<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
<TABLE>
<S> <C>
For the quarterly period ended September 30, 1996 Commission file number 33-23376
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</TABLE>
Aetna Life Insurance and Annuity Company
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(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
------------------------
None
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Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at October 31, 1996
- -------------- -------------------
Common Stock,
par value $50 55,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income. . . . . . . . . . . . . . 3
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Shareholder's Equity . 5
Consolidated Statements of Cash Flows. . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements . . . . 7
Independent Auditors' Review Report. . . . . . . . . . . . . 10
Item 2. Management's Analysis of the Results of Operations. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(2)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
3 Months Ended September 30, 9 Months Ended September 30,
--------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Premiums $14.2 $24.1 $46.4 $94.8
Charges assessed against policyholders 99.1 80.2 289.3 231.1
Net investment income 259.7 250.1 771.8 732.0
Net realized capital gains 0.1 8.3 17.2 19.3
Other income 9.4 7.5 34.6 30.0
-------- -------- -------- --------
Total revenue 382.5 370.2 1,159.3 1,107.2
Benefits and expenses:
Current and future benefits 224.3 225.6 665.6 663.5
Operating expenses 85.5 76.9 264.1 232.4
Amortization of deferred policy acquisition costs 17.9 8.9 46.6 31.4
Severance and facilities charges 47.3 - 61.3 -
-------- -------- -------- --------
Total benefits and expenses 375.0 311.4 1,037.6 927.3
Income before income taxes 7.5 58.8 121.7 179.9
Income taxes 0.5 19.6 31.5 58.8
-------- -------- -------- --------
Net income $7.0 $39.2 $90.2 $121.1
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
(3)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
Investments:
Debt securities, available for sale:
(amortized cost: $12,367.3 and $11,923.7) $12,573.0 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $79.3 and $51.3) 86.6 57.6
Investment in affiliated mutual funds (cost: $112.9 and $173.4) 135.4 191.8
Common stock (cost: $0.0 and $6.9) 0.3 8.2
Short-term investments 29.1 15.1
Mortgage loans 13.0 21.2
Policy loans 368.1 338.6
---------- ----------
Total investments 13,205.5 13,353.3
Cash and cash equivalents 422.0 568.8
Accrued investment income 188.5 175.5
Premiums due and other receivables 159.1 37.3
Deferred policy acquisition costs 1,468.5 1,341.3
Reinsurance loan to affiliate 633.4 655.5
Other assets 19.3 26.2
Separate Accounts assets 14,010.7 10,987.0
---------- ----------
Total assets $30,107.0 $27,144.9
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $3,584.3 $3,594.6
Unpaid claims and claim expenses 28.3 27.2
Policyholders' funds left with the Company 10,413.8 10,500.1
---------- ----------
Total insurance reserve liabilities 14,026.4 14,121.9
Other liabilities 375.1 259.2
Income taxes:
Current 16.6 24.2
Deferred 99.9 169.6
Separate Accounts liabilities 14,010.7 10,987.0
---------- ----------
Total liabilities 28,528.7 25,561.9
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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 39.1 132.5
Retained earnings 1,128.8 1,040.1
---------- ----------
Total shareholder's equity 1,578.3 1,583.0
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Total liabilities and shareholder's equity $30,107.0 $27,144.9
---------- ----------
---------- ----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
(4)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
9 Months Ended September 30,
----------------------------
1996 1995
---- ----
Shareholder's equity, beginning of period $1,583.0 $1,088.5
Net change in unrealized capital gains and losses (93.4) 300.2
Net income 90.2 121.1
Common stock dividends declared (1.5) -
---------- ----------
Shareholder's equity, end of period $1,578.3 $1,509.8
---------- ----------
---------- ----------
See Condensed Notes to Consolidated Financial Statements.
