<PAGE>
As filed with the Securities and Exchange Registration No. 33-79118
Commission on July 14, 1995
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Aetna Life Insurance and Annuity Company
--------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Connecticut
--------------------------------------------------------------------
(State or other Jurisdiction of Incorporation or Organization)
63
--------------------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
71-0294708
--------------------------------------------------------------------
(I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156, (203) 273-0123
(Address, including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4C, Hartford, Connecticut 06156
(203) 273-7834
--------------------------------------------------------------------
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
- - --------------------------------------------------------------------------------
The annuities covered by this registration statement are to be issued from
time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [XX]
<PAGE>
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
ALIAC GUARANTEED ACCOUNT -
A GUARANTEED INTEREST OPTION AVAILABLE UNDER
VARIABLE ANNUITY CONTRACTS
ISSUED BY AETNA LIFE INSURANCE AND ANNUITY COMPANY
CROSS REFERENCE SHEET
Pursuant to Regulation S-K
Item 501(b)
<TABLE>
<CAPTION>
Form S-1
- - --------
Item No. Information Required in Prospectus Location in Prospectus
- - -------- ---------------------------------- ----------------------
<C> <S> <C>
1 Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus................................. Outside Front Cover
2 Inside Front and Outside Back Cover
Pages of Prospectus........................ Table of Contents (inside front
cover)
3 Summary Information, Risk Factors............ Summary
Ratio of Earnings to Fixed Charges........... Not Applicable
4 Use of Proceeds.............................. Investments
5 Determination of Offering Price.............. Not Applicable
6 Dilution..................................... Not Applicable
7 Selling Security Holders..................... Not Applicable
8 Plan of Distribution......................... Description of Contracts
9 Description of Securities to be Description of the ALIAC
Registered................................. Guaranteed Account
10 Interests of Named Experts and
Counsel.................................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form S-1
- - --------
Item No. Information Required in Prospectus Location in Prospectus
- - -------- ---------------------------------- ----------------------
<C> <S> <C>
11 Information with Respect to the
Registrant................................. The Company; Directors
Executive Officers; Executive
Compensation; Legal
Proceedings; Financial
Statements
12 Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities............................ Not Applicable
</TABLE>
<PAGE>
ALIAC GUARANTEED ACCOUNT
(formerly the Growth Plus Guaranteed Account)
A Credited Interest Option
offered by
Aetna Life Insurance and Annuity Company
______, 1995 Supplement to the May 1, 1995 Prospectus
Effective __________, 1995, the Company has made the following changes to the
credited interest option described in this Prospectus.
NAME CHANGE
The name for the Growth Plus Guaranteed Account has been changed to "ALIAC
Guaranteed Account." Where the names "Growth Plus Guaranteed Account" or
"Guaranteed Account" appear in this Prospectus, they will now mean the ALIAC
Guaranteed Account.
SUMMARY, page 4, DESCRIPTION OF THE GUARANTEED ACCOUNT, page 6
The toll-free telephone number that allows Certificate Holders to obtain
information concerning available Deposit Periods, Guaranteed Rates and
Guaranteed Terms has been changed to 1-800-531-4547.
SUMMARY, page 5
The following sentence replaces the first sentence of the eleventh paragraph of
the Summary:
Except for the transactions described in items (1), (3) and (4) in the
preceding paragraph, funds withdrawn or transferred from the Guaranteed
Account prior to the Maturity Date are subject to a Market Value Adjustment.
SUMMARY, page 5, MARKET VALUE ADJUSTMENT, page 9
The following information, subject to state regulatory approval, has been added
after the eleventh paragraph in the Summary and after the second paragraph in
Market Value Adjustment:
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, as applicable, will be applied. 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. (See "Market Value
Adjustment" and "Annuity Period" in this Prospectus.)
<PAGE>
GUARANTEED RATES, page 7
The following paragraph replaces the third paragraph in Guaranteed Rates:
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 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.
MISCELLANEOUS -Annuity Period, page 11
The following sentence, subject to state regulatory approval, has been added as
the next to the last sentence of the paragraph discussing the Annuity Period:
Only a positive Aggregate Market Value Adjustment, if any, is applied due to
annuitization under a lifetime Annuity option.
<PAGE>
The following unaudited interim financial information supplements the audited
financial information presented in the May 1, 1995 Prospectus. This information
should be read in conjunction with the December 31, 1994 financial information
presented therein.
SELECTED FINANCIAL DATA, page 25
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Total Revenue.. $ 360.7 $ 327.6
========= =========
Net Income..... $ 40.3 $ 32.2
========= =========
Total Assets... $22,296.9 $19,866.8
========= =========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS, Page 25
Consolidated Results of Operations: Operating Summary
<TABLE>
<CAPTION>
Three Months
Operating Summary Ended March 31,
--------------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Premiums................................ $ 32.2 $ 25.4
Charges assessed against policyholders.. 74.9 68.2
Net investment income................... 235.8 231.1
Net realized capital gains.............. 5.1 0.8
Other income............................ 12.7 2.1
--------- ---------
Total Revenue........................ 360.7 327.6
--------- ---------
Current and future benefits............. 215.1 206.4
Operating expenses...................... 75.3 60.3
Amortization of deferred policy
acquisition costs...................... 11.2 13.1
--------- ---------
Total benefits and expenses.......... 301.6 279.8
--------- ---------
Income before federal income taxes... 59.1 47.8
Federal income taxes.................... 18.8 15.6
--------- ---------
Net income.............................. $ 40.3 $ 32.2
========= =========
Deposits not included in premiums
above:/(1)/
Fully guaranteed..................... $ 299.3 $ 185.8
Experience-rated..................... 270.8 313.0
Non-guaranteed....................... 351.0 343.0
--------- ---------
Total............................. $ 921.1 $ 841.8
========= =========
Assets under management:/(2)/
Fully guaranteed..................... $ 2,962.9 $ 2,637.6
Experience-rated..................... 9,638.2 8,888.6
Non-guaranteed....................... 8,548.1 7,116.1
--------- ---------
Total............................. $21,149.2 $18,642.3
--------- ---------
</TABLE>
/(1)/ Under FAS 97, certain deposits are not included in premiums or revenue.
/(2)/ Under FAS 115, included above are net unrealized gains (losses) of $(69.8)
million and $218.5 million at March 31, 1995 and 1994, respectively.
<PAGE>
Overview
The Company's adjusted earnings (after-tax) follow (in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1995 1994
------- ------
<S> <C> <C>
Income before cumulative effect
adjustments.................... $40.3 $32.2
Less:
Net realized capital gains..... 3.3 0.5
----- -----
Adjusted earnings................ $37.0 $31.7
===== =====
</TABLE>
The Company's adjusted earnings for the three months ended March 31, 1995
increased 17% when compared with the same period a year ago. The improvement in
the first quarter of 1995 adjusted earnings reflected increases in charges
assessed against policyholders and net investment income, primarily due to an
increase in assets under management. First quarter results also reflected
increases in operating expenses, primarily related to the implementation of a
new contract administration system.
Segment Results
Life Insurance Segment
<TABLE>
<CAPTION>
Three Months
Operating Summary Ended March 31,
- - ----------------- ------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Premiums................................ $ 12.5 $ 12.6
Charges assessed against policyholders.. 40.9 37.0
Net investment income................... 42.1 43.7
Net realized capital gains.............. 0.7 0.1
Other income............................ 1.8 1.5
-------- --------
Total Revenue........................ 98.0 94.9
-------- --------
Current and future benefits............. 47.5 51.1
Operating expenses...................... 15.2 17.4
Amortization of deferred policy
acquisition costs...................... 9.6 6.6
-------- --------
Total benefits and expenses.......... 72.3 75.1
-------- --------
Income before federal income taxes... 25.7 19.8
Federal income taxes.................... 9.7 7.8
-------- --------
Net income.............................. $ 16.0 $ 12.0
======== ========
Deposits not included in premiums
above:/(1)/
Fully guaranteed..................... $ --- $ ---
Experience-rated..................... 79.1 63.5
Non-guaranteed....................... 8.2 5.8
-------- --------
Total............................. $ 87.3 $ 69.3
======== ========
Assets under management:/(2)/
Fully guaranteed..................... $ 620.5 $ 636.9
Experience-rated..................... 1,543.8 1,412.5
Non-guaranteed....................... 88.1 70.2
-------- --------
Total............................. $2,252.4 $2,119.6
======== ========
</TABLE>
(1) Under FAS 97, universal life and interest-sensitive whole life deposits are
not included in premiums or revenue.
(2) Under FAS No. 115, included above are net unrealized gains (losses) of
$(7.8) million and $33.4 million at March 31, 1995 and 1994, respectively.
<PAGE>
Adjusted earnings in the Life Insurance segment (after-tax) follow (in
millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1995 1994
---- ----
<S> <C> <C>
Income before cumulative effect
adjustments...................... $16.0 $12.0
Less:
Net realized capital gains.. 0.4 0.1
----- -----
Adjusted earnings................. $15.6 $11.9
===== =====
</TABLE>
Adjusted earnings of $15.6 million for the three months ended March 31, 1995
increased 31% when compared with $11.9 million for the same period a year ago.
The improvement in adjusted earnings reflected an increase in the volume of
business in force as a result of strong sales over the past year offset in part
by lower net investment income.
Charges assessed against policyholders for universal life and interest-sensitive
whole life insurance increased 11% for the first quarter of 1995 when compared
with the first quarter of 1994 reflecting an increase in the volume of business
in force.
Net investment income for the first quarter of 1995 decreased by 4% when
compared with the same period a year ago reflecting the lower net investment
yield on the Company's portfolio of investments, partially offset by the
increase in universal life assets under management.
Current and future benefits decreased 7% in the first quarter of 1995 when
compared with the same period a year ago reflecting improved mortality
experience related to universal life insurance.
First quarter 1995 operating expenses decreased by 13% when compared with the
first quarter of 1994, primarily attributable to a reduction in the allocation
of corporate expenses from Aetna.
<PAGE>
Financial Services Segment
<TABLE>
<CAPTION>
Three Months
Operating Summary Ended March 31,
- - ----------------- --------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Premiums................................ $ 19.7 $ 12.8
Charges assessed against policyholders.. 34.0 31.2
Net investment income................... 193.7 187.4
Net realized capital gains.............. 4.4 0.7
Other income............................ 10.9 0.6
--------- ---------
Total Revenue........................ 262.7 232.7
--------- ---------
Current and future benefits............. 167.6 155.3
Operating expenses...................... 60.1 42.9
Amortization of deferred policy
acquisition costs...................... 1.6 6.5
--------- ---------
Total benefits and expenses.......... 229.3 204.7
--------- ---------
Income before federal income taxes... 33.4 28.0
Federal income taxes.................... 9.1 7.8
--------- ---------
Net income.............................. $ 24.3 $ 20.2
========= =========
Deposits not included in premiums
above:/(1)/
Fully guaranteed..................... $ 299.3 $ 185.8
Experience-rated..................... 191.7 249.5
Non-guaranteed....................... 342.8 337.2
--------- ---------
Total............................. $ 833.8 $ 772.5
========= =========
Assets under management:/(2)/
Fully guaranteed..................... $ 2,342.4 $ 2,000.7
Experience-rated..................... 8,094.4 7,476.1
Non-guaranteed....................... 8,460.0 7,045.9
--------- ---------
Total............................. $18,896.8 $16,522.7
========= =========
</TABLE>
(1) Under FAS 97, certain deposits are not included in premiums or revenue.
(2) Under FAS No. 115, included above are net unrealized gains (losses) of
$(62.0) million and $185.1 million at March 31, 1995 and 1994, respectively.
Adjusted earnings in the Financial Services segment (after-tax) follow (in
millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1995 1994
------- ------
<S> <C> <C>
Income before cumulative effect
adjustments...................... $24.3 $20.2
Less:
Net realized capital gains....... 2.9 0.4
----- -----
Adjusted earnings................. $21.4 $19.8
===== =====
</TABLE>
Effective January 1, 1995 the Company assumed responsibility for two service
organizations, a record keeping service organization and a payment and retiree
administration service organization with a combined adjusted earnings of $(0.4)
million. As a result, other income and operating expenses reflect variances of
$10.4 million and $11.0 million, respectively, when comparing the first quarter
of 1995 to the same period a year ago. The results of these organizations were
previously reported by an affiliate.
<PAGE>
Adjusted earnings of $21.4 million for the three months ended March 31, 1995
increased 8% when compared with $19.8 million for the same period a year ago.
The improvement in adjusted earnings reflected an increase in charges assessed
against policyholders and net investment income primarily due to an increase in
assets under management offset in part by an increase in operating expenses.
Charges assessed against policyholders for annuity contracts increased 9% for
the first quarter of 1995 when compared with the first quarter of 1994,
reflecting the increase in assets under management.
Net investment income in the first quarter of 1995 increased 3% when compared
with the first quarter of 1994, reflecting the increase in assets under
management offset by a lower new investment yield on the Company's portfolio of
investments.
First quarter 1995 operating expenses, excluding the impact of moving the two
service organizations into the Company as discussed above, increased by 14% when
compared to first quarter 1994. The increase reflected expenses associated with
the implementation of a new contract administration system partially offset by a
reduction in the allocation of corporate expense from Aetna.
<TABLE>
<CAPTION>
General Account Investments
March 31,
1995
---------
<S> <C>
(Millions)
Debt Securities......................... $10,897.4
Equity Securities
Non-redeemable preferred stock....... 46.3
Investment in affiliated mutual funds 221.3
Short-term investments.................. 68.6
Mortgage loans.......................... 9.7
Policy loans............................ 274.7
Limited Partnership..................... 24.5
---------
Total Investments.................... 11,542.5
Cash and Cash equivalents............... 660.1
---------
Total Investments and Cash and Cash
Equivalents....................... $12,202.6
=========
</TABLE>
Liquidity and Capital Resources (page 32)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
(Millions) 1995 1994
---- ----
<S> <C> <C>
Consolidated Assets..................... $22,296.9 $19,866.8
========= =========
Shareholder's Equity.................... $ 1,285.5 $ 1,204.8
========= =========
Net Cash provided by (used by)
Operating Activities................. $ 177.3 $ 56.8
========= =========
Net Cash used for Investing Activities.. $ (359.9) $ (349.2)
========= =========
Net Cash provided by Financing $ 219.4 $ 211.0
Activities............................. ========= =========
Cash and Cash Equivalents............... $ 660.1 $ 454.7
========= =========
</TABLE>
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1995 1994
------ ------
<S> <C> <C>
(Unaudited)
Revenue:
Premiums............................. $ 32.2 $ 25.4
Charges assessed against
policyholders....................... 74.9 68.2
Net investment income................ 235.8 231.1
Net realized capital gains........... 5.1 0.8
Other income......................... 12.7 2.1
------ ------
Total revenue..................... 360.7 327.6
------ ------
Benefits and expenses:
Current and future benefits.......... 215.1 206.4
Operating expenses:.................. 75.3 60.3
Amortization of deferred policy
acquisition costs................. 11.2 13.1
------ ------
Total benefits and expenses:...... 301.6 279.8
------ ------
Income before federal income taxes...... 59.1 47.8
Federal income taxes................. 18.8 15.6
------ ------
Net income.............................. $ 40.3 $ 32.2
====== ======
</TABLE>
See Condensed Notes to Financial Statements
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Consolidated Balance Sheets
(millions)
<TABLE>
<CAPTION>
March 31,
1995
------------
(Unaudited)
<S> <C>
Assets
- - ------
Investments:
Debt securities, available for sale:
(amortized cost $10,967.1)........ $10,897.4
Equity securities, available for
sale:
Non-redeemable preferred stock
(cost $ 43.3).................... 46.3
Investment in affiliated mutual
funds (cost $221.2).............. 221.3
Short-term investments............... 68.6
Mortgage loans....................... 9.7
Policy loans......................... 274.7
Limited partnership.................. 24.5
---------
Total investments................. 11,542.5
Cash and cash equivalents............... 660.1
Accrued investment income............... 148.5
Premiums due and other receivables...... 153.4
Deferred policy acquisition costs....... 1,203.7
Reinsurance loan to affiliate........... 675.7
Other assets............................ 24.1
Separate Accounts assets................ 7,888.9
---------
Total assets......................... $22,296.9
=========
Liabilities and Shareholder's Equity
- - ------------------------------------
Liabilities:
Future policy benefits............... $ 3,027.0
Unpaid claims and claim expenses..... 21.9
Policyholders' funds left with the
Company............................. 9,382.3
---------
Total insurance reserve
liabilities...................... 12,431.2
Other liabilities.................... 525.8
Federal income taxes:
Current........................... 13.8
Deferred.......................... 151.7
Separate Accounts liabilities........ 7,888.9
---------
Total liabilities................. 21,011.4
---------
Shareholder's equity:
Common capital stock, par value $50
(100,000 shares authorized; 55,000
shares issued and outstanding)...... 2.8
Paid-in capital...................... 407.6
Net unrealized capital losses........ (32.3)
Retained earnings.................... 907.4
---------
Total shareholder's equity........ 1,285.5
---------
Total liabilities and $22,296.9
shareholder's equity............. =========
</TABLE>
See Condensed Notes to Financial Statements.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
Shareholder's equity, beginning of
period................................. $1,088.5 $1,246.7
Net change in unrealized capital gains
(losses)............................... 156.7 (74.1)
Net income.............................. 40.3 32.2
-------- --------
Shareholder's equity, end of period..... $1,285.5 $1,204.8
======== ========
</TABLE>
See Condensed Notes to Financial Statements.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1995 1994
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................... $ 40.3 $ 32.2
Adjustments to reconcile net income
to net cash provided by operating
activities:
(Increase) decrease in accrued
investment income................... (6.3) 12.6
Decrease in premiums due and other
receivables......................... 10.9 12.5
Increase in policy loans.............
