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As filed with the Securities and Registration No. 33-______
Exchange
Commission on June 22, 1995
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Aetna Life Insurance and Annuity Company
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(Exact Name of Registrant as Specified in its Charter)
Connecticut
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(State or other Jurisdiction of Incorporation or Organization)
63
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(Primary Standard Industrial Classification Code Number)
71-0294708
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(I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156, (203) 273-0123
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(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
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(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness 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]
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 the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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Calculation of Registration Fee
Proposed Proposed
Maximum maximum
Title of each class of Amount to offering aggregate Amount of
securities to be be price offering Registration
Registered Registered per unit price Fee
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Interests in the * * $250,000,000* $86,206.90
Guaranteed
Accumulation Account - a
Credited Interest Option
Under Variable Annuity
Contracts
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* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the
proposed maximum offering price per unit are not applicable since these
securities are not issued in predetermined amounts or units.
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GUARANTEED ACCUMULATION 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)
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Form S-1
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Item No. Information Required in Prospectus Location in Prospectus
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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 the Account
9 Description of Securities to
be Registered....................... Description of the Account
10 Interests of Named Experts
and Counsel......................... Not Applicable
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<TABLE>
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Form S-1
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Item No. Information Required in Prospectus Location in Prospectus
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11 Information with Respect to the The Company; Directors
Registrant.......................... and Executive Officers;
Executive Compensation;
Security Ownership of
Management; Legal
Proceedings; Financial
Statements
12 Disclosure of Commission
Position on Indemnification
Securities Act Liabilities.......... for Applicable
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GUARANTEED ACCUMULATION ACCOUNT
GUARANTEED INTEREST OPTION
UNDER VARIABLE ANNUITY CONTRACTS
ISSUED BY
AETNA LIFE INSURANCE AND ANNUITY COMPANY
151 FARMINGTON AVENUE
HARTFORD, CONNECTICUT 06156
TELEPHONE: 1-800-525-4225
PROSPECTUS DATED: , 1995
This Prospectus describes the Guaranteed Accumulation Account ("GAA"), which
is a guaranteed interest option available under certain installment and single
Purchase Payment Variable Annuity Contracts ("Contracts") issued by Aetna Life
Insurance and Annuity Company ("Company"). Since GAA is a funding option
available under the Company's Contracts, this Prospectus and the prospectus
describing the Contracts ("Contract Prospectus") must be read along with the
applicable Contract prospectus and the prospectuses for each of the variable
funding options. All of these prospectuses should be retained for future
reference.
The Contract prospectus describes deductions applicable to the variable
annuity Contract, some of which may be deducted from the GAA option in full or
on a pro rata basis. (See "Contract Charges" and the applicable Contract
Prospectus.)
The Company guarantees stipulated rates of interest for stated periods of time
on amounts applied to GAA. During a specified period of time, amounts may be
allocated to available Guaranteed Terms within the Short-Term and Long-Term
Classifications. The interest rate stipulated 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. Guaranteed interest rates will never be less than the minimum
guaranteed interest rate specified in the Contract. (See "Guaranteed Interest
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.
All of the general assets of the Company, including amounts deposited to GAA
are available to meet the guarantees under GAA. These assets are chargeable
with liabilities arising out of other business of the Company.
WITHDRAWALS OR TRANSFERS FROM A GUARANTEED TERM PRIOR TO THE END OF THAT
GUARANTEED TERM MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. WITHDRAWALS FROM
THE CONTRACT MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT, DEFERRED SALES
CHARGE AND A MAINTENANCE FEE. (See "Market Value Adjustment" and "Contract
Charges.") As a result of a negative Aggregate Market Value Adjustment Amount
imposed by GAA and the deferred sales charge imposed by the Contract, the
Contract Holder or, if applicable, the Participant may receive an amount less
than the amount paid into the Contract for surrenders of amounts held under
the Contract.
Under the Contract, the Contract Holder or, if applicable, the Participant may
allocate all or a portion of a Net Purchase Payment to GAA, to any other
credited interest option, or to one or more of the variable funding options
offered under the Contract. Although the Company may impose a minimum Purchase
Payment on a Contract, there is no minimum Purchase Payment required for GAA.
Transfers to GAA from other Contract funding options are also allowed, but
each such transfer must be at least $500. Please refer to the applicable
Contract prospectus for further details.
Under certain emergency conditions, the Company may defer payment of any
surrendered GAA value (see "Surrenders.")
The Company intends generally to invest funds received in relation to the GAA
option primarily in fixed income securities. Contract Holders do not have any
claim against specific assets of the Company relating to the GAA option. (See
"Investments.")
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.
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TABLE OF CONTENTS
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Page
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GLOSSARY................................................................... 3
SUMMARY.................................................................... 4
DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT OPTION.................. 6
General.................................................................. 6
Contributions to GAA..................................................... 6
Purchase Payment(s)...................................................... 6
Deposit Period........................................................... 7
Guaranteed Term.......................................................... 7
Guaranteed Term Classifications.......................................... 7
Guaranteed Interest Rates................................................ 7
Maturity of a Guaranteed Term............................................ 8
TRANSFERS.................................................................. 9
Transfers From GAA....................................................... 9
Transfers Between Guaranteed Term Classifications........................ 9
SURRENDERS................................................................. 9
MARKET VALUE ADJUSTMENT.................................................... 10
Deposit Period Yield..................................................... 11
Current Yield............................................................ 11
MVA Formula.............................................................. 12
CONTRACT CHARGES........................................................... 12
MISCELLANEOUS.............................................................. 12
Annuity Period........................................................... 12
Reinstatement............................................................ 13
Contract Loans (403(b) Plans Only)....................................... 13
INVESTMENTS................................................................ 13
DISTRIBUTION OF CONTRACTS.................................................. 14
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TAX CONSIDERATIONS........................................................ 14
Taxation of the Company................................................. 14
Taxation of Annuities................................................... 14
THE COMPANY............................................................... 15
History and Business.................................................... 15
Life Insurance Segment.................................................. 15
Financial Services Segment.............................................. 16
General Account Investments............................................. 18
Competition............................................................. 18
Employees............................................................... 18
Properties.............................................................. 18
State Regulation........................................................ 19
DIRECTORS AND EXECUTIVE OFFICERS ......................................... 21
EXECUTIVE COMPENSATION.................................................... 23
SECURITY OWNERSHIP OF MANAGEMENT.......................................... 23
EXPERTS................................................................... 23
LEGAL PROCEEDINGS......................................................... 23
LEGAL MATTERS............................................................. 23
APPENDIX I--Examples of Market Value Adjustment Computations.............. 24
APPENDIX II--Examples of Market Value Adjustment Yields................... 26
SELECTED FINANCIAL DATA................................................... 27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 27
FINANCIAL STATEMENTS...................................................... F-1
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GLOSSARY
In this Prospectus, the following terms have the meanings shown:
ACCUMULATION PERIOD: The period during which Net Purchase Payment(s) are
accumulated to provide future annuity benefits.
AGGREGATE MARKET VALUE ADJUSTMENT AMOUNT: The sum of all Market Value
Adjustment Amounts calculated due to a withdrawal of funds (for surrender or
transfer) from Guaranteed Terms prior to the end of those Guaranteed Terms.
This total may be a positive or negative figure.
ANNUITY: A series of payments for life or a definite period.
ANNUITY PERIOD: The period during which Annuity payments are made.
CONTRACT HOLDER: The entity to which the Contract is issued. The Contract
Holder is usually the employer, sponsor or trustee.
DEPOSIT PERIOD: The period of time during which one or more Net Purchase
Payments or transfers of accumulated values may be made to available
Guaranteed Terms to receive stipulated interest rates for stated periods of
time. A Deposit Period may be a month, a calendar quarter, or any other period
of time specified by the Company.
GUARANTEED INTEREST RATES: The interest rate(s) guaranteed to be credited, for
a stated period of time, on amounts applied to a GAA Guaranteed Term during a
specific Deposit Period. Interest rates are annual effective yields reflecting
a full year's interest. Interest is credited daily.
GUARANTEED TERM: The period of time specified by the Company during which one
or a series of Guaranteed Interest Rates are credited.
GUARANTEED TERM CLASSIFICATIONS: The grouping of Guaranteed Terms according to
their time to maturity:
Short-Term -- All Guaranteed Terms of 3 years or less; or
Long-Term -- All Guaranteed Terms of between 3 and 10 years.
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 a Guaranteed Term prior to the end of that Guaranteed Term.
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. The adjustment is expressed as a percentage of
each dollar being withdrawn.
MARKET VALUE ADJUSTMENT AMOUNT: The amount by which the funds being withdrawn
or transferred from a Guaranteed Term is increased or decreased due to the
MVA.
