SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
------------------
Commission file number 33-81010
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Aetna Insurance Company of America
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-1286272
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
--------------
None
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at October 31, 1997
- -------------- -------------------
Common Capital Stock,
par value $2,000 1,275
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income............................................... 3
Balance Sheets..................................................... 4
Statements of Changes in Shareholder's Equity...................... 5
Statements of Cash Flows........................................... 6
Condensed Notes to Financial Statements............................ 7
Independent Auditors' Review Report................................ 9
Item 2. Management's Analysis of the Results of Operations.............. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 5. Other Information............................................. 13
Item 6. Exhibits and Reports on Form 8-K.............................. 13
Signatures.................................................................. 14
(2)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Income
(thousands)
<TABLE>
<CAPTION>
3 Months Ended September 30, 9 Months Ended September 30,
--------------------------- ----------------------------
1997 1996 1997 1996
------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Charges assessed against policyholders .......... 1,760.1 $ 373.2 $4,057.5 $ 757.6
Net investment income............................ 1,975.2 341.0 4,853.0 673.5
Net realized capital gains (losses) ............. 18.5 -- 88.6 (17.1)
Other income .................................... 55.0 -- 168.4 --
-------- ------- ------- -------
Total revenue ............................. 3,808.8 714.2 9,167.5 1,414.0
Benefits and expenses:
Current and future benefits ..................... 1,622.6 533.6 4,241.8 714.8
Operating expenses .............................. 786.1 306.2 2,544.9 1,903.6
Amortization of deferred policy acquisition costs 408.8 -- 1,026.2 --
-------- ------- ------- -------
Total benefits and expenses ................ 2,817.5 839.8 7,812.9 2,618.4
Income (loss) before income
taxes (benefits) ............................... 991.3 (125.6) 1,354.6 (1,204.4)
Income taxes (benefits) ........................... 342.6 (41.1) 387.8 (363.7)
-------- ------- ------- -------
Net income (loss) ................................. $ 648.7 $ (84.5) $ 966.8 $ (840.7)
======== ======= ======== ========
</TABLE>
See Condensed Notes to Financial Statements.
(3)
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Balance Sheets
(thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
- ----- ------------- ------------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost $112,896.5 and $24,736.8) $114,776.2 $ 24,770.3
Cash and cash equivalents 13,766.6 51,842.3
Deferred policy acquisition costs 39,049.8 21,057.0
Accrued investment income 1,683.5 325.8
Deferred tax asset 3,002.4 1,289.7
Income taxes receivable -- 1,133.2
Other assets 1,055.2 447.6
Separate accounts assets 601,301.3 303,518.6
---------- ----------
Total assets $774,635.0 $404,384.5
========== ==========
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Policyholders' funds left with the Company $133,718.4 $ 64,445.4
Other liabilities 2,025.2 4,753.2
Due to parent and affiliates 526.6 347.2
Income taxes payable 73.5 --
Separate accounts liabilities 601,301.3 303,518.6
---------- ----------
Total liabilities 737,645.0 373,064.4
---------- ----------
Shareholder's equity:
Common capital stock, par value $2,000 (1,275 shares
authorized, issued and outstanding) 2,550.0 2,550.0
Paid-in capital 32,550.0 27,550.0
Net unrealized capital gains 121.7 90.3
Retained earnings 1,768.3 1,129.8
---------- ----------
Total shareholder's equity 36,990.0 31,320.1
---------- ----------
Total liabilities and shareholder's equity $774,635.0 $404,384.5
========== ==========
</TABLE>
See Condensed Notes to Financial Statements.
(4)
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Changes in Shareholder's Equity
(thousands)
9 Months Ended September 30,
----------------------------
1997 1996
---- ----
Shareholder's equity, beginning of period $31,320.1 $12,133.0
Capital contribution 5,000.0 --
Net change in unrealized capital gains (losses) 31.4 (102.2)
Net income (loss) 966.8 (840.7)
Other changes (328.3) --
--------- ---------
Shareholder's equity, end of period $36,990.0 $11,190.1
========= =========
See Condensed Notes to Financial Statements.