(5)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
9 Months Ended September 30,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $90.2 $121.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (13.0) (29.6)
(Increase) decrease in premiums due and other receivables (2.3) 28.1
Increase in policy loans (29.5) (57.0)
Increase in deferred policy acquisition costs (127.2) (137.9)
Decrease in reinsurance loan to affiliate 22.1 30.9
Net increase in universal life account balances 172.5 164.0
(Decrease) increase in other insurance reserve liabilities (125.2) 10.6
Net increase in other liabilities and other assets 130.0 9.6
Decrease in income taxes (26.7) (3.6)
Net accretion of discount on investments (51.1) (48.9)
Net realized capital gains (17.2) (19.3)
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Net cash provided by operating activities 22.6 68.0
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Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,830.6 3,271.9
Equity securities 114.5 130.5
Mortgage loans 8.6 4.3
Investment maturities and collections of:
Debt securities available for sale 681.8 420.7
Short-term investments 21.5 95.6
Cost of investment purchases in:
Debt securities available for sale (4,996.5) (4,581.6)
Equity securities (63.7) (170.2)
Short-term investments (35.5) (14.2)
Other, net (9.1) -
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Net cash used for investing activities (447.8) (843.0)
---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,140.6 1,461.9
Withdrawals of investment contracts (860.7) (803.8)
Dividends paid to shareholder (1.5) -
---------- ----------
Net cash provided by financing activities 278.4 658.1
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Net decrease in cash and cash equivalents (146.8) (116.9)
Cash and cash equivalents, beginning of period 568.8 623.3
---------- ----------
Cash and cash equivalents, end of period $422.0 $506.4
---------- ----------
---------- ----------
Supplemental cash flow information:
Income taxes paid, net $60.3 $62.4
---------- ----------
---------- ----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
(6)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1. 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. (collectively, the "Company").
Aetna Life Insurance and Annuity Company is a wholly-owned subsidiary of
Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly-owned
subsidiary of Aetna Retirement Services, Inc., which is a wholly-owned
subsidiary of Aetna Services, Inc. ("Aetna") (formerly Aetna Life and
Casualty Company). Aetna is a wholly-owned subsidiary of Aetna Inc.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1995 financial information to conform
to the 1996 presentation. These interim statements necessarily rely
heavily on estimates, including assumptions as to annualized tax rates. In
the opinion of management, all adjustments necessary for a fair statement
of results for the interim periods have been made. All such adjustments
are of a normal, recurring nature. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes as presented in the Company's 1995
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 29, 1996. Certain financial information that is
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles, but that is not required for
interim reporting purposes, has been condensed or omitted.
2. FUTURE APPLICATION OF ACCOUNTING STANDARDS
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was
issued in June 1996. This statement provides accounting and reporting
standards for transfers of financial assets and extinguishments of
liabilities. Transactions covered by this statement would include
securitizations, sales of partial interests in assets, repurchase
agreements and securities lending. This statement requires that after a
transfer of financial assets, an entity would recognize on the balance
sheet any assets it controls and liabilities it has incurred. Similarly,
an entity would remove assets or liabilities from its balance sheet when
control of the assets has been surrendered or the liabilities satisfied.
This statement is effective for 1997 financial statements and early
adoption or retroactive application of this statement is not permitted.
The Company does not expect the adoption of this statement will have a
material effect on its financial position or results of operations.
(7)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
(Continued)
3. SEVERANCE AND FACILITIES CHARGES
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) severance and facilities charge primarily
related to actions taken or expected to be taken to improve its cost
structure relative to its competitors. The severance portion of the charge
is based on a plan to eliminate 702 positions (primarily customer service,
sales and information technology support staff). The facilities
portion of the charge is based on a plan to consolidate sales/service
field offices.
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations.
The cost allocated to the Company associated with this charge was $9.1
million after tax ($14.0 million pretax).
Severance and facilities charges for the nine months ended September 30,
1996 included the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-Off Property Other Allocation Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ - $ 33.1
Life Insurance 12.5 0.4 0.5 0.8 - 14.2
Corporate Allocation - - - - 14.0 14.0
------------------------------------------------------------------
Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $ 14.0 $ 61.3
- -----------------------------------------------------------------------------------------
</TABLE>
The activity for the nine months ended September 30, 1996 within the severance
and facilities reserve (pretax, in millions) and the number of positions
eliminated related to such actions were as follows:
Reserve Positions
- -------------------------------------------------------------------
Beginning of period $ - -
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 -
Actions taken (5.9) (1) (68)
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End of period $ 55.4 634
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(1) Includes $3.6 million of severance related actions and $2.3
million of corporate allocation related actions.
(8)
<PAGE>
Termination of the remaining employees, under the announced actions, and the
vacating of the leased office space are expected to be substantially completed
within 15 months.
(9)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
(Continued)
4. DIVIDENDS
The Company paid $1.5 million in cash dividends to HOLDCO in the second
quarter of 1996. No dividends were paid in the third quarter of 1996.
5. OFF-BALANCE-SHEET AND OTHER FINANCIAL INSTRUMENTS
The Company engages in hedging activities to manage interest rate and price
risks. Such hedging activities have principally consisted of using futures
and forward contracts and interest rate swap agreements.