MATURITY VALUE TRANSFER PROVISION: At maturity, when the Company automatically
reinvests the total maturing Guaranteed Term value into the open Deposit
Period, the Maturity Value Transfer Provision is available. This provision
allows Contract Holders or Participants to transfer or surrender the
automatically reinvested value, without an MVA, to an open Deposit Period
within either Guaranteed Term Classification or to other available investment
options until the last business day of the month following the maturity of a
Guaranteed Term. The last business day of the month is defined as the last
business day of the month when the New York Stock Exchange is open.
NET PURCHASE PAYMENT(S): The Purchase Payment(s) less all applicable
deductions.
PARTICIPANT: An eligible person participating under a Variable Annuity
Contract.
PURCHASE PAYMENT(S): The gross payment(s) made to the Company under a
Contract.
VARIABLE ANNUITY CONTRACT: An Annuity Contract providing for the accumulation
of values, and for retirement payments which vary in dollar amount with
investment results.
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SUMMARY
GAA is a guaranteed interest option available under the Company's Variable
Annuity Contracts. Purchase Payments applied to Guaranteed Terms under GAA are
credited with stipulated interest rates for stated periods of time. The
interest rates stipulated are annual effective yields. Interest is credited
daily at a rate that provides the annual effective yield over the period of
one year.
Contract Holders or, if applicable, Participants may direct the allocation of
Net Purchase Payments to GAA. Although the Company may impose a minimum
Purchase Payment on a Contract, there is no minimum Purchase Payment for GAA.
Transfers of accumulated values from other funding options to GAA are also
allowed. If a transfer is made to GAA from other Contract funding options, the
transferred value may not be less than $500. (See "Contributions to GAA.")
More specifically, Contract Holders or, if applicable, Participants may
allocate Net Purchase Payments or transfer accumulated values during a Deposit
Period to available Guaranteed Terms within the Short-Term and Long-Term
Classifications. (See "Guaranteed Term Classifications.")
Prior to each Deposit Period, Guaranteed Interest Rates for all available
Guaranteed Terms will be announced. Several different interest rates may be
applicable within a Guaranteed Term, with each interest rate guaranteed for a
specific period of time. Guaranteed Interest Rates will never be less than the
minimum guaranteed interest rate specified in the Contract and cannot be
changed for any Guaranteed Term after the start of the Deposit Period. (See
"Guaranteed Interest Rates.")
The Company will send notification of a Guaranteed Term's maturity, along with
the current month's Guaranteed Interest Rates and Guaranteed Term to Contract
Holders, or, if applicable, Participants with funds in a Guaranteed Term. This
notification is sent at least 18 days prior to maturity of a Guaranteed Term.
Contract Holders or, if applicable, Participants may obtain information
concerning available upcoming Deposit Periods, Guaranteed Interest Rates, and
Guaranteed Terms through the use of a toll-free telephone number within five
business days prior to the upcoming maturity. The telephone number is 1-800-
GAA-FUND (1-800-422-3863). (See "General" and "Maturity of a Guaranteed
Term.")
Before maturity of the Guaranteed Term, a Contract Holder or, if applicable,
Participant, may instruct the Company to (a) transfer the matured value to one
or more new Guaranteed Terms available under the current Deposit Period, (b)
transfer the matured value to one or more of the variable funding options
available under the Variable Annuity Contract, or (c) surrender the matured
value. In all three instances, no Market Value Adjustment would be applicable
to the transferred or surrendered matured value. However, a deferred sales
charge may be assessed on the amount surrendered from the Contract. (See
"Transfers" and "Surrenders.")
If the Company does not receive direction from the Contract Holder or
Participant, if applicable, at its Home Office by the maturity date of the
Guaranteed Term, the amount from the maturing Guaranteed Term will be
transferred to the available Deposit Period for the Guaranteed Term having the
shortest maturity within the same Guaranteed Term Classification. (See
"Maturity of a Guaranteed Term.") A confirmation will be mailed to the
Contract Holder or, if applicable, Participant advising of the new Guaranteed
Term and the applicable Guaranteed Interest Rate(s) that the maturity value
has been transferred to. This confirmation will be mailed within two business
days following the Guaranteed Term maturity date.
The Maturity Value Transfer Provision is available to those Contract Holders
or Participants who allow the Company to automatically reinvest the total
maturing Guaranteed Term value into the open Deposit Period. This provision
allows Contract Holders or Participants, if applicable, to transfer or
surrender, without a Market Value Adjustment, all or a portion of the matured
value that was transferred to a new
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Guaranteed Term (if applicable, a deferred sales charge may be assessed on the
surrendered amount). If all or any portion of the matured value is transferred
or surrendered, the interest credited from the date of maturity to the date of
the transaction will be at the rate equivalent to the Guaranteed Interest Rate
for the new Guaranteed Term. The Maturity Value Transfer Provision is only
available until the last business day of the month following the maturity date
of a Guaranteed Term. (See "Maturity of a Guaranteed Term.")
Full or partial surrenders and transfers to other Contract funding options are
permitted from GAA. In addition, transfers from Guaranteed Terms within one
Guaranteed Term Classification may be made to the current Deposit Period of
other Guaranteed Terms within a different Guaranteed Term Classification.
However, amounts applied to 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, except for transactions processed under the Maturity
Value Transfer Provision. (See "Surrenders" and "Transfers.") This provision
does not apply to amounts transferred from Guaranteed Terms due to the
election of an Annuity option. (See "Annuity Period.")
Contract Holders or, if applicable, Participants may choose the Guaranteed
Term Classification(s) from which funds will be first withdrawn due to a
transfer or partial surrender. Funds are withdrawn starting with the oldest
Deposit Period for which the Guaranteed Term has not reached maturity from
each Guaranteed Term Classification chosen. (See "Surrenders" and
"Transfers".)
Except for transactions processed under the Maturity Value Transfer Provision,
funds withdrawn or transferred from a Guaranteed Term prior to the end of that
Guaranteed Term 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 effect the amount withdrawn from a Guaranteed Term to satisfy
the request for surrender or transfer. (See "Market Value Adjustment.")
Only a positive Aggregate Market Value Adjustment Amount, if any, is applied
to funds withdrawn from GAA due to the death of the Participant if withdrawn
within six months after the Participant's date of death. After the six month
period the positive or negative Aggregate Market Value Adjustment Amount will
be applied. If funds are withdrawn from GAA due to annuitization under one of
the lifetime Annuity options, only the positive Aggregate Market Value
Adjustment Amount, if any, is applied. (See "Market Value Adjustment" and
"Annuity Period.")
Certain charges are levied under the Contract such as mortality and expense
risk charges (applicable only to the variable funding options), maintenance
fee, deferred or asset-based sales charges, and allocation and transfer fees
(see "Contract Charges"). For a complete description of these charges, please
refer to the applicable 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 GAA option, regardless of
which Guaranteed Term Classification is used, will generally be invested in
federal, state and municipal obligations; corporate bonds; preferred stocks;
real estate mortgages; real estate; and certain other fixed income
investments. All of the general assets of the Company are available to meet
the guarantees under GAA. (See "Investments".)
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DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT OPTION
GENERAL
This Prospectus describes the provisions of the Guaranteed Accumulation
Account ("GAA"). GAA is a guaranteed interest option available under Variable
Annuity Contracts ("Contracts") issued by Aetna Life Insurance and Annuity
Company ("Company"). Since GAA is a funding option available under the
Company's Contracts, this Prospectus must be read along with the applicable
Contract prospectus and the prospectuses for each of the variable funding
options. All of these prospectuses should be retained for future reference.
GAA offers guaranteed interest rates ("Guaranteed Interest Rates") for stated
periods of time ("Guaranteed Term"). All Net Purchase Payments or transfers to
GAA during a specific period of time ("Deposit Period") participate in a
specific Guaranteed Term with corresponding Guaranteed Interest Rates.
Guaranteed Terms are classified according to their length of time to maturity
("Guaranteed Term Classifications"). Each Deposit Period may offer various
Guaranteed Terms within one or both Guaranteed Term Classifications. A Market
Value Adjustment, which may be positive or negative, may be applied to any
values withdrawn or transferred from a Guaranteed Term prior to the end of
that Guaranteed Term, except for amounts transferred under the Maturity Value
Transfer Provision. However, if funds are withdrawn from Guaranteed Terms due
to the death of the Participant within six months after the Participant's date
of death, only a positive Aggregate Market Value Adjustment Amount, if any,
will be applied. After the six-month period, the positive or negative
Aggregate Market Value Adjustment Amount will be applied. Only a positive
Aggregate Market Value Adjustment Amount, if any, is applied to any values
withdrawn from Guaranteed Terms due to annuitization under one of the lifetime
Annuity options. If funds are transferred from one Guaranteed Term prior to
the end of that Guaranteed Term to a Guaranteed Term of the other Guaranteed
Term Classification, a Market Value Adjustment (positive or negative) is
applied.
