<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
The registrant meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
For the fiscal year ended DECEMBER 31, 1995 Commission file number 33-23376
AETNA LIFE INSURANCE AND ANNUITY COMPANY
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(Exact name of registrant as specified in its charter)
CONNECTICUT 71-0294708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860)273-0978
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
As of February 29, 1996 there were 55,000 shares of common stock outstanding,
par value $50 per share, all of which shares were held by Aetna Retirement
Services, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Aetna Life and Casualty Company's 1994 Proxy Statement
filed on March 18, 1994, its 1992 Form 10-K filed on March 17, 1993 and its
1993 Form 10-K filed on March 18, 1994 are incorporated by reference into
Part IV of this report.
(1)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Annual Report For 1995 on Form 10-K
TABLE OF CONTENTS
PART I PAGE
Item 1. Business**........................................... 3
Item 2. Properties**.......................................... 10
Item 3. Legal Proceedings..................................... 10
Item 4. Submission of Matters to a Vote of Security Holders*
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 11
Item 6. Selected Financial Data*
Item 7. Management's Analysis of the Results of Operations**.. 12
Item 8. Financial Statements and Supplementary Data........... 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant*
Item 11. Executive Compensation*
Item 12. Security Ownership of Certain Beneficial Owners and
Management*
Item 13. Certain Relationships and Related Transactions*
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K............................... 48
Index to Consolidated Financial Statement Schedules............ 51
Signatures..................................................... 56
** Item prepared in accordance with General Instruction J(2) of Form 10-K.
* Omitted pursuant to General Instruction J(2) of Form 10-K.
(2)
<PAGE>
PART I
Item 1. Business
Aetna Life Insurance and Annuity Company is a stock life insurance company
organized in 1976 under the insurance laws of Connecticut. Aetna Life
Insurance and Annuity Company, together with its two wholly owned
subsidiaries, Aetna Insurance Company of America and Aetna Private Capital,
Inc., is herein called the "Company". The Company is a wholly owned
subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a wholly
owned subsidiary of Aetna Life and Casualty Company ("Aetna") which, with
Aetna's subsidiaries, constitutes one of the nation's largest
insurance/financial services organizations based on its assets at December
31, 1994. Two subsidiaries, Systematized Benefits Administrators, Inc.
("SBA") and Aetna Investment Services, Inc. ("AISI"), which were previously
reported with the Company's operations were distributed in the form of
dividends to ARSI in December of 1995. The impact to the Company's
operations of distributing these dividends was immaterial. The Company's
Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Company markets a variety of life insurance, retirement and other savings
and investment products including individual and group annuities, financial
services and mutual funds. The Company's products are designed for
individuals, pension plans, small businesses and employer-sponsored groups.
The Company's operations are reported through two major business segments:
financial services and life insurance.
FINANCIAL SERVICES SEGMENT
The financial services segment includes individual and group annuity products
which offer a variety of funding and distribution options for personal and
employer-sponsored retirement plans that qualify under Internal Revenue Code
Sections 401, 403, 408, and 457, and individual and group nonqualified
annuity contracts. These contracts may be immediate or deferred and are
offered primarily to individuals, pension plans, small businesses and
employer-sponsored groups in the health care, government, education
(collectively "not-for-profit" organizations) and corporate markets. The
Company also offers life insurance supplemental contracts. Financial
services also include pension plan administrative services. In 1995, the
Company discontinued writing structured settlements of certain liabilities.
Annuity products typically offer fixed (fully guaranteed and experience
rated) investment options and variable investment options (discussed below).
For fully guaranteed and experience rated options the Company earns a spread
representing the difference between income on investments and interest
credited to customer reserves.
(3)
<PAGE>
The Company's variable products (variable annuity and variable life
contracts) utilize Separate Accounts to provide contractholders with a
vehicle for investments under which the contractholders assume the investment
risks as well as the benefit of favorable performance. Assets held under
these products are invested, as designated by the contractholder or
participant under a contract, in Separate Accounts, which in turn invest in
shares of mutual funds that are managed by the Company or other selected
mutual funds that are not managed by the Company. The Company acts as an
investment adviser for its affiliated mutual funds (a retail fund - Aetna
Series Fund, Inc. and variable products funds - Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund,
Aetna Get Fund Series B) and receives advisory fees for its investment
management services. The Company also receives from the Aetna Series Fund,
Inc. service fees for providing administrative and shareholder services and
distribution fees for promoting sales of the Adviser Class shares. The
Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable annuity contracts (actuarial margin)
(see Note 8 of the Notes to the Consolidated Financial Statements).
Product retention is a key driver of profitability for annuity products. To
encourage product retention, annuity contracts typically impose a surrender
charge on policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge vary by
product. In addition, a new approach being incorporated into recent variable
contracts with fixed interest account investment options allows
contractholders to receive an incremental interest rate if withdrawals from
the fixed account are spread over a period of five years. Further, more
favorable credited rates may be offered after policies have been in force for
a period of time. Existing tax penalties on annuity distributions prior to
age 59 1/2 provide an additional disincentive to premature surrenders of
annuity balances, but do not impede transfers of those balances to products
of other competitors.
Certain of the Company's annuity products allow customers to borrow against
their policies. Outstanding policy loans on annuity policies at December 31,
1995 were $181.3 million. Net investment income on annuity policy loans was
$4.0 million for the year ended December 31, 1995.
In the financial services segment markets, competition arises from other
insurance companies, banks, mutual funds and other investment managers.
Principal competitive factors are cost, service, level of investment
performance and the perceived financial strength of the investment manager or
sponsor. Competition in financial services markets may affect, among other
matters, both business growth and the pricing of the Company's products and
services.
Products sold in the corporate pensions market are sold through pension
professionals, stock brokers and third party administrators who work closely
with salaried field office employees. Products sold in the not-for-profit
organization market are distributed primarily through dedicated career
agents, registered life brokers and broker/dealers. Products sold in the
individual market are distributed primarily through dedicated career agents,
registered life brokers, banks and broker/dealers.
(4)
<PAGE>
Reserves for limited payment contracts (immediate annuities with life
contingent payout) are computed on the basis of assumed investment yield,
mortality, morbidity and expenses (including a margin for adverse deviation),
which generally vary by plan, year of issue and policy duration. Reserves
for investment contracts (deferred annuities and immediate annuities without
life contingent payouts) are equal to cumulative deposits plus credited
interest less charges thereon. Of those investment contracts which are
experience-rated, the reserves also reflect net realized capital gains/losses
(which the Company reflects through credited rates on an amortized basis) and
unrealized capital gains/losses related to Financial Accounting Standard
("FAS") No. 115 (see Note 1 of the Notes to the Consolidated Financial
Statements).
The following table summarizes assets under management for the principal
customer groups of the financial services segment. Amounts reflected exclude
unrealized gains (losses) of $689.9 million and $(337.7) million at December
31, 1995 and 1994, respectively, related to market value adjustments required
under FAS 115. See Management's Analysis of the Results of Operations and
Note 1 for further discussion on assets under management and FAS 115,
respectively.
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(Millions) 1995 1994 1993
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Corporate pensions $ 4,233.5 $ 3,217.4 $ 2,886.2
Not-for-profit organizations 12,086.1 10,025.9 9,087.1
Individuals 6,214.8 4,879.6 3,981.0
------------------------------------------------
Total $22,534.4 $18,122.9 $15,954.3
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Deposits, which are not included in premiums or revenue, are shown in the
following table for the years indicated:
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(Millions) 1995 1994 1993
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Corporate pensions $ 1,075.9 $ 890.3 $ 714.5
Not-for-profit organizations 1,093.0 1,093.3 1,107.8
Individuals 1,200.6 670.2 460.9
------------------------------------------------
Total $ 3,369.5 $ 2,653.8 $ 2,283.2
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LIFE INSURANCE SEGMENT
The life insurance segment includes universal life, variable universal life,
interest-sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer-sponsored groups and
executives of Fortune 2000 companies. The Company's universal life insurance
product accounted for approximately 92% of individual life insurance sales in
1995.
The Company's in-force block of insurance includes a sizable block of
traditional ordinary life insurance originally written by an affiliate, Aetna
Life Insurance Company ("Aetna Life"), and transferred to the Company via a
reinsurance agreement in 1988 (see Note 8 of the Notes to the Consolidated
Financial Statements). This closed book of business contributed 29% of the
life insurance segment's earnings in 1995.
(5)
<PAGE>
Universal life products include a cash value component that is credited with
interest at competitive rates. The Company earns the spread between
investment income and interest credited on customer cash values. Universal
life cash values are charged for cost of insurance coverage and for
administrative expenses. The Company is also compensated by the Separate
Accounts for bearing mortality and expense risks pertaining to variable
universal life contracts.
Life insurance products typically require high costs to acquire business. As
with the financial services segment, retention is an important driver of
profitability and is encouraged through product features. For example,
universal and interest-sensitive whole life insurance contracts typically
impose a surrender charge on policyholder balances withdrawn within seven to
twenty years of the contract's inception or for variable life within ten
years. The period of time and level of the charge vary by product. In
addition, more favorable credited rates and policy loan terms may be offered
after policies have been in force for a period of time. To further encourage
retention, life insurance agents are typically paid renewal commissions or
service fees.
Certain of the Company's life insurance products allow customers to borrow
against their policies. Outstanding policy loans on individual life policies
at December 31, 1995 were $157.3 million. Net investment income on
individual life policy loans was $9.7 million for the year ended December 31,
1995.
The markets for life insurance products are highly competitive among
insurance companies. Competition largely is based upon product features and
prices. Competition in life insurance markets may affect, among other
matters, both business growth and the pricing of the Company's products and
services.
Life insurance products are marketed by managing general agents, regional
brokers, banks and broker/dealers.
Reserves for universal life and interest-sensitive whole life products (which
are all experience-rated) are equal to cumulative deposits less withdrawals
and charges, plus credited interest thereon, plus/less net realized capital
gains/losses (which the Company reflects through credited rates on an
amortized basis). These reserves also reflect unrealized capital
gains/losses related to FAS 115. Reserves for all other fixed individual life
contracts are computed on the basis of assumed investment yield, mortality,
morbidity and expenses (including a margin for adverse deviation), which
generally vary by plan, year of issue and policy duration. These reserves
are computed amounts that, with additions from premiums and deposits to be
received, and with interest on such reserves compounded annually at assumed
rates, are expected to be sufficient to meet the Company's policy obligations
at their maturities or to pay expected death or retirement benefits or other
withdrawal requests.
Reinsurance arrangements with affiliated and non-affiliated insurance
companies are utilized to limit exposure to losses in excess of predetermined
amounts per individual life. The Company's retention limit per individual
life is $2.0 million (see Notes 8 and 9 of the Notes to the Consolidated
Financial Statements).