Increase in deferred policy (26.0) (7.8)
acquisition costs................... (31.7) (16.7)
Decrease in reinsurance loan to
affiliate........................... 14.6 8.7
Net increase in universal life
account balances.................... 44.5 28.0
Increase (decrease) in other
insurance reserve liabilities....... 20.5 (1.2)
Net decrease in other liabilities
and other assets.................... 113.3 14.1
Decrease in federal income taxes
liability........................... 16.3 0.5
Net accretion of discount debt
securities.......................... (15.5) (25.1)
Net realized capital gains........... (5.1) (0.8)
Other, net........................... 1.5 (0.2)
--------- ---------
Net cash provided by operating
activities....................... 177.3 56.8
--------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 965.3 165.8
Equity securities................. 66.7 ---
Investment maturities and
collections of:
Debt securities for sale.......... 104.3 606.2
Short-term investments............ 30.0 3.5
Cost of investment purchases in:
Debt securities................... (1,427.6) (1,077.4)
Equity securities................. (98.1) (22.3)
Short-term investments............ (0.5) (25.0)
--------- ---------
Net cash used for investing
activities.................... (359.9) (349.2)
--------- ---------
Cash Flows from Financing Activities
Deposits and interest credited for
investment contracts................ 497.7 501.0
Withdrawals of investment contracts.. (278.3) (290.0)
--------- ---------
Net cash provided by financing
activities....................... 219.4 211.0
--------- ---------
Net increase (decrease) in cash and
cash equivalents....................... 36.8 (81.4)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Cash and cash equivalents, beginning of 623.3 536.1
period................................. --------- ---------
Cash and cash equivalents, end of period $ 660.1 $ 454.7
========= =========
Supplemental cash flow information:
Income taxes paid, net............... $ 2.5 $ 15.1
========= =========
</TABLE>
See Condensed Notes to Financial Statements.
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Notes to Consolidated Financial Statements, page F-7
The following is inserted at the end of Note 1, Summary of Significant
Accounting Policies - Basis of Presentation
The consolidated financial statements for the three-month periods ended March
31, 1995 and 1994 have been prepared in accordance with generally accepted
accounting principles and are unaudited. Certain reclassifications have been
made to 1994 financial information to conform to 1995 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.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY
151 Farmington Avenue, Hartford, Connecticut 06156 Telephone: 1-800-531-4547
GROWTH PLUS GUARANTEED ACCOUNT
CREDITED INTEREST OPTION
Prospectus Dated: May 1, 1995
This Prospectus describes the Growth Plus Guaranteed Account ("Guaranteed
Account"), which is a credited interest 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 fees and expenses that will be deducted
from the funding options (see "Contract Charges"). This Prospectus describes
the pertinent information required to evaluate the terms of the Guaranteed
Account (see "Description of the Growth Plus Guaranteed Account").
Under the terms of the Guaranteed Account, the Company sets various rates of
interest ("Guaranteed Rate") 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 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 Net 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 Net
Purchase Payments; however, the Certificate Holder must meet Contract minimums
(see the Contract Prospectus). There is a $500 minimum for transfers from other
funding options. See "Contributions to the Guaranteed Account." 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 ABOVE THE
CONTRACTUALLY GUARANTEED RATE NOR GUARANTEE WHAT SUCH RATES WILL BE UNTIL THEY
ARE DECLARED FOR EACH GUARANTEED TERM. THE GUARANTEED RATE WILL BE SET FORTH IN
THE CONTRACT PROSPECTUS.
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 MARKET VALUE ADJUSTMENT AND 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.
Under certain emergency conditions, the Company may defer payment of any
amounts requested to be withdrawn from the Guaranteed Account (see
"Withdrawals").
The Company intends generally to invest funds received for the Guaranteed
Account option primarily in fixed income securities.
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.
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
GLOSSARY................................................................... 3
SUMMARY.................................................................... 4
DESCRIPTION OF THE GROWTH PLUS GUARANTEED ACCOUNT.......................... 6
General................................................................. 6
Contributions to the Guaranteed Account................................. 6
Purchase Payments....................................................... 6
Deposit Period.......................................................... 7
Guaranteed Term......................................................... 7
Guaranteed Rates........................................................ 7
Establishment of Guaranteed Rates....................................... 7
Maturity of a Guaranteed Account........................................ 7
TRANSFERS.................................................................. 8
WITHDRAWALS................................................................ 8
MARKET VALUE ADJUSTMENT.................................................... 9
Deposit Period Yield.................................................... 10
Current Yield........................................................... 10
MVA Formula............................................................. 11
MISCELLANEOUS.............................................................. 11
Contract Charges........................................................ 11
Annuity Period.......................................................... 11
Reinvestment............................................................ 11
INVESTMENTS................................................................ 11
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
TAX CONSIDERATIONS......................................................... 12
Taxation of the Company................................................. 12
Taxation of Guaranteed Account.......................................... 12
THE COMPANY................................................................ 13
History and Business.................................................... 13
Life Insurance Segment.................................................. 13
Financial Services Segment.............................................. 14
General Account Investments............................................. 16
Competition............................................................. 16
Employees............................................................... 16
Properties.............................................................. 16
State Regulation........................................................ 17
DIRECTORS AND EXECUTIVE OFFICERS .......................................... 19
EXECUTIVE COMPENSATION..................................................... 21
SECURITY OWNERSHIP OF MANAGEMENT........................................... 21
EXPERTS.................................................................... 21
LEGAL PROCEEDINGS.......................................................... 21
LEGAL MATTERS.............................................................. 21
APPENDIX I................................................................. 22
APPENDIX II................................................................ 24
SELECTED FINANCIAL DATA.................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS.......... 25
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
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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 Adjusted
amounts calculated due to a withdrawal of funds (for surrender or transfer)
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 Net 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 office located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
MARKET VALUE ADJUSTMENT (MVA): An adjustment 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.
MATURED TERM VALUE: The value of the Guaranteed Account on the Maturity Date.
MATURITY DATE: The last day of a Guaranteed Term.
MATURITY VALUE TRANSFER PROVISION: A provision allowing a Certificate Holder to
transfer an amount to a new Guaranteed Term or another funding option, without
a Market Value Adjustment, one time only (see "Maturity of a Guaranteed Term").
NET PURCHASE PAYMENT: The Purchase Payment less premium taxes or commission
payments, if applicable.
PURCHASE PAYMENT: The gross payment made to an Account or to an individual
Contract.
SEPARATE ACCOUNT: A separate account that buys and holds shares of the Fund(s).
Income, gains or losses, realized or unrealized, are credited or charged to the
Separate Account without regard to the Company's other income, gains or losses.
The Company owns the assets held in the Separate Account and is not a trustee
with regard to such amounts. The Separate Account generally is not guaranteed
and is held at market value. The assets of the Separate Account, to the extent
of reserves and other contract liabilities of the Separate Account, shall not
be charged with other Company liabilities.
VARIABLE ANNUITY CONTRACT: An Annuity Contract providing for the accumulation
of values, and for annuity payments which provide varying investment results.
3
<PAGE>
SUMMARY
The Guaranteed Account is a guaranteed interest option available as a funding
option under certain variable annuity contracts issued by the Company (see
"Description of the Growth Plus Guaranteed Account--General"). Amounts invested
in the Guaranteed Account are credited with interest rates guaranteed by the
Company for stated periods of time.
During a Deposit Period, Certificate Holders may direct some or all of their
Net Purchase Payment(s) to the Guaranteed Account. There is no minimum amount
of payment if the investment comes from a Net 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").
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 the length of the
Guaranteed Term.
Interest is credited daily at a rate that will provide the guaranteed annual
effective yield over the period of one year. Guaranteed Rates will never be
less than the annual effective rate stated in the Contract and will not be
changed for any Guaranteed Term after the start of the Deposit Period (see
"Guaranteed Rates").
The Company will send notification of a Guaranteed Term's Maturity, along with
the current month's Guaranteed Rates and Guaranteed Term, to Certificate
Holders with funds in the Guaranteed Account. This notification is sent at
least 18 days prior to the Maturity Date. Certificate Holders may obtain
information concerning available Deposit Periods, Guaranteed Rates, and
Guaranteed Terms through the use of a toll-free telephone number within five
business days before the Maturity Date (1-800-642-6406) (see "Description of
the Growth Plus Guaranteed Account--General" and "Maturity of a Guaranteed
Account").
Before the Maturity Date, a Certificate Holder may instruct the Company to (a)
reinvest the Matured Term Value in the Guaranteed Account for a new Guaranteed
Term available under the current Deposit Period; (b) transfer the Matured Term
Value to one or more of the variable funding options available under the
Contract; or (c) withdraw the Matured Term Value. In none of those
circumstances would a Market Value Adjustment be applicable to the Matured Term
Value; however, a deferred sales charge may be assessed on amounts withdrawn
(see "Contract Changes" and the Contract Prospectus).
If no direction from the Certificate Holder is received by the Company at its
Home Office by the Maturity Date, the Matured Term Value will be reinvested in
the Guaranteed Account for a new Guaranteed Term under the current Deposit
Period. This 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 Account"). A confirmation will be mailed to the
Certificate Holder advising of the new Guaranteed Term and the applicable
Guaranteed Rate(s) for which the Matured Term Value has been reinvested. This
confirmation will be mailed within two business days following the Maturity
Date.
The Maturity Value Transfer Provision is available to those Certificate Holders
who allow the Company to automatically reinvest the total Matured Term Value
into the current Deposit Period. This provision allows Certificate Holders to
transfer to other funding options or withdraw, without a Market Value
Adjustment, all or a
4
<PAGE>
portion of the Matured Term Value that was transferred to a new Guaranteed
Term. A deferred sales charge may be applied to any amounts withdrawn (see the
Contract Prospectus).
If all or any portion of the Matured Term Value is transferred or surrendered,
the interest credited from the Maturity Date to the date of the transaction
will be at the new Guaranteed Rate. The Maturity Value Transfer Provision is
only available until the last business day of the month following the Maturity
Date of the prior Guaranteed Term (see "Maturity of a Guaranteed Account").
Full or partial surrenders and transfers to other Contract funding options 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
provision does not apply to (1) amounts transferred on the Maturity Date or
under the Maturity Value Transfer Provision (see "Maturity of a Guaranteed
Account"); (2) amounts transferred from the Guaranteed Account before the
Maturity Date due to the election of an Annuity option (see "Annuity Period");
(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 The Estate Conservation and Systematic Withdrawal
distribution options described in the Contract Prospectus.
Except for the transactions described in items (1) through (4) in the preceding
paragraph, funds withdrawn or transferred from the Guaranteed Account prior to
the Maturity Date are subject to a Market Value Adjustment. The Market Value
Adjustment reflects the change in the value of the investment due to changes in
interest rates since the date of deposit. When interest rates increase after
the date of deposit, the value of the investment decreases, and the Market
Value Adjustment amount is negative. Conversely, when interest rates decrease
after the date of deposit, the value of the investment increases, and the
Market Value Adjustment amount is positive. Hence, the Market Value Adjustment
will affect the amount withdrawn from the Guaranteed Account to satisfy the
request for withdrawal or transfer (see "Market Value Adjustment").
Certain charges such as the mortality and expense risk charges and
administrative expense 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 (see "Contract Charges"). Other
charges, such as deferred sales charges, maintenance fees and transfer fees may
be deducted from amounts transferred from the Guaranteed Account. For a
complete description of all Contract fees and charges see "Contract Charges"
and the Contract Prospectus.
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 option
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").
5
<PAGE>
DESCRIPTION OF THE GROWTH PLUS GUARANTEED ACCOUNT
GENERAL
This Prospectus describes the material provisions of the Growth Plus Guaranteed
Account ("Guaranteed Account"). The Guaranteed Account is a guaranteed interest
option available to fund certain variable annuity contracts issued by Aetna
Life Insurance and Annuity Company ("Company"). This Prospectus and the
prospectus describing the Separate Account and the variable annuity contracts
("Contract Prospectus") should both be read thoroughly before investing. All of
these prospectuses should be retained for future reference.
Under the terms of the Guaranteed Account, the Company sets various rates of
interest ("Guaranteed Rate") for varying lengths of time ("Guaranteed Terms")
and designates the period of time during which investments can be made
("Deposit Period"). 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 amounts kept in that Guaranteed
Account for that term. Amounts invested in the Guaranteed Account can come from
the Certificate Holder's Net 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 Net Purchase Payments; however, the Certificate Holder must meet
Contract minimums (see the Contract Prospectus). There is a $500 minimum for
transfers from other funding options (see "Contributions to the Guaranteed
Account").
The Contract permits transfers and withdrawals, prior to the Maturity Date,
subject to certain conditions. Transfer and withdrawal amounts from the
Guaranteed Account may be subject to a Market Value Adjustment and/or deferred
sales charges. See "Transfers" and "Withdrawals." Please also refer to the
Contract Prospectus for more information.
The Company maintains a toll-free telephone number (1-800-642-6406) that allows
Certificate Holders to obtain information concerning available Deposit Periods,
Guaranteed Rates, and Guaranteed Terms.
In addition, the Company will send notification of the upcoming Deposit Period
dates and information on the current Guaranteed Rates, Guaranteed Terms and
projected Matured Term Values to Certificate Holders who have funds in a
maturing Guaranteed Account. This notification will be sent at least 18
calendar days prior to the Maturity Date.
CONTRIBUTIONS TO THE GUARANTEED ACCOUNT
Amounts may be invested in the Guaranteed Account at the Guaranteed Terms and
Guaranteed Rates available during the then current Deposit Period by allocating
all or a portion of the Certificate Holder's Net Purchase Payment(s) or by
transferring accumulated value(s) from other Contract funding options or other
Guaranteed Terms. 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 under the Maturity Value Transfer
Provision, Dollar Cost Averaging or the selection of an Estate Conservation or
Systematic Withdrawal distribution option.
