[Aetna Logo]
Aetna
Life Insurance and
Annuity Company
1 9 9 5
S e m i - A n n u a l R e p o r t
Aetna Income Shares
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Overview 3
Statement of Assets and Liabilities 4
Statement of Changes in Net Assets 5
Notes to Financial Statements 6
Financial Highlights 7
Portfolio of Investments 8
</TABLE>
2
<PAGE>
Semi-Annual Report--Overview
Dear Customer,
1995 has been an exciting year thus far for anyone involved in the financial
markets. The exceptional returns of both the U.S. equity and bond markets
have been fueled by the combination of a much more accommodative interest
rate environment and strong corporate earnings which have often exceeded Wall
Street analysts' predictions.
Six-month periods such as the one we have just experienced, while very
attractive, are not without historical precedent. In fact, in reviewing the
U.S. stock market back to 1925, we find that roughly one out of every eight
six-month periods have experienced stock market returns which exceeded 23%.
It is impossible to predict when the financial markets will make a rapid
advance, but one of the rewards of being a long term investor is being in a
position to take advantage of such periods.
In addition to the excitement caused by the financial markets this year,
ALIAC has created its own excitement through the introduction of the three
Aetna Generation Portfolios--Ascent, Crossroads and Legacy. These funds are
designed to provide individuals with investment vehicles which are easy to
use and which reflect one's investment time horizon and overall risk
tolerance.
Aetna Ascent Variable Portfolio is designed for individuals with an
investment horizon exceeding 15 years and who have a high level of risk
tolerance. Aetna Crossroads Variable Portfolio is designed for people who
have an investment horizon exceeding 10 years and who have a moderate level
of risk tolerance. Aetna Legacy Variable Portfolio is designed for
individuals who have a time horizon exceeding five years and who have a low
level of risk tolerance.
The Aetna Generation Portfolios are beginning to receive an enthusiastic
response, especially from customers who were searching for a simple way to
implement an asset allocation strategy for their retirement savings. Now
available in our retirement savings products, we anticipate that the
Portfolios will also be included in our individual variable life insurance
products in the near future.
We will continue to manage your investments for the long term, allowing
you to rely on our recognized position as a financially solid company. We are
pleased that all four major ratings agencies reaffirmed ALIAC's ratings on
July 12 as either excellent or superior, attesting to our financial strength.
We are ever mindful of the trust that you place in us by selecting ALIAC
to assist in your pursuit of retirement and other financial security goals.
Thank you for your trust and for your business.
Sincerely,
Daniel P. Kearney
President, Aetna Life Insurance
and Annuity Company
<PAGE>
To the Shareholders of Aetna Income Shares:
Aetna Income Shares generated a return of 11.07% (net of investment
management fees and other fund expenses) for the six month period ending
6/30/95 as compared to the Lehman Brothers Aggregate Bond Index return of
11.44%.
After a disappointing 1994, the bond market staged a strong rally during
the first half of 1995. The Federal Reserve's seven doses of anti-inflation
medicine appear to have been successful in stemming domestic growth and
controlling inflationary pressures. The degree of weakness was surprising in
the second quarter and soon had the market focusing attention on a reversal
of monetary policy. Anticipation of a Fed ease spurred the market ahead,
causing the yield on 10-year Treasury notes to drop by 100 basis points (1%)
during the quarter.
With declining interest rates driving up prices this year, the major bond
market sectors produced double digit returns. Corporate bonds were the best
performing investment grade sector led by finance and lower quality
industrial issuers. The increase in refinancing activity heightened
prepayment concerns in residential mortgages and caused performance in the
mortgage-backed securities sector to underperform other sectors of the bond
market.
Aetna Income Shares started the year with a defensive posture in regards
to interest rate risk which detracted from performance in the first quarter.
Duration extension in conjunction with a shift towards overweighting the
corporate sector and underweighting the mortgage backed sector enabled the
Fund to generate returns for the second quarter that exceeded the Lehman
Aggregate Bond Index by 48 basis points (6.57% vs 6.09%). Selective high
yield holdings such as News Corp. and Viacom also added value during the
year.
Thus far, the Fed appears to have been successful in orchestrating the
coveted "soft landing." Although recent releases indicate that there is still
strength remaining in the economy, it is unlikely that the Fed will move to
tighten monetary policy. A step towards easing has already occurred in early
July. Whether it will be followed by additional interest rate cuts is
currently under debate. In this uncertain interest rate environment, Aetna
Income Shares will move towards a neutral duration stance while maintaining
an overweighted position in corporate bonds. In the long run, the existing
combination of moderate growth and low inflation should bode well for
financial assets.
