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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, 1997 Commission file number 33-23376
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Aetna Life Insurance and Annuity Company
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(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1998 there were 55,000 shares of common stock outstanding,
par value $50 per share, all of which shares were held by Aetna Retirement
Holdings, Inc.
Reduced Disclosure Format
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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.
1
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Annual Report on Form 10-K
For the year ended December 31, 1997
TABLE OF CONTENTS
Form 10-K
Item Number
PART I PAGE
Item 1. Business**...................................................... 3
Item 2. Properties**....................................................13
Item 3. Legal Proceedings...............................................13
Item 4. Submission of Matters to a Vote of Security Holders*............13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................14
Item 6. Selected Financial Data* .......................................14
Item 7. Management's Analysis of the Results of Operations**............14
Item 8. Financial Statements and Supplementary Data.....................24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................55
PART III
Item 10. Directors and Executive Officers of the Registrant*.............55
Item 11. Executive Compensation*.........................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management*.55
Item 13. Certain Relationships and Related Transactions*.................55
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K......................................55
Index to Consolidated Financial Statement Schedules...........................59
Signatures....................................................................64
* 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
AETNALIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Annual Report on Form 10-K
For the year ended December 31, 1997
PART I
Item 1. Business.
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Aetna Life Insurance and Annuity Company is a Connecticut stock life insurance
company originally organized in 1954. Aetna Life Insurance and Annuity Company,
together with its wholly owned subsidiary, Aetna Insurance Company of America is
herein called the "Company". The Company is a wholly owned subsidiary of Aetna
Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of
Aetna Retirement Services, Inc. ("ARSI") whose ultimate parent is Aetna Inc.
(together with its subsidiaries, "Aetna"). Two subsidiaries, Systematized
Benefits Administrators, Inc. ("SBA") and Aetna Investment Services, Inc.
("AISI"), which were previously reported in the Company's operations were
dividended to ARSI in December of 1995. The impact to the Company's operations
of distributing these dividends was immaterial. The Company's Home Office is
located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Company offers financial services and individual life insurance products.
During 1997 the Company also acted as investment advisor for its affiliated
mutual funds, including a fund that was newly-created in November 1997. With
respect to the newly-created fund, outside investment advisors serve as
subadvisors. In 1997 Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, acted as subadvisor
for the other affiliated mutual funds and advisor for most of the General
Account assets. Starting in February 1998 for certain of the affiliated mutual
funds and in May 1998 for others, Aeltus' role has changed (or will change)
from subadvisor to advisor. For services rendered by the Company to Aeltus
in connection with affiliated mutual funds, Aeltus, as investment advisor,
pays (or will pay) the Company fees.
The Company's operations are reported through two major business segments:
financial services and individual life insurance.
3
Financial Services
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Products and Services
Financial services products include annuity contracts that offer a variety of
funding and payout options for individual and employer-sponsored retirement
plans qualified under Internal Revenue Code Sections 401, 403, 408, and 457
(collectively "qualified plans") and non-qualified annuity contracts. These
contracts may be deferred or immediate ("payout annuities"). Financial services
also include investment advisory services and pension plan administrative
services.
Investment Options
Financial services 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 Aetna mutual funds
and/or unaffiliated mutual funds. Aetna mutual funds include funds managed by
Aeltus and, beginning in 1997, funds managed by outside investment advisors
under subadvisory arrangements. (Separate account assets reflected on the
Consolidated Balance Sheets also include assets related to a fully guaranteed
interest option.) Non-guaranteed separate account investment income and realized
capital gains and losses are not reflected in the Company's consolidated results
of operations.
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, where the contract is held to maturity.
Experience rated options require the customer to assume investment (including
realized capital gains and losses) and other risks subject to, among other
things, certain minimum guarantees. The effect of such realized gains and losses
(as long as minimum guarantees are not triggered) does not impact the Company's
results.
Fees and Investment Margins
Insurance charges, investment management or other fees earned by the Company,
vary by product and depend on, among other factors, the funding option selected
by the customer under the product. For variable products where assets are
allocated to variable funding options, the Company charges the separate account
an asset-based mortality and expense charge. In addition, where the customer
selects an Aetna mutual fund as a variable funding option, the Company receives
an asset-based investment management fee and, in the case of those funds
subadvised by outside managers, the Company pays a subadvisory fee to the fund
manager. For unaffiliated mutual funds, the Company receives distribution fees
and/or expense reimbursements. For fixed funding options, the Company derives an
investment margin, which is based on the difference between income earned on the
investments supporting the liability and interest credited to customers. Other
fees or charges, such as administrative fees, may be assessed depending on the
nature of the products.
4
Assets Under Management
The substantial portion of fees or other charges and investment margins are
based on assets under management. Assets under management are principally
affected by deposits, investment growth (i.e., interest credited to customer
accounts for fixed options or market performance for variable options) and
persistency (i.e., customer retention). Assets under management, excluding net
unrealized capital gains and losses on debt securities other than those held in
separate accounts, were $37.6 billion, $27.3 billion and $22.5 billion at
December 31, 1997, 1996, and 1995, respectively. Approximately 94% and 91% of
assets under management at December 31, 1997 and 1996, respectively, allowed for
contractholder withdrawal, 76% and 79% of which, respectively, were subject to
market value adjustments and/or deferred surrender charges at December 31, 1997.
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, which may be waived at the
Company's discretion. The period of time and level of the charge vary by
product. In addition, an approach incorporated into recent variable annuity
contracts with fixed funding options allows contractholders to receive an
incremental interest rate if withdrawals from the fixed account are spread over
a period of five years. Further, more favorable credited rates may be offered
after policies have been in force for a period of time. Existing tax penalties
on annuity distributions prior to age 59-1/2 provide further disincentive to
customers for premature surrenders of annuity balances, but generally do not
impede transfers of those balances to products of competitors.
The following table summarizes assets under management for the principal
customer groups of the Financial Services segment. Amounts reflected exclude
unrealized gains of $471 million, $321 million and $690 million at December 31,
1997 , 1996 and 1995, respectively, related to market value adjustments required
under Financial Accounting Standard ("FAS") No. 115. See Management's Analysis
of the Results of Operations for further discussion on assets under management.