The Company maintains a toll-free telephone number for Contract Holders or, if
applicable, Participants wishing to obtain information concerning available
Deposit Periods, Guaranteed Interest Rates, and Guaranteed Terms. The
telephone number is 1-800-GAA-FUND (1-800-422-3863).
In addition, the Company will send notification of the upcoming Deposit Period
dates and information on the current Guaranteed Interest Rates, Guaranteed
Terms and projected matured Guaranteed Term values to Contract Holders, or, if
applicable, Participants who have funds in a maturing Guaranteed Term. This
notification will be sent at least 18 calendar days prior to the maturity of a
Guaranteed Term.
CONTRIBUTIONS TO GAA
Amounts may be applied to Guaranteed Terms available in a current Deposit
Period by allocating one or more Net Purchase Payment(s) to GAA or by
transferring accumulated value(s) from other Contract funding options or other
Guaranteed Terms. However, amounts applied to 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, except under the Maturity Value
Transfer Provision.
PURCHASE PAYMENT(S)
A Contract Holder or, if applicable, a Participant may elect to allocate all
or a portion of a Net Purchase Payment(s) to any available Guaranteed Term
within one or both of the Guaranteed Term Classifications during the current
Deposit Period. Although the Company may impose a minimum Purchase Payment on
a Contract, there is no minimum Purchase Payment required for a Guaranteed
Term. Please refer to the applicable Contract prospectus.
6
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DEPOSIT PERIOD
The Deposit Period is a period of time during which one or more Net Purchase
Payments or transfers from other Contract funding options or other Guaranteed
Terms may be made to available Guaranteed Terms to receive stipulated
Guaranteed Interest Rates for stated periods of time. Each Deposit Period may
be a month, a calendar quarter, or any other period of time specified by the
Company.
Both Guaranteed Term Classifications will be available during each Deposit
Period. In addition, more than one Guaranteed Term within a Guaranteed Term
Classification may be available during each Deposit Period. For example, a
Deposit Period might offer a 1-year and a 3-year Guaranteed Term under the
Short-Term Classification and a 5-year and a 7-year Guaranteed Term under the
Long-Term Classification.
GUARANTEED TERM
A Guaranteed Term is the period of time specified by the Company during which
one or a series of Guaranteed Interest Rates are credited. Guaranteed Terms
are offered at the Company's discretion for various lengths of time ranging
from one to ten years.
GUARANTEED TERM CLASSIFICATIONS
Guaranteed Term Classifications refer to the grouping of Guaranteed Terms
according to their time to maturity. The following are the Guaranteed Term
Classifications:
Short-Term -- All Guaranteed Terms of 3 years or less; or
Long-Term -- All Guaranteed Terms of between 3 and 10 years.
During each Deposit Period, the Company may offer more than one Guaranteed
Term within each Guaranteed Term Classification. Contract Holders or, if
applicable, Participants may elect to allocate Purchase Payments to Guaranteed
Terms within one or both of these Guaranteed Term Classifications during a
Deposit Period.
GUARANTEED INTEREST RATES
Guaranteed Interest Rates are the interest rates that are guaranteed to be
credited on amounts applied during a Deposit Period for a specific Guaranteed
Term. Guaranteed Interest Rates are annual effective yields, reflecting a full
year's interest. The interest is credited daily at a rate that will produce
the guaranteed annual effective yield over the period of one year.
Guaranteed Interest Rates are credited according to the length of the
Guaranteed Term as follows:
. GUARANTEED TERMS OF ONE YEAR OR LESS: A Guaranteed Interest Rate is
credited from the date of deposit to the last day of the Guaranteed
Term.
. GUARANTEED TERMS OF GREATER THAN ONE YEAR: Several different Guaranteed
Interest Rates may be applicable during a Guaranteed Term of more than
one year. The initial Guaranteed Interest 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 allow for several
different Guaranteed Interest Rates for subsequent specific periods of
time. For example, a 5-year Guaranteed Term may guarantee 5% for the
first year, 4.75% for the next two years, and 4.5% for the remaining two
years.
The Company will announce the available Guaranteed Terms and current
Guaranteed Interest Rates for each Deposit Period at least 18 calendar days
prior to the start of each Deposit Period. In no event will the Company
guarantee or credit a Guaranteed Interest Rate less than the minimum rate
specified
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in the Contract. In addition, GAA does not allow for the crediting of interest
above the Guaranteed Interest Rates which are announced by the Company prior
to the start of a Deposit Period.
The Company's determination of Guaranteed Interest Rates is influenced by, but
does not necessarily correspond to, interest rates available on fixed income
investments which the Company may acquire using funds deposited into GAA (see
"Investments"). In addition, the Company will consider other items in
determining Guaranteed Interest 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 INTEREST RATES.
THE COMPANY CANNOT PREDICT THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
MATURITY OF A GUARANTEED TERM
At least 18 calendar days prior to the maturity of a Guaranteed Term, the
Company will send notification to Contract Holders, or, if applicable,
Participants of the upcoming Deposit Period, the projected value for the
maturing Guaranteed Term and the Guaranteed Interest Rate and Guaranteed Term
for the current Deposit Period. Contract Holders, or, if applicable,
Participants may transfer amounts in any maturing Guaranteed Term to new
Guaranteed Terms. The amount in any maturing Guaranteed Term may also be
transferred into any other allowable option(s) available under the Contract.
There is no Market Value Adjustment applied to funds transferred or
surrendered from a Guaranteed Term on the date that Guaranteed Term matures.
If the Company does not receive direction from the Contract Holder or, if
applicable, the Participant at its Home Office (or any other designated
office) by the maturity date of a Guaranteed Term, the Company will
automatically transfer the matured value to a Guaranteed Term having the
shortest maturity within the same Guaranteed Term Classification that will be
available for the new Deposit Period. 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,
amounts in this maturing Guaranteed Term will be transferred to the 2-year
Guaranteed Term, which is the Guaranteed Term available within the Short-Term
Classification of the new Deposit Period. If, however, only one Term is
available within the Classification, then the matured Guaranteed Term value
will be reinvested in that Term.
Once the matured amount has been transferred, the Contract Holder or, if
applicable, Participant will receive a statement confirming the transfer,
along with information on the new Guaranteed Rate(s) and Guaranteed Term. For
those Contract Holders or Participants who allow the Company to automatically
transfer the total maturing Guaranteed Term value into the open Deposit
Period, the Maturity Value Transfer Provision is available. This provision
allows Contract Holders or Participants to transfer or surrender, without a
Market Value Adjustment, the matured value that was transferred to a new
Guaranteed Term (if applicable, a deferred sales charge may be assessed on the
amount surrendered from the Contract). If all of the matured value is
transferred or surrendered under the Maturity Value Transfer Provision, any
interest accrued under the current Guaranteed Term will be credited through
the date of transfer or surrender. The right to make a transfer or surrender
under the Maturity Value Transfer Provision is available until the last
business day of the month following the maturity date of a Guaranteed Term.
The last business day of the month is defined as the last business day of the
month that the New York Stock Exchange is open. THE MATURITY VALUE TRANSFER
PROVISION ONLY APPLIES TO THE FIRST REQUEST RECEIVED FROM THE CONTRACT HOLDER,
OR, IF APPLICABLE, PARTICIPANT, WITH RESPECT TO A PARTICULAR MATURED
GUARANTEED TERM VALUE.
8
<PAGE>
TRANSFERS
Contract provisions allow for the transfer of all or any portion of
accumulated values at least 12 times during a calendar year, without a
transfer charge. Under some Contracts, after 12 such transfers, each
additional transfer is subject to a transfer charge of not more than $10,
deducted from the Contract value. Under other Contracts, unlimited transfers
may be made without charge. Please refer to the applicable Contract
prospectus.
Amounts applied to a Guaranteed Term during a Deposit Period may not be
transferred to any other funding option or Guaranteed Term during that Deposit
Period or for 90 days after the close of that Deposit Period.
Funds transferred under the Maturity Value Transfer Provision or upon the
maturity of a Guaranteed Term are not counted as one of the 12 free transfers
of accumulated values allowed per calendar year by those Contracts allowing 12
free transfers. In addition, no Market Value Adjustment is applied to the
matured Guaranteed Term value transferred upon maturity of a Guaranteed Term
or for values withdrawn or transferred from a Guaranteed Term under the
Maturity Value Transfer Provision.
When a request is made to transfer a specific dollar amount in circumstances
in which a Market Value Adjustment is applicable, the Market Value Adjustment
will be included in the determination of the amount withdrawn from a
Guaranteed Term(s) to fulfill the request. Therefore, the amount actually
withdrawn from the Guaranteed Term(s) may be more or less than the requested
specific dollar amount. (See "Appendix I" for an example.)
