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 June 30, 1998 Commission file number 33-81010
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Aetna Insurance Company of America
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(Exact name of registrant as specified in its charter)
Connecticut 06-1286272
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
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None
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Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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.
<TABLE>
<CAPTION>
Shares Outstanding
Title of Class at July 31, 1998
- -------------- ----------------
<S> <C>
Common Capital Stock,
par value $2,000 1,275
</TABLE>
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
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
</TABLE>
2
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Charges assessed against policyholders $2.8 $1.4 $5.1 $2.3
Net investment income 2.4 1.6 4.8 2.9
Net realized capital gains - 0.1 0.1 0.1
Other income 0.3 0.1 0.3 0.1
---- ---- ----- -----
Total revenue 5.5 3.2 10.3 5.4
Benefits and expenses:
Current and future benefits 2.9 1.4 4.9 2.6
Operating expenses 1.2 0.8 2.6 1.8
Amortization of deferred policy acquisition costs 0.6 0.3 1.4 0.6
---- ---- ----- -----
Total expenses 4.7 2.5 8.9 5.0
Income before income taxes and
cumulative effect adjustment 0.8 0.7 1.4 0.4
Income taxes 0.2 0.2 0.4 0.1
---- ---- ----- -----
Income before cumulative effect adjustment 0.6 0.5 1.0 0.3
Cumulative effect adjustment, net of tax - - - 0.5
---- ---- ----- -----
Net income (loss) $0.6 $0.5 $1.0 $(0.2)
==== ==== ==== =====
</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
(millions, except share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------- -----------------
Assets
------
<S> <C> <C>
Investments:
Debt securities, available for sale, at fair value:
(amortized cost: $132.4 and $135.9) $ 136.2 $137.9
Cash and cash equivalents 12.6 12.5
Deferred policy acquisition costs 55.5 45.4
Accrued investment income 1.9 2.0
Deferred tax asset 1.4 2.1
Income taxes receivable - 1.4
Other assets 1.3 2.5
Due from parent and affiliates 0.8 -
Separate Accounts assets 912.8 676.7
-------- ------
Total assets $1,122.5 $880.5
======== ======
Liabilities and Shareholder's Equity
------------------------------------
Liabilities:
Policyholders' funds left with the Company $ 151.4 $145.6
Other liabilities 3.9 5.2
Due to parent and affiliates 0.7 0.8
Current income taxes 0.5 -
Separate Accounts liabilities 912.8 676.7
-------- ------
Total liabilities 1,069.3 828.3
-------- ------
Shareholder's equity:
Common capital stock, par value $2,000 (1,275 shares
authorized, issued and outstanding) 2.5 2.5
Paid-in capital 47.5 47.5
Accumulated other comprehensive income 0.2 0.2
Retained earnings 3.0 2.0
-------- ------
Total shareholder's equity 53.2 52.2
-------- ------
Total liabilities and shareholder's equity $1,122.5 $880.5
======== ======
</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
(millions)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Shareholder's equity, beginning of period $52.2 $31.3
Comprehensive income (loss)
Net income (loss) 1.0 (0.2)
----- -----
Total comprehensive income (loss) 1.0 (0.2)
----- -----
Capital contribution - 5.0
Other changes - (0.3)
----- -----
Shareholder's equity, end of period $53.2 $35.8
===== =====
</TABLE>
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
(millions)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 1.0 $(0.2)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Decrease (increase) in accrued investment income 0.1 (1.0)
Increase in deferred policy acquisition costs (10.1) (11.5)
Net change in amounts due to/from parent and affiliates (0.9) 0.4
Net increase (decrease) in other assets and liabilities 0.8 (1.4)
Net increase (decrease) in income taxes 1.2 (0.5)
Net amortization of discount on debt securities (0.3) (0.2)
Net realized capital gains (0.1) (0.1)
----- -----
Net cash used for operating activities (8.3) (14.5)
----- -----
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 24.4 7.9
Investment maturities and repayments of:
Debt securities available for sale 1.3 1.8
Cost of investment purchases in:
Debt securities available for sale (21.6) (71.6)
Short-term investments - (1.0)
----- -----
Net cash provided by (used for) investing activities 4.1 (62.9)
----- -----
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 10.5 46.4
Withdrawal of investment contracts (6.2) (1.6)
Capital Contribution - 5.0
----- -----
Net cash provided by financing activities 4.3 49.8
----- -----
Net increase (decrease) in cash and cash equivalents 0.1 (27.6)
Cash and cash equivalents, beginning of period 12.5 51.8
----- -----
Cash and cash equivalents, end of period $12.6 $24.2
===== =====
Supplemental cash flow information:
Income taxes (received) paid, net $(2.3) $ 0.3
===== =====
</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 1997 financial information to conform to the 1998
presentation. These interim statements necessarily rely heavily on
estimates, including assumptions as to annualized tax rates. In the opinion
of management, all adjustments necessary for a fair statement of results for
the interim periods have been made. All such adjustments are of a normal,
recurring nature. The accompanying condensed financial statements should be
read in conjunction with the financial statements and related notes as
presented in the Company's 1997 Annual Report on Form 10-K. Certain
financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles, but that is not required for interim reporting purposes, has
been condensed or omitted.