PURCHASE PAYMENTS
A Certificate Holder may elect to invest some or all of the Net Purchase
Payment(s) for any available Guaranteed Terms at the applicable Guaranteed
Rates during the then current Deposit Period. There is no minimum amount
required for the Guaranteed Account. Please refer to the Contract Prospectus
for minimum Purchase Payments for the Contract.
6
<PAGE>
DEPOSIT PERIOD
The Deposit Period is a period of time during which one or more Net Purchase
Payments or amounts transferred from other Contract funding options or other
Guaranteed Terms may be invested at the Guaranteed Rates for the Guaranteed
Terms then available. A 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 be extended by the Company.
GUARANTEED TERM
The Guaranteed Term is the period of time specified by the Company during which
one or a series of Guaranteed Rates are credited.
Guaranteed Terms are offered at the Company's discretion for various lengths of
time ranging up to and including ten years.
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.
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
Guaranteed Account 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.
Guaranteed Rates are credited according to the length of the Guaranteed Term. A
Guaranteed Rate is credited from the date of deposit to the last day of the
Guaranteed Term.
ESTABLISHMENT OF GUARANTEED RATES
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 funds deposited into the Guaranteed
Account (see "Investments"). In addition, the Company will consider other items
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 ACCOUNT
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 maturing Guaranteed Account and the
Guaranteed Rate and Guaranteed Term for the current Deposit Period. Certificate
Holders may transfer amounts from any maturing Guaranteed Account 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 funds transferred or surrendered
from a Guaranteed Term on the Maturity Date.
7
<PAGE>
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. For those Certificate Holders who allow
the Company to transfer automatically the total Matured Term Value 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 transferred 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.
TRANSFERS
The Contract provides for the transfer of all or any portion of accumulated
values under the Contract to the Guaranteed Account and other funding options.
Please refer to the Contract Prospectus for more information. There is a $500
minimum for transfers from other funding options to the Guaranteed Account.
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. (The
90 day restriction does not apply to Dollar Cost Averaging or the selection of
an Estate Conservation or Systematic Withdrawal distribution option. See
"Withdrawals" below for a description of how transferred amounts are allocated
to the Guaranteed Terms.)
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 the request. Therefore, the
amount actually withdrawn from the Guaranteed Account may be more or less than
the requested specific dollar amount (see "Appendix I" and "Market Value
Adjustment"). Transfers made from the one-year Guaranteed Term in connection
with the Dollar Cost Averaging Program and distributions taken under the Estate
Conservation and Systematic Withdrawal options ("ECO and SWO"), both of which
are described in the Contract Prospectus, will not be subject to a Market Value
Adjustment.
WITHDRAWALS
The Contract allows for full or partial withdrawals. To make a full or partial
withdrawal, a withdrawal request form, provided by the Company, must be
properly completed and submitted to the Company's Home Office. Please see the
Contract Prospectus for more information.
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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.
A Market Value Adjustment is applied to amounts withdrawn from a Guaranteed
Account before the Maturity Date (except under the Maturity Value Transfer
Provision and ECO and SWO distribution options). The amount withdrawn may also
be subject to a deferred sales charge. See "Contract Charges." Please also
refer to the Contract Prospectus for more information regarding deferred sales
charges and surrender fees.
When a request for a partial withdrawal of a specific dollar amount is made,
the Market Value Adjustment will be included in the determination of any
amounts to be withdrawn from a Guaranteed Term to fulfill the request.
Therefore, the amount actually withdrawn from the Guaranteed Term(s) may be
more or less than the requested dollar amount (see "Appendix I").
The Guaranteed Account portion of a partial withdrawal request is determined in
the following manner:
1. Amounts invested for Guaranteed Terms having the same lengths are
grouped together;
2. Amounts are withdrawn pro rata from the Guaranteed Term groups; and
3. From each Guaranteed Term group, amounts are withdrawn starting with the
oldest Deposit Period.
For example, for each Net Purchase Payment made, all Guaranteed Terms initially
established for one year are considered a group, all Guaranteed Terms initially
established for two years are considered a group, etc. Funds are then withdrawn
starting from the Guaranteed Term that commenced the earliest in each
Guaranteed Term group.
MARKET VALUE ADJUSTMENT
Upon withdrawal or transfer of funds from or within the Guaranteed Account, the
Company may need to liquidate certain assets or use existing cash flow 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/loss could affect the determination of Guaranteed Rates (see
"Establishment of Guaranteed Rates"). To lessen the impact, all withdrawals and
transfers made before the Maturity Date of a Guaranteed Term, 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 ECO and SWO distribution options (both of
which are described in the Contract Prospectus), will be subject to a Market
Value Adjustment.
The MVA reflects the changes in interest rates since the Deposit Period. When
interest rates increase after the Deposit Period, the value of the investment
decreases and the Market Value Adjustment amount is negative. Conversely, when
interest rates decrease after the Deposit Period, the value of the investment
increases and the Market Value Adjustment amount is positive.
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.
Market Value Adjustment Amounts can be positive or negative and therefore 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
9
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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. As a result of the Market Value
Adjustment imposed on the Guaranteed Account, the amount withdrawn or
transferred from the Guaranteed Account prior to the Maturity Date may be less
than the amount paid into the Guaranteed Account.
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, identify the
Treasury Notes that mature in the last three months of the Guaranteed Term.
Then, list the yield-to-maturity percentages of these Treasury Notes for the
last business day of each week in the Deposit Period. Average these percentages
to determine the deposit period yield.
For example, if the Guaranteed Term matures in May 1998, use the Treasury Notes
that mature in March, April, and May 1998. Then, if the Deposit Period from
which the withdrawal will be made is May 1995, the yield-to-maturity
percentages of the above Treasury Notes on May 5, 1995, May 12, 1995, May 19,
1995, and May 26, 1995 are averaged. This averaged figure (shown as a
percentage) is 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 18, 1995. List the
yield-to-maturity percentage figures as of May 12, 1995 for the same Treasury
Notes that determined the deposit period yield. Average these yields to
determine the current yield.
MVA FORMULA
The mathematical formula used to determine the MVA is:
x
++ ++ -----
+ (1 + i) + 365
++ ------- ++
+ (1 + j) +
++ ++
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.
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For examples of how to calculate MVAs, please see "Appendix I."
MISCELLANEOUS
CONTRACT CHARGES
In addition to the MVA, a deferred sales charge may be deducted upon the full
or partial surrender of a Contract. If amounts used for the surrender are
withdrawn from a Guaranteed Account, the sales charge may be deducted from
those amounts withdrawn. Other surrender charges may also be applied, if
applicable. Please see the Contract Prospectus.
Mortality and expense risk charges and the administrative expense charges that
are deducted from the Separate Account are not deducted from the Guaranteed
Account. These charges only apply to the variable funding options available
under the Contract. There may be other Contract charges such as maintenance
charges or transfer fees deducted from the Guaranteed Account. See the Contract
Prospectus.
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) is applied to any amount
transferred from the Guaranteed Account before the Maturity Date to one of the
nonlifetime Annuity options available under the Contract. Please refer to the
Contract Prospectus for a discussion of the Annuity Period.
REINVESTMENT
The Certificate Holder may elect to reinvest all or a portion of the proceeds
received from a full withdrawal within 30 days after such withdrawal. Any
amounts reinvested in the Guaranteed Account will be invested for the available
Guaranteed Terms of the current Deposit Period in the same proportion as they
were invested at the time of withdrawal. If a Guaranteed Term having the same
length of time to maturity is not available in the current Deposit Period, the
amounts will be reinvested for a Guaranteed Term having the next shortest
length of time to maturity. Any negative MVA amount applied to a withdrawal is
not included in the reinvestment. Please refer to the Contract Prospectus for
further details on reinvestment as it relates to the Contract.
INVESTMENTS
Amounts applied to the Guaranteed Account will be deposited to, and accounted
for in, a 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.
Certificate Holders allocating funds 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.
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 immunization techniques will be
used
11
<PAGE>
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 firms, 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.
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.
TAXATION OF THE COMPANY
The Company is taxed as a life 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.
TAXATION OF 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.
12
<PAGE>
THE COMPANY
HISTORY AND BUSINESS
The Company is a stock life insurance company organized in 1976 under the
insurance laws of the State of Connecticut. Aetna Insurance Company of America,
Systematized Benefits Administrators, Inc., Aetna Private Capital, Inc. and
Aetna Investment Services, Inc., are wholly-owned subsidiaries of the Company.
The Company is licensed to do business in all fifty states, the District of
Columbia, the Virgin Islands, Guam and Puerto Rico. The Company is a wholly
owned subsidiary of Aetna Life and Casualty Company ("Aetna") which, with
Aetna's subsidiaries, constitutes one of the largest insurance/financial
services organizations in the United States based on its assets at December 31,
1994. 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. Effective
December 31, 1994, the Company's operations, which previously were reported in
total, will now be reported through two major business segments: Life Insurance
and Financial Services, to better reflect the way the businesses are managed.
Prior period amounts have been reclassified for comparative purposes.
LIFE INSURANCE SEGMENT
The Company markets most types of life insurance including 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.
These products are marketed by independent agents and brokers, career agents
and registered representatives of selected broker-dealers.
The Company's universal life insurance product accounted for approximately 98%
of life insurance sales in 1994. 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 36% of the life insurance segment earnings in 1994.
Life insurance products typically require high costs to acquire business.
Retention, an important driver of profitability, is encouraged through product
features. For example, universal and interest-sensitive whole life insurance
contracts typically impose a surrender charge on policyholder balances
withdrawn in the first seven to twenty years of the contract life. 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 more than ten years. To also encourage retention, life insurance
agents are typically paid renewal commissions or service fees.
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
Financial Accounting Standard ("FAS") No. 115 (see Note 1 of the Notes to the
Consolidated Financial Statements). 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 additions from premiums 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 in the event
of an insured's death or other withdrawal requests.
13
<PAGE>
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. For further discussion on reinsurance arrangements with affiliates,
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:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(MILLIONS, EXCEPT AS NOTED
BELOW)
<S> <C> <C> <C>
Sales and additions:
Direct:
Permanent...................................... $ 3,369.4 $ 2,767.0 $ 3,011.9
Term........................................... 559.9 237.2 87.5
Assumed:
Term........................................... -- -- --
--------- --------- ---------
Total......................................... $ 3,929.3 $ 3,004.2 $ 3,099.4
========= ========= =========
Terminations:
Direct:
Surrenders and Conversions..................... $ 1,316.4 $ 1,632.6 $ 1,753.2
Lapses......................................... 860.9 816.7 947.1
Other.......................................... 170.0 170.6 210.9
Assumed:
Surrenders and Conversions..................... 59.4 80.3 95.3
Lapses......................................... 303.9 376.2 532.5
Other.......................................... 57.9 55.1 69.8
--------- --------- ---------
Total......................................... $ 2,768.5 $ 3,131.5 $ 3,608.8
========= ========= =========
In force:
Direct:
Permanent...................................... $30,563.0 $29,507.1 $29,253.1
Term........................................... 1,621.3 1.095.2 964.9
Assumed:
Permanent...................................... 1,244.8 1,344.9 1,456.9
Term........................................... 1,433.0 1,754.1 2,153.7
--------- --------- ---------
Total......................................... $34,862.1 $33,701.3 $33,828.6
========= ========= =========
Number of direct policies in force (thousands)... 445.9 439.1 440.0
========= ========= =========
Average size of direct policy in force (thou-
sands).......................................... $ 72.2 $ 69.7 $ 68.7
========= ========= =========
</TABLE>
* Only nonparticipating business is written by the Company.
FINANCIAL SERVICES SEGMENT
The Company markets and services individual and group annuity contracts which
offer a variety of funding and distribution options for personal and employer-
sponsored retirement plans that qualify for tax deferral under sections 401(k),
403(b), 408, and 457 of the Internal Revenue Code. These contracts may be
immediate or
14
<PAGE>
deferred. These products are offered primarily to individuals, pension plans,
small businesses and employer-sponsored groups in the healthcare, government,
education (collectively "not-for-profit" organizations) and corporate markets.
The Company also offers individual and group non-qualified tax deferred annuity
products and life insurance supplemental contracts. In addition, the Company
writes structured settlements of certain liabilities. 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 Advisors 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 (see Note 8 of the Notes
to the Consolidated Financial Statements).
Pension products are sold through pension professionals, stock brokers and
third party administrators who work closely with salaried field office
employees. Annuity products and mutual funds are distributed primarily through
dedicated career agents and registered life brokers.
As with the Life Insurance segment, product retention is a key driver of
profitability. To encourage retention annuity contracts typically impose a
surrender charge on policyholder balances withdrawn in the first five to ten
years of the contract. The period of time and level of the charge vary by
product. A new approach being incorporated into recent annuity product designs
replaces the surrender charge with a requirement that withdrawals be spread
over a period of years for fixed account options. These contracts typically
offer more favorable credited rates and policy loan terms after policies have
been in force for more than ten years. 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 other
insurance carriers.
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 include deferred annuities and immediate annuities without
life contingent payouts. Reserves for deferred annuities are equal to
cumulative deposits, less withdrawals and charges, plus credited interest
thereon. Reserves for immediate annuities without life contingencies are
computed amounts that, and with interest on such reserves compounded annually
at assumed rates are expected to be sufficient to meet the Company's policy
obligations. 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 FAS 115.
The following table summarizes assets under management for the principal
customer groups of the Financial Services segment. Amounts reflected exclude
unrealized gains (losses) of $(337.7) million and $646.2 million at December
31, 1994 and 1993, 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.
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Corporate pensions............................... $ 3,221.1 $ 2,886.2 $ 2,404.3
Not-for-profit organizations..................... 10,025.7 9,087.1 8,070.8
Individuals...................................... 4,882.8 3,981.0 3,169.2
--------- --------- ---------
Total........................................ $18,129.6 $15,954.3 $13,644.3
========= ========= =========
</TABLE>
15
<PAGE>
Deposits, which are not included in premiums or revenue under FAS No. 97 ("FAS
97"), are shown in the following table for the years indicated:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Corporate pensions.................................. $ 886.7 $ 705.6 $ 585.8
Not-for-profit organizations........................ 1,093.3 1,107.8 876.6
Individuals......................................... 1,081.3 715.5 434.9
-------- -------- --------
Totals.......................................... $3,061.3 $2,528.9 $1,897.3
======== ======== ========
</TABLE>
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, mortgaged-
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.
COMPETITION
The Company is engaged in a business that is highly competitive due to the
large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to the Fortune Service 500, as of
December 31, 1993, the Company ranked 19th and 22nd among all United States
domiciled life insurance companies based upon total assets and premium income,
respectively. The Company is not dependent upon any single customer and no
single customer accounted for more than 10% of revenue during 1994, 1993 and
1992.
The environment for life insurance products is highly competitive. The
Company's sales have increased in a flat industry environment as the Company
has differentiated itself from others in the industry by offering competitive
products, quality service, and excellent financial strength.
In the pension and annuity markets, competition arises from other insurance
companies, banks, mutual funds and other investment managers. The Financial
Services segment has become more competitive and customers' retirement needs
have become more diverse and sophisticated. The Company has responded to this
need with new investment choices and more flexible product features.
EMPLOYEES
As of December 31, 1994, the Company had approximately 1,600 employees employed
at its Home Office in Hartford, Connecticut, and various branch and marketing
offices throughout the United States.
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.
16
<PAGE>
STATE REGULATION
The insurance business of the Company is subject to comprehensive and detailed
regulation and supervision 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 requirements, insurer solvency, the maximum interest rates
that can be charged on life insurance policy loans and the minimum rates that
must be provided for accumulation of surrender 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 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.