(5)
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Cash Flows
(thousands)
<TABLE>
<CAPTION>
9 Months Ended September 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 966.8 $ (840.7)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Increase in accrued investment income (1,357.7) (69.7)
Increase in deferred policy acquisition costs (17,992.8) (13,657.6)
Net change in amounts due to/from parent and affiliates 179.4 (174.6)
Net (decrease) increase in other assets and liabilities (1,003.8) 5,555.5
Net decrease in income taxes (730.4) (2,782.4)
Net accretion of discount on debt securities (309.6) (61.3)
Net realized capital (gains) losses (88.6) 17.1
---------- ---------
Net cash used for operating activities (20,336.7) (12,013.7)
---------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 12,012.6 2,410.0
Short-term investments 1,000.0 --
Investment maturities and repayments of:
Debt securities available for sale 2,802.9 --
Cost of investment purchases in:
Debt securities available for sale (105,029.5) (2,458.8)
Short-term investments (1,000.0) --
---------- ---------
Net cash used for investing activities (90,214.0) (48.8)
---------- ---------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 71,075.9 43,734.9
Withdrawal of investment contracts (3,600.8) --
Capital contribution 5,000.0 --
---------- ---------
Net cash provided by financing activities 72,475.1 43,734.9
Net (decrease) increase in cash and cash equivalents (38,075.6) 31,672.4
Cash and cash equivalents, beginning of period 51,842.3 4,044.2
---------- ---------
Cash and cash equivalents, end of period $ 13,766.6 $ 35,716.6
=========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 734.0 $ 2,232.0
=========== ==========
</TABLE>
See Condensed Notes to Financial Statements.
(6)
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Condensed Notes to Financial Statements
1. Basis of Presentation
---------------------
Aetna Insurance Company of America (the "Company") is a stock life insurance
company organized in 1990 under the insurance laws of Connecticut and is a
wholly owned subsidiary of Aetna Life Insurance and Annuity Company
("ALIAC"). 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").
The financial statements have been prepared in accordance with generally
accepted accounting principles and are unaudited. Certain reclassifications
have been made to 1996 financial information to conform to the 1997
presentation. These interim statements necessarily rely heavily on
estimates, including assumptions as to annualized tax rates. In the opinion
of management, all adjustments necessary for a fair statement of results for
the interim periods have been made. All such adjustments are of a normal,
recurring nature. The accompanying condensed financial statements should be
read in conjunction with the financial statements and related notes as
presented in the Company's 1996 Annual Report on Form 10-K. Certain
financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles, but that is not required for interim reporting purposes, has
been condensed or omitted.
2. Future Applications of Accounting Standards
-------------------------------------------
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in June 1996 and provides accounting and reporting standards for transfers
of financial assets and extinguishments of liabilities.
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in
1997 did not have a material effect on the Company's financial position or
results of operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material effect on its
financial position or results of operations.
(7)
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Condensed Notes to Financial Statements
(Continued)
2. Future Applications of Accounting Standards (Continued)
-------------------------------------------------------
FAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and
establishes standards for the reporting and presentation of comprehensive
income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in shareholder's equity (except
those arising from transactions with owners) and includes net income, net
unrealized capital losses on available for sale securities. As this new
standard only requires additional information in a financial statement, it
will not affect the Company's financial position or results of operations.
FAS No. 130 is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. The Company is currently evaluating the
presentation alternatives permitted by the statement.
3. Benefit Plans
-------------
As of March 31, 1997, ALIAC transferred to the Company, approximately $505.0
thousand of accrued liabilities, primarily related to the allocation of
pension and postretirement benefit expenses that had been previously
allocated to ALIAC. The after-tax amount of this transfer (approximately
$328.3 thousand) is reported as a reduction of retained earnings.
4. Litigation
----------
The Company is not currently involved in litigation.
5. Shareholder's Equity
--------------------
On June 26, 1997, the Company received a $5.0 million capital contribution
from ALIAC.
