<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
For the fiscal year ended December 31, 1996 Commission file number 33-23376
----------------- --------
Aetna Life Insurance and Annuity Company
(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
--------------
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 28, 1997 there were 55,000 shares of common stock outstanding,
par value $50 per share, all of which shares were held by Aetna Retirement
Holdings, Inc.
Reduced Disclosure Format
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
(1)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND
SUBSIDIARIES (A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Annual Report on Form 10-K
For the year ended December 31, 1996
TABLE OF CONTENTS
Form 10-K
Item Number
- -----------
PART I PAGE
----
Item 1. Business**......................................................... 3
Item 2. Properties**....................................................... 13
Item 3. Legal Proceedings.................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders*............... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................... 14
Item 6. Selected Financial Data*........................................... 14
Item 7. Management's Analysis of the Results of Operations**............... 14
Item 8. Financial Statements and Supplementary Data........................ 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 54
PART III
Item 10. Directors and Executive Officers of the Registrant*................ 54
Item 11. Executive Compensation*............................................ 54
Item 12. Security Ownership of Certain Beneficial Owners and Management* ... 54
Item 13. Certain Relationships and Related Transactions*.................... 54
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K........................................... 54
Index to Consolidated Financial Statement Schedules......................... 57
Signatures.................................................................. 62
* Item omitted pursuant to General Instruction I(2) of Form 10-K
** Item prepared in accordance with General Instruction I(2) of Form 10-K
(2)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND
SUBSIDIARIES (A wholly owned subsidiary
of Aetna Retirement Holdings, Inc.)
Annual Report on Form 10-K
For the year ended December 31, 1996
PART I
Item 1. Business.
Aetna Life Insurance and Annuity Company is a Connecticut stock life insurance
company originally organized in 1954. 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 Holdings, Inc.
("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services,
Inc. ("ARSI") whose ultimate parent is Aetna Inc. (together with its
subsidiaries, "Aetna") . Two subsidiaries, Systematized Benefits Administrators,
Inc. ("SBA") and Aetna Investment Services, Inc. ("AISI"), which were previously
reported in the Company's operations were dividended 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 offers financial services and individual life insurance products.
The Company also acts as 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.
The Company's operations are reported through two major business segments:
financial services and individual life insurance.
(3)
<PAGE>
Financial Services
Products and Services
Financial services products principally include annuity contracts that offer
a variety of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408, and 457 (collectively "qualified plans") and nonqualified annuity
contracts. These contracts may be deferred or immediate ("payout annuities").
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.
Investment Options
Financial services products provide customers with variable and/or fixed
investment options. Variable ("non-guaranteed") options provide for full
assumption by the customer of investment risks. Assets supporting non-guaranteed
variable options are held in separate accounts that invest in Aetna mutual funds
and/or unaffiliated mutual funds. (Separate account assets reflected on the
Consolidated Balance Sheets also include assets related to a fully guaranteed
interest option, see Note 1 of the Notes to Consolidated Financial Statements.)
Non-guaranteed separate account investment income and realized capital gains and
losses are not reflected in the Company's consolidated results of operations.
Fixed options can be either "fully guaranteed" or "experience rated". Fully
guaranteed options provide guarantees on investment return, maturity values, and
if applicable, benefit payments, where the contract is held to maturity.
Experience rated options require the customer to assume investment (including
realized capital gains and losses) and other risks subject, among other things,
to certain minimum guarantees. The effect of such realized gains and losses (as
long as minimum guarantees are not triggered) does not impact the Company's
results.
Fees and Investment Margins
Insurance charges, investment management or other fees earned by the Company,
vary by product and depend, among other factors, on the funding option selected
by the customer under the product. For variable products where assets are
allocated to variable funding options, the Company charges the separate account
an asset based mortality and expense charge. In addition, where the customer
selects an Aetna mutual fund as a variable funding option, the Company receives
an asset-based investment management fee. For unaffiliated mutual funds, the
Company receives distribution fees and/or expense reimbursements. For fixed
funding options, the Company derives an investment margin, which is based on the
difference between income earned on the investments supporting the liability and
interest credited to customers. Other fees or charges, such as administrative
fees, may be assessed depending on the nature of the products (see Note 10 of
the Notes to Consolidated Financial Statements).
(4)
<PAGE>
Assets Under Management
The substantial portion of fees or other charges and investment margins are
based on assets under management. Assets under management are principally
affected by deposits, investment growth (i.e., interest credited to customer
accounts for fixed options or market performance for variable options) and
persistency (i.e., customer retention). Assets under management, excluding net
unrealized capital gains and losses related to market value adjustments required
under Financial Accounting Standard ("FAS") No. 115, were $27.3 billion, $22.5
billion and $18.1 billion at December 31, 1996, 1995, and 1994, respectively.
Approximately 91% and 90% of assets under management at December 31, 1996 and
1995, respectively, allowed for contractholder withdrawal, 79% and 74% of which,
respectively, are subject to market value adjustments and/or deferred surrender
charges at December 31, 1996.
To encourage customer retention, contracts typically impose a surrender charge
on policyholder balances withdrawn within a period of time after the contract's
inception. The period of time and level of the charge vary by product. In
addition, an approach incorporated into recent variable annuity contracts with
fixed funding 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 further disincentive to customers for
premature surrenders of annuity balances, but generally do not impede transfers
of those balances to products of competitors.
The following table summarizes assets under management for the principal
customer groups of the Financial Services segment. Amounts reflected exclude
unrealized gains (losses) of $321.1 million, $689.9 million and $(337.7) million
at December 31, 1996, 1995 and 1994, respectively, related to market value
adjustments required under FAS No. 115. See Management's Analysis of the Results
of Operations for further discussion on assets under management.
- --------------------------------------------------------------------------------
(Millions) 1996 1995 1994
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Corporate pensions $ 5,341.4 $ 4,233.5 $ 3,217.4
Not-for-profit organizations 14,041.0 12,086.1 10,025.9
Individuals 7,885.7 6,214.8 4,879.6
-----------------------------------------------
Total $27,268.1 $22,534.4 $18,122.9
- --------------------------------------------------------------------------------
Deposits, which are not included in premiums or revenue, are shown in the
following table:
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(Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Corporate pensions $ 1,407.0 $ 997.0 $ 884.1
Not-for-profit organizations 1,360.6 1,264.9 1,093.3
Individuals 1,354.0 984.1 670.2
-----------------------------------------------
Total $ 4,121.6 $ 3,246.0 $ 2,647.6
- --------------------------------------------------------------------------------
(5)
<PAGE>
Principal Markets and Method of Distribution
Financial services products and services 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 pension markets. Products sold in the individual market are
distributed primarily through dedicated career agents, registered life brokers,
banks and broker/dealers. Products sold in the not-for-profit market are
distributed primarily through dedicated career agents, registered life brokers
and broker/dealers. 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.
Competition
Competition arises from other insurance companies, as well as an array of
financial services companies including banks, mutual funds and other investment
managers. Principal competitive factors are reputation for investment
performance, product features, service, cost and the perceived financial
strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of the Company's products and services.
Reserves
Reserves for limited payment contracts (annuities with life contingent payout)
are computed on the basis of assumed investment yield, mortality, and expenses
including a margin for adverse deviation. The assumptions 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 for fixed options less withdrawals and 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 FAS No. 115.
Reserves, as described above, 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.
(6)
<PAGE>
Individual Life Insurance
Products and Services
Individual life insurance products include universal life and variable universal
life, which have both life insurance and investment characteristics, traditional
whole life and term insurance. Universal life and variable universal life
products accounted for approximately 95% of life insurance new business premiums
in 1996.
The Company's in-force block of insurance includes a sizable block of
traditional whole 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 10 of the Notes to the Consolidated
Financial Statements). This closed book of business contributed 16% of the life
insurance segment's earnings in 1996.
Life Insurance In Force
For individual life insurance products, life insurance in force is a key
determinant of earnings as cost of insurance charges are typically based on
amounts of coverage in force less accumulated policy reserves. The key drivers
of life insurance in force are new sales, surrenders and mortality.
Individual life insurance products typically require high costs to acquire
business. As with financial services, retention is an important component of
profitability and is encouraged through product features. For example, universal
life contracts typically impose a surrender charge on policyholder balances
withdrawn within a period of time after the contract's inception. 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.