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 transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation 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 introduced and continue to
work on 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, 1994 was
significantly above the levels which would require regulatory action.
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 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
policyholder or claimant losses under policies issued by companies which become
insolvent. The after tax charges to earnings for guaranty fund obligations for
the years ended December 31, 1994, 1993 and 1992 were $0.9 million, $0.9
million and $5.3 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.
17
<PAGE>
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. Management is not
currently able to predict how the decision will ultimately affect its business.
The Company is regulated by the Securities and Exchange Commission ("SEC") and
some state securities regulators as a broker-dealer and investment adviser.
Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc.
are regulated by the SEC and some state regulators as broker-dealers. The
Company's variable products involve investments through separate accounts, some
of which are securities and are thus registered with the SEC. Additionally, the
retail mutual funds, the mutual funds and certain other products used as
funding vehicles for the Company's variable products are registered with the
SEC. The retail mutual funds are also registered with the fifty state
securities regulators.
18
<PAGE>
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.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS AND
EMPLOYMENT DURING PAST
POSITION(S) WITH THE COMPANY FIVE YEARS; OTHER
NAME, AGE AND YEAR OF ELECTION DIRECTORSHIPS OF DIRECTORS
--------- ---------------------------- --------------------------------------
<C> <S> <C>
Daniel P. Kearney, 54 Director (1991); Group Executive responsible for in-
President (1993); vestments and large case pensions
Chairman, Executive (February 1991 to December 1993) of
Committee Aetna Life and Casualty Company; Fi-
nancial Consultant (1990 to February
1991) of Daniel P. Kearney, Inc.; Di-
rector of MBIA, Inc.; Director of
Margaretten Financial Corporation.
Christopher J. Burns, 47 Director (1991); Senior Vice President (August 1988 to March
Vice President, North 1991) of the Company.
American Operations
(1991); Member of
Executive Committee
Laura R. Estes, 44 Director (1991); Senior Vice President (January 1987 to March
Vice President, ALIAC 1991) of the Financial Division of the
Pensions (1991); Member Company; President and Managing Direc-
of Executive Committee tor (January 1985 to March 1992) of
Aetna Financial Services, Inc.
Shaun P. Mathews, 38 Director (1991); Senior Senior Vice President, Mutual Funds
Vice President, (1991 to 1994) of the Company; Assis-
Strategic Markets and tant Vice President, Pension Opera-
Products (1994) tions (July 1989 to March 1991) of the
Company; Director of seven mutual
funds advised or sponsored by the Com-
pany.
Scott A. Striegel, 45 Director (1993); Senior Senior Vice President, ARPS (since
Vice President, March 1993) of Aetna Life and Casual-
Annuities (1994) ty; Senior Vice President, Homeowners
(February 1992 to March 1993) of Aetna
Life and Casualty; Senior Vice Presi-
dent, Small Business and Specialty
Group Products (March 1991 to February
1992) of Aetna Life and Casualty; Vice
President, Strategic Development Unit
(February 1990 to March 1991) of Aetna
Life and Casualty;
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS AND
EMPLOYMENT DURING PAST
POSITION(S) WITH THE COMPANY FIVE YEARS; OTHER
NAME, AGE AND YEAR OF ELECTION DIRECTORSHIPS OF DIRECTORS
--------- ---------------------------- --------------------------------------
<C> <S> <C>
James C. Hamilton, 53 Director (1988); Vice Vice President and Actuary (October
President (1981); 1988 to March 1991) and Treasurer
Treasurer (1985) (since March 1991) of Aetna Life In-
surance Company.
Gary G. Benanav, 48 Director (1992) Executive Vice President,
Property/Casu- alty (since December
1993) of Aetna Life and Casualty Com-
pany; Group Executive responsible for
international, individual life insur-
ance, annuities, mutual funds and
small case pensions (April 1992 to De-
cember 1993) of Aetna Life and Casu-
alty Company; Director of Barnes Group
Inc.; Executive Risk, Inc.; Aetna Se-
ries Fund, Inc.; and Aetna Interna-
tional Umbrella Fund.
John Y. Kim, 34 Director (1995); Senior Chief Investment Officer, Aetna Life &
Vice President, ALIAC Casualty (since May 1994); Managing
Investments Director, Mitchell Hutchins Institu-
tional Investors (September 1993-April
1994).
Dominick J. Agostino, 48 Director, Senior Vice President and Chief Operating Officer
President and Chief of Citicorp, North America, Inc. (De-
Financial Officer (1994) cember 1992 to September 1994); Manag-
ing Director of Citibank, National As-
sociation (August 1990--September
1994);
Zoe Baird, 41 Senior Vice President Senior Vice President and General
and General Counsel Counsel (since April 1992) of Aetna
(1990) Life and Casualty Company; Vice Presi-
dent and General Counsel (July 1990 to
April 1992) of Aetna Life and Casualty
Company;
Susan E. Schechter, 42 Corporate Secretary and Counsel (November 1993-present), Aetna
Counsel (1995) Life & Casualty Company; Corporate
Secretary and Counsel, Aetna Life As-
signment Company (since June 1994);
Associate Attorney, Steptoe & Johnson
(September 1986-October 1993).
Fred J. Franklin, 47 Vice President and Chief Chief Operating Officer and General
Compliance Officer Counsel (January 1991 to November
(1993) 1993) Barclay Investments, Inc.; Pres-
ident and General Counsel (December
1989 to January 1991) Mutual Benefit
Financial Services Company.
</TABLE>
20
<PAGE>
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 five most highly compensated executive officers whose
allocated compensation exceeds $100,000 and to all executive officers of the
Company, as a group, for services rendered in all capacities to the Company
during 1994. 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
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CAPACITIES IN CASH
OR NUMBER IN GROUP WHICH SERVED COMPENSATION
- - ------------------ --------------------- ------------
<S> <C> <C>
Scott A. Striegel Senior Vice President $ 311,109
Daniel P. Kearney President and CEO 299,437
Thomas L. West* Senior Vice President 297,575
Laura R. Estes Senior Vice President 292,788
Shaun P. Mathews Senior Vice President 243,000
All executive officers as a group (13) $2,117,321
</TABLE>
- - -------
* Executive officer as of December 31, 1994, no longer serving in such
capacity.
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 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.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1994 and 1993, and for each of the years in the three-year period
ended December 31, 1994, have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
auditors, 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 and reinsurance contracts, and a change in 1992 in
the Company's methods of accounting for income taxes and postretirement
benefits other than pensions.
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.
21
<PAGE>
APPENDIX I
EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS
The following are examples of 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.
x
++ ++ -----
+ (1 + i) + 365
MVA = ++ ------- ++
+ (1 + j) +
++ ++
927
++ ++ ---
+ 1.08 + 365
= ++ ------ ++
+ 1.10 +
++ ++
= .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.
x
++ ++ -----
+ (1 + i) + 365
MVA = ++ ------- ++
+ (1 + j) +
++ ++
927
++ ++ ---
+ 1.05 + 365
= ++ ------ ++
+ 1.06 +
++ ++
= .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.
22
<PAGE>
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.
x
++ ++ -----
+ (1 + i) + 365
MVA = ++ ------- ++
+ (1 + j) +
++ ++
927
++ ++ ---
+ 1.10 + 365
= ++ ------ ++
+ 1.08 +
++ ++
= 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 of 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.
x
++ ++ -----
+ (1 + i) + 365
MVA = ++ ------- ++
+ (1 + j) +
++ ++
927
++ ++ ---
+ 1.05 + 365
= ++ ------ ++
+ 1.04 +
++ ++
= 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 of 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.
23
<PAGE>
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%
<TABLE>
<CAPTION>
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
- - ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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>
TABLE B: DEPOSIT PERIOD YIELD OF 5%
<TABLE>
<CAPTION>
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
- - ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the consolidated financial statements and notes thereto
included in this Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------
(MILLIONS)
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total Revenue................. $ 1,332.2 $ 1,264.5 $ 1,176.1 $ 1,129.5 $ 1,151.7
========= ========= ========= ========= =========
Net Income.................... $ 145.3 $ 142.9 $ 122.8 $ 89.8 $ 69.0
========= ========= ========= ========= =========
Total Assets.................. $20,941.8 $20,135.7 $16,932.9 $15,154.0 $13,003.8
========= ========= ========= ========= =========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
Consolidated Results of Operations: Operating Summary
<TABLE>
<CAPTION>
OPERATING SUMMARY 1994 1993 1992
- - ----------------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Premiums........................................ $ 124.2 $ 82.1 $ 72.5
Charges assessed against policyholders.......... 279.0 251.5 235.4
Net investment income........................... 917.2 911.9 848.1
Net realized capital gains...................... 1.5 9.5 13.4
Other income.................................... 10.3 9.5 6.7
--------- --------- ---------
Total revenue............................... 1,332.2 1,264.5 1,176.1
--------- --------- ---------
Current and future benefits..................... 852.4 806.4 761.6
Operating expenses.............................. 227.2 201.3 213.5
Amortization of deferred policy acquisition
costs.......................................... 36.1 37.7 32.9
--------- --------- ---------
Total benefits and expenses................. 1,115.7 1,045.4 1,008.0
--------- --------- ---------
Income before federal income taxes.......... 216.5 219.1 168.1
Federal income taxes............................ 71.2 76.2 54.9
--------- --------- ---------
Income before cumulative effect adjustments. 145.3 142.9 113.2
Cumulative effect adjustments, net of tax:
Change in accounting for income taxes......... -- -- 22.8
Change in accounting for postretirement bene-
fits other than pensions..................... -- -- (13.2)
--------- --------- ---------
Net income.................................. $ 145.3 $ 142.9 $ 122.8
========= ========= =========
Deposits not included in premiums above: /(1)/
Fully guaranteed.............................. $ 323.0 $ 194.9 $ 261.1
Experience-rated.............................. 1,134.2 1,207.9 1,028.1
Non-guaranteed................................ 1,913.1 1,385.9 863.0
--------- --------- ---------
Total....................................... $ 3,370.3 $ 2,788.7 $ 2,152.2
--------- --------- ---------
Assets under management: /(2)/
Fully guaranteed.............................. $ 2,542.6 $ 2,428.1 $ 2,306.6
Experience-rated.............................. 9,201.3 9,241.5 7,416.3
Non-guaranteed................................ 8,223.2 7,111.0 5,894.5
--------- --------- ---------
Total....................................... $19,967.1 $18,780.6 $15,617.4
========= ========= =========
</TABLE>
/(1)/ Under FAS 97, certain deposits are not included in premiums or revenue.
/(2)/ Under FAS 115, included above are net unrealized gains (losses) of
$(386.4) million and $747.1 million at December 31, 1994 and 1993,
respectively.
25
<PAGE>
OVERVIEW
The Company's adjusted earnings (after-tax) follow (in millions):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Income before cumulative effect adjustments............ $ 145.3 $ 142.9 $ 113.2
Less:
Net realized capital gains........................... 1.0 6.2 8.8
------- ------- -------
Adjusted earnings...................................... $ 144.3 $ 136.7 $ 104.4
======= ======= =======
</TABLE>
The Company's adjusted earnings increased 6% in 1994 following a 31% increase
in 1993. 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 annuity contract
administration system. The improvement in 1993 adjusted earnings reflected
increased investment income, primarily due to the increase in assets under
management, partially offset by a downward trend in investment yields on newly
invested assets. The 1993 increase also reflected lower operating expenses due
to prior restructurings.
Assets under management, excluding FAS 115, at December 31, 1994 of $20.3
billion, were 12.9% above 1993 levels, following a 15.4% increase in 1993. The
$20.3 billion includes $2.6 billion of fully guaranteed investment options,
$9.5 billion of experience-rated investment options and $8.2 billion in non-
guaranteed investment options. 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
90% and 91% of assets under management allowed for contractholder withdrawal,
54% and 53% of which are subject to market value adjustments or deferred
surrender charges at December 31, 1994 and 1993, respectively.
26
<PAGE>
SEGMENT RESULTS
LIFE INSURANCE SEGMENT
<TABLE>
<CAPTION>
OPERATING SUMMARY 1994 1993 1992
- - ----------------- -------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
Premiums............................................. $ 54.0 $ 50.1 $ 53.7
Charges assessed against policyholders............... 152.4 142.1 139.3
Net investment income................................ 171.3 172.7 165.6
Net realized capital gains........................... 0.1 0.4 1.0
Other income......................................... 8.3 6.4 4.0
-------- -------- --------
Total revenue.................................... 386.1 371.7 363.6
-------- -------- --------
Current and future benefits.......................... 214.2 194.3 194.3
Operating expenses................................... 58.3 58.2 75.5
Amortization of deferred policy acquisition costs.... 16.8 21.2 19.2
-------- -------- --------
Total benefits and expenses...................... 289.3 273.7 289.0
-------- -------- --------
Income before federal income taxes............... 96.8 98.0 74.6
Federal income taxes................................. 37.0 41.9 29.0
-------- -------- --------
Income before cumulative effect adjustments...... $ 59.8 $ 56.1 $ 45.6
======== ======== ========
Deposits not included in premiums above:/(1)/
Fully guaranteed................................... -- -- --
Experience-rated................................... $ 280.6 $ 237.4 $ 236.7
Non-guaranteed..................................... 28.4 22.4 18.2
-------- -------- --------
Total............................................ $ 309.0 $ 259.8 $ 254.9
-------- -------- --------
Assets under management:/(2)/
Fully guaranteed................................... $ 636.7 $ 670.1 $ 683.7
Experience-rated................................... 1,458.4 1,440.4 1,232.2
Non-guaranteed..................................... 80.1 69.6 57.2
-------- -------- --------
Total............................................ $2,175.2 $2,180.1 $1,973.1
======== ======== ========
</TABLE>
- - -------
/(1)/ Under FAS 97, universal life and interest-sensitive whole life deposits
are not included in premiums or revenue.
/(2)/ Under FAS No. 115, included above are net unrealized gains (losses) of
$(48.7) million and $100.9 million at December 31, 1994 and 1993,
respectively.
Adjusted earnings in the Life Insurance segment (after-tax) follow (in
millions):
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Income before cumulative effect adjustments.................. $59.8 $56.1 $45.6
Less:
Net realized capital gains................................. 0.1 0.3 0.6
----- ----- -----
Adjusted earnings............................................ $59.7 $55.8 $45.0
===== ===== =====
</TABLE>
27
<PAGE>
Adjusted earnings in 1994 of $59.7 million increased 7% over the prior year
adjusted earnings of $55.8 million. The improvement in 1994 adjusted earnings
reflected higher business in force offset in part by lower net investment
income. Adjusted earnings in 1993 increased 24% to $55.8 million when compared
to 1992 adjusted earnings of $44.9 million. The 1993 adjusted earnings
improvement primarily reflected a reduction of operating expenses, attributable
to savings from past restructurings.
Premiums, related to term and whole life insurance, increased by 8% in 1994
following a 7% decrease in 1993. Deposits, related to universal life and
interest-sensitive whole life insurance, grew by 19% and 2% in 1994 and 1993,
respectively. 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 7% in 1994 and 2% in 1993 reflecting
an increase in the volume of business in force.
Net investment income decreased by 1% in 1994 following a 4% increase in 1993
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 increased 10% in 1994 and were flat in 1993. The
increase in 1994 reflected higher mortality related to universal life
insurance. This resulted in lower amortization of deferred policy acquisition
costs which decreased by 21% in 1994. Amortization of deferred policy
acquisition costs increased 10% in 1993 reflecting the increase in the business
in force.
The 1994 operating expenses of $58.3 million is level with the 1993 operating
expenses of $58.2 million, reflecting continued savings from previous
restructurings. Operating expenses decreased by 23% in 1993, also attributable
to savings associated with previous restructurings.
