SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended Commission file number September 30, 1997 33-23376 ------------------ -------- Aetna Life Insurance and Annuity Company - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Connecticut 71-0294708 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156 - -------------------------------------------------------------------------------- (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (860) 273-0123 None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class at October 31, 1997 - -------------- ------------------- Common Stock, par value $50 55,000 The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income............................... 3 Consolidated Balance Sheets..................................... 4 Consolidated Statements of Changes in Shareholder's Equity...... 5 Consolidated Statements of Cash Flows........................... 6 Condensed Notes to Consolidated Financial Statements............ 7 Independent Auditors' Review Report............................. 11 Item 2. Management's Analysis of the Results of Operations................ 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................... 19 Item 5. Other Information............................................... 19 Item 6. Exhibits and Reports on Form 8-K................................ 19 Signatures................................................................ 20 (2) PART I. FINANCIAL INFORMATION Item 1. Financial Statements AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Income (millions) 3 Months Ended September 30, 9 Months Ended September 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenue: Premiums $68.2 $35.5 $200.1 $99.9 Charges assessed against policyholders 127.7 99.1 350.2 289.3 Net investment income 269.5 259.7 804.9 771.8 Net realized capital gains 8.8 0.1 17.9 17.2 Other income 9.6 9.4 28.8 34.6 ----- ----- ------- ------- Total revenue 483.8 403.8 1,401.9 1,212.8 Benefits and expenses: Current and future benefits 286.5 245.6 853.4 719.1 Operating expenses 84.5 84.6 247.3 261.3 Amortization of deferred policy acquisition costs 40.1 17.9 92.4 46.6 Severance and facilities charges - 47.3 - 61.3 ----- ----- ------- ------- Total benefits and expenses 411.1 395.4 1,193.1 1,088.3 ----- ----- ------- ------- Income before income taxes 72.7 8.4 208.8 124.5 Income taxes 21.3 1.4 63.9 34.3 ----- ----- ------- ------- Net income $51.4 $7.0 $144.9 $90.2 ===== ===== ======= ======= See Condensed Notes to Consolidated Financial Statements. (3) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Balance Sheets (millions, except share data) September 30, December 31, Assets 1997 1996 - ------ ---- ---- Investments: Debt securities available for sale, at fair value (amortized cost: $12,736.4 and $12,539.1) $13,257.1 $12,905.5 Equity securities, available for sale: Nonredeemable preferred stock (cost: $143.4 and $107.6) 166.5 119.0 Investment in affiliated mutual funds (cost: $42.0 and $77.3) 55.1 81.1 Common stock .8 .3 Short-term investments 111.8 34.8 Mortgage loans 12.9 13.0 Policy loans 453.7 399.3 --------- --------- Total investments 14,057.9 13,553.0 Cash and cash equivalents 614.2 459.1 Accrued investment income 183.0 159.0 Premiums due and other receivables 37.3 26.6 Deferred policy acquisition costs 1,620.6 1,515.3 Reinsurance loan to affiliate 474.4 628.3 Other assets 40.1 33.7 Separate accounts assets 21,494.5 15,318.3 --------- --------- Total assets $38,522.0 $31,693.3 ========= ========= Liabilities and Shareholder's Equity - ------------------------------------ Liabilities: Future policy benefits $3,757.8 $3,617.0 Unpaid claims and claim expenses 28.0 28.9 Policyholders' funds left with the Company 11,074.5 10,663.7 --------- --------- Total insurance reserve liabilities 14,860.3 14,309.6 Other liabilities 295.2 354.7 Income taxes: Current 37.1 20.7 Deferred 74.8 80.5 Separate accounts liabilities 21,468.6 15,318.3 --------- --------- Total liabilities 36,736.0 30,083.8 --------- --------- 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 418.0 418.0 Net unrealized capital gains 96.7 60.5 Retained earnings 1,268.5 1,128.2 --------- --------- Total shareholder's equity 1,786.0 1,609.5 --------- --------- Total liabilities and shareholder's equity $38,522.0 $31,693.3 ========= ========= See Condensed Notes to Consolidated Financial Statements. (4) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Changes in Shareholder's Equity (millions) 9 Months Ended September 30, ---------------------------- 1997 1996 ---- ---- Shareholder's equity, beginning of year $1,609.5 $1,583.0 Net change in unrealized capital gains 36.2 (93.4) Net income 144.9 90.2 Common stock dividends (8.3) (1.5) Other changes 3.7 - -------- -------- Shareholder's equity, end of period $1,786.0 $1,578.3 ======== ======== See Condensed Notes to