(7)
<PAGE>
Life Insurance in Force and Other Statistical Data*
The following table summarizes changes in life insurance in force before
deductions for reinsurance ceded to other companies:
(millions, except as noted below) 1996 1995 1994
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Sales and additions:
Direct:
Permanent ............................. $ 4,356.1 $ 3,757.9 $ 3,369.4
Term .................................. 1,381.1 2,158.8 1,001.5
Assumed:
Permanent ............................. -- 1,358.5 --
-------------------------------
Total .............................. $ 5,737.2 $ 7,275.2 $ 4,370.9
===============================
Terminations:
Direct:
Surrenders and Conversions ............ $ 1,485.7 $ 1,467.0 $ 1,316.4
Lapses ................................ 1,166.1 891.4 860.9
Other ................................. 199.1 152.7 170.0
Assumed:
Surrenders and Conversions ............ 51.6 53.6 59.4
Lapses ................................ 58.0 331.8 303.9
Other ................................. 52.3 54.2 57.9
-------------------------------
Total .............................. $ 3,012.8 $ 2,950.7 $ 2,768.5
===============================
In force:
Direct:
Permanent ............................. $35,527.1 $32,333.2 $30,563.0
Term .................................. 4,749.2 3,698.3 2,062.9
Assumed:
Permanent ............................. 1,069.8 2,392.9 1,244.8
Term .................................. 1,006.5 1,203.8 1,433.0
-------------------------------
Total .............................. $42,352.6 $39,628.2 $35,303.7
===============================
Number of direct policies in force, end
of year (thousands) ......................... 472.9 466.9 454.0
===============================
Average size of direct policy in force,
end of year (thousands) ...................... $ 85.2 $ 77.2 $ 71.9
===============================
* Only nonparticipating business is written by the Company
(8)
<PAGE>
Investment Options, Fees and Investment Margins
Traditional insurance and universal life products provide customers with only
fixed investment options. Variable universal life products provide customers
with variable and/or fixed investment options. Investment margins and fees for
these investment options are substantially the same as for financial services
products discussed above.
Assets Under Management
Investment margins and fees are based on assets under management. Assets
under management are principally affected by deposits, investment growth
(i.e., interest credited to customer accounts for fixed options or market
performance for variable options) and persistency (i.e., customer retention).
Assets under management, excluding net unrealized capital gains and losses
related to market value adjustments required under FAS No. 115, were $2.8
billion, $2.6 billion and $2.2 billion at December 31, 1996, 1995, and 1994,
respectively.
Principal Markets and Method of Distribution
Individual life insurance products are offered primarily to individuals, small
businesses, employer sponsored groups and executives of Fortune 2000 companies.
Individual life insurance products generally are sold through managing general
agents, regional brokers and broker/dealers.
Competition
The markets for individual life insurance products are highly competitive.
Principal competitive factors are product features and cost. Competition may
affect, among other matters, both business growth and the pricing of the
Company's products.
Reserves
Reserves for universal life products (which are all experience rated) are equal
to cumulative deposits less withdrawals and charges plus credited interest for
fixed options 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 No. 115. Reserves
for all other fixed individual life contracts are computed on a basis of assumed
investment yield, mortality, and expenses including a margin for adverse
duration. The assumptions 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
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 10 and 11 of the Notes to the Consolidated Financial
Statements).
(9)
<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 U.S. corporate debt securities, residential
mortgage-backed securities, foreign government and corporate debt securities,
commercial and multifamily mortgage-backed securities, other asset-backed
securities and U.S. 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 General Account Investments on page 20 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, 3, and 6 of
the Notes to Consolidated Financial Statements.
Other Matters
Regulation
The Company's operations are subject to comprehensive regulation throughout the
United States. The laws of the various jurisdictions establish supervisory
agencies, including the state insurance and securities departments, with broad
authority to grant licenses to transact business and regulate many aspects of
the products and services offered by the Company, as well as solvency and
reserve adequacy. Many agencies also regulate investment activities on the basis
of quality, diversification, and other quantitative criteria. The Company's
operations and accounts are subject to examination at regular intervals by
certain of these regulators.
Operations conducted by the Company are subject to regulation by various
insurance agencies where the Company conducts business, in particular the
insurance departments of Connecticut and New York. Among other matters, these
agencies may regulate premium rates, trade practices, agent licensing, policy
forms, underwriting and claims practices, the maximum interest rates that can be
charged on life insurance policy loans, and the minimum rates that must be
provided for accumulation of surrender value.
The Company is regulated by the Securities and Exchange Commission ("SEC") and
to a lesser extent some state securities regulators as a broker-dealer and
investment adviser. The SEC also regulates certain of the Company's annuity,
life insurance and other investment and retirement products. These products
involve Separate Accounts and mutual funds registered under the Investment
Company Act of 1940.
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").
(10)
<PAGE>
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 a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit contract" 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.
Congress recently enacted the Small Business Job Protection Act (the "Act"),
which, among other matters, created a framework for resolving potential issues
raised by the Supreme Court decision. The Act provides that, absent criminal
conduct, insurers generally will not have liability with respect to general
account assets held under contracts that are not guaranteed benefit contracts
based on claims that those assets are plan assets. The relief afforded extends
to conduct that occurred before the date that is eighteen months after the DOL
issues final regulations required by the Act. The regulations will address
ERISA's application to the general account assets of insurers attributable to
contracts issued on or before December 31, 1998 that are not guaranteed benefit
contracts. The conference report relating to the Act states that contracts
issued after December 31, 1998 that are not guaranteed benefit contracts will be
subject to ERISA's fiduciary obligations. The Company is not currently able to
predict how these matters may ultimately affect its businesses.
A number of states, including Connecticut, regulate affiliated groups of
insurers such as the Company under holding company statutes. These laws may
require these companies to maintain certain levels of equity. See Note 5 of the
Notes to Consolidated Financial Statements.
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, 1996, 1995 and 1994 were $2.2 million, $1.4 million and $0.6
million, respectively. While the Company has historically recovered more than
half of guaranty fund assessments through statutorily permitted premium tax
offsets, significant increases in assessments could jeopardize future efforts to
recover such assessments. For information regarding certain other potential
regulatory changes relating to the Company's businesses, see Forward-Looking
Information on page 12.
Miscellaneous
The Company had approximately 2,500 employees at December 31, 1996.
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 consolidated revenue in 1996. In addition, the
loss of business from any one, or a few, independent brokers or agents would not
have a material adverse effect on the earnings of the Company or either of its
segments. See Note 13 of the Notes to the Consolidated Financial Statements
regarding segment information.
(11)
<PAGE>
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a
"safe harbor" for forward-looking statements, 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 these safe harbor provisions. Certain information contained
herein is forward-looking within the meaning of the Act or SEC rules. Words such
as expects, anticipates, intends, plans, believes, seeks or estimates, or
variations of such words and similar expressions are also intended to identify
forward-looking statements. These forward-looking statements are subject to
significant uncertainties and contingencies, many of which are beyond the
control of the Company. Set forth below are certain important factors that, in
addition to general economic conditions and other factors, some of which are
discussed elsewhere in this report, may affect forward-looking statements and
the Company's business generally.
Ratings. Adverse changes in the claims-paying ratings of the Company and its
insurance subsidiary could have the effect of decreasing new sales and deposits
and increasing withdrawals and surrenders in the Company's businesses, which
would adversely affect the level of asset-based fees and investment margins.
Product Retention. The Company incurs up-front costs, such as commissions, in
sales of its annuity and life insurance products. These costs are generally
deferred and recognized by the Company over time, and the retention of assets
under those products is an important component of profitability. The Company
generally seeks to structure its products to encourage retention of assets under
management, through surrender charges, more favorable credited rates to
customers on assets the Company retains for longer periods, renewal commissions,
service fees or other terms. However, customer withdrawal of assets earlier than
anticipated by the Company in pricing its products would adversely affect
profitability.
Significant Changes in Financial Markets. Significant changes in financial
markets could impact the level of assets under management in the Company's
businesses, and, in turn, the Company's level of asset-based fees and investment
margins. For example, significant increases in interest rates or decreases in
equity markets, in addition to directly affecting the level of assets under
management, may increase the level of withdrawals and decrease the level of
deposits by customers. Customers under those circumstances may seek to diversify
among asset managers or seek investment alternatives not offered by the Company.
Significant declines in the value of investments may also affect the Company's
ability to pass through investment losses to certain experience rated customers,
whether due to triggering minimum guarantees or other business reasons.
Retention of Key Senior Executives. The Company's success is dependent, in part,
on Aetna's ability to attract and retain key senior executives. Aetna has
entered into employment agreements with certain of these executives, although an
employment agreement does not guarantee that an executive's services with the
Company will continue.
(12)
<PAGE>
Other Adverse Changes in Regulation. The Company's businesses are subject to
comprehensive regulation. These businesses could be adversely affected by: (i)
increases in minimum net capital and other financial viability requirements for
insurance operations, (ii) removal of barriers preventing banks from engaging in
insurance and mutual fund businesses, (iii) the taxation of insurance companies,
and (iv) changes in the tax treatment of insurance products.
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 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 4. Submission of Matters to a Vote of Security Holders.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
(13)
<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 HOLDCO, which is a
wholly owned subsidiary of ARSI whose ultimate parent is Aetna. The shares were
contributed to HOLDCO in 1996 from ARSI. The Company paid $3.5 million in cash
dividends to HOLDCO in 1996. The Company received a capital contribution of
$10.4 million in cash from its parent in 1996. In 1995, the Company dividended
$2.9 million in the form of two of its subsidiaries, Systematized Benefits
Administrators, Inc. and Aetna Investment Services, Inc., to Aetna Retirement
Services, Inc. (the Company's former parent). There were no capital
contributions in 1995.
The amount of dividends which may be paid by the Company to HOLDCO 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 $71.1 million in dividend distributions in 1997.
Item 6. Selected Financial Data.
