As filed with the Securities and Exchange
Commission on April 13, 2000 Registration No. 333-49593
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Aetna Life Insurance and Annuity Company
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Connecticut
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71-0294708
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151 Farmington Avenue, Hartford, Connecticut 06156, (860) 273-4686
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Julie E. Rockmore, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, TS31, Hartford, Connecticut 06156
(860) 273-4686
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(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
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The annuities covered by this registration statement are to be issued from time
to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [XX]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [XX]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] _______________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Regulation S-K
Item 501(b)
Form S-2
Item No. Part A (Prospectus) Location
-------- ------------------- --------
Forepart of the Registration
Statement and Outside Front Cover
1 Page of Prospectus.................. Outside Cover Page
Inside Front and Outside Back Cover
Pages Cover Page (inside front
2 of Prospectus....................... cover)
Summary Information, Risk Factors and
3 Ratio of Earnings to Fixed Charges.. Contract Overview
4 Use of Proceeds..................... Purchase; Investments
5 Determination of Offering Price..... Not Applicable
6 Dilution............................ Not Applicable
7 Selling Security Holders............ Not Applicable
Other Topics - Contract
8 Plan of Distribution................ Distribution
Description of Securities to be Guaranteed Terms and
9 Registered.......................... Guaranteed Interest Rates
10 Interests of Named Experts and Counsel Not Applicable
Information with Respect to the
11 Registrant.......................... Not Applicable
Other Topics -
Incorporation of Certain Information Incorporation of Certain
12 by Reference........................ Documents by Reference
Disclosure of Commission Position on
Indemnification for Securities Act
13 Liabilities......................... Not Applicable
<PAGE>
Prospectus - May 1, 2000
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The Contract. The contract described in this prospectus is a group or
individual, single purchase payment, modified, guaranteed, deferred annuity
contract issued by Aetna Life Insurance and Annuity Company (the Company, we,
us, our). The contract is available as a nonqualified deferred annuity.
Additionally, the contract is available as a rollover to a traditional
Individual Retirement Annuity (IRA) under section 408(b) of the Internal
Revenue Code of 1986, as amended (Tax Code) or a rollover to a Roth IRA under
Tax Code section 408A. See "Purchase" in this prospectus for additional
information.
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Why Reading this Prospectus is Important. This prospectus contains facts about
the contract that you should know before investing. The information will help
you determine if the contract is right for you. Read this prospectus carefully.
If you do invest in the contract, retain this document for future reference.
Table of Contents . . . page 3
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How it Works. Upon purchase, you may direct your purchase payment to different
guaranteed terms ranging up to and including ten years. Each guaranteed term
has its own guaranteed interest rate. When the guaranteed term(s) end, you can
reinvest in another guaranteed term, begin receiving income phase payments, or
withdraw your full account value.
Withdrawals. You may withdraw all or part of your accumulated funds at any
time. Withdrawals prior to the end of a guaranteed term may be subject to a
market value adjustment and certain fees. Upon a full withdrawal, you could,
therefore, receive less than your purchase payment. See the "Market Value
Adjustment" section, p. 16, and "Fees" section, p. 10, in this prospectus for
additional information.
Additional Disclosure Information. Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense. We do not intend for this
prospectus to be an offer to sell or a solicitation of an offer to buy these
securities in any state that does not permit their sale. We have not authorized
anyone to provide you with information different from that contained in this
prospectus. The contract is not a deposit with, obligation of, or guaranteed or
endorsed by any bank, nor is it insured by the FDIC.
Our Home Office:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-531-4547
PRO.49593-00
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THIS PAGE INTENTIONALLY LEFT BLANK
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
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Contract Overview ..................................... 4
Questions: Contacting the Company (sidebar)
Contract Design
Who's Who
Contract Phases
Contract Facts
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Guaranteed Terms and Guaranteed Interest Rates ......... 6
Your Choices at the End of a Guaranteed Term ........... 8
Purchase ............................................... 8
Right to Cancel ........................................ 9
Fees ................................................... 10
Withdrawals ............................................ 13
Systematic Distribution Options ........................ 14
Market Value Adjustment (MVA) .......................... 16
Death Benefit .......................................... 17
Income Phase ........................................... 18
Investments ............................................ 21
Taxation ............................................... 23
Other Topics ........................................... 29
</TABLE>
Contract Distribution -- Contract Modification -- Transfer of Ownership;
Assignment -- Involuntary Terminations -- Legal Matters and Proceedings --
Experts -- Getting Further Information -- Incorporation of Certain Documents
by Reference -- Inquiries
<TABLE>
<S> <C>
Appendix I--Calculating a Market Value Adjustment (MVA) ..... 33
</TABLE>
3
<PAGE>
[START SIDE BAR]
Questions: Contacting the Company. To answer your questions, contact your sales
representative or write or call our Home Office:
Aetna Life Insurance and
Annuity Company
151 Farmington Avenue
Hartford, CT 06156
1-800-531-4547
[END SIDE BAR]
Contract Overview
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The following is intended as a summary. Please read each section of this
prospectus for additional detail.
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Contract Design
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The contract described in this prospectus is a group or individual, single
purchase payment, modified, guaranteed, deferred annuity contract issued by
Aetna Life Insurance and Annuity Company. It is intended to be used as a
retirement savings vehicle that allows you to invest in fixed interest options
in order to help meet long-term financial goals.
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Who's Who
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The contract holder (you): The person to whom we issue an individual contract
or a certificate under a group contract.
The Company (we, us, our): Aetna Life Insurance and Annuity Company. We issue
the contract.
The contract: Both individual contracts and certificates under a group contract
are referred to in this prospectus as the contract.
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Contract Phases
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The Accumulation Phase
> At Investment. Upon purchase, you may direct your purchase payment to
different guaranteed terms ranging up to and including ten years. Each
guaranteed term has its own guaranteed interest rate. Generally, your
purchase payment will earn interest at the guaranteed interest rate(s) for
the duration of the guaranteed term(s) you select. If you withdraw or
transfer amounts prior to the end of a guaranteed term, those amounts may
be subject to a market value adjustment and certain fees. See "Market
Value Adjustment" and "Fees."
> At Maturity. We will notify you at least 18 days before the guaranteed term
ends. If you do not make any election before the guaranteed term ends, we
will automatically renew the contract for a guaranteed term of the same or
similar duration. If you do not want to automatically renew, contact us
before the guaranteed term ends. Prior to the end of a guaranteed term,
you can elect to reinvest in a different guaranteed term, begin income
phase payments, or withdraw the full amount available at maturity.
The Income Phase
You may start receiving income phase payments any time after the first year of
the contract. Several payment options are available. See "Income Phase." In
general, you may receive payments for a specified period of time or for life;
receive payments monthly, quarterly, semi-annually or annually; and select an
option that provides a death benefit to beneficiaries.
4
<PAGE>
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Contract Facts
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Free Look/Right to Cancel: You may cancel the contract within ten days of
receipt (or as otherwise provided by state law). See "Right to Cancel."
Death Benefit: A beneficiary may receive a benefit in the event of your death
prior to the income phase. Benefits during the income phase depend upon the
payment option selected. See "Death Benefit" and " Income Phase."
Withdrawals: During the accumulation phase, you may withdraw all or part of
your account value. Amounts withdrawn may be subject to a market value
adjustment, early withdrawal charge, maintenance fee, tax withholding and
taxation. See "Market Value Adjustment," "Withdrawals," "Fees" and "Taxation."
Systematic Distribution Options: You may elect to receive regular payments from
your account, while retaining the account in the accumulation phase. See
"Systematic Distribution Options."
Fees: Certain fees may be deducted from your account value. See "Fees."
Taxation: You will not generally pay taxes on any earnings from the annuity
contract described in this prospectus until they are withdrawn. Tax-qualified
retirement arrangements (e.g., IRAs) also defer payment of taxes on earnings
until they are withdrawn. If you are considering funding a tax-qualified
retirement arrangement with an annuity contract, you should know that the
annuity contract does not provide any additional tax deferral of earnings
beyond the tax deferral provided by the tax-qualified retirement arrangement.
However, annuities do provide other features and benefits which may be valuable
to you. You should discuss your alternatives with your financial
representative.
Taxes will generally be due when you receive a distribution. Tax penalties may
apply in some circumstances. See "Taxation."
Market Value Adjustment (MVA): If you withdraw all or part of your account
value before a guaranteed term is completed, an MVA may apply. The MVA reflects
the change in the value of the investment due to changes in interest rates
since the date of investment, and may be positive or negative. See "Market
Value Adjustment."
5
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Guaranteed Terms and Guaranteed Interest Rates
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The contract offers fixed interest options called guaranteed terms. On the
application or enrollment form, you select the guaranteed term(s) you want to
invest in from among the guaranteed terms we offer at that time. Your purchase
payment earns interest at the guaranteed interest rate applicable to that
guaranteed term.
Guaranteed Terms
Start Date. Guaranteed terms always start on the first business day of the
month.
Length. Guaranteed terms are offered at our discretion for various lengths of
time ranging up to and including ten years.
Minimum Payments. Your single purchase payment must be at least $10,000. You
may divide your single purchase payment among any of the various guaranteed
terms we offer, but you must invest at least $1,000 in any single guaranteed
term.
Guaranteed Interest Rates
We state the guaranteed interest rates as an effective annual rate of return.
In other words, we credit the interest you earn on your purchase payment at a
rate that provides the guaranteed rate of return over a one year period,
assuming you make no withdrawals. Guaranteed interest rates will never be less
than the minimum guaranteed interest rate stated in the contract. We reserve
the right to offer, from time to time, guaranteed interest rates to prospective
investors that are higher than those offered to current contract holders with
respect to guaranteed terms of the same duration.
One Guaranteed Term/Multiple Guaranteed Interest Rates. More than one
guaranteed interest rate may be applicable during a guaranteed term greater
than one year. For example, a guaranteed term of five years may apply one
guaranteed interest rate for the first year, a different guaranteed interest
rate for the next two years, and a third guaranteed interest rate for the last
two years. You may not select a guaranteed term with multiple guaranteed
interest rates if your contract is issued in the State of New York.
Example of Interest Crediting at the Guaranteed Interest Rate. The example
below shows how interest is credited during a guaranteed term. The hypothetical
guaranteed interest rate used in this example is illustrative only and is not
intended to predict future guaranteed interest rates to be offered under the
contract. Actual guaranteed interest rates offered may be more or less than
those shown. The example assumes no withdrawals of any amount during the entire
seven-year guaranteed term illustrated. The example does not reflect any market
value adjustment, federal income taxes, possible tax penalties, or deductions
of any early withdrawal charge, premium taxes, or maintenance fees. See
"Withdrawals," "Market Value Adjustment," "Fees" and "Taxation."
6
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Example:
<TABLE>
<CAPTION>
<S> <C>
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Purchase payment: $20,000
Guaranteed term: 7 years
Guaranteed interest rate: 6.00% per year
The guaranteed interest rate is applied in this example by using the
formula:
1 + the guaranteed interest rate = 1.06
Account Value at End of Interest Earned at End of
Each Contract Year Each Contract Year
------------------ ------------------
Contract year 1 = $21,200.00 Interest at end of contract year
($20,000.00 x 1.06) 1 = $1,200.00
Contract year 2 = $22,472.00 Interest at end of contract year
($21,200.00 x 1.06) 2 = $1,272.00
Contract year 3 = $23,820.32 Interest at end of contract year
($22,472.00 x 1.06) 3 = $1,348.32
Contract year 4 = $25,249.54 Interest at end of contract year
($23,820.32 x 1.06) 4 = $1,429.22
Contract year 5 = $26,764.51 Interest at end of contract year
($25,249.54 x 1.06) 5 = $1,514.97
Contract year 6 = $28,370.38 Interest at end of contract year
($26,764.51 x 1.06) 6 = $1,605.87
End of guaranteed term = $30,072.61 Interest at end of contract year
($28,370.38 x 1.06) 7 = $1,702.23
Total interest credited in guaranteed term = $10,072.61 ($30,072.61 -
$20,000)
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</TABLE>
Determination of Guaranteed Interest Rates. We will periodically determine the
guaranteed interest rates we offer at our sole discretion. We have no specific
formula for determining the rate of interest we will declare as future
guaranteed interest rates. Our determination of guaranteed interest rates is
influenced by, but does not necessarily correspond to, interest rates available
on the types of debt instruments in which we intend to invest the amounts
attributable to the contract. See "Investments." The Company's management will
also consider various factors in determining guaranteed interest rates for a
given guaranteed term, including some or all of the following:
> Regulatory and tax requirements;
> Sales commissions;
> Administrative expenses;
> General economic trends; and
> Competitive factors.
The Company's management determines the guaranteed interest rates we will
offer. We cannot predict nor guarantee future levels of guaranteed interest
rates above the contractually guaranteed minimum rate nor guarantee what rates
will be offered in the future.
7
<PAGE>
Your Choices at the End of a Guaranteed Term
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At least 18 calendar days prior to the end of a guaranteed term, we will notify
you that the guaranteed term is about to end. At the end of a guaranteed term,
you can do three things with the amount you have accumulated for that
guaranteed term:
> Reinvest all or part of it in another guaranteed term;
> Withdraw all or part of it; or
> Use all or part of it to start your income phase payments.
These choices can also be combined. For example, you can withdraw part of the
amount you have accumulated and reinvest the balance or reinvest part and use
the balance to start income phase payments. Each of these choices has certain
consequences, which you should consider carefully. See "Withdrawals," "Income
Phase" and "Taxation."
Requesting Your Choice. Once you decide what you want to do with your account
value for that guaranteed term, you must advise us of your decision by
completing an election form. We must receive your completed election form at
least five days prior to the end of the guaranteed term to which it applies.
If we do not receive your properly completed election form in time, or you do
not submit an election form, your account value at the end of the guaranteed
term will be automatically reinvested in the following manner:
> For a guaranteed term equal to the guaranteed term just ended;
> If no such guaranteed term is available, for the guaranteed term with the
next shortest duration; or
> If no such shorter guaranteed term is available, for the next longest
guaranteed term.
Your account value will then earn interest at the guaranteed interest rate
applicable to the guaranteed term automatically selected for you. We will mail
a confirmation statement to you the next business day after the completion of
the just-ended guaranteed term advising you of the new guaranteed term and
guaranteed interest rate.
Purchase
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Contract Type. The contract may be purchased as one of the following:
(1) A nonqualified deferred annuity;
(2) A rollover to a traditional individual retirement annuity (IRA) under Tax
Code section 408(b) (limitations apply, see "Purchasing a Traditional IRA"
in this section); or
(3) A rollover to a Roth IRA under Tax Code section 408A (limitations apply, see
"Purchasing a Roth IRA" in this section).
How to Purchase. To purchase a contract, complete an application or enrollment
form and submit it to the Company along with your purchase payment.
8
<PAGE>
Payment Methods. The following purchase payment methods are allowed:
> One lump-sum payment; or
> Transfer or rollover from a pre-existing plan or account.
We reserve the right to reject any payments without advance notice.
Payment Amount. The minimum purchase payment is $10,000. We may limit the
amount of the maximum purchase payment. All purchase payments over $1,000,000
will be allowed only with our consent. You may not make any additional purchase
payments under an existing contract. However, eligible persons may purchase
additional contracts at the then prevailing guaranteed interest rates and
guaranteed terms.
Purchasing a Traditional IRA. To purchase the contract as a traditional IRA,
your purchase payment must be a transfer of amounts held in one of the
following:
> A traditional individual retirement account under Tax Code section 408(a);
> A traditional individual retirement annuity under Tax Code section 408(b);
or
> A retirement plan qualified under Tax Code section 401 or 403.
Purchasing a Roth IRA. A contract may be purchased as a Roth IRA under Tax Code
section 408A, by transferring amounts previously accumulated under another Roth
IRA or from a traditional individual retirement annuity or individual
retirement account, provided certain conditions are met. See "Taxation."
Acceptance or Rejection of Applications or Enrollment Forms. We must accept or
reject your application or enrollment form within two business days of receipt.
If the application or enrollment form is incomplete, we may hold it and any
accompanying purchase payment for five days. Payments may be held for longer
periods only with your consent, pending acceptance of the application or
enrollment form. If the application or enrollment form is accepted, a contract
will be issued to you. If the application or enrollment form is rejected, we
will return it and any payments to you, without interest.
What Happens to Your Purchase Payment? If we accept your application or
enrollment form, your purchase payment becomes part of our general assets and
is credited to an account established for you. We will confirm the crediting of
your purchase payment within five business days of receipt of your properly
completed application or enrollment form. You start earning interest on your
purchase payment beginning on the effective date of the contract, which is the
date your purchase payment is credited. During the period of time between the
date your purchase payment is credited and the start of the guaranteed term you
selected, your purchase payment earns interest at the guaranteed interest rate
applicable to the guaranteed term you selected.
Right to Cancel
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You may cancel the contract within ten days of receiving it (or as otherwise
provided by state law) by returning it to our Home Office along with a written
notice of cancellation. We will issue a refund within seven days of our receipt
of the contract and written notice of cancellation. The refund will equal the
amount of your purchase payment.
9
<PAGE>
Fees
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The following fees and other deductions may impact your account value:
> Early Withdrawal Charge (see below);
> Maintenance Fee (see below);
> Premium Taxes (see below);
> Market Value Adjustment (see "Market Value Adjustment"); and
> Taxation (see "Taxation").
Early Withdrawal Charge
Withdrawals of all or a portion of your account value may be subject to a
charge.
Amount. The amount is a percentage of the purchase payment you withdraw. The
percentage will be determined by the early withdrawal charge schedule below.
Purpose. This is a deferred sales charge. It reimburses some of our sales and
administrative expenses associated with the contract.
Early Withdrawal Charge Schedule:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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Years since purchase payment
credited: 0 1 2 3 4 5 6 7
Fee as a percentage
of payment withdrawn: 7% 7% 6% 6% 5% 4% 2% 0%
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</TABLE>
How We Apply the Schedule. For purposes of applying the early withdrawal
charge, all time periods are measured from the date your purchase payment is
credited, even if you reinvest all or part of your account value in another
guaranteed term. Once the early withdrawal charge declines to 0%, it no longer
applies, regardless of how long you own the contract.
The early withdrawal charge applies only to withdrawals of your purchase
payment. However, for the purposes of this charge, we assume you are
withdrawing all or part of your purchase payment first (not your earnings).
This assumption is not made for tax purposes. See "Taxation."
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Example. Assume the first guaranteed term you select is for five years. Further
assume that at the end of this five-year guaranteed term, you decide to
reinvest your account value for another guaranteed term of four years. Assume
you then make a withdrawal (but not a special withdrawal, as described below)
during the second year of the new guaranteed term. Because six years have
passed since your purchase payment was credited, you would pay a 2% early
withdrawal charge, even though you could have withdrawn all or part of your
account value at the end of the first five-year guaranteed term without paying
an early withdrawal charge. See "Waiver of Charge," below. However, if you
make a withdrawal during the third year of the new guaranteed term, or anytime
thereafter, you would pay no early withdrawal charge, because seven years would
have passed since your purchase payment was credited.
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10
<PAGE>
Special Withdrawals. After 12 months from the contract effective date, you may
make one withdrawal equal to 10% or less of your account value during any
calendar year, valued at the time we receive your withdrawal request in
writing, and we will not deduct any early withdrawal charge. This special
withdrawal is subject to the following restrictions:
> It applies only to the first withdrawal each calendar year;
> All subsequent withdrawals that calendar year are subject to an early
withdrawal charge, even if you did not withdraw the full 10% with your first
withdrawal; and
> If your first withdrawal of the calendar year is in excess of 10% of your
account value, the excess amount is subject to an early withdrawal charge.
Waiver of Charge. The early withdrawal charge is waived for amounts that are:
> Withdrawn at the end of a guaranteed term, provided that at least five days
prior to the end of that guaranteed term we receive your withdrawal request
in writing. (If you reinvest those amounts in another guaranteed term,
future withdrawals will be subject to an early withdrawal charge as
described above.); or
> $2,500 or less, provided that no withdrawal has been made from your account
during the prior 12 months; or
> Withdrawn due to your election of a systematic distribution option (see
"Systematic Distribution Options"); or
> Withdrawn due to an involuntary termination. This may occur if your account
value is less than $2,500. See "Other Topics--Involuntary Terminations."
Nursing Home Waiver. If approved in your state, you may withdraw all or a
portion of your account value without an early withdrawal charge if all of the
following conditions are met:
> More than one account year has elapsed since the date your purchase payment
was credited;
> The annuitant, designated under the contract, has spent at least 45
consecutive days in a licensed nursing facility (in New Hampshire, the
facility may be non-licensed); and
> The withdrawal is requested within three years of the designated annuitant's
admission to a licensed nursing facility (in Oregon there is no three year
limitation and in New Hampshire, the facility may be non-licensed).
We will not waive the early withdrawal charge if the annuitant was in a
licensed nursing care facility at the time you purchased the contract. The
nursing home waiver may not be available in all states.
Market Value Adjustment and Taxation. Except for withdrawals at the end of a
guaranteed term as noted above, and withdrawals under a systematic distribution
option, a market value adjustment is applicable to any amounts you withdraw.
Regardless of when or how withdrawals are taken, you may also be required to
pay taxes and tax penalties. See "Market Value Adjustment" and "Taxation."
continued--->
11
<PAGE>
(Fees, continued)
Annual Maintenance Fee
Currently we do not charge a maintenance fee. However, prior to the time you
enter the income phase, an annual maintenance fee may be deducted from your
account value on each anniversary of the contract's effective date and if you
make a full withdrawal from the contract. The terms and conditions under which
the maintenance fee may be deducted are stated in the contract. A maintenance
fee would be used to reimburse us for our administrative expenses relating to
establishing and maintaining the contract.
Premium Taxes
Maximum Amount. Some states and municipalities charge a premium tax on
annuities. These taxes currently range from 0% to 4%, depending upon the
jurisdiction.
When/How. We reserve the right to deduct premium taxes from your account value
or from your payment to the account at any time, but not before there is a tax
liability under state law. Our current practice is to deduct the premium taxes
at the time of a complete withdrawal or the commencement of income payments.
If, at your death, your beneficiary elects to receive a lump-sum distribution,
a charge will be deducted for any premium taxes paid on your behalf for which
we have not been reimbursed. If we deduct premium taxes from your purchase
payment, the amount invested in a guaranteed term will be equal to the amount
of your purchase payment reduced by any applicable premium tax.
12
<PAGE>
Withdrawals
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You may withdraw all or part of your account value at any time during the
accumulation phase. Amounts are withdrawn on a pro rata basis from each of the
guaranteed terms under the contract. You may request that we inform you in
advance of the amount payable upon a withdrawal.
Steps for Making a Withdrawal.
> Select the withdrawal amount.