(6)
<PAGE>
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>
(millions, except as noted below) 1995 1994 1993
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<S> <C> <C> <C>
Sales and additions:
Direct:
Permanent......................................... $ 3,757.9 $ 3,369.4 $ 2,767.0
Term.............................................. 2,600.4 559.9 237.2
Assumed:
Permanent......................................... 1,358.5 - -
----------------------------------
Total........................................... $ 7,716.8 $ 3,929.3 $ 3,004.2
----------------------------------
----------------------------------
Terminations:
Direct:
Surrenders and Conversions........................ $ 1,467.0 $ 1,316.4 $ 1,632.6
Lapses............................................ 891.4 860.9 816.7
Other............................................. 152.7 170.0 170.6
Assumed:
Surrenders and Conversions........................ 53.6 59.4 80.3
Lapses............................................ 331.8 303.9 376.2
Other............................................. 54.2 57.9 55.1
----------------------------------
Total........................................... $ 2,950.7 $ 2,768.5 $ 3,131.5
----------------------------------
----------------------------------
In force:
Direct:
Permanent......................................... $32,333.2 $30,563.0 $29,507.1
Term.............................................. 3,698.3 1,621.3 1,095.2
Assumed:
Permanent......................................... 2,392.9 1,244.8 1,344.9
Term.............................................. 1,203.8 1,433.0 1,754.1
----------------------------------
Total........................................... $39,628.2 $34,862.1 $33,701.3
----------------------------------
----------------------------------
Number of direct policies in force (thousands)......... 378.1 378.3 384.6
----------------------------------
----------------------------------
Average size of direct policy in force (thousands)..... $ 95.3 $ 85.1 $ 79.6
----------------------------------
----------------------------------
</TABLE>
* Only nonparticipating business is written by the Company.
(7)
<PAGE>
GENERAL ACCOUNT INVESTMENTS
Consistent with the nature of the contract obligations involved in the
Company's operations, the majority of the general account assets are invested
in long-term, debt securities such as corporate debt securities, residential
mortgage-backed securities, commercial and multifamily mortgage-backed
securities, other asset-backed securities and government securities. It is
management's objective that the portfolios be of high quality while achieving
competitive investment yields and returns. Investment portfolios generally
match the duration of the insurance liabilities they support. The general
account of the Company has been segmented to improve the asset/liability
matching process. The duration of investments is monitored and security
purchases and sales are executed with the objective of having adequate funds
available to satisfy the Company's maturing liabilities.
Please see Investments on pages 17 and 18 of the Management's Analysis of the
Results of Operations for a further discussion of investments. For
information concerning the valuation of investments, see Notes 1, 2 and 3 of
the Notes to Consolidated Financial Statements.
OTHER MATTERS
REGULATION
The insurance business of the Company is subject to comprehensive, detailed
regulation throughout the United States. The laws of the various
jurisdictions establish supervisory agencies with broad authority to
regulate, among other things, the granting of licenses to transact business,
trade practices, agent licensing, policy forms, underwriting and claims
practices, reserve adequacy, insurer solvency, the maximum interest rates
that can be charged on life insurance policy loans, the minimum rates that
must be provided for accumulation of surrender values, the form and content
of required financial statements and the type and amounts of investments
permitted. The Company is required to file detailed reports with supervisory
agencies in each of the jurisdictions in which it does business, and its
operations and accounts are subject to examination by such agencies at
regular intervals.
Although the federal government does not directly regulate the business of
insurance, many federal laws do affect the business. Existing or recently
proposed federal laws that may significantly affect or would affect, if
passed, the insurance business cover such matters as pensions and other
employee benefits, removal of barriers preventing banks from engaging in the
insurance and mutual fund businesses, the taxation of insurance companies,
and the tax treatment of insurance products.
Material changes in applicable federal and state laws and regulations could
adversely affect the Company's business operations, although the Company is
unable to predict whether any such changes will be implemented.
Several states, including Connecticut, regulate affiliated groups of insurers
such as the Company and its affiliates under insurance holding company
statutes. Under such laws, intercorporate asset transfers and dividend
payments from insurance subsidiaries may require prior notice to or approval
of the insurance regulators, depending on the size of such transfers and
payments relative to the financial position of the Company making the
transfer. Changes in control also are regulated under these laws. As a
Connecticut-domiciled insurance company, the Company is subject to
comprehensive regulation under the Connecticut insurance laws and by the
Connecticut Insurance Department.
(8)
<PAGE>
In recent years, state insurance regulators have been considering changes in
statutory accounting practices and other initiatives to strengthen solvency
regulation. The National Association of Insurance Commissioners (NAIC) has
adopted risk-based capital ("RBC") standards for life insurers. The RBC
formula is a regulatory tool designed to identify weakly capitalized
companies by comparing the adjusted surplus to the required surplus, which
reflects the risk profile of the Company (RBC ratio). Within certain ratio
changes, regulators have increasing authority to take action as the RBC ratio
decreases. There are four levels of regulatory action ranging from requiring
insurers to submit a comprehensive plan to the state insurance commissioner
to when the state insurance commissioner places the insurer under regulatory
control. The Company's RBC ratio at December 31, 1995 was significantly
above the levels which would require regulatory action. Rating agencies also
use their own risk-based capital standards as part of determining a company's
rating.
The NAIC also is considering several other solvency-related regulations
including the development of a model investment law and amendments to the
model insurance holding company law which would limit types and amounts of
insurance company investments. In addition, in recent years there has been
growing interest among certain members of Congress concerning possible
federal roles in the regulation of the insurance industry. Because these
other initiatives are in a preliminary stage, management cannot assess the
potential impact of their adoption on the Company.
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for
certain obligations of insolvent insurance companies to policyholders and
claimants. The after tax charges to earnings for guaranty fund obligations
for the years ended December 31, 1995, 1994 and 1993 were $1.4 million, $0.6
million and $0.9 million, respectively. The amounts ultimately assessed may
differ from the amounts charged to earnings thus far because such assessments
may not be made for several years and will depend upon the final outcome of
regulatory proceedings.
The Company provides a variety of products and services to employee benefit
plans that are covered by the Employee Retirement Income Security Act of 1974
("ERISA"). In December 1993, in a case involving an employee benefit plan
and an insurance company, the United States Supreme Court ruled that assets
in the insurance company's general account that were attributable to the
non-guaranteed portion of a group pension contract issued to the plan were
"plan assets" for purposes of ERISA and that the insurance company was an
ERISA fiduciary with respect to those assets. In reaching its decision, the
Court declined to follow a 1975 Department of Labor ("DOL") interpretive
bulletin that had suggested that insurance company general account assets
were not plan assets. The Company and other insurers are seeking
clarification from the DOL of the effects, if any, of the decision on their
businesses, as well as pursuing clarification of the decision through Federal
legislation. Management is not currently able to predict how the decision, or
the outcome of any legislative or regulatory initiatives, will ultimately
affect its business.
Aetna Life Insurance and Annuity Company is regulated by the Securities and
Exchange Commission ("SEC") and some state securities regulators as a
broker-dealer and investment adviser. The Company's variable products
involve investments through Separate Accounts, some of which are registered
as investment companies with the SEC, as are the retail mutual funds and the
variable mutual funds offered by the Company. Additionally, interests in
some of the Separate Accounts, the retail mutual funds, the variable product
mutual funds and certain other products used as funding vehicles for the
Company's variable products are registered with the SEC. Shares of the
retail mutual funds are also registered with all fifty of the state
securities regulators.
(9)
<PAGE>
MISCELLANEOUS
According to the Fortune Service 500, as of December 31, 1994, the Company
ranked 19th and 22nd among all United States domiciled life insurance
companies based upon total assets and premium income, respectively. As of
December 31, 1995, the Company had approximately 2,700 employees.
The Company's rating at February 6, 1996 by A.M. Best was A+ (Superior).
Management believes that the Company's computer facilities, systems and
related procedures are adequate to meet its business needs. The Company's
data processing systems and backup and security policies, practices and
procedures are regularly evaluated by the Company's management and internal
auditors and are modified as considered necessary.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of revenue in 1995. In addition, neither segment
of the Company's business is dependent upon a single customer or a few
customers, the loss of which would have a significant impact on the segment.
See Note 12 of the Notes to the Consolidated Financial Statements regarding
segment information.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a
new "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the
statement. The Company desires to take advantage of the new "safe harbor"
provisions of the Act. Certain information contained herein, particularly
the information appearing under the heading "Outlook" contained in Item
7-Management's Analysis of the Results of Operations, is forward-looking.
Information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from
any such forward-looking statement appear together with such statement within
this section and within Item 7-Management's Analysis of the Results of
Operations.
Item 2. 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.
Item 3. 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.
(10)
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
All of the Company's outstanding shares are directly owned by ARSI, which is
a wholly owned subsidiary of Aetna. The shares were contributed to ARSI by
Aetna in December, 1995. The Company distributed $2.9 million in the form of
dividends of two of its subsidiaries, SBA and AISI, to ARSI in 1995. Prior
to the distribution of all of the Company's outstanding shares of SBA and
AISI to ARSI in December, 1995, and for the years ended 1994 and 1993, the
Company did not pay dividends to Aetna.
The amount of dividends which may be paid by the Company to ARSI without
prior approval by the Insurance Commissioner of the State of Connecticut is
subject to various restrictions. Based upon these restrictions, the Company
is permitted a maximum of $70.0 million in dividend distributions in 1996.
(11)
<PAGE>
Item 7. Management's Analysis of the Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
Operating Summary (millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders 318.9 279.0 251.5
Net investment income 1,004.3 917.2 911.9
Net realized capital gains 41.3 1.5 9.5
Other income 42.0 10.3 9.5
----------------------------------------------------------------------------------------
Total revenue 1,537.3 1,332.2 1,264.5
----------------------------------------------------------------------------------------
Current and future benefits 915.3 854.1 818.4
Operating expenses 318.7 235.2 207.2
Amortization of deferred policy acquisition costs 43.3 26.4 19.8
----------------------------------------------------------------------------------------
Total benefits and expenses 1,277.3 1,115.7 1,045.4
----------------------------------------------------------------------------------------
Income before federal income taxes 260.0 216.5 219.1
Federal income taxes 84.1 71.2 76.2
----------------------------------------------------------------------------------------
Net income $ 175.9 $ 145.3 $ 142.9
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Deposits not included in premiums above: Fully guaranteed $ 415.7 $ 249.0 $ 263.7
Experience-rated 1,428.0 1,351.4 1,216.8
Non-guaranteed 2,059.1 1,365.9 1,062.5
-----------------------------------------------------
Total $ 3,902.8 $ 2,966.3 $ 2,543.0
- ------------------------------------------------------------------------------------------------
Assets under management: (1) Fully guaranteed $ 3,399.6 $ 2,620.3 $ 2,423.5
Experience-rated 10,999.9 9,272.0 9,241.5
Non-guaranteed 11,522.9 8,064.6 7,111.0
------------------------------------------------------
Total $25,922.4 $19,956.9 $18,776.0
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Included above are net unrealized capital gains (losses) of $797.1
million, $(386.4) million and $747.1 million at December 31, 1995, 1994
and 1993, respectively.