Omitted Pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. Management's Analysis of the Results of Operations.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
(14)
<PAGE>
Consolidated Overview:
<TABLE>
<CAPTION>
Operating Summary (millions) 1996 1995 1994
======================================================================================================
<S> <C> <C> <C>
Premiums (1) $ 133.6 $ 212.7 $ 191.6
Charges assessed against policyholders 396.5 318.9 279.0
Net investment income 1,045.6 1,004.3 917.2
Net realized capital gains 19.7 41.3 1.5
Other income 45.4 42.0 10.3
------------------------------------------------------------------------------------------
Total revenue 1,640.8 1,619.2 1,399.6
------------------------------------------------------------------------------------------
Current and future benefits (1) 968.6 997.2 921.5
Operating expenses 342.2 310.8 225.7
Amortization of deferred policy acquisition costs 69.8 48.0 31.5
Severance and facilities charges 61.3 -- --
------------------------------------------------------------------------------------------
Total benefits and expenses 1,441.9 1,356.0 1,178.7
------------------------------------------------------------------------------------------
Income before income taxes 198.9 263.2 220.9
Income taxes 57.8 87.3 75.6
------------------------------------------------------------------------------------------
Net income $ 141.1 $ 175.9 $ 145.3
==========================================================================================
Net realized capital gains, net of tax (included above) $ 13.0 $ 25.8 $ 1.0
==========================================================================================
- ------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 1,362.3 $ 1,306.8 $ 1,307.2
Annuities--variable options 2,759.3 1,939.2 1,340.4
Individual Life Insurance 443.2 539.1 318.7
--------------------------------
Total $ 4,564.8 $ 3,785.1 $ 2,966.3
======================================================================================================
Assets under management: (2)
Annuities--fixed options $11,692.4 $11,076.8 $10,070.3
Annuities--variable options (3) 14,468.1 10,489.0 7,146.6
Other investment advisory 1,107.6 968.6 906.0
--------------------------------
Financial Services 27,268.1 22,534.4 18,122.9
Individual Life Insurance (3) 2,830.5 2,590.9 2,220.5
--------------------------------
Total $30,098.6 $25,125.3 $20,343.4
======================================================================================================
Individual life insurance coverage issued $ 5,626.8 $ 5,816.9 $ 3,833.0
======================================================================================================
Individual life insurance coverage in force $42,352.6 $39,628.2 $35,303.7
======================================================================================================
</TABLE>
(1) Includes $71.8 million, $81.9 million and $67.4 million for 1996, 1995 and
1994, respectively, for annuity premiums on contracts converting from the
accumulation phase to payout options with life contingencies.
(2) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
million and $(386.4) million at December 31, 1996, 1995 and 1994,
respectively.
(3) Includes $4,724.8 million, $2,604.2 million and $902.9 million at December
31, 1996, 1995 and 1994, respectively, related to assets held and managed
by unaffiliated mutual funds.
The Company's 1996 net income includes after-tax severance and facilities
charges of $39.8 million, see Note 7 in the Notes to Consolidated Financial
Statements. Excluding these charges and net realized capital gains, the
Company's results increased $17.8 million and $5.8 million in 1996 and 1995,
respectively, reflecting improved earnings from financial services, as well as,
in 1996, individual life insurance.
Assets under management, excluding the effect of FAS 115, increased by 20%
during 1996 and 24% in 1995 primarily due to continued business growth and
overall improvement in the stock market.
(15)
<PAGE>
Of the $11.7 billion, $11.1 billion and $10.1 billion of fixed annuity assets
under management at December 31, 1996, 1995 and 1994, respectively, 25%, 23% and
20%, respectively, were fully guaranteed, and 75%, 77% and 80% were experience
rated. The average earned rate on investments supporting fully guaranteed
investment contracts was 7.9%, 8.2% and 8.5% and the average earned rate on
investments supporting experience rated investment contracts was 8.0%, 8.1% and
8.2% for the years ended December 31, 1996, 1995 and 1994, respectively. The
average credited rate on fully guaranteed investment contracts was 6.8%, 7.0%
and 6.8% and the average credited rate on experience rated investment contracts
was 6.0%, 6.2% and 6.2% for the years ended December 31, 1996, 1995 and 1994,
respectively. The resulting interest margins on fully guaranteed investment
contracts were 1.1%, 1.2% and 1.7% and on experience rated investment contracts
were 2.0%, 1.9% and 2.0% for the years ended December 31, 1996, 1995 and 1994,
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
(see "General Account Investments").
(16)
<PAGE>
Financial Services:
<TABLE>
<CAPTION>
Operating Summary 1996 1995 1994
(millions)
===================================================================================================
<S> <C> <C> <C>
Premiums (1) $ 84.9 $ 164.4 $ 137.6
Charges assessed against policyholders 197.0 150.4 126.6
Net investment income 852.6 823.3 745.9
Net realized capital gains 17.0 37.8 1.4
Other income 43.6 35.4 2.0
-----------------------------------------------------------------------------------------
Total revenue 1,195.1 1,211.3 1,013.5
-----------------------------------------------------------------------------------------
Current and future benefits (1) 728.3 786.3 707.3
Operating expenses 275.8 254.4 174.1
Amortization of deferred policy acquisition costs 28.0 10.5 9.6
Severance and facilities charge 33.1 -- --
-----------------------------------------------------------------------------------------
Total benefits and expenses 1,065.2 1,051.2 891.0
-----------------------------------------------------------------------------------------
Income before income taxes 129.9 160.1 122.5
Income taxes 35.6 46.3 37.0
-----------------------------------------------------------------------------------------
Net income (2) $ 94.3 $ 113.8 $ 85.5
=========================================================================================
Net realized capital gains, net of tax (included above) $ 11.1 $ 23.6 $ 0.9
=========================================================================================
- ---------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities - fixed options $ 1,362.3 $ 1,306.8 $ 1,307.2
Annuities - variable options 2,759.3 1,939.2 1,340.4
--------------------------------------------------
Total $ 4,121.6 $ 3,246.0 $ 2,647.6
===================================================================================================
Assets under management: (3)
Annuities - fixed options $11,692.4 $11,076.8 $10,070.3
Annuities - variable options (4) 14,468.1 10,489.0 7,146.6
Other investment advisory 1,107.6 968.6 906.0
--------------------------------------------------
Total $27,268.1 $22,534.4 $18,122.9
===================================================================================================
</TABLE>
(1) Includes $71.8 million, $81.9 million and $67.4 million for 1996, 1995 and
1994, respectively, for annuity premiums on contracts converting from the
accumulation phase to payout options with life contingencies.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the segment.
(3) Excludes net unrealized capital gains (losses) of $321.1 million, $689.9
million and $(337.7) million at December 31, 1996, 1995 and 1994,
respectively.
(4) Includes $4,633.2 million, $2,577.7 million and $892.5 million at December
31, 1996, 1995 and 1994, respectively, related to assets held and managed
by unaffiliated mutual funds.
Earnings, excluding the after-tax severance and facilities charge of $21.5
million (see Note 7 in the Notes to Consolidated Financial Statements) and net
realized capital gains, increased by 16% and 6% in 1996 and 1995, respectively.
The increases in 1996 and 1995 earnings reflect increased charges assessed
against policyholders due to growth in assets under management. Assets under
management increased from continued business growth through deposits and
appreciation in the stock market. Such improved earnings in 1996 also reflect
increased interest margins, primarily related to experience rated contracts.
Partially offsetting the favorable increases in charges assessed against
policyholders were increased operating expenses associated with business growth
and, in 1996, investments in nontraditional distribution channels such as
brokers/dealers and banks.
Premiums relate to annuity products containing life contingencies. Premiums
decreased by $79.5 million in 1996 and increased by $26.8 million in 1995. The
1996 decrease resulted primarily from the Company ceasing to write 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. The 1995 increase resulted primarily from increases in
annuitizations (i.e., contracts converting from the accumulation phase to payout
options with life contingencies) and immediate annuity sales.
(17)
<PAGE>
Deposits relate to annuity contracts not containing life contingencies. Deposits
increased 27% in 1996, reflecting continued business growth. The increase in
1995 reflected the acquisition of a $300.1 million variable annuity block of
business.
(18)
<PAGE>
Individual Life Insurance:
<TABLE>
<CAPTION>
Operating Summary (millions) 1996 1995 1994
=====================================================================================================
<S> <C> <C> <C>
Premiums $ 48.7 $ 48.3 $ 54.0
Charges assessed against policyholders 199.5 168.5 152.4
Net investment income 193.0 181.0 171.3
Net realized capital gains 2.7 3.5 0.1
Other income 1.8 6.6 8.3
-----------------------------------------------------------------------------------------
Total revenue 445.7 407.9 386.1
-----------------------------------------------------------------------------------------
Current and future benefits 240.3 210.9 214.2
Operating expenses 66.4 56.4 51.6
Amortization of deferred policy acquisition costs 41.8 37.5 21.9
Severance and facilities charge 14.2 -- --
-----------------------------------------------------------------------------------------
Total benefits and expenses 362.7 304.8 287.7
-----------------------------------------------------------------------------------------
Income before income taxes 83.0 103.1 98.4
Income taxes 27.1 41.0 38.6
-----------------------------------------------------------------------------------------
Net income (1) $ 55.9 $ 62.1 $ 59.8
=========================================================================================
Net realized capital gains, net of tax (included above) $ 1.9 $ 2.2 $ 0.1
=========================================================================================
- -----------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Individual Life Insurance $ 443.2 $ 539.1 $ 318.7
=====================================================================================================
Assets under management: (2)
Individual Life Insurance (3) $ 2,830.5 $ 2,590.9 $ 2,220.5
=====================================================================================================
Individual life insurance coverage issued $ 5,626.8 $ 5,816.9 $ 3,833.0
=====================================================================================================
Individual life insurance coverage in force $42,352.6 $39,628.2 $35,303.7
=====================================================================================================
</TABLE>
(1) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the segment.
