As filed with the Securities and Exchange Registration No. 33-63657
Commission on April 13, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 8
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Aetna Insurance Company of America
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Florida
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06-1286272
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5100 West Lemon Street, Suite 213, Tampa, Florida 33609
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Julie E. Rockmore, Counsel
Aetna Insurance Company of America
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. |_| _____________________
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. Information Required in Prospectus Location
-------- ---------------------------------- --------
1 Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Cover
2 Inside Front and Outside Back Cover
Pages of Prospectus................... Table of Contents (inside
front cover)
3 Summary Information, Risk Factors and
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
8 Plan of Distribution.................. Other Topics - Contract
Distribution
9 Description of Securities to be Guaranteed Terms and
Registered............................ Guaranteed Interest Rates
10 Interests of Named Experts and Counsel Not Applicable
11 Information with Respect to the
Registrant............................ Not Applicable
12 Incorporation of Certain Information
by Reference.......................... Other Topics -
Incorporation of Certain
Documents by Reference
13 Disclosure of Commission Position on
Indemnification for Securities Act
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 Insurance Company of America (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.
The contract is not offered for sale in the State of New York.
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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 twenty 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 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 issued by the FDIC.
Our Home Office: Our Service Center:
Aetna Insurance Company of America Aetna Insurance Company of America
5100 West Lemon Street 151 Farmington Avenue
Suite 213 Hartford, Connecticut 06156
Tampa, Florida 33609 1-800-531-4547
1-813-261-9582
PRO.63657-00
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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
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
Appendix I--Calculating a Market Value Adjustment (MVA) .................. 33
</TABLE>
3
<PAGE>
[BEGIN SIDEBAR]
Questions: Contacting the Company. To answer your questions, contact your sales
representative or write or call our Service Center:
Aetna Insurance
Company of America
151 Farmington Avenue
Hartford, CT 06156-1277
1-800-531-4547
[END SIDEBAR]
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 Insurance Company of America. 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 Insurance Company of America. 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 twenty 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 twenty 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.
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
<PAGE>
Example:
<TABLE>
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<S> <C>
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 Service Center 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>
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
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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 Service Center.
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 Service Center 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 Service Center.
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.
Eligibility. To exercise one of these options you must meet certain age
criteria and your account value must meet certain minimum requirements. To
14
<PAGE>
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 Service
Center.
Termination. You may revoke a systematic distribution option at any time by
submitting a written request to our Service Center. 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>
[BEGIN SIDEBAR]
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 SIDEBAR]
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 Service Center.
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 Service Center. 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 Service Center. The change will
not be effective until we receive and record it.
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<PAGE>
[BEGIN SIDEBAR]
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 SIDEBAR]
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 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 Payment Amounts. The payment option you select must result in one or
both of the following:
> A first payment of at least $50; or
> 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
Life Income-- of 5, 10, 15, or 20 years, or other periods specified in the contract.
Guaranteed
Payments Death Benefit: If the annuitant dies before we have made all the guaranteed 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.
<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. 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 Florida law. Prior to January 5,
2000, amounts allocated to guaranteed terms were deposited to, and accounted
for, in a nonunitized separate account that we had 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 Florida and other state
insurance laws. Additionally, the guaranteed interest rates we establish need
not relate to the investment performance we experience.
22
<PAGE>
[BEGIN SIDEBARS]
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 SIDEBARS]
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 Service Center 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; and
> 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.
24
<PAGE>
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.
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.
continued -->
25
<PAGE>
(Taxation, continued)
> 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.
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
26
<PAGE>
example, if you die on September 1, 2000, your entire balance must be
distributed to the beneficiary by December 31, 2005. However, if the
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, 2000, 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.
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
continued -->
27
<PAGE>
(Taxation, continued)
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 Contract
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.
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.
28
<PAGE>
Other Topics
- --------------------------------------------------------------------------------
Contract Distribution
Aetna Life Insurance and Annuity Company (ALIAC), an affiliate of the Company,
will serve as the principal underwriter for the securities sold by this
prospectus. ALIAC is registered as a broker-dealer with the SEC and is a member
of the National Association of Securities Dealers, Inc. (NASD). As principal
underwriter, ALIAC will enter into arrangements with one or more registered
broker-dealers, including at least one of its affiliates, to offer and sell the
contracts described in this prospectus. We call these entities "distributors."
ALIAC and one or more of its 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. ALIAC 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. ALIAC 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, ALIAC may provide additional
compensation to the Company's supervisory and other management personnel if the
overall investments in funds advised by the Company or its affiliates increases
over time. ALIAC 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. ALIAC pays any commissions and sales
related expenses and these are not deducted from payments to your account.
ALIAC may also contract with independent third party broker-dealers who will
act as wholesalers by assisting ALIAC 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 ALIAC and for the
distributors and may provide certain administrative services to ALIAC in
connection with the contracts. ALIAC may pay such wholesalers compensation
based on purchase payments for the contracts purchased through distributors
selected by the wholesaler. ALIAC 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. ALIAC will pay all costs and expenses related to these services.
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
29
<PAGE>
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 Service Center. 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 ALIAC, an affiliate of the Company which
serves as principal underwriter for the securities described in this prospectus
(the "Shaner Complaint"). The Shaner Complaint seeks unspecified compensatory
damages from ALIAC and unnamed affiliates of ALIAC. The Shaner Complaint claims
that ALIAC'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. ALIAC intends to defend the action
vigorously.
Experts
We have incorporated by reference into Post Effective Amendment No. 8 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 statements of income, changes in shareholder's equity and cash flows
and the related schedule 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.
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
30
<PAGE>
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 Insurance Company of America
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:
x
---
(1 + i) 365
{-------}
(1 + j)
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 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.
x
---
(1 + i) 365
MVA = {-------}
(1 + j)
927
---
(1.08) 365
= {------}
(1.10)
= .9545
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 increased 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.
x
---
(1 + i) 365
MVA = {-------}
(1 + j)
927
---
(1.05) 365
= {------}
(1.06)
= .9762
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 increased to compensate for the
negative 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.
x
---
(1 + i) 365
MVA = {-------}
(1 + j)
927
---
(1.10) 365
= {------}
(1.08)
= 1.0477
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.
x
---
(1 + i) 365
MVA = {-------}
(1 + j)
927
---
(1.05) 365
= {------}
(1.04)
= 1.0246
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.63657-00
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
Florida Statutes chapter 607.0859 governs the indemnification of officers,
directors, employees and agents of a Florida corporation. Section 607.0859(1)
provides that a corporation may indemnify a person who is or was a party to a
proceeding by reason of the fact that the person is or was a director, officer,
employee or agent of the corporation (or in certain other defined circumstances)
against liability (defined as obligations to pay a judgment, settlement,
penalty, fine, including an excise tax assessed with respect to any employee
benefit plan, and expenses actually and reasonably incurred with respect to the
proceeding). Section 607.0859(2) provides that a corporation may indemnify a
person who was or is a party to any proceeding by or in the right of the
corporation to procure a judgment in its favor by reason that the person is or
was connected to the corporation as noted in subsection (1) against expenses and
amounts paid in settlement not exceeding, in the judgment of the board of
directors, the estimated expense of litigating the proceeding to conclusion,
actually and reasonably incurred in connection with the defense or settlement of
such proceeding, including any appeal. Indemnification under both subsection (1)
and (2) is subject to a determination that the person seeking indemnification
has met the standard of conduct set forth in the applicable subsection. However,
pursuant to section 607.0859(3), to the extent that the person seeking
indemnification has been successful in defense of any proceeding, claim or issue
referred to in subsection (1) or (2), that person shall be indemnified against
expenses that he or she actually and reasonably incurred. Expenses incurred by
an officer or director in defending any such proceeding may be paid in advance
of the final disposition of the proceeding, provided that such person undertakes
to repay any such amount if he or she is ultimately found not to be entitled to
indemnification pursuant to section 607.0850. Expenses incurred by other
employees or agents may be advanced upon such terms and conditions deemed
appropriate by the board of directors.