Aetna Life Insurance and Annuity Company
Adviser to Aetna Income Shares
3
<PAGE>
Aetna Income Shares
Statement of Assets and Liabilities
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at market value (Note
1) $611,296,036
Cash 656
Receivable for:
Dividends and interest 8,898,928
Investments sold 2,520,175
------------
Total assets 622,715,795
-------------
LIABILITIES:
Accrued investment advisory fees 136,145
Accrued service fees 18,012
Accrued custodian fees 8,924
Other liabilities 54,097
------------
Total liabilities 217,178
-------------
Net assets applicable to outstanding
shares $622,498,617
=============
Net assets represented by:
Paid-in capital $604,701,058
Net unrealized gain 20,959,936
Undistributed net investment income 19,499,346
Accumulated net realized loss (22,661,723)
------------
Total--representing net assets
applicable to outstanding shares $622,498,617
=============
Shares authorized Unlimited
Shares outstanding 47,803,452
Net asset value per share $ 13.02
Cost of investments $590,336,100
</TABLE>
Statement of Operations
Six-Month Period Ended June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME: (Note 1)
Interest $22,161,414
Dividends 323,773
----------
22,485,187
Foreign taxes withheld 0.00
----------
Total investment income $22,485,187
-----------
EXPENSES: (Note 2)
Investment advisory fee 735,833
Administrative personnel and service fees 103,005
Custodian and transfer agent fees 12,687
Trustees' fees 10,625
Audit fees 12,708
Miscellaneous 18,117
----------
Total expenses 892,975
----------
Net investment income 21,592,212
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
(Notes 1 and 3)
Net realized loss on:
Sale of investments, excluding short-term
investments (3,616,353)
----------
Net realized loss (3,616,353)
-----------
Net change in unrealized gain on:
Investments 43,999,411
----------
Net change in unrealized gain 43,999,411
-----------
Net realized and change in unrealized gain 40,383,058
-----------
Net increase in net assets resulting from
operations $61,975,270
===========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Aetna Income Shares
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six-Month
Period Ended
June 30, Year Ended
1995 December 31,
(Unaudited) 1994
------------ ----------------
<S> <C> <C>
Operations:
Net investment income $ 21,592,212 $ 37,526,101
Net realized loss (3,616,353) (14,516,626)
Net change in unrealized gain (loss) 43,999,411 (47,425,831)
------------ ----------------
Net increase (decrease) in net assets resulting from operations 61,975,270 (24,416,356)
------------ ----------------
Distributions to Shareholders: (Note 1)
From net investment income 0 (37,526,100)
In excess of net investment income 0 (908,894)
------------ ----------------
Decrease in net assets from distributions to shareholders 0 (38,434,994)
------------ ----------------
Share Transactions:
Proceeds from shares sold 46,441,260 52,636,460
Net asset value of shares issued to shareholders upon reinvestment of
distributions 0 38,350,232
Payments for shares redeemed (47,621,746) (107,860,652)
------------ ----------------
Net decrease in net assets from share transactions (1,180,486) (16,873,960)
------------ ----------------
Change in net assets 60,794,784 (79,725,310)
Net Assets:
Beginning of period 561,703,833 641,429,143
------------ ----------------
End of period $622,498,617 $ 561,703,833
============ ================
End of period net assets includes undistributed (distributions in excess of)
net investment income $ 19,499,346 ($ 2,092,866)
============ ================
Share Transactions:
Shares sold 3,733,709 4,260,197
Shares issued upon reinvestment 0 3,224,948
Shares redeemed (3,861,295) (8,698,147)
------------ ----------------
Net decrease (127,586) (1,213,002)
============ ================
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Aetna Income Shares
Notes to Financial Statements
June 30, 1995 (Unaudited)
1. Summary of Significant Accounting Policies
Aetna Income Shares ("Fund") is registered under the Investment Company Act
of 1940 as a diversified open-end management investment trust whose shares
are currently sold to Aetna Life Insurance and Annuity Company ("Company")
for allocation to certain of its variable life/annuity accounts and other
shareholders of the Fund only through reinvestment of dividends. The
Company's accounts and affiliates held 99% of the Fund's outstanding shares
at June 30, 1995.