(2) Excludes net unrealized capital gains (losses) of $45.3 million, $107.2
million and $(48.7) million at December 31, 1996, 1995 and 1994,
respectively.
(3) Includes $91.6 million, $26.5 million and $10.4 million at December 31,
1996, 1995 and 1994, respectively, related to assets held and managed by
unaffiliated mutual funds.
Earnings, excluding the after-tax severance and facilities charge of $9.2
million (see Note 7 in the Notes to Consolidated Financial Statements) and net
realized capital gains, increased by 5% in 1996. Earnings in 1995 were level
with 1994. The increase in 1996 reflects favorable mortality experience in the
traditional business and favorable mortality and surrender margins from the
universal life block acquired in 1995, partially offset by higher amortization
of deferred policy acquisition costs and by increased operating expenses
associated with business growth.
Premiums relate to traditional life insurance. Premiums were level in 1996 as
increased premiums related to term insurance products were offset by declining
traditional whole life insurance premiums. Premiums decreased by 11% in 1995
which is primarily due to lower traditional whole life insurance premiums.
Deposits relate to universal life contracts. Deposits in 1995 included the
acquisition of a $172.4 million universal life block of business from an
unaffiliated insurer. Excluding this amount, deposits increased 21% and 15% in
1996 and 1995, respectively, reflecting continued business growth.
(19)
<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:
(Millions) 1996 1995
- --------------------------------------------------------------------------------
Debt securities, available for sale $12,905.5 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock 119.0 57.6
Investment in affiliated mutual funds 81.1 191.8
Common stock 0.3 8.2
Short-term investments 34.8 15.1
Mortgage loans 13.0 21.2
Policy loans 399.3 338.6
---------------------------
Total Investments $13,553.0 $13,353.3
================================================================================
At December 31, 1996 and 1995, the Company's carrying value of investments in
debt securities represented 95% of total general account invested assets for
both periods. At December 31, 1996 and 1995, $10.3 billion and $10.0 billion,
80% and 79%, respectively, of total debt securities supported experience rated
products.
(20)
<PAGE>
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 December 31, 1996 and 1995 was AA-.
Debt Securities Quality Ratings
at December 31, 1996
- ---------------------------------
AAA 47.3%
AA 10.5
A 23.9
BBB 11.9
BB 4.3
B and Below 2.1
-----------
100.0%
===========
Debt Securities Investments by Market Sector
at December 31, 1996
- --------------------------------------------------------------------------------
U.S. Corporate Securities 36.8%
Residential Mortgage-Backed Securities 24.6
Foreign Securities - U.S. Dollar Denominated 15.2
U.S. Treasuries/Agencies 8.4
Commercial/Multifamily Mortgage-
Backed Securities 8.0
Asset-Backed Securities 6.9
Other 0.1
-----
100.0%
=====
Debt Securities Quality Ratings
at December 31, 1995
- ---------------------------------
AAA 46.0%
AA 11.7
A 25.4
BBB 11.7
BB 4.0
B and Below 1.2
-----------
100.0%
===========
Debt Securities Investments by Market Sector
at December 31, 1995
- --------------------------------------------------------------------------------
U.S. Corporate Securities 44.7%
Residential Mortgage-Backed Securities 25.2
Foreign Securities - U.S. Dollar Denominated 11.1
Asset-Backed Securities 7.9
Commercial/Multifamily Mortgage-
Backed Securities 6.1
U.S. Treasuries/Agencies 4.6
Other 0.4
-----
100.0%
=====
In 1996, the Company reduced its investments in U.S. Corporate Securities and
increased its investments in U.S. dollar denominated foreign securities, U.S.
Treasuries/Agencies and commercial/multifamily mortgage-backed securities.
Investments in residential mortgage-backed securities and asset-backed
securities also decreased (see Note 2 of the Notes to the Consolidated Financial
Statements).
The portfolio of debt securities at December 31, 1996 and 1995 included $837.0
million and $662.5 million, respectively, (6% and 5%, 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. Of
these below investment grade assets, $16.5 million and $14.5 million, at
December 31, 1996 and 1995, respectively, were investments that were purchased
at investment grade, but whose ratings have since been downgraded.
(21)
<PAGE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions)
<S> <C> <C> <C>
Assets................................................... $31,693.3 $27,144.9 $20,934.1
========= ========= =========
Shareholder's Equity .................................... $ 1,609.5 $ 1,583.0 $ 1,088.5
========= ========= =========
Net cash (used for) provided by operating activities .... $ (126.8) $ 309.1 $ 206.6
========= ========= =========
Net cash used for investing activities .................. $ (423.1) $(1,135.6) $ (908.5)
========= ========= =========
Net cash provided by financing activities ............... $ 440.2 $ 772.0 $ 789.1
========= ========= =========
Cash and Cash Equivalents ............................... $ 459.1 $ 568.8 $ 623.3
========= ========= =========
</TABLE>
The liquidity needs of the Company's businesses have generally been met by cash
provided by premiums, deposits, asset maturities and income received on
investments. Cash provided from these sources is used primarily for benefit
payments, contract withdrawals and operating expenses.
Debt securities and mortgage loans have durations that were selected to
approximate the durations of the liabilities they support. The general account
of the Company has been segmented to improve the asset/liability matching
process. 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.
As the Company's investment strategy focuses on matching asset and liability
durations, and not specific cash flows, and since these duration assessments are
dependent on numerous cash flow assumptions, asset sales may, from time to time,
be required to satisfy liability obligations and/or rebalance asset portfolios.
The investment portfolios are closely monitored to assess asset and liability
matching in order to rebalance the portfolios as conditions warrant.
Given the high quality of the debt securities portfolio (see "General Account
Investments"), management expects the vast majority of the Company's investments
in debt securities to be repaid in accordance with contractual terms. In
addition, most of the debt securities in the portfolio are highly marketable and
can be sold to enhance cash flow before maturity.
The Company's cash flow requirements for 1996 were met by funds provided from
operations, from the maturity and sale of investments and from financing
activities.
The Company has no debt. The Company received a capital contribution of $10.4
million in cash from HOLDCO in 1996. The Company received no capital
contributions in 1995 or 1994. (See Note 10 of Notes to Consolidated Financial
Statements).
The amount of dividends which may be paid to the shareholder 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 $71.1 million in dividend distributions in 1997.
(22)
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 24
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 25
Consolidated Balance Sheets as of December 31, 1996
and 1995 26
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1996, 1995 and 1994 27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29
(23)
<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, 1996 and 1995,
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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
(24)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Revenue:
Premiums $133.6 $212.7 $191.6
Charges assessed against policyholders 396.5 318.9 279.0
Net investment income 1,045.6 1,004.3 917.2
Net realized capital gains 19.7 41.3 1.5
Other income 45.4 42.0 10.3
------- ------- -------
Total revenue 1,640.8 1,619.2 1,399.6
------- ------- -------
Benefits and expenses:
Current and future benefits 968.6 997.2 921.5
Operating expenses 342.2 310.8 225.7
Amortization of deferred policy
acquisition costs 69.8 48.0 31.5
Severance and facilities charges 61.3 -- --
------- ------- -------
Total benefits and expenses 1,441.9 1,356.0 1,178.7
------- ------- -------
Income before income taxes 198.9 263.2 220.9
Income taxes 57.8 87.3 75.6
------- ------- -------
Net income $141.1 $175.9 $145.3
======= ======= =======
See Notes to Consolidated Financial Statements.
(25)
<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)
December 31,
-------------------------
1996 1995
---- ----
Assets
- ------
Investments:
Debt securities, available for sale:
(amortized cost: $12,539.1 and $11,923.7) $12,905.5 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock
(cost: $107.6 and $51.3) 119.0 57.6
Investment in affiliated mutual funds
(cost: $77.3 and $173.4) 81.1 191.8
Common stock (cost: $0.0 and $6.9) 0.3 8.2
Short-term investments 34.8 15.1
Mortgage loans 13.0 21.2
Policy loans 399.3 338.6
--------- ---------
Total investments 13,553.0 13,353.3
Cash and cash equivalents 459.1 568.8
Accrued investment income 159.0 175.5
Premiums due and other receivables 26.6 37.3
Deferred policy acquisition costs 1,515.3 1,341.3
Reinsurance loan to affiliate 628.3 655.5
Other assets 33.7 26.2
Separate Account assets 15,318.3 10,987.0
--------- ---------
Total assets $31,693.3 $27,144.9
========= =========
Liabilities and Shareholder's Equity
- -------------------------------------
Liabilities:
Future policy benefits $3,617.0 $3,594.6
Unpaid claims and claim expenses 28.9 27.2
Policyholders' funds left with the Company 10,663.7 10,500.1
--------- ---------
Total insurance reserve liabilities 14,309.6 14,121.9
Other liabilities 354.7 257.2
Income taxes:
Current 20.7 26.2
Deferred 80.5 169.6
Separate Account liabilities 15,318.3 10,987.0
--------- ---------
Total liabilities 30,083.8 25,561.9
--------- ---------
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 418.0 407.6
Net unrealized capital gains 60.5 132.5
Retained earnings 1,128.2 1,040.1
--------- ---------
Total shareholder's equity 1,609.5 1,583.0
--------- ---------
Total liabilities and shareholder's equity $31,693.3 $27,144.9
========= =========
See Notes to Consolidated Financial Statements.