Section 607.0850(4) provides that any indemnification under subsection (1) or
(2), unless made pursuant to a determination by a court, shall be made only as
authorized in the specific case upon a determination that that indemnification
is proper in the circumstances because the party has met the applicable standard
of conduct set forth in subsection (1) or (2). Such determination may be made
(a) by the disinterested directors, pursuant to section 607.0850(4)(a); (b) by a
committee duly designated by the board of directors, pursuant to section
607.0850(4)(b); (c) by independent legal counsel, pursuant to section
607.0850(4)(c); or (d) by the shareholders, pursuant to section 607.0850(4)(d).
The reasonableness of expenses and authorization of indemnification shall be
made in the same manner, except as otherwise required by section 607.0850(5).
The indemnification and advancement of expenses provisions of section 607.0850
are not exclusive, and a corporation may make other or further provisions for
the indemnification or
<PAGE>
advancement of expenses of parties identified in section 607.0850(1), except as
otherwise prohibited by section 607.0850(7). Indemnification and advancement of
expenses may also be ordered by a court of competent jurisdiction, pursuant to
section 607.0850(9). Section 607.0850(12) specifically authorizes a corporation
to procure indemnification insurance on behalf of an individual who was a
director, officer, employer or agent of the corporation. Consistent with this
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 subsidiary, including the Depositor.
Item 16. Exhibits
Exhibit No.
(1) Principal Underwriting Agreement between Aetna Insurance Company
of America and Aetna Life Insurance and Annuity Company(1)
(1)(b) First Amendment to Principal Underwriting Agreement between
Aetna Insurance Company of America and Aetna Life Insurance and
Annuity Company(1)
(4) Instruments Defining the Rights of Security Holders
(a) Group Annuity Contract (Form No. G2-MGA-95)(2)
(b) Individual Annuity Contract (Form No. I2-MGA-95)(3)
(c) Certificate (G2CC-MGA-95) to Group Annuity Contract Form No.
G-MGA-95(4)
(d) Endorsement (E2-MGAIRA-95-2) to Group Annuity Contract Form No.
G2-MGA-95 and Certificate No. G2CC-MGA-95(4)
(e) Endorsement (E2-MGAROTH-97) to Group Annuity Contract Form No.
G2-MGA-95 and Certificate No. G2CC-MGA-95(4)
(5) Opinion re Legality
(10) Material contracts are listed under exhibit 10 in the Company's
Form 10-K for the fiscal year ended December 31, 1999 (File No.
33-81010), as filed with the Commission on March 23, 2000. Each
of the exhibits so listed is incorporated by reference as
indicated in the Form 10-K
(13) Aetna Insurance Company of America Form 10-K for the fiscal year
ended December 31, 1999
(23)(a) Consent of Independent Auditors
(b) Consent of Legal Counsel (included in Exhibit (5) above)
(24)(a) Powers of Attorney(5)
(b) Certificate of Resolution Authorizing Signature by Power of
Attorney(6)
(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 Registration Statement on Form S-1 (File No.
333-22723), as filed on March 4, 1997.
<PAGE>
2. Incorporated by reference to Registration Statement on Form S-2 (File No.
33-63657), as filed on October 25, 1995.
3. Incorporated by reference to Pre-Effective Amendment No. 3 to Registration
Statement on Form S-2 (File No. 33-63657), as filed on January 17, 1996.
4. Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form S-2 (File No. 33-63657), as filed on
November 24, 1997.
5. Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 333-49581), as filed on April
4, 2000.
6. Incorporated by reference to Registration Statement on Form N-4 (File No.
33-59749), as filed on June 1, 1995.
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
<PAGE>
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.
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. 8 to the Registration Statement on Form S-2 (File No. 33-63657) 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 INSURANCE COMPANY OF AMERICA
(REGISTRANT)
By: Thomas J. McInerney*
-----------------------------------------
Thomas J. McInerney
President
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to Registration Statement on Form S-2 has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Thomas J. McInerney* Director and President )
- --------------------- (principal executive officer) )
Thomas J. McInerney )
)
Deborah Koltenuk* Vice President, Corporate Controller, ) April
- --------------------- and Assistant Treasurer ) 13, 2000
Deborah Koltenuk (principal accounting and financial officer) )
)
Catherine H. Smith* Director )
- --------------------- )
Catherine H. Smith )
)
Shaun P. Mathews* Director )
- --------------------- )
Shaun P. Mathews )
By: /s/ Michael A. Pignatella
------------------------------------------
Michael A. Pignatella
*Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
16(5) Opinion re Legality
---------
16(13) Aetna Insurance Company of America Form 10-K for the
fiscal year ended December 31, 1999
---------
16(23)(a) Consent of Independent Auditors
---------
16(23)(b) Opinion and Consent of Legal Counsel *
(16) (27) Financial Data Schedule
---------
*Included in Exhibit 16(5) above.
[Aetna logo] Aetna Inc.
Financial Services 151 Farmington Avenue
[Aetna letterhead] 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 Insurance Company of America
Post-Effective Amendment No. 8 to Registration Statement on Form S-2
Prospectus Title: Aetna Multi-Rate Annuity
File No. 33-63657
Dear Sir or Madam:
As Counsel of Aetna Insurance Company of America (the "Company"), I have
represented the Company in connection with the Aetna Multi-Rate Annuity (the
"Annuity") available under certain variable annuity contracts and the S-2
Registration Statement relating to such Annuity.
In connection with this opinion, I have reviewed Post-Effective Amendment No. 8
to the Registration Statement on Form S-2 relating to such Annuity, including
the prospectus, and relevant proceedings of the Board of Directors.
Based upon this review, and assuming the securities represented by the Company
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. 8 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 33-81010
----------------- --------
Aetna Insurance Company of America
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Florida 06-1286272
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 West Lemon Street, Suite 213, Tampa,Florida 33609
- --------------------------------------------------------------------------------
(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 March 22, 2000 there were 1,275 shares of common stock outstanding, par
value $100 per share, all of which shares were held by Aetna Life Insurance and
Annuity Company.
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 INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Annual Report on Form 10-K
For the Year Ended December 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business ** ........................................................ 3
Item 2. Properties ** ...................................................... 7
Item 3. Legal Proceedings .................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders * .............. 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................... 7
Item 6. Selected Financial Data * .......................................... 8
Item 7. Management's Analysis of the Results of Operations ** .............. 8
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .......... 15
Item 8. Financial Statements and Supplementary Data ........................ 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant * ............... 36
Item 11. Executive Compensation * ........................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management * ...................................................... 36
Item 13. Certain Relationships and Related Transactions * ................... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K ............................................................... 36
Index to Financial Statement Schedule ..................................... 39
Signatures ................................................................ 42
</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.
