As filed with the Securities and Exchange Registration No. 33-64331
Commission on April 15, 1996
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Aetna Life Insurance and Annuity Company
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(Exact Name of Registrant as Specified in its Charter)
Connecticut
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(State or other Jurisdiction of Incorporation or Organization)
71-0294708
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(I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156, (860) 273-7834
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(Address, including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4C, Hartford, Connecticut 06156
(860) 273-7834
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(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [XX]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Regulation S-K
Item 501(b)
Form S-2
Item No. Part A (Prospectus) Location
-------- ------------------ --------
1 Forepart of the Registration Cover Page
Statement and Outside Front Cover
Page of Prospectus..................
2 Inside Front and Outside Back Cover Cover Page
Pages
of Prospectus.......................
3 Summary Information, Risk Factors and Summary Information;
Ratio of Earnings to Fixed Charges.. Description of Contracts;
Financial Statements
4 Use of Proceeds..................... Investments
5 Determination of Offering Price..... Not Applicable
6 Dilution............................ Not Applicable
7 Selling Security Holders............ Not Applicable
8 Plan of Distribution................ Distribution of Contracts
9 Description of Securities to be Description of Contracts
Registered..........................
10 Interests and Named Experts and Experts
Counsel.............................
11 Information with Respect to the Appendix B and C
Registrant..........................
12 Incorporation of Certain Information Incorporation of Certain
by Reference........................ Document by Reference
13 Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities.........................
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY
AETNA MULTI-RATE ANNUITY
151 FARMINGTON AVENUE
HARTFORD, CONNECTICUT 06156
This Prospectus describes certain single purchase payment modified
guaranteed deferred annuity contracts offered by Aetna Life Insurance and
Annuity Company ("Company"). The contracts are issued as individual or group
contracts and allow you to earn interest and accumulate amounts on a tax
deferred basis. The amounts you accumulate can be used to provide annuity
payments or other benefits.
Individual contracts may be purchased directly or as a rollover Individual
Retirement Annuity. Group contracts may be purchased for both qualified and
non-qualified plans. Interests under a group contract will be evidenced by
the issuance to you of a separate certificate. Individual contracts and
certificates under group contracts are both referred to herein as the
"Contract." This Prospectus should be read thoroughly before you purchase a
Contract.
A minimum single purchase payment of at least $10,000 must accompany the
application for a Contract. Under the Contracts, the Company sets various
rates of interest ("Guaranteed Rates") that are paid for varying periods
("Guaranteed Periods"). You choose the Guaranteed Period for which you would
like to invest. At the end of that Guaranteed Period, you may reinvest your
accumulated funds in another Guaranteed Period. Information concerning
available Guaranteed Periods and Guaranteed Rates may be obtained by calling
1-800-531-4547.
You may withdraw all or part of your accumulated funds at any time.
Withdrawals prior to the end of a Guaranteed Period may be subject to a
Market Value Adjustment and a surrender fee. Upon a full withdrawal, you
could, therefore, receive less than your purchase payment.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK,
NOR ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith, files
periodic reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information concerning the
Company may be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material also
can be obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
This Prospectus is accompanied by a copy of the Company's annual report on
Form 10-K for the year ended December 31, 1995. Reference is made to Form
10-K for a description of the Company and its business, including financial
statements.
The Company intends to deliver to holders of outstanding Contracts account
statements at least annually and such other periodic reports as may be
required by law, but it is not anticipated that any such reports will include
periodic financial statements or information concerning the Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's latest Annual Report on Form 10-K, filed with the Commission
pursuant to Section 15(d) of the Exchange Act, is incorporated by reference
into this Prospectus and must accompany this Prospectus. The Form 10-K
contains additional information about the Company, including certified
financial statements for the Company's latest fiscal year. No other reports
have been filed by the Company pursuant to Section 13(a) or 15(d) of the
Exchange Act since the end of the fiscal year covered by that Form 10-K.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated by reference in the
Registration Statement of which this Prospectus forms a part other than
exhibits to such documents unless such exhibits are specifically incorporated
by reference into such documents. Requests should be directed to Aetna Life
Insurance and Annuity Company, 151 Farmington Avenue, Hartford, Connecticut
06156, telephone (800) 531-4547.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AVAILABLE INFORMATION 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 2
SPECIAL TERMS 4
SUMMARY INFORMATION 5
DESCRIPTION OF CONTRACTS 6
The Application Process 6
Free Look 6
THE ACCUMULATION PERIOD 7
Guaranteed Periods and Guaranteed Rates 7
Your Choices at the End of a Guaranteed Period 8
WITHDRAWALS AND SURRENDERS 8
General 8
The Market Value Adjustment 8
Fees Applicable to Withdrawals 9
Special Withdrawals 9
The Systematic Withdrawal Option 9
The Estate Conservation Option 10
The Nursing Home Waiver 10
Payment Upon Withdrawal or Surrender 10
CHARGES AND DEDUCTIONS 10
Premium Taxes 10
Maintenance Fees 11
DEATH BENEFIT 11
Death Benefit Options Available to Your Beneficiary 11
ANNUITY PERIOD 11
Selecting an Annuity Date 11
Annuity Payments 12
Annuity Options 12
Payment Upon Death After Annuity Payments Begin 12
INVESTMENTS 13
PARTICIPANT AND BENEFICIARY RIGHTS AND PRIVILEGES 13
AMENDMENT OF THE CONTRACTS 13
DISTRIBUTION OF THE CONTRACTS 14
FEDERAL INCOME TAXES 14
The Company 14
Taxes You or Others Pay--Non-Qualified Contracts 14
Accumulation Period 14
Annuity Payments 14
Withdrawals Before the Annuity Date 15
Penalty For Premature Withdrawals and Payments 15
Partial Annuitization 15
Distribution-At-Death Rules 15
Certain Tax-Free Exchanges 15
Taxes You or Others Pay--Qualified Contracts 15
Contracts Purchased As A Rollover Individual Retirement Annuity 16
Withholding on Eligible Rollover Distributions 16
Qualified Pension, Profit-Sharing Plans, or Annuity Plans 16
Tax Sheltered Annuities 16
Withholding of Taxes 16
See Your Own Tax Adviser 16
LEGAL MATTERS 16
EXPERTS 17
FURTHER INFORMATION 17
INQUIRIES 17
APPENDIX A: Calculating A Market Value Adjustment A-1
</TABLE>
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SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
Annuitant: The person whose life is measured for purposes of the duration of
annuity payments or the payment of the death benefit. This individual is
designated by you in your application. Prior to the Annuity Date you may
request In Writing to change the designated Annuitant, but any such change is
only effective if approved by the Company.
Annuity Date: The date your annuity payments start under an annuity option
you elect. This date may be any time after the first year of your Contract,
and will be the later of the Annuitant's 85th birthday, or the tenth
anniversary of your purchase payment, unless you elect otherwise.
Annuity Option: The method you select for your annuity payments to be made.
Beneficiary: The person(s) entitled to receive any payment from the Contract
upon your death, the death of the Annuitant if not you, or the death of a
joint holder, as applicable. This person is designated by you in your
application. If a joint holder dies, the surviving joint holder will be
deemed the designated Beneficiary, and any other Beneficiary on record will
be treated as the contingent Beneficiary.
Current Value: As of any given date, your purchase payment plus interest
credited, less any amount withdrawn or used to provide annuity payments. The
Current Value will also reflect any deduction for premium taxes, in the event
such taxes are deducted from your purchase payment, and any deduction for
maintenance fees, if such fees are applicable.
Guaranteed Period: The period for which Guaranteed Rates are credited.
Guaranteed Rate: The interest rate that we guarantee to pay during Guaranteed
Periods.
In Writing: A written form satisfactory to the Company and received at its
offices addressed to: Aetna Life Insurance and Annuity Company, 151
Farmington Avenue, Hartford, Connecticut 06156.
Market Value Adjustment: An adjustment that may be made to the amount
withdrawn from the Contract before the end of the Guaranteed Period. The
adjustment reflects the change in the value of the investment due to changes
in interest rates since the date of deposit and is computed using the formula
given in the Contract. The adjustment is expressed as a percentage of each
dollar being withdrawn.
You: The person who owns and holds the Contract. You may have a joint holder,
but only if such joint holder is your spouse. With respect to a group
contract, "you" refers to the person or persons who has or have been issued a
certificate under the group contract. Where there are joint holders of the
Contract, each must join in making any request or election or to take any
action pursuant to the Contract.
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SUMMARY INFORMATION
The Contract is an annuity contract issued to you by the Company that
allows you to invest and accumulate funds while deferring taxes on the
interest you earn.
You make a single purchase payment for a Contract. The minimum purchase
payment is $10,000. You may make larger payments, or you may buy more than
one Contract. Purchase payments over $1,000,000 require the Company's prior
approval. The interest rates that we guarantee are called Guaranteed Rates,
and the fixed periods during which these rates are guaranteed are called
Guaranteed Periods.