Assets under management, excluding FAS 115, at December 31, 1994 of $2.2
billion, were 6.9% above 1993 levels, following a 5.3% increase in 1993. The
$2.2 billion includes $0.6 billion of fully guaranteed investment options, $1.5
billion of experience-rated investment options and $0.1 billion in non-
guaranteed investment options.
Outlook
Universal life sales through traditional channels (managing general agents and
regional brokers) are expected to continue to be strong in 1995. ALIAC will
also focus on the sale of life products through non-traditional distribution
channels (banks). ALIAC is also exploring attaining growth through acquisitions
of blocks of business.
28
<PAGE>
FINANCIAL SERVICES SEGMENT
<TABLE>
<CAPTION>
OPERATING SUMMARY 1994 1993 1992
- - ----------------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Premiums......................................... $ 70.2 $ 32.0 $ 18.8
Charges assessed against policyholders........... 126.6 109.4 96.1
Net investment income............................ 745.9 739.2 682.5
Net realized capital gains....................... 1.4 9.1 12.4
Other income..................................... 2.0 3.1 2.7
--------- --------- ---------
Total revenue................................ 946.1 892.8 812.5
--------- --------- ---------
Current and future benefits...................... 638.2 612.1 567.3
Operating expenses............................... 168.9 143.1 138.0
Amortization of deferred policy acquisition
costs........................................... 19.3 16.5 13.7
--------- --------- ---------
Total benefits and expenses.................. 826.4 771.7 719.0
--------- --------- ---------
Income before federal income taxes........... 119.7 121.1 93.5
Federal income taxes............................. 34.2 34.3 25.9
--------- --------- ---------
Income before cumulative effect adjustments.. $ 85.5 $ 86.8 $ 67.6
--------- --------- ---------
Deposits not included in premiums above: /(1)/
Fully guaranteed............................... $ 323.0 $ 194.9 $ 261.1
Experience-rated............................... 853.6 970.5 791.4
Non-guaranteed................................. 1,884.7 1,363.5 844.8
--------- --------- ---------
Total........................................ $ 3,061.3 $ 2,528.9 $ 1,897.3
--------- --------- ---------
Assets under management: /(2)/
Fully guaranteed............................... $ 1,905.9 $ 1,758.0 $ 1,622.9
Experience-rated............................... 7,742.9 7,801.1 6,184.1
Non-guaranteed................................. 8,143.1 7,041.4 5,837.3
--------- --------- ---------
Total........................................ $17,791.9 $16,600.5 $13,644.3
========= ========= =========
</TABLE>
(1) Under FAS 97, certain deposits are not included in premiums or revenue.
(2) Under FAS 115, included above are net unrealized gains (losses) of $(337.7)
million and $646.2 million at December 31, 1994 and 1993, respectively.
Adjusted earnings in the Financial Services segment (after-tax) follow (in
millions):
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Income before cumulative effect adjustments.................. $85.5 $86.8 $67.6
Less:
Net realized capital gains................................. 0.9 5.9 8.2
----- ----- -----
Adjusted earnings............................................ $84.6 $80.9 $59.4
===== ===== =====
</TABLE>
Adjusted earnings in 1994 increased 5% in 1994 to $84.6 million following a 36%
increase in 1993. The 1994 improvement reflected an increase in assets under
management offset in part by an 18% increase in operating expenses. The 1993
improvement in adjusted earnings reflected an increase in assets under
management.
29
<PAGE>
Premiums, related to annuity contracts containing life contingencies, increased
by 119% in 1994, following a 70% increase in 1993, reflecting an increase in
structured settlement sales. Deposits, related to annuity contracts not
containing life contingencies, reflected a 21% increase in 1994 following a 33%
increase in 1993. Deposits in 1994 included the $205 million acquisition of a
block of primarily individual annuity business from an unaffiliated insurer.
Charges assessed against policyholders for certain annuity contracts increased
by 16% and 14% in 1994 and 1993, respectively, reflecting the increase in
assets under management.
Net investment income in 1994 increased 1% to $745.9 million following a 8%
increase in 1993, 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 4% and 8% in 1994 and 1993,
respectively. Amortization of deferred acquisition costs increased by 17% and
20% in 1994 and 1993, respectively. These increases reflected the increase in
assets under management.
Operating expenses increased by 18% in 1994 and 4% in 1993. The 1994 increase
reflected expenses associated with the implementation of a new contract
administration system.
Assets under management, excluding FAS 115, at December 31, 1994 of $18.1
billion were 13.7% above 1993 levels, following a 17.0% increase in 1993. The
$18.1 billion includes $2.0 billion of fully guaranteed investment options,
$8.0 billion of experience-rated investment options and $8.1 billion in non-
guaranteed investment options.
Outlook
Sales through traditional channels (primarily career agents, consultants and
third part administrators) are expected to continue to be strong in 1995. ALIAC
intends to increase its focus on the sale of non-qualified products through the
non-traditional distribution channels (banks and broker/dealers). ALIAC is also
exploring attaining growth through additional acquisitions of blocks of
business.
Results in 1994 and 1993 included costs to implement a new contract
administration system. Additional costs will continue to be incurred as
implementation continues and enhancements are made to realize the full
potential of the new system. The primary benefit of the system is that it
enables ALIAC to offer both new products through product development
flexibility and a large array of investment fund options to customers, which is
necessary to remain competitive in an expanding marketplace.
30
<PAGE>
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 after-tax 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.
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(MILLIONS)
<S> <C> <C>
Debt securities............................................. $10,191.4 $10,531.0
Equity securities
Non-redeemable preferred stock............................ 47.2 45.9
Investment in affiliated mutual funds..................... 181.9 126.7
Short-term investments...................................... 98.0 22.6
Mortgage loans.............................................. 9.9 10.1
Policy loans................................................ 248.7 202.7
Limited partnership......................................... 24.4 --
--------- ---------
Total Investments......................................... 10,801.5 10,939.0
Cash and cash equivalents................................... 623.3 536.1
--------- ---------
Total Investments and Cash and Cash Equivalents........... $11,424.8 $11,475.1
========= =========
</TABLE>
Debt Securities
At December 31, 1994 and 1993, the Company's carrying value of investments in
debt securities were $10.2 billion and $10.5 billion, 94% and 96%,
respectively, of total general account invested assets. At December 31, 1994
and 1993, $8.0 billion and $8.3 billion, 78% and 79%, 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 comparable
to that used by rating agencies. The average quality rating of the Company's
bond portfolio was AA at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
DEBT SECURITY QUALITY RATINGS 12/31/94
- - --------------------------------------
<S> <C>
AAA.......................... 56.7%
AA........................... 8.3
A............................ 23.3
BBB.......................... 8.5
BB........................... 2.5
B............................ 0.7
</TABLE>
<TABLE>
<CAPTION>
DEBT SECURITIES INVESTMENTS BY MARKET SECTOR 12/31/94
- - -----------------------------------------------------
<S> <C>
U.S. Corporate Securities............................ 34.2%
Residential Mortgage-Backed Securities............... 32.1
U.S. Treasuries/Agencies............................. 12.9
Foreign Securities................................... 9.7
Other Loan-Backed Securities......................... 6.7
Commercial/Multifamily Mortgage-Backed Securities.... 4.0
Other................................................ 0.4
</TABLE>
31
<PAGE>
In 1994, the percentage of residential mortgage-backed securities was
significantly reduced as a result of changes in their risk and return
characteristics and to better diversify the risk profile of the Company's
assets. Investments in U.S. Corporate, U.S. Treasuries/Agencies, other loan-
backed, and commercial/multifamily mortgage-backed securities all increased.
Other loan-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 1995, the Company expects to reduce the percentage of its portfolio invested
in Treasuries and Cash Equivalents, maintain the percentage invested in
residential mortgage-backs, and increase the percentage invested in corporates,
U.S. dollar denominated foreigns, and securitized pools of commercial and
multifamily mortgages. The overall average quality rating of the Company's
portfolio and its average duration is not expected to change significantly.
It is expected that the net investment yield on the Company's portfolio of
investments will trend upwards in 1995, assuming current interest rates do not
significantly decrease. There is no assurance that this upward trend will
continue.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(millions)
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Consolidated Assets........................... $20,941.8 $20,135.7 $16,932.9
========= ========= =========
Shareholder's Equity.......................... $ 1,088.5 $ 1,246.7 $ 990.1
========= ========= =========
Net Cash provided by (used by) Operating Ac-
tivities..................................... $ 206.6 $ 179.5 $ 100.1
========= ========= =========
Net Cash used for Investing Activities........ $ (908.5) $(1,151.5) $ (902.1)
========= ========= =========
Net Cash provided by Financing Activities..... $ 789.1 $ 1,117.5 $ 851.9
========= ========= =========
Cash and Cash Equivalents..................... $ 623.3 $ 536.1 $ 390.6
========= ========= =========
</TABLE>
The consolidated assets and shareholder's equity amounts for the years ended
December 31, 1994 and 1993 reflect the implementation of FAS 115. See Notes 1
and 3 of Notes to Consolidated Financial Statements.
Insurance premiums received are invested in assets that generally have
maturities or durations similar to those of the Company's liabilities. In
attempting to match asset and liability durations, a number of assumptions must
be made with regard to cash flows from insurance operations and from investing
and financing activities. In the event that subsequent developments are
inconsistent with earlier assumptions, maturing liabilities and investment
assets may no longer be matched to the degree originally anticipated, thereby
placing unanticipated demands on cash flow and liquidity. 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.
32
<PAGE>
Cash and Cash Equivalents increased $87.2 million in 1994 compared to December
31, 1993 primarily due to a increase in net cash inflows from investment
contracts.
There were no capital contributions in 1994, 1993 or 1992. (See Note 8 of Notes
to Consolidated Financial Statements.)
The amount of dividends which may be paid to the shareholder without 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 $70.9 million in dividend distributions in 1995.
REINSURANCE
Reinsurance arrangements with affiliated and non-affiliated insurance companies
are utilized to reduce exposure to losses in excess of predetermined limits per
individual life. The Company's retention limit per individual life is $2.0
million. For further discussion on reinsurance arrangements, see Notes 8 and 9
of the Notes to the Consolidated Financial Statements.
33
<PAGE>
The following tables set forth the distribution of invested assets, and the
amounts for cash, accrued investment income, and reinsurance loan to affiliate
as of the end of the years indicated, as well as summarize investment results,
excluding Separate Accounts, of the Company:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
--------- --------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C> <C>
Debt Securities/(1)/:
United States Government and
government agencies and
authorities................... $ 1,353.0 $ 840.5 $ 64.6 $ 53.7 $ 7.5
Foreign governments............ 401.7 320.3 82.4 33.8 130.0
Public utilities............... 289.6 388.6 131.3 98.9 168.7
Mortgage-backed securities..... 3,682.0 6,732.7 6,434.3 5,719.3 4,843.5
Corporate and all other........ 4,804.7 2,248.9 1,915.1 1,725.1 1,415.4
--------- --------- -------- -------- --------
Total debt securities.......... 10,191.4 10,531.0 8,627.7 7,630.8 6,565.1
--------- --------- -------- -------- --------
Equity securities............... 47.2 45.9 21.3 58.2 18.3
Investment in affiliated mutual
funds.......................... 181.9 126.7 62.9 .5 --
Short-term investments.......... 98.0 22.6 1.5 1.5 --
Mortgage loans.................. 9.9 10.1 12.3 14.0 19.0
Policy loan..................... 248.7 202.7 166.4 134.0 102.8
--------- --------- -------- -------- --------
Total investments............. $10,801.5 $10,939.0 $8,892.1 $7,839.0 $6,705.2
========= ========= ======== ======== ========
Cash and cash equivalents....... $ 623.3 $ 536.1 $ 390.6 $ 340.7 $ 490.8
========= ========= ======== ======== ========
Accrued investment income....... $ 142.2 $ 124.7 $ 113.7 $ 104.9 $ 87.2
========= ========= ======== ======== ========
Reinsurance loan to
affiliate/(2)/................. $ 690.3 $ 711.0 $ 742.9 $ 780.7 $ 827.2
========= ========= ======== ======== ========
</TABLE>
/(1)/For information concerning the valuation of investments, see Notes 1 and 2
of Notes to Consolidated Financial Statements.
/(2)/For information concerning the reinsurance loan to affiliate, see Note 8 of
Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
EARNED
NET NET CAPITAL
NET INVESTMENT GAINS (LOSSES)/(3)/
INVESTMENT INCOME -------------------
INCOME/(1)/ RATE/(2)/ REALIZED UNREALIZED
----------- ---------- -------- ----------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
For the year:
1994............................. $917.2 7.8% $1.5 $(81.0)/(4)/
1993............................. 911.9 8.8 9.5 176.3 /(4)/
1992............................. 848.1 9.2 13.4 1.2
1991............................. 773.8 9.4 4.3 1.3
1990............................. 704.4 9.7 4.7 (1.7)
</TABLE>
/(1)/Net investment income excludes net capital gains (losses) and is after
deduction of investment expenses, but before deduction of federal income
taxes.
/(2)/The rates of return on invested assets shown above have been determined in
accordance with the rules prescribed by the National Association of
Insurance Commissioners. The Earned Net Investment Income Rate for any
given year is equal to (a) net investment income multiplied by two, divided
by (b) the sum of cash, invested assets and investment income due and
accrued less borrowed money at the beginning of the year and cash, invested
assets and investment income due and accrued less borrowed money at the end
of the year, less net investment income. Amounts relating to the
reinsurance loan to affiliate have been included in the 1993, 1992, 1991,
and 1990 calculations.
/(3)/Net realized and unrealized capital gains (losses) are before federal
income taxes and after deduction for amounts allocable to experience-rated
contract holders.
/(4)/Unrealized gains for 1994 and 1993 reflect the implementation of Financial
Accounting Standards Board Statement No. 115 (See Note 1 of Notes to
Consolidated Financial Statements).