1) Full withdrawal: You will receive, reduced by any required withholding tax,
your account value, plus or minus any applicable market value adjustment,
and minus any applicable early withdrawal charge and annual maintenance fee.
2) Partial Withdrawal (Percentage or Specified Dollar Amount): You will
receive, reduced by any required withholding tax, the amount you specify,
subject to the value available in your account. However, the amount actually
withdrawn from your account will be adjusted for any applicable early
withdrawal charge and any positive or negative market value adjustment, and
accordingly, may be more or less than the amount requested.
> Properly complete a disbursement form and submit it to our Home Office.
Delivery of Payment. Payment of withdrawal requests will be made in accordance
with the SEC's requirements. Normally, payment will be sent not later than
seven days following our receipt of the disbursement form in good order.
However, under certain emergency situations, we may defer payment of any
withdrawal for a period not exceeding six months from the date we receive your
withdrawal request.
Taxes, Fees and Deductions. Amounts withdrawn may be subject to one or more of
the following:
> Early Withdrawal Charge: Withdrawals of all or a portion of your account may
be subject to an early withdrawal charge. This is a deferred sales charge
that reimburses us for some of the sales and administrative expenses
associated with the contract. See "Fees -- Early Withdrawal Charge."
> Annual Maintenance Fee: If you make a full withdrawal from the contract, we
may deduct any applicable annual maintenance fee. See "Fees -- Annual
Maintenance Fee."
> Market Value Adjustment (MVA): The MVA reflects changes in interest rates
since the deposit period. The MVA may be positive or negative. If you make a
withdrawal before the end of a guaranteed term, we will calculate an MVA and
the amount withdrawn will be adjusted for any applicable positive or
negative MVA. See "Market Value Adjustment."
> Tax Penalty: If you make a withdrawal before you attain age 59-1/2, the
amount withdrawn may be subject to a 10% penalty tax. See "Taxation."
> Tax Withholding: Amounts withdrawn may be subject to withholding for federal
income taxes. See "Taxation."
All applicable fees and deductions are deducted from the amount of your
withdrawal in accordance with the terms of the contract. Any market value
adjustment applicable to your withdrawal, taxes, fees and deductions may either
increase or decrease the amount paid to you. To determine which may apply,
refer to the appropriate sections of this prospectus, contact your sales
representative or call our Home Office at the number listed in "Contract
Overview."
13
<PAGE>
Systematic Distribution Options
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Features of a Systematic Distribution Option
A systematic distribution option allows you to receive regular payments from
the contract without moving into the income phase. By remaining in the
accumulation phase, certain rights and flexibility not available during the
income phase are retained.
The following systematic distribution options may be available:
> SWO--Systematic Withdrawal Option. SWO is a series of automatic partial
withdrawals from your account based on a payment method you select. It is
designed for those who want a periodic income while retaining investment
flexibility for amounts accumulated under the contract.
SWO allows you to withdraw either a specified amount or a specified
percentage of the contract's value, or to withdraw amounts over a specified
time period that you determine, within certain limits described in the
contract. SWO payments can be made on a monthly or quarterly basis, and the
amount of each payment is determined by dividing the designated annual
amount by the number of payments due each calendar year. SWO payments are
withdrawn pro rata from each of the guaranteed terms under the contract.
Under a contract purchased as a traditional IRA, if the SWO payment for any
year is less than the minimum required distribution under the Tax Code, the
SWO payment will be increased to an amount equal to the minimum distribution
amount.
If you participate in SWO, you may not utilize a special withdrawal to make
additional withdrawals from the contract. See "Withdrawals -- Special
Withdrawals."
> ECO--Estate Conservation Option. ECO offers the same investment flexibility
as SWO, but is designed for those who want to receive only the minimum
distribution the Tax Code requires each year.
Under ECO, we calculate the minimum distribution amount required by law, and
pay you that amount once a year. ECO is not available under nonqualified
contracts or under Roth IRA contracts. ECO payments are withdrawn pro rata
from each of the guaranteed terms under the contract. We will, upon request,
inform you in advance of the amount payable under ECO.
If you participate in ECO, you may not utilize a special withdrawal to make
additional withdrawals from the contract. See "Withdrawals -- Special
Withdrawals."
> Other Systematic Distribution Options. We may add additional systematic
distribution options from time to time. You may obtain additional
information relating to any of the systematic distribution options from your
sales representative or from our Home Office.
Availability. If allowed by applicable law, we reserve the right to discontinue
the availability of one or all of the systematic distribution options for new
elections at any time and to change the terms of future elections.
14
<PAGE>
Eligibility. To exercise one of these options you must meet certain age
criteria and your account value must meet certain minimum requirements. To
determine if you meet the age and account value criteria and to assess terms
and conditions that may apply, contact your sales representative or our Home
Office.
Termination. You may revoke a systematic distribution option at any time by
submitting a written request to our Home Office. However, once cancelled, you
or your spousal beneficiary may not elect SWO again. In addition, once
cancelled, ECO may not be elected again until 36 months have elapsed.
Deductions and Taxation. When you elect a systematic distribution option, your
account value remains in the accumulation phase and subject to the applicable
charges and deductions described in "Fees." However, we will not apply an early
withdrawal charge or market value adjustment to any part of your account value
paid under SWO or ECO. Taking a withdrawal through a systematic distribution
option may have tax consequences. If you are concerned about tax implications
consult a tax adviser before one of these options is elected. See "Taxation."
15
<PAGE>
Market Value Adjustment (MVA)
- --------------------------------------------------------------------------------
Purpose of the MVA. If you make an early withdrawal from the contract, we may
need to liquidate certain assets or use existing cash flow that would otherwise
be available to invest at current interest rates. The assets we may liquidate
to provide your withdrawal amount may be sold at a profit or a loss, depending
upon market conditions. To lessen this impact, certain withdrawals are subject
to an MVA.
What is an MVA? In certain situations described below, including when you make
a withdrawal before the end of a guaranteed term, we will calculate an MVA and
either add or deduct that value from the amount withdrawn. The calculation we
use to determine the MVA reflects the change in the value of your investment
due to changes in interest rates since the start of the guaranteed term under
the contract. When these interest rates increase, the value of the investment
decreases, and the MVA amount may be negative and cause a deduction from your
withdrawal amount. Conversely, when these interest rates decrease, the value of
the investment increases, and the MVA amount may be positive and cause an
increase in your withdrawal amount.
Calculation of the MVA. For a further explanation of how the MVA is calculated,
see Appendix I.
When Does an MVA Apply? An MVA may apply when:
> You request a withdrawal before the end of a guaranteed term. In this case
the withdrawal amount may be increased or decreased by the application of
the MVA.
> You initiate income phase payments before the end of your guaranteed term.
In this case an MVA may be applied to any amounts used to start income phase
payments. While either a positive or negative MVA may apply to amounts used
to start a nonlifetime payment option, only a positive MVA will apply to
amounts used to start a lifetime payment option. See "Income Phase."
> We terminate the contract because your account value is less than $2,500.
> You cancel the contract.
> A death benefit is paid upon the death of the annuitant, more than six
months after the annuitant's death. See "Death Benefit."
> A death benefit is paid upon the death of a person other than the annuitant.
When Does an MVA Not Apply? An MVA will not be applied to:
> Withdrawals under the Systematic Withdrawal Option or Estate Conservation
Option as described in "Systematic Distribution Options."
> A death benefit payable upon death of an annuitant, if paid within six
months of the annuitant's death. See "Death Benefit."
> Amounts withdrawn at the end of a guaranteed term, provided that at least
five days prior to the end of that guaranteed term we receive your
withdrawal request in writing. The MVA, however, remains applicable to any
amount you reinvest for another guaranteed term.
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<PAGE>
[START SIDE BAR]
This section provides information about the death benefit during the
accumulation phase. For death benefit information applicable to the income
phase, see "Income Phase."
Annuitant: The person(s) on whose life expectancy we calculate the income phase
payments.
[END SIDE BAR]
Death Benefit
- --------------------------------------------------------------------------------
During the Accumulation Phase
Who Receives the Benefit? If you or the annuitant die during the accumulation
phase, a death benefit will be paid to your beneficiary in accordance with the
terms of the contract subject to the following:
> Upon the death of a joint contract holder, the surviving joint contract
holder will be deemed the designated beneficiary, and any other beneficiary
on record will be treated as the beneficiary at the death of the surviving
joint contract holder.
> If you are not a natural person, the death benefit will be payable at the
death of the annuitant designated under the contract or upon any change of
the annuitant.
> If you die and no beneficiary exists, the death benefit will be paid in a
lump sum to your estate.
Designating a Beneficiary(ies). You may designate a beneficiary on your
application or enrollment form, or by providing a written request in good order
to our Home Office.
Calculation of the Benefit. The death benefit is calculated as of the date
proof of death and the beneficiary's right to receive the death benefit are
received in good order at our Home Office. The amount of the death benefit is
determined as follows:
> If the death benefit is paid within six months of the death of the
annuitant, the amount equals your account value.
> If the death benefit is paid more than six months after the date of death of
the annuitant, or if paid upon your death and you are not the annuitant, it
equals your account value as adjusted by any applicable market value
adjustment.
> If you are not the annuitant, the death benefit payable may be subject to an
early withdrawal charge.
Benefit Payment Options. If you are the annuitant and you die before income
phase payments begin, or if you are not a natural person and the annuitant dies
before income phase payments begin, any beneficiary under the contract who is
an individual has several options for receiving payment of the death benefit.
The death benefit may be paid:
> In one lump-sum payment;
> In accordance with any of the available income phase payment options. See
"Income Phase--Payment Options"; or
> In certain circumstances, your beneficiary, spousal beneficiary or joint
contract holder may have the option to continue the contract rather than
receive the death benefit.
Taxation. The Tax Code requires distribution of death benefit proceeds within a
certain period of time. Failure to begin receiving death benefit payments
within those time periods can result in tax penalties. Regardless of the method
of payment, death benefit proceeds will generally be taxed to the beneficiary
in the same manner as if you had received those payments. See "Taxation" for
additional information.
Change of Beneficiary. You may change the beneficiary previously designated at
any time by submitting notice in writing to our Home Office. The change will
not be effective until we receive and record it.
17
<PAGE>
[START SIDE BAR]
We may have used the following terms in prior prospectuses:
Annuity Phase--Income Phase
Annuity Option--Payment Option
Annuity Payment--Income Phase Payment
Annuitization--Initiating Income Phase Payments
[END SIDE BAR]
Income Phase
- --------------------------------------------------------------------------------
During the income phase you receive payments from your accumulated account
value. You may apply all or a portion of your account value to provide these
payments. Income phase payments are made to you or you can request that
payments be deposited directly to your bank account. After your death, we will
send your designated beneficiary any income phase payments still due. You may
be required to pay taxes on all or a portion of the income phase payments you
receive. See "Taxation."
Partial Entry into the Income Phase. You may elect a payment option for a
portion of your account value, while leaving the remaining portion in a
guaranteed term(s). Whether the Tax Code considers such payments taxable as
annuity payments or as withdrawals is currently unclear; therefore, you should
consult with a qualified tax adviser before electing this option.
Initiating Income Phase Payments. At least 30 days prior to the date you want
to start receiving income phase payments, you must notify us in writing of the
following:
> Start date;
> Payment option (see the payment options table in this section); and
> Payment frequency (i.e., monthly, quarterly, semi-annually or annually).
The account will continue in the accumulation phase until you properly initiate
income phase payments. You may change your payment option election up to 30
days before income phase payments begin. Once you elect for income phase
payments to begin, you may not elect a different payment option or elect to
receive a lump-sum payment.
What Affects Income Phase Payment Amounts? Some of the factors that may affect
payment amounts include your age, your gender, your account value, the payment
option selected and number of guaranteed payments (if any) selected.
Minimum Income Phase Payment Amounts. The payment option you select must result
in one or both of the following:
> A first payment of at least $50.
> Total yearly payments of at least $250.
If your account value is too low to meet these minimum payment amounts, you
must elect a lump-sum payment. We reserve the right to increase the minimum
payment amount based upon increases in the Consumer Price Index--Urban.
Payment Start Date. Income phase payments may start any time after the first
year of the contract, and will start the later of the annuitant's 85th birthday
or the tenth anniversary of your purchase payment, unless you elect otherwise.
Regardless of your income phase payment start date, your income phase payments
will not begin until you have selected an income phase payment option. Failure
to select a payment option by your payment start date, or postponement of the
start date past the later of the annuitant's 85th birthday or the tenth
anniversary of your purchase payment, may have adverse tax consequences. You
should consult with a qualified tax adviser if you are considering either of
these courses of action.
18
<PAGE>
Payment Length. If you choose a lifetime income phase payment option with
guaranteed payments, the age of the annuitant plus the number of years for
which payments are guaranteed must not exceed 95 at the time payments begin.
Additionally, federal income tax requirements currently applicable to
traditional IRAs provide that the period of years guaranteed may not be greater
than the joint life expectancies of the payee and his or her designated
beneficiary.
Charges Deducted. No early withdrawal charge will be applied to amounts used to
start income phase payments, although a market value adjustment may be
applicable.
Market Value Adjustment. If your income phase payments start before the end of
your guaranteed term, a market value adjustment will be applied to any amounts
used to start income phase payments. If you select a lifetime payment option,
only a positive market value adjustment will be applied. See "Market Value
Adjustment."
Death Benefit During the Income Phase. Upon the death of either the annuitant
or the surviving joint annuitant, the amount payable, if any, to your
beneficiary depends on the payment option currently in force. Any amounts
payable must be paid at least as rapidly as under the method of distribution in
effect at the annuitant's death. If you die and you are not the annuitant, any
remaining payments will continue to be made to your beneficiary at least as
rapidly as under the method of distribution in effect at your death.
Taxation. To avoid certain tax penalties, you or your beneficiary must meet the
distribution rules imposed by the Tax Code. See "Taxation."
continued--->
19
<PAGE>
(Income Phase, continued)
Income Phase Payment Options
The following table lists the income phase payment options and accompanying
death benefits that may be available during the income phase. We may offer
additional payment options under the contract from time to time.
Terms Used in the Tables:
Annuitant: The person(s) on whose life expectancy the income phase payments are
calculated.
Beneficiary: The person designated to receive the death benefit payable under
the contract.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Lifetime Income Phase Payment Options
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Length of Payments: For as long as the annuitant lives. It is possible only one payment will be
made should the annuitant die prior to the second payment's due date.
Life Income
Death Benefit--None: All payments end upon the annuitant's death.
- -------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as the annuitant lives, with payments guaranteed for your choice
of 5, 10, 15, or 20 years, or other periods specified in the contract.
Life Income--
Guaranteed Death Benefit: If the annuitant dies before we have made all the guaranteed payments, payments
Payments will continue to the beneficiary.
- -------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as either annuitant lives. It is possible only one payment will be
made should both the annuitant and joint annuitant die before the second payment's due date.
Continuing Payments: When you select this option, you will also choose either:
Life Income-- (a) 100%, 66-2/3%, or 50% of the payment to continue to the surviving annuitant after the first
Two Lives death; or
(b) 100% of the payment to continue to the first annuitant on the second annuitant's death, and
50% of the payment to continue to the second annuitant on the first annuitant's death.
Death Benefit--None: Payments cease upon the death of both annuitants.
- -------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as either annuitant lives, with payments guaranteed for a
minimum of 120 months, or other periods specified in the contract.
Life Income--
Two Lives-- Continuing Payments: 100% of the payment will continue to the surviving annuitant after the first
Guaranteed death.
Payments
Death Benefit: If both annuitants die before the guaranteed payments have all been paid,
payments will continue to the beneficiary.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Nonlifetime Income Phase Payment Option
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Length of Payments: Payments will continue for your choice of 10 through 30 years (or other
periods specified in the contract).
Nonlifetime--
Guaranteed Death Benefit: If the annuitant dies before we make all the guaranteed payments, payment will
Payments continue to the beneficiary.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Investments
- --------------------------------------------------------------------------------
Separate Account. Purchase Payments received under the contract and allocated
to guaranteed terms will be deposited to and accounted for in a nonunitized
separate account that we established under Connecticut law. A nonunitized
separate account is a separate account in which you do not participate in the
performance of the assets through unit values or any other interest.
Persons allocating amounts to the nonunitized separate account do not receive a
unit value of ownership of assets accounted for in the separate account. The
assets accrue solely to our benefit and we bear the entire risk of investment
gain or loss. All of our obligations due to allocations to the nonunitized
separate account are contractual guarantees we have made and are accounted for
in the separate account. All of our general assets are available to meet the
guarantees under the contracts. However, to the extent provided for in the
applicable contracts, assets of the nonunitized separate account are not
chargeable with liabilities arising out of any other business we conduct.
Income, gains or losses of the separate account are credited to or charged
against the assets of the separate account without regard to other income,
gains or losses of the Company.
Setting Guaranteed Interest Rates. We do not have any specific formula for
setting guaranteed interest rates for the guaranteed terms. We expect the
guaranteed interest rates to be influenced by, but not necessarily correspond
to, yields on fixed income securities we acquire with amounts allocated to the
guaranteed terms when the guaranteed interest rates are set.
Types of Investments. Our assets will be invested in accordance with the
requirements established by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state, and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, and certain other investments.
We intend to invest in assets which, in the aggregate, have characteristics,
especially cash flow patterns, reasonably related to the characteristics of the
liabilities. Various immunization techniques will be used to achieve the
objective of close aggregate matching of assets and liabilities. We will
primarily invest in investment-grade fixed income securities including:
> Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government;
> Debt securities that are rated, at the time of purchase, within the four
highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or
Baa) or Standard & Poor's Corporation (AAA, AA, A or BBB) or any other
nationally recognized rating organizations;
continued--->
21
<PAGE>
(Investments, continued)
> Other debt instruments including those issued or guaranteed by banks or bank
holding companies and of corporations, which although not rated by Moody's,
Standard & Poor's, or other nationally recognized rating organizations, are
deemed by the Company's management to have an investment quality comparable
to securities which may be purchased as stated above; and
> Commercial paper, cash or cash equivalents, and other short-term investments
having a maturity of less than one year which are considered by the
Company's management to have investment quality comparable to securities
which may be purchased as stated above.
In addition, we may invest in futures and options. We purchase financial
futures and related options and options on securities solely for
nonspeculative hedging purposes. In the event securities prices are
anticipated to decline, we may sell a futures contract or purchase a put
option on futures or securities to protect the value of securities held in
or to be sold for the nonunitized separate account. Similarly, if securities
prices are expected to rise, we may purchase a futures contract or a call
option against anticipated positive cash flow or we may purchase options on
securities.
While this section generally describes our investment strategy, we are not
obligated to invest the assets attributable to the contract according to any
particular strategy, except as may be required by Connecticut and other state
insurance laws. The guaranteed interest rates we establish need not relate to
the investment performance of the nonunitized separate account.
22
<PAGE>
[START SIDE BAR]
In This Section
> Introduction
> The Contract
> Taxation of Withdrawals and Other Distributions
> 10% Penalty Tax
> Withholding for Federal Income Tax Liability
> Minimum Distribution Requirements
> More Rules Specific to IRAs
> More Rules Specific to Nonqualified Contracts
> Taxation of the Company
When consulting a tax adviser, be certain he or she has expertise in the Tax
Code sections applicable to your tax concerns.
[END SIDE BAR]
Taxation
- --------------------------------------------------------------------------------
Introduction
This section discusses our understanding of current federal income tax laws
affecting the contract. You should keep the following in mind when reading it:
> Your tax position (or the tax position of the beneficiary, as applicable)
determines federal taxation of amounts held or paid out under the contract.
> Tax laws change. It is possible a future change could affect contracts
issued in the past.
> This section addresses federal income tax rules and does not discuss federal
estate and gift tax implications, state and local taxes or any other tax
provisions.
> We do not make any guarantee about the tax treatment of the contract or
transactions involving the contract.
- --------------------------------------------------------------------------------
We do not intend this information to be tax advice. For advice about the
effect of federal income taxes or any other taxes on amounts held or paid out
under the contract, consult a tax adviser.
- --------------------------------------------------------------------------------
Taxation of Gains Prior to Distribution. You will not generally pay taxes on
any earnings from the annuity contract described in this prospectus until they
are withdrawn. Tax-qualified retirement arrangements under Tax Code sections
408(b) and 408A also generally defer payment of taxes on earnings until they
are withdrawn. (See "Taxation of Withdrawals and Other Distributions" later in
this "Taxation" section for a discussion of how distributions under the various
types of plans are taxed.) If you are considering funding one of these tax-
qualified retirement arrangements with an annuity contract, you should know
that the annuity contract does not provide any additional tax deferral of
earnings beyond the tax deferral provided by the tax-qualified retirement
arrangement. However, annuities do provide other features and benefits which
may be valuable to you. You should discuss your alternatives with your
financial representative.
The Contract
The contract is designed for use on a non-tax-qualified basis as a nonqualified
contract, or with certain retirement arrangements that qualify under Tax Code
sections 408(b) or 408A.
The tax rules vary according to whether the contract is a nonqualified contract
or used with a retirement arrangement. If used with a retirement arrangement,
you need to know the Tax Code section under which your arrangement qualifies.
Contact your sales representative or our Home Office to learn which Tax Code
section applies to your arrangement.
Contract holders are responsible for determining that contributions,
distributions and other transactions satisfy applicable laws. Legal counsel and
a tax adviser should be consulted regarding the suitability of the contract.
continued--->
23
<PAGE>
(Taxation, continued)
Taxation of Withdrawals and Other Distributions
Certain tax rules apply to distributions from the contract. A distribution is
any amount taken from the contract including withdrawals, income payments,
rollovers, exchanges and death benefit proceeds. We report the taxable portion
of all distributions to the IRS.
Nonqualified Contracts. A full withdrawal of a nonqualified contract is taxable
to the extent the amount received exceeds the investment in the contract. A
partial withdrawal is taxable to the extent the account value immediately
before the withdrawal exceeds the investment in the contract. In other words, a
partial withdrawal is treated first as a withdrawal of taxable earnings.
For income phase payments, a portion of each payment that represents the
investment in the contract is not taxable. An exclusion ratio is calculated to
determine the nontaxable portion.
For fixed income phase payments, in general, there is no tax on the portion of
each payment which represents the same ratio that the investment in the
contract bears to the total dollar amount of the expected payments as defined
in Tax Code section 72(c). The entire income phase payment will be taxable once
the recipient has recovered the investment in the contract.
All deferred nonqualified annuity contracts that are issued by the Company (or
its affiliates) to the same contract holder during any calendar year are
treated as one annuity contract for purposes of determining the amount
includible in gross income under Tax Code section 72(e). In addition, the
Treasury Department has specific authority to issue regulations that prevent
the avoidance of Tax Code section 72(e) through the serial purchase of annuity
contracts or otherwise.