TRANSFERS FROM GAA
Contract Holders or, if applicable, Participants can choose the Guaranteed
Term Classification from which Funds will be first withdrawn. The Company
withdraws funds starting from the oldest Deposit Period for which the
Guaranteed Term has not reached maturity within the Guaranteed Term
Classification chosen. If no direction is received, funds are withdrawn pro
rata among the Guaranteed Term Classifications, starting with the oldest
Deposit Periods for which the Guaranteed Term has not reached maturity, and
any other investment options. A positive or negative Market Value Adjustment
is applied to the amount requested for transfer. (See "Market Value
Adjustment.")
TRANSFERS BETWEEN GUARANTEED TERM CLASSIFICATIONS
Transfers are permitted from Guaranteed Terms within the Short-Term
Classification to available Long-Term Guaranteed Terms of a current Deposit
Period. Transfers are also permitted from Guaranteed Terms within the Long-
Term Classification to available Short-Term Guaranteed Terms of a current
Deposit Period. For example, funds may be transferred from a 3-year Guaranteed
Term (any time after 90 days from the close of the Deposit Period applicable
to that 3-year Guaranteed Term) to the open Deposit Period of a 7-year
Guaranteed Term. Funds will be first transferred from the oldest Deposit
Period for which the Guaranteed Term has not reached maturity. A Market Value
Adjustment is assessed on the transferred amount. The transfer is counted as
one of the 12 free transfers allowed each year by those Contracts allowing 12
free transfers.
A transfer of value from one Guaranteed Term prior to maturity of that
Guaranteed Term to another Guaranteed Term within the same Guaranteed Term
Classification is not permitted under any of the Contracts.
SURRENDERS
The Contract allows for full or partial surrenders at any time during the
Accumulation Period. To make a full or partial surrender, a surrender request
form must be properly completed and submitted to the Company's Home Office (or
any other designated office). Partial surrenders are made pro rata among
9
<PAGE>
the Contract funding options unless requested otherwise by the Contract Holder
or, if applicable, the Participant. For surrender purposes, each Guaranteed
Term Classification is considered a separate funding option.
Under certain emergency conditions, the Company may defer payment of a GAA
surrender value for a period of up to 6 months. Please refer to the applicable
Contract Prospectus for further details.
The portion of the partial surrender made from GAA is withdrawn from the
Guaranteed Term Classification elected by the Contract Holder or, if
applicable, the Participant. Within the elected Guaranteed Term
Classification, funds will be removed starting with the oldest Deposit Period
for which the Guaranteed Term has not reached maturity. If no Guaranteed Term
Classification is elected, the Company will withdraw funds from Guaranteed
Terms in each Guaranteed Term Classification (starting with the oldest Deposit
Period for which the Guaranteed Term has not reached maturity) in the same
proportion as the value of each Guaranteed Term Classification has to the
total value of the Contract.
A Market Value Adjustment is applied to the amount surrendered if surrendered
prior to the end of a Guaranteed Term, except for values surrendered under the
Maturity Value Transfer Provision. The surrendered amount may also be subject
to a deferred sales charge and a maintenance fee. Please refer to the
applicable Contract prospectus for information regarding deferred sales
charges and maintenance fees.
When a request for a partial surrender of a specific dollar amount is made,
the Market Value Adjustment will be included in the determination of the
amount 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" for an example.)
MARKET VALUE ADJUSTMENT
Upon surrender or transfer of funds from or within GAA, 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 Interest Rates (see "Guaranteed
Interest Rates"). To lessen the impact, all surrenders and transfers made
prior to the end of a Guaranteed Term are subject to a Market Value Adjustment
("MVA"). This 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 is a factor applied to amounts withdrawn from a Guaranteed Term prior
to the end of the Guaranteed Term in connection with transfers (including
transfers made in order to elect a nonlifetime Annuity option) and surrenders.
Only a positive Aggregate Market Value Adjustment Amount, if any, is applied
to funds withdrawn from Guaranteed Terms due to the death of the Participant
if withdrawn within six months after the Participant's date of death. After
the six month period, the calculated Aggregate Market Value Adjustment Amount
(positive or negative) is applied. If funds are withdrawn from Guaranteed
Terms due to annuitization of the Contract under one of the lifetime Annuity
options only a positive Aggregate Market Value Adjustment Amount, if any, is
applied. If two or more consecutive Deposit Periods have the same Guaranteed
Interest Rate(s) and mature on the same date, the Company will calculate MVAs
applicable to each Deposit Period. The most favorable MVA to the Contract
Holder or Participant will be applied to any surrender or transfer from either
Deposit Period prior to the Guaranteed Terms' maturity.
10
<PAGE>
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 request for surrender or transfer. The MVA Amount depends on the
relationship of the Deposit Period Yield of U.S. Treasury Notes that mature in
the last quarter of the Guaranteed Term, to the Current Yield of such U.S.
Treasury Notes at the time of withdrawal. In general, if the Current Yield is
the lesser of the two, the MVA will decrease the amount withdrawn from a
Guaranteed Term to satisfy the request for surrender or transfer; if the
Current Yield is the higher of the two, the MVA will increase the amount
withdrawn from a Guaranteed Term to satisfy the request for surrender or
transfer. As a result of the Market Value Adjustment imposed on GAA, the
amount withdrawn or transferred from GAA Guaranteed Terms prior to maturity
may be less than the amount paid into those GAA Guaranteed Terms.
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 which 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 used in the MVA calculation involves
consideration of interest rates prevailing during the Deposit Period of 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.
11
<PAGE>
MVA FORMULA
The mathematical formula used to determine the MVA is:
x
---------
/365/
(1 + i)
-------
(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.
For examples of how to calculate MVAs, please refer to "Appendix I."
CONTRACT CHARGES
Certain charges are assessed under the Contract and are deducted from both the
variable funding options and the GAA.
If the Contract allows for the deduction of a maintenance fee on an annual
basis, the fee is deducted on a pro rata basis from all funding options. In
addition, the maintenance fee is deducted upon total surrender of a Contract.
A deferred sales charge, if applicable, is also deducted upon a full or a
partial surrender of some Contracts. If the surrender occurs prior to the
maturity of a Guaranteed Term, the deferred sales charge and the MVA will be
assessed.
During each calendar year, the Contract Holder (or the Participant, if
authorized) may change the allocation of future Net Purchase Payments among
the investment options allowed by the Contract. Unlimited allocation changes
are allowed. In addition, we allow unlimited transfers of accumulated values
to available investment options during the Accumulation Period. We allow at
least 12 free transfers in any calendar year. Thereafter, under some
Contracts, we reserve the right to charge $10 for each subsequent transfer.
Mortality and expense risk charges and other asset-based charges that may be
assessed under the Contracts are not deducted from any credited interest
option under the Contract (including GAA). These charges are only applicable
to the variable funding options.
Please refer to the applicable Contract prospectus for further details on
Contract deductions. The Contract prospectus includes a full description of
the sales charges made upon withdrawal.
MISCELLANEOUS
ANNUITY PERIOD
GAA cannot be used as an option during the Annuity Period. Prior to
annuitization, values in Guaranteed Terms 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 Guaranteed Terms before the end of those Guaranteed Terms due
to annuitization to the nonlifetime Annuity option available under the
Contract. Only a positive Aggregate Market Value Adjustment Amount, if any, is
applied due to annuitization to a lifetime Annuity option. Please refer to the
applicable Contract Prospectus for a discussion of the Annuity Period.
12
<PAGE>
REINSTATEMENT
The Contract Holder or, if applicable, the Participant may elect to reinvest
all or a portion of the proceeds received from a full surrender within 30 days
after such surrender. Any amounts reinstated to GAA will be applied to the
current Deposit Period. Within the current Deposit Period, amounts are then
proportionately reinstated to the Guaranteed Term Classifications in the same
manner as the amounts were allocated prior to surrender. Any negative MVA
amount applied to a surrender is not included in the reinstatement. Please
refer to the applicable Contract prospectus for further details on
reinstatement of the Contract.
CONTRACT LOANS (403(B) PLANS ONLY)
The GAA value is included in determining the value of a Contract against which
a loan may be made. However, loans may not be made from amounts held in GAA.
In order to receive amounts held in GAA as a loan, the amounts must first be
transferred to a funding option from which loans may be made (see the
applicable Contract prospectus for further information on Contract loans).
Amounts transferred from Guaranteed Terms due to a loan request will be
subject to an MVA.
INVESTMENTS
Amounts applied to Guaranteed Terms under the Short-Term Classification of GAA
will be deposited into the Company's general account which supports insurance
and annuity obligations.