(26)
<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)
Years Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Shareholder's equity, beginning of year $1,583.0 $1,088.5 $1,246.7
Capital contributions 10.4 -- --
Net change in unrealized capital gains (losses) (72.0) 321.5 (303.5)
Net income 141.1 175.9 145.3
Other changes (49.5) -- --
Common stock dividends declared (3.5) (2.9) --
-------- -------- --------
Shareholder's equity, end of year $1,609.5 $1,583.0 $1,088.5
======== ======== ========
See Notes to Consolidated Financial Statements.
(27)
<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>
Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $141.1 $175.9 $145.3
Adjustments to reconcile net income to net
cash (used for) provided by operating activities:
Decrease (increase) in accrued investment income 16.5 (33.3) (17.5)
Decrease in premiums due and other receivables 1.6 25.4 1.3
Increase in policy loans (60.7) (89.9) (46.0)
Increase in deferred policy acquisition costs (174.0) (177.0) (105.9)
Decrease in reinsurance loan to affiliate 27.2 34.8 27.8
Net increase in universal life account balances 243.2 393.4 164.7
(Decrease) increase in other insurance
reserve liabilities (211.5) 79.0 75.1
Net increase in other liabilities and other assets 3.1 13.0 52.5
Decrease in income taxes (26.7) (4.5) (10.3)
Net accretion of discount on investments (68.0) (66.4) (77.9)
Net realized capital gains (19.7) (41.3) (1.5)
Other, net 1.1 -- (1.0)
-------- -------- --------
Net cash (used for) provided by operating activities (126.8) 309.1 206.6
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,182.2 4,207.2 3,593.8
Equity securities 190.5 180.8 93.1
Mortgage loans 8.7 10.7 --
Limited partnership -- 26.6 --
Investment maturities and collections of:
Debt securities available for sale 885.2 583.9 1,289.2
Short-term investments 35.0 106.1 30.4
Cost of investment purchases in:
Debt securities available for sale (6,534.3) (6,034.0) (5,621.4)
Equity securities (118.1) (170.9) (162.5)
Short-term investments (54.7) (24.7) (106.1)
Mortgage loans -- (21.3) --
Limited partnership -- -- (25.0)
Other, net (17.6) -- --
-------- -------- --------
Net cash used for investing activities (423.1) (1,135.6) (908.5)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,579.5 1,884.5 1,737.8
Withdrawals of investment contracts (1,146.2) (1,109.6) (948.7)
Additional capital contributions 10.4 -- --
Dividends paid to shareholder (3.5) (2.9) --
-------- -------- --------
Net cash provided by financing activities 440.2 772.0 789.1
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (109.7) (54.5) 87.2
Cash and cash equivalents, beginning of year 568.8 623.3 536.1
-------- -------- --------
Cash and cash equivalents, end of year $459.1 $568.8 $623.3
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $85.5 $92.8 $85.9
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
(28)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
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 individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services, financial planning and pension plan
administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
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 Holdings, Inc.
("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement
Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1995 and 1994 financial information to conform to the 1996
presentation.
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 any assets it
controls and liabilities it has incurred. An entity would not recognize
assets when control has been surrendered or liabilities have been
satisfied. Portions of this statement are effective for each of 1997 and
1998 financial statements and early adoption is not permitted. The Company
does not expect adoption of this statement to have a material effect on its
financial position or results of operations.
(29)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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 90 days or less when purchased.
Investments
All of the Company's debt and equity securities are classified as available
for sale and carried at fair value. These securities are written down (as
realized capital losses) for other than temporary declines in value.
Unrealized capital gains and losses related to available for sale other
than amounts allocable to experience rated contractholders, are reflected
in shareholder's equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, fair values are measured utilizing quoted
market prices for similar securities or by using discounted cash flow
methods. Cost for mortgage-backed securities is adjusted for unamortized
premiums and discounts, which are amortized using the interest method over
the estimated remaining term of the securities, adjusted for anticipated
prepayments.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds primarily 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 are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
(30)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Swap agreements which are designated as interest rate risk management
instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in
the Consolidated Balance Sheets for changes in the fair value of the
agreement.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new
and renewal 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 (up to 20 years). For universal life and certain
annuity contracts, such costs are amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the life of
the contracts (up to 20 years).
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits are not adequate to cover related losses and expenses.
Insurance Reserve Liabilities
Future Policy Benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00%.
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.
(31)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Policyholders' Funds Left With the Company include reserves for deferred
annuity investment contracts and immediate annuities without life
contingent payouts. Reserves on such contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon (rates
range from 4.00% to 7.00%), net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest.
Reserves on contracts subject to experience rating reflect the rights of
contractholders, plan participants and 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
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges,
actuarial margin and other fees are recorded as revenue in charges assessed
against policyholders. Other amounts received for these contracts are
reflected as deposits and are not recorded as revenue. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments begin under contracts with life contingent
payouts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity, reflected as an offsetting amount in both premiums and current and
future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal 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, the Aetna Series Fund Inc., or the
Aetna Generation Funds (collectively, "Funds"), 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. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $515.6 million for 1996 (fair value $523.0 million)
and $322.2 million for 1995 (fair value $343.9 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to
8.38% in 1995.
(32)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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 and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and 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.
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 expenses/benefits result from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
(33)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other 141.5 3.0 -- 144.5
--------- --------- --------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- --------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- --------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- --------- --------- ---------
Total Debt Securities $12,539.1 $ 432.6 $ 66.2 $12,905.5
========= ========= ========= =========
</TABLE>
(34)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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. government and government
agencies and authorities $ 539.5 $ 47.5 $ -- $ 587.0
States, municipalities and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Food & fiber 310.8 20.8 0.6 331.0
Healthcare & consumer products 766.0 59.2 0.2 825.0
Media & broadcast 191.7 10.0 -- 201.7
Natural resources 186.9 12.6 0.2 199.3
Transportation & capital goods 602.4 46.7 0.2 648.9
Utilities 454.4 27.8 1.0 481.2
Other 119.9 10.2 -- 130.1
--------- --------- --------- ---------
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
Utilities 236.3 32.9 269.2
Other 749.9 60.5 3.5 806.9
--------- --------- --------- ---------
Total foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Pass-throughs 556.7 99.2 1.8 654.1
Collateralized mortgage obligations 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
Other asset-backed securities 961.2 35.5 0.5 996.2
--------- --------- --------- ---------
Total Debt Securities $11,923.7 $ 811.6 $ 14.5 $12,720.8
========= ========= ========= =========
</TABLE>
(35)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1996 and 1995, net unrealized appreciation of $366.4
million and $797.1 million, respectively, on available for sale debt
securities included $288.5 million and $619.1 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in Future Policy Benefits and Policyholders' Funds
Left With the Company.
The amortized cost and fair value of debt securities for the year ended
December 31, 1996 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 $ 424.4 $ 425.7
After one year through five years 2,162.4 2,194.2
After five years through ten years 2,467.4 2,509.6
After ten years 2,568.4 2,675.4
Mortgage-backed securities 4,028.7 4,204.3
Other asset-backed securities 887.8 896.3
--------- ---------
Total $12,539.1 $12,905.5
========= =========
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Collateral, primarily cash, 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, 1996 and 1995, the Company had loaned
securities (which are reflected as invested assets) with a market value of
approximately $444.7 million and $264.5 million, respectively.
At December 31, 1996 and 1995, debt securities carried at $7.6 million and
$7.4 million, respectively, were on deposit as required by regulatory
authorities.
The carrying value of non-income producing investments was $0.9 million and
$0.1 million at December 31, 1996 and 1995, respectively.
The Company did not have any 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, 1996.
(36)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's total debt securities were residential
collateralized mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
Fair Amortized Fair Amortized
Value Cost Value Cost
----- ---- ----- ----
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs (1) $2,309.0 $2,227.8 $2,549.4 $2,383.9
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 84.2% 85.3%
Supporting remaining products 15.8% 14.7%
-------- --------
100.0% 100.0%
======== ========
</TABLE>
(1) At December 31, 1996 and 1995, approximately 71% and 81%,
respectively, of the Company's residential CMO holdings were backed by
government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated.