408(b) IRA. All distributions from a 408(b) traditional individual retirement
annuity (IRA) are taxed as received unless one of the following applies:
> The distribution is rolled over to another traditional IRA or, if the IRA
contains only amounts previously rolled over from a 401(a), 401(k), or
403(b) plan, to another plan of the same type.
> You made after-tax contributions to the plan. In this case, the distribution
will be taxed according to rules detailed in the Tax Code.
408A Roth IRA. A qualified distribution from a Roth IRA is not taxed when it is
received. A qualified distribution is a distribution that meets both of the
following requirements:
> Made after the five-taxable year period beginning with the first taxable
year for which a contribution was made.
> Made after you attain age 59-1/2, die, become permanently and totally
disabled, or for a qualified first-time home purchase.
If a distribution is not qualified, the accumulated earnings are taxable. A
partial distribution will first be treated as a return of contributions, which
is not taxable.
Taxation of Death Benefit Proceeds. In general, payments received by your
beneficiaries after your death are taxed in the same manner as if you had
received those payments.
24
<PAGE>
10% Penalty Tax
Under certain circumstances, the Tax Code may impose a 10% penalty tax on the
taxable portion of any distribution from a nonqualified contract or from a
contract used with a 408A Roth IRA or 408(b) traditional IRA.
Nonqualified Contract. The 10% penalty tax applies to the taxable portion of a
distribution from a nonqualified annuity unless one or more of the following
have occurred:
> The taxpayer has attained age 59-1/2;
> The taxpayer has become disabled within the meaning of the Tax Code;
> The contract holder has died;
> The distribution is made in substantially equal periodic payments (at least
annually) over the life or life expectancy of the taxpayer or the joint
lives or joint life expectancies of the taxpayer and beneficiary; or
> The distribution is allocable to investment in the contract before August
14, 1982.
408(b) Traditional IRA and 408A Roth IRA. The 10% penalty tax applies to the
taxable portion of a distribution from a 408(b) or 408A IRA, unless one or more
of the following have occurred:
> You have attained age 59-1/2;
> You have become disabled within the meaning of the Tax Code;
> You have died;
> The distribution is rolled over in accordance with the Tax Code;
> The distribution is made in substantially equal periodic payments (at least
annually) over your life or life expectancy or the joint lives or joint life
expectancies of you and your beneficiary;
> The distribution is equal to unreimbursed medical expenses that qualify for
deduction as specified in the Tax Code;
> The distribution is used to pay for health insurance premiums for certain
unemployed individuals;
> The amount is withdrawn for a first-time home purchase; or
> The amount withdrawn is for higher education expenses.
These exceptions also apply to a distribution from a Roth IRA that is not a
qualified distribution or a rollover to a Roth IRA that is not a qualified
rollover contribution.
Withholding for Federal Income Tax Liability
Any distributions under the contract are generally subject to withholding.
Federal income tax liability rates vary according to the type of distribution
and the recipient's tax status:
> Nonqualified Contracts, 408(b) and 408A IRAs. Generally, you or a
beneficiary may elect not to have tax withheld from distributions.
> Non-resident Aliens. If you or your beneficiary are a non-resident alien,
then any withholding is governed by Tax Code section 1441 based on the
individual's citizenship, the country of domicile and treaty status.
continued--->
25
<PAGE>
(Taxation, continued)
Minimum Distribution Requirements
If your contract is a 408(b) traditional IRA, to avoid certain tax penalties,
you and any beneficiary must meet the minimum distribution requirements imposed
by the Tax Code. The requirements do not apply to nonqualified contracts or
Roth IRA contracts, except with regard to death benefits. These rules may
dictate one or more of the following:
> Start date for distributions;
> The time period in which all amounts in your account(s) must be distributed;
and
> Distribution amounts.
Start Date. If your contract is a 408(b) IRA, generally you must begin
receiving distributions by April 1 of the calendar year following the calendar
year in which you attain age 70-1/2.
Time Period. We must pay out distributions from 408(b) IRA contracts over a
period not longer than one of the following time periods:
> Over your life or the joint lives of you and your beneficiary; or
> Over a period not greater than your life expectancy or the joint life
expectancies of you and your beneficiary.
50% Excise Tax. If you fail to receive the minimum required distribution for
any tax year from a 408(b) IRA, a 50% excise tax is imposed on the required
amount that was not distributed.
Minimum Distribution of Death Benefit Proceeds (Except Nonqualified
Contracts). The following applies to 408(b) and 408A IRAs. Different
distribution requirements apply if your death occurs:
> After you begin receiving minimum distributions under the contract; or
> Before you begin receiving such distributions.
If your death occurs after you begin receiving minimum distributions under the
contract, distributions must be made at least as rapidly as under the method in
effect at the time of your death. Tax Code section 401(a)(9) provides specific
rules for calculating the minimum required distributions at your death. The
rules differ, dependent upon both of the following:
> Whether your minimum required distribution was calculated each year based on
your single life expectancy or the joint life expectancies of you and your
beneficiary; and
> Whether life expectancy was recalculated.
The rules are complex and any beneficiary should consult with a tax adviser
before electing the method of calculation to satisfy the minimum distribution
requirements.
If your death occurs before you begin receiving minimum distributions under the
contract, your entire balance must be distributed by December 31 of the
calendar year containing the fifth anniversary of the date of your death. For
example, if you die on September 1, 2000, your entire balance must be
distributed to the beneficiary by December 31, 2005. However, if the
26
<PAGE>
distribution begins by December 31 of the calendar year following the calendar
year of your death, then payments may be made in either of the following
time-frames:
> Over the life of the beneficiary; or
> Over a period not extending beyond the life expectancy of the beneficiary.
Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, the
distribution must begin on or before the later of the following:
> December 31 of the calendar year following the calendar year of your death;
or
> December 31 of the calendar year in which you would have attained age
70-1/2.
Special Rule for IRA Spousal Beneficiaries. In lieu of taking a distribution
under these rules, a spousal beneficiary may elect to treat the account as his
or her own IRA and defer taking a distribution until he or she reaches age
70-1/2. The surviving spouse is deemed to have made such an election if the
surviving spouse makes a rollover to or from the account or fails to take a
distribution within the required time period.
Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts)
Death of Contract Holder. The following requirements apply to nonqualified
contracts at the death of the contract holder. Different distribution
requirements apply if you are the contract holder and your death occurs:
> After you begin receiving income phase payments under the contract; or
> Before you begin receiving such distributions.
If your death occurs after you begin receiving income phase payments,
distribution must be made at least as rapidly as under the method in effect at
the time of your death.
If your death occurs before you begin receiving income phase payments, your
entire balance must be distributed within five years after the date of your
death. For example, if you die on September 1, 1999, your entire balance must
be distributed by August 31, 2004. However, if the distribution begins within
one year of your death, then payments may be made in one of the following
time-frames:
> Over the life of the beneficiary; or
> Over a period not extending beyond the life expectancy of the beneficiary.
Spousal Beneficiaries. If the beneficiary is your spouse, the account may be
continued with the surviving spouse as the new contract holder.
Death of Annuitant. If the contract holder is a non-natural person and the
annuitant dies, the same rules apply as outlined above for death of the
contract holder. If the contract holder is a natural person but not the
annuitant and the annuitant dies, the beneficiary must elect an income phase
payment option within 60 days of the date of death, or any gain under the
contract will be includible in the beneficiary's income in the year the
annuitant dies.
continued--->
27
<PAGE>
(Taxation, continued)
More Rules Specific to IRAs
Tax Code section 408(b) permits eligible individuals to contribute to an IRA on
a pre-tax (deductible) basis. Employers may establish Simplified Employee
Pension (SEP) plans and contribute to a traditional IRA owned by the employee.
Tax Code section 408A permits eligible individuals to contribute to a Roth IRA
on an after-tax (nondeductible) basis.
Assignment or Transfer of Contracts. Adverse tax consequences may result if you
assign or transfer your interest in the contract to persons other than your
spouse incident to a divorce.
Eligibility. Eligibility to contribute to a traditional 408(b) IRA on a pre-tax
basis or to establish a Roth IRA or to rollover or transfer from a traditional
408(b) IRA to a Roth IRA depends on your adjusted gross income.
Rollovers and Transfers. Rollovers and direct transfers are permitted from a
401, 403(a) or a 403(b) arrangement to a traditional 408(b) IRA. Distributions
from these arrangements are not permitted to be transferred or rolled over to a
Roth IRA. A Roth IRA can accept transfers/rollovers only from a traditional
408(b) IRA, subject to ordinary income tax, or from another Roth IRA.
More Rules Specific to Nonqualified Contracts
In General. Tax Code section 72 governs taxation of annuities in general. A
contract holder under a nonqualified contract who is a natural person generally
is not taxed on increases in the account value until distribution occurs by
withdrawing all or part of such account value. The taxable portion of a
distribution is taxable as ordinary income.
Non-Natural Contract Holders of a Nonqualified Contract. If the contract holder
is not a natural person, a nonqualified contract generally is not treated as an
annuity for income tax purposes and the income on the contract for the taxable
year is currently taxable as ordinary income. Income on the contract is any
increase over the year in the full withdrawal value, adjusted for purchase
payments made during the year, amounts previously distributed and amounts
previously included in income. There are some exceptions to the rule and a
non-natural person should consult with its tax adviser prior to purchasing this
contract. A non-natural person exempt from federal income taxes should consult
with its tax adviser regarding treatment of income on the contract for purposes
of the unrelated business income tax. When the contract holder is not a natural
person, a change in annuitant is treated as the death of the contract holder.
Transfers, Assignments or Exchanges of a Nonqualified Contract. A transfer of
ownership of a nonqualified contract, the designation of an annuitant, payee or
other beneficiary who is not also the contract holder, the selection of certain
annuity dates, or the exchange of a contract may result in certain tax
consequences. The assignment, pledge, or agreement to assign or pledge any
portion of the account value generally will be treated as a distribution.
Anyone contemplating any such designation, transfer, assignment, selection, or
exchange should contact a tax adviser regarding the potential tax effects of
such a transaction.
28
<PAGE>
Taxation of the Company
We are taxed as a life insurance company under the Tax Code. We own all assets
supporting the obligations of the contracts. Any income earned on these assets
is considered income to the Company.
Other Topics
- --------------------------------------------------------------------------------
Contract Distribution
We will serve as the principal underwriter for the securities sold by this
prospectus. We are registered as a broker-dealer with the SEC and are a member
of the National Association of Securities Dealers, Inc. (NASD). As principal
underwriter, we will enter into arrangements with one or more registered
broker-dealers, including at least one of our affiliates, to offer and sell the
contracts described in this prospectus. We call these entities "distributors."
We and one or more of our affiliates may also sell the contracts directly. All
individuals offering and selling the contracts must be registered
representatives of a broker-dealer and must be licensed as insurance agents to
sell annuity contracts.
Commission Payments. We may pay commissions to persons who offer and sell the
contracts. The maximum percentage amount paid with respect to a given purchase
payment is 6% of the payment to an account. We may also pay asset-based service
fees. Asset-based service fees will not exceed 1-1/4% of the assets held under a
contract. Some sales personnel may receive various types of non-cash
compensation as special sales incentives, including trips and educational
and/or business seminars. However, any such compensation will be paid in
accordance with NASD rules. In addition, we may provide additional compensation
to our supervisory and other management personnel if the overall investments in
funds advised by the Company or our affiliates increases over time. We may
reimburse the distributor for certain expenses. The name of the distributor and
the registered representative responsible for your account are stated in your
application. We pay any commissions and sales related expenses and these are
not deducted from payments to your account.
We may also contract with independent third party broker-dealers who will act
as wholesalers by assisting us in finding broker-dealers interested in acting
as distributors of the contracts. These wholesalers may also provide training,
marketing and other sales related functions for us and for the distributors and
may provide certain administrative services to us in connection with the
contracts. We may pay such wholesalers compensation based on purchase payments
for the contracts purchased through distributors selected by the wholesaler. We
may also designate third parties to provide services in connection with the
contracts, such as reviewing applications for completeness and compliance with
insurance requirements and providing the distributors with approved marketing
material, prospectuses or other supplies. These parties will also receive
payments based on purchase payments for their services, to the extent
applicable securities laws and NASD rules allow such payments. We will pay all
costs and expenses related to these services.
29
<PAGE>
Contract Modification
Only an authorized officer of the Company may change the terms of the contract.
We may change the contract as required by federal or state law. In addition, we
may, upon 30 days' written notice to the contract holder, make other changes to
group contracts that would apply only to individuals who become participants
under that contract after the effective date of such changes. If the group
contract holder does not agree to a change, we reserve the right to refuse to
establish new accounts under the contract. Certain changes will require the
approval of appropriate state or federal regulatory authorities.
Transfer of Ownership; Assignment
Your rights under a nonqualified contract may be assigned or transferred. An
assignment of a contract will only be binding on us if it is made in writing
and sent to and accepted by us at our Home Office. We will use reasonable
procedures to confirm the assignment is authentic, including verification of
signature. If we fail to follow our own procedures, we will be liable for any
losses to you directly resulting from the failure. Otherwise, we are not
responsible for the validity of any assignment. The rights of the contract
holder and the interest of the annuitant and any beneficiary will be subject to
the rights of any assignee we have on our records. We reserve the right not to
accept any assignment or transfer to a non-natural person. In some cases, an
assignment may have adverse tax consequences. You should consult a tax adviser.
Involuntary Terminations
We reserve the right to terminate any account with a value of $2,500 or less
immediately following a partial withdrawal. However, an IRA may only be closed
out when payments to the contract have not been received for a 24-month period
and the paid-up annuity benefit at maturity would be less than $20 per month.
If such right is exercised, you will be given 90 days' advance written notice.
No early withdrawal charge will be deducted for involuntary terminations. We do
not intend to exercise this right in cases where the account value is reduced
to $2,500 or less solely due to investment performance.
Legal Matters and Proceedings
The validity of the securities offered by this prospectus has been passed upon
by Counsel to the Company.
In recent years, several life insurance and annuity companies have been named as
defendants in lawsuits, including class action lawsuits, relating to life
insurance and annuity pricing and sales practices. A purported class action
complaint was filed in the Circuit Court of Lauderdale County, Alabama on March
28, 2000 by Loretta Shaner against the Company (the "Shaner Complaint"). The
Shaner Complaint seeks unspecified compensatory damages from the Company and
unnamed affiliates of the Company. The Shaner Complaint claims that the
Company's sale of deferred annuity products for use as investments in
tax-deferred contributory retirement plans (e.g., IRAs) is improper. This
litigation is in the preliminary stages. The Company intends to defend the
action vigorously.
Experts
We have incorporated by reference into Post Effective Amendment No. 4 to the
Registration Statement of which this prospectus is a part and/or into this
prospectus:
> The balance sheets of the Company as of December 31, 1999 and 1998 and the
related consolidated statements of income, changes in shareholder's equity
and cash flows and all related schedules for each of the years in the
three-year period ended December 31, 1999.
> The reports of KPMG LLP.
These statements are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. We have relied upon the reports of KPMG LLP,
independent certified public accountants, and upon their authority as experts
in accounting and auditing.
30
<PAGE>
Getting Further Information
This prospectus does not contain all of the information contained in the
registration statement of which this prospectus is a part. Portions of the
registration statement have been omitted from this prospectus as allowed by the
Securities and Exchange Commission (SEC). You may obtain the omitted
information from the offices of the SEC, as described below.
We are required by the Securities Exchange Act of 1934 to file periodic reports
and other information with the SEC. You may inspect or copy information
concerning the Company at the Public Reference Room of the SEC at:
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
You may also obtain copies of these materials at prescribed rates from the
Public Reference Room of the above office. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You may also find more information about the Company at www.aetna.com.
A copy of the Company's annual report on Form 10-K for the year ended December
31, 1999 accompanies this prospectus. We refer to Form 10-K for a description
of the Company and its business, including financial statements. We intend to
send contract holders annual account statements and other such legally required
reports. We do not anticipate such reports will include periodic financial
statements or information concerning the Company.
You can find this prospectus and other information the Company files
electronically with the SEC on the SEC'S web site at www.sec.gov.
Incorporation of Certain Documents by Reference
We have incorporated by reference the Company's latest Annual Report on Form
10-K, as filed with the SEC and in accordance with the Securities and Exchange
Act of 1934. The Annual Report must accompany this prospectus. Form 10-K
contains additional information about the Company including certified financial
statements for the latest fiscal year. We have not filed any other reports
pursuant to Sections 13(a) or 15(d) of the Securities and Exchange Act since
the end of the fiscal year covered by that Form 10-K.
The registration statement for this prospectus incorporates some documents by
reference. We will provide a free copy of any such documents upon the written
or oral request of anyone who has received this prospectus. We will not include
exhibits to those documents unless they are specifically incorporated by
reference into the document. Direct requests to:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, CT 06156
1-800-531-4547
Inquiries
You may contact us directly by writing or calling us at the address or phone
number shown above.
31
<PAGE>
Appendix I
Calculating a Market Value Adjustment (MVA)
- --------------------------------------------------------------------------------
Market Value Adjustment Formula
The mathematical formula used to determine the MVA is:
<TABLE>
<S> <C> <C> <C>
x
----
(1 + i) 365
---------
{ (1 + j) }
</TABLE>
Where:
> i is the deposit period yield;
> j is the current yield; and
> x is the number of days remaining (computed from Wednesday of the week of
withdrawal) in a the guaranteed term.
We make an adjustment in the formula of the MVA to reflect the period of time
remaining in the guaranteed term from the Wednesday of the week of a
withdrawal.
Explanation of the Market Value Adjustment Formula
The MVA essentially involves a comparison of two yields: the yield available at
the start of the current guaranteed term of the contract (the deposit period
yield) and the yield currently available (the current yield).
The MVA depends on the relationship between the following:
> The deposit period yield of U.S. Treasury Notes that mature in the last
quarter of the guaranteed term; and
> The current yield of these U.S. Treasury Notes at the time of withdrawal.
If the current yield is the lesser of the two, the MVA will decrease the amount
withdrawn from the contract to satisfy the withdrawal request (the MVA will be
positive). If the current yield is the higher of the two, the MVA will increase
the amount withdrawn from the contract to satisfy the withdrawal request (the
MVA will be negative, or detrimental to the investor). As a result of the MVA
imposed, the amount withdrawn from the contract prior to the maturity date may
be less than the amount paid into the contract.
To determine the deposit period yield and the current yield, certain
information must be obtained about the prices of outstanding U.S. Treasury
Notes. This information may be found each business day in publications such as
the Wall Street Journal, which publishes the yield-to-maturity percentages for
all Treasury Notes as of the preceding business day. These percentages are used
in determining the deposit period yield and the current yield for the MVA
calculation.
Deposit Period Yield
Determining the deposit period yield in the MVA calculation involves
consideration of interest rates prevailing at the start of the guaranteed term
from which the withdrawal will be made, as follows:
> We identify the Treasury Notes that mature in the last three months of the
guaranteed term; and
> We determine the yield-to-maturity percentages of these Treasury Notes for
the last business day of each week in the deposit period.
The resulting percentages are then averaged to determine the deposit period
yield. The deposit period is the period of time during which the purchase
payment or any reinvestment may be made to available guaranteed terms. A
deposit period may be a month, a calendar quarter, or any other period of time
we specify.
32
<PAGE>
Current Yield
To determine the current yield, we use the same Treasury Notes identified for
the deposit period yield --Treasury Notes that mature in the last three months
of the guaranteed term. However, the yield-to-maturity percentages used are
those for the last business day of the week preceding the withdrawal. We
average these percentages to determine the current yield.
Examples of MVA Calculations
The following are examples of MVA calculations using several hypothetical
deposit period yields and current yields. These examples do not include the
effect of any early withdrawal charge that may be assessed under the contract
upon withdrawal.
Example I.
Assumptions:
i, the deposit period yield, is 8%
j, the current yield, is 10%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the guaranteed term, is 927.
<TABLE>
<S> <C> <C> <C><C>
x
---
(1 + i) 365
-------
MVA = { (1 + j) }
927
(1.08) ---
----- 365
= { (1.10) }
= .9545
</TABLE>
In this example the deposit period yield of 8% is less than the current yield
of 10%, therefore, the MVA is less than one. The amount withdrawn from the
guaranteed term is multiplied by this MVA.
If a withdrawal or transfer of a specific dollar amount is requested, the
amount withdrawn from a guaranteed term will be decreased to compensate for the
negative MVA amount. For example, a withdrawal request to receive a check for
$2,000 would result in a $2,095.34 withdrawal from the guaranteed term.
Assumptions:
i, the deposit period yield, is 5%
j, the current yield, is 6%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the guaranteed term, is 927.
<TABLE>
<S> <C> <C> <C><C>
x
---
(1 + i) 365
-------
MVA = { (1 + j) }
927
---
(1.05) 365
-----
= { (1.06) }
= .9762
</TABLE>
In this example the deposit period yield of 5% is less than the current yield
of 6%, therefore, the MVA is less than one. The amount withdrawn from the
guaranteed term is multiplied by this MVA.
If a withdrawal or transfer of a specific dollar amount is requested, the
amount withdrawn from a guaranteed term will be decreased to compensate for the
positive MVA amount. For example, a withdrawal request to receive a check for
$2,000 would result in a $2,048.76 withdrawal from the guaranteed term.
continued--->
33
<PAGE>
(Appendix I, continued)
Example II.
Assumptions:
i, the deposit period yield, is 10%
j, the current yield, is 8%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the guaranteed term, is 927.
<TABLE>
<S> <C> <C> <C><C>
x
---
(1 + i) 365
-------
MVA = { (1 + j) }
927
---
(1.10) 365
-----
= { (1.08) }
= 1.0477
</TABLE>
In this example the deposit period yield of 10% is greater than the current
yield of 8%, therefore, the MVA is greater than one. The amount withdrawn from
the guaranteed term is multiplied by this MVA.
If a withdrawal or transfer of a specific dollar amount is requested, the
amount withdrawn from a guaranteed term will be decreased to compensate for the
positive MVA amount. For example, a withdrawal request to receive a check for
$2,000 would result in a $1,908.94 withdrawal from the guaranteed term.
Assumptions:
i, the deposit period yield, is 5%
j, the current yield, is 4%
x, the number of days remaining (computed from Wednesday of the week of
withdrawal) in the guaranteed term, is 927.
<TABLE>
<S> <C> <C> <C><C>
x
---
(1 + i) 365
-------
MVA = { (1 + j) }
927
---
(1.05) 365
-----
= { (1.04) }
= 1.0246
</TABLE>
In this example the deposit period yield of 5% is greater than the current
yield of 4%, therefore, the MVA is greater than one. The amount withdrawn from
the guaranteed term is multiplied by this MVA.