General account assets of the Company must be invested in accordance with
applicable state laws. These laws govern the nature and quality of investments
that may be made by life insurance companies and the percentage of their
assets that may be committed to any particular type of investment. In general,
these laws permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations; corporate bonds;
preferred stocks; real estate mortgages; real estate and certain other fixed
income investments. All of the general assets of the Company, including
amounts deposited to GAA, are available to meet the guarantees under GAA.
These assets are chargeable with liabilities arising out of any other business
of the Company.
Amounts applied to Guaranteed Terms under the Long-Term Classification of GAA
will be deposited to and accounted for in a nonunitized separate account
established by the Company under Title 38a, Section 38a-433, of the
Connecticut General Statutes. A nonunitized separate account is a separate
account in which the Contract Holder or Participant does not participate in
the performance of the assets through unit values.
Contract Holders and Participants allocating funds to the Long-Term
Classification of GAA do not receive a unit ownership of assets accounted for
in this separate account. The assets accrue solely to the benefit of the
Company. Contract Holders and Participants 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. All benefits available to
Participants under the Long-Term Classification of GAA are Contract guarantees
made by the Company and are accounted for in the separate account. These
assets are chargeable with liabilities arising out of any other business of
the Company.
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 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 which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investors Services, Inc.
(Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or
any other nationally recognized rating service.
13
<PAGE>
. 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
non-speculative 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 GAA, 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 INTEREST RATES
ESTABLISHED BY THE COMPANY NECESSARILY RELATE TO THE PERFORMANCE OF THE
NONUNITIZED SEPARATE ACCOUNT.
DISTRIBUTION OF CONTRACTS
The Company will serve as Underwriter for the securities sold herein. The
Company is registered as a broker-dealer with the Securities and Exchange
Commission and is a member of the National Association of Securities Dealers,
Inc. (NASD). As Underwriter, the Company will contract with one or more
registered broker-dealers ("Distributors") to offer and sell the Contracts.
The Company and one or more affiliates may also sell the Contracts directly.
All registered representatives for the Distributor will also be licensed as
insurance agents to sell Variable Annuity Contracts.
TAX CONSIDERATIONS
Contract Holders and Participants should seek advice from their tax advisers
as to the application of federal (and where applicable, state and local) tax
laws to amounts received by them and by their beneficiaries under the
Contracts. Please refer to the applicable Contract Prospectus for further
information.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter L
of the Internal Revenue Code. All assets supporting the Annuity obligations of
GAA are owned by the Company. Any income earned on such assets is considered
income to the Company.
TAXATION OF ANNUITIES
Generally, any income earned on GAA deposits is not taxable to individual
Contract Holders or Participants until distributed from the Contract. For
further information concerning the tax treatment of Purchase Payments and
distributions from the Contracts, please refer to the applicable Contract
Prospectus.
14
<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.
15
<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
(thousands)..................................... $ 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 deferred. These products are offered primarily to individuals,
pension plans, small businesses and employer-sponsored groups in the
healthcare, government, education
16
<PAGE>
(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 Advisers Fund,
Aetna GET Fund--Series B and Aetna Generation Portfolios, Inc.) 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>
17
<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.
18
<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.
19
<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.
20
<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
POSITION(S) WITH THE EMPLOYMENT DURING PAST
COMPANY AND FIVE YEARS; OTHER
NAME, AGE YEAR OF ELECTION DIRECTORSHIPS OF DIRECTORS
--------- ----------------------- --------------------------------------
<C> <S> <C>
Daniel P. Kearney, 56 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, 48 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, 45 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, 39 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, 46 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.
James C. Hamilton, 54 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS AND
POSITION(S) WITH THE EMPLOYMENT DURING PAST
COMPANY AND FIVE YEARS; OTHER
NAME, AGE YEAR OF ELECTION DIRECTORSHIPS OF DIRECTORS
--------- ------------------------ --------------------------------------
<C> <S> <C>
Gary G. Benanav, 49 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, 43 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, 48 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>
22
<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 or incorporated by
reference in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent auditors, appearing herein or incorporated by
reference 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.
<PAGE>
APPENDIX I
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
---------
/365/
(1 + i)
MVA = -------
(1 + j)
/927/
---------
/365/
1.08
= -------
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
---------
/365/
(1 + i)
MVA = -------
(1 + j)
/927/
---------
/365/
1.05
= ------
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.
24
<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
---------
/365/
(1 + i)
MVA = -------
(1 + j)
/927/
---------
/365/
= 1.10
------
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
--------
/365/
(1 + i)
MVA = -------
(1 + j)
/927/
--------
/365/
1.05
= --------
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.
25
<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 decreased as the end of the Guaranteed Term
approaches.
TABLE A: DEPOSIT PERIOD YIELD OF 10%
<TABLE>
<CAPTION>
CHANGE IN
DEPOSIT
CURRENT PERIOD TIME REMAINING TO
YIELD YIELD MATURITY OF GUARANTEED TERM
------- --------- -----------------------------------------------
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
CURRENT PERIOD TIME REMAINING TO
YIELD YIELD MATURITY OF GUARANTEED TERM
------- --------- -----------------------------------------------
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>
26
<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>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------- -------------------------------------------------
(MILLIONS)
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenue........... $ 360.7 $ 327.6 $ 1,332.2 $ 1,264.5 $ 1,176.1 $ 1,129.5 $ 1,151.7
========= ========= ========= ========= ========= ========= =========
Net Income.............. $ 40.3 $ 32.2 $ 145.3 $ 142.9 $ 122.8 $ 89.8 $ 69.0
========= ========= ========= ========= ========= ========= =========
Total Assets............ $22,296.9 $19,866.8 $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>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------- -----------------------------
OPERATING SUMMARY 1995 1994 1994 1993 1992
- ----------------- --------- --------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Premiums.................... $ 32.2 $ 25.4 $ 124.2 $ 82.1 $ 72.5
Charges assessed against
policyholders.............. 74.9 68.2 279.0 251.5 235.4
Net investment income....... 235.8 231.1 917.2 911.9 848.1
Net realized capital gains.. 5.1 0.8 1.5 9.5 13.4
Other income................ 12.7 2.1 10.3 9.5 6.7
--------- --------- --------- --------- ---------
Total revenue........... 360.7 327.6 1,332.2 1,264.5 1,176.1
--------- --------- --------- --------- ---------
Current and future benefits. 215.1 206.4 852.4 806.4 761.6
Operating expenses.......... 75.3 60.3 227.2 201.3 213.5
Amortization of deferred
policy acquisition costs... 11.2 13.1 36.1 37.7 32.9
--------- --------- --------- --------- ---------
Total benefits and ex-
penses................. 301.6 279.8 1,115.7 1,045.4 1,008.0
--------- --------- --------- --------- ---------
Income before federal
income taxes........... 59.1 47.8 216.5 219.1 168.1
Federal income taxes........ 18.8 15.6 71.2 76.2 54.9
--------- --------- --------- --------- ---------
Income before cumulative
effect adjustments..... 40.3 32.2 145.3 142.9 113.2
Cumulative effect adjust-
ments, 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
========= ========= ========= ========= =========
Deposits not included in
premiums above: (/1/)
Fully guaranteed.......... $ 299.3 $ 185.8 $ 323.0 $ 194.9 $ 261.1
Experience-rated.......... 270.8 313.0 1,134.2 1,207.9 1,028.1
Non-guaranteed............ 351.0 343.0 1,913.1 1,385.9 863.0
--------- --------- --------- --------- ---------
Total................... $ 921.1 $ 841.8 $ 3,370.3 $ 2,788.7 $ 2,152.2
--------- --------- --------- --------- ---------
Assets under management:
(/2/)
Fully guaranteed.......... $ 2,962.9 $ 2,637.6 $ 2,542.6 $ 2,428.1 $ 2,306.6
Experience-rated.......... 9,638.2 8,888.6 9,201.3 9,241.5 7,416.3
Non-guaranteed............ 8,548.1 7,116.1 8,223.2 7,111.0 5,894.5
--------- --------- --------- --------- ---------
Total................... $21,149.2 $18,642.3 $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 $(69.8)
million and $218.5 million at March 31, 1995 and 1994, respectively, and
$(386.4) million and $747.1 million at December 31, 1994 and 1993,
respectively.
27
<PAGE>
OVERVIEW
The Company's adjusted earnings (after-tax) follow (in millions):
<TABLE>
<CAPTION>
3 MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------- --------------------------
1995 1994 1994 1993 1992
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before cumulative effect
adjustments........................ $ 40.3 $ 32.2 $ 145.3 $ 142.9 $ 113.2
Less:
Net realized capital gains........ 3.3 0.5 1.0 6.2 8.8
------- ------- -------- -------- --------
Adjusted earnings................... $ 37.0 $ 31.7 $ 144.3 $ 136.7 $ 104.4
======= ======= ======== ======== ========
</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.