Aetna Insurance Company of America (the "Company") is a stock life insurance
company organized in 1990 under the insurance laws of Connecticut. Effective
January 5, 2000, the Company's state of domicile changed from Connecticut to
Florida. The Company 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. (together
with its subsidiaries, "Aetna"). The Company has one operating segment and all
revenue reported by the Company comes from external customers. The Company's
principal executive office is located at 5100 West Lemon Street, Suite 213,
Tampa, Florida 33609 and its principal office for operations is located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Products and Services
The Company principally offers annuity contracts to individuals on a qualified
and nonqualified basis and to employer-sponsored retirement plans qualified
under Internal Revenue Code Sections 401, 403 and 408. These contracts may be
deferred or immediate ("payout annuities").
Investment Options
The Company's products provide customers with variable and/or fixed investment
options. Variable ("non-guaranteed") options provide for full assumption by the
customer of investment risks. Assets supporting non-guaranteed variable options
are held in separate accounts that invest in ALIAC mutual funds and/or
unaffiliated mutual funds. ALIAC mutual funds include funds managed by Aeltus
Investment Management, Inc. ("Aeltus"), an affiliate of the Company, and,
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 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, among other things, to certain minimum guarantees. The
effect of investment performance (as long as minimum guarantees are not
triggered) does not impact the Company's results.
Fees and Investment Margins
Insurance charges or other fees earned by the Company vary by product and
depend, among other factors, on the funding option selected by the customer
under the product. For annuity products where assets are allocated to variable
funding options, the Company may charge the separate account an asset-based
insurance and expense charge. When a customer selects an ALIAC mutual fund as a
variable funding option, the Company receives a participation fee from either
Aeltus or ALIAC. In addition, when a customer selects an unaffiliated mutual
fund as a variable funding option, the Company receives distribution fees
and/or expense reimbursements. For fixed funding
3
<PAGE>
Item 1. Business. (continued)
Fees and Investment Margins (continued)
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
The substantial portion of fees or other charges and investment margins is
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. Assets under management, excluding net unrealized capital gains and
losses related to market value adjustments required under Financial Accounting
Standard ("FAS") No. 115, were $1.3 billion, $1.1 billion and $0.8 billion at
December 31, 1999, 1998 and 1997, respectively. Assets under management are
available for contractholder withdrawal and are subject to fair 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. Existing tax penalties on annuity 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.
Principal Markets and Method of Distribution
The Company's products are offered primarily to individuals and
employer-sponsored groups in the education market. The Company's products
generally are sold through a managed network of banks and broker/dealers and
dedicated career agents.
Competition
Competition arises from other insurance companies, as well as an array of
financial services companies including banks, mutual funds and other investment
managers. Principal competitive factors are reputation for investment
performance, product features, service, cost and the perceived financial
strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of the Company's products and services.
Reserves
Reserves for investment contracts (deferred annuities and immediate annuities
without life contingent payouts) are equal to cumulative deposits plus credited
interest less withdrawals and charges thereon. Of those investment contracts
which are experience-rated, the reserves also reflect
4
<PAGE>
Item 1. Business. (continued)
Reserves (continued)
net realized capital gains/losses (which the Company reflects through credited
rates on an amortized basis) and net unrealized capital gains/losses related to
FAS No. 115.
Reserves, as described above, are computed amounts that, with additions from
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.
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, U.S.
government securities, foreign government and corporate debt securities,
residential mortgage-backed securities, commercial and multifamily
mortgage-backed securities and other asset-backed 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. Aeltus is the advisor
of the Company's general account assets.
See Management's Analysis of the Results of Operations--General Account
Investments 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 Department of Connecticut, prior to January 5, 2000, and the
Insurance Department of Florida, subsequent to January 5, 2000. Among other
matters, these agencies may regulate premium rates, trade practices, agent
licensing, policy forms, and underwriting and claims practices.
The Securities and Exchange Commission ("SEC") and, to a lesser extent, the
states regulate the sales and investment management activities and operations
of the Company. Regulations of the
5
<PAGE>
Item 1. Business. (continued)
Other Matters (continued)
SEC, Department of Labor and Internal Revenue Service also impact certain of
the Company's annuity and other investment and retirement products. These
products involve Separate Accounts and mutual funds registered under the
Investment Company Act of 1940.
Insurance Holding Company Laws
A number of states, including Florida and Connecticut, regulate affiliated
groups of insurers, such as the group to which the Company belongs, 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, see "Liquidity &
Capital Resources" in Management's Analysis of the Results of Operations and
Note 5 of Notes to 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.
The after-tax charges to earnings for guaranty fund obligations for the years
ended December 31, 1999 and 1997 were $0.1 million and $0.5 million. There was
no after-tax charge to earnings for guaranty fund obligations for the year
ended December 31, 1998. The full amount of the charge reported for guaranty
fund obligations in 1997 was an after-tax cumulative effect charge to net
income related to the company's adoption of Statement of Position 97-3,
Accounting by Insurance and Other Enterprises for Insurance related Assessments
("SOP 97-3"), in 1997.
For information regarding certain other potential regulatory changes relating
to the Company's businesses, see "Forward-Looking Information/Risk Factors" in
Management's Analysis of the Results of Operations.
b. Ratings
The Company's financial strength ratings at October 27, 1999 and March 22, 2000
were as follows:
<TABLE>
<CAPTION>
Rating Agencies
--------------------------------------------------
Moody's
Duff & Investors Standard &
A.M. Best Phelps Service Poor's
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
October 27, 1999 A AA Aa3 AA-
March 22, 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.
6
<PAGE>
Item 1. Business. (continued)
Other Matters (continued)
c. Miscellaneous
The Company utilizes the employees of Aetna and its affiliates (primarily
ALIAC) and receives an expense allocation, at cost, based on the utilization of
these employees.
The Company uses ALIAC's computer facilities. The Company's management believes
that ALIAC's computer facilities, systems and related procedures are adequate
to meet its business needs. ALIAC's data processing systems and backup and
security policies, practices and procedures are regularly evaluated by ALIAC'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 10% or more of 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 principal executive office is located at 5100 West Lemon Street,
Suite 213, Tampa, Florida 33609 and its principal office for operations is
located at 151 Farmington Avenue, Hartford, Connecticut 06156. The Company
occupies office space that is owned or leased by Aetna Life Insurance Company
or other affiliates. Expenses associated with these offices are allocated on a
direct and indirect basis to the Company and the other subsidiaries of Aetna.
Item 3. Legal Proceedings
The Company is not currently involved in any material litigation.
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 owned by its parent company, ALIAC.
For the years ended 1999, 1998 and 1997, the Company did not pay dividends to
ALIAC. Effective January 5, 2000, the Company changed its state of domicile
from Connecticut to Florida. All dividends paid to ALIAC in 2000 must have
prior approval by the Insurance Commissioner of the State of Florida.
The Company has entered into support agreements with ALIAC under which ALIAC
has agreed to cause the Company to have sufficient capital to meet a certain
capital and surplus level. The Company did not receive any capital
contributions relating to these agreements in 1999 and received contributions
relating to these agreements of $15 million and $20 million from ALIAC in 1998
and 1997, respectively.
7
<PAGE>
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 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.
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 services businesses into two
independent publicly traded companies as soon as an orderly separation can be
achieved.
