SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998 Commission file number 33-23376
-------------- --------
Aetna Life Insurance and Annuity Company
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Connecticut 71-0294708
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
-------------------------------------------- ------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
---------------
</TABLE>
None
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding
Title of Class at April 30, 1998
- -------------- -----------------
<S> <C>
Common Stock,
par value $50 55,000
</TABLE>
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income ................................. 3
Consolidated Balance Sheets ....................................... 4
Consolidated Statements of Changes in Shareholder's Equity ........ 5
Consolidated Statements of Cash Flows ............................. 6
Condensed Notes to Consolidated Financial Statements ................ 7
Independent Auditors' Review Report ................................. 10
Item 2. Management's Analysis of the Results of Operations .................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................... 17
Item 5. Other Information ................................................... 17
Item 6. Exhibits and Reports on Form 8-K .................................... 17
Signatures ..................................................................... 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Premiums $61.5 $52.3
Charges assessed against policyholders 127.3 109.7
Net investment income 262.0 267.8
Net realized capital (losses) gains (3.6) 5.0
Other income 9.8 9.7
-------- --------
Total revenue 457.0 444.5
Benefits and expenses:
Current and future benefits 272.2 272.0
Operating expenses 90.3 78.2
Amortization of deferred policy
acquisition costs 32.6 19.9
-------- --------
Total benefits and expenses 395.1 370.1
Income before income taxes 61.9 74.4
Income taxes 19.9 24.0
-------- --------
Net income $42.0 $50.4
======== ========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
- ------ --------- ------------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,860.2 and $12,912.2) $13,440.2 $13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $90.0 and $131.7) 99.1 147.6
Investment in affiliated mutual funds (cost: $141.1 and $78.1) 156.3 83.0
Common stock (cost: $2.0 and $0.2) 4.5 0.6
Short-term investments 35.1 95.6
Mortgage loans 12.8 12.8
Policy loans 480.1 469.6
--------- ---------
Total investments 14,228.1 14,273.0
Cash and cash equivalents 797.2 565.4
Short-term investments under securities loan agreement 1,272.1 -
Accrued investment income 180.6 163.0
Premiums due and other receivables 70.1 63.7
Deferred policy acquisition costs 1,687.7 1,654.6
Reinsurance loan to affiliate 351.4 397.2
Other assets 71.5 46.8
Separate accounts assets 25,998.3 22,982.7
--------- ---------
Total assets $44,657.0 $40,146.4
========= =========
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $3,815.3 $3,785.7
Unpaid claims and claim expenses 36.4 38.0
Policyholders' funds left with the Company 11,157.5 11,121.5
--------- ---------
Total insurance reserve liabilities 15,009.2 14,945.2
Payables under securities loan agreement 1,272.1 -
Other liabilities 399.4 312.8
Income taxes:
Current 24.0 12.4
Deferred 83.6 72.0
Separate accounts liabilities 25,985.4 22,970.0
--------- ---------
Total liabilities 42,773.7 38,312.4
--------- ---------
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 418.0 418.0
Accumulated other comprehensive income 103.0 92.9
Retained earnings 1,359.5 1,320.3
--------- ---------
Total shareholder's equity 1,883.3 1,834.0
--------- ---------
Total liabilities and shareholder's equity $44,657.0 $40,146.4
========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Shareholder's equity, beginning of period $1,834.0 $1,609.5
Comprehensive income
Net income 42.0 50.4
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
($15.5, $(72.2), pretax, respectively ) 10.1 (46.9)
-------- --------
Total comprehensive income 52.1 3.5
-------- --------
Other changes 0.2 1.8
Common stock dividends (3.0) --
-------- --------
Shareholder's equity, end of period $1,883.3 $1,614.8
======== ========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $42.0 $50.4
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Increase in accrued investment income (17.6) (26.3)
Decrease (increase) in premiums due and other receivables 17.6 (3.2)
Increase in policy loans (10.5) (9.1)
Increase in deferred policy acquisition costs (33.1) (44.8)
Decrease in reinsurance loan to affiliate 45.8 34.6
Net increase in universal life account balances 91.3 75.6
Decrease in other insurance reserve liabilities (54.1) (22.0)
Net decrease in other liabilities and other assets (33.3) (4.9)
Increase in income taxes 22.2 18.4
Net accretion of discount on investments (14.7) (16.9)
Net realized capital losses (gains) 3.6 (5.0)
-------- --------
Net cash provided by operating activities 59.2 46.8