(8)
<PAGE>
Independent Auditors' Review Report
The Board of Directors
Aetna Insurance Company of America:
We have reviewed the accompanying condensed balance sheet of Aetna Insurance
Company of America as of September 30, 1997, and the related condensed
statements of income for the three-month and nine-month periods ended September
30, 1997 and 1996, and the related condensed statements of changes in
shareholder's equity and cash flow for the nine-month periods ended September
30, 1997 and 1996. These condensed financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Aetna Insurance Company of America as of
December 31, 1996, and the related statements of income, changes in
shareholder's equity, and cash flows for the year then ended (not presented
herein); and in our report dated March 20, 1997, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of December 31, 1996, is fairly
presented, in all material respects, in relation to the balance sheet from which
it has been derived.
/s/ KPMG PEAT MARWICK LLP
November 3, 1997
Hartford, Connecticut
(9)
<PAGE>
Item 2. Management's Analysis of the Results of Operations
Results of Operations
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
(Thousands) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charges assessed against policyholders $1,760.1 $ 373.2 $4,057.5 $ 757.6
Net investment income 1,975.2 341.0 4,853.0 673.5
Net realized capital gains (losses) 18.5 -- 88.6 (17.1)
Other income 55.0 -- 168.4 --
----------------------------------------------------------------------------------------------------------------
Total revenue 3,808.8 714.2 9,167.5 1,414.0
----------------------------------------------------------------------------------------------------------------
Current and future benefits 1,622.6 533.6 4,241.8 714.8
Operating expenses 786.1 306.2 2,544.9 1,903.6
Amortization of deferred policy acquisition costs 408.8 -- 1,026.2 --
----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,817.5 839.8 7,812.9 2,618.4
----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefits) 991.3 (125.6) 1,354.6 (1,204.4)
Income taxes (benefits) 342.6 (41.1) 387.8 (363.7)
----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 648.7 $ (84.5) $ 966.8 $ (840.7)
================================================================================================================
Net realized capital gains (losses),
net of tax (included above) $ 12.0 $ -- $ 57.6 $ (11.1)
==========================================================================================================================
Deposits not included above:
Annuities - Fixed Options $ 50,709.4 $52,554.0 $121,542.2 $125,477.7
Annuities - Variable Options 58,522.9 46,488.6 177,663.8 98,843.5
---------------------------------------------------------
Total $109,232.3 $99,042.6 $299,206.0 $224,321.2
==========================================================================================================================
Assets under management: (1) (2)
Annuities - Fixed Options (3) $229,127.0 $125,532.1
Annuities - Variable Options 501,688.0 149,891.7
-------------------------
Total $730,815.0 $275,423.8
==========================================================================================================================
</TABLE>
(1) Excludes net unrealized capital gains of $1,879.7 thousand and $77.2
thousand at September 30, 1997 and 1996, respectively.
(2) Includes $464,961.0 thousand and $141,611.3 thousand at September 30, 1997
and 1996, respectively, of assets invested through the Company's products
in unaffiliated mutual funds.
(3) Includes $97,219.0 thousand and $81,811.9 thousand related to the assets
supporting a guaranteed interest option at September 30, 1997 and 1996,
respectively.
The Company had net income of $648.7 thousand and $966.8 thousand for the three
and nine months ended September 30, 1997 compared to net losses of $84.5
thousand and $840.7 thousand for the same periods a year ago. Excluding net
realized capital gains or losses, results for the three and nine months ended
September 30, 1997 were $636.7 thousand and $909.2 thousand, respectively,
compared with losses of $84.5 thousand and $829.6 thousand, respectively. Third
quarter and year-to-date 1997 results continue to reflect significant increases
in revenues and current and future benefits associated with the Company's
growth. Despite this growth in new business, the Company has been able to
maintain the growth in expenses at a lower rate than the growth in its revenues,
resulting in net income for the 1997 periods compared to net losses for the same
periods a year ago.