Results of Operations
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charges assessed against policyholders $ 15.5 $ 11.5 $ 6.1
Net investment income 10.9 10.4 7.1
Other income 1.5 0.6 0.2
Net realized capital (losses) gains (0.3) (0.2) 0.1
- -----------------------------------------------------------------------------------------------------------
Total revenue 27.6 22.3 13.5
- -----------------------------------------------------------------------------------------------------------
Current and future benefits 8.0 9.0 6.5
Operating expenses 6.9 6.2 3.7
Amortization of deferred policy acquisition costs 4.6 3.9 0.8
- -----------------------------------------------------------------------------------------------------------
Total benefits and expenses 19.5 19.1 11.0
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative-effect adjustment 8.1 3.2 2.5
Income taxes 2.7 0.6 0.8
- -----------------------------------------------------------------------------------------------------------
Income before cumulative-effect adjustment 5.4 2.6 1.7
- -----------------------------------------------------------------------------------------------------------
Cumulative-effect adjustment, net of tax -- -- 0.5
- -----------------------------------------------------------------------------------------------------------
Net income $ 5.4 $ 2.6 $ 1.2
===========================================================================================================
Net realized capital (losses) gains, net of tax (included above) $ (0.2) $ (0.1) $ 0.1
===========================================================================================================
Deposits not included above:
Annuities--fixed options $ 9.0 $ 73.8 $ 161.7
Annuities--variable options 20.1 168.4 231.0
- -----------------------------------------------------------------------------------------------------------
Total $ 29.1 $ 242.2 $ 392.7
===========================================================================================================
Assets under management: (1)
Annuities--fixed options (2) $ 223.0 $ 251.3 $ 257.8
Annuities--variable options (3) 1,108.4 891.4 560.7
- -----------------------------------------------------------------------------------------------------------
Total (4) $ 1,331.4 $ 1,142.7 $ 818.5
===========================================================================================================
</TABLE>
(1) Excludes net unrealized capital losses of $4.5 million at December 31, 1999
and net unrealized capital gains of $4.1 million and $2.1 million at
December 31, 1998 and 1997, respectively.
(2) Includes $78.7 million, $101.9 million and $114.2 million related to the
assets supporting a guaranteed interest option at December 31, 1999, 1998
and 1997, respectively.
(3) Includes $870.3 million, $689.1 million and $448.5 million at December 31,
1999, 1998 and 1997, respectively, of assets held and managed by
unaffiliated mutual funds.
(4) Includes $340.8 million, $359.6 million and $257.8 million of assets
managed by Aeltus at December 31, 1999, 1998 and 1997, respectively, and
includes $120.2 million, $94.0 million and $112.2 million of assets
managed by its parent, ALIAC, at December 31, 1999, 1998 and 1997,
respectively.
8
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
Results of Operations (continued)
The Company's net income increased $2.8 million and $1.4 million in 1999 and
1998, respectively. Net income in 1997 included a charge for a
cumulative-effect adjustment, net of tax, of $0.5 million related to a change
in the accounting for guaranty fund and other insurance related assessments.
Excluding net realized capital gains or losses and the 1997 cumulative-effect
adjustment, earnings increased $2.9 million and $1.1 million in 1999 and 1998,
respectively. The increases in 1999 and 1998 earnings were due to increased fee
income from higher levels of assets under management partially offset by
increased operating expenses.
Assets under management increased by $188.7 million in 1999 and $324.2 million
in 1998. The increases in 1999 and 1998 were primarily due to appreciation in
the stock market.
Net deposits (deposits, including new contracts, less surrenders) decreased in
1999 and 1998 primarily due to decreases in deposits from new contracts. The
decrease in deposits from new contracts occurred because the Company did not
actively market its group and individual annuity products in 1999 and during
the last part of 1998 (see "Outlook" below).
Outlook
The Company's strategy is to increase assets under management and improve
profitability by focusing on new distribution opportunities, primarily in
Florida. As part of this strategy, effective January 5, 2000, the Company
changed its state of domicile from Connecticut to Florida. The Company has
begun to focus its marketing efforts principally on expanding its group annuity
sales with the offering, through dedicated agents, of contracts to public, tax
exempt and private employers sponsoring retirement plans. The Company also
plans to explore alternative methods of distribution, such as direct marketing.
Although the Company has offered group and individual annuities, principally
non-qualified annuities and qualified individual retirement annuities, it is
not actively marketing these products. The Company plans, however, to continue
to make them available through dedicated agents, although some sales, in
particular the non-qualified and IRA sales, may be made through brokering
agents and certain banks that have selling agreements with the Company.
Refer to "Forward-Looking Information/Risk Factors" regarding other important
factors that may materially affect the Company.
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.
9
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
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 $ 128.3 $ 142.3
Nonredeemable preferred stock 0.9 3.0
- ------------------------------------------------------------------------------------------------
Total investments $ 129.2 $ 145.3
================================================================================================
</TABLE>
Total investments decreased for 1999 primarily due to the decrease in debt
securities. Compared to 1998, debt securities decreased as a result of fixed
annuity withdrawals and a decline in the securities' fair value. The decline in
fair value was attributable to higher interest rates at the end of 1999.
Debt Securities
At December 31, 1999 and 1998, $126.1 million (or 98% of the total carrying
value of debt securities) and $133.4 million (or 94% of the total carrying
value of debt securities), respectively, 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 and AA-,
respectively.
The percent of total debt securities investments by quality ratings is as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
- -----------------------------------------------------
<S> <C> <C>
AAA 39.0% 38.4%
AA 8.8 8.5
A 35.3 33.5
BBB 16.9 19.6
- -----------------------------------------------------
Total 100.0% 100.0%
=====================================================
</TABLE>
The percent 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 55.8% 56.7%
U.S. Treasuries/Agencies 16.5 16.4
Commercial/Multifamily Mortgage-Backed Securities 6.8 7.4
Residential Mortgage-Backed Securities 7.9 6.9
Foreign Securities--U.S. Dollar Denominated 8.1 6.3
Asset-Backed Securities 4.9 6.3
- -----------------------------------------------------------------------------------------------
Total 100.0% 100.0%
===============================================================================================
</TABLE>
10
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
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 fair value is at least
partially determined by, among other things, levels of or changes in domestic
interest rates (short-term or long-term), duration, prepayment rates, or credit
ratings/spreads.
The risks associated with investments supporting experience-rated annuity
products are assumed by those contractholders and not by the Company (subject
to, among other things, certain minimum guarantees). Risks associated with the
investments and liabilities related to experience-rated 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 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, the Company believes that
these changes in market rates would not materially affect the 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
instruments is estimated to be $ 0.1 million (after-tax), (0.1% of total
shareholder's equity) at December 31, 1999 and 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 effect of interest rate risk on potential 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 rates scenarios.
11
<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 deposits, income received on investments and capital
contributions. Cash provided from these sources was used primarily for
operating expenses and to fund contract withdrawals.
Debt securities 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.
The Company has significant short-term liquidity supporting its business. At
December 31, 1999, cash and cash equivalents were $22.9 million.
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.
For the years ended 1999, 1998 and 1997, the Company did not pay dividends to
ALIAC. Effective January 5, 2000, the Company changed its state of domicile
from Connecticut to Florida. All dividends paid to ALIAC in 2000 must have
prior approval by the Insurance Commissioner of the State of Florida.