If a withdrawal or transfer of a specific dollar amount is requested, the
amount withdrawn from a guaranteed term will be decreased to compensate for the
positive MVA amount. For example, a withdrawal request to receive a check for
$2,000 would result in a $1,951.98 withdrawal from the guaranteed term.
PRO.49593-00
34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
- ----------------------------------------------------
Not Applicable
Item 15. Indemnification of Directors and Officers
- --------------------------------------------------
Section 21 of Public Act No. 97-246 of the Connecticut General Assembly (the
"Act") provides that a corporation may provide indemnification of or advance
expenses to a director, officer, employee or agent only as permitted by Sections
33-770 to 33-778, inclusive, of the Connecticut General Statutes, as amended by
Sections 12 to 20, inclusive, of this Act. Reference is hereby made to Section
33-771(e) of the Connecticut General Statutes ("CGS") regarding indemnification
of directors and Section 33-776(d) of CGS regarding indemnification of officers,
employees and agents of Connecticut corporations. These statutes provide in
general that Connecticut corporations incorporated prior to January 1, 1997
shall, except to the extent that their certificate of incorporation expressly
provides otherwise, indemnify their directors, officers, employees and agents
against "liability" (defined as the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with respect to a proceeding) when
(1) a determination is made pursuant to Section 33-775 that the party seeking
indemnification has met the standard of conduct set forth in Section 33-771 or
(2) a court has determined that indemnification is appropriate pursuant to
Section 33-774. Under Section 33-775, the determination of and the authorization
for indemnification are made (a) by the disinterested directors, as defined in
Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in
the case of indemnification of an officer, agent or employee of the corporation,
by the general counsel of the corporation or such other officer(s) as the board
of directors may specify. Also, Section 33-772 provides that a corporation shall
indemnify an individual who was wholly successful on the merits or otherwise
against reasonable expenses incurred by him in connection with a proceeding to
which he was a party because he was a director of the corporation. Pursuant to
Sections 33-771(d), in the case of a proceeding by or in the right of the
corporation or with respect to conduct for which the director, officer, agent or
employee was adjudged liable on the basis that he received a financial benefit
to which he was not entitled, indemnification is limited to reasonable expenses
incurred in connection with the proceeding against the corporation to which the
individual was named a party.
The statute does specifically authorize a corporation to procure indemnification
insurance on behalf of an individual who was a director, officer, employer or
agent of the corporation. Consistent with the statute, Aetna Inc. has procured
insurance from Lloyd's of London and several major United States excess insurers
for its directors and officers and the directors and officers of its
subsidiaries, including the Depositor.
<PAGE>
Item 16. Exhibits
- -----------------
(4)(a) Group Annuity Contract (Form No. G1-MGA-95)(1)
(4)(b) Individual Annuity Contract (Form No. I1-MGA-95)(2)
(4)(c) Certificate (G1CC-MGA-95) to Group Annuity Contract Form No.
G1-MGA-95(3)
(4)(d) Endorsement (E1-MGAIRA-95-2) to Group Annuity Contract Form No.
G1-MGA-95 and Certificate No. G1CC-MGA-95(3)
(4)(e) Endorsement (E1-MGAROTH-97) to Group Annuity Contract Form No.
G1-MGA-95 and Certificate No. G1CC-MGA-95(3)
(5) Opinion as to Legality
(10) Material contracts are listed under Item 14(a)10 in the Company's
Form 10-K for the fiscal year ended December 31, 1999 (File No.
33-23376), as filed with the commission on March 22, 2000. Each
of the Exhibits so listed is incorporated by reference as
indicated in the Form 10-K
(13) Aetna Life Insurance and Annuity Company Form 10-K for the fiscal
year ended December 31, 1999
(23)(a) Consent of Independent Auditors
(23)(b) Consent of Legal Counsel (included in Exhibit (5) above)
(24)(a) Powers of Attorney(4)
(24)(b) Certificate of Resolution Authorizing Signature by Power of
Attorney(5)
(27) Financial Data Schedule
Exhibits other than these listed are omitted because they are not required or
are not applicable.
1. Incorporated by reference to the Registration Statement on Form S-2 (File No.
33-64331), as filed on November 16, 1995.
2. Incorporated by reference to Pre-Effective Amendment No. 2 to Registration
Statement on Form S-2 (File No. 33-64331), as filed on January 17, 1996.
3. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form S-2 (File No. 33-64331), as filed on November 24, 1997.
4. Incorporated by reference to Post-Effective Amendment No. 20 to Registration
Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000.
5. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996.
<PAGE>
Item 17. Undertakings
- ---------------------
The undersigned registrant hereby undertakes as follows, pursuant to Item 512
of Regulation S-K:
(a) Rule 415 offerings:
(1) To file, during any period in which offers or sales of the registered
securities are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material changes to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(h) Request for Acceleration of Effective Date:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
<PAGE>
Item 18. Financial Statements and Schedules
- -------------------------------------------
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Post-Effective
Amendment No. 4 to the Registration Statement on Form S-2 (File No. 333-49593)
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Hartford, State of Connecticut, on this 13th day of April, 2000.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(REGISTRANT)
By: Thomas J. McInerney*
------------------------------------------
Thomas J. McInerney
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 4 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Thomas J. McInerney* Director and President )
- -------------------------- (principal executive officer) )
Thomas J. McInerney )
)
Catherine H. Smith* Director and Chief Financial Officer )
- -------------------------- ) April
Catherine H. Smith ) 13, 2000
)
Shaun P. Mathews* Director )
- -------------------------- )
Shaun P. Mathews )
)
Deborah Koltenuk* Vice President, Corporate Controller, and )
- -------------------------- Assistant Treasurer )
Deborah Koltenuk )
</TABLE>
By: /s/ Michael A. Pignatella
--------------------------
Michael A. Pignatella
*Attorney-in-Fact
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C> <C>
16(5) Opinion re: Legality
----------
Aetna Life Insurance and Annuity Company Form 10-K for
16(13) the fiscal year ended December 31, 1999
----------
16(23)(a) Consent of Independent Auditors
----------
16(23)(b) Consent of Legal Counsel
*
16(27) Financial Data Schedule
----------
</TABLE>
* Included in Exhibit 16(5) above.
[Aetna logo] Aetna Inc.
Financial Services 151 Farmington Avenue
Hartford, CT 06156-8975
Michael A. Pignatella
Counsel
AFS Law, TS31
April 13, 2000 (860) 273-0261
Fax: (860) 273-9407
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company
Post-Effective Amendment No. 4 to Registration Statement on Form S-2
Prospectus Title: Aetna Multi-Rate Annuity
File No.: 333-49593
Dear Sirs:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I have
represented the Company in connection with the Aetna Multi-Rate Annuity (the
"Multi-Rate Annuity"), a multi-rate interest option available under certain
variable annuity contracts, and the Form S-2 Registration Statement relating to
such account.
In connection with this opinion, I have reviewed Post-Effective Amendment No. 4
to the Registration Statement on Form S-2 for the Multi-Rate Annuity, including
the prospectus, and relevant proceedings of the Board of Directors.
Based upon this review, and assuming the securities represented by the
Multi-Rate Annuity are issued in accordance with the provisions of the
prospectus, I am of the opinion that the securities, when sold, will have been
legally issued, and will constitute a legal and binding obligation of the
Company.
I further consent to the use of this opinion as an exhibit to Post-Effective
Amendment No. 4 to the Registration Statement.
Sincerely,
/s/ Michael A. Pignatella
- -------------------------
Michael A. Pignatella
Counsel
UNITED STATES
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, 1999 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)
</TABLE>
(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 29, 2000 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.
<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, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form 10-K
Item No. Page
- ------------- ----
<S> <C> <C>
PART I
Item 1. Business** ................................................... 3
Item 2. Properties** ................................................. 12
Item 3. Legal Proceedings ............................................ 12
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 .......................................... 13
Item 6. Selected Financial Data* ..................................... 13
Item 7. Management's Analysis of the Results of Operations** ......... 13
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .... 25
Item 8. Financial Statements and Supplementary Data .................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant* .......... 58
Item 11. Executive Compensation* ...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management*.. ................................................ 58
Item 13. Certain Relationships and Related Transactions* .............. 58
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K ...................................... 58
Index to Consolidated Financial Statement Schedules .......... 64
Signatures ................................................... 69
</TABLE>
* 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>
PART I
Item 1. Business
A. Organization of Business
Aetna Life Insurance and Annuity Company ("ALIAC") is a Connecticut stock life
insurance company which was originally organized in 1976. ALIAC, together with
its wholly owned subsidiaries, Aetna Insurance Company of America ("AICA") and
Aetna Investment Adviser Holding Company, Inc. is herein called the "Company".
ALIAC 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").
On July 1, 1999, HOLDCO contributed Aetna Investment Adviser Holding Company,
Inc., and its subsidiaries (collectively, "IA Holdco") to the Company (refer to
Note 2 of Notes to Consolidated Financial Statements). As a result, the Company
has two business segments: Financial Products and Investment Management
Services. On October 1, 1998, the Company sold its domestic individual life
insurance business to Lincoln National Corporation ("Lincoln") and accordingly,
such business was classified as Discontinued Operations. See "Overview" in
Management's Analysis of the Results of Operations and Note 3 of Notes to
Consolidated Financial Statements for further discussion on the sale.
Financial Products
Products and Services
The Financial Products segment includes 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,
nonqualified annuity contracts and mutual funds. Annuity contracts may be
deferred or immediate ("payout annuities"). These products also include
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a menu
of investment options, including mutual funds (both Company and nonaffiliated
mutual funds), and variable and fixed investment options. Financial Products
may also include wrapper agreements entered into with retirement plans which
contain certain benefit responsive guarantees (i.e. liquidity guarantees of
principal and previously accrued interest for benefits paid under the terms of
the plan) with respect to portfolios of plan-owned assets not invested with the
Company. Financial Products also include investment advisory services and
pension plan administrative services.
Investment Options
The Financial Products segment offers customers products that contain variable
and/or fixed investment options. Variable options and mutual funds generally
provide for full assumption (and, in limited cases, provide for partial
assumption) by the customer of investment risks. Assets supporting variable
annuity options are held in separate accounts that invest in Company mutual
funds and/or unaffiliated mutual funds. Company mutual funds include funds
managed by Aeltus Investment Management, Inc. ("Aeltus"), an indirect wholly
owned subsidiary of ALIAC, and,
3
<PAGE>
Item 1. Business. (continued)
Financial Products (continued)
beginning in November 1997, funds managed by ALIAC and subadvised by outside
investment advisors. Variable separate account investment income and realized
capital gains and losses are not reflected in the Company's consolidated
statements of income. 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. Experience-rated
options require the customer to assume investment (including realized capital
gains and losses) and other risks subject to, among other things, certain
minimum guarantees. As long as minimum guarantees are not triggered, the effect
of experience-rated products' investment performance does not impact the
Company's consolidated results.
Fees and Investment Margins
Insurance charges, investment management or other fees earned by the Company
vary by product and depend on, among other factors, the funding option selected
by the customer under the product. For annuity products where assets are
allocated to variable funding options, the Company may charge the separate
account an asset-based insurance and expense fee. In addition, where the
customer selects a Company mutual fund as a variable funding option, the
Company receives a participation fee from Aeltus and, in the case of those
funds advised by ALIAC and subadvised by outside managers, the Company receives
an investment advisory fee from the fund and pays a subadvisory fee to the fund
manager. This participation fee is eliminated in the computation of the
Company's consolidated earnings. (Refer to Note 11 of Notes to Consolidated
Financial Statements for information on other related party fees.) For
unaffiliated mutual funds, the Company receives distribution fees and/or
expense reimbursements. For fixed funding options, the Company earns an
investment margin, which is based on the difference between income earned on
the investments supporting the liability and interest credited to customers.
The Company may also receive other fees or charges depending on the nature of
the products.
Assets Under Management and Administration
The substantial portion of the Company's fees or other charges and investment
margins are based on assets under management. Assets under management are
principally affected by net deposits (i.e., deposits, including new contracts,
less surrenders), investment growth (e.g., interest credited to customer
accounts for fixed options or market performance for variable options) and
customer retention. Financial Products' assets under management, excluding net
unrealized capital gains and losses on debt securities that support fixed
annuities, were $54.5 billion, $44.2 billion and $37.2 billion at December 31,
1999, 1998, and 1997, respectively.
Financial Products' assets under management include assets which are also
reported in the Investment Management Services segment. Both segments report
certain assets under management because they each earn a different component of
the revenue derived from these assets. Refer to "Overview-Continuing
Operations" in Management's Analysis of the Results of Operations for the
elimination adjustment required to calculate consolidated assets under
management.
Approximately 95% and 94% of assets under management at December 31, 1999 and
1998, respectively, allowed for contractholder withdrawal. Approximately 85%
and 81% of assets under
4
<PAGE>
Item 1. Business. (continued)
Financial Products (continued)
management at December 31, 1999 and 1998, respectively, are subject to market
value adjustments and/or deferred surrender charges. To encourage customer
retention and recover acquisition expenses, 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. This charge may be waived from time to time at the Company's
discretion. 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 and certain custodial account distributions prior to age 591/2
provide further disincentive to customers for premature surrenders of account
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 Products segment excluding net unrealized
capital losses and gains related to fair value adjustments required under
Financial Accounting Standard ("FAS") No. 115. Refer to "Overview" and
"Financial Products" in Management's Analysis of the Results of Operations for
further discussion of assets under management.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Millions) 1999 1998 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Corporate pensions $ 15,806.9 $ 13,603.5 $ 10,955.8
Not-for-profit organizations 24,434.6 19,333.8 16,828.8
Individuals 14,284.8 11,261.1 9,394.6
- --------------------------------------------------------------------------------
Total (1) $ 54,526.3 $ 44,198.4 $ 37,179.2
- --------------------------------------------------------------------------------
</TABLE>
(1) Excludes net unrealized capital losses of $247.9 million at December 31,
1999 and net unrealized capital gains of $496.9 million and $471.3 million
at December 31, 1998 and 1997, respectively.
Deposits, which are not included in premiums or revenue, are shown in the
following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Millions) 1999 1998 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Corporate pensions $ 2,444.2 $ 1,871.0 $ 1,634.6
Not-for-profit organizations 2,638.7 1,591.7 1,404.4
Individuals 1,824.8 1,305.6 1,443.6
- --------------------------------------------------------------------------------
Total $ 6,907.7 $ 4,768.3 $ 4,482.6
- --------------------------------------------------------------------------------
</TABLE>
A portion of the segment's fee revenue is also based on assets under
administration. Assets under administration are assets for which the Company
provides administrative services only. Assets under administration were $4.4
billion at December 31, 1999, $2.9 billion at December 31, 1998 and $2.3 billion
at December 31, 1997.
Principal Markets and Method of Distribution
Products and services of the Financial Products segment are offered primarily
to individuals, pension plans, small businesses and employer-sponsored groups
in the health care, government,
5
<PAGE>
Item 1. Business. (continued)
Financial Products (continued)
education (collectively "not-for-profit" organizations) and corporate markets.
The Company's products generally are sold through pension professionals,
independent agents and brokers, third party administrators, banks, dedicated
career agents and financial planners.
Competition
Competition arises from other insurance companies and from an array of financial
services companies including banks and mutual funds, as well as 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 (i.e. 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
(i.e. 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.
Investment Management Services
The Investment Management Services segment primarily consists of the operations
of Aeltus, the primary operating subsidiary of IA Holdco, which has two
wholly-owned operating subsidiaries: Aeltus Capital, Inc. ("ACI"), a broker
dealer, and Aeltus Trust Company ("ATC"), a limited purpose banking entity. IA
Holdco was contributed to ALIAC on July 1, 1999 by HOLDCO. Refer to Note 2 of
Notes to Consolidated Financial Statements.
Products and Services
Investment Management Services provides investment advisory services to
affiliated and unaffiliated institutional and retail clients on a
fee-for-service basis; underwriting services to the Aetna Series Fund, Inc.;
distribution services for other Aetna products; and trustee, administrative and
other fiduciary services to retirement plans requiring or otherwise utilizing a
trustee or custodian.
6
<PAGE>
Item 1. Business. (continued)
Investment Management Services (continued)
Fees
Investment management fees earned by the Company depend primarily on the
investment style (e.g. equity vs. fixed income) and the service level (e.g.
asset allocation service) selected by the client, as well as the size (measured
by assets under management) of the account. Fees are generated by client money
invested in advisory accounts, individual and pooled trust accounts,
collateralized bond obligations, affiliated mutual funds and separate accounts,
and the general account assets of ALIAC and AICA, which collectively represent
substantially all assets under management.
Assets Under Management
Fee income is substantially derived from a charge assessed on assets under
management. Assets under management are principally affected by net deposits
(i.e., deposits, including new contracts, less surrenders), market performance
and customer retention. Investment Management Services' assets under
management, excluding net unrealized capital gains and losses on debt
securities that support fixed annuities, were $55.0 billion, $47.8 billion and
$41.5 billion at December 31, 1999, 1998, and 1997, respectively. Investment
Management Services' assets under management include assets which are also
reported in the Financial Products segment. Both segments report certain assets
under management because they each earn a different component of the revenue
derived from these assets. Refer to "Overview-Continuing Operations" in
Management's Analysis of the Results of Operations for the elimination
adjustment required to calculate consolidated assets under management.
Substantially all assets under management invested through the products of the
Investment Management Services segment at December 31, 1999 and 1998 allowed
for contractholder withdrawal subject to market value adjustments and/or
deferred contingent sales charges. Collaterized bond obligations managed by the
segment are generally not withdrawable. To encourage customer retention and
recover acquisition expenses, certain mutual fund assets under management are
subject to deferred contingent sales charges on balances withdrawn within a
period of time after contribution to the fund. This charge may be waived from
time to time at the Company's discretion. For withdrawal characteristics on
assets under management invested through the Financial Products segment, refer
to "Financial Products".
The following table summarizes assets under management for the principal
business channels of the Investment Management Services segment. Amounts
reflected exclude net unrealized capital losses and gains related to fair value
adjustments required by FAS No. 115. Refer to "Overview" and "Investment
Management Services" in Management's Analysis of the Results of Operations for
further discussion on assets under management.
7
<PAGE>
Item 1. Business. (continued)
Investment Management Services (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(Millions) 1999 1998 1997
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Retail mutual funds $ 1,447.7 $ 616.6 $ 564.6
Plan sponsored (1) 14,244.5 11,581.5 10,273.7
Collateralized bond obligations and other 2,338.3 1,770.5 711.3
- -----------------------------------------------------------------------------------------
Subtotal $ 18,030.5 $ 13,968.6 $ 11,549.6
- -----------------------------------------------------------------------------------------
Invested through products of the Financial
Products segment:
Variable annuity mutual funds $ 18,144.2 $ 15,423.3 $ 12,996.9
Fixed annuities (2) 12,641.1 12,131.1 12,056.3
Plan sponsored and other 6,180.4 6,265.1 4,896.8
- -----------------------------------------------------------------------------------------
Subtotal 36,965.7 33,819.5 29,950.0
- -----------------------------------------------------------------------------------------
Total $ 54,996.2 $ 47,788.1 $ 41,499.6
=========================================================================================
</TABLE>
(1) Includes $6,986.3 million, $7,809.3 million and $7,679.1 million of assets
managed for Aetna Life Insurance Company, an affiliate of the Company, as
of December 31, 1999, 1998 and 1997, respectively.
(2) Excludes net unrealized capital losses of $247.9 million at December 31,
1999 and net unrealized capital gains of $496.9 million and $471.3 million
at December 31, 1998 and 1997, respectively.
Principal Markets and Method of Distribution
Products and services of the Investment Management Services segment are offered
primarily to pension plans (e.g., corporate, public, health care, religious),
non-profit (e.g., endowments, foundations), taxable entities (e.g., corporate,
health care), corporate sponsored retirement plans and individual investors.
The Company's products are sold through an in-house sales force utilizing
consultant relationships, affiliated and unaffiliated brokers, banks, and
financial planners.
Competition
Competition arises from 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.
Discontinued Operations--Domestic Individual Life Insurance
Products and Services
Discontinued Operations include universal life and variable universal life
products, which have both life insurance and investment characteristics,
traditional whole life and term insurance.
Life Insurance In Force and Other Statistical Data
The table below summarizes nonparticipating life insurance in force before
deductions for reinsurance ceded to other companies. As a result of the sale of
the Company's domestic individual
8
<PAGE>
Item 1. Business. (continued)
Discontinued Operations--Domestic Individual Life Insurance (continued)
life insurance business on October 1, 1998, substantially all of the in force
amounts shown in the table for the years 1999 and 1998 have been ceded to
Lincoln.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(Billions, except as noted below) 1999 1998 1997
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
In force, end of year
Direct:
Permanent $ 36.1 $ 37.8 $ 37.1
Term 3.6 5.1 5.0
Assumed:
Permanent .9 .9 1.0
Term 1.5 1.6 1.0
- ---------------------------------------------------------------------------------------
Total $ 42.1 $ 45.4 $ 44.1
=======================================================================================
Number of direct policies in force, end of year
(thousands) 390.2 419.8 452.5
=======================================================================================
Average size of direct policy in force, end of
year (thousands) $ 101.7 $ 102.2 $ 93.1
=======================================================================================
</TABLE>
Assets Under Management
No assets under management were reported for the years ended December 31, 1999
and 1998 due to the sale of the domestic individual life business to Lincoln on
October 1, 1998. Assets under management, excluding net unrealized capital
gains on debt securities related to the fair value adjustments required under
FAS No. 115, were $2.7 billion at December 31, 1997.
Reserves
Prior to the sale of the domestic individual life insurance business on October
1, 1998, reserves for universal life products were 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 reflected
through credited rates on an amortized basis). These reserves also included net
unrealized capital gains/losses related to FAS No. 115. As a result of the sale
and transfer of assets supporting the business, reserves for universal life
products will no longer include net realized capital gains/losses and
unrealized capital gains/losses related to FAS No. 115 for the years ended
December 31, 1998 and beyond. Reserves for all other fixed individual life
contracts are computed on a basis of assumed investment yield, mortality,
morbidity and expenses including a margin for adverse deviation. These
assumptions vary by plan, year of issue and policy duration.
Because the sale of the domestic individual life business was substantially in
the form of an indemnity reinsurance agreement, the Company reported an
addition to its reinsurance recoverable approximating the total domestic
individual life insurance reserves at the sale date.
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,
9
<PAGE>
Item 1. Business. (continued)
Discontinued Operations--Domestic Individual Life Insurance (continued)
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.
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 foreign
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. See "General Account
Investments" in Management's Analysis of the Results of Operations for a
further discussion of investments.
Other Matters
a. 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 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 and the maximum interest rates that
can be charged on policy loans.
The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of the Company.
Regulations of the SEC, Department of Labor ("DOL") and Internal Revenue
Service also impact 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.