-------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 1,711.9 1,380.4
Equity securities 45.6 14.8
Mortgage loans -- 0.1
Investment maturities and repayments of:
Debt securities available for sale 376.5 227.4
Short-term investments 74.8 10.4
Cost of investment purchases in:
Debt securities available for sale (1,973.6) (1,376.5)
Equity securities (66.7) (33.8)
Short-term investments (14.1) (21.1)
-------- --------
Net cash provided by investing activities 154.4 201.7
-------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 403.2 378.2
Withdrawals of investment contracts (383.3) (326.9)
Return of capital from Separate Account 1.3 --
Dividends paid to shareholder (3.0) --
-------- --------
Net cash (used for) provided by financing activities 18.2 51.3
-------- --------
Net increase in cash and cash equivalents 231.8 299.8
Cash and cash equivalents, beginning of period 565.4 459.1
-------- --------
Cash and cash equivalents, end of period $797.2 $758.9
======== ========
Supplemental cash flow information:
Income taxes paid, net $1.9 $9.4
======== ========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1) Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of
America (collectively, the "Company"). Aetna Life Insurance and Annuity
Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc.
("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services,
Inc., whose ultimate parent is Aetna Inc. ("Aetna").
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1997 financial information to conform to
the 1998 presentation. These interim statements necessarily rely heavily on
estimates, including assumptions as to annualized tax rates. In the opinion
of management, all adjustments necessary for a fair statement of results for
the interim periods have been made. All such adjustments are of a normal,
recurring nature. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes as presented in the Company's 1997 Annual Report
on Form 10-K. Certain financial information that is normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles, but that is not required for interim reporting
purposes, has been condensed or omitted.
2) New Accounting Standards
------------------------
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public
Accountants ("AICPA"). This statement requires that certain costs incurred in
developing internal-use computer software be capitalized, and provides
guidance for determining whether computer software is considered to be for
internal use. The Company will amortize these costs over a period of 3 years.
Previously, the Company expensed the cost of internal-use computer software
as incurred. The adoption of this statement resulted in an increase to net
income of $1.7 million in the first quarter of 1998.
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in June 1996 and provides accounting and reporting standards for transfers of
financial assets and extinguishments of liabilities.
FAS No. 125 was effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending were not effective until January 1, 1998. The adoption of those
provisions effective in 1998, did not have a material effect on the Company's
financial position or results of operations.
7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
3) Future Application of Accounting Standard
-----------------------------------------
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments, which provides guidance
for determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance-related assessments and
guidance for measuring the liability. This statement is effective for 1999
financial statements, with early adoption permitted. The Company does not
expect adoption of this statement to have a material effect on its financial
position or results of operations.
4) Additional Information - Accumulated Other Comprehensive Income
---------------------------------------------------------------
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience rated contractholders) were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------------------------------------
(Millions) 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during
the period (1) $17.3 $(32.7)
Less: reclassification adjustment for gains and
other items included in net income (2) 7.2 14.2
-------------------------------------------------------------------------
Net unrealized gains (losses) on securities $10.1 $(46.9)
=========================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$26.6 million and $(50.3) million for 1998 and 1997, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $11.1 million and $21.9 million for 1998 and 1997,
respectively.
5) Severance and Facilities Charges
--------------------------------
During 1996, the Company was allocated severance and facilities reserves from
Aetna to reflect actions taken or to be taken to reduce the level of
corporate expenses and other costs previously absorbed by Aetna's
property-casualty operations.