At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of
the Company's CMO holdings were in planned amortization class ("PAC") and
sequential structure tranches, which are subject to less prepayment and
extension risk than other types of CMO instruments. At December 31, 1996
and 1995, approximately 3% of the Company's CMO holdings were in the
interest-only ("IOs") and principal-only ("POs") tranches, which are
subject to more prepayment and extension risks than other types of CMO
instruments. Remaining CMO holdings are in other tranches that have
prepayment and extension risks which fall between the degree of risk
associated with PACs and sequentials, and IOs and POs.
(37)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in available for sale equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- -----
(millions)
1996
Equity Securities $ 184.9 $ 16.3 $ 0.8 $ 200.4
======= ======= ======= =======
1995
Equity Securities $ 231.6 $ 27.2 $ 1.2 $ 257.6
======= ======= ======= =======
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 13.0 $ 13.2 $ 21.2 $ 21.9
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,014.1 $ 1,028.8 $ 989.1 $ 1,001.2
Without a fixed maturity 9,649.6 9,427.6 9,511.0 9,298.4
</TABLE>
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 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, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
(38)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are 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.
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 and Other Financial Instruments (including Derivative
Financial Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1996, Treasury
futures contracts were used to manage interest rate risk in the Company's
bond portfolio and stock index futures contracts were used to manage price
risk in the Company's equity portfolio. In 1996 and 1995, interest rate
swaps and forward commitments to enter into interest rate swaps,
respectively, were also used to manage interest rate risk in the Company's
bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
underlying assets at a specified future date. Futures contracts trade on
organized exchanges and, therefore, have minimal credit risk. Cash
settlements are made daily based on changes in the prices of the underlying
assets. There were no futures contracts open as of December 31, 1996 and
1995.
(39)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be exposed to credit-related losses in the
event of nonperformance by counterparties to financial instruments,
however, the Company controls its exposure to credit risk through credit
approvals, credit limits and regular monitoring procedures. The credit
exposure of interest rate swaps is represented by the fair value (market
value) of contracts with a positive fair value (market value) at the
reporting date. There were no interest rate swap agreements open as of
December 31, 1996. At December 31, 1995, the Company had an open forward
swap agreement with a notional amount of $100.0 million and a fair value of
$0.1 million.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1996.
As of December 31, 1996 and 1995, there were no option contracts
outstanding.
The Company also had investments in certain debt instruments with
derivative characteristics, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short or long term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
amortized cost and fair value of these securities, included in the debt
securities portfolio, as of December 31, 1996 was as follows:
Amortized Fair
Cost Value
---- -----
(millions)
Residential collateralized mortgage obligations $ 2,227.8 $ 2,309.0
Principal-only strips (included above) 44.5 53.3
Interest-only strips (included above) 10.3 22.8
Other structured securities with derivative
characteristics (1) 126.3 129.2
(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.
(40)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ 945.3 $ 891.5 $ 823.9
Preferred stock 5.9 4.2 3.9
Investment in affiliated mutual funds 14.3 14.9 5.2
Mortgage loans 2.2 1.4 1.4
Policy loans 18.4 13.7 11.5
Reinsurance loan to affiliate 44.1 46.5 51.5
Cash equivalents 29.4 38.9 29.5
Other 2.1 8.4 6.7
-------- -------- --------
Gross investment income 1,061.7 1,019.5 933.6
Less investment expenses (16.1) (15.2) (16.4)
-------- -------- --------
Net investment income $1,045.6 $1,004.3 $ 917.2
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $787.6 million, $744.2 million and $677.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Interest
credited to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
the Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services,
Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
The amount of dividends that may be paid to the shareholder in 1997 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$71.1 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus 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
$57.8 million, $70.0 million and $64.9 million for the years ended December
31, 1996, 1995 and 1994, respectively. Statutory capital and surplus was
$713.6 million and $670.7 million as of December 31, 1996 and 1995,
respectively.
As of December 31, 1996 the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
(41)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ 11.1 $ 32.8 $ 1.0
Equity securities 8.6 8.3 0.2
Mortgage loans -- 0.2 0.3
-------- -------- -------
Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5
======== ======= =======
After tax realized capital gains $ 13.0 $ 25.8 $ 1.0
======== ======= =======
Net realized capital gains of $53.1 million and $61.1 million for 1996 and
1995, respectively, and net realized capital losses of $29.1 million for
1994, allocable to experience rated contracts, were deducted from net
realized capital gains (losses) and an offsetting amount was reflected in
policyholder funds' left with the Company. Net unamortized gains were
$53.3 million and $7.3 million at December 31, 1996 and 1995, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities for other than temporary declines in value are included in net
realized capital gains (losses) and amounted to $(3.3) million, $3.1
million and $1.1 million, of which $(3.2) million, $2.2 million and $0.8
million were allocable to experience rated contractholders, for the years
ended December 31, 1996, 1995 and 1994, respectively. There was no
valuation reserve for mortgage loans at December 31, 1996 or at December
31, 1995.
Proceeds from the sale of available for sale debt securities and the
related gross gains and losses were as follows:
1996 1995 1994
---- ---- ----
(millions)
Proceeds on Sales $5,182.2 $4,207.2 $3,593.8
Gross gains 24.3 44.6 26.6
Gross losses 13.2 11.8 25.6
(42)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in unrealized capital
gains (losses), (excluding those related to experience rated
contractholders), were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ (100.1) $ 255.9 $ (242.1)
Equity securities (10.5) 27.3 (13.3)
Limited partnership -- 1.8 (1.8)
-------- -------- --------
(110.6) 285.0 (257.2)
Deferred income taxes (See Note 8) (38.6) (36.5) 46.3
-------- -------- --------
Net change in unrealized
capital gains (losses) $ (72.0) $ 321.5 $ (303.5)
======== ======== ========
Net unrealized capital gains allocable to experience rated contracts of
$245.2 million and $43.3 million at December 31, 1996 and $515.0 million
and $104.1 million at December 31, 1995 are reflected on the Consolidated
Balance Sheets 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:
1996 1995 1994
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $101.7 $179.3 $ 27.4
Gross unrealized capital losses (23.8) (1.3) (105.2)
------ ------ --------
77.9 178.0 (77.8)
Equity securities
Gross unrealized capital gains 16.3 27.2 6.5
Gross unrealized capital losses (0.8) (1.2) (7.9)
------ ------ --------
15.5 26.0 (1.4)
Limited Partnership -- -- --
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- -- (1.8)
------ ------ --------
-- -- (1.8)
Deferred income taxes (See Note 8) 32.9 71.5 108.0
------ ------ --------
Net unrealized capital gains (losses) $ 60.5 $132.5 $(189.0)
====== ====== ========
(43)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, 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
Individual 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>
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally 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).
The activity during 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 year $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
-------------------------------
End of year $ 47.9 524
---------------------------------------------------------------------------
(1) Includes $8.0 million of severance-related actions and $4.1 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed
by March 31, 1998. The corporate allocation actions and the vacating of the
leased office space are expected to be substantially completed in 1997.
(44)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return and
combined Connecticut and New York state income tax returns 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 used in the consolidated
returns.
Income taxes for the years ended December 31, consist of:
1996 1995 1994
---- ---- ----
(millions)
Current taxes (benefits):
Income Taxes:
Federal $ 50.9 $ 82.9 $ 78.7
State 3.7 3.2 4.4
Net realized capital gains (losses) 25.3 28.5 (33.2)
------ ------ ------
79.9 114.6 49.9
------ ------ ------
Deferred taxes (benefits):
Income Taxes:
Federal (3.5) (14.4) (8.0)
Net realized capital gains (losses) (18.6) (12.9) 33.7
------ ------ ------
(22.1) (27.3) 25.7
------ ------ ------
Total $ 57.8 $ 87.3 $ 75.6
====== ====== ======
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1996 1995 1994
---- ---- ----
(millions)
Income before income taxes $198.9 $263.2 $220.9
Tax rate 35% 35% 35%
------ ------ ------
Application of the tax rate 69.6 92.1 77.3
------ ------ ------
Tax effect of:
State income tax, net of federal benefit 2.4 2.1 2.9
Excludable dividends (8.7) (9.3) (8.6)
Other, net (5.5) 2.4 4.0
------ ------ ------
Income taxes $ 57.8 $ 87.3 $ 75.6
====== ====== ======
(45)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. 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:
1996 1995
---- ----
(millions)
Deferred tax assets:
Insurance reserves $ 344.6 $ 290.4
Unrealized gains allocable to
experience rated contracts 100.8 216.7
Investment losses 7.5 7.3
Postretirement benefits other
than pensions 27.0 7.7
Deferred compensation 25.0 18.9
Pension 7.6 5.7
Other 29.3 9.2
------- -------
Total gross assets 541.8 555.9
Deferred tax liabilities:
Deferred policy acquisition costs 482.1 433.0
Market discount 6.8 4.4
Net unrealized capital gains 133.7 288.2
Other (0.3) (0.1)
------- -------
Total gross liabilities 622.3 725.5
------- -------
Net deferred tax liability $ 80.5 $ 169.6
======= =======
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. Valuation allowances are provided when it is
not considered more likely than not that deferred tax assets will be
realized. As of December 31, 1996 and 1995, no valuation allowances were
required for unrealized capital gains and losses.