10
<PAGE>
Item 1. Business. (continued)
Other Matters (continued)
Federal Employee Benefit Regulation
The Company provides a variety of products and services to employee benefit
plans that are covered by the Employee Retirement Income Security Act of 1974
("ERISA").
In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group
pension contract issued to the plan that was not a "guaranteed benefit policy"
were "plan assets" for purposes of ERISA and that the insurance company had
fiduciary responsibility with respect to those assets. In reaching its
decision, the Court declined to follow a 1975 DOL interpretive bulletin that
had suggested that insurance company general account assets were not plan
assets.
The Small Business Job Protection Act (the "Act"), was signed into law in 1996.
The Act 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 policies 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, except as provided in the
anti-avoidance portion of the regulations. The regulations, which were issued
on January 5, 2000, address ERISA's application to the general account assets
of insurers attributable to policies issued on or before December 31, 1998 that
are not guaranteed benefit policies. The conference report relating to the Act
states that policies issued after December 31, 1998 that are not guaranteed
benefit policies will be subject to ERISA's fiduciary obligations. The Company
is not currently able to predict how these matters may ultimately affect its
businesses.
Insurance Holding Company Laws
A number of states, including Connecticut, regulate affiliated groups of
insurers such as the Company under holding company statutes. These laws, among
other things, place certain restrictions on transactions between affiliates
such as dividends and other distributions that may be paid to the Company's
parent corporation. For information regarding payments of dividends by the
Company, refer to "Liquidity & Capital Resources" in Management's Analysis of
the Results of Operations and Note 7 of Notes to Consolidated Financial
Statements.
Insurance Company Guaranty Fund Assessments
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.
There were no material charges to earnings for guaranty fund obligations during
1999, 1998 and 1997. While the Company has historically recovered more than
half of its 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
11
<PAGE>
Item 1. Business. (continued)
Other Matters (continued)
businesses, see Management's Analysis of the Results of Operations--
Forward-Looking Information/Risk Factors (Refer to Note 1 of Notes to
Consolidated Financial Statements for new accounting standards related to
guaranty fund assessments.)
b. Ratings
The Company's financial strength ratings at October 27, 1999 and March 21, 2000
are as follows:
<TABLE>
<CAPTION>
Rating Agencies
----------------------------------------------------------
Duff & Moody's Standard &
A.M. Best Phelps Investors Service Poor's
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
October 27, 1999 A AA Aa3 AA-
March 21, 2000 (1) A AA Aa3 AA-
- ---------------------------------------------------------------------------------
</TABLE>
(1) A. M. Best has placed the Company's rating under review with developing
implications. Duff & Phelps has placed the Company's rating on "Rating
Watch - Uncertain". Moody's Investors Service has the Company's rating on
review, direction uncertain. Standard & Poor's has the Company's rating on
Credit Watch with "developing" implications.
c. Miscellaneous
The Company had approximately 2,900 employees at December 31, 1999.
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. See Management's Analysis of the Results
of Operations for information regarding the Company's Year 2000 status.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of consolidated revenue in 1999. 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.
Item 2. Properties.
The Company's home office is located at 151 Farmington Avenue, Hartford,
Connecticut 06156. All Company office space is owned or leased by Aetna Life
Insurance Company ("Aetna Life") 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 services
established, it is not expected to result in liability for amounts material to
the
12
<PAGE>
Item 3. Legal Proceedings (continued)
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.
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 $255 million,
$570 million and $34 million in cash dividends to HOLDCO in 1999, 1998 and
1997, respectively. Of the $255 million paid in 1999, $206 million was accrued
for in 1998. Of the $776 million dividends paid or accrued in 1998, $756
million (all of which was approved by the Insurance Commissioner of the State
of Connecticut) was attributable to proceeds from the sale of the domestic
individual life insurance business. The Company may not pay distributions,
including dividends, to HOLDCO in excess of a statutory limit unless approved
in advance by the Insurance Commissioner of the State of Connecticut. As of
March 21, 2000, the Company had not exceeded such statutory limit.
The Company received no capital contributions in 1999. In 1998, the Company
received a capital contribution of approximately $9 million in cash from
HOLDCO. In 1997, the Company returned capital of $5 million to HOLDCO.
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.
Overview
Recent Developments
On February 25, 2000, William H. Donaldson became Chairman, President and Chief
Executive Officer of Aetna Inc. He replaced Richard L. Huber, who resigned. On
March 12, 2000, Aetna Inc. announced that, among other things, it plans to
separate its global health and global financial
13
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Overview (continued)
services businesses into two independent publicly traded companies as soon as
an orderly separation can be achieved.
Sale of the Domestic Individual Life Insurance Business
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The sale resulted in an after-tax
gain of approximately $117 million. Since the principal agreement to sell this
business was generally in the form of an indemnity reinsurance arrangement, the
Company deferred approximately $58 million of the gain and was recognizing it
over approximately 15 years. Approximately $5 million of the deferred gain was
recognized during 1999. During the fourth quarter of 1999, the Company refined
certain accrual and tax estimates which had been established in connection with
the recording of the deferred gain. As a result, the deferred gain was
increased by $12 million (after tax) to $65 million at December 31, 1999. The
remaining deferred gain will be recognized over approximately 14 years.
Revenues from the business sold were $652 million for 1998 through the sale
date, $620 million for 1997. For more details about the transaction and the
indemnity reinsurance arrangement, refer to Note 3 of Notes to Consolidated
Financial Statements.
Consolidated Results
Consolidated results include results from continuing operations and
discontinued operations. Continuing operations is comprised of the Financial
Products and Investment Management Services segments plus certain items not
directly allocable to the business segments. Discontinued Operations is
comprised of the domestic individual life insurance business. All prior year
income statement data has been restated to reflect the presentation as
Discontinued Operations.
Continuing Operations
Income from continuing operations increased $9 million and $4 million in 1999
and 1998, respectively. Income from continuing operations includes Year 2000
costs of $18 million in 1999 and $22 million in 1998. Excluding Year 2000
costs, net realized capital losses of $14 million in 1999 and net realized
capital gains of $7 million and $19 million in 1998 and 1997, respectively,
earnings from continuing operations increased $26 million in 1999 and $39
million in 1998. The increases in 1999 and 1998 earnings primarily reflect
increased fee income from higher levels of assets under management and
administration.
Assets under management and administration for continuing operations are shown
in the table below. Because Financial Products and Investment Management
Services report different components of the revenues generated by a particular
group of assets under management, this group of assets is included in the
assets reported by both segments. These assets must be eliminated from combined
segment assets to determine the consolidated assets under management of the
Company.
14
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Overview (continued)
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Assets under management:
Financial Products $ 54,526.3 $ 44,198.4 $ 37,179.2
Investment Management Services (1) 54,996.2 47,788.1 41,499.6
Consolidating adjustment (2) (36,965.7) (33,819.5) (29,950.0)
- ---------------------------------------------------------------------------------------------
Total--assets under management (3) (4) $ 72,556.8 $ 58,167.0 $ 48,728.8
- ---------------------------------------------------------------------------------------------
Assets under administration: (5)
Financial Products $ 4,441.7 $ 2,860.1 $ 2,285.8
- ---------------------------------------------------------------------------------------------
Assets under management and administration $ 76,998.5 $ 61,027.1 $ 51,014.6
=============================================================================================
</TABLE>
(1) Includes $6,986.3 million, $7,809.3 million and $7,679.1 million of assets
managed for Aetna Life Insurance Company, an affiliate of the Company, as
of December 31, 1999, 1998 and 1997, respectively.
(2) Represents consolidating adjustment related to the assets under management
reported by both the Financial Products and Investment Management
segments.
(3) Includes $13,472.4 million, $7,467.5 million and $5,070.0 million at
December 31, 1999, 1998 and 1997, respectively, of assets invested through
the Company's products in unaffiliated mutual funds.
(4) Excludes net unrealized capital losses of $247.9 million at December 31,
1999 and net unrealized capital gains of $496.9 million and $471.3 million
at December 31, 1998 and 1997, respectively.
(5) Represents assets for which the Company provides administrative services
only.
Outlook
The Company's strategy is to increase assets under management and
administration and improve profitability by focusing on strategic markets and
products in its businesses. In doing so, the Company may take a variety of
actions intended to improve its investment and product management, marketing,
distribution and customer service. For example, the Company plans to improve
its operational efficiency and further leverage and expand its internet
capability over time through increased spending for improved technology and
operating platforms. The Company also anticipates enhancing its product
distribution capabilities through adding new sales representatives and
increasing relationships with advisors, brokers and wholesalers. The Company
also may seek acquisitions or divestitures in order to align its businesses
with strategic and financial targets or build scale.
See "Forward-Looking Information/Risk Factors" regarding other important
factors that may materially affect the Company.
15
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Financial Products
Operating Summary
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Premiums (1) $ 107.5 $ 79.4 $ 69.1
Charges assessed against policyholders 388.3 324.3 262.0
Net investment income 881.5 865.3 876.7
Net realized capital (losses) gains (21.5) 10.4 29.7
Other income 55.3 41.9 40.4
- -----------------------------------------------------------------------------------------------------------------
Total revenue 1,411.1 1,321.3 1,277.9
- -----------------------------------------------------------------------------------------------------------------
Current and future benefits 746.2 714.4 720.4
Operating expenses 306.4 281.3 286.5
Amortization of deferred policy acquisition costs 93.4 80.3 57.2
- -----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,146.0 1,076.0 1,064.1
- -----------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 265.1 245.3 213.8
Income taxes 87.0 67.7 59.7
- -----------------------------------------------------------------------------------------------------------------
Net income (2) $ 178.1 $ 177.6 $ 154.1
=================================================================================================================
Net realized capital (losses) gains, net of tax (included above) $ (14.0) $ 7.3 $ 19.2
=================================================================================================================
Deposits (not included in premiums above)
Annuities--fixed options $ 1,973.2 $ 1,125.6 $ 1,191.4
Annuities--variable options 4,934.5 3,642.7 3,291.2
- -----------------------------------------------------------------------------------------------------------------
Total--deposits $ 6,907.7 $ 4,768.3 $ 4,482.6
=================================================================================================================
Assets Under Management (3)
Annuities--fixed options (4) $ 12,641.1 $ 12,131.1 $ 12,056.3
Annuities--variable options (5) 35,352.9 25,527.0 20,076.9
- -----------------------------------------------------------------------------------------------------------------
Subtotal--annuities 47,994.0 37,658.1 32,133.2
Plan Sponsored and Other 6,532.3 6,540.3 5,046.0
- -----------------------------------------------------------------------------------------------------------------
Total--assets under management 54,526.3 44,198.4 37,179.2
Assets under administration (6) 4,441.7 2,860.1 2,285.8
- -----------------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 58,968.0 $ 47,058.5 $ 39,465.0
=================================================================================================================
</TABLE>
(1) Includes $71.5 million in 1999, $67.4 million in 1998 and $64.8 million in
1997 for annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies.
(2) Year 2000 costs are not allocated to segment operating expenses; and,
therefore, excluded in the determination of segment net income.
(3) Includes $36,965.7 million, $33,819.5 million and $29,950.0 million of
assets under management that are also reported in the Investment
Management Services segment (refer to the assets under management section
of "Overview").
(4) Excludes net unrealized capital losses of $247.9 million at December 31,
1999 and net unrealized capital gains of $496.9 million and $471.3 million
at December 31, 1998 and 1997, respectively.
(5) Includes $13,472.4 million at December 31, 1999, $7,467.5 million at
December 31, 1998 and $5,069.9 million at December 31, 1997 related to
assets invested through the Company's products in unaffiliated mutual
funds.
(6) Represents assets for which the Company provides administrative services
only.
Financial Products' net income increased $1 million in 1999 and $24 million in
1998. Excluding net realized capital losses and gains, earnings increased $22
million, or 13%, in 1999 and $35 million, or 26%, in 1998. The increase in
earnings primarily reflects increased fee income from higher levels of assets
under management and administration.
16
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Financial Products (continued)
Assets under management and administration increased 25% in 1999 and 19% in
1998. The increases in assets under management and administration were due to
appreciation in the stock market and, to a lesser extent, additional net
deposits (i.e. deposits, including new contracts, less surrenders). Partially
offsetting the increase in fee income were increased operating expenses
resulting from business growth. However, for annuity products, operating
expenses as a percentage of assets under management declined in both years.
Premiums relate to annuity products containing life contingencies. Premiums
increased by $28 million in 1999 following an increase of $10 million in 1998.
The increase in 1999 was due to the acquisition of a block of payout annuity
business and, to a lesser extent, additional sales. The increase in 1998 was
due to additional sales.
Annuity deposits relate to annuity contracts not containing life contingencies.
Deposits increased 45% and 6% in 1999 and 1998, respectively, reflecting
business growth.
Of the $12.6 billion at December 31, 1999 and $12.1 billion at December 31,
1998 and 1997 of fixed annuity assets under management, 25% were fully
guaranteed and 75% were experienced rated. The average earned rate on
investments supporting fully guaranteed investment contracts was 7.4%, 7.6% and
7.8%, and the average annualized earned rate on investments supporting
experience rated investment contracts was 7.6%, 7.8% and 7.9% for the years
ended December 31, 1999, 1998 and 1997, respectively. The average credited rate
on fully guaranteed investment contracts was 6.3%, 6.5% and 6.6%, and the
average credited rate on experience rated investment contracts was 5.6%, 5.8%
and 5.9% for the years ended December 31, 1999, 1998 and 1997, respectively.
The resulting interest margins on fully guaranteed investment contracts were
1.1%, 1.1% and 1.2% and on experience rated investment contracts were 2.0% for
the years ended December 31, 1999, 1998 and 1997, 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. Refer to "General Account Investments" for further information on
the Company's investments.
17
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
Investment Management Services
Operating Summary
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 1.5 $ 1.5 $ 1.4
Other income (1) 118.3 96.7 80.3
- ----------------------------------------------------------------------------------------------------------------
Total revenue 119.8 98.2 81.7
Operating expenses 75.2 59.5 50.1
- ----------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 44.6 38.7 31.6
Income taxes 16.5 14.7 11.9
- ----------------------------------------------------------------------------------------------------------------
Net income (2) $ 28.1 $ 24.0 $ 19.7
================================================================================================================
Assets under management:
Retail mutual funds $ 1,447.7 $ 616.6 $ 564.6
Plan sponsored (3) 14,244.5 11,581.5 10,273.7
Collateralized bond obligations and other 2,338.3 1,770.5 711.3
- ----------------------------------------------------------------------------------------------------------------
Subtotal $ 18,030.5 $ 13,968.6 $ 11,549.6
- ----------------------------------------------------------------------------------------------------------------
Invested through products of the Financial Products segment (4)
Variable annuity mutual funds $ 18,144.2 $ 15,423.3 $ 12,996.9
Fixed annuities (5) 12,641.1 12,131.1 12,056.3
Plan sponsored and other 6,180.4 6,265.1 4,896.8
- ----------------------------------------------------------------------------------------------------------------
Subtotal $ 36,965.7 $ 33,819.5 $ 29,950.0
- ----------------------------------------------------------------------------------------------------------------
Total assets under management (6) $ 54,996.2 $ 47,788.1 $ 41,499.6
================================================================================================================
</TABLE>
(1) Primarily includes investment advisory fees earned on assets under
management.
(2) Year 2000 costs are not allocated to segment operating expenses and,
therefore, excluded in the determination of segment net income.
(3) Includes $6,986.3 million, $7,809.3 million and $7,679.1 million of assets
managed for Aetna Life Insurance Company, an affiliate of the Company, as
of December 31, 1999, 1998 and 1997, respectively.
(4) The Investment Management Services segment earns investment advisory fees
on these assets. Such assets are also reported in the Financial Products
segment.
(5) Excludes net unrealized capital losses of $247.9 million at December 31,
1999 and net unrealized capital gains of $496.9 million and $471.3 million
at December 31, 1998 and 1997, respectively.
(6) Excludes $2.7 billion of assets managed by Aeltus which were reported in
Discontinued Operations at December 31, 1997.
Net income from the Investment Management Services segment increased $4 million
for the year ended December 31, 1999, or 17%, and increased $4 million, or 22%,
for the year ended December 31, 1998.
The increase in earnings primarily reflects increased fee income from higher
levels of assets under management. Assets under management increased 15% and
16% for the years ended December 31, 1999 and 1998, respectively. The increase
in these assets was primarily due to appreciation in the stock market and, to a
lesser extent, additional net deposits (i.e. deposits, including new contracts,
less surrenders). Partially offsetting the increase in fee income were
increased operating expenses resulting from business growth.
18
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Discontinued Operations--Domestic Individual Life Insurance
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln. See "Overview" and Note 3 of Notes to Consolidated
Financial Statements for further discussion on the sale.
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:
<TABLE>
<CAPTION>
(Millions) December 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities, available for sale, at fair value $ 11,410.1 $ 12,068.2
Equity securities, available for sale:
Nonredeemable preferred stock 130.9 203.3
Investment in affiliated mutual funds 64.1 100.1
Common stock 11.5 2.0
Short-term investments 74.2 48.9
Mortgage loans 6.7 12.7
Policy loans 314.0 292.2
Other investments 13.2 12.7
- ------------------------------------------------------------------------------------------------
Total Investments $ 12,024.7 $ 12,740.1
================================================================================================
</TABLE>
Total investments decreased in 1999 primarily due to a decrease in the fair
value of the Company's debt securities held at the end of the year. This
decrease is the result of an increase in interest rates that occurred during
1999.
Debt Securities
At December 31, 1999 and 1998, the Company's carrying value of investments in
debt securities represented 95% of the total general account invested assets.
For the same periods, $8.7 billion, or 76% of total debt securities, and $9.1
billion, or 76% 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 December 31, 1999 and 1998 was AA-.
19
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
General Account Investments (continued)
The percentage of total debt securities by quality rating category is as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
- ---------------------------------------------------------
<S> <C> <C>
AAA 48.4% 43.3%
AA 9.5 11.0
A 24.5 24.4
BBB 11.1 14.4
BB 2.5 3.7
B and Below 4.0 3.2
- ---------------------------------------------------------
Total 100.0% 100.0%
=========================================================
</TABLE>
The portfolio of debt securities at December 31, 1999 and 1998 included $739
million (6.5% of the total debt securities) and $839 million (6.9% of the total
debt securities), respectively, of investments that are considered "below
investment grade". "Below investment grade" securities are defined to be
securities that carry a rating below BBB- and Baa3, by Standard & Poor's and
Moody's Investors Services, respectively.
The percentage of total debt securities investments by market sector is as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Corporate Securities 40.6% 45.7%
Residential Mortgage-Backed Securities 23.9 22.4
Foreign Securities--U.S. Dollar Denominated 11.4 10.0
Commercial/Multifamily Mortgage-Backed
Securities 8.6 9.4
U.S. Treasuries/Agencies 9.4 6.4
Asset-Backed Securities 6.1 6.1
- -----------------------------------------------------------------------------------------
Total 100.0% 100.0%
=========================================================================================
</TABLE>
Risk Management and Market Sensitive Instruments
The Company regularly evaluates the appropriateness of investments relative to
its management approved investment guidelines and the business objective of the
portfolios. The Company manages interest rate risk by seeking to maintain a
tight duration band, while credit risk is managed by maintaining high average
quality ratings and diversified sector exposure within the debt securities
portfolio. In connection with its investment and risk management objectives,
the Company also uses financial instruments whose market value is at least
partially determined by, among other things, levels of or changes in domestic
and/or foreign interest rates (short-term or long-term), duration, exchange
rates, prepayment rates, equity markets or credit ratings/spreads.
The Company's use of derivatives is generally limited to hedging purposes and
has principally consisted of using futures contracts to hedge interest rate and
equity price risk. When used for hedging, the expectation is that these
instruments would reduce overall risk. (Refer to Note 5 of Notes to
Consolidated Financial Statements for additional information.)
20
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
General Account Investments (continued)
The risks associated with investments supporting experience rated pension and
annuity products are assumed by those contractholders, not by the Company
(subject to, among other things, certain minimum guarantees). Risks associated
with the investments and liabilities related to experience-rated pension and
annuity products are not included in the sensitivity analysis presented below.
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties. Set
forth below are management's projections of hypothetical net losses in fair
value of shareholder's equity of the Company's market sensitive instruments if
certain assumed changes in market rates and prices were to occur (sensitivity
analysis). These instruments are not leveraged and are held for purposes other
than trading. While the Company believes that the assumed market rate changes
are reasonably possible in the near term, actual results may differ,
particularly as a result of any management actions that would be taken to
mitigate such hypothetical losses in fair value of shareholder's equity. Based
on the Company's overall exposure to interest rate risk and equity price risk,
the Company believes that these changes in market rates and prices would not
materially affect the consolidated near-term financial position, results of
operations or cash flows of the Company.
Interest Rate Risk
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical loss in fair value of shareholder's equity related to financial
and derivative instruments is estimated to be $12 million (after tax), (0.9% of
total shareholder's equity) at December 31, 1999 and $39 million (after tax),
(2.9% of total shareholder's equity) at December 31, 1998. The Company believes
that an interest rate shift of this magnitude represents a moderately adverse
scenario, and is approximately equal to the historical annual volatility of
interest rate movements for the Company's intermediate term available-for-sale
debt securities. The Company has included corresponding changes in certain
insurance liabilities in this sensitivity analysis.
The potential effect of interest rate risk on near-term net income, cash flow
and fair value was determined based on commonly used models. The models project
the impact of interest rate changes on a wide range of factors, including
duration, prepayment, put options and call options. Fair value was estimated
based on the net present value of cash flows or duration estimates, using a
representative set of likely future interest rate scenarios.
Equity Price Risk
The Company's available-for-sale equity securities are comprised primarily of
domestic stocks. Assuming an immediate decrease of 10% in equity prices for
domestic equity securities, the hypothetical loss in fair value of
shareholder's equity related to financial and derivative instruments is
estimated to be $5 million (after tax), (0.4% of total shareholder's equity) at
December 31, 1999 and $7 million (after tax), (0.5% of total shareholder's
equity) at December 31, 1998.
21
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Liquidity and Capital Resources
Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from 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. Subsequent to the close
of the sale of the domestic individual life insurance business on October 1,
1998, premiums received and benefits paid on policies assumed under the sale
agreement are generally deposited to or paid out of Lincoln funds.
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 quality ratings of the Company's 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 received no capital contributions in 1999. In 1998, the Company
received capital a contribution of approximately $9 million in cash from
HOLDCO. In 1997, the Company returned capital of $5 million to HOLDCO.