1994 COMPARED TO 1993
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.
28
<PAGE>
SEGMENT RESULTS
LIFE INSURANCE SEGMENT
<TABLE>
<CAPTION>
3 MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------- --------------------------
OPERATING SUMMARY 1995 1994 1994 1993 1992
- ----------------- -------- -------- -------- -------- --------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Premiums.......................... $ 12.5 $ 12.6 $ 54.0 $ 50.1 $ 53.7
Charges assessed against
policyholders.................... 40.9 37.0 152.4 142.1 139.3
Net investment income............. 42.1 43.7 171.3 172.7 165.6
Net realized capital gains........ 0.7 0.1 0.1 0.4 1.0
Other income...................... 1.8 1.5 8.3 6.4 4.0
-------- -------- -------- -------- --------
Total revenue................. 98.0 94.9 386.1 371.7 363.6
-------- -------- -------- -------- --------
Current and future benefits....... 47.5 51.1 214.2 194.3 194.3
Operating expenses................ 15.2 17.4 58.3 58.2 75.5
Amortization of deferred policy
acquisition costs................ 9.6 6.6 16.8 21.2 19.2
-------- -------- -------- -------- --------
Total benefits and expenses... 72.3 75.1 289.3 273.7 289.0
-------- -------- -------- -------- --------
Income before federal income
taxes........................ 25.7 19.8 96.8 98.0 74.6
Federal income taxes.............. 9.7 7.8 37.0 41.9 29.0
-------- -------- -------- -------- --------
Income before cumulative
effect adjustments........... $ 16.0 $ 12.0 $ 59.8 $ 56.1 $ 45.6
======== ======== ======== ======== ========
Deposits not included in premiums
above:(/1/)
Fully guaranteed................ -- -- -- -- --
Experience-rated................ $ 79.1 $ 63.5 $ 280.6 $ 237.4 $ 236.7
Non-guaranteed.................. 8.2 5.8 28.4 22.4 18.2
-------- -------- -------- -------- --------
Total......................... $ 87.3 $ 69.3 $ 309.0 $ 259.8 $ 254.9
-------- -------- -------- -------- --------
Assets under management:(/2/)
Fully guaranteed................ $ 620.5 $ 636.9 $ 636.7 $ 670.1 $ 683.7
Experience-rated................ 1,543.8 1,412.5 1,458.4 1,440.4 1,232.2
Non-guaranteed.................. 88.1 70.2 80.1 69.6 57.2
-------- -------- -------- -------- --------
Total......................... $2,252.4 $2,119.6 $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
$(7.8) million and $33.4 million at March 31, 1994 and 1995, respectively,
and $(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>
3 MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------- -----------------
1995 1994 1994 1993 1992
------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Income before cumulative effect adjustments... $16.0 $12.0 $59.8 $56.1 $45.6
Less:
Net realized capital gains.................. 0.4 0.1 0.1 0.3 0.6
------- ------- ----- ----- -----
Adjusted earnings............................. $15.6 $11.9 $59.7 $55.8 $45.0
======= ======= ===== ===== =====
</TABLE>
29
<PAGE>
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 expense from Aetna.
1994 COMPARED TO 1993
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.
30
<PAGE>
FINANCIAL SERVICES SEGMENT
<TABLE>
<CAPTION>
3 MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------- -----------------------------
OPERATING SUMMARY 1995 1994 1994 1993 1992
- ----------------- --------- --------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Premiums..................... $ 19.7 $ 12.8 $ 70.2 $ 32.0 $ 18.8
Charges assessed against
policyholders............... 34.0 31.2 126.6 109.4 96.1
Net investment income........ 193.7 187.4 745.9 739.2 682.5
Net realized capital gains... 4.4 0.7 1.4 9.1 12.4
Other income................. 10.9 0.6 2.0 3.1 2.7
--------- --------- --------- --------- ---------
Total revenue............ 262.7 232.7 946.1 892.8 812.5
--------- --------- --------- --------- ---------
Current and future benefits.. 167.6 155.3 638.2 612.1 567.3
Operating expenses........... 60.1 42.9 168.9 143.1 138.0
Amortization of deferred
policy acquisition costs.... 1.6 6.5 19.3 16.5 13.7
--------- --------- --------- --------- ---------
Total benefits and
expenses................ 229.3 204.7 826.4 771.7 719.0
--------- --------- --------- --------- ---------
Income before federal
income taxes............ 33.4 28.0 119.7 121.1 93.5
Federal income taxes......... 9.1 7.8 34.2 34.3 9.125.9
--------- --------- --------- --------- ---------
Income before cumulative
effect adjustments...... $ 24.3 $ 20.2 $ 85.5 $ 86.8 $ 67.6
--------- --------- --------- --------- ---------
Deposits not included in
premiums above: (/1/)
Fully guaranteed........... $ 299.3 $ 185.8 $ 323.0 $ 194.9 $ 261.1
Experience-rated........... 191.7 249.5 853.6 970.5 791.4
Non-guaranteed............. 342.8 337.2 1,884.7 1,363.5 844.8
--------- --------- --------- --------- ---------
Total.................... $ 833.8 $ 772.5 $ 3,061.3 $ 2,528.9 $ 1,897.3
--------- --------- --------- --------- ---------
Assets under management: (/2/)
Fully guaranteed........... $ 2,342.4 $ 2,000.7 $ 1,905.9 $ 1,758.0 $ 1,622.9
Experience-rated........... 8,094.4 7,476.1 7,742.9 7,801.1 6,184.1
Non-guaranteed............. 8,460.0 7,045.9 8,143.1 7,041.4 5,837.3
--------- --------- --------- --------- ---------
Total.................... $18,896.8 $16,522.7 $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 $(62.0)
million and $185.1 million at March 31, 1995 and 1994, respectively, and
$(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>
3 MONTHS YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- -----------------
1995 1994 1994 1993 1992
------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Income before cumulative effect adjustments... $24.3 $20.2 $85.5 $86.8 $67.6
Less:
Net realized capital gains.................. 2.9 0.4 0.9 5.9 8.2
------- ------- ----- ----- -----
Adjusted earnings............................. $21.4 $19.8 $84.6 $80.9 $59.4
======= ======= ===== ===== =====
</TABLE>
31
<PAGE>
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.
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 net 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.
1994 COMPARED TO 1993
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.
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.
32
<PAGE>
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.
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>
DECEMBER 31,
MARCH 31, -------------------
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Debt securities.................................. $10,897.4 $10,191.4 $10,531.0
Equity securities
Non-redeemable preferred stock................. 46.3 47.2 45.9
Investment in affiliated mutual funds.......... 221.3 181.9 126.7
Short-term investments........................... 68.6 98.0 22.6
Mortgage loans................................... 9.7 9.9 10.1
Policy loans..................................... 274.7 248.7 202.7
Limited partnership.............................. 24.5 24.4 --
--------- --------- ---------
Total Investments.............................. 11,542.5 10,801.5 10,939.0
Cash and cash equivalents........................ 660.1 623.3 536.1
--------- --------- ---------
Total Investments and Cash and Cash
Equivalents................................... $12,202.6 $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.
33
<PAGE>
<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>
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)
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Assets..... $22,296.9 $19,866.8 $20,941.8 $20,135.7 $16,932.9
========= ========= ========= ========= =========
Shareholder's Equity.... $ 1,285.5 $ 1,204.8 $ 1,088.5 $ 1,246.7 $ 990.1
========= ========= ========= ========= =========
Net Cash provided by
(used by) Operating
Activities............. $ 177.3 $ 56.8 $ 206.6 $ 179.5 $ 100.1
========= ========= ========= ========= =========
Net Cash used for In-
vesting Activities..... $ (359.9) $ (349.2) $ (908.5) $(1,151.5) $ (902.1)
========= ========= ========= ========= =========
Net Cash provided by
Financing Activities... $ 219.4 $ 211.0 $ 789.1 $ 1,117.5 $ 851.9
========= ========= ========= ========= =========
Cash and Cash Equiva-
lents.................. $ 660.1 $ 454.7 $ 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.
34
<PAGE>
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.
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.
35
<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
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(MILLIONS)
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).