OVERVIEW
The Company's adjusted earnings (after-tax) follow (in millions):
1995 1994 1993
----------------------------------
Net Income $175.9 $145.3 $142.9
Less:
Net realized capital gains 26.8 1.0 6.2
----------------------------------
Adjusted earnings $149.1 $144.3 $136.7
----------------------------------
----------------------------------
The Company's adjusted earnings increased 3% in 1995 following a 6% increase
in 1994. Results in 1995 reflected improved earnings in the financial
services segment, while earnings in the life insurance segment were level
with the prior year. The improvement in earnings related to the financial
services segment reflected an increase in charges assessed against
policyholders and increased net investment income related to the growth in
assets under management which were partially offset by an increase in
operating expenses. This increase in operating expenses primarily reflects
continued business growth. The improvement in 1994 adjusted earnings
reflected an increase in charges assessed against policyholders, primarily
due to an increase in the volume of business in force, partially offset by
increases in operating expenses, primarily related to the implementation of a
new contract administration system.
Assets under management, excluding the effect of FAS 115, at December 31,
1995 of $25.1 billion, were 24% above 1994 levels, primarily reflecting
continued business growth and overall improvement in the stock and bond
markets.
(12)
<PAGE>
The Company's contracts typically impose surrender fees which decline over
the duration of the contract. Assets held under experience rated general
account options have transfer and withdrawal limitations. Withdrawals from
the fully guaranteed accumulation options prior to maturity include an
adjustment intended to reflect the estimated fair value of the assets
supporting the contract at the time of withdrawal. Approximately 91% and 90%
of assets under management at December 31, 1995 and 1994, respectively,
allowed for contractholder withdrawal, 63% and 57% of which, respectively,
are subject to market value adjustments or deferred surrender charges at
December 31, 1995.
SEGMENT RESULTS
FINANCIAL SERVICES SEGMENT
<TABLE>
<CAPTION>
Operating Summary (millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 82.6 $ 70.2 $ 32.0
Charges assessed against policyholders 150.4 126.6 109.4
Net investment income 823.3 745.9 739.2
Net realized capital gains 37.8 1.4 9.1
Other income 35.4 2.0 3.1
-----------------------------------------------------------------------------------------
Total revenue 1,129.5 946.1 892.8
-----------------------------------------------------------------------------------------
Current and future benefits 704.4 639.9 624.1
Operating expenses 256.5 176.9 149.0
Amortization of deferred policy acquisition costs 10.5 9.6 (1.4)
-----------------------------------------------------------------------------------------
Total benefits and expenses 971.4 826.4 771.7
-----------------------------------------------------------------------------------------
Income before federal income taxes 158.1 119.7 121.1
Federal income taxes 44.3 34.2 34.3
-----------------------------------------------------------------------------------------
Net income $ 113.8 $ 85.5 $ 86.8
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Deposits not included in premiums above: Fully guaranteed $ 415.7 $ 249.0 $ 263.7
Experience-rated 934.4 1,064.3 979.4
Non-guaranteed 2,019.4 1,340.5 1,040.1
------------------------------------------------------
Total $ 3,369.5 $ 2,653.8 $ 2,283.2
- ------------------------------------------------------------------------------------------------
Assets under management: (1) Fully guaranteed $ 2,789.4 $ 1,999.1 $ 1,758.0
Experience-rated 9,034.5 7,803.2 7,801.1
Non-guaranteed 11,400.4 7,982.9 7,041.4
-------------------------------------------------------
Total $23,224.3 $17,785.2 $16,600.5
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Included above are net unrealized capital gains (losses) of $689.9
million, $(337.7) million and $646.2 million at December 31, 1995, 1994
and 1993, respectively.
Adjusted earnings in the Financial Services segment (after-tax) follow (in
millions):
1995 1994 1993
------------------------------------
Net Income $113.8 $85.6 $86.8
Less:
Net realized capital gains 24.6 0.9 5.9
------------------------------------
Adjusted earnings $ 89.2 $84.6 $80.9
------------------------------------
------------------------------------
Effective January 1, 1995 the Company assumed responsibility for two service
organizations, a plan administration service organization and a payment and
retiree administration service organization, from an affiliate, with
year-to-date combined adjusted income of $0.2 million. As a result, other
income and operating expenses include $39.1 million and $38.8 million,
respectively, for the year ended December 31, 1995.
(13)
<PAGE>
Adjusted earnings increased 5% in both 1995 and 1994. The 1995 improvement
in adjusted earnings reflected an increase in charges assessed against
policyholders and increased net investment income related to the growth in
assets under management which were partially offset by an increase in
operating expenses. The 1994 improvement in adjusted earnings reflected an
increase in assets under management offset in part by an increase in
operating expenses.
Premiums, related to annuity contracts containing life contingencies,
increased by 18% in 1995, following a 119% increase in 1994. The 1995 and
1994 increases resulted primarily from increases in immediate annuity sales.
Deposits, related to annuity contracts not containing life contingencies,
reflected a 27% increase in 1995 following a 16% increase in 1994. Deposits
in 1995 included the assumption of a $300.1 million variable annuity block of
business from an unaffiliated insurer. Deposits in 1994 included the $205.0
million acquisition of a block of primarily individual annuity business from
an unaffiliated insurer.
Charges assessed against policyholders for certain annuity contracts
increased by 19% and 16% in 1995 and 1994, respectively, reflecting the
increase in assets under management.
Net investment income increased by 10% in 1995, reflecting the increase in
assets under management. Net investment income increased by 1% in 1994,
reflecting the increase in assets under management offset by a downward trend
in the net investment yield on the Company's portfolio of investments.
Current and future benefits increased by 10% and 3% in 1995 and 1994,
respectively, reflecting the increase in assets under management.
Operating expenses, excluding the impact of moving the two service
organizations into the Company as discussed above, increased by 23% in 1995
and 19% in 1994. The 1995 increase primarily reflects continued business
growth. The 1994 increase primarily reflected expenses associated with the
implementation of the new contract administration system.
Assets under management, excluding the effect of FAS 115, at December 31,
1995 of $22.5 billion, were 24% above 1994 levels, primarily reflecting
continued business growth and overall improvement in the stock and bond
markets.
OUTLOOK
Sales of tax-qualified annuities are expected to continue to be strong in
1996. Sales of non-qualified products are expected to significantly exceed
1995 levels as relationships formed with broker/dealers and banks in 1995
build sales momentum. The Company intends to expand its retirement planning
capabilities. The Company expects to evaluate opportunities for growth of
its financial services businesses and strengthen their competitive position.
(14)
<PAGE>
LIFE INSURANCE SEGMENT
<TABLE>
<CAPTION>
Operating Summary (millions) 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 48.2 $ 54.0 $ 50.1
Charges assessed against policyholders 168.5 152.4 142.1
Net investment income 181.0 171.3 172.7
Net realized capital gains 3.5 0.1 0.4
Other income 6.6 8.3 6.4
--------------------------------------------------------------------------------------
Total revenue 407.8 386.1 371.7
--------------------------------------------------------------------------------------
Current and future benefits 210.9 214.2 194.3
Operating expenses 62.2 58.3 58.2
Amortization of deferred policy acquisition costs 32.8 16.8 21.2
--------------------------------------------------------------------------------------
Total benefits and expenses 305.9 289.3 273.7
--------------------------------------------------------------------------------------
Income before federal income taxes 101.9 96.8 98.0
Federal income taxes 39.8 37.0 41.9
--------------------------------------------------------------------------------------
Net income $ 62.1 $ 59.8 $ 56.1
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Deposits not included in premiums above: Experience-rated $ 493.6 $ 287.1 $ 237.4
Non-guaranteed 39.7 25.4 22.4
----------------------------------------------------
Total $ 533.3 $ 312.5 $ 259.8
- ---------------------------------------------------------------------------------------------
Assets under management: (1) Fully guaranteed $ 610.2 $ 621.2 $ 665.5
Experience-rated 1,965.4 1,468.8 1,440.4
Non-guaranteed 122.5 81.7 69.6
----------------------------------------------------
Total $2,698.1 $2,171.7 $2,175.5
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Included above are net unrealized capital gains (losses) of $107.2
million, $(48.7) million and $100.9 million at December 31, 1995, 1994
and 1993, respectively.
Adjusted earnings in the Life Insurance segment (after-tax) follow (in
millions):
1995 1994 1993
---------------------------------
Net Income $62.1 $59.8 $56.1
Less:
Net realized capital gains 2.2 0.1 0.3
---------------------------------
Adjusted earnings $59.9 $59.7 $55.8
---------------------------------
---------------------------------
Adjusted earnings in 1995 remained level with the prior year adjusted
earnings, reflecting an increase in the volume of business in force as a
result of strong sales offset by an increase in operating expenses. Adjusted
earnings in 1994 increased 7% when compared to 1993 adjusted earnings. The
1994 adjusted earnings improvement reflected higher business in force offset
in part by lower net investment income.
Premiums, related to term and whole life insurance, decreased by 11% in 1995
following an 8% increase in 1994. The decrease in premiums in 1995 is
primarily due to lower whole life insurance premiums. Deposits, related to
universal life and interest-sensitive whole life insurance, grew by 71% and
20% in 1995 and 1994, respectively. Deposits in 1995 included the assumption
of a $172.4 million universal life block of business from an unaffiliated
insurer and also reflected strong first year sales and retention. The
increase in premiums and deposits in 1994 reflected strong first year sales
and retention.
Charges assessed against policyholders for universal life and
interest-sensitive whole life insurance increased 11% in 1995 and 7% in 1994
reflecting an increase in the volume of business in force.
(15)
<PAGE>
Net investment income increased by 6% in 1995, reflecting an increase in
universal life assets under management offset in part by the downward trend
in the net investment yield on the Company's portfolio of investments. Net
investment income decreased 1% in 1994, reflecting the downward trend in the
net investment yield on the Company's portfolio of investments, offset by the
increase in universal life assets under management.
Current and future benefits decreased 2% in 1995 following a 10% increase in
1994, reflecting improved mortality experience related to universal life
insurance. The increase in 1994 reflected higher mortality related to
universal life insurance. Amortization of deferred policy acquisition costs
increased by 95% in 1995, reflecting the growth in current and estimated
future gross profit margins related to universal life insurance.
Amortization of deferred policy acquisition costs decreased 21% in 1994,
primarily reflecting lower mortality margins related to universal life
insurance.
Operating expenses increased 7% in 1995, reflecting continued business
growth. Operating expenses were level in 1994, reflecting savings from
previous restructurings.
Assets under management, excluding the effect of FAS 115, at December 31,
1995 of $2.6 billion, were 17% above 1994 levels, primarily reflecting
continued business growth and overall improvement in the stock and bond
markets.