Consolidated Financial Statements. (5) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Cash Flows (millions) 9 Months Ended September 30, ---------------------------- 1997 1996 ---- ---- Cash Flows from Operating Activities: Net income $144.9 $90.2 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Increase in accrued investment income (24.0) (13.0) Increase in premiums due and other receivables (8.8) (2.3) Increase in policy loans (54.4) (29.5) Increase in deferred policy acquisition costs (105.3) (127.2) Decrease in reinsurance loan to affiliate 153.9 22.1 Net increase in universal life account balances 224.1 172.5 Decrease in other insurance reserve liabilities (165.5) (125.2) Net (decrease) increase in other liabilities and other assets (122.4) 126.8 Decrease in income taxes (3.9) (23.5) Net accretion of discount on investments (51.9) (51.1) Net realized capital gains (17.9) (17.2) -------- ---------- Net cash (used for) provided by operating activities (31.2) 22.6 -------- ---------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 3,828.5 3,830.6 Equity securities 61.3 114.5 Mortgage loans 0.1 8.6 Investment maturities and collections of: Debt securities available for sale 966.8 681.8 Short-term investments 43.2 21.5 Cost of investment purchases in: Debt securities available for sale (4,811.0) (4,996.5) Equity securities (53.6) (63.7) Short-term investments (120.1) (35.5) Other, net - (9.1) -------- ---------- Net cash used for investing activities (84.8) (447.8) -------- ---------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,230.2 1,140.6 Withdrawals of investment contracts (925.8) (860.7) Dividends paid to shareholder (8.3) (1.5) Capital contribution to Separate Account (25.0) - -------- ---------- Net cash provided by financing activities 271.1 278.4 -------- ---------- Net increase (decrease) in cash and cash equivalents 155.1 (146.8) Cash and cash equivalents, beginning of period 459.1 568.8 -------- ---------- Cash and cash equivalents, end of period $614.2 $422.0 ======== ========== Supplemental cash flow information: Income taxes paid, net $68.7 $61.4 ======== ========== See Condensed Notes to Consolidated Financial Statements. (6) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements 1. 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. (collectively, the "Company"). Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna"). These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. Certain reclassifications have been made to 1996 financial information to conform to the 1997 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as presented in the Company's 1996 Annual Report on Form 10-K. Certain financial information that is normally included in annual financial statements prepared in accordance with generally accepted accounting principles, but that is not required for interim reporting purposes, has been condensed or omitted. 2. Future Application of Accounting Standards Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996 and provides accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. FAS No. 125 is effective for 1997 financial statements; however, certain provisions relating to accounting for repurchase agreements and securities lending are not effective until January 1, 1998. Provisions effective in 1997 did not have a material effect on the Company's financial position or results of operations. The Company does not expect adoption of this statement for provisions effective in 1998 to have a material effect on its financial position or results of operations. FAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income encompasses all changes in shareholder's equity (except those arising from transactions with owners) and includes net income, net unrealized capital gains or losses on available for sale securities. As this new standard only requires additional information in a financial statement, it will not affect the Company's financial position or results of operations. FAS No. 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company is currently evaluating the presentation alternatives permitted by the statement. (7) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (Continued) 2. Future Application of Accounting Standards - continued FAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was issued in June 1997 and establishes standards for the reporting of information relating to operating segments in annual financial statements, as well as disclosure of selected information in interim financial reports. This statement supersedes FAS No. 14, Financial Reporting for Segments of a Business Enterprise, which requires reporting segment information by industry and geographic area (industry approach). Under FAS No. 131, operating segments are defined as components of a company for which separate financial information is available and is used by management to allocate resources and assess performance (management approach). This statement is effective for year-end 1998 financial statements. Interim financial information will be required beginning in 1999 (with comparative 1998 information). The Company does not anticipate that this standard will significantly impact the composition of its current operating segments, which are consistent with the management approach. 