At September 30, 1996, the Company had stock index futures with a notional
amount of $139.2 million and a carrying value of ($9.1) million which
approximated fair value. In addition, at September 30, 1996, the Company
had commitments to purchase investments for $2.3 million, the fair market
value of which is $2.5 million.
6. RELATED PARTY TRANSACTIONS
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly-
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor of all affiliated mutual funds and of most of the General
Account assets.
Fees paid by the Company to Aeltus, on an annual basis, range from .06% to
.55% of the average daily net assets under management. For both the three
and nine months ended September 30, 1996, the Company paid $6.0 million in
such fees.
7. LITIGATION
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
(10)
<PAGE>
INDEPENDENT AUDITORS REVIEW REPORT
The Board of Directors
Aetna Life Insurance and Annuity Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Aetna Life Insurance and Annuity Company as of September 30, 1996, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1996 and 1995, and the related
condensed consolidated statements of changes in shareholder's equity and cash
flows for the nine-month periods then ended. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Life Insurance and Annuity
Company as of December 31, 1995, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for the year then
ended (not presented herein); and in our report dated February 6, 1996, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995, is fairly presented, in
all material respects, in relation to the balance sheet from which it has
been derived.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
October 23, 1996
(11)
<PAGE>
Item 2. Management's Analysis of the Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
Operating Summary (millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 14.2 $ 24.1 $ 46.4 $ 94.8
Charges assessed against policyholders 99.1 80.2 289.3 231.1
Net investment income 259.7 250.1 771.8 732.0
Net realized capital gains 0.1 8.3 17.2 19.3
Other income 9.4 7.5 34.6 30.0
------------------------------------------------------------------------------------------------------------
Total revenue 382.5 370.2 1,159.3 1,107.2
------------------------------------------------------------------------------------------------------------
Current and future benefits 224.3 225.6 665.6 663.5
Operating expenses 85.5 76.9 264.1 232.4
Amortization of deferred policy acquisition costs 17.9 8.9 46.6 31.4
Severance and facilities charges 47.3 - 61.3 -
------------------------------------------------------------------------------------------------------------
Total benefits and expenses 375.0 311.4 1,037.6 927.3
------------------------------------------------------------------------------------------------------------
Income before income taxes 7.5 58.8 121.7 179.9
Income taxes 0.5 19.6 31.5 58.8
------------------------------------------------------------------------------------------------------------
Net income $ 7.0 $ 39.2 $ 90.2 $ 121.1
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Net realized capital gains, net of tax
(included above) $ 0.2 $ 5.4 $ 11.3 $ 12.5
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Fully guaranteed $ 98.9 $ 90.5 $ 373.0 $ 289.2
Experience-rated 310.4 299.2 944.0 961.0
Non-guaranteed 689.0 438.6 2,053.9 1,146.8
-----------------------------------------------------------
Total $ 1,098.3 $ 828.3 $ 3,370.9 $ 2,397.0
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Assets under management: (1) (2)
Fully guaranteed $ 3,445.6 $ 3,217.1
Experience-rated 10,730.0 10,060.7
Non-guaranteed 14,691.0 10,538.3
-----------------------------
Total $ 28,866.6 $ 23,816.1
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</TABLE>
(1) Excludes net unrealized capital gains of $205.6 million and $458.7 million
at September 30, 1996 and 1995, respectively.
(2) Includes $4,286.5 million and $1,931.4 million at September 30, 1996 and
1995, respectively, of assets held and managed by unaffiliated mutual
funds.
OVERVIEW
The Company's net income for the three and nine months ended September 30, 1996
decreased by 82% and 26%, respectively, from the same periods a year ago.
Excluding net realized capital gains, results for the three and nine months
ended September 30, 1996 decreased 80% and 27%, respectively, from the same
periods a year ago. Such decreases reflected after-tax severance and facilities
charges of $30.7 million in the third quarter of 1996 primarily related to
actions taken or expected to be taken to improve the Company's cost structure
relative to its competitors and $9.1 million allocated to the Company by Aetna
in the second quarter of 1996 (see Note 3 of the Condensed Notes to Consolidated
Financial Statements). Excluding net realized capital gains and the severance
and facilities charges, earnings for the three and nine months ended September
30, 1996 increased 11% and 9%, respectively, from the same periods a year ago.