36
<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 Three Months Ended March 31,
1995 and 1994 (unaudited) and for the Years Ended December 31, 1994,
1993 and 1992.......................................................... F-3
Consolidated Balance Sheets as of March 31, 1995 (unaudited) and
December 31, 1994 and 1993............................................. F-4
Consolidated Statements of Shareholder's Equity for the Three Months
Ended March 31, 1995 and 1994 (unaudited) and for the Years Ended
December 31, 1994, 1993 and 1992....................................... F-5
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1995 and 1994 (unaudited) and 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>
3 MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------- --------------------------
1995 1994 1994 1993 1992
------- ------- -------- -------- --------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Premiums..................... $ 32.2 $ 25.4 $ 124.2 $ 82.1 $ 72.5
Charges assessed against
policyholders............... 74.9 68.2 279.0 251.5 235.4
Net investment income........ 235.8 231.1 917.2 911.9 848.1
Net realized capital gains... 5.1 0.8 1.5 9.5 13.4
Other income................. 12.7 2.1 10.3 9.5 6.7
------- ------- -------- -------- --------
Total revenue.............. 360.7 327.6 1,332.2 1,264.5 1,176.1
------- ------- -------- -------- --------
Benefits and expenses:
Current and future benefits.. 215.1 206.4 852.4 806.4 761.6
Operating expenses........... 75.3 60.3 227.2 201.3 213.5
Amortization of deferred
policy acquisition costs.... 11.2 13.1 36.1 37.7 32.9
------- ------- -------- -------- --------
Total benefits and
expenses.................. 301.6 279.8 1,115.7 1,045.4 1,008.0
------- ------- -------- -------- --------
Income before federal income
taxes and cumulative effect
adjustments................... 59.1 47.8 216.5 219.1 168.1
Federal income taxes......... 18.8 15.6 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..................... $ 40.3 $ 32.2 $ 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,
MARCH 31, --------------------
1995 1994 1993
--------- --------- ---------
UNAUDITED
<S> <C> <C> <C>
ASSETS
- ------
Investments:
Debt securities, available for sale:
(amortized cost: $10,967.1, $10,577.8 and
$9,783.9, respectively).......................... $10,897.4 $10,191.4 $10,531.0
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $43.3,
$43.3 and $38.3, respectively)................... 46.3 47.2 45.9
Investment in affiliated mutual funds (cost:
$221.2, $187.2 and $122.4, respectively)........ 221.3 181.9 126.7
Short-term investments............................ 68.6 98.0 22.6
Mortgage loans.................................... 9.7 9.9 10.1
Policy loans...................................... 274.7 248.7 202.7
Limited partnership............................... 24.5 24.4 --
--------- --------- ---------
Total investments............................. 11,542.5 10,801.5 10,939.0
Cash and cash equivalents........................... 660.1 623.3 536.1
Accrued investment income........................... 148.5 142.2 124.7
Premiums due and other receivables.................. 153.4 75.8 67.0
Deferred policy acquisition costs................... 1,203.7 1,172.0 1,061.0
Reinsurance loan to affiliate....................... 675.7 690.3 711.0
Other assets........................................ 24.1 15.9 12.6
Separate Accounts assets............................ 7,888.9 7,420.8 6,684.3
--------- --------- ---------
Total assets.................................. $22,296.9 $20,941.8 $20,135.7
========= ========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
<S> <C> <C> <C>
Liabilities:
Future policy benefits............................ $ 3,027.0 $ 2,968.1 $ 2,741.8
Unpaid claims and claim expenses.................. 21.9 23.8 27.2
Policyholders' funds left with the Company........ 9,382.3 8,901.6 9,003.9
--------- --------- ---------
Total insurance liabilities................... 12,431.2 11,893.5 11,698.7
Other liabilities................................. 525.8 302.1 229.7
Federal income taxes:
Current......................................... 13.8 3.4 40.6
Deferred........................................ 151.7 233.5 161.5
Separate Accounts liabilities..................... 7,888.9 7,420.8 6,684.3
--------- --------- ---------
Total liabilities............................. 21,011.4 19,853.3 18,889.0
--------- --------- ---------
Shareholder's equity:
Common capital stock, par value $50 (100,000
shares authorized; 55,000 shares issued and
outstanding)..................................... 2.8 2.8 2.8
Paid-in capital................................... 407.6 407.6 407.6
Net unrealized capital gains (losses)............. (32.3) (189.0) 114.5
Retained earnings................................. 907.4 867.1 721.8
--------- --------- ---------
Total shareholder's equity.................... 1,285.5 1,088.5 1,246.7
--------- --------- ---------
Total liabilities and shareholder's equity.... $22,296.9 $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>
3 MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------- -------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- ------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Shareholder's equity, beginning
of year......................... $1,088.5 $1,246.7 $1,246.7 $ 990.1 $867.4
Net change in unrealized capital
gains (losses).................. 156.7 (74.1) (303.5) 113.7 (0.1)
Net income....................... 40.3 32.2 145.3 142.9 122.8
-------- -------- -------- -------- ------
Shareholder's equity, end of
year............................ $1,285.5 $1,204.8 $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>
3 MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Cash Flows from Operat-
ing Activities:
Net income........... $ 40.3 $ 32.2 $ 145.3 $ 142.9 $ 122.8
Cumulative effect
adjustments......... -- -- -- -- (9.6)
Increase (decrease)
in accrued
investment income... (6.3) 12.6 (17.5) (11.1) (8.7)
Increase (decrease)
in premiums due and
other receivables... 10.9 12.5 1.3 (5.6) (19.9)
Increase in policy
loans............... (26.0) (7.8) (46.0) (36.4) (32.4)
Increase in deferred
policy acquisition
costs............... (31.7) (16.7) (96.5) (60.5) (60.8)
Decrease in
reinsurance loan to
affiliate........... 14.6 8.7 27.8 31.8 37.8
Net increase in
universal life
account balances.... 44.5 28.0 164.7 126.4 130.8
Increase (decrease)
in other insurance
reserve liabilities. 20.5 (1.2) 65.7 86.1 20.5
Net increase
(decrease) in other
liabilities and
other assets........ 113.3 14.1 53.9 7.0 20.2
Decrease in federal
income taxes........ 16.3 0.5 (11.7) (3.7) (11.8)
Net accretion of
discount on bonds... (15.5) (25.1) (77.9) (88.1) (75.2)
Net realized capital
gains............... (5.1) (0.8) (1.5) (9.5) (13.4)
Other, net........... 1.5 (0.2) (1.0) 0.2 (0.2)
--------- --------- --------- --------- ---------
Net cash provided
by operating
activities........ 177.3 56.8 206.6 179.5 100.1
--------- --------- --------- --------- ---------
Cash Flows from Invest-
ing Activities:
Proceeds from sales
of:
Debt securities
available for
sale.............. 965.3 165.8 3,593.8 473.9 543.3
Equity securities.. 66.7 -- 93.1 89.6 50.6
Investment maturities
and collections of:
Debt securities
available for
sale.............. 104.3 606.2 1,289.2 2,133.3 1,179.2
Short-term
investments....... 30.0 3.5 30.4 19.7 5.0
Cost of investment
purchases in:
Debt securities.... (1,427.6) (1,077.4) (5,621.4) (3,669.2) (2,612.2)
Equity securities.. (98.1) (22.3) (162.5) (157.5) (63.0)
Short-term
investments....... (0.5) (25.0) (106.1) (41.3) (5.0)
Limited
partnership....... -- -- (25.0) -- --
--------- --------- --------- --------- ---------
Net cash used for
investing
activities...... (359.9) (349.2) (908.5) (1,151.5) (902.1)
--------- --------- --------- --------- ---------
Cash Flows from
Financing Activities:
Deposits and interest
credited for
investment
contracts........... 497.7 501.0 1,737.8 2,117.8 1,619.6
Withdrawals of
investment
contracts........... (278.3) (290.0) (948.7) (1,000.3) (767.7)
--------- --------- --------- --------- ---------
Net cash provided
by financing
activities...... 219.4 211.0 789.1 1,117.5 851.9
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents........... 36.8 (81.4) 87.2 145.5 49.9
Cash and cash
equivalents, beginning
of year (period)...... 623.3 536.1 536.1 390.6 340.7
--------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
year (period)......... $ 660.1 $ 454.7 $ 623.3 $ 536.1 $ 390.6
========= ========= ========= ========= =========
Supplemental cash flow
information:
Income taxes paid,
net................. $ 2.5 $ 15.1 $ 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.
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.
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.
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)
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.
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.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
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)
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, Aetna Generation Portfolios,
Inc. or The Aetna Series Fund Inc., which are managed by the Company or other
selected mutual funds not managed by the Company.