When you purchase a Contract, you select the Guaranteed Period you want
from among those the Company then offers. Except as described below, your
purchase payment will earn interest at the Guaranteed Rate for the duration
of the Guaranteed Period you select. Guaranteed Periods always start on the
first business day of the month. During the period of time between the date
your purchase payment is credited and the start of the Guaranteed Period you
select, your purchase payment earns interest at the Guaranteed Rate
applicable to the Guaranteed Period you selected. The Guaranteed Rates
offered will never be less than the minimum guaranteed interest rate stated
in the Contract. Guaranteed Periods are offered at the Company's discretion
for various lengths of time ranging up to and including ten years. You may
divide your single purchase payment among any of the various Guaranteed
Periods that we offer, but you must invest at least $1,000 in any single
Guaranteed Period selected.
Except for Contracts issued in the State of New York, for Guaranteed
Periods of greater than one year, more than one Guaranteed Rate may be
applicable during a Guaranteed Period. For example, a Guaranteed Period of
five years may apply one Guaranteed Rate for the first year, a different
Guaranteed Rate for the next two years, and a third Guaranteed Rate for the
last two years.
Prior to the end of any Guaranteed Period, you can elect to reinvest the
current value of your Contract in another Guaranteed Period then available,
withdraw all or part of your current value, or choose to start your annuity
payments, subject to certain restrictions. The Company will notify you at
least 18 calendar days before the end of any Guaranteed Period in which you
have current value. If you make no election, the current value of your
Contract automatically will be reinvested for a Guaranteed Period equal to
the one just completed, or if not available, the next shortest Guaranteed
Period then available. If no such shorter Guaranteed Period is available, the
next longest Guaranteed Period will be used.
THE COMPANY'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS TO
GUARANTEED RATES TO BE DECLARED. THE COMPANY CANNOT PREDICT NOR CAN THE
COMPANY GUARANTEE WHAT THE GUARANTEED RATES WILL BE FOR FUTURE GUARANTEED
PERIODS UNTIL SUCH RATES ARE DECLARED. (See "Guaranteed Periods and
Guaranteed Rates.")
You may withdraw all or part of your Contract's current value at anytime.
However, such withdrawals may be subject to a Market Value Adjustment,
surrender fee, a deduction for premium taxes and maintenance fees, and/or
federal income taxes and tax penalties.
A Market Value Adjustment is an adjustment applied to any amounts you
withdraw prior to the end of your Guaranteed Period. The Market Value
Adjustment may increase or decrease the amount of your withdrawal. The Market
Value Adjustment reflects the change in value of your investment in a
Guaranteed Period due to changes in interest rates since the start of that
Guaranteed Period. Generally, when interest rates decrease, the Market Value
Adjustment amount is positive. Conversely, when interest rates increase, the
Market Value Adjustment amount is negative. If interest rates increase, the
amount you receive upon the withdrawal of the current value of your Contract
before the end of the Guaranteed Period could be less than the amount you
invested at the start of the Guaranteed Period. The amount of the Market
Value Adjustment is determined by using the formula described in Appendix A.
The Market Value Adjustment does not apply to Systematic Withdrawals or
withdrawals under the Estate Conservation Option, but it is applicable to
Special Withdrawals and withdrawals under the Nursing Home Waiver. The Market
Value Adjustment also does not apply to amounts withdrawn at the end of your
Guaranteed Period, provided that five days prior to the end of that
Guaranteed Period we receive notice of the withdrawal In Writing. (See
"Market Value Adjustment" and "The Systematic Withdrawal Option.")
Except as described below, a surrender fee is imposed on any amount of
your purchase payment withdrawn during the first seven years of your
Contract. For purposes of this fee it is assumed that you are withdrawing all
or a portion of your purchase payment first, not your earnings. The amount of
the surrender fee is initially 7%, and declines periodically thereafter to 0%
after the seventh year. The surrender fee is not applicable to any amounts
withdrawn at the end of a Guaranteed Period if appropriate notice has been
given. The surrender fee is also not applicable to any amounts used to
provide annuity payments.
After you own your Contract for one year, you are entitled to one Special
Withdrawal per year, up to a maximum amount equal to 10% of the current value
of your Contract at the time of your withdrawal. Also, if the current value
of your Contract meets the minimum dollar amounts established by the Company,
you can arrange a program of Systematic Withdrawals. Systematic
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Withdrawals allow you to withdraw specified amounts or percentages of your
Contract's current value or to withdraw amounts over specified time periods
that you determine. Similarly, for Contracts purchased as Individual
Retirement Annuities, if you are at least age 70-1/2 and the current value of
your Contract meets the minimum dollar amounts established by the Company,
you can arrange a program of annual withdrawals through the Estate
Conservation Option. This option is designed to provide annual payments in an
amount equal to the minimum distribution that is required to be withdrawn
each year under the federal tax laws. Surrender fees do not apply to Special
Withdrawals, Systematic Withdrawals or withdrawals under the Estate
Conservation Option or the Nursing Home Waiver, but such withdrawals may be
subject to taxes, penalties and withholding taxes. (See "Federal Income
Taxes.")
Under certain emergency conditions, the Company may defer payment of any
withdrawal, including surrenders, for a period not exceeding six months from
the date of receipt of a surrender request.
You choose when you want your annuity payments to start. Your annuity
payments can start any time after the first year of your Contract, upon your
selection of an annuity option. You may use all or part of the current value
of your Contract to provide annuity payments. If your annuity payments start
before the end of your Guaranteed Period, a Market Value Adjustment may be
applied to any amounts used to start annuity payments. The annuity option you
select also determines the number, amount and frequency of your annuity
payments. Your annuity payments can be for a fixed period of time, for your
life, for the life of another person you select, or for the joint lives of
you and another person.
The Contract also provides a death benefit, which is paid if you or the
annuitant die before your annuity payments start. The amount of the death
benefit equals the current value of your Contract, provided that the death
benefit is paid within six months of the death of the annuitant. If paid
after six months of the date of death of the annuitant, or if paid upon your
death and you are not the annuitant, the death benefit equals the current
value of your Contract as adjusted by any applicable Market Value Adjustment.
Additionally, if you die and you are not the annuitant, the death benefit
payable will be subject to a surrender fee, if applicable. In certain
circumstances, your beneficiary or joint holder may have the option to
continue the Contract rather than receiving the death benefit.
The Company currently pays all state and local premium taxes on your
Contract when due. The Company recovers applicable taxes paid on your behalf
by deducting an appropriate amount from the current value of your Contract
when annuity payments start, or earlier upon surrender of your Contract.
Currently, such taxes range up to 3.5% of the amount of current value of the
Contract used for annuity payments. The Company reserves the right to deduct
premium taxes at any time from your purchase payment or from the current
value of your Contract based upon the Company's determination of when such
tax is due.
DESCRIPTION OF CONTRACTS
The Application Process
To begin the application process, you must submit a completed application
and your purchase payment to the Company for approval. The minimum purchase
payment is $10,000. The Company retains the right to limit the amount of the
maximum purchase payment, and all purchase payments over $1,000,000 require
the Company's approval. You may not make any additional purchase payments
under an existing Contract. However, additional Contracts may be purchased by
eligible persons at the then prevailing Guaranteed Rates and terms.
The Company will accept or reject an application within two business days
of its receipt. If the application is incomplete, the Company may hold it and
any accompanying purchase payment for five days. A purchase payment may be
held for longer periods only with your consent, pending acceptance of the
application. If the application is accepted, a Contract will be issued to
you. If the application is rejected, the application and any purchase payment
will be returned to you.
If your application is properly completed and accepted by the Company,
your purchase payment becomes part of the Company's general assets and is
credited to an account established for you. The Company will confirm the
crediting of your purchase payment In Writing within five business days of
receipt of your properly completed application. You start earning interest on
your purchase payment beginning on the effective date of your Contract, which
is the date your purchase payment is credited.
A Contract may be purchased as a rollover Individual Retirement Annuity by
transferring amounts previously accumulated (rollover amounts) under another
Individual Retirement Annuity or an Individual Retirement Account under
Section 408 of the Internal Revenue Code of 1986 ("Tax Code"), or a
retirement plan qualified under Section 401 or 403 of the Tax Code.
The Company reserves the right to reject an application and, in such case,
any purchase payment will be returned to you without interest. The Company
will deliver your Contract within a reasonable time after receipt and
acceptance of your properly completed application and purchase payment.
Free Look
You may cancel your Contract within ten days of receiving it (or as
otherwise provided by state law) by giving Aetna written notice and returning
your Contract. Upon cancellation, the Company will return your purchase
payment to you within seven days after it receives your notice of
cancellation.