2. Future Application of Accounting Standard
In June 1998, the Financial Accounting Standards Board issued 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. This standard is
effective at the beginning of 2000, with early adoption permitted. The
Company is currently evaluating the impact of the adoption of this
statement and the potential 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
3. Additional Information - Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains on securities (excluding those related to experience rated
contractholders) were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------------------------------
(Millions) 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains arising during the period (1) $ .3 $ .2
Less: reclassification adjustments for amortization of net
investment discounts and gains included in net income (2) .3 .2
-----------------------------------------------------------------------------------------
Net unrealized gains on securities $ - $ -
=========================================================================================
</TABLE>
(1) Pretax unrealized holding gains arising during the period were $.4
million and $.3 million for 1998 and 1997, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income were $.4 million and $.3
million for 1998 and 1997, respectively.
4. Litigation
The Company is not currently involved in any material litigation.
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 June 30, 1998, and the related condensed statements of
income for the three-month and six-month periods ended June 30, 1998 and 1997,
and the related condensed statements of changes in shareholder's equity and cash
flows for the six-month periods ended June 30, 1998 and 1997. 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, 1997, 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 25, 1998, we expressed an unqualified
opinion on those financial statements. Our report refers to a change in method
for accounting for guaranty-fund and other insurance related assessments in
1997. In our opinion, the information set forth in the accompanying condensed
balance sheet as of December 31, 1997, is fairly presented, in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
August 4, 1998
9
<PAGE>
Item 2. Management's Analysis of the Results of Operations
Overview
<TABLE>
<CAPTION>
Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
(Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charges assessed against policyholders $ 2.8 $ 1.4 $ 5.1 $ 2.3
Net investment income 2.4 1.6 4.8 2.9
Net realized capital gains - .1 .1 .1
Other income .3 .1 .3 .1
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 5.5 3.2 10.3 5.4
- -------------------------------------------------------------------------------------------------------------------------
Current and future benefits 2.9 1.4 4.9 2.6
Operating expenses 1.2 .8 2.6 1.8
Amortization of deferred policy acquisition costs .6 .3 1.4 .6
- -------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 4.7 2.5 8.9 5.0
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect adjustment .8 .7 1.4 .4
Income taxes .2 .2 .4 .1
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect adjustment .6 .5 1.0 .3
- -------------------------------------------------------------------------------------------------------------------------
Cumulative effect adjustment, net of tax - - - .5
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .6 $ .5 $ 1.0 (.2)
=========================================================================================================================
Net realized capital gains, net of tax (included above) $ - $ - $ .1 $ -
=========================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------
Deposits not included above:
Annuities - Fixed Options $24.5 $ 40.7 $ 53.4 $ 70.8
Annuities - Variable Options 58.4 59.8 110.4 119.1
- -------------------------------------------------------------------------------------------------------------------------
Total $82.9 $100.5 $ 163.8 $189.9
=========================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------
Assets under management: (1)
Annuities - Fixed Options (2) $ 272.6 $190.9
Annuities - Variable Options (3) 782.1 400.4
- -------------------------------------------------------------------------------------------------------------------------
Total $1,054.7 $591.3
=========================================================================================================================
</TABLE>
(1) Excludes net unrealized capital gains of $3.8 million and $.1 million at
June 30, 1998 and 1997, respectively.
(2) Includes $124.3 million and $85.1 million related to the assets supporting
a guaranteed interest option at June 30, 1998 and 1997, respectively.