(12)
<PAGE>
Third quarter and year-to-date earnings in 1996 benefited from increases in
charges assessed against policyholders primarily due to the growth in assets
under management resulting from continued business growth and, for the nine
months ended September 30, 1996, from appreciation in the stock market, as well
as overall increased interest margins primarily related to experience rated
contracts. Partially offsetting such favorable increases in charges assessed
against policyholders were increased expenses. Operating expenses increased
primarily due to business growth and investments in nontraditional distribution
channels (e.g., broker/dealers and banks). In addition, investment management
expenses, included in both charges assessed against policyholders and net
investment income, increased as a result of the subadvisory agreement which
became effective on August 1, 1996 (see Note 6 of the Condensed Notes to
Consolidated Financial Statements).
The average annualized earned rate on investments supporting fully guaranteed
contracts was 7.9% and 8.0% and the average annualized earned rate on
investments supporting experience rated contracts was 8.1% and 8.2% for the nine
months ended September 30, 1996 and 1995, respectively. The average annualized
credited rate on fully guaranteed contracts was 6.7% and 6.8% and the average
annualized credited rate on experience rated contracts was 6.1% and 6.3% for the
nine months ended September 30, 1996 and 1995, respectively. The resulting
annualized interest margins on fully guaranteed contracts were 1.2% and 1.2% and
on experience rated contracts were 2.0% and 1.9% for the nine months ended
September 30, 1996 and 1995, respectively.
The duration of the investment portfolios supporting the Company's liabilities
is regularly monitored and adjusted in order to maintain an aggregate duration
that is within 0.5 years of the estimated duration of the underlying
liabilities. For additional information regarding the Company's asset/liability
management practices please see General Account Investments on page 17.
(13)
<PAGE>
SEGMENT RESULTS
FINANCIAL SERVICES SEGMENT
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
Operating Summary (millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 3.0 $ 15.8 $ 11.6 $ 61.3
Charges assessed against policyholders 48.0 38.7 141.6 108.2
Net investment income 211.0 205.8 629.6 602.3
Net realized capital gains (losses) (0.6) 6.8 14.5 18.2
Other income 11.3 6.2 33.7 25.7
------------------------------------------------------------------------------------------------------------
Total revenue 272.7 273.3 831.0 815.7
------------------------------------------------------------------------------------------------------------
Current and future benefits 163.5 170.8 489.3 514.4
Operating expenses 68.3 64.7 213.9 191.4
Amortization of deferred policy acquisition costs 7.8 2.6 15.1 4.9
Severance and facilities charge 33.1 - 33.1 -
------------------------------------------------------------------------------------------------------------
Total benefits and expenses 272.7 238.1 751.4 710.7
------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) - 35.2 79.6 105.0
Income taxes (benefits) (2.2) 10.4 20.2 29.7
------------------------------------------------------------------------------------------------------------
Net income (1) $ 2.2 $ 24.8 $ 59.4 $ 75.3
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses),
net of tax (included above) $ (0.3) $ 4.4 $ 9.5 $ 11.8
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Fully guaranteed $ 98.9 $ 90.5 $ 373.0 $ 289.2
Experience-rated 225.4 227.6 690.7 721.4
Non-guaranteed 654.7 428.9 1,979.2 1,117.3
-----------------------------------------------------------
Total $ 979.0 $ 747.0 $ 3,042.9 $ 2,127.9
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Assets under management: (2) (3)
Fully guaranteed $ 2,855.9 $ 2,610.7
Experience-rated 8,761.1 8,416.3
Non-guaranteed 14,491.7 10,421.3
------------------------------
Total $ 26,108.7 $ 21,448.3
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes any effect of corporate facilities and severance charge recorded
in the second quarter of 1996 which is not directly allocable to the
segment.
(2) Excludes net unrealized capital gains of $185.8 million and $395.7 million
at September 30, 1996 and 1995, respectively.
(3) Includes $4,207.1 million and $1,908.4 million at September 30, 1996 and
1995, respectively, of assets held and managed by unaffiliated mutual
funds.
Net income in the Financial Services segment for the three and nine months ended
September 30, 1996 decreased 91% and 21%, respectively, from the same periods a
year ago. Excluding net realized capital gains and losses, earnings for the
three and nine months ended September 30, 1996 decreased 88% and 21%,
respectively, from the same periods a year ago. Such decreases reflected an
after-tax severance and facilities charge of $21.5 million in the third quarter
of 1996 primarily related to actions taken or expected to be taken to improve
the Company's cost structure relative to its competitors (see Note 3 of the
Condensed Notes to Consolidated Financial Statements). Excluding net realized
capital gains and losses and the third quarter 1996 severance and facilities
charge, earnings for the three and nine months ended September 30, 1996
increased 18% and 12%, respectively, from the same periods a year ago.