(10)
<PAGE>
Results of Operations (Continued)
During the nine months ended September 30, 1997, the Company's net deferred tax
asset increased by $1,712.7 thousand, the benefit of which increased the
Company's net income for the nine months ended September 30, 1997. This increase
in the deferred tax asset is attributable to temporary differences between
generally accepted accounting principles and federal income tax methodologies
for insurance reserves and capitalized acquisition costs. Management believes it
is more likely than not that the Company will realize the benefit of its net
deferred tax asset.
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
experienced-rated products are assumed by those customers subject to, among
other things, certain minimum guarantees.
The Company's invested assets were comprised of the following:
September 30, December 31,
(Thousands) 1997 1996
===============================================================================
Debt securities, available for sale, at fair value $114,776.2 $24,770.3
===============================================================================
At September 30, 1997 and December 31, 1996, the Company's carrying value of
investments in debt securities represented 100% of total general account
invested assets. At September 30, 1997 and December 31, 1996, $106,247.3
thousand or 93% and $16,520.0 thousand or 67%, respectively, of total debt
securities supported experienced 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 September 30, 1997 and December 31, 1996 was AA-.
(11)
<PAGE>
General Account Investments (Continued)
<TABLE>
<CAPTION>
Debt Securities Quality Ratings Debt Securities by Market
at September 30, 1997 Sector at September 30, 1997
- ------------------------------------- ------------------------------------------
<S> <C> <C>
AAA 44.2% U.S. Corporate Securities 46.0%
AA 4.5 U.S. Treasuries/Agencies 26.9
A 31.4 Foreign Securities - U.S. Dollar
BBB 19.9 Denominated 9.8
----- Asset-Backed Securities 6.9
100.0% Commercial/Multifamily Mortgage-
===== Backed Securities 5.8
Residential Mortgage-Backed
Securities 4.6
------
100.0%
=====
Debt Securities Quality Ratings Debt Securities by Market
at December 31, 1996 Sector at December 31, 1996
- ------------------------------------- ------------------------------------------
AAA 47.3% U.S. Corporate Securities 44.7%
A 25.4 U.S. Treasuries/Agencies 33.3
BBB 27.3 Commercial/Multifamily Mortgage-
----- Backed Securities 10.0
100.0% Foreign Securities - U.S. Dollar
===== Denominated 8.0
Asset-Backed Securities 4.0
-----
100.0%
=====
</TABLE>
Year 2000: The Company is preparing its computer systems, applications and
facilities to accommodate date-sensitive information relating to the Year 2000.
The Company expects to incur internal staff costs, as well as consulting and
other expenses related to infrastructure and facilities enhancements necessary
to prepare its systems for the Year 2000. While the Company has not determined
at this time total costs associated with the Year 2000 systems preparation,
these costs are not expected to result in amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods materially.
(12)
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is currently not involved in legal proceedings.
Item 5. Other Information
(a) Ratings
The Company received a ratings downgrade from Moody's in July 1997 (Aa3)
which is a step down from the previous rating of Aa2. This rating is still
considered in the excellent category by Moody's.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
(13)
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AETNA INSURANCE COMPANY OF AMERICA
(Registrant)
November 13, 1997
- -----------------
(Date) By /s/ Deborah Koltenuk
--------------------------------------
Deborah Koltenuk
Vice President and Treasurer, Corporate Controller
(Chief Accounting Officer)
(14)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
[identify specific financial statements here] The financial statements
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000925988
<NAME> Aetna Insurance Company of America
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 114,776
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 114,776
<CASH> 13,767
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 39,050
<TOTAL-ASSETS> 774,635
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 133,718
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,550
<OTHER-SE> 34,440
<TOTAL-LIABILITY-AND-EQUITY> 774,635
0
<INVESTMENT-INCOME> 4,853
<INVESTMENT-GAINS> 89
<OTHER-INCOME> 168
<BENEFITS> 4,242
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1,355
<INCOME-TAX> 388
<INCOME-CONTINUING> 967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 967
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