The Company has entered into support agreements with ALIAC under which ALIAC
has agreed to cause the Company to have sufficient capital to meet a certain
capital and surplus level. The Company did not receive any capital
contributions relating to these agreements in 1999 and received contributions
relating to these agreements of $15 million and $20 million from ALIAC in 1998
and 1997, respectively.
See "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 equipment ("embedded systems") to conduct its business.
It shares the same IT systems as its parent, ALIAC. The Company
12
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
Year 2000 (continued)
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, ALIAC and Aetna conducted a series of quality
control checks on the Company's 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. ALIAC and
Aetna are in the process of reassigning their Year 2000 personnel and
transferring Year 2000 related responsibilities to their businesses. The
Company remains Year 2000 vigilant, and any potential future Year 2000 issues
will be addressed by IT personnel.
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 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, contingency plans have been developed for
those failure scenarios it believes could have a significant impact on the
Company's operations. Those plans remain in effect. The scenarios that have
been 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
Year 2000 project costs are not allocated to the Company.
Refer to "Foward-Looking Information/Risk Factors" for factors that could cause
actual Year 2000 results to differ from the Company's expectation.
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
13
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
Forward-Looking Information/Risk Factors (continued)
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) "Results of Operations --
Outlook", (2) "General Account Investments- Risk Management and Market
Sensitive Instruments/Interest Rate 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.
Certain Factors Particular to Financial Services Operations
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.
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. Claims-paying ratings
of the Company are periodically reviewed and subject to changes, in certain
cases, based on factors beyond our control.
14
<PAGE>
Item 7. Management's Analysis of the Results of Operations (continued)
Forward-Looking Information/Risk Factors (continued)
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
10 of Notes to Financial Statements 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; and
o Changes in the tax treatment of annuity 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 products.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
See "General Account Investments" in Management's Analysis of the Results of
Operations.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ................................... 17
Financial Statements:
Statements of Income for the Years Ended December 31, 1999,
1998 and 1997 ................................................ 18
Balance Sheets as of December 31, 1999 and 1998 ............... 19
Statements of Changes in Shareholder's Equity for the Years
Ended December 31, 1999, 1998 and 1997 ....................... 20
Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997 ................................................ 21
Notes to Financial Statements ................................. 22
</TABLE>
16
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Insurance Company of America:
We have audited the accompanying balance sheets of Aetna Insurance Company of
America as of December 31, 1999 and 1998, and the related 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 financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aetna Insurance Company of
America at December 31, 1999 and 1998, and the results of its operations and
its 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
March 22, 2000
17
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
------- ------- -----
<S> <C> <C> <C>
Revenues:
Charges assessed against policyholders $ 15.5 $ 11.5 $ 6.1
Net investment income 10.9 10.4 7.1
Net realized capital (losses) gains (0.3) (0.2) 0.1
Other income 1.5 0.6 0.2
------- ------- -----
Total revenue 27.6 22.3 13.5
------- ------- -----
Benefits and expenses:
Current and future benefits 8.0 9.0 6.5
Operating expenses:
Salaries and related benefits 2.4 2.5 1.6
Other 4.5 3.7 2.1
Amortization of deferred policy acquisition costs 4.6 3.9 0.8
------- ------- -----
Total benefits and expenses 19.5 19.1 11.0
------- ------- -----
Income before income taxes and cumulative
effect adjustment 8.1 3.2 2.5
Income taxes 2.7 0.6 0.8
------- ------- -----
Income before cumulative effect adjustments 5.4 2.6 1.7
Cumulative-effect adjustment, net of tax -- -- 0.5
------- ------- -----
Net income $ 5.4 $ 2.6 $ 1.2
======= ======= =====
</TABLE>
See Notes to Financial Statements.
18
<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>
December 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Assets
Investments:
Debt securities, available-for-sale, at fair value:
(amortized cost: $132.8 and $138.2) $ 128.3 $ 142.3
Equity securities, available-for-sale, at fair value:
Nonredeemable preferred stock (amortized cost: $1.0 and $3.1) 0.9 3.0
Cash and cash equivalents 22.9 16.5
Deferred policy acquisition costs 58.8 59.9
Accrued investment income 2.0 2.1
Premiums due and other receivables 9.0 13.3
Other assets 0.6 0.4
Separate Accounts assets 1,194.6 1,006.5
-------------- --------------
Total assets $ 1,417.1 $ 1,244.0
============== ==============
Liabilities and Shareholder's Equity
Liabilities:
Policyholders' funds left with the Company 138.8 153.2
Other liabilities 6.5 11.8
Due to parent and affiliates 0.5 0.9
Income taxes
Current 0.7 0.1
Deferred 2.6 0.7
Separate Accounts liabilities 1,194.6 1,006.5
-------------- --------------
Total liabilities 1,343.7 1,173.2
-------------- --------------
Shareholder's equity:
Common capital stock, par value $2,000 (1,275 shares authorized,
issued and outstanding) 2.5 2.5
Paid-in capital 62.5 62.5
Accumulated other comprehensive (loss) income (1.6) 1.2
Retained earnings 10.0 4.6
-------------- --------------
Total shareholder's equity 73.4 70.8
-------------- --------------
Total liabilities and shareholder's equity $ 1,417.1 $ 1,244.0
============== ==============
</TABLE>
See Notes to Financial Statements.
19
<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>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $ 70.8 $ 52.2 $ 31.3
Comprehensive income
Net income 5.4 2.6 1.2
Other comprehensive income, net of tax
Unrealized (losses) gains on securities
(($4.3) million, $1.5 million and $0.0
million, pretax) (2.8) 1.0 --
----------- ----------- -----------
Total comprehensive income 2.6 3.6 1.2
----------- ----------- -----------
Capital contributions -- 15.0 20.0
Other changes -- -- (0.3)
----------- ----------- -----------
Shareholder's equity, end of year $ 73.4 $ 70.8 $ 52.2
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
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 $ 5.4 $ 2.6 $ 1.2
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Net amortization of discount on debt securities (0.1) (0.1) (0.4)
------- ------- --------
Cash flows provided by operating activities and
net realized capital gains before changes in
assets and liabilities 5.3 2.5 0.8
Net realized capital losses (gains) 0.3 0.2 (0.1)
------- ------- --------
Cash flows provided by operating activities
before changes in assets and liabilities 5.6 2.7 0.7
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 0.1 (0.1) (1.7)
Decrease (increase) in deferred policy acquisition costs 1.1 (14.5) (24.3)
Net change in amounts due to/from parent and affiliates (0.4) 0.9 0.5
Net (decrease) increase in other assets and liabilities (10.1) 9.2 3.4
Net change in income taxes 4.0 2.4 (1.4)
------- ------- --------
Net cash provided by (used for) operating activities 0.3 0.6 (22.8)
------- ------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available-for-sale 34.2 27.8 16.6
Equity securities 2.1 -- --
Investment maturities and repayments of:
Debt securites available-for-sale 17.9 3.4 3.2
Short-term investments -- -- 1.0
Cost of investment purchases in:
Debt securities available-for-sale (47.6) (36.8) (132.8)
Short-term investments -- -- (1.0)
------- ------- --------
Net cash provided by (used for) investing activities 6.6 (5.6) (113.0)
------- ------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 12.8 19.7 84.7
Withdrawal of investment contracts (19.0) (14.3) (5.7)
Capital contribution -- 15.0 20.0
Other, net 5.7 (11.4) (2.5)
------- ------- --------
Net cash (used for) provided by financing activities (0.5) 9.0 96.5
------- ------- --------
Net increase (decrease) in cash and cash equivalents 6.4 4.0 (39.3)
Cash and cash equivalents, beginning of year 16.5 12.5 51.8
------- ------- --------
Cash and cash equivalents, end of year $ 22.9 $ 16.5 $ 12.5
======= ======= ========
Supplemental cash flow information:
Income taxes (received) paid, net $ (1.3) $ (3.3) $ 1.5
======= ======= ========
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Aetna Insurance Company of America (the "Company") is a provider of financial
services in the United States. The Company 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 Company has one operating segment and all revenue reported by the Company
comes from external customers.