Also during 1996, the Company established severance and facilities reserves
in the Financial Services and Individual Life Insurance segments to reflect
actions taken or to be taken in order to make its businesses more
competitive.
8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
5) Severance and Facilities Charges (Continued)
--------------------------------
Activity for the three months ended March 31, 1998 within the severance and
facilities reserves (pretax, in millions) and positions eliminated related to
such actions were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Reserve Positions
---------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1997 $ 20.8 361
Actions taken (1) 1.5 23
------ ----
Balance at March 31, 1998 $ 19.3 338
---------------------------------------------------------
</TABLE>
(1) Includes $.7 million of severance-related actions and $.5 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
6) 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.
7) Dividends
---------
On January 30, 1998 the Company paid a $3.0 million dividend to HOLDCO. The
additional amount of dividends that may be paid by the Company to HOLDCO in
1998 without prior approval by the Insurance Commissioner of the State of
Connecticut is $74.6 million.
8) Other Matters
-------------
Effective January 1, 1998, 90% of the mortality risk on substantially all
individual universal life product business written from June 1, 1991 through
October 31, 1997 has been reinsured externally. Beginning November 1, 1997,
90% of new business written on these products has been reinsured externally.
9
<PAGE>
Independent Auditors' Review Report
The Board of Directors
Aetna Life Insurance and Annuity Company:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Life Insurance and Annuity Company and Subsidiary as of March 31, 1998, and the
related condensed consolidated statements of income, changes in shareholder's
equity and cash flows for the three-month periods ended March 31, 1998 and 1997.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Life Insurance and Annuity
Company and Subsidiary as of December 31, 1997, and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 3,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
May 5, 1998
Hartford, Connecticut
10
<PAGE>
Item 2. Management's Analysis of the Results of Operations
Consolidated Overview:
- ----------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
Operating Summary (millions) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Premiums (1) $ 61.5 $ 52.3
Charges assessed against policyholders 127.3 109.7
Net investment income 262.0 267.8
Net realized capital (losses) gains (3.6) 5.0
Other income 9.8 9.7
- -------------------------------------------------------------------------------------
Total revenue 457.0 444.5
- -------------------------------------------------------------------------------------
Current and future benefits 272.2 272.0
Operating expenses 90.3 78.2
Amortization of deferred policy acquisition costs 32.6 19.9
- -------------------------------------------------------------------------------------
Total benefits and expenses 395.1 370.1
- -------------------------------------------------------------------------------------
Income before income taxes 61.9 74.4
Income taxes 19.9 24.0
- -------------------------------------------------------------------------------------
Net income (2) $ 42.0 $ 50.4
=====================================================================================
Net realized capital (losses) gains,
net of tax (included above) $ (2.3) $ 3.2
=====================================================================================
- -------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 333.1 $ 280.2
Annuities--variable options 907.1 818.1
Individual Life Insurance 131.1 120.5
----------------------------------------------------
Total $ 1,371.3 $ 1,218.8
=====================================================================================
Assets under management: (3)
Annuities--fixed options $12,069.9 $11,767.9
Annuities--variable options (4) 22,852.1 15,047.7
----------------------------------------------------
Subtotal Annuities 34,922.0 26,815.6
Other Investment Advisory (5)(6) 4,343.0 2,102.8
----------------------------------------------------
Financial Services 39,265.0 28,918.4
Individual Life Insurance 3,207.3 2,894.4
----------------------------------------------------
Total $42,472.3 $31,812.8
=====================================================================================
Individual life insurance
coverage issued $ 1,225.7 $ 1,393.8
=====================================================================================
Individual life insurance
coverage in force $45,437.6 $42,923.9
=====================================================================================
</TABLE>
(1) Includes $14.3 million and $16.4 million for the three months ended March
31, 1998 and 1997, respectively, for annuity premiums on contracts
converting from the accumulation phase to payout options with life
contingencies.