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THE ACCUMULATION PERIOD
Guaranteed Periods and Guaranteed Rates
In your application you select the Guaranteed Period you want from among
those Guaranteed Periods the Company then offers. Your purchase payment earns
interest at the Guaranteed Rate applicable to that Guaranteed Period.
Guaranteed Periods always start on the first business day of the month.
During the period of time between the date your purchase payment is credited
and the start of the Guaranteed Period you selected, your purchase payment
earns interest at the Guaranteed Rate applicable to the Guaranteed Period you
selected. Guaranteed Periods are offered at the Company's discretion for
various lengths of time ranging up to and including ten years. You may divide
your single purchase payment among any of the various Guaranteed Periods that
we offer, but you must invest at least $1,000 in any single Guaranteed Period
selected, and not less than $10,000 in all Guaranteed Periods selected.
Except for Contracts issued in the State of New York, for Guaranteed Periods
of greater than one year more than one Guaranteed Rate may be applicable
during one Guaranteed Period. For example, a Guaranteed Period of five years
may apply one Guaranteed Rate for the first year, a different Guaranteed Rate
for the next two years, and a third Guaranteed Rate for the last two years.
All Guaranteed Rates are stated in terms of effective annual rate of
return; that is, a Guaranteed Rate reflects a full year's interest. Interest
you earn is credited daily at a rate that will provide the guaranteed
effective rate of return over the period of one year assuming no surrenders.
Guaranteed Rates will never be less than the minimum guaranteed interest rate
stated in the Contract. The Company reserves the right to offer, from time to
time, Guaranteed Rates to prospective investors that are higher than those
offered to current Contract owners with respect to Guaranteed Periods of the
same duration.
The example below shows how interest will be credited to you during each
Guaranteed Period. The hypothetical interest rate used in this example is
illustrative only and is not intended to predict future Guaranteed Rates to
be offered under the Contract. Actual Guaranteed Rates offered may be more or
less than those shown. The example assumes no withdrawals of any amount
during the entire seven year Guaranteed Period illustrated. Accordingly, the
example does not give effect to any Market Value Adjustment, surrender fee,
deduction for premium taxes and maintenance fees, or federal income taxes or
possible tax penalties. (See "Withdrawals and Surrenders," "The Market Value
Adjustment," and "Premium Taxes," below, and "Federal Income Taxes.")
Example of Interest Crediting at the Guaranteed Rate
Purchase Payment: $20,000
Guaranteed Period: 7 years
Guaranteed Rate: 6.00% per annum
The Guaranteed Rate is applied in this example by using the following
formula: 1 + the Guaranteed Rate = 1.06.
Current Value at end of Contract Year 1 = $21,200.00 ($20,000.00 x 1.06)
Current Value at end of Contract Year 2 = $22,472.00 ($21,200.00 x 1.06)
Current Value at end of Contract Year 3 = $23,820.32 ($22,472.00 x 1.06)
Current Value at end of Contract Year 4 = $25,249.54 ($23,820.32 x 1.06)
Current Value at end of Contract Year 5 = $26,764.51 ($25,249.54 x 1.06)
Current Value at end of Contract Year 6 = $28,370.38 ($26,764.51 x 1.06)
Current Value at End of Guaranteed Period = $30,072.61 ($28,370.38 x 1.06)
Total Interest Credited in Guaranteed Period = $10,072.61
($30,072.61 - $20,000)
The Company will determine the Guaranteed Rates it offers periodically at
its sole discretion. The Company has no specific formula for determining the
rate of interest that it will declare as future Guaranteed Rates. The
determination of Guaranteed Rates will reflect interest rates available on
the types of debt instruments in which the Company intends to invest the
proceeds attributable to the Contracts. (See "Investments.") The Company's
management will also consider various other factors in determining Guaranteed
Rates for a given Guaranteed Period, such as regulatory and tax requirements,
sales commissions and administrative expenses, general economic trends, and
competitive factors. The Company's management will make the final
determination as to Guaranteed Rates to be offered. The Company cannot
predict nor guarantee future levels of guaranteed interest rates above a
contractually guaranteed minimum rate nor guarantee what rates will be
offered in the future.
Your Choices at the End of a Guaranteed Period
At least 18 calendar days prior to the end of a Guaranteed Period under
your Contract, the Company will send you a notice that your Guaranteed Period
is about to end. At the end of your Guaranteed Period, you can do three
things with the amount you have accumulated for that Guaranteed Period: (1)
reinvest all or part of it in another Guaranteed Period; (2) withdraw all or
part of it; or (3) use all or part of it to start your annuity payments.
These choices also can be used in combination. For example, you
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could withdraw part of the amount you have accumulated, and reinvest the
balance; or reinvest part, and use the balance to start annuity payments.
Each of these choices has certain consequences, which you should consider
carefully. (See "Withdrawals and Surrenders," below, and "Annuity Period" and
"Federal Income Taxes.")
Once you decide what you want to do with the Current Value for that
Guaranteed Period, you must advise the Company of your decision In Writing by
completing an election form. To be effective, your completed election form
must be received by the Company In Writing at least five days prior to the
end of the Guaranteed Period to which it applies. If you decide you want to
reinvest the Current Value of your Contract for a Guaranteed Period of the
same duration as the one just ending, you need not take any action.
IF THE COMPANY DOES NOT RECEIVE YOUR PROPERLY COMPLETED ELECTION FORM IN
TIME, YOUR CURRENT VALUE AT THE END OF THE GUARANTEED PERIOD WILL BE
AUTOMATICALLY REINVESTED FOR A GUARANTEED PERIOD EQUAL TO THE GUARANTEED
PERIOD JUST ENDED. If no such Guaranteed Period is then being offered, the
Guaranteed Period with the next shortest duration will be used. If no such
shorter Guaranteed Period is available, the next longest Guaranteed Period
will be used. Your Current Value will then earn interest at the Guaranteed
Rate applicable to the Guaranteed Period automatically selected for you. The
Company will mail a confirmation statement to you the next business day after
the completion of your just ended Guaranteed Period advising you of the new
Guaranteed Period and Guaranteed Rate.
WITHDRAWALS AND SURRENDERS
General
At any time prior to the time your annuity payments start, you may
surrender all or part of the Current Value of your Contract. If, after any
partial withdrawal, the Current Value of your contract is less than $2,500,
the Company may terminate your Contract upon 90 days notice and refund the
remaining balance to you. If you withdraw all of your Current Value, you must
surrender your Contract. To make a partial or full withdrawal, you must
properly complete a withdrawal request or surrender form provided by the
Company, and submit it to the Company In Writing. All withdrawals may be
subject to a Market Value Adjustment, a surrender fee, a deduction for
premium taxes and maintenance fees, and federal income taxes and tax
penalties. All applicable fees and deductions are deducted from the amount of
your withdrawal in accordance with the terms of your Contract. Any Market
Value Adjustment applicable to your withdrawal may either increase or
decrease the amount paid to you. (See "Market Value Adjustment," below.)
Accordingly, if you request that you receive a specific dollar amount upon
withdrawal, the amount actually withdrawn from your Contract may be more or
less than the requested dollar amount. The Company will, upon request, inform
you in advance of the amount payable upon a withdrawal. Amounts are withdrawn
on a pro rata basis from each of the Guaranteed Periods under the Contract.
The Market Value Adjustment
The amount payable upon a withdrawal before the end of a Guaranteed Period
may be increased or decreased by the application of the Market Value
Adjustment. When applicable, the Market Value Adjustment is applied to the
amount withdrawn. If your annuity payments start before the end of your
Guaranteed Period, a Market Value Adjustment may be applied to any amounts
used to start annuity payments. The Market Value Adjustment will not be
applied to Systematic Withdrawals, to withdrawals under the Estate
Conservation Option or to a death benefit payable on death of Annuitant if
paid within six months of the Annuitant's death. The Market Value Adjustment
also does not apply to amounts withdrawn at the end of your Guaranteed
Period, provided that five days prior to the end of that Guaranteed Period we
receive notice of the withdrawal In Writing.
The Market Value Adjustment reflects the change in the value of your
investment due to changes in interest rates since the start of the Guaranteed
Period under your Contract. When interest rates increase, the Market Value
Adjustment amount is negative. Conversely, when interest rates decrease, the
Market Value Adjustment amount is positive. Because a Market Value Adjustment
can be positive or negative, it may increase or decrease the amount of your
withdrawal before the end of a Guaranteed Period.
The Company imposes a Market Value Adjustment for several reasons. Upon
withdrawal of money from your Contract, the Company may need to liquidate
certain assets or use existing cash flow that would otherwise be available to
invest at current interest rates. The assets that are liquidated may be sold
at a profit or a loss, depending upon market conditions. This profit or loss
could affect the determination of Guaranteed Rates. (See "Guaranteed Periods
and Guaranteed Rates," above.) To lessen this impact, certain withdrawals are
subject to a Market Value Adjustment.