34
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992.......................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1993............ F-4
Consolidated Statements of Shareholder's Equity for the Years Ended
December 31, 1994, 1993 and 1992....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
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, 1994 and
1993, 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, 1994. 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 at December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994, 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 and reinsurance contracts. In 1992, the Company changed its
method of accounting for income taxes and postretirement benefits other than
pensions.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 7, 1995
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premiums......................................... $ 124.2 $ 82.1 $ 72.5
Charges assessed against policyholders........... 279.0 251.5 235.4
Net investment income............................ 917.2 911.9 848.1
Net realized capital gains....................... 1.5 9.5 13.4
Other income..................................... 10.3 9.5 6.7
-------- -------- --------
Total revenue.................................. 1,332.2 1,264.5 1,176.1
-------- -------- --------
Benefits and expenses:
Current and future benefits...................... 852.4 806.4 761.6
Operating expenses............................... 227.2 201.3 213.5
Amortization of deferred policy acquisition
costs........................................... 36.1 37.7 32.9
-------- -------- --------
Total benefits and expenses.................... 1,115.7 1,045.4 1,008.0
-------- -------- --------
Income before federal income taxes and cumulative
effect adjustments................................ 216.5 219.1 168.1
Federal income taxes............................. 71.2 76.2 54.9
-------- -------- --------
Income before cumulative effect adjustments........ 145.3 142.9 113.2
Cumulative effect adjustments, net of tax:
Change in accounting for income taxes............ -- -- 22.8
Change in accounting for postretirement benefits
other than pensions............................. -- -- (13.2)
-------- -------- --------
Net income......................................... $ 145.3 $ 142.9 $ 122.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED BALANCE SHEETS
(MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
ASSETS 1994 1993
- - ------ --------- ---------
<S> <C> <C>
Investments:
Debt securities, available for sale:
(amortized cost: $10,577.8 and $9,783.9).................... $10,191.4 $10,531.0
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $43.3 and $38.3)...... 47.2 45.9
Investment in affiliated mutual funds (cost: $187.2 and
$122.4).................................................... 181.9 126.7
Short-term investments....................................... 98.0 22.6
Mortgage loans............................................... 9.9 10.1
Policy loans................................................. 248.7 202.7
Limited partnership.......................................... 24.4 --
--------- ---------
Total investments........................................ 10,801.5 10,939.0
Cash and cash equivalents...................................... 623.3 536.1
Accrued investment income...................................... 142.2 124.7
Premiums due and other receivables............................. 75.8 67.0
Deferred policy acquisition costs.............................. 1,172.0 1,061.0
Reinsurance loan to affiliate.................................. 690.3 711.0
Other assets................................................... 15.9 12.6
Separate Accounts assets....................................... 7,420.8 6,684.3
--------- ---------
Total assets............................................. $20,941.8 $20,135.7
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- - ------------------------------------
<S> <C> <C>
Liabilities:
Future policy benefits....................................... $ 2,968.1 $ 2,741.8
Unpaid claims and claim expenses............................. 23.8 27.2
Policyholders' funds left with the Company................... 8,901.6 9,003.9
--------- ---------
Total insurance liabilities.............................. 11,893.5 11,698.7
Other liabilities............................................ 302.1 229.7
Federal income taxes:
Current.................................................... 3.4 40.6
Deferred................................................... 233.5 161.5
Separate Accounts liabilities................................ 7,420.8 6,684.3
--------- ---------
Total liabilities........................................ 19,853.3 18,889.0
--------- ---------
Shareholder's equity:
Common capital stock, par value $50 (100,000 shares autho-
rized; 55,000 shares issued and outstanding)................ 2.8 2.8
Paid-in capital.............................................. 407.6 407.6
Net unrealized capital gains (losses)........................ (189.0) 114.5
Retained earnings............................................ 867.1 721.8
--------- ---------
Total shareholder's equity............................... 1,088.5 1,246.7
--------- ---------
Total liabilities and shareholder's equity............... $20,941.8 $20,135.7
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1993 1992
-------- -------- ------
<S> <C> <C> <C>
Shareholder's equity, beginning of year.............. $1,246.7 $ 990.1 $867.4
Net change in unrealized capital gains (losses)...... (303.5) 113.7 (0.1)
Net income........................................... 145.3 142.9 122.8
-------- -------- ------
Shareholder's equity, end of year.................... $1,088.5 $1,246.7 $990.1
======== ======== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................. $ 145.3 $ 142.9 $ 122.8
Cumulative effect adjustments............... -- -- (9.6)
Increase in accrued investment income....... (17.5) (11.1) (8.7)
(Increase) decrease in premiums due and
other receivables.......................... 1.3 (5.6) (19.9)
Increase in policy loans.................... (46.0) (36.4) (32.4)
Increase in deferred policy acquisition
costs...................................... (96.5) (60.5) (60.8)
Decrease in reinsurance loan to affiliate... 27.8 31.8 37.8
Net increase in universal life account
balances................................... 164.7 126.4 130.8
Increase in other insurance reserve
liabilities................................ 65.7 86.1 20.5
Net increase in other liabilities and other
assets..................................... 53.9 7.0 20.2
Decrease in federal income taxes............ (11.7) (3.7) (11.8)
Net accretion of discount on bonds.......... (77.9) (88.1) (75.2)
Net realized capital gains.................. (1.5) (9.5) (13.4)
Other, net.................................. (1.0) 0.2 (0.2)
--------- --------- ---------
Net cash provided by operating activities. 206.6 179.5 100.1
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale........ 3,593.8 473.9 543.3
Equity securities......................... 93.1 89.6 50.6
Investment maturities and collections of:
Debt securities available for sale........ 1,289.2 2,133.3 1,179.2
Short-term investments.................... 30.4 19.7 5.0
Cost of investment purchases in:
Debt securities........................... (5,621.4) (3,669.2) (2,612.2)
Equity securities......................... (162.5) (157.5) (63.0)
Short-term investments.................... (106.1) (41.3) (5.0)
Limited partnership....................... (25.0) -- --
--------- --------- ---------
Net cash used for investing activities.. (908.5) (1,151.5) (902.1)
--------- --------- ---------
Cash Flows from Financing Activities:
Deposits and interest credited for
investment contracts....................... 1,737.8 2,117.8 1,619.6
Withdrawals of investment contracts......... (948.7) (1,000.3) (767.7)
--------- --------- ---------
Net cash provided by financing
activities............................. 789.1 1,117.5 851.9
--------- --------- ---------
Net increase in cash and cash equivalents..... 87.2 145.5 49.9
Cash and cash equivalents, beginning of year.. 536.1 390.6 340.7
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 623.3 $ 536.1 $ 390.6
========= ========= =========
Supplemental cash flow information:
Income taxes paid, net...................... $ 82.6 $ 79.9 $ 54.0
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993, AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiaries, Aetna Insurance Company of America,
Systematized Benefits Administrators, Inc., Aetna Private Capital, Inc. and
Aetna Investment Services, Inc. (collectively, the "Company"). Aetna Life
Insurance and Annuity Company is a wholly owned subsidiary of Aetna Life and
Casualty Company ("Aetna").
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 1993 and 1992 financial
information to conform to the 1994 presentation.
The Company offers a wide range of life insurance products and annuity
contracts with variable and fixed accumulation and payout options. The Company
also provides investment advisory and other services to affiliated mutual
funds.
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.
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts
During 1993, the Company adopted FAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts, retroactive to
January 1, 1993. Reinsurance recoverables (previously reported as a reduction
in insurance reserve liabilities) and reinsurance receivables and ceded
unearned premiums are included in premiums due and other receivables. The
adoption of FAS No. 113 did not have a material impact on the Company's 1993
Consolidated Financial Statements.
Accounting for Income Taxes
The Company adopted FAS No. 109, Accounting for Income Taxes, in 1992,
retroactive to January 1, 1992. A cumulative effect benefit of $22.8 million
related to the adoption of this standard is reflected in the 1992 Consolidated
Statement of Income.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postretirement Benefits Other Than Pensions
FAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, required that employers accrue the cost and recognize the liability
for providing non-pension benefits to retired employees and agents. Aetna and
the Company implemented FAS No. 106 in 1992, retroactive to January 1, 1992 on
the immediate recognition basis. The cumulative effect charge for all Aetna
employees was reflected in Aetna's 1992 Statement of Income. A cumulative
effect charge of $13.2 million, net of taxes of $7.1 million, related to the
adoption of this standard for Company agents is reflected in the Company's 1992
Consolidated Statement of Income.
Cash and Cash Equivalents
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, 1994 and 1993, 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
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Limited Partnership
The Company's limited partnership investment is carried at the amount invested
plus the Company's share of undistributed operating results and unrealized
gains (losses), which approximates fair value.
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 10.50%. 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 5.85% in 1994 and
4.00% to 7.68% in 1993. For all other fixed options, the interest credited
ranged from 5.00% to 7.50% in 1994 and 5.00% to 9.25% in 1993.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the
Progressive Annuity Table (modified), the Annuity Table for 1949, the 1971
Individual Annuity Mortality Table, the 1971 Group Annuity Mortality Table, the
1983 Individual Annuity Mortality Table and the 1983 Group Annuity Mortality
Table, 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.
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $149.7 million for 1994
(fair value $146.3 million) and $31.2 million for 1993 (fair value $33.3
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 1994 and from 4% to 9.45% in 1993. 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
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS
Investments in debt securities available for sale as of December 31, 1994 were
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obliga-
tions 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 securi-
ties:
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 se-
curities............................ 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 loan-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
========= ====== ====== =========
</TABLE>
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments in debt securities available for sale as of December 31, 1993
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obliga-
tions of U.S. government agencies
and corporations.................... $ 827.2 $ 19.4 $ 6.6 $ 840.0
Obligations of states and political
subdivisions........................ 0.5 -- -- 0.5
U.S. Corporate securities:
Financial.......................... 983.3 49.2 0.7 1,031.8
Utilities.......................... 141.2 12.4 -- 153.6
Other.............................. 704.3 51.6 2.3 753.6
-------- ------ ----- ---------
Total U.S. Corporate securi-
ties.......................... 1,828.8 113.2 3.0 1,939.0
Foreign securities:
Government......................... 289.1 31.7 0.5 320.3
Financial.......................... 365.8 18.5 0.9 383.4
Utilities.......................... 206.2 28.9 0.1 235.0
Other.............................. 30.4 1.3 0.8 30.9
-------- ------ ----- ---------
Total Foreign securities....... 891.5 80.4 2.3 969.6
Residential mortgage-backed securi-
ties:
Residential pass-throughs.......... 1,125.0 218.1 1.7 1,341.4
Residential CMOs................... 4,868.7 318.1 1.1 5,185.7
-------- ------ ----- ---------
Total Residential mortgage-backed se-
curities............................ 5,993.7 536.2 2.8 6,527.1
Commercial/Multifamily mortgage-
backed securities................... 193.0 13.4 0.8 205.6
-------- ------ ----- ---------
Total Mortgage-backed securi-
ties.......................... 6,186.7 549.6 3.6 6,732.7
Other loan-backed securities......... 49.2 0.2 0.2 49.2
-------- ------ ----- ---------
Total debt securities available for
sale................................ $9,783.9 $762.8 $15.7 $10,531.0
======== ====== ===== =========
</TABLE>
At December 31, 1994 and 1993, net unrealized appreciation (depreciation) of
$(386.4) million and $747.1 million, respectively, on available for sale debt
securities included $(308.6) million and $582.8 million, respectively, related
to experience-rated contractholders, which were not included in shareholder's
equity.
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and fair value of debt securities for the year ended
December 31, 1994 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be restructured,
called, or prepaid.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ---------
(millions)
<S> <C> <C>
Due to mature:
One year or less................................... $ 103.9 $ 103.5
After one year through five years.................. 1,965.6 1,920.0
After five years through ten years................. 2,371.3 2,207.0
After ten years.................................... 1,707.8 1,599.4
Mortgage-backed securities......................... 3,733.1 3,682.0
Other loan-backed securities....................... 696.1 679.5
--------- ---------
Total............................................ $10,577.8 $10,191.4
========= =========
</TABLE>
At December 31, 1994 and 1993, debt securities carried at $7.0 million and $7.3
million, respectively, were on deposit as required by regulatory authorities.
The valuation reserve for mortgage loans was $3.1 million and $4.2 million at
December 31, 1994 and 1993, respectively. The carrying value of non-income
producing investments was $0.2 million and $34.3 million at December 31, 1994
and 1993, respectively.
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, 1994 are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
DEBT SECURITIES COST VALUE
--------------- --------- ------
(millions)
<S> <C> <C>
General Electric Capital Corporation.................... $264.9 $252.1
General Motors Corporation.............................. 167.8 161.7
Society National Bank................................... 152.8 143.7
Ford Motor Company...................................... 144.7 142.3
Associates Corporation of North America................. 132.9 131.1
First Deposit Master Trust 1994-1A...................... 114.9 112.1
</TABLE>
The portfolio of debt securities at December 31, 1994 and 1993 included $318
million and $329 million, respectively, (3% of the debt securities for both
years) 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.
Of these below investment grade assets, $32 million and $39 million, at
December 31, 1994 and 1993, respectively, were investments that were purchased
at investment grade, but whose ratings have since been downgraded.
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in residential mortgage-back securities are collateralized mortgage
obligations ("CMOs") with carrying values of $2.6 billion and $5.2 billion at
December 31, 1994 and 1993, respectively. The $2.6 billion decline in CMOs from
December 31, 1993 to December 31, 1994 was related primarily to sales and
principal repayments. CMO sales of $1.6 billion resulted in net realized
capital gains of $35 million of which $23 million was allocated to experience-
rated contracts. The Company's CMO exposure was reduced as a result of changes
in their risk and return characteristics and to better diversify the risk
profile of the Company's assets. 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, 1994 and 1993,
approximately 85% and 93%, respectively, of the Company's CMO holdings
consisted of sequential and planned amortization class ("PAC") debt securities
which are subject to less prepayment and extension risk than other CMO
instruments. At December 31, 1994 and 1993, approximately 82% 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.
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, 1994 and 1993, 4% and 3%, 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, PACs and sequentials
was mitigated by purchasing 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 by holding offsetting
positions in PO's, PACs, and sequentials. During dramatic decreases in interest
rates POs, PACs and sequentials would generate future cash flows much quicker
than originally anticipated.
In 1993, due to declining interest rates and prepayments on the underlying pool
of mortgages, the amortized cost on IO's was written down by $85.4 million. IO
writedowns of $4.7 million, net of $80.7 million allocated to experience-rated
contracts, were reflected in 1993 net realized capital gains (losses). In 1994,
due to increasing interest rates, unrealized gains on IO's increased from $0.5
million at December 31, 1993 to $17.8 million at December 31, 1994. Conversely,
unrealized gains on POs decreased from $36.7 million at December 31, 1993 to
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$5.3 million at December 31, 1994. 1994 net realized gains (losses) included
net gains of $10.0 million as a result of sales of IOs and POs (including
amounts allocated to experience-rated contractholders).
The Company did not use derivative instruments (ie., futures, forward
contracts, interest swaps, etc.) for hedging or any other purposes in 1994 or
1993.
The Company does hold investments in certain debt and equity securities with
derivative characteristics (ie., 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 $10.8
billion investment portfolio, as of December 31, 1994 was as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(millions)
<S> <C> <C>
Collateralized mortgage obligations (including
interest-only and principal-only strips)............ $2,671.0 $2,564.5
Treasury and agency strips:
Principal.......................................... 20.7 21.6
Interest........................................... 104.2 90.2
Mandatorily convertible preferred stock.............. 12.1 11.6
</TABLE>
Investments in available for sale equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
(millions)
<S> <C> <C> <C> <C>
1994
Equity Securities...................... $ 230.5 $ 6.5 $7.9 $ 229.1
------- ----- ---- -------
1993
Equity Securities...................... $ 160.7 $12.0 $0.1 $ 172.6
------- ----- ---- -------
</TABLE>
At December 31, 1994 and 1993, 91% of outstanding policy loans had fixed
interest rates. The fixed interest rates for annuity policy loans ranged from
1% to 3% for individual annuity policies in both 1994 and 1993. The fixed
interest rates for individual life policy loans ranged from 5% to 8% in 1994
and 6% to 8% in 1993. The remaining outstanding policy loans had variable
interest rates averaging 8% in 1994 and 1993. Investment income from policy
loans was $11.5 million, $10.8 million and $9.5 million in 1994, 1993 and 1992,
respectively.
Off-Balance Sheet Financial Instruments
At December 31, 1993, the Company had $149.0 million in outstanding forward
commitments to purchase mortgage-backed securities at a specified future date
and at a specified price or yield. These instruments involve
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
elements of market risk whereby future changes in market prices may make a
financial instrument less valuable. However, the difference between the fair
value at which the commitments can be settled, and the contractual value of
these securities, was immaterial at December 31, 1993. There were no
outstanding forward commitments at December 31, 1994.
There were no material concentrations of off-balance sheet financial
instruments at December 31, 1994 and 1993.
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 $(29.1) million, $(54.8) million and $36.1 million for the
years ended December 31, 1994, 1993, and 1992, 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 $(50.7) million and $(16.5) million at the end of December 31,
1994 and 1993, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and amounted to
$1.1 million and $(98.5) million, of which $0.8 million and $(91.5) million
were allocable to experience-rated contractholders, for the years ended
December 31, 1994 and 1993, respectively. There were no changes to the
valuation reserve or writedowns in 1992. The 1993 losses were primarily related
to writedowns of interest-only mortgage-backed securities to their fair value.