The Company paid $255 million, $570 million and $34 million in cash dividends
to HOLDCO in 1999, 1998 and 1997, respectively. Of the $255 million paid in
1999, $206 million was accrued for in 1998. Of the $776 million dividends paid
or accrued in 1998, $756 million (all of which was approved by the Insurance
Commissioner of the State of Connecticut) was attributable to proceeds from the
sale of the domestic individual life insurance business. The Company may not
pay distributions, including dividends, to HOLDCO in excess of a statutory
limit unless approved by the Insurance Commissioner of the State of
Connecticut. As of March 21, 2000, the Company had not exceeded such statutory
limit.
See "Consolidated Statements of Cash Flows" for additional information.
Year 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities, such as telephones, building access control systems and
heating and ventilation
22
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Year 2000 (continued)
equipment ("embedded systems") to conduct its business. The Company also has
business relationships with financial institutions, financial intermediaries,
public utilities and other critical vendors, as well as regulators and
customers who are themselves reliant on IT and embedded systems to conduct
their businesses.
Current Status
After the Year 2000 rollover, either the Company or Aetna conducted a series of
quality control checks on its mission-critical IT systems and embedded systems.
These systems operated as planned, in all material respects, and there were no
significant interruptions in the Company's operations. Data within the
Company's IT systems was up-to-date and customers were able to access
information electronically. As of March 22, 2000 the Company has not
experienced any material difficulties with its mission-critical IT systems,
embedded systems, suppliers, or customers due to Year 2000 issues. The Company
is in the process of reassigning its Year 2000 personnel and transferring Year
2000 related responsibilities to its businesses. The Company remains Year 2000
vigilant and any potential future Year 2000 issues will be addressed by IT
personnel within the Company's business segments.
Future Risks and Contingency/Recovery Planning
The Company currently does not expect any future material Year 2000 issues.
However, the Company cannot guarantee that it will not have any future material
Year 2000 issues due to the cyclical nature of certain of the Company's
business processes and those of its critical suppliers or customers. The
Company has developed contingency/recovery plans aimed at sustaining the
continuity of critical business functions in the event of future Year 2000
issues. As part of its contingency planning process, the Company developed
contingency plans for those failure scenarios it believes could have a
significant impact on the Company's operations. Those plans remain in effect.
The scenarios the Company has planned for include, but are not limited to,
limitations on providers', suppliers' and customers' ability to interact
electronically with the Company, Year 2000 related failures at key external
relationships, limitations on the Company's suppliers' or customers' ability to
move funds electronically, failures in pricing securities and increased call
volumes. The Company's planned responses to these scenarios include, but are
not limited to, reallocation of existing resources, use of alternative
processes and procedures, use of outside providers to supplement internal
capabilities and use of alternative suppliers.
Year 2000 Costs
Total Year 2000 project costs were $18 million (after tax) in 1999, $22 million
(after tax) in 1998, and were not material in 1997. The Company expects that
Year 2000 costs in 2000 will be immaterial. The Company expenses these costs as
incurred and funds these costs through operating cash flows.
See "Forward-Looking Information/Risk Factors" for factors that could cause
actual Year 2000 results to differ from the Company's expectations.
23
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Forward-Looking Information/Risk Factors
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides
a "safe harbor" for forward-looking statements, so long as (1) those statements
are identified as forward-looking, and (2) the statements are accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from those discussed in the
statement. We want to take advantage of these safe harbor provisions.
Certain information contained in this Management's Analysis of the Results of
Operations is forward-looking within the meaning of the 1995 Act or Securities
and Exchange Commission rules. This information includes, but is not limited to
the information that appears under the headings: (1) Overview--Outlook, (2)
General Account Investments--Risk Management and Market Sensitive
Instruments/Interest Rate Risk/Equity Price Risk and (3) "Year 2000." In
writing this Management's Analysis of the Results of Operations, we also used
the following words, or variations of these words and similar expressions,
where we intended to identify forward-looking statements:
<TABLE>
<S> <C>
o Expects o Plans
o Projects o Believes
o Anticipates o Seeks
o Intends o Estimates
</TABLE>
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of significant uncertainties and
other factors, many of which are outside our control, that could cause actual
results to differ materially from these statements. You should not put undue
reliance on these forward-looking statements. We disclaim any intention or
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise.
Set forth below are certain important risk factors that, in addition to general
economic conditions and other factors (some of which are discussed elsewhere in
this report), may affect these forward-looking statements and our businesses
generally.
Significant changes in financial markets could affect earnings. Significant
changes in financial markets could impact the level of assets under management
and administration in our businesses, and, in turn, our level of asset-based
fees in those businesses. For example, significant increases in interest rates
or decreases in equity markets would directly affect the level of assets under
management and administration and, in addition, 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 that we do not offer. Significant declines in the value
of investments also may affect our ability to pass through investment losses to
certain experience rated customers, whether due to triggering minimum
guarantees or other business reasons.
24
<PAGE>
Item 7. Management's Analysis of the Results of Operations. (continued)
Forward-Looking Information/Risk Factors (continued)
Decreases in ratings could affect assets under management. Decreases in the
claims-paying ratings of the Company could have the effect of decreasing new
sales and deposits and increasing withdrawals and surrenders in our businesses.
Such changes in sales and deposits, withdrawals and surrenders would adversely
affect the level of asset-based fees of our businesses. The claims-paying
ratings are periodically reviewed and subject to changes, in certain cases,
based on factors beyond our control.
Early withdrawal of assets could affect earnings. We incur up-front costs, such
as commissions, when we sell our annuity and other financial services products.
We generally defer these costs and recognize them over time. As a result, the
retention of assets under these products is an important component of
profitability. We generally seek to structure our products and sales to
encourage retention of assets under management and administration or recover
costs, through surrender charges, higher credited rates to customers if we
retain their assets for longer periods, paying renewal commissions, paying
service fees or other terms. However, if customers withdraw assets earlier than
we anticipated when we priced the products, it would adversely affect
profitability. We could also experience competitive pressure to lower margins.
Litigation can adversely affect us. Litigation also could adversely affect us,
both through costs of defense and adverse results or settlements. Refer to Note
14 of Notes to Consolidated Financial Statements and Legal Proceedings for
information regarding litigation.
Year 2000 related issues could affect operations and results of operations. As
of March 22, 2000, we have not experienced any material Year 2000 related
difficulties. However, our operations and results of operations could be
materially and adversely affected if we or any of our mission-critical
suppliers were to experience significant Year 2000 related difficulties.
Adverse changes in regulation could affect the operations of each of our
businesses. Each of our businesses is subject to comprehensive regulation.
These businesses could be adversely affected by:
o Increases in minimum capital and other financial viability requirements for
insurance operations;
o Changes in the taxation of insurance companies. For example, the President of
the United States' revenue proposal would require life insurance companies
to pay tax on certain income earned prior to 1984. Under current law, that
income is deferred for tax purposes. If this tax change, which currently is
just a proposal, were enacted, then we would recognize a one-time charge to
income in the amount of the tax; and
o Changes in the tax treatment of annuity, pension and other insurance products
as well as changes in capital gains tax rates. Certain of these changes,
should they occur, could affect the attractiveness to customers of our
financial services products.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
See "General Account Investments" in Management's Analysis of the Results of
Operations.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................................ 27
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997.................................................................. 28
Consolidated Balance Sheets as of December 31, 1999 and 1998..................... 29
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended
December 31, 1999, 1998 and 1997............................................... 30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997....................................................................... 31
Notes to Consolidated Financial Statements....................................... 32
</TABLE>
26
<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, 1999 and
1998, 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, 1999. 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
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Aetna Life
Insurance and Annuity Company and Subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 7, 2000
27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Premiums $ 107.5 $ 79.4 $ 69.1
Charges assessed against policyholders 388.3 324.3 262.0
Net investment income 886.3 871.8 881.7
Net realized capital (losses) gains (21.5) 10.4 29.7
Other income 129.7 100.2 96.8
-------- -------- --------
Total revenue 1,490.3 1,386.1 1,339.3
-------- -------- --------
Benefits and expenses:
Current and future benefits 746.2 714.4 720.4
Operating expenses:
Salaries and related benefits 153.0 141.0 133.5
Other 214.9 200.8 182.8
Amortization of deferred policy acquisition costs 104.9 91.2 66.3
-------- -------- --------
Total benefits and expenses 1,219.0 1,147.4 1,103.0
-------- -------- --------
Income from continuing operations before income
taxes 271.3 238.7 236.3
Income taxes 90.1 66.6 68.4
-------- -------- --------
Income from continuing operations 181.2 172.1 167.9
Discontinued operations, net of tax:
Income from operations -- 61.8 67.8
Amortization of deferred gain on sale 5.7 -- --
Immediate gain on sale -- 59.0 --
-------- -------- --------
Net income $ 186.9 $ 292.9 $ 235.7
======== ======== ========
</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.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- --------------
<S> <C> <C>
Assets
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,657.9 and $11,571.3) $11,410.1 $12,068.2
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $134.7 and $202.6) 130.9 203.3
Investment in affiliated mutual funds (cost: $63.5 and $96.8) 64.1 100.1
Common stock (cost: $6.7 and $1.0) 11.5 2.0
Short-term investments 74.2 48.9
Mortgage loans 6.7 12.7
Policy loans 314.0 292.2
Other investments 13.2 12.7
----------- -----------
Total investments 12,024.7 12,740.1
Cash and cash equivalents 693.3 628.3
Short-term investments under securities loan agreement 232.5 277.3
Accrued investment income 150.7 151.6
Premiums due and other receivables 298.3 61.1
Reinsurance recoverable 3,001.2 2,959.8
Deferred income taxes 150.4 114.3
Deferred policy acquisition costs 1,046.4 893.1
Other assets 96.5 70.4
Separate Accounts assets 38,692.6 29,430.2
----------- -----------
Total assets $56,386.6 $47,326.2
=========== ===========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,850.4 $ 3,815.9
Unpaid claims and claim expenses 27.3 18.8
Policyholders' funds left with the Company 11,121.7 11,305.6
----------- -----------
Total insurance reserve liabilities 14,999.4 15,140.3
Payables under securities loan agreement 232.5 277.3
Current income taxes 14.7 279.6
Other liabilities 1,063.0 805.5
Separate Accounts liabilities 38,692.6 29,430.2
----------- -----------
Total liabilities 55,002.2 45,932.9
----------- -----------
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 431.8 431.8
Accumulated other comprehensive (loss) income (44.8) 104.8
Retained earnings 994.6 853.9
----------- -----------
Total shareholder's equity 1,384.4 1,393.3
----------- -----------
Total liabilities and shareholder's equity $56,386.6 $47,326.2
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
29
<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)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,393.3 $1,852.8 $1,618.3
Comprehensive income:
Net income 186.9 292.9 235.7
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities
($(230.2), $18.2 $49.9, pretax)(1) (149.6) 11.9 32.4
---------- ---------- ----------
Total comprehensive income 37.3 304.8 268.1
---------- ---------- ----------
Capital contribution -- 9.3 (5.0)
Other changes 2.8 2.4 5.7
---------- ---------- ----------
Common stock dividends (49.0) (776.0) (34.3)
---------- ---------- ----------
Shareholder's equity, end of year $1,384.4 $1,393.3 $1,852.8
========== ========== ==========
</TABLE>
(1) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements
30
<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,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 186.9 $ 292.9 $ 235.7
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Net accretion of discount on investments (26.5) (29.5) (66.8)
Amortization of deferred gain on sale ( 5.7) -- --
Immediate gain on sale -- (59.0) --
Net realized capital losses (gains) 21.5 (11.1) (36.0)
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 0.9 11.4 ( 4.0)
Increase in premiums due and other receivables 23.3 (23.7) (30.0)
(Increase) decrease in policy loans (21.8) 177.4 (70.3)
Increase in deferred policy acquisition costs (153.3) (132.8) (155.8)
Decrease in reinsurance loan to affiliate -- 397.2 231.1
Net increase in universal life account balances 55.7 122.9 157.1
Decrease in other insurance reserve liabilities (28.6) (41.8) (120.3)
Decrease in other liabilities and other assets (53.9) (53.6) (74.0)
(Decrease) increase in income taxes (259.8) 106.4 (25.8)
---------- ---------- ----------
Net cash (used for) provided by operating activities (261.3) 756.7 40.9
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,890.1 6,790.2 5,311.4
Equity securities 111.2 150.1 103.1
Mortgage loans 6.1 0.3 0.2
Life Business -- 966.5 --
Investment maturities and collections of:
Debt securities available for sale 1,216.5 1,296.3 1,212.7
Short-term investments 80.6 135.3 108.4
Cost of investment purchases in:
Debt securities available for sale (7,099.7) (6,706.4) (6,734.8)
Equity securities (13.0) (125.7) (113.3)
Short-term investments (106.0) (83.9) (167.1)
Increase in property and equipment 5.7 9.0 10.0
Other, net 3.7 (2,725.9) --
---------- ---------- ----------
Net cash provided by (used for) investing activities 95.2 (294.2) (269.4)
---------- ---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 2,040.2 1,571.1 1,621.2
Withdrawals of investment contracts (1,680.8) (1,393.1) (1,256.3)
Capital contribution to Separate Account -- -- (25.0)
Return of capital from Separate Account -- 1.7 12.3
Capital contribution from HOLDCO -- 9.3 (5.0)
Dividends paid to shareholder (255.0) (570.0) (34.3)
Other, net 126.7 (34.3) 26.4
---------- ---------- ----------
Net cash provided by (used for) financing activities 231.1 (415.3) 339.3
---------- ---------- ----------
Net increase in cash and cash equivalents 65.0 47.2 110.8
Cash and cash equivalents, beginning of year 628.3 581.1 470.3
---------- ---------- ----------
Cash and cash equivalents, end of year $ 693.3 $ 628.3 $ 581.1
========== ========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 316.5 $ 60.5 $ 130.3
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company ("ALIAC") and its wholly owned
subsidiaries (collectively, the "Company") are providers of financial products
and services and investment management services in the United States. The
Company has two business segments: Financial Products and Investment Management
Services. On October 1, 1998, the Company sold its individual life insurance
business to Lincoln National Corporation ("Lincoln") and accordingly, it is now
classified as Discontinued Operations (refer to note 3).
Financial 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,
nonqualified annuity contracts and mutual funds. Annuity contracts may be
deferred or immediate ("payout annuities"). These products also include
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a menu
of investment options, including mutual funds (both ALIAC and nonaffiliated
mutual funds), variable and fixed investment options. Financial Products also
include investment advisory services and pension plan administrative services.
Investment Management Services provides: investment advisory services to
affiliated and unaffiliated institutional and retail clients on a
fee-for-service basis; underwriting services to the Aetna Series Fund Inc.;
distribution services for other Aetna products; and trustee, administrative,
and other fiduciary services to retirement plans requiring or otherwise
utilizing a trustee or custodian.
Discontinued Operations include universal life, variable universal life,
traditional whole life and term insurance.
Principles of Consolidation
The consolidated financial statements include ALIAC and its wholly owned
subsidiaries, Aetna Insurance Company of America ("AICA") and Aetna Investment
Adviser Holding Company, Inc. ("IA Holdco"). ALIAC 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"). On July 1, 1999, HOLDCO contributed IA Holdco to the Company
(refer to note 2).
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The contribution of IA Holdco to the
Company was accounted for in a manner similar to that of a pooling-of-interests
and accordingly, the Company's historical consolidated financial statements
have been restated to include the accounts and results of operations of IA
Holdco. Certain reclassifications have been made to 1998 and 1997 financial
information to conform to the 1999 presentation.
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
New Accounting Standards
Accounting by Insurance and Other Enterprises for Insurance-Related Assesments
As of January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments, issued by the American Institute of Certified Public Accountants
("AICPA"). This statement 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. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations, as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.
Future Application of Accounting Standards
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000. The Company does not expect the adoption
of this standard to have a material effect on its financial position and
results of operations.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard requires companies to record
all derivatives on the balance sheet as either assets or liabilities and
measure those instruments at fair value. The manner in which companies are to
record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, this standard is effective for the Company's financial
statements beginning January 1, 2001, with early adoption permitted. The impact
of FAS No. 133 on the Company's financial statements will vary based on certain
factors including future interpretative guidance from the FASB, the extent of
the Company's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. The Company is evaluating the impact of
adoption of this standard and currently does not believe that it will have a
material effect on its financial position and results of operations.
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
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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
Debt and equity securities are classified as available for sale and carried at
fair value. Securities are written down (as realized capital losses) for other
than temporary declines in value. Included in available-for-sale securities are
investments that support experience-rated products.
Experience-rated products are products where the customer, not the Company,
assumes investment (including realized capital gains and losses) and other
risks, subject to, among other things, minimum guarantees. As long as minimum
guarantees are not triggered, the effect of experience- rated products'
investment performance does not impact the Company's results of operations.
Realized and unrealized capital gains and losses on investments supporting
these products are reflected in policyholder's funds left with the Company.
Realized capital gains and losses on all other investments are reflected in the
Company's results of operations. Unrealized capital gains and losses on all
other investments are reflected in shareholders' equity, net of related income
taxes. Purchases and sales of debt and equity securities are recorded on the
trade date. Sales of mortgage loans are recorded on the closing date.
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. The Company does not accrue
interest on problem debt securities when management believes the collection of
interest is unlikely.
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value
of a loaned domestic security and 105% of the market value of a loaned foreign
security. The collateral is deposited by the borrower with a lending agent, and
retained and invested by the lending agent according to the Company's
guidelines to generate additional income. The market value of the loaned
securities is monitored on a daily basis with additional collateral obtained or
refunded as the market value of the loaned securities fluctuates. At December
31, 1999 and 1998, the Company loaned securities (which are reflected as
invested assets) with a fair value of approximately $232.5 million and $277.3
million, respectively.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have been seeded by the Company, and is carried at
fair value.
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Mortgage loans and policy loans are carried at unpaid principal balances, net
of impairment reserves.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of 91 days to one year,
are considered available for sale and are carried at fair value, which
approximates amortized cost.
The Company utilizes futures contracts for other than trading purposes in order
to hedge interest rate risk (i.e. market risk, refer to note 5.)
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts allocable to experience rated
contracts are deducted from capital gains and losses with an offsetting amount
reported in future policy benefits. Changes in the fair value of futures
contracts allocable to non-experienced-rated 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 or losses on the hedging instrument are reflected in
net realized capital gains or losses.
Included in common stock are warrants which represent the right to purchase
specific securities. Upon exercise, the cost of the warrants is added to the
basis of the securities purchased.
On occasion, the Company sells call options written on underlying securities
which are carried at fair value. Changes in fair value of these options are
recorded in net realized capital gains or losses.
Deferred Policy Acquisition Costs
Certain costs of acquiring certain 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 certain
annuity and pension 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 for annuity and pension contracts.)
Periodically, modifications may be made to deferred annuity contract features,
such as shortening the surrender charge period or waiving the surrender charge,
changing the mortality and expense fees, etc. Unamortized deferred policy
acquisition costs associated with these modified contracts are not written off,
but rather, continue to be associated with the original block of business to
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
which these costs were previously recorded. Such costs are amortized based on
revised estimates of expected gross profits based upon the contract after the
modification. Unamortized deferred policy acquisition costs related to deferred
annuity products were approximately $1.0 billion and $893 million as of
December 31, 1999 and 1998, respectively.
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 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 products are equal to cumulative deposits less withdrawals
and charges plus credited interest thereon. Reserves for traditional life
insurance contracts represent the present value of future benefits to be paid
to or on behalf of policyholders and related expenses less the present value of
future net premiums.
Reserves for immediate annuities with life contingent payouts 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
1.50% to 11.25% for all years presented. 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.
Because the sale of the domestic individual life insurance business was
substantially in the form of an indemnity reinsurance agreement, the Company
reported an addition to its reinsurance recoverable approximating the Company's
total individual life reserves at the sale date.
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 1.50%
to 11.25% for all years presented) net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest. These
reserves also include unrealized gains/losses related to FAS No. 115. 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.
Revenue Recognition
For 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
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
and are not recorded as revenue. 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 with
life contingencies begin under contracts that were initially investment
contracts, the accumulated balance in the account is treated as a single
premium for the purchase of an annuity and reflected as an offsetting amount in
both premiums and current and future benefits in the Consolidated Statements of
Income.
Separate Accounts
Separate Accounts assets and liabilities generally represent funds maintained
to meet specific investment objectives of contractholders who bear the
investment risk, subject, in some cases, to minimum guaranteed rates.
Investment income and investment gains and losses generally accrue directly to
such contractholders. The assets of each account are legally segregated and are
not subject to claims that arise out of any other business of the Company.
Separate Accounts assets supporting variable options under universal life and
annuity contracts are invested, as designated by the contractholder or
participant under a contract (who bears the investment risk subject, in limited
cases, to minimum guaranteed rates) in shares of mutual funds which are managed
by the Company, or other selected mutual funds not managed by the Company.
Separate Accounts assets are carried at fair value. At December 31, 1999 and
1998 , unrealized losses of $8.0 million and unrealized gains of $10.0 million,
respectively, after taxes, on assets supporting a guaranteed interest option
are reflected in shareholder's equity. Separate Accounts liabilities are
carried at fair value, except for those relating to the guaranteed interest
option. Reserves relating to the guaranteed interest option are maintained at
fund value and reflect interest credited at rates ranging from 3.70% to 12.00%
in 1999 and 3.00 to 8.10% in 1998.
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 Financial Statements (with the exception of realized and
unrealized capital gains and losses on the assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
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 recoverable deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets. Of the reinsurance recoverable on
the Consolidated Balance Sheets at December 31, 1999 and 1998, $2,989 million
and $2,946 million, respectively, is related to the reinsurance recoverable
from Lincoln arising from the sale of the domestic life insurance business.
(Refer to note 3)
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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.
2. Contribution of IA Holdco from HOLDCO
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The primary
operating subsidiary of IA Holdco is Aeltus Investment Management, Inc.
("Aeltus") which has two wholly-owned operating subsidiaries: Aeltus Capital,
Inc. ("ACI"), a broker dealer, and Aeltus Trust Company ("ATC"), a limited
purpose banking entity. Aeltus is a registered investment advisor under the
Investment Advisers Act of 1940 and provides investment advisory services to
institutional and retail clients on a fee-for-service basis. In addition,
Aeltus, through its ACI subsidiary, provides distribution services for certain
Aetna mutual funds and other Aetna products. Aeltus' ATC subsidiary provides
trustee, administrative, and other fiduciary services to retirement plans
requiring or otherwise utilizing a trustee or custodian.
3. Discontinued Operations-Individual Life Insurance
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction was generally in
the form of an indemnity reinsurance arrangement, under which Lincoln
contractually assumed from the Company certain policyholder liabilities and
obligations, although the Company remains directly obligated to policyholders.