OUTLOOK
Sales of life products through traditional channels (managing general agents
and regional brokers) are expected to continue to be strong in 1996. Sales
of life products through non-traditional distribution channels (banks,
broker/dealers, worksite), are expected to significantly exceed 1995 levels
as the Company's retirement planning emphasis begins to build momentum.
(16)
<PAGE>
GENERAL ACCOUNT INVESTMENTS
The Company's investment strategies and portfolios are intended to match the
duration of the related liabilities and provide sufficient cash flow to meet
obligations while maintaining a competitive 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.
(Millions) 1995 1994
- -------------------------------------------------------------------------
Debt securities $12,720.8 $10,191.4
Equity securities:
Non-redeemable preferred stock 57.6 47.2
Investment in affiliated mutual funds 191.8 181.9
Common stock 8.2 -
Short-term investments 15.1 98.0
Mortgage loans 21.2 9.9
Policy loans 338.6 248.7
Limited partnership - 24.4
------------------------
Total Investments 13,353.3 10,801.5
Cash and cash equivalents 568.8 623.3
------------------------
Total Investments and Cash and Cash Equivalents $13,922.1 $11,424.8
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
At December 31, 1995 and 1994, the Company's carrying value of investments in
debt securities were $12.7 billion and $10.2 billion, 95% and 94%,
respectively, of total general account invested assets. At December 31, 1995
and 1994, $10.0 billion and $8.0 billion, 79% and 78%, respectively, of total
debt securities supported experience-rated products.
It is management's objective that the portfolio of debt securities be of high
quality and be well-diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies, and, if
not externally rated, are rated by the Company on a basis believed to be
similar to that used by the rating agencies. The average quality rating of
the Company's debt security portfolio was AA- at December 31, 1995 and AA at
December 31, 1994.
<TABLE>
<CAPTION>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
12/31/95 12/31/95
- ------------------------------- -------------------------------------------------------
<S> <C> <C> <C>
AAA 46.0% U.S. Corporate Securities 44.7%
AA 11.7 Residential Mortgage-Backed Securities 25.2
A 25.4 Foreign Securities - U.S. Dollar Denominated 11.1
BBB 11.7 Asset-Backed Securities 7.9
BB 4.0 Commercial/Multifamily Mortgage-
B and Below 1.2 Backed Securities 6.1
---------- U.S. Treasuries/Agencies 4.6
100.0% Other 0.4
---------- --------
---------- 100.0%
--------
--------
</TABLE>
(17)
<PAGE>
<TABLE>
<CAPTION>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
12/31/94 12/31/94
- ------------------------------- -------------------------------------------------------
<S> <C> <C> <C>
AAA 56.7% U.S. Corporate Securities 34.2%
AA 8.3 Residential Mortgage-Backed Securities 32.1
A 23.3 U.S. Treasuries/Agencies 12.9
BBB 8.5 Foreign Securities - U.S. Dollar Denominated 9.7
BB 2.5 Asset-Backed Securities 6.7
B and Below 0.7 Commercial/Multifamily Mortgage-
-------- Backed Securities 4.0
100.0% Other 0.4
-------- --------
-------- 100.0%
--------
--------
</TABLE>
In 1995, as a result of a change in investment strategy, the Company reduced
its investments in U.S. Treasuries/Agencies and residential mortgage-backed
securities and increased its investments in U.S. Corporate securities (see
Note 2 of the Notes to the Consolidated Financial Statements). Investments in
U.S. dollar denominated foreign corporations and governments, asset-backed,
and commercial/multifamily mortgage-backed securities also increased.
Asset-backed securities (securities backed by auto loans, credit card
receivables, etc.) and commercial/multifamily mortgage-backed securities
(securitized pools of mortgages) are predominantly AAA rated, and are not
subject to the prepayment risk of residential mortgage-backed securities.
OUTLOOK
In 1996, the Company does not anticipate any major changes in market sector
weightings, but will continue to marginally increase exposure to diversifying
asset classes, such as securitized commercial mortgage-backed securities.
The average quality rating of the Company's portfolio is not expected to
change significantly. Duration is anticipated to remain fairly constant and
will be monitored and maintained in line with liability duration to minimize
interest rate risk.
(18)
<PAGE>
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements
INDEX
PAGE
Independent Auditors' Report 20
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993 21
Consolidated Balance Sheets as of December 31, 1995
and 1994 22
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1995, 1994 and 1993 23
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993 24
Notes to Consolidated Financial Statements 25
(19)
<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, 1995 and
1994, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aetna
Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
(20)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Premiums $ 130.8 $124.2 $ 82.1
Charges assessed against policyholders 318.9 279.0 251.5
Net investment income 1,004.3 917.2 911.9
Net realized capital gains 41.3 1.5 9.5
Other income 42.0 10.3 9.5
-------- -------- --------
Total revenue 1,537.3 1,332.2 1,264.5
-------- -------- --------
Benefits and expenses:
Current and future benefits 915.3 854.1 818.4
Operating expenses 318.7 235.2 207.2
Amortization of deferred policy acquisition costs 43.3 26.4 19.8
-------- -------- --------
Total benefits and expenses 1,277.3 1,115.7 1,045.4
-------- -------- --------
Income before federal income taxes 260.0 216.5 219.1
Federal income taxes 84.1 71.2 76.2
-------- -------- --------
Net income $175.9 $145.3 $142.9
-------- -------- --------
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
(21)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Balance Sheets
(millions)
<TABLE>
<CAPTION>
December 31,
-------------------
ASSETS 1995 1994
---- ----
<S> <C> <C>
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8) $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3 and $43.3) 57.6 47.2
Investment in affiliated mutual funds (cost: $173.4 and $187.1) 191.8 181.9
Common stock (cost: $6.9 at December 31, 1995) 8.2 -
Short-term investments 15.1 98.0
Mortgage loans 21.2 9.9
Policy loans 338.6 248.7
Limited partnership - 24.4
--------- ---------
Total investments 13,353.3 10,801.5
Cash and cash equivalents 568.8 623.3
Accrued investment income 175.5 142.2
Premiums due and other receivables 37.3 75.8
Deferred policy acquisition costs 1,341.3 1,164.3
Reinsurance loan to affiliate 655.5 690.3
Other assets 26.2 15.9
Separate Accounts assets 10,987.0 7,420.8
--------- ---------
Total assets $27,144.9 $20,934.1
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses 27.2 23.8
Policyholders' funds left with the Company 10,500.1 8,949.3
--------- ---------
Total insurance reserve liabilities 14,121.9 11,885.8
Other liabilities 259.2 302.1
Federal income taxes:
Current 24.2 3.4
Deferred 169.6 233.5
Separate Accounts liabilities 10,987.0 7,420.8
--------- ---------
Total liabilities 25,561.9 19,845.6
--------- ---------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 407.6 407.6
Net unrealized capital gains (losses) 132.5 (189.0)
Retained earnings 1,040.1 867.1
--------- ---------
Total shareholder's equity 1,583.0 1,088.5
--------- ---------
Total liabilities and shareholder's equity $27,144.9 $20,934.1
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
(22)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,088.5 $1,246.7 $990.1
Net change in unrealized capital gains (losses) 321.5 (303.5) 113.7
Net income 175.9 145.3 142.9
Common stock dividends declared (2.9) - -
-------- -------- --------
Shareholder's equity, end of year $1,583.0 $1,088.5 $1,246.7
-------- -------- --------
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
(23)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (33.3) (17.5) (11.1)
Decrease (increase) in premiums due and other receivables 25.4 1.3 (5.6)
Increase in policy loans (89.9) (46.0) (36.4)
Increase in deferred policy acquisition costs (177.0) (105.9) (60.5)
Decrease in reinsurance loan to affiliate 34.8 27.8 31.8
Net increase in universal life account balances 393.4 164.7 126.4
Increase in other insurance reserve liabilities 79.0 75.1 86.1
Net increase in other liabilities and other assets 15.0 53.9 7.0
Decrease in federal income taxes (6.5) (11.7) (3.7)
Net accretion of discount on bonds (66.4) (77.9) (88.1)
Net realized capital gains (41.3) (1.5) (9.5)
Other, net - (1.0) 0.2
---------- --------- --------
Net Cash provided by operating activities 309.1 206.6 179.5
---------- --------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,207.2 3,593.8 473.9
Equity securities 180.8 93.1 89.6
Mortgage loans 10.7 - -
Limited partnership 26.6 - -
Investment maturities and collections of:
Debt securities available for sale 583.9 1,289.2 2,133.3
Short-term investments 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities (6,034.0) (5,621.4) (3,669.2)
Equity securities (170.9) (162.5) (157.5)
Short-term investments (24.7) (106.1) (41.3)
Mortgage loans (21.3) - -
Limited partnership - (25.0) -
---------- --------- --------
Net cash used for investing activities (1,135.6) (908.5) (1,151.5)
---------- --------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,884.5 1,737.8 2,117.8
Withdrawals of investment contracts (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder (2.9) - -
---------- --------- --------
Net cash provided by financing activities 772.0 789.1 1,117.5
---------- --------- --------
Net (decrease) increase in cash and cash equivalents (54.5) 87.2 145.5
Cash and cash equivalents, beginning of year 623.3 536.1 390.6
---------- --------- --------
Cash and cash equivalents, end of year $568.8 $623.3 $536.1
---------- --------- --------
---------- --------- --------
Supplemental cash flow information:
Income taxes paid, net $90.2 $82.6 $79.9
---------- --------- --------
---------- --------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
(24)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business
segments, financial services and life insurance.
The financial services products include individual and group annuity
contracts which offer a variety of funding and distribution options for
personal and employer-sponsored retirement plans that qualify under
Internal Revenue Code Sections 401, 403, 408 and 457, and individual and
group non-qualified annuity contracts. These contracts may be immediate or
deferred and are offered primarily to individuals, pension plans, small
businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate
markets. Financial services also include pension plan administrative
services.
The life insurance products include universal life, variable universal
life, interest sensitive whole life and term insurance. These products
are offered primarily to individuals, small businesses, employer sponsored
groups and executives of Fortune 2000 companies.
BASIS OF PRESENTATION
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company
of America and Aetna Private Capital, Inc. Aetna Life Insurance and
Annuity Company is a wholly owned subsidiary of Aetna Retirement Services,
Inc. ("ARSI"). ARSI is a wholly owned subsidiary of Aetna Life and
Casualty Company ("Aetna"). Two subsidiaries, Systematized Benefits
Administrators, Inc. ("SBA"), and Aetna Investment Services, Inc.
("AISI"), which were previously reported in the consolidated financial
statements were distributed in the form of dividends to ARSI in December
of 1995. The impact to the Company's financial statements of distributing
these dividends was immaterial.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. Intercompany transactions
have been eliminated. Certain reclassifications have been made to 1994 and
1993 financial information to conform to the 1995 presentation.
(25)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from reported results
using those estimates.