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(Millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Corporate pensions $ 10,970.5 $ 5,341.4 $ 4,233.5
Not-for-profit organizations 16,679.6 14,041.0 12,086.1
Individuals 9,959.2 7,885.7 6,214.8
- -----------------------------------------------------------------------------------------------------------------
Total $ 37,609.3 $ 27,268.1 $ 22,534.4
- -----------------------------------------------------------------------------------------------------------------
Deposits, which are not included in premiums or revenue, are shown in the
following table:
- -----------------------------------------------------------------------------------------------------------------
(Millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Corporate pensions $ 1,634.6 $ 1,407.0 $ 997.0
Not-for-profit organizations 1,404.4 1,360.6 1,264.9
Individuals 1,443.6 1,354.0 984.1
- -----------------------------------------------------------------------------------------------------------------
Total $ 4,482.6 $ 4,121.6 $ 3,246.0
- -----------------------------------------------------------------------------------------------------------------
5
Principal Markets and Method of Distribution
Financial services products and services are offered primarily to individuals,
pension plans, small businesses and employer sponsored groups in the health
care, government, education (collectively "not-for-profit" organizations) and
corporate pension markets. Products sold in the individual market are
distributed primarily through dedicated career agents, registered life brokers,
banks and broker/dealers. Products sold in the not-for-profit market are
distributed primarily through dedicated career agents, registered life brokers
and broker/dealers. Products sold in the corporate pensions market are sold
through pension professionals, stock brokers and third party administrators who
work closely with salaried field office employees.
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 limited payment contracts (annuities with life contingent payout)
are computed on the basis of assumed investment yield, mortality, and expenses
including a margin for adverse deviation. The assumptions vary by plan, year of
issue and policy duration. Reserves for investment contracts (deferred annuities
and immediate annuities without life contingent payouts) are equal to cumulative
deposits plus credited interest for fixed options less withdrawals and charges
thereon. Of those investment contracts which are experience rated, the reserves
also reflect net realized capital gains/losses (which the Company reflects
through credited rates on an amortized basis) and unrealized capital
gains/losses related to FAS No. 115.
Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
6
Individual Life Insurance
- -------------------------
Products and Services
Individual life insurance products include universal life and variable universal
life, which have both life insurance and investment characteristics, traditional
whole life and term insurance. Universal life and variable universal life
products accounted for approximately 96% of life insurance new business premiums
in 1997.
The Company's in-force block of insurance includes a sizable block of
traditional whole life insurance originally written by an affiliate, Aetna Life
Insurance Company ("Aetna Life"), and transferred to the Company via a
reinsurance agreement in 1988. Effective January 1, 1997, this agreement has
been amended to transition (based on underlying investment rollover in Aetna
Life) from a modified coinsurance to a coinsurance agreement.
Life Insurance In Force
For individual life insurance products, life insurance in force is a key
determinant of earnings as cost of insurance charges are typically based on
amounts of coverage in force less accumulated policy reserves. The key drivers
of life insurance in force are new sales, surrenders and mortality.
Individual life insurance products typically require high costs to acquire
business. As with financial services, retention is an important component of
profitability and is encouraged through product features. For example, universal
life 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. In addition, more favorable
credited rates and policy loan terms may be offered after policies have been in
force for a period of time. To further encourage retention, life insurance
agents are typically paid renewal commissions or service fees.
7
Life Insurance in Force and Other Statistical Data*
The following table summarizes changes in life insurance in force before
deductions for reinsurance ceded to other companies:
- --------------------------------------------------------------- ----------------- ----------------- ----------------
(Millions, except as noted below) 1997 1996 1995
- --------------------------------------------------------------- ----------------- ----------------- ----------------
Sales and additions:
Direct:
Permanent................................................. $ 4,255.3 $ 4,356.1 $ 3,757.9
Term...................................................... 846.9 1,381.1 2,158.8
Assumed:
Permanent................................................. 26.2 - 1,358.5
Term...................................................... 736.6 - -
- --------------------------------------------------------------- ----------------- ----------------- ----------------
Total.................................................. $ 5,865.0 $ 5,737.2 $ 7,275.2
=============================================================== ================= ================= ================
Terminations:
Direct:
Surrenders and conversions................................ $ 1,749.3 $ 1,485.7 $ 1,467.0
Lapses.................................................... 1,296.9 1,166.1 891.4
Other..................................................... 198.9 199.1 152.7
Assumed:
Surrenders and conversions................................ 45.2 51.6 53.6
Lapses.................................................... 15.0 58.0 331.8
Other..................................................... 772.7 52.3 54.2
- --------------------------------------------------------------- ----------------- ----------------- ----------------
Total.................................................. $ 4,078.0 $ 3,012.8 $ 2,950.7
=============================================================== ================= ================= ================
In force, end of year:
Direct:
Permanent................................................. $ 37,070.3 $ 35,527.1 $ 32,333.2
Term...................................................... 5,063.1 4,749.2 3,698.3
Assumed:
Permanent................................................. 995.1 1,069.8 2,392.9
Term...................................................... 1,011.1 1,006.5 1,203.8
- --------------------------------------------------------------- ----------------- ----------------- ----------------
Total.................................................. $ 44,139.6 $ 42,352.6 $ 39,628.2
=============================================================== ================= ================= ================
Number of direct policies in force, end of year
(thousands)................................................... 452.5 472.9 466.9
=============================================================== ================= ================= ================
Average size of direct policy in force, end of year
(thousands)................................................... $ 93.1 $ 85.2 $ 77.2
=============================================================== ================= ================= ================
* Only nonparticipating business is written by the Company.
8
Investment Options, Fees and Investment Margins
Traditional insurance and universal life products provide customers with only
fixed investment options. Variable universal life products provide customers
with variable and/or fixed investment options. Investment margins and fees for
these investment options are substantially the same as for financial services
products discussed above.
Assets Under Management
Investment margins and fees are based on assets under management. Assets under
management are principally affected by deposits, investment growth (i.e.,
interest credited to customer accounts for fixed options or market performance
for variable options) and persistency (i.e., customer retention). Assets under
management, excluding net unrealized capital gains and losses on debt securities
related to market value adjustments required under FAS No. 115, were $3.1
billion, $2.8 billion and $2.6 billion at December 31, 1997, 1996, and 1995,
respectively.
Principal Markets and Method of Distribution
Individual life insurance products are offered primarily to individuals, small
businesses, employer sponsored groups and executives of Fortune 2000 companies.
Individual life insurance products generally are sold through managing general
agents, regional brokers and broker/dealers.
Competition
The markets for individual life insurance products are highly competitive.
Principal competitive factors are product features and cost. Competition may
affect, among other matters, both business growth and the pricing of the
Company's products.
Reserves
Reserves for universal life products (which are all experience rated) are equal
to cumulative deposits less withdrawals and charges plus credited interest for
fixed options thereon, plus/less net realized capital gains/losses (which the
Company reflects through credited rates on an amortized basis). These reserves
also reflect unrealized capital gains/losses related to FAS No. 115. Reserves
for all other fixed individual life contracts are computed on a basis of assumed
investment yield, mortality, morbidity and expenses including a margin for
adverse deviation. The assumptions vary by plan, year of issue and policy
duration.