(2) Net income for the three months ended March 31, 1998 includes a net benefit
from capitalizing internal-use software of $1.7 million.
(3) Excludes net unrealized capital gains of $579.9 million and $50.1 million
at March 31, 1998 and 1997, respectively.
(4) Includes $6,029.3 million and $4,888.9 million at March 31, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) The March 31, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously held by an affiliate, reflecting the migration
of certain other pension products which complement the Company's business
strategy.
(6) The March 31, 1997 balance included $ 1,152.5 million of mutual fund assets
for which the Company is no longer the investment advisor. The advisory
agreement was transferred to an affiliate effective February 2, 1998.
11
<PAGE>
Overview
The Company's net income for the three months ended March 31, 1998 decreased $8
million compared to the same period a year ago. Results for the three months
ended March 31, 1998 include costs of $4 million related to Year 2000
remediation. Excluding Year 2000 costs and net realized capital gains or losses,
results for the three months ended March 31, 1998 increased $1 million, or 2%,
from the same period a year ago, reflecting improved earnings from financial
services products partially offset by a decrease in earnings from individual
life products.
Assets under management, excluding approximately $3 billion in assets under
management that were previously reported by an affiliate, increased by 24%
primarily due to appreciation in the stock market and additional net deposits
(deposits less surrenders).
Of the $12.1 billion and $11.8 billion of fixed annuity assets under management
at March 31, 1998 and 1997, 25% were fully guaranteed and 75% were experience
rated. The average annualized earned rate on investments supporting fully
guaranteed contracts was 7.5% and 7.9% and the average annualized earned rate on
investments supporting experience rated contracts was 8.0% and 8.1% for the
three months ended March 31, 1998 and 1997, respectively. The average annualized
credited rate on fully guaranteed contracts was 6.5% and 6.7% and the average
annualized credited rate on experience rated contracts was 5.9% and 6.0% for
each of the three months ended March 31, 1998 and 1997, respectively. The
resulting annualized interest margins on fully guaranteed contracts were 1.0%
and 1.2% and on experienced rated contracts was 2.1% for each of the three
months ended March 31, 1998 and 1997, respectively.
12
<PAGE>
Segment Results
Financial Services:
- -------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
Operating Summary (millions) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Premiums (1) $ 17.3 $ 17.8
Charges assessed against policyholders 77.6 57.5
Net investment income 213.7 217.6
Net realized capital (losses) gains (3.6) 4.6
Other income 7.0 9.3
- -----------------------------------------------------------------------------------
Total revenue 312.0 306.8
- -----------------------------------------------------------------------------------
Current and future benefits 173.8 179.3
Operating expenses 68.0 64.5
Amortization of deferred policy acquisition costs 24.0 13.8
- -----------------------------------------------------------------------------------
Total benefits and expenses 265.8 257.6
- -----------------------------------------------------------------------------------
Income before income taxes 46.2 49.2
Income taxes 13.9 14.9
- -----------------------------------------------------------------------------------
Net income (2) $ 32.3 $ 34.3
===================================================================================
Net realized capital (losses) gains,
net of tax (included above) $ (2.3) $ 3.0
===================================================================================
- -----------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 333.1 $ 280.2
Annuities--variable options 907.1 818.1
-------------------------------------------------
Total $ 1,240.2 $ 1,098.3
===================================================================================
Assets under management: (3)
Annuities--fixed options $12,069.9 $11,767.9
Annuities--variable options (4) 22,852.1 15,047.7
-------------------------------------------------
Subtotal Annuities 34,922.0 26,815.6
Other Investment Advisory (5) (6) 4,343.0 2,102.8
-------------------------------------------------
Total $39,265.0 $28,918.4
===================================================================================
</TABLE>
(1) Includes $14.3 million and $16.4 million for the three months ended March
31, 1998 and 1997, respectively, for annuity premiums on contracts
converting from the accumulation phase to payout options with life
contingencies.