CASH AND CASH 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, 1995 and 1994, all of the Company's debt securities are
classified as available for sale and carried at fair value. These
securities are written down (as realized losses) for other than temporary
decline in value. Unrealized gains and losses related to these securities,
after deducting amounts allocable to experience-rated contractholders and
related taxes, are reflected in shareholder's equity.
Fair values for debt securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and
discounts, which are amortized using the interest method over the
estimated remaining term of the securities, adjusted for anticipated
prepayments.
(26)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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.
Limited Partnership
The Company's limited partnership investment was carried at the amount
invested plus the Company's share of undistributed operating results and
unrealized gains (losses), which approximates fair value. The Company
disposed of the limited partnership during 1995.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with an original maturity of over ninety
days and less than one year, are considered available for sale and are
carried at fair value, which approximates amortized cost.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring insurance business have been deferred. These
costs, all of which vary with and are primarily related to the production
of new business, consist principally of commissions, certain expenses of
underwriting and issuing contracts and certain agency expenses. For fixed
ordinary life contracts, such costs are amortized over expected
premium-paying periods. For universal life and certain annuity contracts,
such costs are amortized in proportion to estimated gross profits and
adjusted to reflect actual gross profits. These costs are amortized over
twenty years for annuity pension contracts, and over the contract period
for universal life contracts.
(27)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits would not be adequate to cover related losses and expenses.
INSURANCE RESERVE LIABILITIES
The Company's liabilities include reserves related to fixed ordinary life,
fixed universal life and fixed annuity contracts. Reserves for future
policy benefits for fixed ordinary life contracts are computed on the
basis of assumed investment yield, assumed mortality, withdrawals and
expenses, including a margin for adverse deviation, which generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 2.25% to 10.00%. Assumed investment yield is based on the Company's
experience. Mortality and withdrawal rate assumptions are based on
relevant Aetna experience and are periodically reviewed against both
industry standards and experience.
Reserves for fixed universal life (included in Future Policy Benefits) and
fixed deferred annuity contracts (included in Policyholders' Funds Left
With the Company) are equal to the fund value. The fund value is equal to
cumulative deposits less charges plus credited interest thereon, without
reduction for possible future penalties assessed on premature withdrawal.
For guaranteed interest options, the interest credited ranged from 4.00%
to 6.38% in 1995 and 4.00% to 5.85% in 1994. For all other fixed options,
the interest credited ranged from 5.00% to 7.00% in 1995 and 5.00% to
7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the
1971 Individual Annuity Mortality Table, the 1983 Individual Annuity
Mortality Table, the 1983 Group Annuity Mortality Table and, in some
cases, mortality improvement according to scales G and H, at assumed
interest rates ranging from 3.5% to 9.5%. Reserves relating to contracts
with life contingencies are included in Future Policy Benefits. For other
contracts, the reserves are reflected in Policyholders' Funds Left With
the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
PREMIUMS, CHARGES ASSESSED AGAINST POLICYHOLDERS, BENEFITS AND EXPENSES
Premiums are recorded as revenue when due for fixed ordinary life
contracts. Charges assessed against policyholders' funds for cost of
insurance, surrender charges, actuarial margin and other fees are recorded
as revenue for universal life and certain annuity contracts. Policy
benefits and expenses are recorded in relation to the associated premiums
or gross profit so as to result in recognition of profits over the
expected lives of the contracts.
(28)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
SEPARATE ACCOUNTS
Assets held under variable universal life, variable life and variable
annuity contracts are segregated in Separate Accounts and are invested, as
designated by the contractholder or participant under a contract, in
shares of Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna
Series Fund Inc., which are managed by the Company or other selected
mutual funds not managed by the Company. Separate Accounts assets and
liabilities are carried at fair value except for those relating to a
guaranteed interest option which is offered through a Separate Account.
The assets of the Separate Account supporting the guaranteed interest
option are carried at an amortized cost of $322.2 million for 1995 (fair
value $343.9 million) and $149.7 million for 1994 (fair value $146.3
million), since the Company bears the investment risk where the contract
is held to maturity. Reserves relating to the guaranteed interest option
are maintained at fund value and reflect interest credited at rates
ranging from 4.5% to 8.38% in both 1995 and 1994. Separate Accounts assets
and liabilities are shown as separate captions in the Consolidated Balance
Sheets. Deposits, investment income and net realized and unrealized
capital gains (losses) of the Separate Accounts are not reflected in the
Consolidated Statements of Income (with the exception of realized capital
gains (losses) on the sale of assets supporting the guaranteed interest
option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
FEDERAL INCOME TAXES
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax benefits result from changes during the year in
cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
(29)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Investments in debt securities available for sale as of December 31, 1995
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 $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Utilities 454.4 27.8 1.0 481.2
Other 2,177.7 159.5 1.2 2,336.0
--------- ------ ----- ---------
Total U.S. Corporate securities 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government 316.4 26.1 2.0 340.5
Financial 534.2 45.4 3.5 576.1
Utilities 236.3 32.9 -- 269.2
Other 215.7 15.1 -- 230.8
--------- ------ ----- ---------
Total Foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Residential pass-throughs 556.7 99.2 1.8 654.1
Residential CMOs 2,383.9 167.6 2.2 2,549.3
--------- ------ ----- ---------
Total Residential mortgage-
backed securities 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily mortgage-
backed securities 741.9 32.3 0.2 774.0
--------- ------ ----- ---------
Total Mortgage-backed securities 3,682.5 299.1 4.2 3,977.4
Other asset-backed securities 961.2 35.5 0.5 996.2
--------- ------ ----- ---------
Total debt securities available for sale $11,923.7 $811.6 $14.5 $12,720.8
--------- ------ ----- ---------
--------- ------ ----- ---------
</TABLE>
(30)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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 asset-backed securities 696.1 0.2 16.8 679.5
--------- ------ ------ ---------
Total debt securities available for sale $10,577.8 $133.4 $519.8 $10,191.4
--------- ------ ------ ---------
--------- ------ ------ ---------
</TABLE>
(31)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1995 and 1994, net unrealized appreciation (depreciation)
of $797.1 million and $(386.4) million, respectively, on available for
sale debt securities included $619.1 million and $(308.6) million,
respectively, related to experience-rated contractholders, which were not
included in shareholder's equity.
The amortized cost and fair value of debt securities for the year ended
December 31, 1995 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may
be restructured, called, or prepaid.
Amortized Fair
Cost Value
--------- ------
(millions)
Due to mature:
One year or less $ 348.8 $ 351.1
After one year through five years 2,100.2 2,159.5
After five years through ten years 2,516.0 2,663.4
After ten years 2,315.0 2,573.2
Mortgage-backed securities 3,682.5 3,977.4
Other asset-backed securities 961.2 996.2
--------- ---------
Total $11,923.7 $12,720.8
--------- ---------
--------- ---------
The Company engages in securities lending whereby certain securities
from its portfolio are loaned to other institutions for short periods of
time. Cash collateral, which is in excess of the market value of the
loaned securities, is deposited by the borrower with a lending agent,
and retained and invested by the lending agent to generate additional
income for the Company. The market value of the loaned securities is
monitored on a daily basis with additional collateral obtained or
refunded as the market value fluctuates. At December 31, 1995, the
Company had loaned securities (which are reflected as invested assets on
the Consolidated Balance Sheets) with a market value of approximately
$264.5 million.
At December 31, 1995 and 1994, debt securities carried at $7.4 million
and $7.0 million, respectively, were on deposit as required by regulatory
authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31,
1994. There was no valuation reserve for mortgage loans at December 31,
1995. The carrying value of non-income producing investments was
$0.1 million and $0.2 million at December 31, 1995 and 1994, respectively.
(32)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in a single issuer, other than obligations of the U.S.
government, with a carrying value in excess of 10% of the Company's
shareholder's equity at December 31, 1995 are as follows:
Debt Securities Amortized Fair
Cost Value
--------- ------
(millions)
General Electric Corporation $314.9 $329.3
General Motors Corporation 273.9 284.5
Associates Corporation of North America 230.2 239.1
Society National Bank 203.5 222.3
Ciesco, L.P. 194.9 194.9
Countrywide Funding 171.2 172.7
Baxter International 168.9 168.9
Time Warner 158.6 166.1
Ford Motor Company 156.7 162.6
The portfolio of debt securities at December 31, 1995 and 1994 included
$662.5 million and $318.3 million, respectively, (5% and 3%,
respectively, of the debt securities) of investments that are considered
"below investment grade". "Below investment grade" securities are defined
to be securities that carry a rating below BBB-/Baa3, by Standard &
Poors/Moody's Investor Services, respectively. The increase in below
investment grade securities is the result of a change in investment
strategy, which has reduced the Company's holdings in residential
mortgage-back securities and increased the Company's holdings in corporate
securities. Residential mortgage-back securities are subject to higher
prepayment risk and lower credit risk, while corporate securities earning
a comparable yield are subject to higher credit risk and lower prepayment
risk. We expect the percentage of below investment grade securities will
increase in 1996, but we expect that the overall average quality of the
portfolio of debt securities will remain at AA-. Of these below
investment grade assets, $14.5 million and $31.8 million, at December 31,
1995 and 1994, respectively, were investments that were purchased at
investment grade, but whose ratings have since been downgraded.
Included in residential mortgage-back securities are collateralized
mortgage obligations ("CMOs") with carrying values of $2.5 billion and
$2.6 billion at December 31, 1995 and 1994, respectively. The principal
risks inherent in holding CMOs are prepayment and extension risks related
to dramatic decreases and increases in interest rates whereby the CMOs
would be subject to repayments of principal earlier or later than
originally anticipated. At December 31, 1995 and 1994, approximately 79%
and 85%, respectively, of the Company's CMO holdings consisted of
sequential and planned amortization class debt securities which are
subject to less prepayment and extension risk than other CMO instruments.
At December 31, 1995 and 1994, approximately 81% and 82%, respectively, of
the Company's CMO holdings were collateralized by residential mortgage
loans, on which the timely payment of principal and interest was backed by
specified government agencies (e.g., GNMA, FNMA, FHLMC).
(33)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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, 1995 and 1994, approximately 3% and 4%, respectively, of
the Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs
receive payments of principal on the underlying pool of mortgages. The
risk inherent in holding POs is extension risk related to dramatic
increases in interest rates whereby the future payments due on POs could
be repaid much slower than originally anticipated. The extension
risks inherent in holding POs was mitigated somewhat by offsetting
positions in IOs. During dramatic increases in interest rates, IOs
would generate more future payments than originally anticipated.
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much
less than originally anticipated and in some cases could be less than the
original cost of the IO. The risks inherent in IOs are mitigated
somewhat by holding offsetting positions in POs. During dramatic
decreases in interest rates POs would generate future cash flows much
quicker than originally anticipated.