These reserves are computed amounts that, with additions from premiums and
deposits to be received, and with interest on such reserves compounded annually
at assumed rates, are expected to be sufficient to meet the Company's policy
obligations at their maturities or to pay expected death or retirement benefits
or other withdrawal requests.
Reinsurance
Reinsurance arrangements with affiliated and non-affiliated insurance companies
are utilized to limit exposure to losses in excess of predetermined amounts per
individual life. The Company's retention limit per individual life is $2
million.
9
General Account Investments
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Consistent with the nature of the contract obligations involved in the Company's
operations, the majority of the general account assets are invested in long-term
debt securities such as U.S. corporate debt securities, residential
mortgage-backed securities, foreign government and corporate debt securities,
commercial and multifamily mortgage-backed securities, other asset-backed
securities and U.S. government securities. It is management's objective that the
portfolios be of high quality while achieving competitive investment yields and
returns. Investment portfolios generally match the duration of the insurance
liabilities they support. The general account of the Company has been segmented
to improve the asset/liability matching process. The duration of investments is
monitored and security purchases and sales are executed with the objective of
having adequate funds available to satisfy the Company's maturing liabilities.
See "General Account Investments" on page 20 of the Management's Analysis of the
Results of Operations for a further discussion of investments.
Other Matters
- -------------
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 and securities departments, with broad
authority to grant licenses to transact business and regulate many aspects of
the products and services offered by the Company, as well as solvency and
reserve adequacy. Many agencies also regulate investment activities on the basis
of quality, diversification, and other quantitative criteria. The Company's
operations and accounts are subject to examination at regular intervals by
certain of these regulators.
Operations conducted by the Company are subject to regulation by various
insurance agencies where the Company conducts business, in particular the
insurance departments of Connecticut and New York. Among other matters, these
agencies may regulate premium rates, trade practices, agent licensing, policy
forms, underwriting and claims practices, the maximum interest rates that can be
charged on life insurance policy loans, and the minimum rates that must be
provided for accumulation of surrender value.
The Company is regulated by the Securities and Exchange Commission ("SEC") and
to a lesser extent some state securities regulators as a broker-dealer and
investment adviser. The SEC also regulates certain of the Company's annuity,
life insurance and other investment and retirement products. These products
involve Separate Accounts and mutual funds registered under the Investment
Company Act of 1940.
The Company provides a variety of products and services to employee benefit
plans that are covered by the Employee Retirement Income Security Act of 1974
("ERISA").
In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit contract" were
"plan assets" for purposes of ERISA and that the insurance company was an ERISA
fiduciary with respect to those assets. In reaching its decision, the Court
declined to follow a 1975 Department of Labor ("DOL") interpretive bulletin that
had suggested that insurance company general account assets were not plan
assets.
10
Congress recently enacted the Small Business Job Protection Act (the "Act"),
which, among other matters, created a framework for resolving potential issues
raised by the Supreme Court decision. The Act provides that, absent criminal
conduct, insurers generally will not have liability with respect to general
account assets held under contracts that are not guaranteed benefit contracts
based on claims that those assets are plan assets. The relief afforded extends
to conduct that occurred before the date that is eighteen months after the DOL
issues final regulations required by the Act, except as provided in the
anti-avoidance portion of the regulations. The regulations, which were proposed
by the DOL on December 22, 1997, will address ERISA's application to the general
account assets of insurers attributable to contracts issued on or before
December 31, 1998 that are not guaranteed benefit contracts. The conference
report relating to the Act states that contracts issued after December 31, 1998
that are not guaranteed benefit contracts will be subject to ERISA's fiduciary
obligations. The Company is not currently able to predict how these matters may
ultimately affect its businesses.
A number of states, including Connecticut, regulate affiliated groups of
insurers such as the Company under holding company statutes. These laws, among
other things, place certain restrictions on transactions between affiliates such
as dividends and other distributions that may be paid to the Company's parent
corporation.
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, 1997, 1996 and 1995 were $3 million, $2 million and $1 million,
respectively. While the Company has historically recovered more than half of
guaranty fund assessments through statutorily permitted premium tax offsets,
significant increases in assessments could jeopardize future efforts to recover
such assessments. For information regarding certain other potential regulatory
changes relating to the Company's businesses, see "Forward-Looking Information"
on page 12.
Miscellaneous
The Company had approximately 2,500 employees at December 31, 1997.
Management believes that the Company's computer facilities, systems and related
procedures are adequate to meet its business needs. The Company's data
processing systems and backup and security policies, practices and procedures
are regularly evaluated by the Company's management and internal auditors and
are modified as considered necessary. See the Management Analysis of the Results
of Operations for information regarding the Company's efforts to prepare its
systems, applications and facilities to accommodate Year 2000 date-sensitive
information.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of consolidated revenue in 1997. 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 or either of its
segments.
New Accounting Standards
In March of 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for Internal Use Software, which provides
guidance for determining when internal use software costs (acquired or
internally developed) are expensed as incurred or capitalized. This Statement is
effective for 1999 financial statements with early adoption permitted. The
Company expects to report a benefit on its financial statements upon adoption of
this standard.
11
See Note 1 of the Notes to the Consolidated Financial Statements for discussion
of recently issued accounting standards.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions. Certain information contained
herein is forward-looking within the meaning of the Act or SEC rules including,
but not limited to, the information that appears under the heading "General
Account Investments-Risk Management and Market Sensitive Instruments". Words
such as expects, projects, anticipates, intends, plans, believes, seeks or
estimates, or variations of such words and similar expressions are also intended
to identify forward-looking statements. These forward-looking statements are
subject to significant uncertainties and contingencies, many of which are beyond
the control of the Company. Set forth below are certain important factors that,
in addition to general economic conditions and other factors, some of which are
discussed elsewhere in this report, may affect forward-looking statements and
the Company's business generally.
Ratings. Adverse changes in the claims-paying ratings of the Company and its
insurance subsidiary could have the effect of decreasing new sales and deposits
and increasing withdrawals and surrenders in the Company's businesses, which
would adversely affect the level of asset-based fees and investment margins.
Product Retention. The Company incurs up-front costs, such as commissions, in
sales of its annuity and life insurance products. These costs are generally
deferred and recognized by the Company over time, and the retention of assets
under those products is an important component of profitability. The Company
generally seeks to structure its products to encourage retention of assets under
management, through surrender charges, more favorable credited rates to
customers on assets the Company retains for longer periods, renewal commissions,
service fees or other terms. However, customer withdrawal of assets earlier than
anticipated by the Company in pricing its products would adversely affect
profitability. To retain asset levels, also the Company may experience
competitive pressure to lower margins.
Significant Changes in Financial Markets. Significant changes in financial
markets could impact the level of assets under management in the Company's
businesses, and, in turn, the Company's level of asset-based fees and investment
margins. For example, significant increases in interest rates or decreases in
equity markets, in addition to directly affecting the level of assets under
management, 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 not offered by the Company.