For an explanation of how the Market Value Adjustment is calculated, see
Appendix A.
Fees Applicable to Withdrawals
Upon any withdrawal, a surrender fee of up to 7% may be deducted from the
amount withdrawn, depending on the length of time that has passed since your
initial purchase payment was credited. The surrender fee only applies to the
amount of your purchase payment withdrawn, but for purposes of this fee it is
assumed that you are withdrawing all or a portion of your purchase
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payment first, not your earnings. This assumption, however, does not apply
for tax purposes. (See "Federal Income Taxes.") The chart below indicates the
percentage fee applied to amounts you withdraw.
<TABLE>
<CAPTION>
Surrender Fee
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Years since initial
payment credited: 0 1 2 3 4 5 6 7
Fee as a percentage
of payment withdrawn: 7% 7% 6% 6% 5% 4% 2% 0%
</TABLE>
The surrender fee and Market Value Adjustment are waived and not
applicable to any amounts withdrawn at the end of a Guaranteed Period,
provided that five days prior to the end of that Guaranteed Period we receive
notice of the withdrawal In Writing. The surrender fee and Market Value
Adjustment, however, remain applicable to any amount you reinvest for another
Guaranteed Period. For purposes of applying the surrender fee, all time
periods are measured from the date your initial purchase payment is credited,
even if you reinvest all or part of your Current Value in another Guaranteed
Period. Once the surrender fee declines to 0%, it is no longer applicable,
regardless of how long you own your Contract.
For example, assume that the first Guaranteed Period you select is for 5
years. Further assume that at the end of this 5 year Guaranteed Period, you
decide to reinvest the Current Value of your Contract for another Guaranteed
Period of 4 years. Assume you then make a withdrawal (but not a Special
Withdrawal, as described below) during the second year of the new Guaranteed
Period. Because six years have passed since your purchase payment was
credited, you would pay a 2% surrender fee, even though you could have
withdrawn all or part of the Current Value of your Contract at the end of the
first 5 year Guaranteed Period without paying a surrender fee. However, if
you make a withdrawal during the third year of the new Guaranteed Period, or
anytime thereafter, you would pay no surrender fee, because seven years would
have passed since your purchase payment was credited.
If you surrender your Contract and the Current Value is less than $2,500,
the surrender fee will be waived, provided you have not withdrawn any amounts
within the prior 12 months. The surrender fee is also waived if the Company
terminates your Contract because its Current Value is less than $2,500. In
both cases, a Market Value Adjustment will be applied, and a deduction will
be made for any premium taxes and maintenance fees, if applicable.
Special Withdrawals
After you own your Contract for one year, you have the opportunity to make
one Special Withdrawal per year without paying a surrender fee unless you
have elected "SWO" or "ECO" described below. The maximum amount of the
Special Withdrawal equals 10% of the Current Value of your Contract at the
time the Company receives your withdrawal request In Writing. This
opportunity is only available for the first withdrawal of each year, and all
subsequent withdrawals during that year will be subject to the surrender fee,
even if you did not withdraw the full 10% with your first withdrawal. If your
first withdrawal for the year is in excess of 10% of the Current Value of
your Contract, only the excess amount is subject to a surrender fee. A Market
Value Adjustment is applicable to any amounts that you withdraw, and you also
may be required to pay taxes and tax penalties. (See "Federal Income Taxes.")
The Systematic Withdrawal Option
If the Current Value of your Contract meets the minimum dollar amounts
established by the Company, you can elect a program of automated partial
withdrawals through the Systematic Withdrawal Option ("SWO"). SWO allows you
to withdraw either a specified amount or a percentage of your Contract's
value, or to withdraw amounts over a specified time period that you
determine, within certain limits described in your Contract. SWO payments can
be made on a monthly or quarterly basis, and the amount of each payment is
determined by dividing the designated annual amount by the number of payments
due each calendar year. SWO payments are withdrawn pro rata from each of the
Guaranteed Periods under your Contract.
SWO is available under three payment methods: the specified percentage
method, the specified payment method, and the specified period method. The
terms and conditions applicable to each of these payment methods are
described in your Contract.
Under a Contract purchased as a rollover Individual Retirement Annuity, if
the SWO payment for any year is less than the minimum required distribution
under the Tax Code, the SWO payment will be increased to an amount equal to
the minimum distribution amount.
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If you participate in SWO, you may not utilize a Special Withdrawal to
make additional withdrawals from your Contract. Once elected, SWO may be
canceled at any time by submitting a request In Writing to the Company.
However, once canceled, SWO may not be elected again by you or your spousal
Beneficiary. The Company reserves the right to change the terms of SWO for
future elections and to discontinue the availability of this option upon
notice. The Company also reserves the right to establish the date when you
may first elect SWO.
The Market Value Adjustment and surrender fees do not apply to withdrawals
received under SWO, but you may be required to pay taxes and tax penalties on
any amounts that you withdraw. (See "Federal Income Taxes.")
The Estate Conservation Option
If your Contract was purchased as a rollover Individual Retirement
Annuity, you are at least age 70-1/2 and the Current Value of your Contract
meets the minimum dollar amounts established by the Company, you can arrange
a program of annual partial withdrawals through the Estate Conservation
Option ("ECO"). ECO is designed to provide annual payments in an amount equal
to the minimum distribution that is required to be withdrawn each year under
the Tax Code. ECO payments are withdrawn pro rata from each of the Guaranteed
Periods under your Contract. The Company will, upon request, inform you in
advance of the amount payable under ECO.
The Market Value Adjustment does not apply to withdrawals received under
ECO, and surrender fees also are not applicable. You will be required to pay
taxes on any amounts that you withdraw. (See "Federal Income Taxes.")
If you participate in ECO, you may not utilize a Special Withdrawal to
make additional withdrawals from your Contract. Once elected, ECO may be
canceled at any time by submitting a request In Writing to the Company.
However, once canceled, ECO may not be elected again until 36 months have
elapsed. The Company reserves the right to change the terms of ECO for future
elections and to discontinue the availability of this option upon notice.
The Nursing Home Waiver
The Nursing Home Waiver provides that if you have owned your Contract for
over one year, and the Annuitant has spent at least 45 consecutive days in a
licensed nursing care facility, then the surrender fee will be waived if you
withdraw any portion of the Current Value of your Contract within three years
of the Annuitant's admission to such licensed nursing care facility. The
Market Value Adjustment applies to withdrawals under the Nursing Home Waiver,
and you also may be required to pay taxes and tax penalties on any amounts
that you withdraw. (See "Federal Income Taxes.") The Nursing Home Waiver may
not be available in all states and does not apply if the Annuitant was in a
licensed nursing care facility when you purchased your Contract.
Payment Upon Withdrawal or Surrender
Under certain emergency conditions, the Company may defer payment of any
withdrawal for a period not exceeding six months from date of receipt of a
withdrawal request.
CHARGES AND DEDUCTIONS
Premium Taxes
Several states and local governments impose a premium or similar tax on
annuities. Currently, such taxes range up to 3.5% of either your purchase
payment or the amount accumulated in your Contract that you use for annuity
payments. The Company initially will pay all state-imposed premium or similar
taxes applicable to your Contract. These taxes will be deducted from the
amounts that you use for annuity payments immediately prior to the time your
annuity payments begin. If you surrender your Contract, or at your death your
Beneficiary elects to receive a lump sum distribution, a charge will be
deducted for any premium taxes paid on your behalf for which the Company has
not been reimbursed. The Company reserves the right to deduct premium taxes
at any time from your purchase payment or from the Current Value of your
Contract based upon the Company's determination of when such tax is due. In
the event that premium taxes are deducted from your purchase payment, the
amount invested in a Guaranteed Period will be equal to the amount of your
purchase payment reduced by any applicable premium tax.
Maintenance Fees
Prior to the time your annuity payments start, an annual maintenance fee
may be deducted from the Current Value of your Contract on each anniversary
of your Contract's effective date and upon the surrender of your Contract.
The terms and conditions under which the maintenance fee may be deducted are
stated in your Contract.
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DEATH BENEFIT
In your application to purchase a Contract, you will select a Beneficiary.
If you or the Annuitant die before annuity payments begin, a death benefit
will be paid to your Beneficiary in accordance with the terms of your
Contract. If a joint holder dies, the surviving joint holder will be deemed
the designated Beneficiary, and any other Beneficiary on record will be
treated as the contingent Beneficiary. If the Contract holder is not a
natural person, the death benefit will be payable at the death of the
Annuitant or upon any change of the Annuitant.