(14)
<PAGE>
Third quarter and year-to-date earnings in 1996 benefited from increases in
charges assessed against policyholders primarily due to the growth in assets
under management resulting from continued business growth and, for the nine
months ended September 30, 1996, from appreciation in the stock market, as well
as overall increased interest margins primarily related to experience rated
contracts. Partially offsetting such favorable increases in charges assessed
against policyholders were increased operating expenses.
Premiums, related to annuity contracts containing life contingencies, decreased
81% for both the three and nine months ended September 30, 1996, respectively,
compared to the same periods in 1995 primarily because the Company ceased
writing structured settlement annuities in the fourth quarter of 1995. The
cessation of writing this product did not and is not expected to have a material
effect on results of the segment.
Charges assessed against policyholders for annuity contracts increased 24% and
31% during the three and nine months ended September 30, 1996, respectively,
compared to the same periods in 1995 reflecting the above-indicated increase in
assets under management and higher fees partially offset by increased
subadvisory costs (see Note 6 of the Condensed Notes to Consolidated Financial
Statements).
Net investment income increased 3% and 5% during the three and nine months ended
September 30, 1996, respectively, compared to the same periods in 1995
reflecting the above-indicated increase in assets under management partially
offset by increased investment expenses associated with the above-indicated
subadvisory agreement.
Current and future benefits decreased 4% and 5% during the three and nine months
ended September 30, 1996, respectively, compared to the same periods in 1995
primarily reflecting the cessation of writing the structured settlement product
discussed above, partially offset by continued business growth.
Operating expenses increased 6% and 12% during the three and nine months ended
September 30, 1996, respectively, compared to the same periods in 1995. The
increase primarily reflects continued business growth and investments in
nontraditional distribution channels (e.g., broker/dealers and banks).
(15)
<PAGE>
LIFE INSURANCE SEGMENT
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
Operating Summary (millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 11.2 $ 8.3 $ 34.8 $ 33.5
Charges assessed against policyholders 51.1 41.5 147.7 122.9
Net investment income 48.7 44.3 142.2 129.7
Net realized capital gains 0.7 1.5 2.7 1.1
Other income (1.9) 1.3 0.9 4.3
------------------------------------------------------------------------------------------------------------
Total revenue 109.8 96.9 328.3 291.5
------------------------------------------------------------------------------------------------------------
Current and future benefits 60.8 54.8 176.3 149.1
Operating expenses 17.2 12.2 50.2 41.0
Amortization of deferred policy acquisition costs 10.1 6.3 31.5 26.5
Severance and facilities charge 14.2 - 14.2 -
------------------------------------------------------------------------------------------------------------
Total benefits and expenses 102.3 73.3 272.2 216.6
------------------------------------------------------------------------------------------------------------
Income before income taxes 7.5 23.6 56.1 74.9
Income taxes 2.7 9.2 16.2 29.1
------------------------------------------------------------------------------------------------------------
Net income (1) $ 4.8 $ 14.4 $ 39.9 $ 45.8
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Net realized capital gains, net of tax
(included above) $ 0.5 $ 1.0 $ 1.8 $ 0.7
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Experience-rated $ 85.0 $ 71.6 $ 253.3 $ 239.6
Non-guaranteed 34.3 9.7 74.7 29.5
-----------------------------------------------------------
Total $ 119.3 $ 81.3 $ 328.0 $ 269.1
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Assets under management: (2) (3)
Fully guaranteed $ 589.7 $ 606.4
Experience-rated 1,968.9 1,644.4
Non-guaranteed 199.3 117.0
------------------------------
Total $ 2,757.9 $ 2,367.8
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes any effect of corporate facilities and severance charge recorded
in the second quarter of 1996 which is not directly allocable to the
segment.
(2) Excludes net unrealized capital gains of $19.8 million and $63.0 million at
September 30, 1996 and 1995, respectively.
(3) Includes $79.4 million and $23.0 million at September 30, 1996 and 1995,
respectively, of assets held and managed by unaffiliated mutual funds.