The accompanying financial statements of the Fund have
been prepared in accordance with generally accepted accounting principles.
a. Valuation of Investments Investments are stated at market values based
upon closing sales prices as reported on national securities exchanges or,
for over-the-counter securities, at the mean of the bid and asked prices.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value. Short-
term investments maturing in less than sixty days are valued at amortized
cost which when combined with accrued interest approximates market.
Securities for which market quotations are not considered to be readily
available are valued in good faith using methods approved by the Board of
Directors.
b. Federal Income Taxes As a qualified regulated investment company, the
Fund is relieved of federal income and excise taxes by distributing its net
taxable investment income and capital gains, if any, in compliance with the
applicable provisions of the Internal Revenue Code.
c. Distributions The Fund distributes all net investment income and net
capital gains, if any, to shareholders semi- annually. Distributions from net
investment income are based on taxable net income. Distributions are recorded
on the ex-dividend date. Income and capital gain distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for losses deferred due to wash sales.
d. Other Investment transactions are accounted for on the day following
trade-date, except same day settlements which are accounted for on the
trade-date. Interest income is recorded on an accrual basis. Discounts and
premiums on securities purchased are amortized over the life of the
respective security. Dividend income and stock splits are recorded on the
ex-dividend date. Realized gains and losses from investment transactions are
determined on an identified cost basis.
2. Investment Advisory Fee and Other Expenses
The Fund pays the Company (its investment adviser) an annual fee of
one-quarter of one percent (.25%) of its average daily net assets. The Fund
also paid the Company $103,005 for administrative personnel and service fees
for the six-month period ended June 30, 1995. Other than expenses
specifically assumed by the Company under the Management Agreement, all
expenses incurred in the operation of the Fund are borne by the Fund.
3. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the six-month period ended June 30, 1995
aggregated $367,125,294 and $380,224,157, respectively.
4. Capital Loss Carryforward
At June 30, 1995, for federal income tax purposes, the Fund had the following
capital loss carryforwards:
<TABLE>
<CAPTION>
Year of
Capital Loss Carryforward Expiration
-------------------------------- -----------------
<S> <C>
$3,975,000 2001
10,377,000 2002
3,193,000 2003
</TABLE>
6
<PAGE>
Aetna Income Shares
Financial Highlights
Selected data for each share outstanding throughout each period:
<TABLE>
<CAPTION>
Six-Month
Period Ended
June 30, 1995 Year Ended December 31,
------------------------------------------
(Unaudited) 1994 1993 1992 1991
------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.719 13.052 12.759 13.511 12.307
------------- -------- -------- -------- ---------
Income from investment operations:
Net investment income 0.453 0.791 0.854 0.949 0.919
Net realized and unrealized gain (loss) 0.850 (1.294) 0.365 0.039 1.465
------------- -------- -------- -------- ---------
Total from investment operations 1.303 (0.503) 1.219 0.988 2.384
------------- -------- -------- -------- ---------
Less distributions:
From net investment income 0.000 (0.811) (0.842) (1.070) (1.039)
In excess of net investment income 0.000 (0.019) (0.010) 0.000 0.000
From net realized gains on investments 0.000 0.000 (0.060) (0.670) (0.141)
In excess of net realized gains on investments 0.000 0.000 (0.014) 0.000 0.000
------------- -------- -------- -------- ---------
Total distributions 0.000 (0.830) (0.926) (1.740) (1.180)
------------- -------- -------- -------- ---------
Net asset value, end of period $ 13.022 11.719 13.052 12.759 13.511
============= ======== ======== ======== =========
Total return * 11.07% (3.80%) 9.68% 7.45% 19.43%
Net assets, end of period (000's) $622,499 $561,704 $641,429 $530,880 $470,760
Ratio of total expenses to average net assets 0.31%** 0.33% 0.31% 0.31% 0.31%
Ratio of net investment income to average
net assets 7.42%** 6.38% 6.47% 6.96% 6.98%
Portfolio turnover rate 71.62% 74.24% 56.37% 94.26% 97.82%
</TABLE>
* The total return percentage does not reflect any separate account charges
under variable annuity contracts.
** Annualized
Per share data calculated using weighted average number of shares outstanding
throughout the period.