(3) Includes $616.5 million and $370.0 million at June 30, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
10
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
The Company reported a slight increase in net income for the second quarter of
1998 compared to the second quarter of 1997 and reported an increase of $1.2
million for the six months ended June 30, 1998 compared to the same period a
year ago. The net loss reported for the six months ended June 30, 1997 has been
restated to include a charge for a cumulative effect adjustment, net of tax of
$.5 million related to a change in the accounting for guaranty fund and other
insurance related assessments. Excluding net realized capital gains and the 1997
cumulative effect adjustment, the Company would have reported an increase in
results of $.6 million for the six months ended June 30, 1998 when compared to
the same period in 1997. Second quarter results continue to reflect significant
increases in revenues and expenses associated with the growth of the Company's
business operations. Assets under management increased by $463 million primarily
due to appreciation in the stock market and additional net deposits (deposits
less surrenders).
Outlook
The Company anticipates that, in the near term, it will cease marketing existing
products, although certain of the products will be marketed by its parent
company. The Company will continue to accept additional contributions into
existing contracts and will continue to maintain existing contracts. Long term
decisions concerning future sales of new products have not been made.
General Account Investments
The Company's general account invested assets were comprised entirely of debt
securities available for sale with a fair value of $136.2 million and $137.9
million at June 30, 1998 and December 31, 1997, respectively.
At June 30, 1998 and December 31, 1997, $127.1 million, or 93%, and $129.3
million, or 94%, 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 June 30, 1998 and December 31, 1997 was AA- for both
periods.
11
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
The percent of total debt securities investments by quality ratings is as
follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
AAA 42.2% 49.6%
AA 7.7 6.0
A 30.9 26.2
BBB 18.9 17.7
B & Below 0.3 0.5
----- -----
100.0% 100.0%
===== =====
</TABLE>
The percent of total debt securities investments by market sector is as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
U.S. Corporate Securities 49.5% 41.5%
U.S. Treasuries/Agencies 19.4 28.2
Foreign Securities - U.S. Dollar Denominated 8.3 8.9
Commercial/Multifamily Mortgage-Backed Securities 8.1 6.3
Residential Mortgage-Backed Securities 7.6 7.4
Asset-Backed Securities 7.1 7.7
----- -----
100.0% 100.0%
===== =====
</TABLE>
Year 2000
See "Year 2000" in the Company's 1997 Report on Form 10-K.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently involved in any material legal proceedings.
Item 5. Other Information
Ratings
Following the announcement of Aetna's agreement to acquire New York Life
Insurance Company's NYLCare health plans business (which closed in July 1998),
as is typical standard operating procedures, all of Aetna's ratings were placed
on credit watch, until the rating agencies could do further analysis of the
transaction. In July of 1998, all of the agencies completed their annual review
of the Company with the exception of A.M. Best. Moody's and Standard & Poors
reaffirmed their ratings and removed their credit watch status. Duff & Phelps
has maintained their rating watch pending the completion of the sale of its
parent company's domestic individual life business to Lincoln. A.M. Best's
rating is pending until completion of their review.
The Company's ratings are as follows:
<TABLE>
<CAPTION>
Rating Agencies
---------------------------------------------------------------------
A.M. Best Duff & Phelps Moody's Standard &
Investor Service Poors
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Claims paying rating on
May 6, 1998 (1) A+ AA+ Aa3 AA-
Claims paying rating on
August 4, 1998 (2) A+ AA+ Aa3 AA-
</TABLE>
(1) As of May 6, 1998, A.M. Best ratings were on review and Standard &
Poors, Moody's Investor Service and Duff & Phelps ratings were on
credit watch or review for possible downgrade.
(2) As of August 4, 1998, A.M. Best ratings are on review and Duff &
Phelps ratings are on credit watch for possible downgrade.
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)
August 12, 1998 By /s/ Deborah Koltenuk
- --------------- ----------------------------------------
(Date) 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 the
condensed financial statements contained in the Form 10-Q for the six
months ended June 30, 1998 for the Aetna Insurance Company of America and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000925988
<NAME> Aetna Insurance Company of America
<MULTIPLIER> 1,000,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 136
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 136
<CASH> 13
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 56
<TOTAL-ASSETS> 1,123
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 151
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 50
<TOTAL-LIABILITY-AND-EQUITY> 1,123
0
<INVESTMENT-INCOME> 5
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 5
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 1
<INCOME-TAX> 0
<INCOME-CONTINUING> 1
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<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>