Significant declines in the value of investments may also affect the Company's
ability to pass through investment losses to certain experience rated customers,
whether due to triggering minimum guarantees or other business reasons.
Retention of Key Senior Executives. The Company's success is dependent, in part,
on Aetna's ability to attract and retain key senior executives. Aetna has
entered into employment agreements with certain of these executives, although an
employment agreement does not guarantee that an executive's services with the
Company will continue.
12
Other Adverse Changes in Regulation. The Company's businesses are subject to
comprehensive regulation. These businesses could be adversely affected by: (i)
increases in minimum net capital and other financial viability requirements for
insurance operations, (ii) removal of barriers preventing banks from engaging in
insurance and mutual fund businesses, (iii) the taxation of insurance companies,
and (iv) changes in the tax treatment of annuity and other insurance products,
such as those suggested in the President of the United States' recent federal
budget proposal.
Litigation and Year 2000. Litigation could also adversely affect the Company.
See Note 12 of the Notes to Financial Statements for information regarding
litigation. The Company could also be adversely affected by Year 2000 issues.
See "Year 2000" in the Management Analysis of Results of Operations.
Item 2. Properties.
- ---------------------
The Company occupies office space which is owned or leased by Aetna Life or
other affiliates. Expenses associated with these offices are allocated on a
direct and indirect basis to the Company and the other subsidiaries of Aetna.
Item 3. Legal Proceedings.
- ----------------------------
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect results
of operations in future periods.
Item 4. Submission of Matters to a Vote of Security Holders.
- --------------------------------------------------------------
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- --------------------------------------------------------------------------------
All of the Company's outstanding shares are directly owned by HOLDCO, which is a
wholly owned subsidiary of ARSI whose ultimate parent is Aetna. The shares were
contributed to HOLDCO in 1996 from ARSI. The Company paid $17 million in cash
dividends to HOLDCO in 1997. The Company received a capital contribution of $10
million in cash from its parent in 1996. In 1995, the Company dividended $3
million in the form of two of its subsidiaries, Systematized Benefits
Administrators, Inc. and Aetna Investment Services, Inc., to Aetna Retirement
Services, Inc. (the Company's former parent). There were no capital
contributions in 1997 or 1995.
The amount of dividends which may be paid by the Company to HOLDCO without prior
approval by the Insurance Commissioner of the State of Connecticut is subject to
various restrictions. Based upon these restrictions, the Company is permitted a
maximum of $78 million in dividend distributions in 1998.
Item 6. Selected Financial Data.
- ----------------------------------
Omitted Pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. Management's Analysis of the Results of Operations.
- -------------------------------------------------------------
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
14
Consolidated Overview:
- ---------------------
Operating Summary (millions) 1997 1996 1995
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Premiums (1) $ 267.1 $ 133.6 $ 212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Total revenue 1,898.3 1,640.8 1,619.2
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Current and future benefits (1) 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy acquisition costs 128.4 69.8 48.0
Severance and facilities charges - 61.3 -
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Net income $ 205.3 $ 141.1 $ 175.9
=============================================================== ================ ================= ================
Net realized capital gains, net of tax (included above) $ 23.2 $ 13.0 $ 25.8
=============================================================== ================ ================= ================
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Deposits not included in premiums above:
Annuities--fixed options $ 1,191.4 $ 1,362.3 $ 1,306.8
Annuities--variable options 3,291.2 2,759.3 1,939.2
Individual Life Insurance 486.4 443.2 539.1
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Total $ 4,969.0 $ 4,564.8 $ 3,785.1
=============================================================== ================ ================= ================
Assets under management: (2)
Annuities--fixed options $ 12,056.3 $ 11,692.4 $ 11,076.8
Annuities--variable options (3) 20,076.9 14,468.1 10,489.0
Other investment advisory (4) 5,476.1 1,107.6 968.6
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Financial Services 37,609.3 27,268.1 22,534.4
Individual Life Insurance (3) 3,096.1 2,830.5 2,590.9
- --------------------------------------------------------------- ---------------- ----------------- ----------------
Total $ 40,705.4 $ 30,098.6 $ 25,125.3
=============================================================== ================ ================= ================
Individual life insurance coverage issued $ 5,005.6 $ 5,626.8 $ 5,816.9
=============================================================== ================ ================= ================
Individual life insurance coverage in force $ 44,139.6 $ 42,352.6 $ 39,628.2
=============================================================== ================ ================= ================
(1) Includes $59.1 million, $71.8 million and $81.9 million for 1997, 1996 and
1995, respectively, for annuity premiums on contracts converting from the
accumulation phase to payout options with life contingencies.
(2) Excludes net unrealized capital gains of $551.6 million, $366.4 million
and $797.1 million at December 31, 1997, 1996 and 1995, respectively.
(3) Includes $5,178.6 million, $4,724.8 million and $2,604.2 million at
December 31, 1997, 1996 and 1995, respectively, related to assets invested
through the Company's products in unaffiliated mutual funds.
(4) The December 31, 1997 balance includes the transfer of $4,078.5 million of
assets that were previously reported by an affiliate, reflecting the
migration of certain other pension products which complement the Company's
business strategy.
The Company's net income increased $64 million in 1997 and decreased $35 million
in 1996. The Company's 1996 net income includes an after-tax severance and
facilities charge of $31 million primarily related to actions taken or expected
to be taken to improve the Company's cost structure relative to its competitors
and, in addition, a corporate severance and facilities charge of $9 million
allocated to the Company by Aetna (see Note 7 in the Notes to the Consolidated
Financial Statements). Excluding net realized capital gains and the severance
and facilities charges, results increased by $14 million, or 8%, and $18
million, or, 12%, in 1997 and 1996, respectively. The 1997 results reflect
improved earnings from financial services. The 1996 results reflect improved
earnings from both financial services and individual life products.
15
Assets under management (excluding the effect of FAS No. 115 and the transfer of
assets under management that were previously reported by an affiliate),
increased by 22% during 1997 and 20% in 1996 primarily due to continued business
growth and overall improvement in the stock market.
Of the $12.1 billion, $11.7 billion and $11.1 billion of fixed annuity assets
under management at December 31, 1997, 1996 and 1995, respectively, 25%, 25% and
23%, respectively, were fully guaranteed, and 75%, 75% and 77% were experience
rated. The average earned rate on investments supporting fully guaranteed
investment contracts was 7.8%, 7.9% and 8.2% and the average earned rate on
investments supporting experience rated investment contracts was 7.9%, 8.0% and
8.1% for the years ended December 31, 1997, 1996 and 1995, respectively. The
average credited rate on fully guaranteed investment contracts was 6.6%, 6.8%
and 7.0% and the average credited rate on experience rated investment contracts
was 5.9%, 6.0% and 6.2% for the years ended December 31, 1997, 1996 and 1995,
respectively. The resulting interest margins on fully guaranteed investment
contracts were 1.2%, 1.1% and 1.2% and on experience rated investment contracts
were 2.0%, 2.0% and 1.9% for the years ended December 31, 1997, 1996 and 1995,
respectively.