(2) Net income for the three months ended March 31, 1998 includes a net benefit
from capitalizing internal-use software of $1.4 million and excludes any
effect of Year 2000 costs recorded in 1998 which are not allocable to the
segment.
(3) Excludes net unrealized capital gains of $496.3 million and $51.7 million
at March 31, 1998 and 1997, respectively.
(4) Includes $6,029.3 million and $4,888.9 million at March 31, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) The March 31, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously held by an affiliate, reflecting the migration
of certain other pension products which complement the Company's business
strategy.
(6) The March 31, 1997 balance included $ 1,152.5 million of mutual fund assets
for which the Company is no longer the investment advisor. The advisory
agreement was transferred to an affiliate effective February 2, 1998.
Net income in the financial services segment for the three months ended March
31, 1998 decreased $2 million compared to the same period a year ago. Excluding
realized capital losses or gains, results for the three months ended March 31,
1998 increased $3 million, or 11% from the same period a year ago, reflecting
increased fee income primarily from increased assets under management. Assets
under management, excluding approximately $3 billion in assets under management
that were previously reported by an affiliate, increased by 25% primarily due to
appreciation in the stock market and additional net deposits.
13
<PAGE>
Individual Life Insurance:
- --------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
Operating Summary (millions) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Premiums $ 44.2 $ 34.5
Charges assessed against policyholders 49.7 52.2
Net investment income 48.3 50.2
Net realized capital gains -- 0.4
Other income 2.8 0.4
- -------------------------------------------------------------------------------------
Total revenue 145.0 137.7
- -------------------------------------------------------------------------------------
Current and future benefits 98.4 92.7
Operating expenses 16.0 13.7
Amortization of deferred policy acquisition costs 8.6 6.1
- -------------------------------------------------------------------------------------
Total benefits and expenses 123.0 112.5
- -------------------------------------------------------------------------------------
Income before income taxes 22.0 25.2
Income taxes 8.2 9.1
=====================================================================================
Net income (1) $ 13.8 $ 16.1
=====================================================================================
Net realized capital gains net of tax
(included above) $ -- $ 0.2
- -------------------------------------------------------------------------------------
=====================================================================================
- -------------------------------------------------------------------------------------
Deposits not included in premiums
above $ 131.1 $ 120.5
=====================================================================================
Assets under management (2) $ 3,207.3 $ 2,894.4
=====================================================================================
Individual life insurance coverage
issued $ 1,225.7 $ 1,393.8
=====================================================================================
Individual life insurance coverage in
force $45,437.6 $42,923.9
=====================================================================================
</TABLE>
(1) Net income for the three months ended March 31, 1998 includes a net benefit
from capitalizing internal-use software of $.3 million and excludes any
effect of Year 2000 costs recorded in 1998 which are not allocable to the
segment.
(2) Excludes net unrealized capital gains of $83.6 million and net unrealized
capital losses of $1.6 million at March 31, 1998 and 1997, respectively.
Net income in the individual life insurance segment, excluding realized capital
gains, for the three months ended March 31, 1998 decreased $2 million, or 13%,
primarily due to lower earnings associated with sponsored life products, which
are no longer marketed to new employer sponsors, and higher operating expenses
attributable to business growth in other products.
Premiums and current and future benefits reflect offsetting amounts of $32.8
million and $22.5 million for the three months ended March 31, 1998 and 1997,
respectively, related to the transition of the reinsurance agreement with Aetna
Life Insurance Company from a modified coinsurance to a coinsurance arrangement.
14
<PAGE>
General Account Investments
- ---------------------------
The Company's invested assets were comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
(Millions) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Debt securities, available for sale,
at fair value $13,440.2 $13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock 99.1 147.6
Investment in affiliated mutual funds 156.3 83.0
Common stock 4.5 0.6
Short-term investments 35.1 95.6
Mortgage loans 12.8 12.8
Policy loans 480.1 469.6
---------------------------
Total Investments $14,228.1 $14,273.0
=========================================================================
</TABLE>
At March 31, 1998 and December 31, 1997, the Company's carrying value of
investments in debt securities represented 94% of total general account invested
assets. For the same periods, $10.7 billion, or 79% of total debt securities,
supported experience rated products.