Basis of Presentation
These financial statements have been prepared in conformity with generally
accepted accounting principles. Certain reclassifications have been made to
1998 and 1997 financial information to conform to the 1999 presentation.
Future Application of Accounting Standards
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk
In October 1998, the American Institute of Certified Public Accountants 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.
22
<PAGE>
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
Investments
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 shareholder's equity, net of related income
taxes. Purchases and sales of debt and equity securities are recorded on the
trade 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
23
<PAGE>
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
additional collateral obtained or refunded as the market value of the loaned
securities fluctuates. At December 31, 1999 and 1998, the Company had no
securities on loan.
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.
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 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
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 $58.8 million and $59.9 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.
Reserves
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 5.40%
to 7.50% 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.
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 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.
24
<PAGE>
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 Account assets supporting variable options under 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 an affiliate of the
Company, or other selected mutual funds not managed by the Company or an
affiliate.
Separate Accounts assets are carried at fair value. At December 31, 1999 and
1998, unrealized losses of $(0.8) million and unrealized gains of $1.0 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
Balance Sheets. Deposits, investment income and net realized and unrealized
capital gains and losses of the Separate Accounts are not reflected in the
Financial Statements (with the exception of realized and unrealized capital
gains and losses on the assets supporting the guaranteed interest option). The
Statements of Cash Flows do not reflect investment activity of the Separate
Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax
expenses/benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
25
<PAGE>
Notes to Financial Statements (continued)
2. Investments
Debt securities available-for-sale at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 21.5 $ -- $ 0.3 $ 21.2
- --------------------------------------------------------------------------------------------------------
U.S. corporate securities:
Utilities 5.7 -- 0.2 5.5
Financial 33.3 -- 0.6 32.7
Transportation/capital goods 1.6 -- -- 1.6
Health care/consumer products 12.6 -- 0.9 11.7
Natural resources 14.5 -- 0.7 13.8
Other corporate securities 6.7 -- 0.4 6.3
- --------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 74.4 -- 2.8 71.6
- --------------------------------------------------------------------------------------------------------
Foreign securities:
Government 1.0 -- -- 1.0
Other 9.9 0.1 0.5 9.5
- --------------------------------------------------------------------------------------------------------
Total foreign securities 10.9 0.1 0.5 10.5
- --------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs -- -- -- --
Collateralized mortgage obligations 10.6 -- 0.5 10.1
- --------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 10.6 -- 0.5 10.1
- --------------------------------------------------------------------------------------------------------
Commercial/multifamily mortgage-
backed securities 9.0 -- 0.3 8.7
- --------------------------------------------------------------------------------------------------------
Other asset-backed securities 6.4 -- 0.2 6.2
- --------------------------------------------------------------------------------------------------------
Total debt securities $ 132.8 $ 0.1 $ 4.6 $ 128.3
========================================================================================================
</TABLE>
26
<PAGE>
Notes to Financial Statements (continued)
2. Investments (continued)
Debt securities available-for-sale at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Millions) Cost Gain Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 22.6 $ 0.7 $ -- $ 23.3
- --------------------------------------------------------------------------------------------------------
U.S. corporate securities:
Utilities 7.0 0.1 -- 7.1
Financial 37.9 1.2 0.1 39.0
Transportation & capital goods 8.6 0.3 -- 8.9
Healthcare & consumer products 15.3 0.6 -- 15.9
Natural resources 8.6 0.3 -- 8.9
Other corporate securities 0.7 0.2 -- 0.9
- --------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 78.1 2.7 0.1 80.7
- --------------------------------------------------------------------------------------------------------
Foreign securities:
Government 1.1 -- -- 1.1
Other 8.0 0.2 0.3 7.9
- --------------------------------------------------------------------------------------------------------
Total foreign securities 9.1 0.2 0.3 9.0
- --------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 0.7 -- -- 0.7
Collateralized mortgage obligations 8.7 0.4 -- 9.1
- --------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 9.4 0.4 -- 9.8
- --------------------------------------------------------------------------------------------------------
Commercial/multifamily mortgage-
backed securities 10.3 0.3 -- 10.6
- --------------------------------------------------------------------------------------------------------
Other asset-backed securities 8.7 0.2 -- 8.9
- --------------------------------------------------------------------------------------------------------
Total Debt Securities $ 138.2 $ 4.5 $ 0.4 $ 142.3
========================================================================================================
</TABLE>
27
<PAGE>
Notes to Financial Statements (continued)
2. Investments (continued)
At December 31, 1999 and 1998 net unrealized (depreciation) appreciation of
$(4.5) million and $4.1 million respectively, on available-for-sale debt
securities included unrealized (losses) gains of $(4.5) million and $3.8
million, respectively, related to experience-rated contracts, which were not
reflected in shareholder's equity but in policyholders' funds left with the
Company.
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 $ 9.3 $ 9.3
After one year through five years 49.8 49.0
After five years through ten years 18.2 17.6
After ten years 29.5 27.3
Mortgage-backed securities 19.6 18.9
Other asset-backed securities 6.4 6.2
- ---------------------------------------------------------------
Total $ 132.8 $ 128.3
===============================================================
</TABLE>
At December 31, 1999 and 1998, debt securities carried at $5.6 million and $5.4
million, respectively, were on deposit as required by various state regulatory
agencies.
Investments in equity securities available for sale as of December 31, were as
follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998
- --------------------------------------------------
<S> <C> <C>
Cost $ 1.0 $ 3.1
Gross unrealized gains -- --
Gross unrealized losses (0.1) (0.1)
- --------------------------------------------------
Fair value $ 0.9 $ 3.0
==================================================
</TABLE>
The Company does 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.
28
<PAGE>
Notes to Financial Statements (continued)
3. 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>
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1.2 $ 1.3 $ 0.6 $ 0.5
Without a fixed maturity $ 137.6 $ 131.6 $ 152.6 $ 143.8
- ----------------------------------------------------------------------------------------
</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.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Investment contract liabilities (included in policyholders' funds left with the
Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable.
Off-Balance-Sheet and Other Financial Instruments
The Company did not have transactions in off-balance-sheet instruments in 1999
or 1998.