3. Financial Instruments The Company engages in hedging activities to manage interest rate and price risks. Such hedging activities have principally consisted of using off-balance sheet instruments such as futures and forward contracts and interest rate swap agreements. There were no such contracts or agreements open as of September 30, 1997. (8) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (Continued) 4. Severance and Facilities Charges In the second quarter of 1996, the Company was allocated severance and facilities reserves from Aetna to reflect actions taken or to be taken to reduce the level of corporate expenses and other costs previously absorbed by Aetna's property-casualty operations. In the third quarter of 1996, the Company established severance and facilities reserves in the Financial Services and Individual Life Insurance segments to reflect actions taken or to be taken in order to make its businesses more competitive. Activity for the nine months ended September 30, 1997 within the severance and facilities reserves (pretax, in millions) and positions eliminated related to such actions were as follows: Reserve Positions -------------------------------------------------------------------------- Balance at December 31, 1996 $ 47.9 524 Actions taken (1) (19.5) (129) ------------------------- Balance at September 30, 1997 $ 28.4 395 -------------------------------------------------------------------------- (1) Includes $9.9 million of severance-related actions and $7.0 million of corporate allocation-related actions. The Company's severance actions are expected to be substantially completed by March 31, 1998. The corporate allocation actions and vacating of certain leased office space are expected to be substantially completed in 1997. 5. Related Party Transactions Effective December 31, 1988, the Company entered into a reinsurance agreement with Aetna Life Insurance Company ("Aetna Life") in which substantially all of the nonparticipating individual life and annuity business written by Aetna Life prior to 1981 was assumed by the Company. Effective January 1, 1997, this agreement has been amended to transition (based on underlying investment rollover in Aetna Life) from a modified coinsurance to a coinsurance arrangement. As a result of this change, reserves will be ceded to the Company from Aetna Life as investment rollover occurs and the loan previously established will be reduced. (9) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (Continued) 6. Litigation The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, it is not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. 7. Dividends On June 27, 1997 and August 15, 1997, the Company paid a $5.3 million and $3.0 million, respectively, dividend to HOLDCO. The additional amount of dividends that may be paid by the Company to HOLDCO in 1997 without prior approval by the Insurance Commissioner of the State of Connecticut is $62.8 million. (10) Independent Auditors' Review Report The Board of Directors Aetna Life Insurance and Annuity Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life Insurance and Annuity Company and Subsidiaries as of September 30, 1997, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1997 and 1996, and the related condensed consolidated statements of changes in shareholder's equity and cash flows for the nine-month periods ended September 30, 1997 and 1996. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1996, and the related consolidated statements of income, changes in shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 4, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG PEAT MARWICK LLP November 3, 1997 Hartford, Connecticut (11) Item 2. Management's Analysis of the Results of Operations Consolidated Overview: 3 Months Ended 9 Months Ended September 30, September 30, Operating Summary (millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Premiums (1) $ 68.2 $ 35.5 $ 200.1 $ 99.9 Charges assessed against policyholders 127.7 99.1 350.2 289.3 Net investment income 269.5 259.7 804.9 771.8 Net realized capital gains 8.8 .1 17.9 17.2 Other income (4) 9.6 9.4 28.8 34.6 -------------------------------------------------------------------------------------------------------------- Total revenue 483.8 403.8 1,401.9 1,212.8 -------------------------------------------------------------------------------------------------------------- Current and