The duration of the investment portfolios supporting the Company's liabilities
is regularly monitored and adjusted in order to maintain an aggregate duration
that is within 0.5 years of the estimated duration of the underlying liabilities
(see "General Account Investments").
16
Financial Services:
- -------------------
Operating Summary (millions) 1997 1996 1995
- -------------------------------------------------------------- ------------------ ------------------ -------------------
Premiums (1) $ 69.1 $ 84.9 $ 164.4
Charges assessed against policyholders 262.0 197.0 150.4
Net investment income 878.8 852.6 823.3
Net realized capital gains 29.7 17.0 37.8
Other income 38.3 43.6 35.4
- -------------------------------------------------------------- ------------------ ------------------ -------------------
Total revenue 1,277.9 1,195.1 1,211.3
- -------------------------------------------------------------- ------------------ ------------------ -------------------
Current and future benefits (1) 720.4 728.3 786.3
Operating expenses 286.5 275.8 254.4
Amortization of deferred policy acquisition costs 82.8 28.0 10.5
Severance and facilities charge - 33.1 -
- -------------------------------------------------------------- ------------------ ------------------ -------------------
Total benefits and expenses 1,089.7 1,065.2 1,051.2
- -------------------------------------------------------------- ------------------ ------------------ -------------------
Income before income taxes 188.2 129.9 160.1
Income taxes 50.7 35.6 46.3
- -------------------------------------------------------------- ------------------ ------------------ -------------------
Net income (2) $ 137.5 $ 94.3 $ 113.8
============================================================== ================== ================== ===================
Net realized capital gains, net of tax (included above) $ 19.2 $ 11.1 $ 23.6
============================================================== ================== ================== ===================
Deposits not included in premiums above:
Annuities - fixed options $ 1,191.4 $ 1,362.3 $ 1,306.8
Annuities - variable options 3,291.2 2,759.3 1,939.2
============================================================== ================== ================== ===================
Total $ 4,482.6 $ 4,121.6 $ 3,246.0
============================================================== ================== ================== ===================
Assets under management: (3)
Annuities - fixed options $ 12,056.3 $ 11,692.4 $ 11,076.8
Annuities - variable options (4) 20,076.9 14,468.1 10,489.0
Other investment advisory (5) 5,476.1 1,107.6 968.6
============================================================== ================== ================== ===================
Total $ 37,609.3 $ 27,268.1 $ 22,534.4
============================================================== ================== ================== ===================
(1) Includes $59.1 million, $71.8 million and $81.9 million for 1997, 1996 and
1995, respectively, for annuity premiums on contracts converting from the
accumulation phase to payout options with life contingencies.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the segment.
(3) Excludes net unrealized capital gains of $471.3 million, $321.1 million and
$689.9 million at December 31, 1997, 1996 and 1995, respectively.
(4) Includes $5,069.9 million, $4,633.2 million and $2,577.7 million at
December 31, 1997, 1996 and 1995, respectively, related to assets held and
managed by unaffiliated mutual funds.
(5) The December 31, 1997 balance includes the transfer of $4,078.5 million of
assets that were previously reported by an affiliate, reflecting the
migration of certain other pension products which complement the Company's
business strategy.
The Financial Services segment's net income increased $43 million in 1997 and
decreased $20 million in 1996. The Company's 1996 net income includes an
after-tax severance and facilities charge of $22 million primarily related to
actions taken or expected to be taken to improve the Company's cost structure
relative to its competitors (see Note 7 in the Notes to the Consolidated
Financial Statements). Excluding net realized capital gains and the severance
and facilities charges, results increased by $14 million, or 13%, and $15
million, or, 16%, in 1997 and 1996, respectively. The increases in 1997 and 1996
earnings for financial services reflect increased fee income primarily from
increased assets under management in annuity products. Assets under management
(excluding transfers of assets under management previously reported by an
affiliate) increased by 23% and 21% in 1997 and 1996, respectively, primarily
due to appreciation in the stock market and additional net deposits.
Premiums relate to annuity products containing life contingencies. Premiums
decreased by $16 million in 1997 and decreased by $80 million in 1996. The
decrease in 1997 was due to a shift from annuity products containing life
contingencies and, in part, from ceasing to write structured settlement
business. The 1996
17
decrease resulted primarily from the Company ceasing to write structured
settlement annuities in the fourth quarter of 1995. The cessation of writing
this product did not and is not expected to have a material effect on results of
the segment.
Deposits relate to annuity contracts not containing life contingencies. Deposits
increased 9% and 27% in 1997 and 1996, respectively, reflecting continued
business growth. Deposits in 1995 included the assumption of a $300.1 million
variable annuity block of business from an unaffiliated insurer.
18
Individual Life Insurance:
- --------------------------
Operating Summary (millions) 1997 1996 1995
- --------------------------------------------------------------- ----------------- ----------------- ----------------
Premiums (1) $ 198.0 $ 48.7 $ 48.3
Charges assessed against policyholders 213.0 199.5 168.5
Net investment income 201.7 193.0 181.0
Net realized capital gains 6.3 2.7 3.5
Other income 1.4 1.8 6.6
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Total revenue 620.4 445.7 407.9
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Current and future benefits (1) 407.4 240.3 210.9
Operating expenses 60.9 66.4 56.4
Amortization of deferred policy acquisition costs 45.6 41.8 37.5
Severance and facilities charge - 14.2 -
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Total benefits and expenses 513.9 362.7 304.8
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Income before income taxes 106.5 83.0 103.1
Income taxes 38.7 27.1 41.0
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Net income (2) $ 67.8 $ 55.9 $ 62.1
================================================================ ================ ================= ================
Net realized capital gains, net of tax (included above) $ 4.0 $ 1.9 $ 2.2
================================================================ ================ ================= ================
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Deposits not included in premiums above:
Individual Life Insurance $ 486.4 $ 443.2 $ 539.1
================================================================ ================ ================= ================
Assets under management: (3)
Individual Life Insurance (4) $ 3,096.1 $ 2,830.5 $ 2,590.9
================================================================ ================ ================= ================
Individual life insurance coverage issued $ 5,005.6 $ 5,626.8 $ 5,816.9
================================================================ ================ ================= ================
Individual life insurance coverage in force $ 44,139.6 $ 42,352.6 $ 39,628.2
================================================================ ================ ================= ================
(1) Both premiums and current and future benefits reflect $150.6 million
related to the transition of the reinsurance agreement with Aetna Life from
a modified coinsurance to a coinsurance arrangement.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the segment.