Investments in available for sale equity securities were as follows:
Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
---- ---------- ---------- -----
(millions)
1995
----
Equity Securities $231.6 $27.2 $1.2 $257.6
------ ----- ---- ------
------ ----- ---- ------
1994
----
Equity Securities $230.5 $ 6.5 $7.9 $229.1
------ ----- ---- ------
------ ----- ---- ------
(34)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between proceeds
received from investments sold or prepaid, and amortized cost. Net
realized capital gains as reflected in the Consolidated Statements of
Income are after deductions for net realized capital gains (losses)
allocated to experience-rated contracts of $61.1 million, $(29.1) million
and $(54.8) million for the years ended December 31, 1995, 1994, and 1993,
respectively. Net realized capital gains (losses) allocated to
experience-rated contracts are deferred and subsequently reflected
in credited rates on an amortized basis. Net unamortized gains (losses),
reflected as a component of Policyholders' Funds Left With the Company,
were $7.3 million and $(50.7) million at the end of December 31, 1995 and
1994, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and
amounted to $3.1 million, $1.1 million and $(98.5) million, of which
$2.2 million, $0.8 million and $(91.5) million were allocable
to experience-rated contractholders, for the years ended December 31, 1995,
1994 and 1993, respectively. The 1993 losses were primarily related to
writedowns of interest-only mortgage-backed securities to their fair
value.
Net realized capital gains (losses) on investments, net of amounts
allocated to experience-rated contracts, were as follows:
1995 1994 1993
---- ---- ----
(millions)
Debt securities $32.8 $1.0 $9.6
Equity securities 8.3 0.2 0.1
Mortgage loans 0.2 0.3 (0.2)
----- ---- ------
Pretax realized capital gains $41.3 $1.5 $9.5
----- ---- ------
----- ---- ------
After-tax realized capital gains $25.8 $1.0 $ 6.2
----- ---- ------
----- ---- ------
Gross gains of $44.6 million, $26.6 million and $33.3 million and
gross losses of $11.8 million, $25.6 million and $23.7 million were
realized from the sales of investments in debt securities in 1995, 1994
and 1993, respectively.
(35)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
Changes in unrealized capital gains (losses), excluding changes in
unrealized capital gains (losses) related to experience-rated contracts,
for the years ended December 31, were as follows:
1995 1994 1993
---- ---- ----
(millions)
Debt securities $255.9 $(242.1) $164.3
Equity securities 27.3 (13.3) 10.6
Limited partnership 1.8 (1.8) --
------ -------- ------
285.0 (257.2) 174.9
Deferred federal income taxes (See Note 6) (36.5) 46.3 61.2
------ -------- ------
Net change in unrealized capital
gains (losses)
$321.5 $(303.5) $113.7
------ -------- ------
------ -------- ------
Net unrealized capital gains (losses) allocable to experience-rated
contracts of $515.0 million and $104.1 million at December 31, 1995
and $(260.9) million and $(47.7) million at December 31, 1994 are
reflected on the Consolidated Balance Sheet in Policyholders' Funds Left
With the Company and Future Policy Benefits, respectively, and are not
included in shareholder's equity.
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience-rated
contractholders, at December 31:
1995 1994 1993
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $179.3 $ 27.4 $164.3
Gross unrealized capital losses (1.3) (105.2) --
------ ------- ------
178.0 (77.8) 164.3
------ ------- ------
Equity securities
Gross unrealized capital gains 27.2 6.5 12.0
Gross unrealized capital losses (1.2) (7.9) (0.1)
------ ------- ------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- (1.8) --
------ ------- ------
-- (1.8) --
Deferred federal income taxes (See Note 6) 71.5 108.0 61.7
------ ------- ------
Net unrealized capital gains (losses) $132.5 $(189.0) $114.5
------ ------- ------
------ ------- ------
(36)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1995 1994 1993
---- ---- ----
(millions)
Debt securities $891.5 $823.9 $828.0
Preferred stock 4.2 3.9 2.3
Investment in affiliated mutual funds 14.9 5.2 2.9
Mortgage loans 1.4 1.4 1.5
Policy loans 13.7 11.5 10.8
Reinsurance loan to affiliate 46.5 51.5 53.3
Cash equivalents 38.9 29.5 16.8
Other 8.4 6.7 7.7
-------- ------ ------
Gross investment income 1,019.5 933.6 923.3
Less investment expenses (15.2) (16.4) (11.4)
-------- ------ ------
Net investment income $1,004.3 $917.2 $911.9
-------- ------ ------
-------- ------ ------
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
Interest credited to contractholders is included in Current and
Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company distributed $2.9 million in the form of dividends of two of
its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in
1995.
The amount of dividends that may be paid to the shareholder in 1996
without prior approval by the Insurance Commissioner of the State of
Connecticut is $70.0 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts
determined in conformity with statutory accounting practices prescribed
or permitted by the Department, which differ in certain respects from
generally accepted accounting principles. Statutory net income was
$70.0 million, $64.9 million and $77.6 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Statutory shareholder's
equity was $670.7 million and $615.0 million as of December 31, 1995 and
1994, respectively.
At December 31, 1995 and December 31, 1994, the Company does not
utilize any statutory accounting practices which are not prescribed by
insurance regulators that, individually or in the aggregate, materially
affect statutory shareholder's equity.
(37)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it
would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes in the
consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA)
was enacted which resulted in an increase in the federal corporate
tax rate from 34% to 35% retroactive to January 1, 1993. The enactment
of OBRA resulted in an increase in the deferred tax liability of
$3.4 million at date of enactment, which is included in the 1993 deferred
tax expense.
Components of income tax expense (benefits) were as follows:
1995 1994 1993
---- ---- ----
(millions)
Current taxes (benefits):
Income from operations $ 82.9 $ 78.7 $ 87.1
Net realized capital gains 28.5 (33.2) 18.1
------ ------ ------
111.4 45.5 105.2
------ ------ ------
Deferred taxes (benefits):
Income from operations (14.4) (8.0) (14.2)
Net realized capital gains (12.9) 33.7 (14.8)
------ ------ ------
(27.3) 25.7 (29.0)
------ ------ ------
Total $ 84.1 $ 71.2 $ 76.2
------ ------ ------
------ ------ ------
Income tax expense was different from the amount computed by applying
the federal income tax rate to income before federal income taxes for
the following reasons:
1995 1994 1993
---- ---- ----
(millions)
Income before federal income taxes $260.0 $216.5 $219.1
Tax rate 35% 35% 35%
Application of the tax rate 91.0 75.8 76.7
------ ------ ------
Tax effect of:
Excludable dividends (9.3) (8.6) (8.7)
Tax reserve adjustments 3.9 2.9 4.7
Reinsurance transaction (0.5) 1.9 (0.2)
Tax rate change on deferred liabilities -- -- 3.7
Other, net (1.0) (0.8) --
------ ------ ------
Income tax expense $ 84.1 $ 71.2 $ 76.2
------ ------ ------
------ ------ ------
(38)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1995 1994
---- ----
Deferred tax assets: (millions)
Insurance reserves $290.4 $211.5
Net unrealized capital losses -- 136.3
Unrealized gains allocable to
experience-rated contracts 216.7 --
Investment losses not currently
deductible 7.3 15.5
Postretirement benefits other than
pensions 7.7 8.4
Other 32.0 28.3
------ ------
Total gross assets 554.1 400.0
Less valuation allowance -- 136.3
------ ------
Deferred tax assets, net of valuation 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs 433.0 385.2
Unrealized losses allocable to
experience-rated contracts -- 108.0
Market discount 4.4 3.6
Net unrealized capital gains 288.2 --
Other (1.9) 0.4
------ ------
Total gross liabilities 723.7 497.2
------ ------
Net deferred tax liability $169.6 $233.5
------ ------
------ ------
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. At December 31, 1994, $81.0 million of
net unrealized capital losses were reflected in shareholder's equity
without deferred tax benefits. As of December 31, 1995, no valuation
allowance was required for unrealized capital gains and losses. The
reversal of the valuation allowance had no impact on net income in 1995.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income
that has not been subject to taxation. As of December 31, 1983, no
further additions could be made to the Policyholders' Surplus Account for
tax return purposes under the Deficit Reduction Act of 1984. The balance
in such account was approximately $17.2 million at December 31, 1995.
This amount would be taxed only under certain conditions. No income
taxes have been provided on this amount since management believes the
conditions under which such taxes would become payable are remote.
(39)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of
the consolidated federal income tax returns of Aetna through 1986.
Discussions are being held with the Service with respect to proposed
adjustments. However, management believes there are adequate defenses
against, or sufficient reserves to provide for, such challenges. The
Service has commenced its examinations for the years 1987 through 1990.
7. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially
all employees. The plans provide pension benefits based on years of
service and average annual compensation (measured over sixty consecutive
months of highest earnings in a 120 month period). Contributions are
determined using the Projected Unit Credit Method and, for qualified
plans subject to ERISA requirements, are limited to the amounts that are
currently deductible for tax reporting purposes. The accumulated benefit
obligation and plan assets are recorded by Aetna. The accumulated plan
assets exceed accumulated plan benefits. There has been no funding to
the plan for the years 1993 through 1995, and therefore, no expense has
been recorded by the Company.
Agent Pension Plans - The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. The accumulated
plan assets exceed accumulated plan benefits. There has been no
funding to the plan for the years 1993 through 1995, and therefore, no
expense has been recorded by the Company.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna also provides certain postretirement health care and
life insurance benefits, subject to certain caps, for retired employees.
Medical and dental benefits are offered to all full-time employees
retiring at age 50 with at least 15 years of service or at age 65 with
at least 10 years of service. Retirees are required to contribute to the
plans based on their years of service with Aetna.
The cost to the Company associated with the Aetna postretirement plans
for 1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million,
respectively.
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postemployment health care and life insurance
benefits for certain agents.
The cost to the Company associated to the agents' postretirement plans
for 1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million,
respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions,
which may be invested in common stock of Aetna or certain other
investments, are matched, up to 5% of compensation, by Aetna. Pretax
charges to operations for the incentive savings plan were $4.9 million,
$3.3 million and $3.1 million in 1995, 1994 and 1993, respectively.
(40)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Benefit Plans (Continued)
Stock Plans - Aetna has a stock incentive plan that provides for stock
options and deferred contingent common stock or cash awards to certain
key employees. Aetna also has a stock option plan under which executive
and middle management employees of Aetna may be granted options to
purchase common stock of Aetna at the market price on the date of grant
or, in connection with certain business combinations, may be granted
options to purchase common stock on different terms. The cost to the
Company associated with the Aetna stock plans for 1995, 1994 and 1993,
was $6.3 million, $1.7 million and $0.4 million, respectively.
8. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts.