future benefits (1) 286.5 245.6 853.4 719.1 Operating expenses (4) 84.5 84.6 247.3 261.3 Amortization of deferred policy acquisition costs 40.1 17.9 92.4 46.6 Severance and facilities charges - 47.3 - 61.3 -------------------------------------------------------------------------------------------------------------- Total benefits and expenses 411.1 395.4 1,193.1 1,088.3 -------------------------------------------------------------------------------------------------------------- Income before income taxes 72.7 8.4 208.8 124.5 Income taxes 21.3 1.4 63.9 34.3 -------------------------------------------------------------------------------------------------------------- Net income $ 51.4 $ 7.0 $ 144.9 $ 90.2 ============================================================================================================== Net realized capital gains, net of tax (included above) $ 5.6 $ .2 $ 11.5 $ 11.3 ========================================================================================================================== - -------------------------------------------------------------------------------------------------------------------------- Deposits not included in premiums above: Annuities--fixed options $ 322.7 $ 323.1 $ 901.8 $ 1,046.7 Annuities--variable options 806.0 655.9 2,420.0 1,996.2 Individual Life Insurance 113.3 119.3 351.2 328.0 ---------------------------------------------------------------- Total $1,242.0 $1,098.3 $ 3,673.0 $ 3,370.9 ========================================================================================================================== Assets under management: (2) (3) Annuities--fixed options $11,997.4 $11,589.1 Annuities--variable options 19,895.5 13,240.6 ---------------------------------------------------------------- Subtotal Annuities 31,892.9 24,829.7 Other Investment Advisory (4) 2,362.9 1,279.0 ---------------------------------------------------------------- Financial Services 34,255.8 26,108.7 Individual Life Insurance 3,050.3 2,757.9 ---------------------------------------------------------------- Total $37,306.1 $28,866.6 ========================================================================================================================== Individual life insurance coverage issued $ 3,788.6 $ 3,975.4 ========================================================================================================================== Individual life insurance coverage in force $43,627.2 $41,505.2 ========================================================================================================================== (1) Includes $17.1 million and $47.2 million for the three and nine months ended September 30, 1997, respectively, and $21.3 million and $53.5 million, respectively, for the same periods a year ago, for annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies. (2) Excludes net unrealized capital gains of $520.7 million and $205.6 million at September 30, 1997 and 1996, respectively. (3) Includes $7,134.1 million and $4,286.5 million at September 30, 1997 and 1996, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (4) The three and nine months ended September 30, 1997 include $.4 million and $1.4 million, respectively, of fees and other income and $.4 million and $.4 million, respectively, of operating expenses and, at September 30, 1997 assets under management includes the transfer of $950.3 million to the Company of business previously written by an affiliate. Overview The Company's net income for the three and nine months ended September 30, 1997 increased $44 million and $55 million, respectively, compared to the same periods a year ago. Net income for the three and nine months ended September 30, 1996 reflects an after-tax severance and facilities charge of $31 million (12) primarily related to actions taken or expected to be taken to improve the Company's cost structure relative to its competitors and, in addition, for the nine months ended September 30, 1996 a charge of $9 million allocated to the Company by Aetna (see Note 4 of the Condensed Notes to Consolidated Financial Statements). Excluding net realized capital gains and the severance and facilities charges, results for the three and nine months ended September 30, 1997 increased $8 million, or 22%, and $15 million, or 12%, respectively, from the same periods a year ago, reflecting improved earnings from the financial services segment and, for the three months ended September 30, 1997, improved earnings from the individual life insurance segment. Assets under management, excluding the amount related to business previously written by an affiliate, increased by 26% primarily due to appreciation in the stock market and additional net deposits. Of the $12.0 billion and $11.6 billion of fixed annuity assets under management at September 30, 1997 and 1996, respectively, 25% were