The amount of the death benefit equals the Current Value of your Contract,
provided that the death benefit is paid within six months of the death of the
Annuitant. If the death benefit is paid after six months of the date of death
of the Annuitant, or if paid upon your death and you are not the Annuitant,
it equals the Current Value of your contract as adjusted by any applicable
Market Value Adjustment. Additionally, if you die and you are not the
Annuitant, the death benefit payable will be subject to a surrender fee, if
applicable. The death benefit is calculated as of the date of receipt of
notification In Writing of due proof of death and the Beneficiary's claim. In
certain circumstances, your Beneficiary or joint holder may have the option
to continue the Contract rather than receiving the death benefit.
You may change the Beneficiary you previously designated at any time by
submitting notice In Writing to the Company. The change will not be effective
until received and recorded by the Company.
Death Benefit Options Available to Your Beneficiary
If you die before annuity payments begin, or, if the Contract holder is
not a natural person and the Annuitant dies before annuity payments begin,
any Beneficiary under the Contract who is an individual has several options
for receiving payment of the death benefit. The death benefit may be paid in
one lump sum payment, or all or part of such amounts may be used to start
annuity payments using the Annuity Options available under the Contract.
Unless the designated Beneficiary is your spouse, all death benefits paid as
a lump sum must be distributed within five years of the date of death. If the
Beneficiary elects to receive a lump sum payment, a charge will be deducted
for any premium taxes paid on your behalf for which the Company has not been
reimbursed. A spousal Beneficiary also may elect to exercise all rights under
the Contract.
If you are an individual who is not the Annuitant, and the Annuitant dies,
your Beneficiary may elect either to apply all of the death benefit amount to
any Annuity Option available under the Contract within 60 days of the date of
death, or to receive such amount as a lump sum payment.
ANNUITY PERIOD
Selecting an Annuity Date
You select the Annuity Date for your Contract, which is the date you want
your annuity payments to start under an Annuity Option that you select. This
date may be any time after the first year of your Contract, and will be the
later of the Annuitant's 85th birthday or the tenth anniversary of your
purchase payment, unless you elect otherwise.
You can change your Annuity Date by notifying the Company In Writing at
least 30 days before your annuity payments are to begin.
Regardless of your Annuity Date, your annuity payments will not begin
until you have selected an Annuity Option. Failure to select an Annuity
Option on your Annuity Date, or postponement of the Annuity Date past the
later of the Annuitant's 85th birthday or the tenth anniversary of your
purchase payment, may have adverse tax consequences. You should consult with
a qualified tax adviser if you are considering either of these courses of
action.
Annuity Payments
You may apply all or a portion of the Current Value of your Contract to
provide annuity payments. Annuity payments are made to you unless you request
otherwise. You can request that we send annuity payments to any person you
name, or have the payments deposited directly in any bank account. After your
death, we will send any annuity payments still due to the Beneficiary you
have selected. You may be required to pay taxes on portions of the annuity
payments you receive. (See "Federal Income Taxes.")
Annuity payments are made monthly unless you request that annuity payments
be made quarterly, semi-annually or annually. You may change your request In
Writing at any time. The amount of each annuity payment depends on how much
of your Current Value, less applicable premium taxes, you use to start your
annuity payments, and the Annuity Option that you elect. No election
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may be made that would result in a first annuity payment of less than $50 or
total yearly annuity payments of less than $250. If the amount you have
accumulated in your Contract as of the Annuity Date is insufficient to elect
an Annuity Option for the minimum amount specified, you will receive a lump
sum payment. After any two full consecutive years, measured from the
anniversary of the effective date of your Contract, and upon 90 days notice
to you, the Company may terminate a rollover Individual Retirement Annuity
Contract if the paid-up benefit at maturity would be less than $20 per month.
Instead of electing annuity payments, you may request that the Company make a
lump sum payment. No surrender fee will be applied to any amounts used to
start annuity payments, although a Market Value Adjustment may be applicable.
Annuity Options
You can elect to have your annuity payments made:
(1) for the life of your designated Annuitant or joint Annuitant;
(2) for the life of the Annuitant but guaranteed for a minimum of 5, 10,
15 or 20 years;
(3) for the life of two Annuitants; or
(4) for a stated period of time (10 to 30 years).
You must notify the Company In Writing of the Annuity Option elected at
least 30 days prior to the Annuity Date. You may change your election at any
time up to 30 days before your annuity payments start. If your annuity
payments start before the end of your Guaranteed Period, a Market Value
Adjustment will be applied to any amounts used to start annuity payments. If
the Annuity Option selected is one of the first three listed above (i.e., a
lifetime annuity), only a positive Market Value Adjustment will be applied.
Once you elect for annuity payments to begin, you may not elect to instead
receive a lump sum payment.
If you choose an annuity for life but guaranteed for a minimum number of
years, when the annuity payments start, the age of the Annuitant plus the
number of years for which payments are guaranteed must not exceed 95.
Additionally, federal income tax requirements currently applicable to
Individual Retirement Annuities provide that the period of years guaranteed
may not be any greater than the joint life expectancies of the payee and his
or her designated Beneficiary.
Further, if you choose an annuity for the life of two Annuitants, annuity
payments will continue until both Annuitants have died. When this Annuity
Option is chosen, you must choose one of the following:
(1) 100% of the payment to continue after the first death;
(2) 66-2/3% of the payment to continue after the first death;
(3) 50% of the payment to continue after the first death;
(4) Payments for a minimum of 120 months, with 100% of the payment to
continue after the first death; or
(5) 100% of the payment to continue at the death of the second Annuitant
and 50% of the payment to continue at the death of the Annuitant.
Payment Upon Death After Annuity Payments Begin
Upon the death of either the Annuitant or the surviving joint Annuitant
after annuity payments start, the amount payable, if any, to your Beneficiary
depends on the Annuity Option currently in force. Any amounts payable must be
paid at least as rapidly as under the method of distribution in effect at the
Annuitant's death.
If you die after annuity payments start and you are not the Annuitant, any
remaining payments will continue to be made to your Beneficiary at least as
rapidly as under the method of distribution in effect at your death.
INVESTMENTS
Purchase payments received under the Contracts and allocated to Guaranteed
Periods will be invested by the Company under the laws of the State of
Connecticut. You have no priority claims on, or participation in the
performance of, such assets. All such assets are the property of the Company
and available to meet the guarantees under the Contracts and the general
obligations of the Company.
The assets of the Company will be invested in accordance with the
requirements established by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified
limits and subject
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to certain qualifications, in federal, state, and municipal obligations,
corporate bonds, preferred and common stocks, real estate mortgages, and
certain other investments.
The Company has no specific formula for establishing the Guaranteed Rates
for the Guaranteed Periods. The Company expects the rates to be influenced
by, but not necessarily correspond to, the yields on the fixed income
securities to be acquired with amounts that are allocated to the Guaranteed
Periods at the time that the Guaranteed Rates are established.
The Company intends to invest in assets which, in the aggregate, have
characteristics, especially cash flow patterns, reasonably related to the
characteristics of the liabilities. Various immunization techniques will be
used to achieve the objective of close aggregate matching of assets and
liabilities. The Company will primarily invest in investment-grade fixed
income securities including:
(bullet) Securities issued by the United States Government or its agencies
or instrumentalities, which issues may or may not be guaranteed
by the United States Government.
(bullet) Debt securities that are rated, at the time of purchase, within
the four highest grades assigned by Moody's Investors Services,
Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation (AAA,
AA, A or BBB) or any other nationally recognized rating
organizations.
(bullet) Other debt instruments, including, but not limited to, issues of
or guaranteed by banks or bank holding companies and of
corporations, which obligations, although not rated by Moody's,
Standard & Poor's, or other nationally recognized rating
organizations, are deemed by the Company's management to have an
investment quality comparable to securities which may be
purchased as stated above.
(bullet) Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year which are
considered by the Company's management to have investment quality
comparable to securities which may be purchased as stated above.
In addition, the Company may invest in futures and options. Financial
futures and related options thereon and options on securities are purchased
solely for nonspeculative hedging purposes. In the event the securities
prices are anticipated to decline, the Company may sell a futures contract or
purchase a put option on futures or securities to protect the value of
securities it holds. Similarly, if securities prices are expected to rise,
the Company may purchase a futures contract or a call option thereon against
anticipated positive cash flow or may purchase options on securities.
WHILE THE FOREGOING GENERALLY DESCRIBES THE COMPANY'S INVESTMENT STRATEGY,
THE COMPANY IS NOT OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE
CONTRACTS ACCORDING TO ANY PARTICULAR STRATEGY, EXCEPT AS MAY BE REQUIRED BY
CONNECTICUT AND OTHER STATE INSURANCE LAWS, NOR WILL THE GUARANTEED RATES THE
COMPANY ESTABLISHES NECESSARILY RELATE TO THE INVESTMENT PERFORMANCE THE
COMPANY EXPERIENCES.