Net realized capital gains (losses) on investments, net of amounts allocated to
experience-rated contracts, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
(millions)
<S> <C> <C> <C>
Debt securities............................................ $1.0 $9.6 $12.9
Equity securities.......................................... 0.2 .1 0.5
Mortgage loans............................................. 0.3 (0.2) --
---- ---- -----
Pretax realized capital gains.............................. $1.5 $9.5 $13.4
==== ==== =====
After-tax realized capital gains........................... $1.0 $6.2 $ 8.8
==== ==== =====
</TABLE>
Gross gains of $26.6 million, $33.3 million and $13.9 million and gross losses
of $25.6 million, $23.7 million and $1.0 million were realized from the sales
of investments in debt securities in 1994, 1993 and 1992, respectively.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -----
(millions)
<S> <C> <C> <C>
Debt securities...................................... $(242.1) $164.3 $ --
Equity securities.................................... (13.3) 10.6 (0.1)
Limited partnership.................................. (1.8) -- --
------- ------ -----
(257.2) 174.9 (0.1)
Deferred federal income taxes (See Note 6)........... 46.3 61.2 --
------- ------ -----
Net change in unrealized capital gains (losses)...... $(303.5) $113.7 $(0.1)
======= ====== =====
</TABLE>
The net change in unrealized capital gains (losses) on debt securities in 1994
and 1993 resulted from the adoption of FAS No. 115. For the year ended December
31, 1992, debt securities were carried at amortized cost. The unrecorded net
appreciation for debt securities carried at amortized cost (including amounts
allocable to experience-rated contracts) amounted to $612.4 million at December
31, 1992.
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $(308.6) million and $582.8 million at December 31, 1994 and 1993,
respectively, are not included in shareholder's equity. These amounts are
reflected on the Consolidated Balance Sheet in policyholders' funds left with
the Company.
Shareholder's equity included the following unrealized capital gains (losses),
which are net of amounts allocable to experience-rated contractholders, at
December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
(millions)
<S> <C> <C> <C>
Debt securities
Gross unrealized capital gains.................... $ 27.4 $164.3 $ --
Gross unrealized capital losses................... (105.2) -- --
------- ------ ------
(77.8) 164.3 --
Equity securities
Gross unrealized capital gains.................... 6.5 12.0 2.0
Gross unrealized capital losses................... (7.9) (0.1) (0.7)
------- ------ ------
(1.4) 11.9 1.3
Limited Partnership
Gross unrealized capital gains.................... -- -- --
Gross unrealized capital losses................... (1.8) -- --
------- ------ ------
(1.8) -- --
Deferred federal income taxes (See Note 6).......... 108.0 61.7 0.5
------- ------ ------
Net unrealized capital gains (losses)............... $(189.0) $114.5 $ 0.8
======= ====== ======
</TABLE>
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(millions)
<S> <C> <C> <C>
Debt securities.................................. $823.9 $828.0 $763.7
Preferred stock.................................. 3.9 2.3 2.8
Investment in affiliated mutual funds............ 5.2 2.9 3.2
Mortgage loans................................... 1.4 1.5 1.8
Policy loans..................................... 11.5 10.8 9.5
Reinsurance loan to affiliate.................... 51.5 53.3 56.7
Cash equivalents................................. 29.5 16.8 16.6
Other............................................ 6.7 7.7 6.4
------ ------ ------
Gross investment income.......................... 933.6 923.3 860.7
Less investment expenses......................... (16.4) (11.4) (12.6)
------ ------ ------
Net investment income............................ $917.2 $911.9 $848.1
====== ====== ======
</TABLE>
Net investment income includes amounts allocable to experience-rated
contractholders of $677.1 million, $661.3 million and $604.0 million for the
years ended December 31, 1994, 1993 and 1992, respectively. Interest credited
to contractholders is included in Current and Future Benefits.
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The amount of dividends that may be paid to the shareholder in 1995 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.9 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 $70.9 million, $77.6 million and $62.5
million for the years ended December 31, 1994, 1993 and 1992, respectively.
Statutory shareholder's equity was $615.0 million and $574.4 million as of
December 31, 1994 and 1993, respectively.
As of 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.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Note 1, the Company adopted FAS No. 109 as of January 1, 1992
resulting in a cumulative effect benefit of $22.8 million.
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:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(millions)
<S> <C> <C> <C>
Current taxes (benefits):
Income from operations............................. $ 78.7 $ 87.1 $ 68.0
Net realized capital gains......................... (33.2) 18.1 18.1
------ ------ ------
45.5 105.2 86.1
------ ------ ------
Deferred taxes (benefits):
Income from operations............................. (8.0) (14.2) (17.7)
Net realized capital gains......................... 33.7 (14.8) (13.5)
------ ------ ------
25.7 (29.0) (31.2)
------ ------ ------
Total............................................ $ 71.2 $ 76.2 $ 54.9
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(millions)
<S> <C> <C> <C>
Income before federal income taxes................... $216.5 $219.1 $168.1
Tax rate............................................. 35% 35% 34%
------ ------ ------
Application of the tax rate.......................... 75.8 76.7 57.2
------ ------ ------
Tax effect of:
Excludable dividends............................... (8.6) (8.7) (6.4)
Tax reserve adjustments............................ 2.9 4.7 5.1
Reinsurance transaction............................ 1.9 (0.2) (0.5)
Tax rate change on deferred liabilities............ -- 3.7 --
Other, net......................................... (0.8) -- (0.5)
------ ------ ------
Income tax expense............................... $ 71.2 $ 76.2 $ 54.9
====== ====== ======
</TABLE>
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities under FAS No. 109 at December 31, 1994 and 1993
are presented below:
<TABLE>
<CAPTION>
1994 1993
------ ------
(millions)
<S> <C> <C>
Deferred tax assets:
Insurance reserves........................................... $211.5 $195.4
Net unrealized capital losses................................ 136.3 --
Investment losses not currently deductible................... 15.5 31.2
Postretirement benefits other than pensions.................. 8.4 8.6
Impairment reserves.......................................... -- 7.9
Other........................................................ 28.3 19.3
------ ------
Total gross assets......................................... 400.0 262.4
Less valuation allowance....................................... 136.3 --
------ ------
Deferred tax assets net of valuation......................... 263.7 262.4
Deferred tax liabilities:
Deferred policy acquisition costs............................ 385.2 355.2
Unrealized losses allocable to experience-rated contracts.... 108.0 --
Market discount.............................................. 3.6 5.4
Net unrealized capital gains................................. -- 61.7
Other........................................................ 0.4 1.6
------ ------
Total gross liabilities.................................... 497.2 423.9
------ ------
Net deferred tax liability................................. $233.5 $161.5
====== ======
</TABLE>
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. For federal income tax purposes, capital losses are deductible only
against capital gains in the year of sale or during the carryback and
carryforward periods (three and five years, respectively). Due to the expected
full utilization of capital gains in the carryback period and the uncertainty
of future capital gains, a valuation allowance of $28.3 million related to the
net unrealized capital losses has been reflected in shareholder's equity. In
addition, $308.6 million of net unrealized capital losses related to
experience-rated contracts are not reflected in shareholder's equity since such
losses, if realized, are allocable to contractholders. However, the potential
loss of tax benefits on such losses is the risk of the Company and therefore
would adversely affect the Company rather than the contractholder. Accordingly,
an additional valuation allowance of $108.0 million has been reflected in
shareholder's equity as of December 31, 1994. Any reversals of the valuation
allowance are contingent upon the recognition of future capital gains in the
Company's federal income tax return or a change in circumstances which causes
the recognition of the benefits to become more likely than not. Non-recognition
of the deferred tax benefits on net unrealized losses described above had no
impact on net income for 1994, but has the potential to adversely affect future
results if such losses are realized.
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
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994. 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 adjustments. 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 Entry
Age Normal Cost 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 1992 through 1994, 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 1992 through 1994, 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.
Aetna implemented FAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions in 1992 on the immediate recognition basis. The
cumulative effect charge for all Aetna employees was reflected in Aetna's 1992
Statement of Income. Prior to the adoption of FAS No. 106, the cost of
postretirement benefits was charged to operations as payments were made. The
accumulated benefit obligation and plan assets are recorded by Aetna.
Accumulated postretirement benefits exceed plan assets.
The cost to the Company associated with the Aetna postretirement plans for
1994, 1993 and 1992 were $1.0 million, $0.8 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. The impact of recognizing the liability for agent costs was a
cumulative effect adjustment of $13.2 million (net of deferred taxes of $6.8
million) and is reported in the 1992 Consolidated Statement of Income.
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost to the Company associated to the agents' postretirement plans for
1994, 1993 and 1992 were $0.7 million, $0.6 million and $0.7 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 $3.3 million, $3.1 million and $2.8 million in
1994, 1993 and 1992, 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 to the Aetna stock plans for 1994 and
1993 was $2.3 million, $0.4 million, respectively. The cost for 1992 was
immaterial.
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 .70% 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 $104.6 million, $93.6 million and $80.5 million in 1994, 1993 and
1992, 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 $690.3 million and $711.0
million as of December 31, 1994 and 1993, 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 $630.3 million and $685.8
million as of December 31, 1994 and 1993, respectively, and is based upon the
fair value of the underlying assets. Premiums of $32.8 million, $33.3 million
and $36.8 million and current and future benefits of $43.8 million, $55.4
million and $47.2 million were assumed in 1994, 1993 and 1992, respectively.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment income of $51.5 million, $53.3 million and $56.7 million was
generated from the reinsurance loan to affiliate in 1994, 1993 and 1992,
respectively. Net income of approximately $25.1 million, $13.6 million and
$21.7 million resulted from this agreement in 1994, 1993 and 1992,
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 $24.2 million and $27.8
million were maintained for this contract as of December 31, 1994 and 1993,
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 for 1994, 1993 and 1992 were
immaterial.
Effective December 31, 1992, the Company entered into an assumption reinsurance
agreement with Aetna Life to reinsure a block of approximately 3,500 life
contingent, period certain and deferred lump sum annuities (totaling $175.5
million in premium) issued by the Company to Aetna Casualty to fund its
obligations under structured settlement agreements. The negotiated price
recognized the sale of future profits and included consideration to ALIAC for
the continued administration of the reinsured contracts on behalf of, and in
the name of, Aetna Life.
The Company received no capital contributions in 1994, 1993 or 1992.
Premiums due and other receivables include $27.6 million and $9.8 million due
from affiliates in 1994 and 1993, respectively. Other liabilities include $27.9
million and $26.1 million due to affiliates for 1994 and 1993, 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-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.
<TABLE>
<CAPTION>
CEDED TO ASSUMED
DIRECT OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
------ --------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
1994
Premiums:
Life Insurance............................ $ 25.8 $ 6.0 $32.8 $ 52.6
Accident and Health Insurance............. 10.8 9.3 -- 1.5
Annuities................................. 69.9 -- 0.2 70.1
------ ----- ----- ------
Total earned premiums................... $106.5 $15.3 $33.0 $124.2
====== ===== ===== ======
1993
Premiums:
Life Insurance............................ $ 20.9 $ 5.6 $33.3 $ 48.6
Accident and Health Insurance............. 14.4 12.9 -- 1.5
Annuities................................. 31.3 -- 0.7 32.0
------ ----- ----- ------
Total earned premiums................... $ 66.6 $18.5 $34.0 $ 82.1
====== ===== ===== ======
1992
Premiums:
Life Insurance............................ $ 20.8 $ 5.2 $36.8 $ 52.4
Accident and Health Insurance............. 15.1 13.7 -- 1.4
Annuities................................. 18.4 -- 0.3 18.7
------ ----- ----- ------
Total earned premiums................... $ 54.3 $18.9 $37.1 $ 72.5
====== ===== ===== ======
</TABLE>
10. FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(millions)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............. $ 623.3 $ 623.3 $ 536.1 $ 536.1
Short-term investments................ 98.0 98.0 22.6 22.6
Debt securities....................... 10,191.4 10,191.4 10,531.0 10,531.0
Equity securities..................... 229.1 229.1 172.6 172.6
Limited partnership................... 24.4 24.4 -- --
Mortgage loans........................ 9.9 9.9 10.1 10.1
Liabilities:
Investment contract liabilities:
With a fixed maturity............... 826.7 833.5 733.3 795.6
Without a fixed maturity............ 8,074.9 7,870.4 8,196.4 8,099.3
</TABLE>
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
11. SEGMENT INFORMATION
Effective December 31, 1994, the Company's operations, which previously were
reported in total, will now be reported through two major business segments:
Life Insurance and Financial Services. The Life Insurance segment markets most
types of life insurance including 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 Financial Services segment markets and services individual and
group annuity contracts which offer a variety of funding and distribution
options for personal and employer-sponsored retirement plans that qualify for
tax deferral under sections 401(k) for corporations, 403(b) for hospitals and
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
educational institutions, 408 for individual retirement accounts, and 457 for
state and local governments and tax exempt healthcare organizations (the
"deferred compensation market"), of the Internal Revenue Code. These contracts
may be immediate or deferred. These products are offered primarily to
individuals, pension plans, small businesses and employer-sponsored groups.
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(millions)
<S> <C> <C> <C>
Revenue:
Life insurance................................. $ 386.1 $ 371.7 $ 363.6
Financial services............................. 946.1 892.8 812.5
--------- --------- ---------
Total revenue................................ $ 1,332.2 $ 1,264.5 $ 1,176.1
========= ========= =========
Income from continuing operations before income
taxes and cumulative effect adjustments:
Life insurance................................. $ 96.8 $ 98.0 $ 74.6
Financial services............................. 119.7 121.1 93.5
--------- --------- ---------
Total income from continuing operations be-
fore income taxes and cumulative effect ad-
justments................................... $ 216.5 $ 219.1 $ 168.1
Net income:
Life insurance................................. $ 59.8 $ 56.1 $ 45.6
Financial services............................. 85.5 86.8 67.6
--------- --------- ---------
Income before cumulative effect adjustments.. $ 145.3 $ 142.9 $ 113.2
--------- --------- ---------
Cumulative effect adjustments................ -- -- 9.6
--------- --------- ---------
Net income....................................... $ 145.3 $ 142.9 $ 122.8
========= ========= =========
<CAPTION>
1994 1993 1992
--------- --------- ---------
(millions)
<S> <C> <C> <C>
Assets under management, at fair value:
Life insurance................................. $ 2,175.2 $ 2,180.1 $ 1,973.1
Financial services............................. 17,791.9 16,600.5 13,644.3
--------- --------- ---------
Total assets under management................ $19,967.1 $18,780.6 $15,617.4
========= ========= =========
</TABLE>
F-26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
- - -------- -------------------------------------------
Not Applicable
Item 14. Indemnification of Directors and Officers
- - -------- -----------------------------------------
Reference is hereby made to Section 33-320a of the Connecticut General
Statutes ("C.G.S.") regarding indemnification of directors and officers of
Connecticut corporations. The statute provides in general that Connecticut
corporations shall indemnify their officers, directors, employees, agents, and
certain other defined individuals against judgments, fines, penalties, amounts
paid in settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification does not apply unless (1) the individual is successful on
the merits in the defense of any such proceeding; or (2) a determination is made
(by a majority of the board of directors not a party to the proceeding by
written consent; by independent legal counsel selected by a majority of the
directors not involved in the proceeding; or by a majority of the shareholders
not involved in the proceeding) that the individual acted in good faith and in
the best interests of the corporation; or (3) the court, upon application by the
individual, determines in view of all the circumstances that such person is
reasonably entitled to be indemnified.
C.G.S. Section 33-320a provides an exclusive remedy: a Connecticut corporation
cannot indemnify a director or officer to an extent either greater or less than
that authorized by the statute, e.g., pursuant to its certificate of
incorporation, bylaws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared by the corporation with the insured individuals on an
agreed basis.