fully guaranteed and 75% were experience rated. The average annualized earned rate on investments supporting fully guaranteed contracts was 7.8% and 7.9% and the average annualized earned rate on investments supporting experience rated contracts was 8.0% and 8.0% for the nine months ended September 30, 1997 and 1996, respectively. The average annualized credited rate on fully guaranteed contracts was 6.6% and 6.7% and the average annualized credited rate on experience rated contracts was 5.9% and 6.0% for each of the nine months ended September 30, 1997 and 1996, respectively. The resulting annualized interest margins on fully guaranteed contracts were 1.2% and 1.2% and on experience rated contracts were 2.1% and 2.0% for the nine months ended September 30, 1997 and 1996, respectively. The duration of the investment portfolios supporting the Company's liabilities is regularly monitored and adjusted in order to maintain an aggregate duration that is within 0.5 years of the estimated duration of the underlying liabilities. For additional information regarding the Company's asset/liability management practices please see the Company's 1996 Annual Report on Form 10-K. (13) Segment Results Financial Services: 3 Months Ended 9 Months Ended September 30, September 30, Operating Summary (millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Premiums (1) $ 19.2 $ 24.3 $ 53.4 $ 65.1 Charges assessed against policyholders 70.6 48.0 188.5 141.6 Net investment income 218.7 211.0 654.3 629.6 Net realized capital gains (losses) 6.6 (.6) 14.7 14.5 Other income (5) 9.5 11.3 28.2 33.7 ---------------------------------------------------------------------------------------------------------------- Total revenue 324.6 294.0 939.1 884.5 ---------------------------------------------------------------------------------------------------------------- Current and future benefits (1) 187.5 184.8 545.6 542.8 Operating expenses (5) 69.8 67.7 204.3 212.1 Amortization of deferred policy acquisition costs 24.5 7.8 57.3 15.1 Severance and facilities charge - 33.1 - 33.1 ---------------------------------------------------------------------------------------------------------------- Total benefits and expenses 281.8 293.4 807.2 803.1 ---------------------------------------------------------------------------------------------------------------- Income before income taxes 42.8 .6 131.9 81.4 Income taxes (benefit) 10.6 (1.6) 36.0 22.0 ---------------------------------------------------------------------------------------------------------------- Net income (2) $ 32.2 $ 2.2 $ 95.9 $ 59.4 ================================================================================================================ Net realized capital gains (losses), net of tax (included above) $ 4.2 $ (.3) $ 9.5 $ 9.5 ========================================================================================================================== - -------------------------------------------------------------------------------------------------------------------------- Deposits not included in premiums above: Annuities--fixed options $ 322.7 $ 323.1 $ 901.8 $ 1,046.7 Annuities--variable options 806.0 655.9 2,420.0 1,996.2 ---------------------------------------------------------------- Total $1,128.7 $ 979.0 $ 3,321.8 $ 3,042.9 ========================================================================================================================== Assets under management: (3) (4) Annuities--fixed options $11,997.4 $11,589.1 Annuities--variable options 19,895.5 13,240.6 ---------------------------------------------------------------- Subtotal Annuities 31,892.9 24,829.7 Other Investment Advisory (5) 2,362.9 1,279.0 ---------------------------------------------------------------- Total $34,255.8 $26,108.7 ========================================================================================================================== (1) Includes $17.1 million and $47.2 million for the three and nine months ended September 30, 1997, respectively, and $21.3 million and $53.5 million, respectively, for the same periods a year ago, for annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies. (2) Excludes any effect of the corporate severance and facilities charge recorded in the second quarter of 1996 which is not directly allocable to the segment. (3) Excludes net unrealized capital gains of $452.6 million and $185.8 million at September 30, 1997 and 1996, respectively. (4) Includes $7,003.6 million and $4,207.1 million at September 30, 1997 and 1996, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (5) The three and nine months ended September 30, 1997 include $.4 million and $1.4 million, respectively, of fees and other income and $.4 million and $.4 million, respectively, of operating expenses and, at September 30, 1997 assets under management includes the transfer