7
<PAGE>
Aetna Income Shares
Portfolio of Investments--June 30, 1995 (Unaudited)
LONG TERM BONDS AND NOTES (82.3%)
<TABLE>
<CAPTION>
Principal Market
Amount Value
---------- -----------
<S> <C> <C>
U.S. Government and Agency Obligations (30.7%)
Agency Mortgage-Backed Securities (7.5%)
Federal Home Loan Mortgage Corp. 20 6-B,
Zero Coupon, 07/15/19 $ 2,497,594 $ 2,396,191
Federal National Mortgage Association,
93-176B, Zero Coupon, 06/25/18 8,000,000 7,222,400
Federal National Mortgage Association,
90 34 C, CMO, Zero Coupon, 06/25/19 2,660,607 2,374,592
Government National Mortgage Association,
10.00%, 10/15/09-01/15/21 15,556,717 16,947,099
Government National Mortgage Association,
10.50%, 02/15/13-01/15/21 15,954,102 17,589,397
Government National Mortgage Association,
11.00%, 02/15/10 40,023 44,076
Government National Mortgage Association,
11.25%, 12/15/15 88,825 98,498
-----------
46,672,253
-----------
U.S. Government Obligations (20.1%)
U.S. Treasury Bond, 10.375%, 11/15/12 15,000,000 19,875,000
U.S. Treasury Bond, 7.50%, 11/15/24 30,000,000 33,234,390
U.S. Treasury Bond, 5.875%, 02/15/04 20,000,000 19,550,000
U.S. Treasury Bond, 6.875%, 03/31/00 25,000,000 25,882,800
U.S. Treasury Bond, 6.50%, 05/15/05 26,000,000 26,544,362
-----------
125,086,552
-----------
U.S. Government Agency Obligations (3.1%)
Small Business Administration 92-20K,
7.55%, 11/01/12 10,205,432 10,256,459
Student Loan Marketing Association,
7.82%, 10/14/99 9,000,000 9,199,656
-----------
19,456,115
-----------
Total U.S. Government and Agency
Obligations 191,214,920
-----------
Corporate and Convertible Bonds and Notes (34.3%)
Asset-Backed Securities (2.1%)
Advanta Credit Card 93-2, 6.04%, 08/31/00 6,000,000 6,028,260
First Chicago Corp., 5.983%, 11/17/97 7,000,000 7,017,290
-----------
13,045,550
-----------
Finance (14.5%)
American General, 8.125%, 08/15/09 10,000,000 11,082,840
Associates Corp., 7.95%, 02/15/10 15,000,000 16,245,810
Capital One Bank, 8.625%, 01/15/97 5,000,000 5,149,535
Chemical Bank, 6.625%, 01/15/98 10,000,000 10,055,700
Dean Witter, Discover & Co., 6.00%,
03/01/98 6,000,000 5,959,992
Ford Motor Credit Corp., FRN, 06/02/98 7,000,000 7,030,590
General Electric Capital Corp., 7.96%,
02/02/98 10,000,000 10,431,130
General Electric Co. (U.S.), 8.625%,
06/15/08 10,000,000 11,478,720
Textron Financial Corp. FRC-MTN, 6.39%,
11/24/95 (a) 12,500,000 12,500,000
-----------
89,934,317
-----------
Other Corporate Bonds (17.7%)
Eaton Corp., 8.875%, 06/15/19 $ 5,000,000 $ 5,865,430
Fleming Co., 10.625%, 12/15/99 4,000,000 4,230,000
Georgia Pacific Corp., 9.50%, 12/01/11 5,000,000 5,855,410
Healthtrust, Inc., 10.75%, 05/01/02 9,000,000 9,922,500
MGM Grand Hotel, 12.00%, 05/01/02 8,000,000 8,930,000
National Medical Enterprises, 9.625%,
09/01/02 6,220,000 6,608,750
News American Holdings, 7.75%, 01/20/24 5,000,000 4,861,995
News American Holdings, 9.25%, 02/01/13 5,000,000 5,677,300
News American Holdings, 9.50%, 07/15/24 12,000,000 14,020,980
Ralph's Grocery, 10.45%, 06/15/04 5,000,000 5,025,000
Stone Container Corp., 9.875%, 02/01/01 9,000,000 9,000,000
Time Warner, Inc., 7.45%, 02/01/98 7,000,000 7,099,834
Time Warner Entertainment, 9.625%,
05/01/02 5,000,000 5,619,240
TRW Inc., 9.35%, 06/04/20 10,000,000 12,097,460
Viacom, 10.25%, 09/15/01 5,000,000 5,587,500
-----------
110,401,399
-----------
Total Corporate and Convertible Bonds
and Notes 213,381,266
-----------
Foreign and Supranationals (15.0%)
African Development Bank, 8.80%,
09/01/19 11,650,000 14,044,052
Banco Nacional de Comercia Exterior,