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, 1996. 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.
(46)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions
are being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or sufficient
reserves to provide for, any such adjustments. The Service has commenced
its examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 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 tax-deductible. As of
December 31, 1996, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate
share of the projected benefit obligation and plan assets is not available.
The accumulated benefit obligation and plan assets are recorded by Aetna.
As of the measurement date (i.e., September 30), the accumulated plan
assets exceeded accumulated plan benefits. Allocated pretax charges to
operations for the pension plan (based on the Company's total salary cost
as a percentage of Aetna's total salary cost) were $4.3 million, $6.1
million and $5.5 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides health care and life insurance benefits,
subject to certain caps, for retired employees. A comprehensive medical and
dental plan is offered to all full-time employees retiring at age 50 with
15 years of service or at age 65 with 10 years of service. Retirees are
generally required to contribute to the plans based on their years of
service with Aetna. The costs to the Company associated with the Aetna
postretirement plans for 1996, 1995 and 1994 were $1.8 million, $1.4
million and $1.0 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$77.7 million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously
recorded by Aetna. The after tax amount of this transfer (approximately
$50.5 million) is reported as a reduction in retained earnings.
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. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
(47)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1996, 1995 and 1994 were $0.7 million,
$0.8 million and $0.7 million, respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $5.4 million, $4.9 million and $3.3
million in 1996, 1995 and 1994, respectively.
Stock Plans - Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to certain key employees. Executive and middle management
employees may be granted options to purchase common stock of Aetna at or
above the market price on the date of grant. Options generally become 100%
vested three years after the grant is made, with one-third of the options
vesting each year. Aetna does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. In addition, executives may be granted incentive
units which are rights to receive common stock or an equivalent value in
cash. The incentive units may vest within a range from 0% to 175% at the
end of a four year period based on the attainment of performance goals. The
costs to the Company associated with the Aetna stock plans for 1996, 1995
and 1994, were $8.1 million, $6.3 million and $1.7 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$1.1 million of deferred tax benefits related to stock options. This amount
is reported as an increase in retained earnings.
10. 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 .10% to
1.90% 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 .85% of their average daily net assets. The Company
also receives fees (expressed as a percentage of the average daily net
assets) from the variable life and annuity mutual funds and The Aetna
Series Fund for providing administration services, and from The Aetna
Series Fund for providing 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
$185.4 million, $128.1 million and $104.6 million in 1996, 1995 and 1994,
respectively. The Company may waive advisory fees at its discretion.
(48)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
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, included in both
Charges Assessed Against Policyholders and Net Investment Income, on an
annual basis, range from .06% to .55% of the average daily net assets under
management. For the year ended December 31, 1996, the Company paid $16.0
million in such fees.
The Company may, from time to time, make reimbursements to a Fund for some
or all of its operating expenses. Reimbursement arrangements may be
terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by Aetna
Life prior to 1981 was assumed by the Company. A $108.0 million commission,
paid by the Company to Aetna Life in 1988, was capitalized as deferred
policy acquisition costs. An additional $6.1 million commission, paid by
the Company to Aetna Life in 1996, was capitalized as deferred policy
acquisition costs. The Company maintained insurance reserves of $628.3
million and $655.5 million as of December 31, 1996 and 1995, 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 $625.3 million and $663.5 million as of December 31, 1996 and 1995,
respectively, and is based upon the fair value of the underlying assets.
Premiums of $25.3 million, $28.0 million and $32.8 million and current and
future benefits of $39.5 million, $43.0 million and $43.8 million were
assumed in 1996, 1995 and 1994, respectively.
Investment income of $44.1 million, $46.5 million and $51.5 million was
generated from the reinsurance loan to affiliate in 1996, 1995 and 1994,
respectively. Net income of approximately $8.1 million, $18.4 million and
$25.1 million resulted from this agreement in 1996, 1995 and 1994,
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 $28.9 million and
$28.0 million were maintained for this contract as of December 31, 1996 and
1995, 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 $5.2
million, $3.2 million and $1.3 million for 1996, 1995 and 1994,
respectively.
(49)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1995 or
1994.
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
the Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services,
Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $2.8 million and $5.7 million
due from affiliates in 1996 and 1995, respectively. Other liabilities
include $10.7 million and $12.4 million due to affiliates for 1996 and
1995, respectively.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
11. 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.
(50)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
------ --------- --------- ------
(millions)
1996
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
======= ======= ======= =======
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6
======= ======= ======= =======
1995
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
======= ======= ======= =======
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7
======= ======= ======= =======
1994
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance 9.3 9.3 -- --
Annuities 137.3 -- 0.2 137.5
======= ======= ======= =======
Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6
======= ======= ======= =======
12. 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, 1996, the
Company had commitments to purchase investments of $17.9 million. The fair
value of the investments at December 31, 1996 approximated $18.3 million.
(51)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
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.
(52)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance.
Summarized financial information for the Company's principal operations was
as follows:
(Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
Financial Services $ 1,195.1 $ 1,211.3 $ 1,013.5
Individual Life Insurance 445.7 407.9 386.1
---------------------------------
Total revenue $ 1,640.8 $ 1,619.2 $ 1,399.6
- --------------------------------------------------------------------------------
Income before income taxes: (2)
Financial Services $ 129.9 $ 160.1 $ 122.5
Individual Life Insurance 83.0 103.1 98.4
---------------------------------
Total income before income taxes $ 212.9 $ 263.2 $ 220.9
- --------------------------------------------------------------------------------
Net income: (2)
Financial Services $ 94.3 $ 113.8 $ 85.5
Individual Life Insurance 55.9 62.1 59.8
---------------------------------
Net income $ 150.2 $ 175.9 $ 145.3
- --------------------------------------------------------------------------------
Assets under management: (3)
Financial Services $27,268.1 $22,534.4 $18,122.9
Individual Life Insurance 2,830.5 2,590.9 2,220.5
- --------------------------------------------------------------------------------
Total assets under management $30,098.6 $25,125.3 $20,343.4
- --------------------------------------------------------------------------------
(1) The 1996 results include severance and facilities charges of $30.7 million,
after tax. Of this charge $21.5 million related to the Financial Services
segment and $9.2 million related to the Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the Financial Services
and Individual Life Insurance segments. (Refer to Note 7).
(3) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
million and $(386.4) million at December 31, 1996, 1995 and 1994,
respectively.
(53)
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to General Instruction I(2) of Form 10-K .
Item 11. Executive Compensation.
Omitted pursuant to General Instruction I(2) of Form 10-K .
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to General Instruction I(2) of Form 10-K .
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to General Instruction I(2) of Form 10-K .
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 23.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 23.
3. Exhibits:
3(i)(a) Certificate of Incorporation
Incorporated herein by reference to post-effective amendment
No. 1 to Registration Statement on Form S-1 (File No.
33-60477) as filed with the Securities and Exchange
Commission on April 15, 1996.
3(i)(b) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company
Incorporated herein by reference to post-effective amendment
No. 12 to Registration Statement on Form N-4 (File No.
33-75964) as filed on February 11, 1997.
3(ii) By-Laws
Incorporated herein by reference to post-effective amendment
No. 1 to Registration Statement on Form S-1 (File No.
33-60477) as filed with the Securities and Exchange
Commission on April 15, 1996.
(54)
<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)
Incorporated herein by reference to Form N-4, File No. 33-75980,
as amended, and filed most recently on February 12, 1997.
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 19, 1996.
Incorporated herein by reference to Form N-4, File No. 33-75986,
as amended and filed most recently on November 27, 1996.
Incorporated herein by reference to Form N-4, File No. 33-34370,
as amended and filed most recently on February 21, 1997.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-81216, as amended and filed most recently
on February 12, 1997.
Incorporated herein by reference to Registration Statement Form
N-4, File No. 33-88722, as amended and filed most recently on
September 13, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75974, as amended and filed most recently
on February 28, 1997.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75982, as amended and filed most recently
on February 20, 1997.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75996, as amended and filed most recently
on November 27, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75992, as amended and filed most recently
on February 13, 1997.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-91846, as amended and filed most recently
on December 31, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75988, as amended and filed most recently
on September 13, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-88720, as amended and filed most recently
on February 21, 1997.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75964, as amended and filed most recently
on February 11, 1997.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-79122, as amended and filed most recently
on January 29, 1997.
(55)
<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. 33-62473, 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 amended and filed most recently
on February 26, 1997.
Incorporated herein by reference to Registration Statement on
Form S-2, File No. 33-64331, as amended and filed most recently
on April 15, 1996.
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-75962, as amended and filed most recently
on February 11, 1997.
10 Material Contracts (Management contracts / compensatory plans or
arrangements)
The Aetna Inc. Annual Incentive Plan, incorporated by reference
to Aetna Inc.'s Registration Statement on Form S-4 (Registration
No. 333-5791) filed on June 12, 1996.*
The Supplemental Pension Benefit Plan for Certain Employees of
Aetna Services, Inc., incorporated herein by reference to Aetna
Inc.'s Form 10-Q filed on October 25, 1996.*
The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by
reference to Aetna Inc.'s Registration Statement on Form S-4
(Registration Statement No. 333-5791) filed on June 12, 1996.*
* 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 33-75964) as filed on February
11, 1997.