Under the insurance contracts, the Separate Accounts pay the Company a
daily fee which, on an annual basis, ranges, depending on the product,
from .25% to 1.80% of their average daily net assets. The Company also
receives fees from the variable life and annuity mutual funds and The
Aetna Series Fund for serving as investment adviser. Under the advisory
agreements, the Funds pay the Company a daily fee which, on an annual
basis, ranges, depending on the fund, from .25% to 1.00% of their average
daily net assets. The advisory agreements also call for the variable
funds to pay their own administrative expenses and for The Aetna Series
Fund to pay certain administrative expenses. The Company also receives
fees (expressed as a percentage of the average daily net assets) from The
Aetna Series Fund for providing administration, shareholder services and
promoting sales. The amount of compensation and fees received from the
Separate Accounts and Funds, included in Charges Assessed Against
Policyholders, amounted to $128.1 million, $104.6 million and $93.6
million in 1995, 1994 and 1993, respectively. The Company may waive
advisory fees at its discretion.
The Company may, from time to time, make reimbursements to a Fund for
some or all of its operating expenses. Reimbursement arrangements may
be terminated at any time without notice.
(41)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Related Party Transactions (Continued)
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by
Aetna Life prior to 1981 was assumed by the Company. A $108.0 million
commission, paid by the Company to Aetna Life in 1988, was capitalized as
deferred policy acquisition costs. The Company maintained insurance
reserves of $655.5 million and $690.3 million as of December 31, 1995
and 1994, respectively, relating to the business assumed. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance
reserves. The loan is being reduced in accordance with the decrease in
the reserves. The fair value of this loan was $663.5 million and $630.3
million as of December 31, 1995 and 1994, respectively, and is based upon
the fair value of the underlying assets. Premiums of $28.0 million,
$32.8 million and $33.3 million and current and future benefits of $43.0
million, $43.8 million and $55.4 million were assumed in 1995, 1994 and
1993, respectively.
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million
and $13.6 million resulted from this agreement in 1995, 1994 and 1993,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium
revenue from Aetna Life for the purchase and administration of a life
contingent single premium variable payout annuity contract. In addition, the
Company also is responsible for administering fixed annuity payments that
are made to annuitants receiving variable payments. Reserves of
$28.0 million and $24.2 million were maintained for this contract as of
December 31, 1995 and 1994, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this limit, up to a
maximum of $8.0 million on any new individual life business, on a
yearly renewable term basis. Premium amounts related to this agreement
were $3.2 million, $1.3 million and $0.6 million for 1995, 1994 and 1993,
respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of
its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in
1995.
Premiums due and other receivables include $5.7 million and $27.6 million
due from affiliates in 1995 and 1994, respectively. Other liabilities
include $12.4 million and $27.9 million due to affiliates for 1995 and
1994, respectively.
(42)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Related Party Transactions (Continued)
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial
statements reflect allocated charges for these services based upon
measures appropriate for the type and nature of service provided.
9. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business.
Such reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the
financial strength of potential reinsurers and continually monitors the
financial condition of reinsurers. Only those reinsurance recoverables
deemed probable of recovery are reflected as assets on the Company's
Consolidated Balance Sheets.
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 8 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
------ --------- ---------- ------
(millions)
1995
----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health 7.5 7.5 -- --
Insurance
Annuities 82.1 -- 0.5 82.6
---------------------------------------------
Total earned premiums $118.4 $16.1 $28.5 $130.8
---------------------------------------------
---------------------------------------------
1994
----
Premiums:
Life Insurance $ 27.3 $ 6.0 $32.8 $ 54.1
Accident and Health 9.3 9.3 -- --
Insurance
Annuities 69.9 -- 0.2 70.1
---------------------------------------------
Total earned premiums $106.5 $15.3 $33.0 $124.2
---------------------------------------------
---------------------------------------------
1993
----
Premiums:
Life Insurance $22.4 $ 5.6 $33.3 $ 50.1
Accident and Health 12.9 12.9 -- --
Insurance
Annuities 31.3 -- 0.7 32.0
---------------------------------------------
Total earned premiums $66.6 $18.5 $34.0 $82.1
---------------------------------------------
(43)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
1995 1994
----------------- ---------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(millions)
Assets:
Cash and cash equivalents $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments 15.1 15.1 98.0 98.0
Debt securities 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities 257.6 257.6 229.1 229.1
Limited partnership -- -- 24.4 24.4
Mortgage loans 21.2 21.9 9.9 9.9
Liabilities:
Investment contract liabilities:
With a fixed maturity 989.1 1,001.2 826.7 833.5
Without a fixed maturity 9,511.0 9,298.4 8,122.6 7,918.2
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the disclosed
value be realized in immediate settlement of the instrument. In evaluating
the Company's management of interest rate and liquidity risk, the fair values
of all assets and liabilities should be taken into consideration, not only
those above.
The following valuation methods and assumptions were used by the Company
in estimating the fair value of the above financial instruments:
SHORT-TERM INSTRUMENTS: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices are not available, the
carrying amounts reported in the Consolidated Balance Sheets approximates
fair value. Short-term instruments have a maturity date of one year or
less and include cash and cash equivalents, and short-term investments.
(44)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
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.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS)
During 1995, the Company received $0.4 million for writing call options
on underlying securities. As of December 31, 1995 there were no option
contracts outstanding.
At December 31, 1995, the Company had a forward swap agreement with a
notional amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
(45)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
The Company also holds investments in certain debt and equity securities
with derivative characteristics (i.e., including the fact that their
market value is at least partially determined by, among other things,
levels of or changes in interest rates, prepayment rates, equity
markets or credit ratings/spreads). The amortized cost and fair value
of these securities, included in the $13.4 billion investment portfolio,
as of December 31, 1995 was as follows:
Amortized Fair
(Millions) Cost Value
--------- -----
Collateralized mortgage obligations $2,383.9 $2,549.3
Principal-only strips (included above) 38.7 50.0
Interest-only strips (included above) 10.7 20.7
Structured Notes (1) 95.0 100.3
(1) Represents non-leveraged instruments whose fair values and credit risk
are based on underlying securities, including fixed income securities and
interest rate swap agreements.
11. Commitments and Contingent Liabilities
COMMITMENTS
Through the normal course of investment operations, the Company commits
to either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability
of counterparties to honor these commitments may result in either higher
or lower replacement cost. Also, there is likely to be a change in the
value of the securities underlying the commitments. At December 31, 1995,
the Company had commitments to purchase investments of $31.4 million. The
fair value of the investments at December 31, 1995 approximated $31.5
million. There were no outstanding forward commitments at December 31,
1994.
LITIGATION
There were no material legal proceedings pending against the Company as
of December 31, 1995 or December 31, 1994 which were beyond the ordinary
course of business. The Company is involved in lawsuits arising, for
the most part, in the ordinary course of its business operations as an
insurer.
(46)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Segment Information
The Company's operations are reported through two major business
segments: Life Insurance and Financial Services.
Summarized financial information for the Company's principal operations
was as follows:
(Millions) 1995 1994 1993
- -----------------------------------------------------------------------------
Revenue:
Financial services $ 1,129.4 $ 946.1 $ 892.8
Life insurance 407.9 386.1 371.7
---------------------------------
Total revenue $ 1,537.3 $ 1,332.2 $ 1,264.5
- ------------------------------------------------------------------------------
Income before federal income taxes:
Financial services $ 158.0 $ 119.7 $ 121.1
Life insurance 102.0 96.8 98.0
---------------------------------
Total income before federal $ 260.0 $ 216.5 $ 219.1
income taxes
- -----------------------------------------------------------------------------
Net income:
Financial services $ 113.8 $ 85.5 $ 86.8
Life insurance 62.1 59.8 56.1
---------------------------------
Net income $ 175.9 $ 145.3 $ 142.9
- -----------------------------------------------------------------------------
(Millions) 1995 1994 1993
Assets under management, at fair value:
Financial services
$23,224.3 $17,785.2 $16,600.5
Life insurance 2,698.1 2,171.7 2,175.5
- -----------------------------------------------------------------------------
Total assets under management $25,922.4 $19,956.9 $18,776.0
- -----------------------------------------------------------------------------
(47)
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 19.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 51.
3. Exhibits:
3(a) Certificate of Incorporation
Incorporated herein by reference to post-effective amendment
No. 58 to Registration Statement on Form N-4 (File No. 2-52449)
as filed with the Securities and Exchange Commission on
February 28, 1994.
3(b) By-Laws
Incorporated herein by reference to post-effective amendment
No. 58 to Registration Statement on Form N-4 (File No. 2-52449)
as filed with the Securities and Exchange Commission on
February 28, 1994.
4 Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts)
Incorporated herein by reference to Form S-1, File No. 33-42555,
as amended, originally filed with the Securities and Exchange
Commission on January 4, 1989 and most recently amended and
filed on April 4, 1995.
Incorporated herein by reference to Form S-1, File No. 33-34583,
as amended, originally filed with the Securities and Exchange
Commission on January 4, 1989 and most recently amended and
filed on April 4, 1995.
Incorporated herein by reference to Form N-4, File No. 2-52448,
as amended and filed most recently on April 28, 1995.
Incorporated herein by reference to Form N-4, File No. 33-34370,
as amended and filed most recently on February 27, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-81216, as amended and filed most recently
on August 21, 1995.
Incorporated herein by reference to Registration Statement
Form N-4, File No. 33-88722, as amended and filed most recently
on November 30, 1995.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75954, as amended and filed most recently
on April 28, 1995.
(48)
<PAGE>
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K (Continued)
4 Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts) (Continued)
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75996, as amended and filed most recently
on February 16, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75956, as amended and filed most recently
on April 28, 1995.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 2-52449, as amended and filed most recently
on February 28, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75988, as amended and filed most recently
on February 22, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75976, as amended and filed most recently
on May 19, 1995.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75984, as amended and filed most recently
on April 28, 1995.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-79122, as amended and filed most recently
on August 16, 1995.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-62473, as amended and filed most recently
on February 16, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 333-01107, as filed on February 21, 1996.
Incorporated herein by reference to Registration Statement on
Form S-2, File No. 33-64331, as filed on November 16, 1995.
Incorporated herein by reference to Pre-Effective Amendment
No. 2 to Registration Statement on Form S-2, File No. 33-64331,
as filed on January 17, 1996.
10 Material Contracts (Management contracts/compensatory plans or
arrangements)
* The 1984 Stock Option Plan of Aetna Life and Casualty Company
and the amendments thereto; incorporated by reference to
Aetna Life and Casualty Company's 1992 Form 10-K, filed on
March 17, 1993.
Commission File Number 1-5704
* Aetna Life and Casualty Company's Supplemental Incentive
Savings Plan; incorporated by reference to Aetna Life and
Casualty Company's 1992 Form 10-K, filed on March 17, 1993.
Commission File Number 1-5704
(49)
<PAGE>
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K (Continued)
10 Material Contracts (Management contracts/compensatory plans or
arrangements) (Continued)
* Aetna Life and Casualty Company's Supplemental Pension
Benefit Plan; incorporated by reference to Aetna Life and
Casualty Company's 1992 Form 10-K, filed on March 17, 1993.