29
<PAGE>
Notes to Financial Statements (continued)
4. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 9.4 $ 9.0 $ 6.0
Nonredeemable preferred stock 0.1 0.3 --
Cash equivalents 0.7 0.7 1.2
Other 0.8 0.6 --
- ------------------------------------------------------------------------
Gross investment income 11.0 10.6 7.2
Less: investment expenses 0.1 0.2 0.1
- ------------------------------------------------------------------------
Net investment income $ 10.9 $ 10.4 $ 7.1
========================================================================
</TABLE>
Net investment income includes amounts allocable to experience-rated
contractholders of $8.6 million, $8.9 million and $7.0 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Interest credited to
contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
Effective January 5, 2000 the Company changed its state of domicile from
Connecticut to Florida. All dividends paid to shareholders in 2000 must have
prior approval by the Insurance Commissioner of the State of Florida.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus, those amounts
determined in conformity with statutory accounting practices prescribed or
permitted by the Department, which differ in certain respects from generally
accepted accounting principles ("GAAP"). Statutory net income (loss) was $(0.1)
million, $(5.2) million and $0.4 million for the years ended December 31, 1999,
1998 and 1997, respectively. Statutory capital and surplus was $52.5 million
and $53.4 million as of December 31, 1999 and 1998, respectively. The Company
has entered into support agreements with ALIAC under which ALIAC has agreed to
cause the Company to have sufficient capital to meet a certain capital and
surplus level. The Company received no capital contributions relating to these
agreements in 1999. The Company received $15.0 million and $20.0 million from
ALIAC in 1998 and 1997, respectfully.
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.
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold.
Net realized capital gains (losses) on debt securities, as reflected in the
Statements of Income for the years ended December 31, 1999, 1998 and 1997 were
$(0.3) million, $(0.2) million and $0.1 million, respectively.
30
<PAGE>
Notes to Financial Statements (continued)
6. Capital Gains and Losses on Investment Operations (continued)
Net realized capital (losses) gains of $(1.1) million, $(0.2) million and $0.2
million 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 in 1999, 1998 and 1997, respectively. Net
unamortized (losses) gains were $(1.0) million and $0.2 million at December 31,
1999 and 1997, respectively. The amounts in 1998 were immaterial.
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses (excluding those related to experience rated
contractholders in 1999, 1998 and 1997) were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $ 34.2 $ 27.8 $ 16.6
Gross gains 0.2 0.6 0.1
Gross losses 0.5 0.8 --
- ---------------------------------------------------------
</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 $ (0.3) $ 0.1 --
Equity securities -- (0.1) --
Other (4.1) 1.6
- ----------------------------------------------------------------------------------
Subtotal (4.4) 1.6 --
Increase in deferred income taxes (See Note 7) (1.6) 0.6 --
- ----------------------------------------------------------------------------------
Net change in accumulated other
comprehensive income $ (2.8) $ 1.0 --
==================================================================================
</TABLE>
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $(4.5) million and $3.8 million at December 31, 1999 and 1998, respectively,
are reflected on the Balance Sheets in policyholders' funds left with the
Company and are not included in shareholder's equity.
31
<PAGE>
Notes to Financial Statements (continued)
6. Capital Gains and Losses on Investment Operations (continued)
Shareholder's equity included the following accumulated other comprehensive
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 gains $ 0.1 $ 0.3 $ 0.2
Gross unrealized losses (0.1) -- --
- ------------------------------------------------------------------------------------
-- 0.3 0.2
- ------------------------------------------------------------------------------------
Equity securities:
Gross unrealized gains -- -- --
Gross unrealized losses (0.1) (0.1) --
- ------------------------------------------------------------------------------------
(0.1) (0.1) --
- ------------------------------------------------------------------------------------
Other:
Gross unrealized gains -- 1.9 --
Gross unrealized losses (2.4) (0.3) --
- ------------------------------------------------------------------------------------
(2.4) 1.6 --
- ------------------------------------------------------------------------------------
Less: deferred federal income (benefits) taxes
(see Note 7) (0.9) 0.6 --
- ------------------------------------------------------------------------------------
Net unrealized capital (losses) gains $ (1.6) $ 1.2 $ 0.2
====================================================================================
</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 gains (losses) arising
during the period (1) $ (2.9) $ 0.9 $ 0.3
Less: reclassification adjustment for gains and
other items included in net income (2) (0.1) (0.1) 0.3
- ------------------------------------------------------------------------------------
Net unrealized (losses) gains on securities $ (2.8) $ 1.0 $ --
====================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$(4.5) million, $1.3 million and $0.4 million for 1999, 1998 and 1997,
respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $(0.2) million, $(0.2) million and $0.4 million for 1999,
1998 and 1997, respectively.
32
<PAGE>
Notes to Financial Statements (continued)
7. Income Taxes
The Company is included in the consolidated federal income tax return of Aetna
and combined Connecticut state income tax return of Aetna. Aetna allocates to
each member an amount approximating the tax it would have incurred were it not
a member of the consolidated group, and credits the member for the use of its
tax saving attributes used in the consolidated returns.
Income taxes for the years ended December 31, consist of:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes (benefits):
Federal $ (0.3) $ (1.7) $ 1.2
State -- 0.1 --
Net realized capital gains (losses) (0.4) (0.1) 0.1
- ------------------------------------------------------------------------------
(0.7) (1.7) 1.3
- ------------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 3.1 2.3 (0.4)
Net realized capital gains (losses) 0.3 -- (0.1)
- ------------------------------------------------------------------------------
3.4 2.3 (0.5)
- ------------------------------------------------------------------------------
Total $ 2.7 $ 0.6 $ 0.8
==============================================================================
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes and cumulative
effect adjustment $ 8.1 $ 3.2 $ 2.5
Tax rate 35% 35% 35%
- ------------------------------------------------------------------------------
Application of the tax rate 2.8 1.1 0.9
Tax effect of:
Excludable dividends (0.1) (0.5) (0.1)
- ------------------------------------------------------------------------------
Income taxes $ 2.7 $ 0.6 $ 0.8
==============================================================================
</TABLE>
33
<PAGE>
Notes to Financial Statements (continued)
7. 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:
Policyholders' funds left with the Company $ 12.4 $ 16.6
Unrealized gains allocable to experience-rated
contracts -- 1.3
Net unrealized capital losses 2.5 --
Investment losses 0.4 --
Guaranty fund assessments 0.1 0.1
Other 0.5 0.1
- -------------------------------------------------------------------------
Total gross assets 15.9 18.1
- -------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 16.9 16.9
Unrealized losses allocable to experience-rated
contracts 1.6 --
Net unrealized capital gains -- 1.9
- -------------------------------------------------------------------------
Total gross liabilities 18.5 18.8
- -------------------------------------------------------------------------
Net deferred tax liability $ 2.6 $ 0.7
=========================================================================
</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 deferred tax assets. The Company expects sufficient
taxable income in the future to realize the deferred tax assets because of the
Company's long-term history of having taxable income, which is projected to
continue.
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.
8. Benefit Plans
The Company utilizes the employees of Aetna and its affiliates (primarily
ALIAC). The benefit plan charges allocated to the Company were $0.4 million and
$0.2 million at December 31, 1999 and 1998, respectively. In 1997 the charges
were immaterial.
34
<PAGE>
Notes to Financial Statements (continued)
9. Related Party Transactions
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges, at cost, for these services based upon measures appropriate
for the type and nature of service provided. Total charges allocated to the
Company, including rent, salaries and other administrative expenses, were $6.0
million and $10.5 million for the years ended December 31, 1999 and 1998,
respectively, (of which $2.0 million and $5.5 million, respectively, were
capitalized as deferred policy acquisition costs).