(3) Excludes net unrealized capital gains of $80.3 million, $45.3 million and
$107.2 million at December 31, 1997, 1996 and 1995, respectively.
(4) Includes $108.7 million, $91.6 million and $26.5 million at December 31,
1997, 1996 and 1995, respectively, related to assets held and managed by
unaffiliated mutual funds.
The Individual Life Insurance segment's net income increased $12 million in 1997
and decreased $6 million in 1996. The Company's 1996 net income includes an
after-tax severance and facilities charge of $9 million primarily related to
actions taken or expected to be taken to improve the Company's cost structure
relative to its competitors (see Note 7 in the Notes to the Consolidated
Financial Statements). Excluding net realized capital gains and the severance
and facilities charges, results increased by $1 million, or 1%, and $3 million,
or, 6%, in 1997 and 1996, respectively.
Premiums relate to traditional (term and whole life) life insurance. In 1997,
premium and current and future benefits reflect offsetting amounts relating to
the transition of the reinsurance agreement with Aetna Life from a modified
coinsurance to a coinsurance arrangement at the beginning of the year (see Note
10 of the Notes to the Consolidated Financial Statements). Excluding the
additional premium from the transition of the reinsurance agreement, premiums
were level in 1997 and 1996 as increased premiums relating to term insurance
products were offset by declining traditional whole life insurance premiums.
Deposits relate to universal life contracts. Deposits increased 10% and 21% in
1997 and 1996, respectively, reflecting continued business growth. The
percentage increase in 1996 excludes $172 million of deposits, which relate to
the 1995 acquisition of a universal life block of business from an unaffiliated
insurer.
19
General Account Investments
- ---------------------------
The Company's investment strategies and portfolios are intended to match the
duration of the related liabilities and provide sufficient cash flow to meet
obligations while maintaining a competitive rate of return. The duration of
these investments is monitored, and investment purchases and sales are executed
with the objective of having adequate funds available to satisfy the Company's
maturing liabilities. The risks associated with investments supporting
experience rated products are assumed by those customers subject to, among other
things, certain minimum guarantees.
The Company's invested assets were comprised of the following:
- ----------------------------------------------------------- -------------------
(Millions) 1997 1996
- ----------------------------------------------------------- -------------------
Debt securities, available for sale $ 13,463.8 $12,905.5
Equity securities, available for sale:
Non-redeemable preferred stock 147.6 119.0
Investment in affiliated mutual funds 83.0 81.1
Common stock 0.6 0.3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
=========================================================== ===================
Total Investments $ 14,273.0 $13,553.0
=========================================================== ===================
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk is
managed by maintaining high average quality ratings and diversified sector
exposure within the debt securities portfolio. In connection with its investment
and risk management objectives, the Company also uses financial instruments
whose market value is at least partially determined by, among other things,
levels of or changes in domestic interest rate (short-term or long-term),
prepayment rates, equity markets or credit ratings/spreads.
Using financial modeling and other techniques, the Company regularly evaluates
the appropriateness of investments relative to its management-approved
investment guidelines and the business objective of the portfolios. The Company
operated within these investment guidelines by maintaining a mix of investments
that diversifies its assets and reflects the characteristics of the liabilities
that they support.
The risks associated with investments supporting experience rated pension,
annuity and life products are assumed by those contractholders, not by the
Company (subject to, among other things, certain minimum guarantees). Risks
associated with the investments and liabilities related to experience rated
pension, annuity and life 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
shareholders' equity of the Company's market sensitive instruments if certain
assumed changes in market rates and prices were to occur (sensitivity analysis).
These instruments are not leveraged and are held for purposes other than
trading. While the Company believes that the assumed market rate changes are
reasonably
20
possible in the near term, actual results may differ, particularly as a result
of any management actions that would be taken to mitigate such hypothetical
losses in fair value of shareholder's equity. Based on the Company's overall
exposure to interest rate risk and equity price risk, the Company believes that
these changes in market rates and prices would not materially affect the
consolidated near-term financial position, results of operations or cash flows
of the Company.
Interest Rate Risk. Assuming an immediate increase of 100 basis points in
interest rates the net hypothetical loss in fair value of shareholder's equity
related to financial and derivative instruments is estimated to be $35 million
(after tax), (1.9% of total shareholder's equity at December 31, 1997). 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 rate scenarios.
Equity Price Risk. The Company's available for sale equity securities are
comprised primarily of domestic stocks. Assuming an immediate decrease of 10% in
equity prices for domestic equity securities, the hypothetical loss in fair
value of shareholder's equity related to financial and derivative instruments is
estimated to be $5 million (after tax), (0.3% of total shareholder's equity at
December 31, 1997).
Debt Securities
At December 31, 1997 and 1996, the Company's carrying value of investments in
debt securities represented 94% and 95%, respectively, of total general account
invested assets. At December 31, 1997 and 1996, $10.7 billion and $10.3 billion,
79% and 80%, respectively, of total debt securities supported experience rated
products.
It is management's objective that the portfolio of debt securities be of high
quality and be well-diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies, and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio at both December 31, 1997 and 1996 was AA-.
21
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
at December 31, 1997 at December 31, 1997
- ---------------------------------------------- -----------------------------------------------------------------------
AAA 48.3% U.S. Corporate Securities 37.4%
AA 10.4 Residential Mortgage-Backed Securities 24.3
A 21.7 Foreign Securities - U.S. Dollar Denominated 12.4
BBB 12.9 U.S. Treasuries/Agencies 9.6
BB 3.8 Commercial/Multifamily Mortgage-
B and Below 2.9 Backed Securities 8.6
------------- Asset-Backed Securities 7.7
100.0% -------------
============= 100.0%
=============
Debt Securities Quality Ratings Debt Securities Investments by Market Sector
at December 31, 1996 at December 31, 1996
- ---------------------------------------------- ------------------------------------------------------------------------
AAA 47.3% U.S. Corporate Securities 36.8%
AA 10.5 Residential Mortgage-Backed Securities 24.6
A 23.9 Foreign Securities - U.S. Dollar Denominated 15.2
BBB 11.9 U.S. Treasuries/Agencies 8.4
BB 4.3 Commercial/Multifamily Mortgage-
B and Below 2.1 Backed Securities 8.0
------------- Asset-Backed Securities 6.9
100.0% Other 0.1
============= --------------
100.0%
==============
The portfolio of debt securities at December 31, 1997 and 1996 included $903
million and $837 million, respectively, (7% and 6%, respectively, of the debt
securities) of investments that are considered "below investment grade". "Below
investment grade" securities are defined to be securities that carry a rating
below BBB-/Baa3, by Standard & Poors/Moody's Investor Services, respectively.