Assets related to and supporting the life policies were transferred to Lincoln
and the Company recorded a reinsurance recoverable from Lincoln. The
transaction resulted in an after-tax gain on the sale of approximately $117
million, of which $57.7 million was deferred and was being recognized over
approximately 15 years. The remaining portion of the gain is recognized
immediately in net income and was largely attributed to access to the agency
sales force and brokerage distribution channel. Approximately $5.2 million
(after tax) of the deferred gain was recognized during 1999. During the fourth
quarter of 1999, the Company refined certain accrual and tax estimates which
had been established in connection with the recording of the deferred gain. As
a result, the deferred gain was increased by $12.9 million (after tax) to $65.4
million at December 31, 1999. The remaining deferred gain will be recognized
over approximately 14 years. The unamortized portion of the deferred gain is
presented in other liabilities on the Consolidated Balance Sheets.
The operating results of the domestic individual life insurance business are
presented as Discontinued Operations. All prior year income statement data has
been restated to reflect the presentation as Discontinued Operations. Revenues
for the individual life segment were $652.2 million and $620.4 million for 1998
and 1997. Premiums ceded and reinsurance recoveries made in 1999 totaled $476.5
million and $513.4 million, respectively, and in 1998 totaled $153.4 million
and $70.5 million, respectively.
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments
Debt securities available for sale as of December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 (Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government agencies
and authorities $ 1,087.2 $ 4.6 $ 22.1 $ 1,069.7
States, municipalities and political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 514.5 5.6 12.7 507.4
Financial 1,869.8 8.2 44.7 1,833.3
Transportation/capital goods 623.4 .9 39.0 585.3
Health care/consumer products 1,138.7 9.3 51.3 1,096.7
Natural resources 424.6 1.3 15.4 410.5
Other corporate securities 214.0 1.0 14.9 200.1
- ----------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 4,785.0 26.3 178.0 4,633.3
- ----------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 364.6 17.1 11.9 369.8
Utilities 196.4 7.3 .4 203.3
Other 748.2 8.9 34.3 722.8
- ----------------------------------------------------------------------------------------------------------------
Total foreign securities 1,309.2 33.3 46.6 1,295.9
- ----------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,055.9 19.8 17.6 1,058.1
Collateralized mortgage obligations 1,683.1 25.1 37.7 1,670.5
- ----------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 2,739.0 44.9 55.3 2,728.6
- ----------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed
securities 1,031.5 3.4 48.7 986.2
Other asset-backed securities 705.7 0.3 9.9 696.1
- ----------------------------------------------------------------------------------------------------------------
Total debt securities $ 11,657.9 $ 112.8 $ 360.6 $ 11,410.1
================================================================================================================
</TABLE>
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
Debt securities available for sale as of December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 (Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government agencies
and authorities $ 718.9 $ 60.4 $ 0.2 $ 779.1
States, municipalities and political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 615.2 29.8 4.1 640.9
Financial 2,260.2 94.6 5.6 2,349.2
Transportation/capital goods 580.8 33.0 1.1 612.7
Healthcare/consumer products 1,328.2 69.8 4.8 1,393.2
Natural resources 254.5 6.9 2.3 259.1
Other corporate securities 261.7 5.8 7.4 260.1
- ----------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 5,300.6 239.9 25.3 5,515.2
- ----------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 507.6 30.4 32.9 505.1
Utilities 147.0 32.4 -- 179.4
Other 511.2 14.9 1.8 524.3
- ----------------------------------------------------------------------------------------------------------------
Total foreign securities 1,165.8 77.7 34.7 1,208.8
- ----------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 671.9 38.4 2.9 707.4
Collateralized mortgage obligations 1,879.6 119.7 10.4 1,988.9
- ----------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 2,551.5 158.1 13.3 2,696.3
- ----------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed
securities 1,114.9 30.9 9.8 1,136.0
Other asset-backed securities 719.3 13.8 0.6 732.5
- ----------------------------------------------------------------------------------------------------------------
Total debt securities $ 11,571.3 $ 580.8 $ 83.9 $ 12,068.2
================================================================================================================
</TABLE>
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
At December 31, 1999 and 1998, net unrealized (depreciation) appreciation of
$(247.8) million and $496.9 million, respectively, on available-for-sale debt
securities included $(189.7) million and $355.8 million, respectively, related
to experience-rated contracts, which were not reflected in shareholder's equity
but in insurance reserves.
The amortized cost and fair value of debt securities for the year ended
December 31, 1999 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be restructured,
called, or prepaid.
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
- -------------------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 266.4 $ 266.5
After one year through five years 2,838.4 2,798.7
After five years through ten years 1,718.0 1,674.6
After ten years 2,351.4 2,250.1
Mortgage-backed securities 3,776.5 3,722.3
Other asset-backed securities 707.2 697.9
- -------------------------------------------------------------------------
Total $ 11,657.9 $ 11,410.1
=========================================================================
</TABLE>
At December 31, 1999 and 1998, debt securities carried at fair value of $8.7
million and $8.8 million, respectively, were on deposit as required by
regulatory authorities.
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, 1999.
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------- --------------------------
Amortized Fair Amortized Fair
(Millions) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 1,683.1 $ 1,670.5 $ 1,879.6 $ 1,988.9
=====================================================================================================
Percentage of total:
Supporting experience rated products 80.7% 81.7%
Supporting remaining products 19.3% 18.3%
- -----------------------------------------------------------------------------------------------------
100.0% 100.0%
=====================================================================================================
</TABLE>
(1) At December 31, 1999 and 1998, approximately 81% and 66%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, FHLMC.
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for CMO's that are not agency-backed,
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, 1999 and 1998,
approximately 1% and 2%, respectively, of the Company's CMO holdings were
invested in types of CMOs which are subject to more prepayment and extension
risk than traditional CMOs (such as interest- or principal-only strips).
Investments in equity securities available for sale as of December 31 were as
follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ----------------------------------------------------
<S> <C> <C>
Amortized Cost $ 204.9 $ 300.4
Gross unrealized gains 12.5 13.1
Gross unrealized losses 10.9 8.1
- ----------------------------------------------------
Fair Value $ 206.5 $ 305.4
====================================================
</TABLE>
5. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ----------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 6.7 $ 6.8 $ 12.7 $ 12.3
Liabilities:
Investment contract liabilities:
With a fixed maturity 1,055.3 991.0 1,063.9 984.3
Without a fixed maturity 10,066.4 9,452.8 10,241.7 9,686.2
- ------------------------------------------------------------------------------------------
</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.
42
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. 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.
Off-Balance-Sheet and Other Financial Instruments
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.
Futures Contracts:
Futures contracts are used to manage interest rate risk in the Company's bond
portfolio. Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
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. The notional amounts, carrying values and estimated fair
values of the Company's open treasury futures as of December 31, 1998 were
$250.9 million, $.1 million, and $.1 million, respectively. There were no open
treasury futures as of December 31, 1999.
Warrants:
Included in common stocks are warrants which are instruments giving the Company
the right, but not the obligation to buy a security at a given price during a
specified period. The carrying values and estimated fair values of the
Company's warrants to purchase equity securities as of December 31, 1999 were
both $6.5 million. The carrying values and estimated fair values as of December
31, 1998 were both $1.5 million.
Options:
During 1999, the Company earned $0.4 million of investment income for writing
call options on underlying securities. The Company did not write any call
options in 1998. As of December 31, 1999 and 1998, there were no option
contracts outstanding.
43
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Financial Instruments (continued)
Debt Instruments with Derivative Characteristics:
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,
1999 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Residential collateralized mortgage obligations $ 1,683.1 $ 1,670.5
Principal-only strips (included above) 9.2 9.7
Interest-only strips (included above) 10.7 14.6
Other structured securities with derivative
characteristics (1) 81.7 67.2
- --------------------------------------------------------------------------------
</TABLE>
(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.
6. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 823.3 $ 798.8 $ 814.6
Nonredeemable preferred stock 17.1 18.4 12.9
Investment in affiliated mutual funds 2.4 6.6 3.8
Mortgage loans 1.1 0.6 0.3
Policy loans 7.7 7.2 5.7
Reinsurance loan to affiliate -- 2.3 5.5
Cash equivalents 39.0 46.1 40.2
Other 15.3 13.2 16.1
- --------------------------------------------------------------------------------
Gross investment income 905.9 893.2 899.1
Less: investment expenses (19.6) (21.4) (17.4)
- --------------------------------------------------------------------------------
Net investment income $ 886.3 $ 871.8 $ 881.7
================================================================================
</TABLE>
Net investment income includes amounts allocable to experience rated
contractholders of $659.6 million, $655.6 million and $673.8 million for the
years ended December 31, 1999, 1998 and 1997, respectively. Interest credited
to contractholders is included in current and future benefits.
44
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. Dividend Restrictions and Shareholder's Equity
The Company paid $255.0 million, $570.0 million and $34.3 million in cash
dividends to HOLDCO in 1999,1998 and 1997, respectively. Of the $255.0 million
paid in 1999, $206 million was accrued for in 1998. Of the $776.0 million
dividends paid or accrued in 1998, $756.0 million (all of which was approved by
the Insurance Commissioner of the State of Connecticut) was attributable to
proceeds from the sale of the domestic individual life insurance business.
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 $133.9
million, $148.1 million and $80.5 million for the years ended December 31,
1999, 1998 and 1997, respectively. Statutory capital and surplus was $845.2
million and $773.0 million as of December 31, 1999 and 1998, respectively.
As of December 31, 1999, 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.
8. 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 (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ (23.6) $ 7.4 $ 21.1
Equity securities 2.1 3.0 8.6
- ----------------------------------------------------------------------------------
Pretax realized capital (losses) gains $ (21.5) $ 10.4 $ 29.7
==================================================================================
After-tax realized capital (losses) gains $ (14.0) $ 7.3 $ 19.2
==================================================================================
</TABLE>
Net realized capital (losses) gains of $(36.7) million, $15.0 million and $83.7
million for 1999, 1998 and 1997, respectively, allocable to experience rated
contracts, were deducted from net realized capital gains and an offsetting
amount was reflected in Policyholders' funds left with the Company. Net
unamortized gains allocable to experienced-rated contractholders were $68.5
million and $118.6 million at December 31, 1999 and 1998, respectively.
45
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Capital Gains and Losses on Investment Operations (continued)
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $ 5,890.1 $ 6,790.2 $ 5,311.3
Gross gains 10.5 98.8 23.8
Gross losses 34.1 91.4 2.7
- ------------------------------------------------------------------
</TABLE>
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities,
excluding those related to experience-rated contractholders) were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ (199.2) $ 18.9 $ 44.3
Equity securities (3.4) (16.1) 5.6
Other (27.6) 15.4 --
- -------------------------------------------------------------------------------------
Subtotal (230.2) 18.2 49.9
(Decrease) increase in deferred income taxes
(Refer to note 9) (80.6) 6.3 17.5
- -------------------------------------------------------------------------------------
Net changes in accumulated other
comprehensive (loss) income $ (149.6) $ 11.9 $ 32.4
=====================================================================================
</TABLE>
Net unrealized capital (losses) gains allocable to experience-rated contracts
of $(189.7) and $355.8 million at December 31, 1999 and December 31, 1998
respectively, are reflected on the Consolidated Balance Sheets in
Policyholders' funds left with the Company and are not included in
shareholder's equity.
46
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Capital Gains and Losses on Investment Operations (continued)
Shareholder's equity included the following accumulated other comprehensive
(loss) income, which is net of amounts allocable to experience-rated
contractholders, at December 31:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Gross unrealized capital gains $ 18.6 $ 157.3 $ 140.6
Gross unrealized capital losses (76.7) (16.2) (18.4)
- -----------------------------------------------------------------------------------
(58.1) 141.1 122.2
- -----------------------------------------------------------------------------------
Equity securities:
Gross unrealized capital gains 12.5 13.1 21.2
Gross unrealized capital losses (10.9) (8.1) (0.1)
- -----------------------------------------------------------------------------------
1.6 5.0 21.1
- -----------------------------------------------------------------------------------
Other:
Gross unrealized capital gains 1.3 17.1 --
Gross unrealized capital losses (13.7) (1.8) --
- -----------------------------------------------------------------------------------
(12.4) 15.3 --
- -----------------------------------------------------------------------------------
Deferred income taxes (Refer to note 9) (24.1) 56.6 50.4
- -----------------------------------------------------------------------------------
Net accumulated other comprehensive (loss)
income $ (44.8) $ 104.8 $ 92.9
===================================================================================
</TABLE>
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>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising
during the year (1) $ (146.3) $ 38.3 $ 99.2
Less: reclassification adjustment for gains and
other items included in net income (2) 3.3 26.4 66.8
========================================================================================
Net unrealized (losses) gains on securities $ (149.6) $ 11.9 $ 32.4
========================================================================================
</TABLE>
(1) Pretax unrealized holding (losses) gains arising during the year were
$(225.2) million, $58.8 million and $152.7 million for 1999, 1998 and
1997, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $5.0 million, $40.6 million and $102.8 million for 1999,
1998 and 1997, respectively.
47
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company is included in the consolidated federal income tax return, the
combined New York return, and Illinois unitary state income tax return of
Aetna. Aetna allocates to each member, as permitted under a tax sharing
arrangement, an amount approximating the tax it would have incurred were it not
a member of the consolidated group, and credits the member for the use of its
tax saving attributes in the consolidated federal income tax return.
Income taxes from continuing operations consist of the following:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes (benefits):
Federal $ 63.8 $ 257.4 $ 40.0
State 2.5 3.0 3.3
Net realized capital (losses) gains (20.1) 16.8 39.1
- -----------------------------------------------------------------------------
46.2 277.2 82.4
- -----------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 31.3 (196.7) 14.3
Net realized capital gains (losses) 12.6 (13.9) (28.3)
- -----------------------------------------------------------------------------
43.9 (210.6) (14.0)
- -----------------------------------------------------------------------------
Total $ 90.1 $ 66.6 $ 68.4
=============================================================================
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes for
the following reasons:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations before
income taxes $ 271.3 $ 238.7 $ 236.3
Tax rate 35% 35% 35%
- ------------------------------------------------------------------------------------
Application of the tax rate 95.0 83.5 82.7
Tax effect of:
State income tax, net of federal benefit 1.6 2.0 2.1
Excludable dividends (6.1) (17.1) (15.6)
Other, net (0.4) (1.8) (0.8)
- ------------------------------------------------------------------------------------
Income taxes $ 90.1 $ 66.6 $ 68.4
=====================================================================================
</TABLE>
48
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. 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:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 323.1 $ 324.1
Unrealized gains allocable to experience rated contracts -- 124.5
Net unrealized capital losses 90.5 --
Investment losses 1.3 --
Postretirement benefits other than pensions 24.8 27.6
Deferred compensation 42.5 37.3
Sale of individual life 44.9 48.9
Other 20.2 20.4
- ---------------------------------------------------------------------------------------
Total gross assets 547.3 582.8
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 324.0 282.9
Market discount 6.5 4.5
Net unrealized capital gains -- 181.1
Unrealized losses allocable to experience rated contracts 66.4 --
- ---------------------------------------------------------------------------------------
Total gross liabilities 396.9 468.5
- ---------------------------------------------------------------------------------------
Net deferred tax asset $ 150.4 $ 114.3
=======================================================================================
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes.
Management believes that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset. The Company expects
sufficient taxable income in the future to realize the net deferred tax asset
because of the Company's long-term history of having taxable income, which is
projected to continue.
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, 1999. This amount would be taxed
only under certain conditions. No income taxes have been provided on this
amount since management believes under current tax law the conditions under
which such taxes would become payable are remote.
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1994. 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 1995 through 1997.
49
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Benefit Plans
Aetna has noncontributory defined benefit pension plans covering substantially
all employees. 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 (September 30), fair value of plan assets exceed projected
benefit obligations. 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 $6.6 million and $3.0 million for the years ended December
31, 1999 and 1997, respectively. There were no charges in 1998 due to favorable
plan asset performance.
Effective January 1, 1999, the Company, in conjunction with Aetna, changed the
formula from the previous final average pay formula to a cash balance formula,
which will credit employees annually with an amount equal to a percentage of
eligible pay based on age and years of service as well as an interest credit
based on individual account balances. The formula also provides for a
transition period until December 1, 2006, which allows certain employees to
receive vested benefits at the higher of the final average pay or cash balance
formula. The changing of this formula did not have a material effect on the
Company's results of operations, liquidity or financial condition.
In addition to providing pension benefits, Aetna currently provides certain
health care and life insurance benefits for retired employees. A comprehensive
medical and dental plan is offered to all full-time employees retiring at age
45 with 10 years of service. The company provides subsidized benefits to
employees whose sum of age and service is at least equal to 65. There is a cap
on the portion of the cost paid by the Company relating to medical and dental
benefits. The costs to the Company associated with the Aetna postretirement
plans for 1999, 1998 and 1997 were $2.1 million, $1.0 million and $2.4 million,
respectively.
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 (September 30), accumulated
benefit obligations exceeded fair value of plan assets.
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 1999, 1998 and
1997 were $2.1 million, $1.4 million and $0.6 million, respectively.
Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested
in common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $7.7 million, $5.3 million and $5.0 million in 1999, 1998 and 1997,
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 employees. Executive, middle
50
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Benefit Plans (continued)
management and non-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,
from time to time, 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 1999, 1998 and 1997, were $0.4 million, $4.2 million and
$2.9 million, respectively.
11. Related Party Transactions
Investment Advisory and Other Fees
The Company serves as investment advisor to the Aetna managed mutual funds and
variable funds (collectively, the Funds). Under the advisory agreements, the
Funds pay the Company a daily fee which, on an annual basis, ranged, depending
on the fund, from 0.25% to 0.95% of their average daily net assets. The Company
is also compensated by the Separate Accounts (variable funds) for bearing
mortality and expense risks pertaining to variable life and annuity contracts.
Under the insurance and annuity contracts, the Separate Accounts pay the
Company a daily fee which, on an annual basis is, depending on the product, up
to 2.15% of their average daily net assets. The amount of compensation and fees
received from the Funds and Separate Accounts, included in charges assessed
against policyholders and other income, amounted to $424.2 million, $349.0
million and $271.2 million in 1999, 1998 and 1997, respectively.
Reinsurance Transactions
Effective December 31, 1988, the Company entered into a modified coinsurance
reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna
Life"), an affiliate company, 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. Effective January 1, 1997, this
agreement was amended to transition (based on underlying investment rollover in
Aetna Life) from a modified coinsurance arrangement to a coinsurance agreement.
As a result of this change, reserves were ceded to the Company from Aetna Life
as investment rollover occurred. Effective October 1, 1998, this agreement was
fully transitioned to a coinsurance arrangement and this business along with
the Company's direct individual non-participation life insurance business was
sold to Lincoln. (Refer to note 3).
The operating results of the domestic individual life business are presented as
Discontinued Operations. Premiums of $17.9 million, $336.3 million and $176.7
million and current and future benefits of $8.6 million, $341.1 million and
$183.9 million, were assumed in 1999, 1998 and 1997, respectively. Investment
income of $17.0 million and $37.5 million was generated from a reinsurance loan
to affiliate for the years ended December 31, 1998 and 1997, respectively.
Prior to the sale of the domestic individual life insurance business to Lincoln
on October 1, 1998, the Company's retention limit per individual life was $2.0
million and amounts in excess of this
51
<PAGE>
Notes to Consolidated Financial Statements (continued)
11. Related Party Transactions (continued)
limit, up to a maximum of $8.0 million on any new individual life business was
reinsured with Aetna Life on a yearly renewable term basis. Premium amounts
related to this agreement were $2.0 million and $5.9 million for 1998 and 1997,
respectively. This agreement was terminated effective October 1, 1998.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of its
participating life insurance, on a yearly renewable term basis. Premium amounts
related to this agreement were $4.4 million in1998. The business assumed under
this agreement was retroceded to Lincoln effective October 1, 1998.
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 is also
responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $115.3 million and $87.8
million were maintained for this contract as of December 31, 1999 and 1998,
respectively.
Capital Transactions
The Company received no capital contributions in 1999. In 1998, the Company
received a capital contribution of $9.3 million in cash from HOLDCO. In 1997,
the Company returned capital of $5.0 million to HOLDCO.
Refer to note 7 for dividends paid to HOLDCO.
Other
Premiums due and other receivables include $10.5 million and $1.6 million due
from affiliates in 1999 and 1998, respectively. Other liabilities include $1.9
million and $2.2 million due to affiliates for 1999 and 1998, respectively.
Aetna transferred to the Company $0.8 million, $1.7 million and $3.8 million
based on its decision not to settle state tax liabilities for the years 1999,
1998 and 1997, respectively, as permitted under the tax sharing arrangement,
which is reported in other changes in retained earnings.
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.
12. Reinsurance
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction is generally in the
form of an indemnity reinsurance arrangement, under which Lincoln contractually
assumed from the Company certain policyholder liabilities and obligations,
although the Company remains directly obligated to policyholders. (Refer to
note 3)
52
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Reinsurance (continued)
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 was reinsured externally. Beginning November 1, 1997, 90% of
new business written on these products was reinsured externally. Effective
October 1, 1998 this agreement was assigned from the third party reinsurer to
Lincoln.
The following table includes premium amounts ceded/assumed as discussed in note
11.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
(Millions) Amount Companies Companies Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
----
Premiums:
Discontinued Operations $ 460.1 $ 478.0 $ 17.9 $ --
Accident and Health Insurance 33.4 33.4 -- --
Annuities 111.5 4.9 .9 107.5
- ---------------------------------------------------------------------------------------
Total earned premiums $ 605.0 $ 516.3 $ 18.8 $ 107.5
=======================================================================================
1998
----
Premiums:
Discontinued Operations $ 166.8 $ 165.4 $ 340.6 $ 342.0
Accident and Health Insurance 16.3 16.3 -- --
Annuities 80.8 2.9 1.5 79.4
- ---------------------------------------------------------------------------------------
Total earned premiums $ 263.9 $ 184.6 $ 342.1 $ 421.4
=======================================================================================
1997
----
Premiums:
Discontinued Operations $ 35.7 $ 15.1 $ 177.4 $ 198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
- ---------------------------------------------------------------------------------------
Total earned premiums $ 109.2 $ 20.7 $ 178.6 $ 267.1
=======================================================================================
</TABLE>
53
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Segment Information
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
Investment
Year ended December 31, Financial Management Discontinued
1999 (Millions) Products (1) Services (1) Operations (1) Other (1) Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 551.1 $ 118.3 -- $ (43.9) $ 625.5
Net investment income 881.5 1.5 -- 3.3 886.3
- ---------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital losses $ 1,432.6 $ 119.8 -- $ (40.6) $ 1,511.8
=========================================================================================================
Amortization of deferred policy
acquisition costs $ 93.4 $ 11.5 $ 104.9
- ---------------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 87.0 $ 16.5 $ (13.4) $ 90.1
- ---------------------------------------------------------------------------------------------------------
Operating earnings (losses) (2) $ 192.1 $ 28.1 -- $ (7.5) $ 212.7
Other item (3) -- -- (17.5) (17.5)
Net realized capital losses,
net of tax (14.0) -- -- (14.0)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 178.1 28.1 -- (25.0) 181.2
Discontinued operations,
net of tax:
Amortization of deferred
gain on sale -- $ 5.7 -- 5.7
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 178.1 $ 28.1 $ 5.7 $ (25.0) $ 186.9
=========================================================================================================
Segment assets $ 53,324.4 $ 73.2 $ 2,989.0 $ 56,386.6
- ---------------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (4) -- -- -- $ 5.7 $ 5.7
- ---------------------------------------------------------------------------------------------------------
Balance of long-lived assets -- -- -- $ 16.5 $ 16.5
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial Products include: deferred and immediate annuity contracts,
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment Management
Services include the following services: investment advisory to affiliated
and unaffiliated institutional and retail clients, underwriting,
distribution for Company products and trustee, administrative and other
fiduciary services to retirement plans. (Refer to notes 1 and 2.)