PARTICIPANT AND BENEFICIARY RIGHTS AND PRIVILEGES
You have the sole and absolute power to exercise all rights and privileges
under the Contract, except as otherwise provided by the Contract. Your rights
under the Contract may be assigned or transferred. The Company will not be
bound by an assignment unless and until notice of such assignment is
submitted In Writing and such assignment is accepted by the Company. The
Company assumes no responsibility for the validity or effect of any
assignment. The Company reserves the right not to accept any assignment or
transfer to a nonnatural person. In some cases, an assignment may have
adverse tax consequences. You should consult a tax adviser regarding the
consequences of an assignment.
AMENDMENT OF THE CONTRACTS
Only an authorized officer of the Company may change the terms of the
Contract. The Company will notify you In Writing of any such change. The
Company reserves the right to modify the Contract to meet the requirements of
applicable state or federal laws or regulations.
DISTRIBUTION OF THE CONTRACTS
The Company will serve as the underwriter of the securities being sold by
this Prospectus. The Company is registered as a broker-dealer with the
Securities and Exchange Commission and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). As underwriter, the Company
will contract with one or more other registered broker-dealers who are NASD
members ("Distributors") to offer and sell the Contracts. Sales compensation
paid to Distributors will not exceed 6-1/2 percent of the purchase payment
made for a Contract. Alternatively, the Company may pay asset-based sales
compensation annually to Dis-
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tributors that will not exceed 1-1/4 percent of the assets held under a
Contract. At its discretion, the Company may also pay sales compensation to
Dealers based on both a percentage of the purchase payment and the assets
held annually under a Contract. From time to time, customers of certain
Broker-Dealers and other entities may be offered special initial Guaranteed
Rates and negotiated commissions. The Company and one or more affiliates may
also sell the Contracts directly. All registered representatives of the
Distributors must also be licensed as insurance agents to sell the Contracts.
The Company may also contract with independent third party broker-dealers
who will act as wholesalers by assisting the Company in finding
broker-dealers interested in acting as Distributors of the Contract. These
wholesalers may also provide training, marketing and other sales related
functions for the Company and the Distributors and may provide certain
administrative services to the Company in connection with the Contracts. The
Company may pay such wholesalers compensation based on purchase payments for
the Contracts purchased through Distributors selected by the wholesaler.
The Company may also designate third parties to provide services in
connection with the Contracts such as reviewing applications for completeness
and compliance with insurance requirements and providing the Distributors
with approved marketing material, prospectuses or other supplies. These
parties will also receive payments based on purchase payments for their
services, to the extent such payments are allowed by applicable securities
laws and NASD rules. All costs and expenses related to these services will be
paid by the Company.
FEDERAL INCOME TAXES
The Company
The Company is taxed as a life insurance company under the Tax Code. The
assets underlying the Contracts will be owned by the Company. The income
earned on such assets will be the Company's income.
The Company assumes no responsibility for determining whether a particular
individual retirement annuity plan satisfies the applicable requirements of
the Tax Code or whether a particular person is eligible for such a plan.
Taxes You or Others Pay--Non-Qualified Contracts
Non-qualified Contracts are those used other than in connection with a
rollover Individual Retirement Annuity or tax-favored retirement program such
as an employee benefit plan.
Accumulation Period
The Contracts are considered annuity contracts under Section 72 of the Tax
Code. Currently, no Federal income tax is payable on increases in the value
of the Contract (such as interest credited to you) until payments are made to
you or another payee under such Contract. However, a Contract owned other
than by a natural person is not generally an annuity for tax purposes and any
increase in value thereunder is currently taxable as ordinary income.
Annuity Payments
Annuity payments are in part taxable to you or another payee as ordinary
income, and in part nontaxable. The nontaxable portion of each annuity
payment is that portion of your purchase payment returned to you. This
nontaxable portion is determined by dividing the "investment in the contract"
(generally, your purchase payment with certain adjustments) by the amount of
"expected return" during the time that periodic payments are to be made, and
then multiplying by the amount of the payment. The balance of the annuity
payment is taxable.
Non-Natural Holders of a Non-Qualified Contract
If you are not a natural person, a Non-qualified Contract is not treated
as an annuity for income tax purposes and the "income on the contract" for
the taxable year is currently taxable as ordinary income. "Income on the
contract" is any increase over the year in the amount payable upon the
withdrawal of all or any portion of the Current Value, adjusted for amounts
previously distributed and amounts previously included in income. There are
some exceptions to the rule, and a non-natural person should consult with its
tax adviser prior to purchasing this Contract. A non-natural person exempt
from federal income taxes should consult with its tax adviser regarding
treatment of "income on the contract" for purposes of the unrelated business
income tax.
Withdrawals Before the Annuity Date
Partial withdrawals prior to the Annuity Date, other than those used to
provide annuity payments, and total surrenders at any time, will be taxable
to you as ordinary income to the extent that the Contract's Current Value
exceeds your "investment in the contract" at that time. For tax purposes, it
is assumed that you are withdrawing all or a portion of your earnings first,
not your purchase payment.
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If you assign or pledge any part of your Current Value, the value so
pledged or assigned is treated like a withdrawal for tax purposes. Transfer
of ownership without full and adequate consideration is treated for income
tax purposes as a taxable surrender of the Contract. Transfers between
spouses or incident to divorce are not subject to this rule.
The tax treatment of withdrawals from each Contract may be affected if you
own other annuity contracts issued by us (or our affiliates) that were
purchased on or after October 21, 1988. (See the Contract Prospectus.)
Penalty For Premature Withdrawals and Payments
In addition to being included in ordinary income, the taxable portion of
any withdrawal or payment made before you reach age 59-1/2 may be subject to
a 10 percent penalty tax. The penalty tax does not apply to, among other
things, payments made on account of your death or becoming disabled, or to
payments made in substantially equal periodic payments, not less than
annually, over the life (or life expectancy) of the payee or over the joint
lives (or life expectancies) of the payee and a designated Beneficiary.
Partial Annuitization
Prior to the Annuity Date, you may withdraw a portion of your Account
Value and use it to provide annuity payments, while leaving the remaining
portion of your Account Value invested in one or more Guaranteed Periods. The
Tax Code and the regulations thereunder do not specifically address the tax
treatment applicable to payments provided pursuant to the exercise of this
type of option. The Company takes the position that payments provided
pursuant to this option are taxable as annuity payments, and not as a
withdrawal. However, because the tax treatment of such payments is currently
unclear, you should consult with a qualified tax adviser if you are
considering a partial annuitization of your Contract.
Distribution-At-Death Rules
In order to be treated for tax purposes as a non-qualified annuity
Contract, a non-qualified Contract must provide the following two
distribution rules: (a) if you die on or after the Annuity Date, and before
the entire interest in the Contract has been distributed, the remainder of
your interest will be distributed at least as quickly as the method in effect
on your death; and (b) if you die before the Annuity Date, your entire
interest must generally be distributed within five years after the date of
death, or if the interest is payable to a designated Beneficiary, such
interest must be annuitized over the life of that Beneficiary or a period not
extending beyond the life expectancy of that Beneficiary, beginning within
one year after the date of death. A "designated Beneficiary" is any
individual designated as a Beneficiary by you. If the designated Beneficiary
is your spouse, the Contract (together with the deferral of tax on the
accrued and future income thereunder) may be continued in the name of the
spouse.
Where the holder of the Contract is not an individual, the primary
Annuitant is considered the owner, solely for the purpose of the
distribution-at-death rules. The primary Annuitant is the individual the
events in whose life are of primary importance in affecting the timing and
payment under a Contract. In addition, when the holder of the Contract is not
an individual, a change in the primary Annuitant is treated as the death of
the holder of the Contract.
Certain Tax-Free Exchanges
Section 1035 of the Tax Code provides generally that no gain or loss will
be recognized under the exchange of a life insurance, endowment or annuity
contract for an annuity contract. Thus, a properly completed exchange from
one of these types of products into a Contract pursuant to the special
annuity contract exchange form the Company provides for this purpose is not
generally a taxable event under the Tax Code, and the investment in the
Contract will be the same as in the exchanged product.
Because of the complexity of these and other tax aspects in connection
with an exchange, a tax adviser should be consulted before any exchange is
made.
Taxes You or Others Pay--Qualified Contracts
Contracts may also be used with several types of tax-favored retirement
programs, such as a rollover Individual Retirement Annuity or an employee
benefit plan. The tax rules applicable to participants in such programs vary
according to the type of program and the terms and conditions of the program
itself.
Contracts Purchased As A Rollover Individual Retirement Annuity
The Contract may be purchased as a rollover Individual Retirement Annuity,
by transferring amounts previously accumulated (rollover amounts) under
another Individual Retirement Annuity, an Individual Retirement Account (as
defined by the Tax Code), or a retirement plan qualified under Sections 401
or 403 of the Tax Code.