It is management's objective that the portfolio of debt securities be of high
quality and be well-diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies, and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio at March 31, 1998 and December 31, 1997 was AA-.
The percentage of total debt securities by quality rating category is as
follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 49.7% 48.3%
AA 10.5 10.4
A 21.2 21.7
BBB 12.3 12.9
BB 3.5 3.8
B and Below 2.8 2.9
-------------------------------------
100.0% 100.0%
=====================================
</TABLE>
15
<PAGE>
General Account Investments (Continued)
- ---------------------------
The percentage of total debt securities investments by market sector is as
follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
U.S. Corporate Securities 37.5% 37.4%
Residential Mortgage-Backed Securities 23.5 24.3
Foreign Securities - U.S. Dollar Denominated 10.6 12.4
U.S. Treasuries/Agencies 11.7 9.6
Commercial/Multifamily Mortgage-Backed
Securities 9.2 8.6
Asset-Backed Securities 7.5 7.7
------------------------------------
100.0% 100.0%
====================================
</TABLE>
Year 2000
- ---------
During the first three months of 1998, the Company incurred $4 million of costs
for company-owned systems and applications related to Year 2000 remediation. A
large majority of these costs are currently believed to be incremental expenses
that will not recur in the Year 2000 or thereafter. Year 2000 remediation costs
were not material in 1997. See "Year 2000" in the Company's 1997 Report on Form
10-K.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect results
of operations in future periods.
Item 5. Other Information.
Ratings
- -------
The Company's ratings are as follows:
<TABLE>
<CAPTION>
Rating Agencies
------------------------------------------------
Moody's
Investor
A.M. Best Duff & Service Standard &
(1) Phelps (2) (2) Poors (2)
------------------------------------------------
<S> <C> <C> <C> <C>
Claims paying rating
on February 4, 1997 A+ AA+ Aa2 AA-
Claims paying rating
on May 6, 1998 A+ AA+ Aa3 AA-
</TABLE>
(1) Rating on review.
(2) Rating on credit watch or review for possible downgrade.
On the heels of the announcement of Aetna's pending acquisition of New York Life
Insurance Company's NYLCare health plans business, as is typical standard
operating procedures, all of Aetna's ratings were placed on credit watch, until
the rating agencies could do further analysis of the transaction.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
Amendment dated as of February 27, 1998 to the Aetna Inc.
1996 Stock Incentive Plan, incorporated by reference to Aetna
Inc.'s Form 10-Q, as filed electronically on May 6, 1998
(Accession No. 0000950123-98-004554).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
<TABLE>
<S> <C>
May 12, 1998 By /s/ Deborah Koltenuk
- --------------------------- -------------------------
(Date) Deborah Koltenuk
Vice President, Treasurer,
and Corporate Controller
(Chief Accounting Officer)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This Schedule contains summary financial information extracted from the
condensed consolidated financial statements contained in the Form 10-Q for
the three months ended March 31, 1998 for the 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 13,440
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 260
<MORTGAGE> 13
<REAL-ESTATE> 0
<TOTAL-INVEST> 14,228
<CASH> 797
<RECOVER-REINSURE> 19
<DEFERRED-ACQUISITION> 1,688
<TOTAL-ASSETS> 44,657
<POLICY-LOSSES> 3,814
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 36
<POLICY-HOLDER-FUNDS> 11,158
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,880
<TOTAL-LIABILITY-AND-EQUITY> 44,657
62
<INVESTMENT-INCOME> 262
<INVESTMENT-GAINS> (4)
<OTHER-INCOME> 10
<BENEFITS> 272
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 62
<INCOME-TAX> 20
<INCOME-CONTINUING> 42
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42
<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>