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.
(56)
<PAGE>
Index to Consolidated Financial Statement Schedules
Page
----
Independent Auditors' Report............................................... 58
I. Summary of Investments - Other than Investments in
Affiliates as of December 31, 1996.................................. 59
III. Supplementary Insurance Information as of and for the years
ended December 31, 1996, 1995, 1994................................. 60
IV. Reinsurance for the years ended December 31, 1996,
1995, 1994.......................................................... 61
Schedules other than those listed above are omitted because they are not
required or are not applicable.
(57)
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
Under date of February 4, 1997, we reported on the consolidated balance sheets
of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31,
1996 and 1995, 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, 1996, as included herein. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedules as listed in the
accompanying index. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
(58)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Schedule I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1996
Amount at
Which Shown
in the
Type of Investment Cost Value* Balance Sheet
------------------ ---- ------ -------------
(millions)
Debt Securities:
U.S. government and government
agencies and authorities $ 1,072.4 $ 1,088.4 $ 1,088.4
States, municipalities and political
subdivisions 6.0 7.2 7.2
U.S. corporate securities 4,652.3 4,746.4 4,746.4
Foreign securities (1) 1,891.9 1,962.9 1,962.9
Residential mortgage-backed securities 3,020.0 3,176.4 3,176.4
Commercial/Multifamily mortgage-backed
securities 1,008.7 1,027.9 1,027.9
Other asset-backed securities 887.8 896.3 896.3
--------- --------- ---------
Total debt securities 12,539.1 12,905.5 12,905.5
--------- ========= ---------
Equity securities:
Non-redeemable preferred stock 107.6 119.0 119.0
Investment in affiliated mutual funds 77.3 81.1 81.1
Common stock 0.0 0.3 0.3
--------- --------- ---------
Total equity securities 184.9 200.4 200.4
--------- ========= ---------
Short-term investments 34.8 34.8
Mortgage loans 13.0 13.0
Policy loans 399.3 399.3
--------- ---------
Total investments $13,171.1 $13,553.0
========= =========
* See Notes 1 and 2 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.
(59)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Schedule III
Supplementary Insurance Information
As of and for the years ended December 31, 1996, 1995 and 1994
(Millions)
<TABLE>
<CAPTION>
Deferred Unpaid Policyholders' Other income
policy Future claims funds left Net (including
acquisition policy and claim Unearned with the Premium investment realized capital
Segment costs benefits expenses premiums(1) company revenue income (2) gains and losses)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Financial Services $ 715.2 $ 960.0 $ 0.5 $ -- $10,648.5 $ 84.9 $ 852.6 $ 257.6
Individual Life
Insurance 800.1 2,655.8 28.4 1.2 15.2 48.7 193.0 204.0
----------------------------------------------------------------------------------------------------------
Total $ 1,515.3 $ 3,615.8 $ 28.9 $ 1.2 $10,663.7 $ 133.6 $ 1,045.6 $ 461.6
==========================================================================================================
1995
Financial Services $ 602.5 $ 1,018.9 $ 1.0 $ -- $10,483.3 $ 164.4 $ 823.3 $ 223.6
Individual Life
Insurance 738.8 2,574.3 26.2 1.4 16.8 48.3 181.0 178.6
----------------------------------------------------------------------------------------------------------
Total $ 1,341.3 $ 3,593.2 $ 27.2 $ 1.4 $10,500.1 $ 212.7 $ 1,004.3 $ 402.2
==========================================================================================================
1994
Financial Services $ 516.8 $ 773.7 $ 1.4 $ -- $ 8,942.9 $ 137.6 $ 745.9 $ 130.0
Individual Life
Insurance 647.5 2,137.3 22.4 1.7 6.4 54.0 171.3 160.8
----------------------------------------------------------------------------------------------------------
Total $ 1,164.3 $ 2,911.0 $ 23.8 $ 1.7 $ 8,949.3 $ 191.6 $ 917.2 $ 290.8
==========================================================================================================
</TABLE>
Amortization
of deferred
Current policy Other
and future acquisition operating
Segment benefits costs expenses (3)
- -----------------------------------------------------------
1996
Financial Services $ 728.3 $ 28.0 $ 308.9
Individual Life
Insurance 240.3 41.8 80.6
------------------------------------
Total $ 968.6 $ 69.8 $ 389.5
====================================
1995
Financial Services $ 786.3 $ 10.5 $ 254.4
Individual Life
Insurance 210.9 37.5 56.4
------------------------------------
Total $ 997.2 $ 48.0 $ 310.8
====================================
1994
Financial Services $ 707.3 $ 9.6 $ 174.1
Individual Life
Insurance 214.2 21.9 51.6
------------------------------------
Total $ 921.5 $ 31.5 $ 225.7
====================================
(1) Included in future policy benefits on the Company's Consolidated Balance
Sheets.
(2) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(3) Includes operating expenses and severance and facilities charges. Excludes
any effect of the corporate facilities and severance charge recorded in
1996 which is not directly allocable to the Financial Services and
Individual Life Insurance segments.
(60)
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, 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>
1996
Life insurance in force $40,276.3 $ 2,416.0 $ 2,076.3 $39,936.6 5.2%
=============================================
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7 52.0
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9 0.7
---------------------------------------------
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6 19.4
=============================================
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 164.0 -- 0.5 164.5 0.3
---------------------------------------------
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7 13.4
=============================================
1994
Life insurance in force $32,625.9 $ 1,423.0 $ 2,677.8 $33,880.7 7.9%
=============================================
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1 60.6
Accident and Health Insurance 9.3 9.3 -- -- --
Annuities 137.3 -- 0.2 137.5 0.1
---------------------------------------------
Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6 17.2
=============================================
</TABLE>
(61)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
Date March 28, 1997 By /s/ Deborah Koltenuk
-------------- ------------------------
Deborah Koltenuk
Vice President and Treasurer,
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 28, 1997.
Signature Title
* ______________________ President and Director
Daniel P. Kearney (Principal Executive Officer)
* ______________________ Senior Vice President, Chief Financial Officer,
Timothy A. Holt and Director (Principal Financial Officer)
* ______________________ Senior Vice President and Director
Christopher J. Burns
* ______________________ Senior Vice President and Director
Laura R. Estes
* ______________________ Senior Vice President and Director
John Y. Kim
* ______________________ Vice President and Director
Gail P. Johnson
* ______________________ Vice President and Director
Shaun P. Mathews
* ______________________ Vice President and Director
Glen Salow
* ______________________ Vice President and Director
Creed R. Terry
/s/ Deborah Koltenuk Vice President and Treasurer, Corporate
- ------------------------ Controller (Principal Accounting Officer)
Deborah Koltenuk
* By: /s/ Kirk P. Wickman
-------------------------------
Kirk P. Wickman, Vice President, General Counsel and Secretary
(62)
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life Insurance and Annuity
Company, hereby severally constitute and appoint Kirk P. Wickman and Deborah
Koltenuk and each of them individually, our true and lawful attorneys, with full
power to them and each of them to sign for us, and in our names and in the
capacities indicated below, the 1996 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, hereby ratifying and confirming our signatures
as they may be signed by our said attorney to the Form 10-K and any and all
amendments thereto.
WITNESS our hands and common seal on this 28th day of March, 1997.
Signature Title
/s/ Daniel P. Kearney President and Director
- ---------------------------- (Principal Executive Officer)
Daniel P. Kearney
/s/ Timothy A. Holt Senior Vice President, Chief Financial Officer,
- ---------------------------- and Director (Principal Financial Officer)
Timothy A. Holt
/s/ Christopher J. Burns Senior Vice President and Director
- ----------------------------
Christopher J. Burns
/s/ Laura R. Estes Senior Vice President and Director
- ----------------------------
Laura R. Estes
/s/ John Y. Kim Senior Vice President and Director
- ----------------------------
John Y. Kim
/s/ Gail P. Johnson Vice President and Director
- ----------------------------
Gail P. Johnson
/s/ Shaun P. Mathews Vice President and Director
- ----------------------------
Shaun P. Mathews
/s/ Glen Salow Vice President and Director
- ---------------------------
Glen Salow
/s/ Creed R. Terry Vice President and Director
- ----------------------------
Creed R. Terry
/s/ Deborah Koltenuk Vice President and Treasurer, Corporate
- ---------------------------- Controller (Principal Accounting Officer)
Deborah Koltenuk
(63)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 12,906
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 200
<MORTGAGE> 13
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,553
<CASH> 459
<RECOVER-REINSURE> 10
<DEFERRED-ACQUISITION> 1,515
<TOTAL-ASSETS> 31,693
<POLICY-LOSSES> 3,617
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 28
<POLICY-HOLDER-FUNDS> 10,664
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,607
<TOTAL-LIABILITY-AND-EQUITY> 31,693
134
<INVESTMENT-INCOME> 1,046
<INVESTMENT-GAINS> 20
<OTHER-INCOME> 45
<BENEFITS> 969
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 199
<INCOME-TAX> 58
<INCOME-CONTINUING> 141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141
<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>