Discontinued operations include life insurance products. (Refer to note
3.) Other includes consolidating adjustments and Year 2000 costs.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(3) Other item excluded from operating earnings represents after-tax Year 2000
costs of $17.5 million
(4) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
54
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Investment
Year ended December 31, Financial Management Discontinued
1998 (Millions) Products (1) Services (1) Operations (1) Other (1) Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 445.6 $ 96.7 -- $ (38.4) $ 503.9
Net investment income 865.3 1.5 -- 5.0 871.8
- --------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 1,310.9 $ 98.2 -- $ (33.4) $ 1,375.7
========================================================================================================
Amortization of deferred policy
acquisition costs $ 80.3 -- -- $ 10.9 $ 91.2
- --------------------------------------------------------------------------------------------------------
Income Taxes (benefits) $ 67.7 $ 14.7 -- $ (15.8) $ 66.6
- --------------------------------- ---------- ------- -- ------- ----------
Operating earnings (2) $ 170.3 $ 24.0 -- $ (7.1) $ 187.2
Other item (3) -- -- -- (22.4) (22.4)
Net realized capital gains,
net of tax 7.3 -- -- -- 7.3
- --------------------------------------------------------------------------------------------------------
Income from continuing
operations 177.6 24.0 -- (29.5) 172.1
Discontinued operations,
net of tax:
Income from operations -- -- $ 61.8 -- 61.8
Immediate gain on sale -- -- 59.0 -- 59.0
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 177.6 $ 24.0 $ 120.8 $ (29.5) $ 292.9
========================================================================================================
Segment assets $ 44,366.4 $ 13.4 $ 2,946.4 $ 47,326.2
- --------------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (4) -- -- -- $ 9.0 $ 9.0
- --------------------------------------------------------------------------------------------------------
Balance of long-lived assets $ 14.8 $ 14.8
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial products include: deferred and immediate annuity contracts,
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment Management
Services include the following services: investment advisory to affiliated
and unaffiliated institutional and retail clients, underwriting,
distribution for Company products and trustee, administrative and other
fiduciary services to retirement plans. (Refer to notes 1 and 2.)
Discontinued operations include life insurance products. (Refer to note
3.) Other includes consolidating adjustments and Year 2000 costs.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(3) Other item excluded from operating earnings represents after-tax Year 2000
costs of $22.4 million
(4) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
55
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Investment
Year ended December 31, Financial Management Discontinued
1997 (Millions) Products (1) Services (1) Operations (1) Other (1) Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 371.5 $80.3 -- $(23.9) $ 427.9
Net investment income 876.7 1.4 -- 3.6 881.7
- --------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 1,248.2 $81.7 -- $(20.3) $ 1,309.6
========================================================================================================
Amortization of deferred policy
acquisition costs $ 57.2 -- -- $ 9.1 $ 66.3
- --------------------------------------------------------------------------------------------------------
Income Taxes (benefits) $ 59.7 $11.9 -- $ (3.2) $ 68.4
- --------------------------------------------------------------------------------------------------------
Operating earnings (2) $ 134.9 $19.7 -- $ (5.9) $ 148.7
Net realized capital gains,
net of tax 19.2 -- -- -- 19.2
- --------------------------------------------------------------------------------------------------------
Income from continuing
operations 154.1 $19.7 -- (5.9) 167.9
Discontinued operations,
net of tax:
Income from operations -- -- $ 67.8 -- 67.8
Deferred gain on sale -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 154.1 $19.7 $ 67.8 $ (5.9) $ 235.7
========================================================================================================
Segment assets $ 36,379.5 $17.9 $ 3,792.5 -- $ 40,189.9
- --------------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (3) -- -- -- $ 10.0 $ 10.0
- --------------------------------------------------------------------------------------------------------
Balance of long-lived assets $ 12.7 $ 12.7
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial products include: deferred and immediate annuity contracts,
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment Management
Services include the following services: investment advisory to affiliated
and unaffiliated institutional and retail clients, underwriting,
distribution for Company products and trustee, administrative and other
fiduciary services to retirement plans. (Refer to notes 1 and 2.)
Discontinued operations include life insurance products. (Refer to note
3.) Other includes consolidating adjustments and Year 2000 costs.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(3) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
56
<PAGE>
Notes to Consolidated Financial Statements (continued)
14. 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 31,1998, the Company had off-balance
sheet commitments to purchase investments of $68.7 million with an estimated
fair value of $68.9 million. At December 31, 1999, there were no off-balance
sheet commitments.
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.
57
<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 26.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 64.
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 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, as amended September 17, 1997.
Incorporated herein by reference to post-effective amendment No. 12
to Registration Statement on Form N-4 (File No. 33-91846) as filed
on October 30, 1997.
58
<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 by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on July
29, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on
February 12, 1997.
Incorporated 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.
Incorporated by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-4 (File No. 33-75986), as filed on April
12, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on
February 4, 1999.
Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 33-75988), as filed on April
15, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-81216), as filed on April
7, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on April
15, 1996.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on
August 6, 1996.
Incorporated by reference to Registration Statement on Form N-4 (File No.
333-01107), as filed on February 21, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75982), as filed on
February 20, 1997.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-75992), as filed on
February 13, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75974), as filed on
February 28, 1997.
Incorporated by reference to Post-Effective Amendment No. 15 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on April
17, 1996.
59
<PAGE>
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K. (continued)
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on April
17, 1998.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75982), as filed on April
22, 1996.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on August
19, 1997.
Incorporated by reference to Registration Statement on Form N-4 (File No.
333-56297), as filed on June 8, 1998.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on August
16, 1995.
Incorporated by reference to Post-Effective Amendment No. 32 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
December 16, 1997.
Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
September 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 21, 1997.
Incorporated by reference to Post-Effective Amendment No. 35 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on April
17, 1998.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 33-87932), as filed on
September 15, 1995.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on April
17, 1998.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on April
22, 1997.
Incorporated by reference to Post-Effective Amendment No. 21 to
Registration Statement on Form N-4 (File No. 33-75996), as filed on
February 16, 2000.
Incorporated by reference to Post-Effective Amendment No. 11 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on
February 4, 1999.
Incorporated by reference to Post-Effective Amendment No. 13 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on April
7, 1999.
60
<PAGE>
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K. (continued)
Incorporated by reference to Post-Effective Amendment No. 37 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on April
9, 1999.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 333-87305), as filed on
December 13, 1999.
Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 333-56297), as filed on
February 16, 1999.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 333-56297), as filed on June
25, 1999.
Incorporated by reference to Post-Effective Amendment No. 11 to
Registration Statement on Form N-4 (File No. 333-56297), as filed on
November 23, 1999.
Incorporated by reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-4 (File No. 33-75988), as filed on August
24, 1999.
Incorporated by reference to Post-Effective Amendment No. 17 to
Registration Statement on Form N-4 (File No. 33-75996), as filed on April
7, 1999.
Incorporated by reference to Post-Effective Amendment No. 19 to
Registration Statement on From N-4 (File No. 333-01107), as filed on
February 16, 2000.
10 Material Contracts (Management contracts / compensatory plans or
arrangements)
The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to
Exhibit 10.6 to Aetna Inc.'s Registration Statement on Form S-4
(Registration No. 333-5791) filed on June 12, 1996.*
The Aetna Services, Inc. Supplemental Incentive Savings Plan Amended and
Restated as of January 1, 1999, incorporated herein by reference to
Exhibit 10.2 to Aetna Inc.'s Form 10-Q filed on July 29, 1999.*
The Aetna Services, Inc. Supplemental Pension Benefit Plan Amended and
Restated as of January 1, 1999, incorporated herein by reference to
Exhibit 10.1 to Aetna Inc.'s Form 10-Q filed on July 29, 1999. *
The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference
to Exhibit 10.5 to Aetna Inc.'s Registration Statement on Form S-4
(Registration Statement No. 333-5791) filed on June 12, 1996.*
The Aetna Inc. 1998 Stock Incentive Plan, incorporated herein by reference
to Exhibit 4.4 to Aetna Inc.'s Registration Statement on Form S-8
(Registration Statement No. 333-68881) filed on December 14, 1998.*
61
<PAGE>
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K. (continued)
Employment Agreement, dated as of December 19, 1995 between Aetna
Services, Inc. and Daniel P. Kearney, incorporated herein by reference to
Aetna Services, Inc.'s 1995 Form 10-K*
Amendment dated as of July 22, 1996 to Employment Agreement dated as of
December 19, 1995 between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6,
1997*
Amendment dated as of September 8, 1997 to Employment Agreement dated as
of December 19, 1995 between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on
November 4, 1997*
Letter Agreement, dated as of April 6, 1999, between Aetna Inc. and Thomas
J. McInerney, incorporated herein by reference to Exhibit 10.4 to Aetna
Inc.'s Form 10-Q filed on July 29, 1999.*
Description of certain arrangements not embodied in formal documents, as
described under the heading "Executive Compensation", are incorporated
herein by reference to Aetna Inc.'s 2000 Proxy Statement.
Amended and Restated Asset Purchase Agreement by and among Aetna Life
Insurance Company, Aetna Life Insurance and Annuity Company, The Lincoln
National Life Insurance Company and Lincoln Life & Annuity Company of New
York, dated May 21, 1998, incorporated herein by reference to the
Company's Form 10-Q filed on August 8, 1998. (The Company will provide to
the Securities and Exchange Commission a copy of omitted schedules or
similar attachments upon request.)
* Management contract or compensatory plan or arrangement
62
<PAGE>
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K. (continued)
21 Subsidiaries of the Registrant
Incorporated by reference to Exhibit Item 24 of Post-Effective Amendment
No.38 to Registration Statement on Form N-1A (File Number 33-41694), as
filed on February 23, 2000.
24 Power of Attorney
(Filed herein immediately after Signature page.)
27 Financial Data Schedules
Exhibits, other than these listed, are omitted because they are not
required or not applicable.
(b) Reports on Form 8-K.
None.
63
<PAGE>
Index to Consolidated Financial Statement Schedules
<TABLE>
<S> <C> <C>
Page
----
Independent Auditors' Report ..................................... 65
I. Summary of Investments--Other than Investments in Affiliates as
of December 31, 1999 .......................................... 66
III. Supplementary Insurance Information as of and for the years
ended December 31, 1999, 1998 and 1997 ........................ 67
</TABLE>
Schedules other than those listed above are omitted because they are not
required or are not applicable.
64
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
Under date of February 7, 2000, we reported on the consolidated balance sheets
of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31,
1999 and 1998, 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, 1999, as included herein. In connection with our
audits of the aforementioned consolidated financial statements, we also 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 LLP
Hartford, Connecticut
February 7, 2000
65
<PAGE>
Schedule I
Summary of Investments--Other than Investments in Affiliates
As of December 31, 1999
(in millions)
<TABLE>
<CAPTION>
Amount at
Which Shown
in the
Type of Investment Cost Value* Balance Sheet
------------------ ---- ------ -------------
Debt Securities:
<S> <C> <C> <C>
U.S. government and government
agencies and authorities $ 1,087.2 $ 1,069.7 $ 1,069.7
States, municipalities and political
subdivisions 0.3 0.3 0.3
U.S. corporate securities 4,785.0 4,633.3 4,633.3
Foreign securities (1) 1,309.2 1,295.9 1,295.9
Residential mortgage-backed securities 2,739.0 2,728.6 2,728.6
Commercial/Multifamily mortgage-
backed securities 1,031.5 986.2 986.2
Other asset-backed securities 705.7 696.1 696.1
---------- ---------- ----------
Total debt securities 11,657.9 11,410.1 11,410.1
---------- ---------- ----------
Equity securities:
Non-redeemable preferred stock 134.7 130.9 130.9
Investment in affiliated mutual funds 63.5 64.1 64.1
Common stock 6.7 11.5 11.5
---------- ---------- ----------
Total equity securities 204.9 206.5 206.5
---------- ---------- ----------
Short-term investments 74.2 74.2 74.2
Mortgage loans 6.7 6.8 6.7
Policy loans 314.0 314.0 314.0
Other investments 13.2 13.2 13.2
---------- ---------- ----------
Total investments $ 12,270.9 $ 12,024.8 $ 12,024.7
========== ========== ==========
</TABLE>
* See Notes 1 and 4 of Notes to 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.
66
<PAGE>
Schedule III
Supplementary Insurance Information
As of and for the years ended December 31, 1999, 1998 and 1997
(in millions)
<TABLE>
<CAPTION>
Policy-
Deferred Unpaid holders'
policy Future claims funds left
acquisition policy and claim Unearned with the
Segment costs benefits expenses premiums (1) Company
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Financial Products $ 1,080.8 $ 889.8 $ 7.4 $ 1.0 $ 11,112.2
Investment Management
Services -- -- -- -- --
Other (2) ( 34.4) -- -- -- --
Discontinued
Operations (3) -- 2,959.6 19.9 -- 9.5
- ----------------------------------------------------------------------------------------------------
Total $ 1,046.4 $ 3,849.4 $ 27.3 $ 1.0 $ 11,121.7
====================================================================================================
1998
Financial Products $ 916.0 $ 878.0 $ 0.3 $ 1.1 $ 11,295.1
Investment Management
Services -- -- -- -- --
Other (2) ( 22.9) -- -- -- --
Discontinued
Operations (3) -- 2,936.8 18.5 -- 10.5
- ----------------------------------------------------------------------------------------------------
Total $ 893.1 $ 3,814.8 $ 18.8 $ 1.1 $ 11,305.6
====================================================================================================
1997
Financial Products $ 824.9 $ 948.0 $ 0.8 $ 1.1 $ 11,116.8
Investment Management
Services -- -- -- -- --
Other (2) ( 11.7) -- -- -- --
Discontinued
Operations (3) 855.0 2,814.6 37.2 -- 26.7
- ----------------------------------------------------------------------------------------------------
Total $ 1,668.2 $ 3,762.6 $ 38.0 $ 1.1 $ 11,143.5
====================================================================================================
</TABLE>
Notes to Schedule III:
(1) Included in future policy benefits on the Company's Consolidated Balance
Sheets.
(2) Includes consolidating adjustments.
(3) Domestic individual life insurance business.
67
<PAGE>
Schedule III (continued)
Supplementary Insurance Information
As of and for the years ended December 31, 1999, 1998 and 1997
(in millions)
<TABLE>
<CAPTION>
Amortization
of deferred
Net Current policy Other
Premium investment Other and future acquisition Operating
Segment Revenue income (4) Income (5) benefits costs Expenses (6)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Financial Products $ 107.5 $ 881.5 $ 422.1 $ 746.2 $ 93.4 $ 306.4
Investment Management
Services -- 1.5 118.3 -- -- 75.2
Other (7) -- 3.3 ( 43.9) -- 11.5 ( 13.7)
- ----------------------------------------------------------------------------------------------------
Continuing Operations $ 107.5 $ 886.3 $ 496.5 $ 746.2 $ 104.9 $ 367.9
====================================================================================================
Discontinued
Operations (8) -- -- $ 8.7 -- -- --
====================================================================================================
1998
Financial Products $ 79.4 $ 865.3 $ 376.6 $ 714.4 $ 80.3 $ 281.3
Investment Management
Services -- 1.5 96.7 -- -- 59.5
Other (7) -- 5.0 ( 38.4) -- 10.9 1.0
- ----------------------------------------------------------------------------------------------------
Continuing Operations $ 79.4 $ 871.8 $ 434.9 $ 714.4 $ 91.2 $ 341.8
====================================================================================================
Discontinued
Operations (8) $ 342.0 $ 146.1 $ 164.1 $ 482.4 $ 34.7 $ 41.3
====================================================================================================
1997
Financial Products $ 69.1 $ 876.7 $ 332.1 $ 720.4 $ 57.2 $ 286.5
Investment Management
Services -- 1.4 80.3 -- -- 50.1
Other (7) -- 3.6 ( 23.9) -- 9.1 ( 20.3)
- ----------------------------------------------------------------------------------------------------
Continuing Operations $ 69.1 $ 881.7 $ 388.5 $ 720.4 $ 66.3 $ 316.3
====================================================================================================
Discontinued
Operations (8) $ 198.0 $ 201.7 $ 220.7 $ 407.4 $ 45.6 $ 60.9
====================================================================================================
</TABLE>
Notes to Schedule III (continued):
(4) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(5) Includes net realized capital losses and gains and charges assessed
against policyholders.
(6) Year 2000 costs are not included in the amounts reported for the Financial
Products and Investment Management Services segments.
(7) Includes consolidating adjustments and Year 2000 costs.
(8) Domestic individual life insurance business.
68
<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 22, 2000 By /s/ Deborah Koltenuk
-------------- --------------------
Deborah Koltenuk
Vice President, Corporate Controller and
Assistant Treasurer
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 22, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*
- -------------------------------------
Thomas J. McInerney President and Director
(Principal Executive Officer)
*
- -------------------------------------
Catherine H. Smith Senior Vice President, Chief Financial
Officer, and Director
(Principal Financial Officer)
*
- -------------------------------------
Shaun P. Mathews Senior Vice President and Director
/s/ Deborah Koltenuk
- -------------------------------------
Deborah Koltenuk Vice President, Corporate Controller
and Assistant Treasurer
(Principal Accounting Officer)
</TABLE>
* By: /s/ Kirk P. Wickman
-------------------
Kirk P. Wickman,
Senior Vice President, General Counsel and Corporate Secretary
69
<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 1999 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 22nd day of March, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Thomas J. McInerney
- -------------------------------------
Thomas J. McInerney President and Director
(Principal Executive Officer)
/s/ Catherine H. Smith
- -------------------------------------
Catherine H. Smith Senior Vice President, Chief Financial Officer,
and Director (Principal Financial Officer)
/s/ Shaun P. Mathews
- -------------------------------------
Shaun P. Mathews Senior Vice President and Director
/s/ Deborah Koltenuk
- -------------------------------------
Deborah Koltenuk Vice President, Corporate Controller and Assistant
Treasurer (Principal Accounting Officer)
</TABLE>
70
<PAGE>
SECRETARY CERTIFICATE
AETNA LIFE INSURANCE AND ANNUITY COMPANY
I, Rose-Marie DeRensis, the duly elected Assistant Corporate Secretary of Aetna
Life Insurance and Annuity Company (the "Company"), do hereby certify that the
attached resolutions entitled "Company Name, Authority to Sign (Duplicate
Corporate Seals)" adopted by the Board of Directors on June 22, 1995, are
currently in full force and effect, and have not been amended, restated, or
superceded.
IN WITNESS WHEREOF, I have affixed my name as Assistant Corporate Secretary and
have caused the corporate seal of said Company to be hereunto affixed this 22nd
day of March, 2000.
By: /s/ Rose-Marie DeRensis
(corporate seal) ---------------------------
Rose-Marie DeRensis
Assistant Corporate Secretary
71
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY
COMPANY NAME, AUTHORITY TO
SIGN (DUPLICATE CORPORATE SEALS)
June 22, 1995
RESOLVED: That the following officers:
President
Senior Vice President
Vice President
General Counsel
Corporate Secretary
Treasurer
Assistant Corporate Secretary
(1) are hereby severally authorized to sign in the Company's name:
(a) insurance contracts of every type and description which the Company is
authorized to write;
(b) agreements relating to the purchase, sale, or exchange of securities
including any consents and modifications given or made under such
agreements;
(c) conveyances and leases of real estate or any interest therein
including any modifications thereof;
(d) assignments and releases of mortgages and other liens, claims or
demands;
(e) any other written instrument which they are authorized to approve in
the normal course of Company business; and
(f) any other written instrument when specifically authorized by the Board
of Directors or the President;
and are further severally authorized (i) to delegate all or any part of the
foregoing authority to one or more officers, employees or agents of this
Company, provided that each such delegation is in writing and a copy
thereof is filed in the Office of the Corporate Secretary, or (ii) to
designate any attorney at law representing this Company on a matter under
their direction, to so sign this Company's name;
(2) are hereby severally authorized to possess the Company's duplicate seals
and to affix the same to items (a) through (f) above;
and are further severally authorized to designate any Company officer under
their direction to possess and to so affix the Company's duplicate seals;
and
that the Senior Vice President, Investments is hereby authorized to
designate any officer, employee or agent of this Company under his
direction to sign the Company's name and to affix the Company's seal to any
and all documents required in connection with any investment transaction in
which the Company has an interest.
72
Consent of Independent Auditors
The Shareholder and Board of Directors of
Aetna Life Insurance and Annuity Company:
We consent to the incorporation by reference in the registration statement No.
333-49593 on Post Effective Amendment No. 4 on Form S-2 of Aetna Life Insurance
and Annuity Company and Subsidiaries (the "Company") of our audit reports dated
February 7, 2000 relating to the consolidated balance sheets of the Company as
of December 31, 1999 and 1998, and the related consolidated statements of
income, changes in shareholder's equity and cash flows and all related schedules
for each of the years in the three-year period ended December 31, 1999, which
reports appear in the December 31, 1999 annual report on Form 10-K of the
Company and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG LLP
Hartford, Connecticut
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999 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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 11,410
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 207
<MORTGAGE> 7
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,025
<CASH> 693
<RECOVER-REINSURE> 3,001
<DEFERRED-ACQUISITION> 1,046
<TOTAL-ASSETS> 56,387
<POLICY-LOSSES> 3,849
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 27
<POLICY-HOLDER-FUNDS> 11,122
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,381
<TOTAL-LIABILITY-AND-EQUITY> 56,387
108
<INVESTMENT-INCOME> 886
<INVESTMENT-GAINS> (22)
<OTHER-INCOME> 130
<BENEFITS> 746
<UNDERWRITING-AMORTIZATION> 105
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 271
<INCOME-TAX> 90
<INCOME-CONTINUING> 181
<DISCONTINUED> 6
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187
<EPS-BASIC> 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>