For Contracts purchased as a rollover Individual Retirement Annuity, the
Tax Code requires that minimum distributions must begin no later than April 1
of the year following the year in which you attain age 70-1/2. When payments
under an Individual Retire
15
<PAGE>
ment Annuity Contract are made in the form of an annuity, or in a single sum
such as on surrender of the Contract or by withdrawal, the entire payment is
generally taxed as ordinary income. As in the case of non-qualified
Contracts, certain distributions, such as those made prior to your reaching
59-1/2, may be subject to a 10% penalty.
Withholding on Eligible Rollover Distributions
If you wish to rollover your entire Current Value to or from a rollover
Individual Retirement Annuity, you should have it paid directly to the
successor plan. Otherwise, your distribution will be subject to 20%
withholding. Consult a qualified tax adviser before taking such a
distribution.
Qualified Pension, Profit-Sharing Plans, or Annuity Plans
Sections 401(a) and 403(a) of the Tax Code permit corporate employers and
self-employed individuals to establish various types of retirement plans for
employees. Such retirement plans may permit the purchase of Contracts to
provide benefits thereunder. The plan trustee must be the Contract holder and
Beneficiary of Contracts used in such plans. The Tax Code contains
requirements with respect to commencement of minimum distributions and
premature withdrawals similar to those applicable to rollover Individual
Retirement Annuities.
Tax Sheltered Annuities
Tax Code Section 403(b) permits the purchase of Contracts by employees of
public schools and certain charitable, educational and scientific
organizations described in Tax Code Section 501(c)(3). These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employee until the employee receives distributions from the Contract. The
amount of contributions to the Contract used in connection with Tax Code
Section 403(b) is limited to certain maximums imposed by the Tax Code.
Furthermore, the Tax Code sets forth additional restrictions governing such
items as transferability, distributions, non-discrimination and withdrawals.
The Tax Code contains requirements with respect to commencement of minimum
distributions and premature withdrawals similar to those applicable to
rollover Individual Retirement Annuities.
Withholding of Taxes
The Company is obligated to withhold taxes from certain payments unless
the recipient elects otherwise. The withholding rate varies depending upon
the nature and the amount of the distribution. The Company will notify you or
another payee in advance of the first payment of his or her right to elect
out of withholding and furnish a form on which the election may be made. Any
election must be received by the Company In Writing in advance of the payment
in order to avoid withholding.
See Your Own Tax Adviser
The above description of Federal income tax consequences of owning a
Contract and of the qualified retirement plans which may be funded by the
Contracts is only a brief summary and is not intended as tax advice. The tax
rules applicable to the Contracts and to tax qualified plans are extremely
complex and often difficult to understand. Anything less than full compliance
with the applicable rules, all of which are subject to change from time to
time, can have adverse tax consequences. The taxation of an Annuitant or
other payee has become so complex and confusing that great care must be taken
to avoid adverse tax consequences. For further information you should consult
a qualified tax adviser.
LEGAL MATTERS
The validity of the interests under the Contracts offered hereby has been
passed upon for the Company by Susan E. Bryant, Esq.
EXPERTS
The consolidated financial statements of the Company and related
consolidated financial statement schedules as of December 31, 1995 and 1994,
and for each of the years in the three-year period ended December 31, 1995,
have been incorporated by reference herein to the Company's Form 10-K for the
year ended December 31, 1995 upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm
as experts in accounting and auditing.
The reports of KPMG Peat Marwick LLP on the above-mentioned consolidated
financial statements and related consolidated financial statement schedules
refer to a change in 1993 in the Company's methods of accounting for certain
investments in debt and equity securities.
16
<PAGE>
FURTHER INFORMATION
This Prospectus does not contain all of the information contained in the
registration statement of which the Prospectus is a part, and certain
portions of the registration statement have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
information so omitted may be obtained from the offices of the Commission, as
set forth under "Available Information," upon payment of the prescribed fee.
INQUIRIES
You may direct inquiries by writing directly to us at the address shown on
the cover page of this Prospectus or by calling 1-800-531-4547.
17
<PAGE>
APPENDIX A
CALCULATING A MARKET VALUE ADJUSTMENT
The Market Value Adjustment Formula
The mathematical formula used to determine the Market Value Adjustment is:
(1 + i)(x)
(365)
(1 + j)
Where:
i is the Deposit Period Yield; j is the Current Yield; and x is the number
of days remaining (computed from Wednesday of the week of withdrawal) in
the Guaranteed Period.
Explanation of the Market Value Adjustment Formula
The Market Value Adjustment essentially involves a comparison of two
yields: the yield available at the start of the current Guaranteed Period of
your Contract (the "Deposit Period Yield") and the yield currently available
(the "Current Yield"). An adjustment is needed to reflect the period of time
remaining in the Guaranteed Period of your contract.
The Market Value Adjustment depends on the relationship of the Deposit
Period Yield of U.S. Treasury Notes that mature in the last quarter of the
Guaranteed Period, to the Current Yield of such U.S. Treasury Notes at the
time of withdrawal. In general, if the Current Yield is the lesser of the
two, the Market Value Adjustment will decrease the amount withdrawn from the
Contract to satisfy the withdrawal request; if the Current Yield is the
higher of the two, the Market Value Adjustment will increase the amount
withdrawn from the Contract to satisfy the withdrawal request. As a result of
the Market Value Adjustment imposed, the amount withdrawn from the Contract
prior to the Maturity Date may be less than the amount paid into the
Contract.
To determine the Deposit Period Yield and the Current Yield, certain
information must be obtained about the prices of outstanding U.S. Treasury
issues. This information may be found each business day in publications such
as The Wall Street Journal. This newspaper publishes the yield-to-maturity
percentages for all Treasury Notes as of the preceding business day. These
percentages are used in determining the Deposit Period Yield and the Current
Yield for the Market Value Adjustment calculation.
Deposit Period Yield
Determining the Deposit Period Yield in the Market Value Adjustment
calculation involves consideration of interest rates prevailing at the start
of the Guaranteed Period from which the withdrawal will be made. First, the
Treasury Notes that mature in the last three months of the Guaranteed Period
are identified, and then, the yield-to-maturity percentages of these Treasury
Notes for the last business day of each week in the "Deposit Period" are
determined. The resulting percentages are then averaged to determine the
Deposit Period Yield. The Deposit Period is the period of time during which
the purchase payment or any reinvestment may be made to available Guaranteed
Periods. A Deposit Period may be a month, a calendar quarter, or any other
period of time specified by the Company.
Current Yield
To determine the Current Yield, use the same Treasury Notes identified for
the Deposit Period Yield: Treasury Notes that mature in the last three months
of the Guaranteed Period. However, the yield-to-maturity percentages used are
those for the last business day of the week preceding the withdrawal. Average
these percentages to determine the Current Yield.
The following are examples of Market Value Adjustment ("MVA") calculations
using several hypothetical Deposit Period Yields and Current Yields. These
examples do not include the effect of any surrender fee that may be assessed
under the Contract upon withdrawal.
A-1
<PAGE>
EXAMPLE I
Assumptions:
i, the Deposit Period Yield, is 8%
j, the Current Yield, is 10%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the Guaranteed Period, is 927.
MVA = (1+i)(x)
(365)
(1+j)
= 1.08(927)
(365)
1.10
= .9545
In this example the Deposit Period Yield of 8% is less than the Current
Yield of 10%, therefore, the Market Value Adjustment is less than 1. The
amount withdrawn from the Guaranteed Period is multiplied by this Market
Value Adjustment.
If a withdrawal of a stated percentage is requested, the value withdrawn
from a Guaranteed Period will reflect the deduction of the negative Market
Value Adjustment amount. However, if a withdrawal request of a specific
dollar amount is requested, the amount withdrawn from a Guaranteed Period
will be increased to compensate for the negative Market Value Adjustment
amount. For example, a withdrawal request to receive a check for $2,000 would
result in a $2,095.34 withdrawal from the Guaranteed Period.
Assumptions:
i, the Deposit Period Yield, is 5%
j, the Current Yield, is 6%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the Guaranteed Period, is 927.
MVA = (1+i)(x)
(365)
(1+j)
= 1.05(927)
(365)
1.06
= .9762
In this example the Deposit Period Yield of 5% is less than the Current
Yield of 6%, therefore, the Market Value Adjustment is less than 1. The
amount withdrawn from the Guaranteed Period is multiplied by this Market
Value Adjustment.
If a withdrawal of a stated percentage is requested, the value withdrawn
from a Guaranteed Period will reflect the deduction of the negative Market
Value Adjustment amount. However, if a withdrawal request of a specific
dollar amount is requested, the amount withdrawn from a Guaranteed Period
will be increased to compensate for the negative Market Value Adjustment
amount. For example, a withdrawal request to receive a check for $2,000 would
result in a $2,048.76 withdrawal from the Guaranteed Period.