Liquidity and Capital Resources
- -------------------------------
The liquidity needs of the Company's businesses are generally met by cash
provided by premiums, deposits, asset maturities and income received on
investments. Cash provided from these sources is used primarily for benefit
payments, contract withdrawals and operating expenses.
Debt securities and mortgage loans have durations that were selected to
approximate the durations of the liabilities they support. The general account
of the Company has been segmented to improve the asset/liability matching
process. The duration of these investments is monitored, and investment
purchases and sales are executed with the objective of having adequate funds
available to satisfy the Company's maturing liabilities.
As the Company's investment strategy focuses on matching asset and liability
durations, and not specific cash flows, and since these duration assessments are
dependent on numerous cash flow assumptions, asset sales may, from time to time,
be required to satisfy liability obligations and/or
22
rebalance asset portfolios. The investment portfolios are closely monitored to
assess asset and liability matching in order to rebalance the portfolios as
conditions warrant.
Given the high quality of the debt securities portfolio (see "General Account
Investments"), management expects the vast majority of the Company's investments
in debt securities to be repaid in accordance with contractual terms. In
addition, most of the debt securities in the portfolio are highly marketable and
can be sold to enhance cash flow before maturity.
The Company's cash flow requirements for 1997 were met by funds provided from
operations, from the maturity and sale of investments and from financing
activities.
The Company has no debt. The Company received a capital contribution of $10
million in cash from HOLDCO in 1996. The Company did not receive capital
contributions in 1997 or 1995. (See Note 10 of Notes to Consolidated Financial
Statements).
The amount of dividends which may be paid to the shareholder without prior
approval by the Insurance Commissioner of the State of Connecticut is subject to
various restrictions. Based upon these restrictions, the Company is permitted a
maximum of $78 million in dividend distributions in 1998. See "Consolidated
Statements of Cash Flows" for additional information.
Year 2000
- ---------
The Company is dependent on computer systems and applications to conduct its
business. The Company has developed and is currently executing a comprehensive
risk-based plan designed to make its computer systems, applications and
facilities Year 2000 ready. The plan covers four stages including (i) inventory,
(ii) assessment, (iii) remediation and (iv) testing and certification. At year
end 1997, the Company had substantially completed the inventory and assessment
stages. The remediation process is currently underway and targeted for
completion by December 31, 1998. Testing and certification of these systems and
applications are targeted for completion by mid 1999. The Company expects to
incur internal staffing costs, as well as consulting and other expenses related
to infrastructure and facilities enhancements necessary to prepare its systems
for the Year 2000. Total Year 2000 costs, including a corporate charge allocated
to the Company by Aetna, for these systems are currently estimated to be at
least $18 million (after tax) in 1998 and $5 million (after tax) in 1999 and are
expected to be funded through operating cash flows.
23
Item 8. Financial Statements and Supplementary Data.
- ---------------------------------------------------------
Index to Consolidated Financial Statements
------------------------------------------
Page
Independent Auditors' Report 25
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 26
Consolidated Balance Sheets as of December 31, 1997
and 1996 27
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995 28
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 29
Notes to Consolidated Financial Statements 30
24
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life Insurance
and Annuity Company and Subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
25
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenue:
Premiums $267.1 $133.6 $212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
------- ------- -------
Total revenue 1,898.3 1,640.8 1,619.2
------- ------- -------
Benefits and expenses:
Current and future benefits 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy
acquisition costs 128.4 69.8 48.0
Severance and facilities charges -- 61.3 --
------- ------- -------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
------- ------- -------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
------- ------- -------
Net income $205.3 $141.1 $175.9
======= ======= =======
See Notes to Consolidated Financial Statements.
26
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
December 31, December 31,
Assets 1997 1996
- ------ ---- ----
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,912.2 and $12,539.1) $13,463.8 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0
Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1
Common stock (cost: $0.2 and $0.0) .6 .3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
--------- --------
Total investments 14,273.0 13,553.0
Cash and cash equivalents 565.4 459.1
Accrued investment income 163.0 159.0
Premiums due and other receivables 63.7 26.6
Deferred policy acquisition costs 1,654.6 1,515.3
Reinsurance loan to affiliate 397.2 628.3
Other assets 46.8 33.7
Separate accounts assets 22,982.7 15,318.3
--------- --------
Total assets $40,146.4 $31,693.3
========= ========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $3,763.7 $3,617.0
Unpaid claims and claim expenses 38.0 28.9
Policyholders' funds left with the Company 11,143.5 10,663.7
--------- --------
Total insurance reserve liabilities 14,945.2 14,309.6
Other liabilities 312.8 354.7
Income taxes:
Current 12.4 20.7
Deferred 72.0 80.5
Separate accounts liabilities 22,970.0 15,318.3
--------- --------
Total liabilities 38,312.4 30,083.8
--------- --------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 92.9 60.5
Retained earnings 1,320.3 1,128.2
--------- --------
Total shareholder's equity 1,834.0 1,609.5
--------- --------
Total liabilities and shareholder's equity $40,146.4 $31,693.3
========= ========
See Notes to Consolidated Financial Statements.
27
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Years Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
Shareholder's equity, beginning of year $1,609.5 $1,583.0 $1,088.5
Comprehensive income
Net income 205.3 141.1 175.9
Other comprehensive income, net of tax
Unrealized gains (losses) on securities ($50.1
million, $(110.8) million and $494.6 million, 32.4 (72.0) 321.5
pretax, respectively)
-------- -------- --------
Total comprehensive income 237.7 69.1 497.4
-------- -------- --------
Capital contributions -- 10.4 0.0
Other changes 4.1 (49.5) 0.0
Common stock dividends (17.3) (3.5) (2.9)
-------- -------- --------
Shareholder's equity, end of year $1,834.0 $1,609.5 $1,583.0
======== ======== ========
See Notes to Consolidated Financial Statements.