S.N.C., 7.25%, 02/02/04 5,000,000 3,573,615
Bank of China, 6.75%, 03/15/99 5,000,000 4,951,290
China International Trust, 9.00%, 10/15/06 5,000,000 5,346,615
Groupe Videotron, 10.625%, 02/15/05 4,500,000 4,770,000
Interamerican Development Bank, 12.25%,
12/15/08 4,000,000 5,998,916
International Bank For Reconstruction and
Development, 9.25%, 07/15/17 11,000,000 13,528,119
Korean Development Bank, 9.25%, 06/15/98 5,000,000 5,374,885
Quebec Province, 7.125%, 02/09/24 5,000,000 4,642,750
Republic of Argentina, 10.95%, 11/01/99 3,000,000 2,862,405
South Africa Global Bond, 9.625%, 12/15/99 10,000,000 10,396,870
Swire Pacific, Ltd., 8.50%, 09/29/04 (a) 10,000,000 10,525,000
Tenaga Nasional Berhad, 7.875%,
06/15/04 (a) 6,750,000 7,146,401
-----------
Total Foreign and Supranationals 93,160,918
-----------
Non-Agency Mortgage Backed Securities (3.5%)
Chase Mortgage Finance 92 L4, 6.75%,
11/25/09 10,915,000 10,937,460
Security Pacific 87-D, 8.50%, 03/01/17 3,183,016 3,196,414
Security Pacific 87-B, 8.50%, 09/01/16 388,419 390,066
-----------
Total Non-Agency Mortgage Backed
Securities 14,523,940
-----------
Total Long-Term Bonds and Notes
(cost $491,932,684) $512,281,044
-----------
</TABLE>
8
<PAGE>
COMMON AND PREFERRED STOCKS (1.4%)
Common Stocks (0.4%)
<TABLE>
<CAPTION>
Number Market
of Shares Value
--------- -------------
<S> <C> <C>
Banks (0.4%)
Citicorp 40,545 $ 2,346,542
-------------
Total Common Stocks 2,346,542
-------------
Preferred Stocks (1.0%)
Banks (1.0%)
Citicorp, PERCS 315,564 6,390,171
-------------
Total Preferred Stocks $ 6,390,171
-------------
Total Common and Preferred Stocks (cost
$8,125,138) $ 8,736,713
-------------
</TABLE>
Short Term Investments (14.5%)
<TABLE>
<CAPTION>
Principal Market
Amount Value
---------- ------------
<S> <C> <C>
Baxter International, Inc., 6.40%, 07/05/95 $ 5,214,000 $ 5,212,146
Detroit Edison Co., 6.10%, 07/03/95 3,000,000 3,000,000
Houston Industries, Inc., 6.25%, 07/07/95 10,000,000 9,993,056
ITT Financial Corp., 6.35%, 07/05/95 28,092,000 28,082,090
Sprint Capital Corp., 6.55%, 07/03/95 19,000,000 19,000,000
Sprint Capital Corp., 6.45%, 07/05/95 10,000,000 9,996,417
TCI Communications Inc., 6.50%, 07/05/95 10,000,000 9,996,389
TCI Communications Inc., 6.55%, 07/05/95 5,000,000 4,998,181
------------
Total Short-Term Investments (cost
$90,278,278) $ 90,278,279
------------
TOTAL INVESTMENTS (cost $590,336,100) (b) $611,296,036
============
</TABLE>
Notes to Portfolio of Investments
(a) Securities that may be resold to "qualified institutional buyers" under
rule 144A or securities offered pursuant to section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under the guidelines determined by the Board of Trustees.
(b) The cost of investments for income tax purposes amounted to $591,835,996.
Unrealized gains and losses, base on identified tax cost at June 30, 1995 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized gains $22,294,292
Unrealized losses (2,834,252)
------------
Net unrealized gain $19,460,040
</TABLE>
Category percentages are based on net assets.
9
<PAGE>
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
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Permit No. 9
This report is for the information of contract holders and participants under
Aetna Life Insurance and Annuity Company's variable annuity contracts. It is
authorized for distribution to other persons only when preceded or
accompanied by an effective prospectus which gives the sales expense and
other pertinent information.
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<PAGE>