Separate Account 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
obligations of U.S government
agencies and corporations........... $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states and political
subdivisions........................ 37.9 1.2 -- 39.1
U.S. Corporate securities:
Financial.......................... 2,216.9 3.8 109.4 2,111.3
Utilities.......................... 100.1 -- 7.9 92.2
Other.............................. 1,344.3 6.0 67.9 1,282.4
--------- ------ ------ ---------
Total U.S. Corporate securities.. 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government......................... 434.4 1.2 33.9 401.7
Financial.......................... 368.2 1.1 23.0 346.3
Utilities.......................... 204.4 2.5 9.5 197.4
Other.............................. 46.3 0.8 1.5 45.6
--------- ------ ------ ---------
Total Foreign securities......... 1,053.3 5.6 67.9 991.0
Residential mortgage-backed
securities:
Residential pass-throughs.......... 627.1 81.5 5.0 703.6
Residential CMOs................... 2,671.0 32.9 139.4 2,564.5
--------- ------ ------ ---------
Total Residential mortgage-backed
securities.......................... 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily mortgage-
backed securities................... 435.0 0.2 21.3 413.9
--------- ------ ------ ---------
Total Mortgage-backed securities. 3,733.1 114.6 165.7 3,682.0
Other 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
obligations 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
securities.................... 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
securities:
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
securities.......................... 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
securities.................... 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.
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
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)
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 $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).
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)
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 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.
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)
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.
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>
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)
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>
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>
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)
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.
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>
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)
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>
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
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)
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
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
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)
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.
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.
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 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.
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.
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)
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.
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-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)
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
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
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--(CONCLUDED)
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
before income taxes and cumulative effect
adjustments................................ $ 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-25
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<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
<PAGE>
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
(a) Form of Annuity Contract (G-CDA-HF)/2/
(b) Form of Annuity Contract (G-CDA-IA(RP))/3/
(c) Form of Annuity Contract (G-CDA-IB(ATORP))/4/
(d) Form of Annuity Contract (G-CDA-IB(AORP))/4/
(e) Form of Annuity Contract (G-401-IB(X/M))/4 /
(f) Form of Annuity Contract (G-CDA-IB(XC/SM))/4/
(g) Form of Annuity Contract (G-CDA-ID(DC))/5/
(h) Form of Annuity Contract (GTCC-HF)/6/
(i) Form of Annuity Contract (G-TDA-HH(XC/M))/7/
(5) Opinion re Legality
(10) Material Contracts
(a) The 1984 Stock Option Plan of Aetna Life and Casualty
Company and amendments thereto/8/
(b) Aetna Life and Casualty Company's Supplemental Incentive
Savings Plan/8/
(c) Aetna Life and Casualty Company's Supplemental Pension
Benefit Plan/8/
(d) Aetna Life and Casualty Company's 1986 Management
Incentive Plan/9/
(21) Subsidiaries of the Registrant/10/
(23) (a) Consent of Independent Auditors
(b) Consent of Legal Counsel (Included in Item (5) above)
(24) (a) Powers of Attorney (Included in signature page of this
filing)
(b) Certificate of Resolution Authorizing Signature of Power
of Attorney/11/
(27) Financial Data Schedule
(b) Consolidated Financial Statement Schedules
(i) Independent Auditors' Report/4/
(ii) Schedule I - Summary of Investments - Other than Investments in
Affiliates as of December 31, 1994/4/
(iii) Schedule IV - Indebtedness of Related Parties - Not Current as
of December 31, 1994, 1993 and 1992/4/
(iv) Schedule VI - Reinsurance for the years ended December 31, 1994,
1993 and 1992/4/
Exhibits and Schedules other than those listed above are omitted because they
are not required or are not applicable.
<PAGE>
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 Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-75996) filed on
February 23, 1995
3. Incorporated by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-4 (File No. 33-75956) filed on
February 23, 1995
4. Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form S-1 (File No. 33-42555) filed on
April 4, 1995
5. Incorporated by reference to Registration Statement on Form N-4
(File No. 33-88722) filed on January 20, 1995
6. Incorporated by reference to Post-Effective Amendment No. 60 to
Registration Statement on Form N-4 (File No. 2-52449) filed on
February 24, 1995
7. Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 33-75962) filed on
March 24, 1995
8. Incorporated by reference to Aetna Life and Casualty Company's 1992
Form 10-K filed on March 17, 1993. Commission File Number 1-5704.
9. 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.
10. Incorporated by reference to Registration Statement on Form N-4
(File No. 33-88720) filed on January 20, 1995.
11. 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 Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Hartford, State of Connecticut, on this 21st day of June, 1995.
By: AETNA LIFE INSURANCE AND ANNUITY
COMPANY
By: /s/Daniel P. Kearney
----------------------------------------------
Daniel P. Kearney
Principal Executive Officer
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby constitutes
Susan E. Bryant, Steven J. Lauwers, and Julie E. Rockmore and each of them
individually, such person's true and lawful attorneys, with full power to them
and each of them to sign for such person and in such person's name and capacity
indicated below, any and all amendments to this Registration Statement, hereby
ratifying and confirming such person's signature as it may be signed by said
attorneys to any and all amendments.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C> <C>
/s/Daniel P. Kearney * Director and President )
- --------------------------- (Principal Executive Officer) )
Daniel P. Kearney )
)
/s/Dominick J. Agostino * Director, Senior Vice President and Chief )
- --------------------------- Financial Officer (Principal Accounting )
Dominick J. Agostino and Financial Officer) )
)
/s/James C. Hamilton * Director, Vice President and Treasurer )
- --------------------------- ) June 21,
James C. Hamilton ) 1995
)
/s/Gary G. Benanav * Director )
- --------------------------- )
Gary G. Benanav )
)
Director and Senior Vice President, Life )
- --------------------------- )
Christopher J. Burns )
)
Director and Senior Vice President, ALIAC )
- --------------------------- Pensions )
Laura R. Estes )
)
/s/John Y. Kim * Director and Senior Vice President, ALIAC )
- --------------------------- Investments )
John Y. Kim )
)
Director and Senior Vice President, Mutual )
- --------------------------- Funds )
Shaun P. Mathews )
)
Director and Senior Vice President, Annuity )
- --------------------------- )
Scott A. Striegel )
</TABLE>
* Constituting a majority of the members of the Board of Directors.
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page
- ----------- ------- ----
16(a)(3.1) Articles of Incorporation of Registrant *
16(a)(3.2) By-Laws *
16(a)(4) Instruments Defining the Rights of Security Holders
16(a)(4)(a) Form of Annuity Contract (G-CDA-HF) *
16(a)(4)(b) Form of Annuity Contract (G-CDA-IA(RP)) *
16(a)(4)(c) Form of Annuity Contract (G-CDA-IB(ATORP)) *
16(a)(4)(d) Form of Annuity Contract (G-CDA-IB(AORP)) *
16(a)(4)(e) Form of Annuity Contract (G-401-IB(X/M)) *
16(a)(4)(f) Form of Annuity Contract (G-CDA-IB(XC/SM)) *
16(a)(4)(g) Form of Annuity Contract (G-CDA-ID(DC)) *
16(a)(4)(h) Form of Annuity Contract (GTCC-HF) *
16(a)(4)(i) Form of Annuity Contract (G-TDA-HH(XC/M)) *
16(a)(5) Opinion re Legality
------
16(a)(10)(a) The 1984 Stock Option Plan of Aetna Life and Casualty *
Company and amendments thereto
16(a)(10)(b) Aetna Life and Casualty Company's Supplemental *
Incentive Savings Plan
16(a)(10)(c) Aetna Life and Casualty Company's Supplemental Pension *
Benefit Plan
16(a)(10)(d) Aetna Life and Casualty Company's 1986 Management *
Incentive Plan
16(a)(21) Subsidiaries of the Registrant *
16(a)(23)(a) Consent of Independent Auditors
------
16(a)(23)(b) Consent of Legal Counsel (Included in Item (5) above)
16(a)(24)(a) Powers of Attorney (Included in signature page of this
filing)
16(a)(24)(b) Certificate of Resolution Authorizing Signature of Power *
of Attorney
16(b) Consolidated Financial Statement Schedules
16(b)(i) Independent Auditors' Report *
16(b)(ii) Schedule I - Summary of Investments - Other than *
Investments in Affiliates as of December 31, 1994
16(b)(iii) Schedule IV - Indebtedness of Related Parties - Not *
Current as of December 31, 1994, 1993 and 1992
16(b)(iv) Schedule VI - Reinsurance for the years ended *
December 31, 1994, 1993 and 1992
27 Financial Data Schedule
------
*Incorporated by reference
<PAGE>
EXHIBIT 16(a)(5)
151 FARMINGTON AVENUE SUSAN E. BRYANT
HARTFORD, CT 06156 COUNSEL
LAW AND REGULATORY AFFAIRS, RE4C
(203) 273-7834
FAX: (203) 273-8340
June 21, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company Contracts -
Guaranteed Accumulation Account Guaranteed Interest Option
Dear Sirs:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I have
represented the Company in connection with the Guaranteed Accumulation 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.
Very truly yours,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Aetna Life Insurance and Annuity Company
<PAGE>
EXHIBIT 16(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 incorporated by
reference 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
June 21, 1995
<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>