Commission File Number 1-5704
* Aetna Life and Casualty Company's 1986 Management Incentive
Plan as amended effective February 25, 1994; incorporated
by reference to Aetna Life and Casualty Company's 1993
Form 10-K, filed on March 18, 1994.
Commission File Number 1-5704
* Aetna Life and Casualty Company's 1994 Stock Incentive Plan;
incorporated by reference to 1994 Proxy Statement of Aetna
Life and Casualty Company.
* Management contract or compensatory plan or arrangement
21 Subsidiaries of the Registrant Incorporated by reference to
Exhibit Item 26 to Registration Statement on Form N-4
(File Number 33-75982) as filed on February 20, 1996.
24 Power of Attorney
Filed herein immediately after Signature page.
27 Financial Data Schedule
Exhibits other than these listed are omitted because they are not
required or not applicable.
(b) Reports on Form 8-K.
None.
(50)
<PAGE>
Index to Consolidated Financial Statement Schedules
Page
----
Independent Auditors' Report 52
I. Summary of Investments - Other than Investments in
Affiliates as of December 31, 1995 53
III. Supplementary Insurance Information as of and for the
years ended December 31, 1995, 1994, 1993 54
IV. Reinsurance for the years ended December 31, 1995,
1994, 1993 55
Schedules other than those listed above are omitted because they are not
required or are not applicable.
(51)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
Under date of February 6, 1996, we reported on the consolidated balance
sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
income, changes in shareholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1995, as included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedules as listed in the accompanying index. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the financial statements, in 1993 the Company
changed its methods of accounting for certain investments in debt and equity
securities.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
(52)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Schedule I
Summary of Investments - Other than Investments in Affiliates
December 31, 1995
<TABLE>
<CAPTION>
Amount at
Which Shown
in the
Type of Investment Cost Value* Balance Sheet
------------------ ---- ------ -------------
(millions)
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury securities and obligations
of U.S. government agencies and corporations $ 539.5 $ 587.0 $ 587.0
Obligations of states and political subdivisions 41.4 53.8 53.8
U.S. Corporate securities 5,396.5 5,689.8 5,689.8
Foreign securities (1) 1,302.6 1,416.6 1,416.6
Residential mortgage-backed securities 2,940.6 3,203.4 3,203.4
Commercial/Multifamily mortgage-backed securities 741.9 774.0 774.0
Other asset-backed securities 961.2 996.2 996.2
--------- --------- ---------
Total debt securities 11,923.7 12,720.8 12,720.8
--------- --------- ---------
Equity securities:
Non-redeemable preferred stocks 51.3 57.6 57.6
Investment in affiliated mutual funds 173.4 191.8 191.8
Common stock 6.9 8.2 8.2
--------- --------- ---------
Total equity securities 231.6 257.6 257.6
--------- --------- ---------
Short-term investments 15.1 --------- 15.1
Mortgage loans 21.2 21.2
Policy loans 338.6 338.6
--------- ---------
Total investments $12,530.2 $13,353.3
--------- ---------
--------- ---------
</TABLE>
* See Notes 1, 2 and 10 to the Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. All of the Company's foreign securities are denominated in
U.S. dollars.
(53)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Schedule III
Supplementary Insurance Information
As of and for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(Millions)
Deferred Unpaid Policyholders'
policy Future claims funds left Net
acquisition policy and claim Unearned with the Premium investment
Segment costs benefits expenses premiums company revenue income (1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
- ----
Financial Services $ 602.5 $1,018.9 $ 1.0 $ - $10,483.3 $ 82.6 $ 823.3
Life Insurance 738.8 2,574.3 26.2 1.4 16.8 48.2 181.0
----------------------------------------------------------------------------------------------------------
Total $1,341.3 $3,593.2 $27.2 $1.4 $10,500.1 $130.8 $1,004.3
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
1994
- ----
Financial Services $ 516.8 $ 773.7 $ 1.4 $ - $ 8,942.9 $ 70.2 $ 745.9
Life Insurance 647.5 2,137.3 22.4 1.7 6.4 54.0 171.3
----------------------------------------------------------------------------------------------------------
Total $1,164.3 $2,911.0 $23.8 $1.7 $ 8,949.3 $124.2 $ 917.2
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
1993
- ----
Financial Services $ 440.8 $ 720.3 $ 1.2 $ - $ 8,898.8 $ 32.0 $ 739.2
Life Insurance 610.8 2,109.3 26.0 1.7 6.2 50.1 172.7
----------------------------------------------------------------------------------------------------------
Total $1,051.6 $2,829.6 $27.2 $1.7 $ 8,905.0 $ 82.1 $ 911.9
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Amortization
Other income of deferred
(including Current policy Other
realized capital and future acquisition operating
gains and losses) benefits costs expenses
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
- ----
Financial Services $223.6 $704.4 $10.5 $256.5
Life Insurance 178.6 210.9 32.8 62.2
-----------------------------------------------------------------
Total $402.2 $915.3 $43.3 $318.7
------------------------------------------------------------------
------------------------------------------------------------------
1994
- ----
Financial Services $130.0 $639.9 $ 9.6 $176.9
Life Insurance 160.8 214.2 16.8 58.3
-----------------------------------------------------------------
Total $290.8 $854.1 $26.4 $235.2
------------------------------------------------------------------
------------------------------------------------------------------
1993
- ----
Financial Services $121.6 $624.1 $(1.4) $149.0
Life Insurance 148.9 194.3 21.2 58.2
-----------------------------------------------------------------
Total $270.5 $818.4 $19.8 $207.2
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(54)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Schedule IV
Reinsurance
For the years ended December 31,
(Millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed to
Amount Companies Companies Amount Net
------ --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
1995
----
Life insurance in force $36,031.5 $1,846.8 $3,596.7 $37,781.4 9.5%
-----------------------------------------------------
-----------------------------------------------------
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2 58.1
Accident and Health Insurance 7.5 7.5 - - -
Annuities 82.1 - 0.5 82.6 0.6 -
------------------------------------------------------
Total earned premiums $ 118.4 $ 16.1 $ 28.5 $ 130.8 21.8
-----------------------------------------------------
-----------------------------------------------------
1994
----
Life insurance in force $32,184.3 $1,423.0 $2,677.8 $33,439.1 8.0%
-----------------------------------------------------
-----------------------------------------------------
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1 60.6
Accident and Health Insurance 9.3 9.3 - - -
Annuities 69.9 - 0.2 70.1 0.3 -
-----------------------------------------------------
Total earned premiums $ 106.5 $ 15.3 $ 33.0 $ 124.2 26.6
-----------------------------------------------------
-----------------------------------------------------
1993
----
Life insurance in force $30,602.3 $1,210.2 $3,099.0 $32,491.1 9.5%
-----------------------------------------------------
-----------------------------------------------------
Premiums:
Life Insurance $ 22.4 $ 5.6 $ 33.3 $ 50.1 66.5
Accident and Health Insurance 12.9 12.9 - - -
Annuities 31.3 - 0.7 32.0 2.2 -
------------------------------------------------------
Total earned premiums $ 66.6 $ 18.5 $ 34.0 $ 82.1 41.4
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
(55)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
Date March 29, 1996 By /s/ Eugene M. Trovato
---------------------------------
Eugene M. Trovato
Vice President, Treasurer, and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 1996.
Signature Title
/s/ Daniel P. Kearney President and Director
- -------------------------- (Principal Executive Officer)
Daniel P. Kearney
/s/ Timothy A. Holt Senior Vice President, Chief Financial
- -------------------------- Officer, and Director
Timothy A. Holt
/s/ Christopher J. Burns Senior Vice President and Director
- --------------------------
Christopher J. Burns
/s/ Laura R. Estes Senior Vice President and Director
- --------------------------
Laura R. Estes
/s/ John Y. Kim Senior Vice President and Director
- --------------------------
John Y. Kim
/s/ Gail P. Johnson Vice President and Director
- --------------------------
Gail P. Johnson
/s/ Shaun P. Mathews Vice President and Director
- --------------------------
Shaun P. Mathews
/s/ Glen Salow Vice President and Director
- --------------------------
Glen Salow
/s/ Creed R. Terry Vice President and Director
- --------------------------
Creed R. Terry
/s/ Eugene M. Trovato Vice President, Treasurer, and Corporate
- -------------------------- Controller
Eugene M. Trovato
*By: /s/ Susan E. Schechter
------------------------------------------
Susan E. Schechter, Corporate Secretary
and Counsel
(56)
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life Insurance and
Annuity Company, hereby severally constitute and appoint Susan E. Schechter
and Eugene M. Trovato and each of them individually, our true and lawful
attorneys, with full power to them and each of them to sign for us, and in
our names and in the capacities indicated below, the 1995 Form 10-K and any
and all amendments thereto to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to the
Form 10-K and any and all amendments thereto.
WITNESS our hands and common seal on this 29th day of March, 1996.
Signature Title
/s/ Daniel P. Kearney President and Director
- -------------------------- (Principal Executive Officer)
Daniel P. Kearney
/s/ Timothy A. Holt Senior Vice President, Chief Financial
- -------------------------- Officer, and Director
Timothy A. Holt
/s/ Christopher J. Burns Senior Vice President and Director
- --------------------------
Christopher J. Burns
/s/ Laura R. Estes Senior Vice President and Director
- --------------------------
Laura R. Estes
/s/ John Y. Kim Senior Vice President and Director
- --------------------------
John Y. Kim
/s/ Gail P. Johnson Vice President and Director
- --------------------------
Gail P. Johnson
/s/ Shaun P. Mathews Vice President and Director
- --------------------------
Shaun P. Mathews
/s/ Glen Salow Vice President and Director
- --------------------------
Glen Salow
/s/ Creed R. Terry Vice President and Director
- --------------------------
Creed R. Terry
/s/ Eugene M. Trovato Vice President, Treasurer, and Corporate
- -------------------------- Controller
Eugene M. Trovato
(57)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANICIAL STATEMENTS CONTAINED IN FORM 10K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995 FOR AETNA LIFE INSURANCE AND ANNUITY COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000837010
<NAME> AETNA LIFE INSURANCE AND ANNUITY COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 12,721
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 258
<MORTGAGE> 21
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,353
<CASH> 569
<RECOVER-REINSURE> 10
<DEFERRED-ACQUISITION> 1,341
<TOTAL-ASSETS> 27,145
<POLICY-LOSSES> 3,595
<UNEARNED-PREMIUMS> 2
<POLICY-OTHER> 25
<POLICY-HOLDER-FUNDS> 10,500
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,580
<TOTAL-LIABILITY-AND-EQUITY> 27,145
131
<INVESTMENT-INCOME> 1,004
<INVESTMENT-GAINS> 41
<OTHER-INCOME> 42
<BENEFITS> 915
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 260
<INCOME-TAX> 84
<INCOME-CONTINUING> 176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 176
<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>