Consistent with the statute, Aetna Life and Casualty Company has procured
insurance from Lloyd's of London and several major United States excess insurers
for its directors and officers and the directors and officers of its
subsidiaries, including the Registrant, which supplements the indemnification
rights provided by C.G.S. Section 33-320a to the extent such coverage does not
violate public policy.
Item 15. Recent Sales of Unregistered Securities
- - -------- ---------------------------------------
The Company offers its Contracts through Variable Annuity Accounts D and F to
qualified pension and profit sharing plans and certain governmental plans in
reliance upon the exemption from registration provided by Section 3(a)(2) under
the Securities Act of 1933. Data relating to the amount of securities sold is:
<TABLE>
<CAPTION>
VARIABLE ANNUITY ACCOUNT D
--------------------------
Years Ended December 31,
------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C>
$521,462,283 $338,384,188 $302,369,083
</TABLE>
VARIABLE ANNUITY ACCOUNT F
--------------------------
Variable Annuity Account F began its operations on August 23, 1994. The
amount of securities sold from August 23, 1994 through December 31, 1994 was
$4,163,884.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
- - -------- ------------------------------------------
(a) Exhibits
(3.1) Articles of Incorporation of Registrant/1/
(3.2) By-Laws/1/
(4) Instruments Defining the Rights of Security Holders:
Form of Annuity Contracts (G-CDA-GP1 (4/94)),(GP1NHEND (4/94))
(I-GDA-GP1 (4/94)), (GP1NHEND (4/94)), and (C-GP1QEND (4/94))/ 2/
(5) Opinion re Legality
(10) Material Contracts:
(a) The 1984 Stock Option Plan of Aetna Life and Casualty
Company and amendments thereto/3/
(b) Aetna Life and Casualty Company's Supplemental Incentive
Savings Plan/3/
(c) Aetna Life and Casualty Company's Supplemental Pension
Benefit Plan/3/
(d) Aetna Life and Casualty Company's 1986 Management
Incentive Plan/4/
(21) Subsidiaries of the Registrant/5/
(23) (a) Consent of Independent Auditors
(b) Consent of Legal Counsel (Included in Item (5) above)
(24) (a) Powers of Attorney/6/
(b) Certificate of Resolution Authorizing Signature of Power
of Attorney/6/
(27) Financial Data Schedule
(b) Consolidated Financial Statement Schedules
(i) Independent Auditors' Report
(ii) Schedule I - Summary of Investments - Other than Investments
in Affiliates as of December 31, 1994
(iii) Schedule V - Supplementary Insurance Information
as of December 31, 1994, 1993 and 1992
(iv) Schedule VI - Reinsurance for the years ended December 31,
1994, 1993 and 1992
Exhibits and Schedules other than those listed above are omitted because they
are not required or are not applicable.
1. Incorporated by reference to Post-Effective Amendment No. 58 to the
Registration Statement on Form N-4 (File No. 2-52449) filed on
February 28, 1994.
2. Incorporated by reference to the Registration Statement on Form N-4
(File No. 33-79122) filed on May 18, 1994..
3. Incorporated by reference to Aetna Life and Casualty Company's 1992
Form 10-K filed on March 17, 1993. Commission File No. 1-5704.
4. Incorporated by reference to Aetna Life and Casualty Company's 1993
Form 10-K, as amended, effective February 25, 1994. Commission File
Number 1-5704.
<PAGE>
5. Incorporated by reference to Registration Statement on Form N-4
(File No. 33-88720) filed on January 20, 1995.
6. Incorporated by reference to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-4 (File No. 33-75996) filed on
February 23, 1995.
<PAGE>
Item 17. Undertakings
- - -------- ------------
The undersigned registrant hereby undertakes as follows, pursuant
to Item 512 of Regulation S-K:
(a) Rule 415 offerings:
(1) To file, during any period in which offers or sales of the
registered securities are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material changes to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(h) Request for Acceleration of Effective Date:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised 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. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 33-79118) to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Hartford,
State of Connecticut, on this 14th day of July, 1995.
By: AETNA LIFE INSURANCE AND ANNUITY
COMPANY
By: Daniel P. Kearney*
-----------------------------------
Daniel P. Kearney
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 2 to the Registration Statement on Form S-1 has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
Daniel P. Kearney* Director and President )
- - ---------------------- (Principal Executive Officer) )
Daniel P. Kearney )
)
Dominick J. Agostino* Director, Senior Vice President and )
- - ---------------------- Chief Financial )
Dominick J. Agostino Officer (Principal Accounting and )
Financial Officer) )
)
James C. Hamilton* Director, Vice President and Treasurer )
- - ---------------------- )
James C. Hamilton ) July
) 14, 1995
Gary G. Benanav* Director )
- - ---------------------- )
Gary G. Benanav )
)
Christopher J. Burns* Director and Senior Vice President, )
- - ---------------------- Life )
Christopher J. Burns )
)
Laura R. Estes* Director and Senior Vice President, )
- - ---------------------- ALIAC Pensions )
Laura R. Estes )
)
John Y. Kim* Director and Senior Vice President, )
- - ---------------------- ALIAC Investments )
John Y. Kim )
)
Shaun P. Mathews* Director and Senior Vice President, )
- - ---------------------- Strategic Markets & Products )
Shaun P. Mathews )
)
<PAGE>
Scott A. Striegel* Director and Senior Vice President, )
- - ---------------------- Annuity )
Scott A. Striegel
By: /s/Julie E. Rockmore
------------------------------------
Julie E. Rockmore
*Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- - ---------- ------- ----
<C> <S> <C>
99-A(3.1) Articles of Incorporation of Registrant *
99-A(3.2) By-Laws *
99-A(4) Instruments Defining the Rights of Security *
Holders
99-A(5) Opinion re Legality ______
99-A(10)(a) The 1984 Stock Option Plan of Aetna Life and *
Casualty Company and amendments thereto
99-A(10)(b) Aetna Life and Casualty Company's *
Supplemental Incentive Savings Plan
99-A(10)(c) Aetna Life and Casualty Company's *
Supplemental Pension Benefit Plan
99-A(10)(d) Aetna Life and Casualty Company's 1986 *
Management Incentive Plan
99-A(21) Subsidiaries of the Registrant *
99-A(23)(a) Consent of Independent Auditors ______
99-A(23)(b) Consent of Legal Counsel (Included in Item
(5) above)
99-A(24)(a) Powers of Attorney *
99-A(24)(b) Certificate of Resolution Authorizing *
Signature of Power of Attorney
99-B(i) Independent Auditors' Report on Financial
Statement Schedules ______
99-B(ii) Schedule I - Summary of Investments - Other
than Investments in Affiliates as of
December 31, 1994 ______
99-B(iii) Schedule V - Supplementary Insurance
Information as of December 31, 1994, 1993
and 1992 ______
99-B(iv) Schedule VI - Reinsurance for the years
ended December 31, 1994, 1993 and 1992 ______
27 Financial Data Schedule ______
</TABLE>
*Incorporated by reference
<PAGE>
Exhibit 99-A(5)
[LOGO OF AETNA APPEARS HERE]
151 Farmington Avenue Susan E. Bryant
Hartford, CT 06156 Counsel
Law & Regulatory Affairs, RE4C
(203) 273-7834
Fax: (203) 273-8340
July 14, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company
Post-Effective Amendment No. 2 to Registration Statement on Form S-1
Prospectus Title: ALIAC Guaranteed Account Interest Option
Registration No. 33-79118
Dear Sirs:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I have
represented the Company in connection with the ALIAC Guaranteed Account (the
"Guaranteed Account"), a credited interest option available under certain
variable annuity contracts, and the Form S-1 Registration Statement relating to
such account.
In connection with such representation, I have reviewed the Registration
Statement for the Guaranteed Account including the prospectus, and relevant
proceedings of the Board of Directors.
Based upon this review, and assuming the securities represented by the
Guaranteed Account are issued in accordance with the provisions of the
prospectus, I am of the opinion that the securities, when issued, will have been
validly issued, and will constitute a legal and binding obligation of the
Company.
I further consent to the use of this opinion as an exhibit to the Registration
Statement and to my being named under the caption "Legal Matters" therein.
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Aetna Life Insurance and Annuity Company
<PAGE>
EXHIBIT 99-A(23)(a)
Consent of Independent Auditors
-------------------------------
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We consent to the use of our reports included herein and to the reference to our
Firm under the heading "Experts" in the Prospectus.
Our reports refer to a change in 1993 in the Company's methods of accounting for
certain investments in debt and equity securities and reinsurance contracts, and
a change in 1992 in the Company's methods of accounting for income taxes and
postretirement benefits other than pensions.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
July 14, 1995
<PAGE>
Exhibit 99-B(i)
Independent Auditors' Report
----------------------------
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
Under date of February 7, 1995, we reported on the consolidated balance sheets
of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31,
1994 and 1993, 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, 1994, as included herein. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedules as listed in the
accompanying index. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
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 and reinsurance contracts. In 1992, the Company changed its
method of accounting for income taxes and postretirement benefits other than
pensions.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 7, 1995
<PAGE>
Exhibit 99-B(ii)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Schedule I
Summary of Investments - Other than Investments in Affiliates
December 31, 1994
<TABLE>
<CAPTION>
Amount at
Which Shown
Amortized in the
Type of Investment Cost Value* Balance Sheet
------------------ --------- ------ -------------
(millions)
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 1,396.1 $ 1,313.9 $ 1,313.9
Obligations of states and political
subdivisions 37.9 39.1 39.1
U.S. Corporate securities 3,661.3 3,485.9 3,485.9
Foreign securities 1,053.3 991.0 991.0
Residential mortgage-backed
securities 3,298.1 3,268.1 3,268.1
Commercial/Multifamily mortgage-
backed securities 435.0 413.9 413.9
Other loan-backed securities 696.1 679.5 679.5
--------- --------- ---------
Total debt securities 10,577.8 $10,191.4 10,191.4
--------- --------- ---------
Equity securities:
Investment in affiliated mutual funds 187.2 $ 181.9 181.9
Non-redeemable preferred stocks 43.3 47.2 47.2
--------- --------- ---------
Total equity securities 230.5 $ 229.1 229.1
--------- --------- ---------
Short-term investments 98.0 98.0
Mortgage loans 9.9 9.9
Policy loans 248.7 248.7
Limited partnership 24.4 24.4
--------- ---------
Total investments $11,189.3 $10,801.5
--------- ---------
</TABLE>
* See Notes 1,2 and 10 to the Consolidated Financial Statements.
<PAGE>
Exhibit 99-B(iii)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Schedule V
Supplementary Insurance Information
As of and for the year ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
(Millions)
Deferred Unpaid Policyholders' Other income
policy Future claims funds left Net (including
acquisition policy Unearned and claim with the Premium investment realized capital
Segment costs benefits premiums expenses company revenue income (1) gains and losses)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
- - ----
Life Insurance $ 655.2 $ 2,145.0 $ 1.7 $ 22.4 $ 6.4 $ 54.0 $ 171.3 $ 8.4
Financial Services 516.8 821.4 - 1.4 8,895.2 70.2 745.9 3.4
----------------------------------------------------------------------------------------------------------------
Total $ 1,172.0 $ 2,966.4 $ 1.7 $ 23.8 $ 8,901.6 $ 124.2 $ 917.2 $ 11.8
================================================================================================================
1993
- - ----
Life Insurance $ 610.8 $ 2,010.4 $ 1.7 $ 26.0 $ 6.2 $ 50.1 $ 172.7 $ 6.8
Financial Services 450.2 729.7 - 1.2 8,997.7 32.0 739.2 12.2
----------------------------------------------------------------------------------------------------------------
Total $ 1,061.0 $ 2,740.1 $ 1.7 $ 27.2 $ 9,003.9 $ 82.1 $ 911.9 $ 19.0
================================================================================================================
1992
- - ----
Life Insurance $ 582.7 $ 2,039.7 $ - $ 20.7 $ 8.8 $ 53.7 $ 165.6 $ 5.0
Financial Services 417.7 556.4 - 0.7 7,288.6 18.8 682.5 15.1
----------------------------------------------------------------------------------------------------------------
Total $ 1,000.4 $ 2,596.1 $ - $ 21.4 $ 7,297.4 $ 72.5 $ 848.1 $ 20.1
================================================================================================================
<CAPTION>
Amortization
of deferred
policy Other
acquisition operating Premiums
Segment costs expenses written (2)
- - ------------------------------------------------------------
<S> <C> <C> <C>
1994
- - ----
Life Insurance $ 16.8 $ 58.3 -
Financial Services 19.3 168.9 -
----------------------------------------
Total $ 36.1 $ 227.2 -
========================================
1993
- - ----
Life Insurance $ 21.2 $ 58.2 -
Financial Services 16.5 143.1 -
----------------------------------------
Total $ 37.7 $ 201.3 -
========================================
1992
- - ----
Life Insurance $ 19.2 $ 75.5 -
Financial Services 13.7 138.0 -
----------------------------------------
Total $ 32.9 $ 213.5 -
========================================
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Excludes life insurance business pursuant to Regulation S-X.
<PAGE>
Exhibit 99-B(iv)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Schedule VI
Reinsurance
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed to
Amount Companies Companies Amount Net
------ --------- ---------- ------ ----------
(millions)
<S> <C> <C> <C> <C> <C>
1994
----
Life insurance in force $32,184.2 $ 977.4 $2,677.9 $33,884.7 7.9%
=============================================
Premiums:
Life Insurance $ 25.8 $ 6.0 $ 32.8 $ 52.6 62.4
Accident and Health
Insurance 10.8 9.3 - 1.5 -
Annuities 69.9 - 0.2 70.1 0.3
---------------------------------------------
Total earned premiums $ 106.5 $ 15.3 $ 33.0 $ 124.2 26.6
=============================================
1993
----
Life insurance in force $30,602.3 $1,210.2 $3,099.0 $32,491.1 9.5
Premiums:
Life Insurance $ 20.9 $ 5.6 $ 33.3 $ 48.6 68.5
Accident and Health
Insurance 14.4 12.9 - 1.5 -
Annuities 31.3 - 0.7 32.0 2.2
---------------------------------------------
Total earned premiums $ 66.6 $ 18.5 $ 34.0 $ 82.1 41.4
=============================================
1992
----
Life insurance in force $30,218.0 $1,154.1 $3,610.6 $32,674.5 11.1
Premiums:
Life Insurance $ 20.8 $ 5.2 $ 36.8 $ 52.4 70.2
Accident and Health
Insurance 15.1 13.7 - 1.4 -
Annuities 18.4 - 0.3 18.7 1.6
---------------------------------------------
Total earned premiums $ 54.3 $ 18.9 $ 37.1 $ 72.5 51.2
=============================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q FOR THE FISCAL QUARTER ENDED
MARCH 31, 1995 FOR AETNA LIFE INSURANCE AND ANNUITY COMPANY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 10,897
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 268
<MORTGAGE> 10
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,542
<CASH> 661
<RECOVER-REINSURE> 2
<DEFERRED-ACQUISITION> 1,204
<TOTAL-ASSETS> 22,297
<POLICY-LOSSES> 3,027
<UNEARNED-PREMIUMS> 2
<POLICY-OTHER> 20
<POLICY-HOLDER-FUNDS> 9,382
<NOTES-PAYABLE> 0
<COMMON> 3
0
0
<OTHER-SE> 1,283
<TOTAL-LIABILITY-AND-EQUITY> 22,297
32
<INVESTMENT-INCOME> 236
<INVESTMENT-GAINS> 5
<OTHER-INCOME> 13
<BENEFITS> 215
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 59
<INCOME-TAX> 19
<INCOME-CONTINUING> 40
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