of $950.3 million to the Company of business previously written by an affiliate. Net income in the financial services segment for the three and nine months ended September 30, 1997 increased $30 million and $37 million, respectively, compared to the same periods a year ago. Net income for the three and nine months ended September 30, 1996 reflects an after-tax severance and facilities charge of $22 million primarily related to actions taken or expected to be taken to improve the Company's cost structure relative to its competitors (see Note 4 of the Condensed Notes to Consolidated Financial Statements). Excluding realized capital gains or losses and the severance and facilities charge, results for the three and nine months ended September 30, 1997 increased $4 million, or 17%, and $15 million, or 21%, respectively, from the same periods a year ago, primarily reflecting increased charges (14) assessed against policyholders and net investment income primarily from increased assets under management partially offset by increased amortization of deferred policy acquisition costs. Assets under management, excluding the amount related to business previously written by an affiliate, increased primarily due to appreciation in the stock market and additional net deposits. Earnings also reflect lower operating expenses relative to assets under management resulting from cost savings associated with previous restructurings. (15) Individual Life Insurance: 3 Months Ended 9 Months Ended September 30, September 30, Operating Summary (millions) 1997 1996 1997 1996 -------------------------------------------------------------------------------------------------------------------------- Premiums $ 49.0 $ 11.2 $ 146.7 $ 34.8 Charges assessed against policyholders 57.1 51.1 161.7 147.7 Net investment income 50.8 48.7 150.6 142.2 Net realized capital gains 2.2 .7 3.2 2.7 Other income .1 (1.9) .6 .9 ---------------------------------------------------------------------------------------------------------------- Total revenue 159.2 109.8 462.8 328.3 ---------------------------------------------------------------------------------------------------------------- Current and future benefits 99.0 60.8 307.8 176.3 Operating expenses 14.7 16.9 43.0 49.2 Amortization of deferred policy acquisition costs 15.6 10.1 35.1 31.5 Severance and facilities charge - 14.2 - 14.2 ---------------------------------------------------------------------------------------------------------------- Total benefits and expenses 129.3 102.0 385.9 271.2 ---------------------------------------------------------------------------------------------------------------- Income before income taxes 29.9 7.8 76.9 57.1 Income taxes 10.7 3.0 27.9 17.2 ---------------------------------------------------------------------------------------------------------------- Net income (1) $ 19.2 $ 4.8 $ 49.0 $ 39.9 ================================================================================================================ Net realized capital gains net of tax (included above) $ 1.4 $ .5 $ 2.0 $ 1.8 ========================================================================================================================== - -------------------------------------------------------------------------------------------------------------------------- Deposits not included in premiums above $ 113.3 $ 119.3 $ 351.2 $ 328.0 ========================================================================================================================== Assets under management (2) (3) $ 3,050.3 $ 2,757.9 ========================================================================================================================== Individual life insurance coverage issued $ 3,788.6 $ 3,975.4 ========================================================================================================================== Individual life insurance coverage in force $43,627.2 $41,505.2 ========================================================================================================================== (1) Excludes any effect of the corporate severance and facilities charge recorded in the second quarter of 1996 which is not directly allocable to the segment. (2) Excludes net unrealized capital gains of $68.1 million and $19.8 million at September 30, 1997 and 1996, respectively. (3) Includes $130.5 million and $79.4 million at September 30, 1997 and 1996, respectively, of assets invested through the Company's products in unaffiliated mutual funds. Net income in the individual life insurance segment increased $14 million and $9 million for the three months and nine months ended September 30, 1997, respectively, compared with the same periods a year ago. Net income for the three and nine months ended September 30, 1996 reflects an after-tax severance and facilities charge of $9 million primarily