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable annuity contracts. Under the insurance
contracts, the Separate Accounts pay the Company a daily fee which, on an
annual basis, was 1.25% and 1.40% for 1999 and 1998 and 1.40% in 1997, of their
average daily net assets. The amount of compensation and fees received from the
Separate Accounts, included in charges assessed against policyholders, amounted
to $13.5 million, $10.3 million and $5.6 million for the years ended December
31, 1999, 1998 and 1997, respectively.
The Company received no capital contributions in 1999. The Company received
capital contributions of $15.0 million in cash from ALIAC in 1998 and $20.0
million in 1997.
Aeltus, an affiliate of the Company, acts as adviser for the general account
assets. The Company pays Aeltus a fee which, on an annual basis, is .06% of the
average daily net assets under management. The amount of such fees for the
years ended December 31, 1999, 1998 and 1997 amounted to $0.1 million, $0.2
million and $0.1 million, respectively.
10. Commitments and Contingent Liabilities
Commitments
At December 31, 1999 and 1998 the Company had no commitments or contingent
liabilities.
Litigation
The Company is not currently involved in any material litigation.
35
<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, 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 16
2. Financial statement schedules. See Index to Financial Statement
Schedules on Page 39.
3. Exhibits:
3(i) Certificate of Incorporation
Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4, File No. 333-87131, as filed
with the Securities and Exchange Commission on December 15, 1999.
3(ii) By-Laws
Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4, File No. 333-87131, as filed on
December 15, 1999.
4 Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts)
Incorporated herein by reference to Registration Statement on Form
N-4, File No. 33-80750, as amended and filed most recently on April
23, 1997.
36
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(Continued)
Incorporated herein by reference to Registration Statement on Form
N-4, File No. 33-59749, as filed on June 1, 1995.
Incorporated herein by reference to Post-Effective Amendment No. 4
to Registration Statement on Form N-4, File No. 33-59749, as filed
on April 16, 1997.
Incorporated herein by reference to Post-Effective Amendment No. 6
to Registration Statement on Form N-4, File No. 33-59749, as filed
on November 26, 1997.
Incorporated herein by reference to Post-Effective Amendment No. 8
to Registration Statement on Form N-4, File No. 33-59749, as filed
on April 17, 1998.
Incorporated herein by reference to Registration Statement on Form
S-2, File No. 33-63657, as filed on October 25, 1995.
Incorporated herein by reference to Pre-Effective Amendment No. 3
to the Registration Statement on Form S-2, File No. 33-63657, as
filed on January 17, 1996.
Incorporated herein by reference to Post-Effective Amendment No. 3
to Registration Statement on Form S-2, File No. 33-63657, as filed
on November 24, 1997.
Incorporated herein by reference to Pre-Effective Amendment No. 1
to Registration Statement on Form N-4, File No. 333-01107 as filed
on December 15, 1999.
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. 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.*
37
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(Continued)
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.*
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 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.
* Management contract or compensatory plan or arrangement.
24 Power of Attorney
Filed with this Report immediately after Signature page.
27 Financial Data Schedule
Exhibits other than these listed are omitted because they are not
required or not applicable.
(b) Reports on Form 8-K.
None.
38
<PAGE>
Index to Financial Statement Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ................................. 40
III. Supplementary Insurance Information as of and for the years
ended December 31, 1999, 1998 and 1997 .................. 41
</TABLE>
Schedules other than those listed above are omitted because they are not
required or are not applicable.
39
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Insurance Company of America:
Under date of March 22, 2000, we reported on the balance sheets of Aetna
Insurance Company of America as of December 31, 1999 and 1998, and the related
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 financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Hartford, Connecticut
March 22, 2000
40
<PAGE>
Schedule III
Supplementary Insurance Information
As of and for the years ended December 31, 1999, 1998 and 1997
(in millions)
<TABLE>
<CAPTION>
Amortization
Deferred Policyholders' of Deferred
Policy Funds Left Net Other Current Policy Other
Acquisition with the Investment Income and Future Acquisition Operating
Costs Company Income (1) (2) Benefits Costs Expenses
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ 58.8 $ 138.8 $ 10.9 $ 16.7 $ 8.0 $ 4.6 $ 6.9
- -----------------------------------------------------------------------------------------------------------------
1998 $ 59.9 $ 153.2 $ 10.4 $ 11.9 $ 9.0 $ 3.9 $ 6.2
- -----------------------------------------------------------------------------------------------------------------
1997 $ 45.4 $ 145.6 $ 7.1 $ 6.4 $ 6.5 $ 0.8 $ 3.7
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(2) Amounts include realized capital gains and losses and charges assessed
against policyholders.
41
<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 INSURANCE COMPANY OF AMERICA
(Registrant)
Date March 23, 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 23, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*
- ---------------------------------
Thomas J. McInerney President and Director
(Principal Executive Officer)
*
- ---------------------------------
Shaun P. Mathews Senior Vice President and Director
*
- ---------------------------------
Catherine H. Smith Director
*
- ---------------------------------
David W. O'Leary Director
*
- ---------------------------------
Steven A. Haxton Director
/s/ Deborah Koltenuk
- ---------------------------------
Deborah Koltenuk Vice President, Corporate Controller
and Assistant Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
*By: /s/ Mary Ellen Thibodeau
-------------------------------
Mary Ellen Thibodeau,
Corporate Secretary and Counsel
42
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Insurance Company of
America, hereby severally constitute and appoint Mary Ellen Thibodeau 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 23rd day of March, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Thomas J. McInerney
- -----------------------------------
Thomas J. McInerney President and Director
(Principal Executive Officer)
/s/ Shaun P. Mathews
- -----------------------------------
Shaun P. Mathews Senior Vice President and Director
/s/ Catherine H. Smith
- -----------------------------------
Catherine H. Smith Director
/s/ David W. O'Leary
- -----------------------------------
David W. O'Leary Director
/s/ Steven A. Haxton
- -----------------------------------
Steven A. Haxton Director
/s/ Deborah Koltenuk
- -----------------------------------
Deborah Koltenuk Vice President, Corporate Controller
and Assistant Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
43
<PAGE>
ASSISTANT CORPORATE SECRETARY'S CERTIFICATE
AETNA INSURANCE COMPANY OF AMERICA
I, Lena A. Kalynowski, the duly appointed Assistant Corporate Secretary of
Aetna Insurance Company of America (the "Company"), hereby certify that the
attached resolutions adopted by the Board of Directors on April 18, 1996, are
currently in full force and effect, and have not been amended, restated, or
superseded.
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 23rd day of March, 2000.
/s/ Lena A. Kalynowski
-------------------------------------------
(corporate seal) Lena A. Kalynowski
Assistant Corporate Secretary
Aetna Insurance Company of America
44
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
COMPANY NAME, AUTHORITY TO
SIGN (DUPLICATE CORPORATE SEALS)
April 18, 1996
- --------------
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.
45
Consent of Independent Auditors
The Shareholder and Board of Directors of
Aetna Insurance Company of America:
We consent to the incorporation by reference in the registration statement No.
33-63657 on Post Effective Amendment No. 8 on Form S-2 of Aetna Insurance
Company of America (the "Company") of our reports dated March 22, 2000 with
respect to the balance sheets of the Company as of December 31, 1999 and 1998,
and the related statements of income, changes in shareholder's equity and cash
flows and the related schedule 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 financial statements contained in the Form 10-K for the year
ended December 31, 1999 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
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
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0
0
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0
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