A-2
<PAGE>
EXAMPLE II
Assumptions:
i, the Deposit Period Yield, is 10%
j, the Current Yield, is 8%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the Guaranteed Period, is 927.
MVA = (1+i)(x)
(365)
(1+j)
= 1.10(927)
(365)
1.08
= 1.0477
In this example the Deposit Period Yield of 10% is greater than the
Current Yield of 8%, therefore, the Market Value Adjustment is greater than
1. The amount withdrawn from the Guaranteed Period is multiplied by this
Market Value Adjustment.
If a withdrawal of a stated percentage is requested, the value withdrawn
from a Guaranteed Period will reflect the addition of the positive Market
Value Adjustment amount. However, if a withdrawal request of a specific
dollar amount is requested, the amount withdrawn from a Guaranteed Period
will be decreased to reflect the positive Market Value Adjustment amount. For
example, a withdrawal request to receive a check for $2,000 would result in a
$1,908.94 withdrawal from the Guaranteed Period.
Assumptions:
i, the Deposit Period Yield, is 5%
j, the Current Yield, is 4%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the Guaranteed Period, is 927.
MVA = (1+i)(x)
(365)
(1+j)
= 1.05(927)
(365)
1.04
= 1.0246
In this example the Deposit Period Yield of 5% is greater than the Current
Yield of 4%, therefore, the Market Value Adjustment is greater than 1. The
amount withdrawn from the Guaranteed Period is multiplied by this Market
Value Adjustment.
If a withdrawal of a stated percentage is requested, the value withdrawn
from a Guaranteed Period will reflect the addition of the positive Market
Value Adjustment amount. However, if a withdrawal of a specific dollar amount
is requested, the amount withdrawn from a Guaranteed Period will be decreased
to reflect the positive Market Value Adjustment amount. For example, a
withdrawal request to receive a check for $2,000 would result in a $1,951.98
withdrawal from the Guaranteed Period.
A-3
<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
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT 71-0294708
- - ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
- - ------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860)273-0978
-------------
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.
- - ----------------------------------------------------------------------------
(Millions) 1995 1994 1993
- - ----------------------------------------------------------------------------
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
- - ----------------------------------------------------------------------------
Deposits, which are not included in premiums or revenue, are shown in the
following table for the years indicated:
- - ----------------------------------------------------------------------------
(Millions) 1995 1994 1993
- - ----------------------------------------------------------------------------
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
- - ----------------------------------------------------------------------------
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
- - ------------------------------------------------------------------------------------------
<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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses payable by the Company in connection with the offering are set
forth in the table below.
SEC registration fee $ 20,000
Printing $ 25,000
Legal Fees and expenses $ 50,000
Accounting fees and expenses $ 5,000
Miscellaneous ___________
Total $ 100,000
Item 15. Indemnification of Directors and Officers
Reference is hereby made to Section 33-320a of the Connecticut General
Statutes ("C.G.S.") regarding indemnification of directors and officers of
Connecticut corporations. The statute provides in general that Connecticut
corporations shall indemnify their officers, directors, employees, agents, and
certain other defined individuals against judgments, fines, penalties, amounts
paid in settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification does not apply unless (1) the individual is successful on
the merits in the defense of any such proceeding; or (2) a determination is made
(by a majority of the board of directors not a party to the proceeding by
written consent; by independent legal counsel selected by a majority of the
directors not involved in the proceeding; or by a majority of the shareholders
not involved in the proceeding) that the individual acted in good faith and in
the best interests of the corporation; or (3) the court, upon application by the
individual, determines in view of all the circumstances that such person is
reasonably entitled to be indemnified.
C.G.S. Section 33-320a provides an exclusive remedy: a Connecticut
corporation cannot indemnify a director or officer to an extent either greater
or less than that authorized by the statute, e.g., pursuant to its certificate
of incorporation, bylaws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared by the corporation with the insured individuals on an
agreed basis.
Consistent with the statute, Aetna Life and Casualty Company has procured
insurance from Lloyd's of London and several major United States excess insurers
for its directors and officers and the directors and officers of its
subsidiaries, including the Registrant, which supplements the indemnification
rights provided by C.G.S. Section 33-320a to the extent such coverage does not
violate public policy.
Item 16. Exhibits and Financial Statement Schedules
(4)(a) Form of Group Annuity Contract (Form No. G1-MGA-95)1
(4)(b) Form of Individual Annuity Contract (Form No. I1-MGA-95)2
(5) Opinion as to Legality
(10) Material contracts are listed under exhibit 10 in the Company's Form
10-K for the fiscal year ended December 31, 1995 (File No.
33-23376), as filed electronically with the Commission on March 29,
1996. Each of the exhibits so listed is incorporated by reference as
indicated in the Form 10-K.
(23)(a) Consent of Independent Auditors
(23)(b) Consent of Counsel (included in Exhibit 16(5) above)
(24) Powers of Attorney3
Exhibits other than these listed are omitted because they are not required
or are not applicable.
1. Incorporated by reference to the Registration Statement on Form S-2 (File
No.
33-64331), as filed electronically on November 16, 1995.
2. Incorporated by reference to Pre-Effective Amendment No. 2 to Registration
Statement on Form S-2 (File No. 33-64331), as filed electronically on
January 17, 1996.
3. Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-75974), as filed
electronically on April 9, 1996.
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes as follows, pursuant to Item 512
of Regulation S-K:
(a) Rule 415 offerings:
(1) To file, during any period in which offers or sales of the registered
securities are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material changes to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(h) Request for Acceleration of Effective Date:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
33-64331.DOC
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement on Form S-2 (File No. 33-64331) to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Hartford,
State of Connecticut, on this 15th day of April, 1996.
By: AETNA LIFE INSURANCE AND ANNUITY COMPANY
By: Daniel P. Kearney*
-------------------------------------------
Daniel P. Kearney
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement on Form S-2 has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
Daniel P. Kearney* Director and President )
- - ------------------------- (principal executive officer) )
Daniel P. Kearney
)
Timothy A. Holt* Director and Chief Financial Officer ) April
- - -------------------------
Timothy A. Holt ) 15, 1996
)
Christopher J. Burns* Director )
- - -------------------------
Christopher J. Burns )
)
Laura R. Estes* Director )
- - -------------------------
Laura R. Estes )
)
Gail P. Johnson* Director )
- - -------------------------
Gail P. Johnson )
)
John Y. Kim* Director )
- - -------------------------
John Y. Kim )
)
<PAGE>
Shaun P. Mathews* Director )
- - -------------------------
Shaun P. Mathews )
)
Glen Salow* Director )
- - -------------------------
Glen Salow )
)
Creed R. Terry* Director )
- - -------------------------
Creed R. Terry )
)
Eugene M. Trovato* Vice President and Treasurer, Corporate
- - ------------------------- Controller )
Eugene M. Trovato )
By: /s/ Julie E. Rockmore
------------------------------------------
Julie R. Rockmore
*Attorney-in-Fact
<PAGE>
33-64331.DOC
EXHIBIT INDEX
Exhibit No. Exhibit Page
99-4.a Form of Group Annuity Contract (Form No. G1-MGA-95) *
99-4.b Form of Individual Annuity Contract (Form No. *
I1-MGA-95)
99-5 Opinion as to Legality
--------
99-10 Material Contracts *
99-23.a Consent of Independent Auditors
--------
99-23.b Consent of Counsel (included in Exhibit 16(5) above) *
24 Powers of Attorney *
*Incorporated by reference
151 Farmington Avenue Susan E. Bryant
Hartford, CT 06156 Counsel
Law & Regulatory Affairs,
RE4C
(860) 273-7834
Fax: (860) 273-8340
April 15, 1996
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company
Post-Effective Amendment No. 1 to Registration Statement on Form S-2
File No. 33-64331
Prospectus Title: Aetna Multi-Rate Annuity
Dear Sirs:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I have
represented the Company in connection with the Aetna Multi-Rate Annuity (the
"Aetna Multi-Rate Annuity"), under the Securities Act of 1933, as amended. In
connection with such representation, I have reviewed Post-Effective Amendment
No. 1 to the Registration Statement on Form S-2 relating to such annuity,
including the prospectus, and relevant proceedings of the Board of Directors.
Based upon this review, and assuming the securities represented by the Company
are issued in accordance with the provisions of the prospectus, I am of the
opinion that the securities, when sold, will have been legally issued, and will
constitute a legal and binding obligation of the Company.
I further consent to the use of this opinion as an exhibit to the Registration
Statement and to my being named under the caption "Legal Matters" therein.
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Aetna Life Insurance and Annuity Company
Consent of Independent Certified Public Accountants
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We consent to the use of our reports incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the Prospectus.
Our reports refer to a change in 1993 in the Company's methods of accounting for
certain investments in debt and equity securities.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
April 15, 1996
