoted market prices for similar
securities or discounted cash flow methods.
F-24
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
10. FINANCIAL INSTRUMENTS (CONTINUED)
MORTGAGE LOANS: Fair value is estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimate
of mortgage loans of lower quality, including problem and restructured loans, is
based on the estimated fair value of the underlying collateral.
INVESTMENT CONTRACT LIABILITIES (INCLUDED IN POLICYHOLDERS' FUNDS LEFT WITH THE
COMPANY):
WITH A FIXED MATURITY: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable on demand.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS)
During 1995, the Company received $0.4 million for writing call options on
underlying securities. As of December 31, 1995 there were no option contracts
outstanding.
At December 31, 1995, the Company had a forward swap agreement with a notional
amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
The Company also holds investments in certain debt and equity securities with
derivative characteristics (i.e., including the fact that their market value is
at least partially determined by, among other things, levels of or changes in
interest rates, prepayment rates, equity markets or credit ratings/spreads). The
amortized cost and fair value of these securities, included in the $13.4 billion
investment portfolio, as of December 31, 1995 was as follows:
AMORTIZED FAIR
(MILLIONS) COST VALUE
----------- -----------
Collateralized mortgage obligations......................... $ 2,383.9 $ 2,549.3
Principal-only strips (included above)...................... 38.7 50.0
Interest-only strips (included above)....................... 10.7 20.7
Structured Notes (1)........................................ 95.0 100.3
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
11. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either higher or lower replacement
cost. Also, there is likely to be a change in
F-25
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
the value of the securities underlying the commitments. At December 31, 1995,
the Company had commitments to purchase investments of $31.4 million. The fair
value of the investments at December 31, 1995 approximated $31.5 million. There
were no outstanding forward commitments at December 31, 1994.
LITIGATION
There were no material legal proceedings pending against the Company as of
December 31, 1995 or December 31, 1994 which were beyond the ordinary course of
business. The Company is involved in lawsuits arising, for the most part, in the
ordinary course of its business operations as an insurer.
12. SEGMENT INFORMATION
The Company's operations are reported through two major business segments: Life
Insurance and Financial Services.
Summarized financial information for the Company's principal operations was as
follows:
(MILLIONS) 1995 1994 1993
----------- ----------- -----------
Revenue:
Financial services........................................ $ 1,129.4 $ 946.1 $ 892.8
Life insurance............................................ 407.9 386.1 371.7
----------- ----------- -----------
Total revenue............................................. $ 1,537.3 $ 1,332.2 $ 1,264.5
----------- ----------- -----------
Income before federal income taxes:
Financial services........................................ $ 158.0 $ 119.7 $ 121.1
Life insurance............................................ 102.0 96.8 98.0
----------- ----------- -----------
Total income before federal income taxes.................. $ 260.0 $ 216.5 $ 219.1
----------- ----------- -----------
Net income:
Financial services........................................ $ 113.8 $ 85.5 $ 86.8
Life insurance............................................ 62.1 59.8 56.1
----------- ----------- -----------
Net income.................................................. $ 175.9 $ 145.3 $ 142.9
----------- ----------- -----------
Assets under management, at fair value:
Financial services........................................ $ 23,224.3 $ 17,785.2 $ 16,600.5
Life insurance............................................ 2,698.1 2,171.7 2,175.5
----------- ----------- -----------
Total assets under management............................. $ 25,922.4 $ 19,956.9 $ 18,776.0
----------- ----------- -----------
----------- ----------- -----------
F-26
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ALIAC GUARANTEED ACCOUNT
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PROSPECTUS
DATED MAY 1, 1996
[LOGO]
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, Hartford, Connecticut 06156
Telephone: 1-800-531-4547
34583-2 5/96