related to actions taken or expected to be taken to improve the Company's cost structure relative to its competitors (see Note 4 of the Condensed Notes to Consolidated Financial Statements). Excluding realized capital gains and the severance and facilities charge, results for the three months ended September 30, 1997 increased $4 million, or 32%, and remained level on a year-to-date basis when compared to the same periods a year ago, primarily reflecting improved mortality experience during the three months ended September 30, 1997. Third quarter and year-to-date results also reflect lower operating expenses resulting from cost savings associated with previous restructurings. Premiums and current and future benefits reflect $38.4 and $113.0 million for the three and nine months ended September 30, 1997 related to the transition of the reinsurance agreement with Aetna Life Insurance Company from a modified coinsurance to a coinsurance arrangement (see Note 5 of the Condensed Notes to Consolidated Financial Statements). (16) 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 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. The Company's invested assets were comprised of the following: September 30, December 31, (Millions) 1997 1996 - ------------------------------------------------------------------------------- Debt securities, available for sale, at fair value $13,257.1 $12,905.5 Equity securities, available for sale: Nonredeemable preferred stock 166.5 119.0 Investment in affiliated mutual funds 55.1 81.1 Common stock .8 .3 Short-term investments 111.8 34.8 Mortgage loans 12.9 13.0 Policy loans 453.7 399.3 ---------------------------------- Total Investments $14,057.9 $13,553.0 =============================================================================== The Company's carrying value of investments in debt securities represented 94% and 95% at September 30, 1997 and December 31, 1996, respectively, of total general account invested assets. At September 30, 1997 and December 31, 1996, $10.5 billion and $10.3 billion, respectively, or 79% of total debt securities supported experience rated products for both periods. 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 at both September 30, 1997 and December 31, 1996 was AA-. Debt Securities Quality Ratings at September 30, 1997 - ----------------------------------------------- AAA 46.1% AA 10.6 A 22.9 BBB 14.0 BB 4.0 B and Below 2.4 ------------- 100.0% ============= Debt Securities by Market Sector at September 30, 1997 - ---------------------------------------------------------------------- U.S. Corporate Securities 39.3% Residential Mortgage-Backed Securities 24.1 Foreign Securities - U.S. Dollar Denominated 12.9 Commercial/Multifamily Mortgage- Backed Securities 9.4 Asset-Backed Securities 7.8 U.S. Treasuries/Agencies 6.5 ----------- 100.0% =========== (17) Debt Securities Quality Ratings at December 31, 1996 - ----------------------------------------------- AAA 47.3% AA 10.5 A 23.9 BBB 11.9 BB 4.3 B and Below 2.1 ------------- 100.0% ============= Debt Securities by Market Sector at December 31, 1996 - ---------------------------------------------------------------------- U.S. Corporate Securities 36.8% Residential Mortgage-Backed Securities 24.6 Foreign Securities - U.S. Dollar Denominated 15.2 Asset-Backed Securities 8.4 Commercial/Multifamily Mortgage- Backed Securities 8.0 U.S. Treasuries/Agencies 6.9 Other 0.1 ------------ 100.0% ============ Year 2000: The Company is preparing its computer systems, applications and facilities to accommodate date-sensitive information relating to the Year 2000. The Company expects to incur internal staff costs, as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare its systems for the Year 2000. While the Company has not determined at this time total costs associated with the Year 2000 systems preparation, these costs are not expected to result in amounts material to the financial condition of the Company, although they may adversely affect results of operations in future periods materially. (18) PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, it is not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. Item 5. Other Information. (a) Ratings The Company received a ratings downgrade from Moody's in July 1997 (Aa3) which is a step down from a previous rating of Aa2. This rating is still considered in the excellent category by Moody's. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (27) Financial Data Schedule. (b) Reports on Form 8-K None. (19) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AETNA LIFE INSURANCE AND ANNUITY COMPANY (Registrant) November 13, 1997 - -------------------------------- By /s/ Deborah Koltenuk (Date) ------------------------------------- Deborah Koltenuk Vice President, Treasurer, and Corporate Controller (Chief Accounting Officer) (20)