Net income in the Life Insurance segment for the three and nine months ended
September 30, 1996 decreased 67% and 13%, respectively, from the same periods a
year ago. Excluding net realized capital gains, earnings for the three and nine
months ended September 30, 1996 decreased 68% and 16%, respectively, from the
same periods a year ago. Such decreases reflected an after-tax severance and
facilities charge of $9.2 million in the third quarter of 1996 primarily related
to actions taken or expected to be taken to improve the Company's cost structure
relative to its competitors (see Note 3 of the Condensed Notes to Consolidated
Financial Statements). Excluding net realized capital gains and the third
quarter 1996 severance and facilities charge, earnings for the three months
ended September 30, 1996 were level and increased 5%, respectively, compared to
the same periods a year ago.
(16)
<PAGE>
Third quarter earnings in 1996 benefited from increased charges assessed against
policyholders and increased net investment income, offset by increases in
current and future benefits and operating expenses. Year-to-date earnings in
1996 benefited from increased charges assessed against policyholders and
increased net investment income, partially offset by increases in current and
future benefits and operating expenses.
Charges assessed against policyholders for universal life insurance increased
23% and 20% for the three and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995 reflecting an increase in the
volume of business in force.
Net investment income increased 10% for both the three and nine months ended
September 30, 1996, respectively, compared to the same periods in 1995
reflecting an increase in universal life assets under management primarily as a
result of continued business growth partially offset by increased subadvisory
costs (see Note 6 of the Condensed Notes to Consolidated Financial Statements).
Current and future benefits increased 11% and 18% for the three and nine months
ended September 30, 1996, respectively, compared to the same periods in 1995
reflecting higher credited interest and higher benefit payments to policyholders
due to the increase in universal life business.
Operating expenses increased 41% and 22% for the three and nine months ended
September 30, 1996, respectively, compared to the same periods in 1995 primarily
reflecting continued business growth.
(17)
<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.
The Company's invested assets were comprised of the following:
September 30, December 31,
(Millions) 1996 1995
- --------------------------------------------------------------------------------
Debt securities, available for sale $12,573.0 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock 86.6 57.6
Investment in affiliated mutual funds 135.4 191.8
Common stock 0.3 8.2
Short-term investments 29.1 15.1
Mortgage loans 13.0 21.2
Policy loans 368.1 338.6
------------------------------
Total Investments $13,205.5 $13,353.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At September 30, 1996 and December 31, 1995, the Company's carrying value of
investments in debt securities represented 95% of total general account invested
assets for both periods. At both September 30, 1996 and December 31, 1995,
$10.0 billion or 79% 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 at both September 30, 1996 and December 31, 1995 was
AA-.
<TABLE>
<CAPTION>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
at September 30, 1996 at September 30, 1996
- --------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C>
AAA 46.2% U.S. Corporate Securities 40.3%
AA 11.3 Residential Mortgage-Backed Securities 24.2
A 25.4 Foreign Securities - U.S. Dollar Denominated 14.2
BBB 11.6 Commercial/Multifamily Mortgage-
BB 3.7 Backed Securities 7.6
B and Below 1.8 Asset-Backed Securities 6.9
---------- U.S. Treasuries/Agencies 6.7
100.0% Other 0.1
---------- --------
---------- 100.0%
--------
--------
(18)
<PAGE>
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
at December 31, 1995 at December 31, 1995
- --------------------------------------- -------------------------------------------------------------
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>
(19)
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
(20)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
November 14, 1996 By /s/ Deborah Koltenuk
- --------------------- ---------------------------
(Date) Deborah Koltenuk
Vice President, Treasurer, and Corporate
Controller (Chief Accounting Officer)
(21)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10Q FOR THE FISCAL QUARTER
ENDED SEPTEMBER 30, 1996 FOR AETNA LIFE INSURANCE AND ANNUITY COMPANY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000837010
<NAME> AETNA LIFE INSURANCE AND ANNUITY COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 12,573
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 222
<MORTGAGE> 13
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,206
<CASH> 422
<RECOVER-REINSURE> 11
<DEFERRED-ACQUISITION> 1,469
<TOTAL-ASSETS> 30,107
<POLICY-LOSSES> 3,584
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 27
<POLICY-HOLDER-FUNDS> 10,414
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,575
<TOTAL-LIABILITY-AND-EQUITY> 30,107
46
<INVESTMENT-INCOME> 772
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 35
<BENEFITS> 666
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 122
<INCOME-TAX> 32
<INCOME-CONTINUING> 90
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