28
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
Years Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
Cash Flows from Operating Activities:
Net income $205.3 $141.1 $175.9
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
(Increase) decrease in accrued investment income (4.0) 16.5 (33.3)
(Increase) decrease in premiums due and other receivables (33.3) 1.6 25.4
Increase in policy loans (70.3) (60.7) (89.9)
Increase in deferred policy acquisition costs (139.3) (174.0) (177.0)
Decrease in reinsurance loan to affiliate 231.1 27.2 34.8
Net increase in universal life account balances 286.4 243.2 393.4
(Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0
Net (decrease) increase in other liabilities and other assets (41.7) 3.1 13.0
Decrease in income taxes (31.4) (26.7) (4.5)
Net accretion of discount on investments (66.4) (68.0) (66.4)
Net realized capital gains (36.0) (19.7) (41.3)
Other, net -- 1.1 --
-------- -------- --------
Net cash provided by (used for) operating activities 50.8 (126.8) 309.1
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,311.3 5,182.2 4,207.2
Equity securities 103.1 190.5 180.8
Mortgage loans 0.2 8.7 10.7
Limited partnership -- -- 26.6
Investment maturities and collections of:
Debt securities available for sale 1,212.7 885.2 583.9
Short-term investments 89.3 35.0 106.1
Cost of investment purchases in:
Debt securities available for sale (6,732.8) (6,534.3) (6,034.0)
Equity securities (113.3) (118.1) (170.9)
Short-term investments (149.9) (54.7) (24.7)
Mortgage loans -- -- (21.3)
Other, net -- (17.6) --
-------- -------- --------
Net cash used for investing activities (279.4) (423.1) (1,135.6)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5
Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6)
Capital contribution to Separate Account (25.0) -- --
Return of capital from Separate Account 12.3 -- --
Capital contribution from HOLDCO -- 10.4 --
Dividends paid to shareholder (17.3) (3.5) (2.9)
-------- -------- --------
Net cash provided by financing activities 334.9 440.2 772.0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5)
Cash and cash equivalents, beginning of year 459.1 568.8 623.3
-------- -------- --------
Cash and cash equivalents, end of year $565.4 $459.1 $568.8
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $119.6 $85.5 $92.8
======== ======== ========
See Notes to Consolidated Financial Statements.
29
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiary
(collectively, the "Company") are providers of financial services and life
insurance products in the United States. The Company has two business
segments: financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services and pension plan administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of
America. Aetna Life Insurance and Annuity Company is a wholly owned
subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a
wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate
parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1996 and 1995 financial information to conform to the 1997
presentation.
New Accounting Standard
-----------------------
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholder's equity (except those arising from
transactions with shareholders) and includes net income and net unrealized
capital gains or losses on available-for-sale securities. As this new
standard only requires additional information in a financial statement, it
does not affect the Company's financial position or results of operations.
Future Application of Accounting Standards
------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and provides
accounting and reporting standards for transfers of financial assets and
extinguishments of liabilities.
30
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in
1997 did not have a material effect on the Company's financial position or
results of operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material effect on its
financial position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance related assessments and
guidance for measuring the liability. This statement is effective for 1999
financial statements with early adoption permitted. The Company does not
expect adoption of this statement to have a material effect on its
financial position or results of operations.
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. These securities are written down (as realized capital
losses) for other than temporary declines in value. Unrealized capital
gains and losses related to available for sale investments, other than
amounts allocable to experience rated contractholders, are reflected in
shareholder's equity, net of related taxes.
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.
31
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
The company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of a loaned domestic security and 105% of the market value of
a loaned foreign security. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according
to the Company's guidelines to generate additional income. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned
securities fluctuates. At December 31, 1997 and 1996, the Company loaned
securities (which are reflected as invested assets) with a market value of
approximately $385.1 million and $444.7 million, respectively.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have been seeded by the Company, and is carried
at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
The Company utilizes futures contracts, swap agreements and warrants for
other than trading purposes in order to manage investment returns and price
risk and to align maturities, interest rates, and funds availability with
its obligations. (Refer to Note 3.)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Interest rate swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the accrual
method. Accordingly, the difference between amounts
32
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
paid and received on such agreements is reported in net investment income.
There is no recognition in the Consolidated Balance Sheets for changes in
the fair value of the agreement.
Warrants represent the right to purchase specific securities and are
accounted for as hedges. Upon exercise, the cost of the warrants are added
to the basis of the securities purchased.
Deferred Policy Acquisition Costs
Certain costs of acquiring 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
fixed ordinary life contracts, such costs are amortized over expected
premium-paying periods (up to 20 years). For universal life and 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). 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
losses and expenses.
Insurance Reserve Liabilities
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00% for all
years presented. Investment yield is based on the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Aetna
experience and are periodically reviewed against both industry standards
and experience.
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 3.50% to 9.50% for all years presented) net of adjustments for
investment experience that the Company is entitled to reflect in future
credited interest. Reserves on contracts subject to experience rating
reflect the rights of contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
33
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and 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. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and current
and future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts
are segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of mutual funds
which are managed by the Company, or other selected mutual funds not
managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except
for those relating to a guaranteed interest option. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $658.6 million for 1997 (fair value $668.7 million)
and $515.6 million for 1996 (fair value $523.0 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in both 1997 and in
1996.
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and losses on the sale of assets
supporting the guaranteed interest option). The Consolidated 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.
34
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1997 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
U.S. government and government
agencies and authorities $1,219.7 $74.0 $0.1 $1,293.6
States, municipalities and political
subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Financial 2,370.7 84.6 1.3 2,454.0
Food & fiber 195.4 9.3 -- 204.7
Healthcare & consumer products 728.5 27.0 2.6 752.9
Media & broadcast 252.9 14.7 0.1 267.5
Natural resources 143.5 5.5 - 149.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Utilities 521.3 23.5 0.9 543.9
Other corporate securities 96.9 3.2 - 100.1
---------- -------- -------- -----------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
Foreign Securities:
Government 612.5 36.7 23.6 625.6
Utilities 177.5 28.7 -- 206.2
Other 857.9 27.7 42.8 842.8
---------- -------- -------- -----------
Total foreign securities 1,647.9 93.1 66.4 1,674.6
Residential mortgage-backed securities:
Pass-throughs 784.4 71.3 2.0 853.7
Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9
---------- -------- -------- -----------
Total residential mortgage-
backed securities 3,064.9 208.7 4.0 3,269.6
Commercial/Multifamily mortgage-
backed securities 1,127.8 34.0 0.4 1,161.4
Other asset-backed securities 1,014.2 17.1 0.4 1,030.9
---------- -------- -------- -----------
Total Debt Securities $12,912.2 $627.9 $76.3 $13,463.8
========== ======== ======== ===========
35
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1996 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
U.S. government and government
agencies and authorities $1,072.4 $20.5 $4.5 $1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other corporate securities 141.5 3.0 -- 144.5
--------- --------- -------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- -------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- -------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- -------- --------- --------
Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5
========= ======== ========= ========
36
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1997 and 1996, net unrealized appreciation of $551.6
million and $366.4 million, respectively, on available-for-sale debt
securities included $429.3 million and $288.5 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in future policy benefits and policyholders' funds
left with the Company.
The carrying and fair value of debt securities for the year ended December
31, 1997 are shown below by contractual maturity. Actual maturities may
differ from contractual maturities because securities may be restructured,
called, or prepaid.
Amortized Fair
Cost Value
--------- ------
(millions)
Due to mature:
One year or less $367.3 $367.6
After one year through five years 2,165.1 2,195.4
After five years through ten years 2,367.3 2,407.0
After ten years 2,805.6 3,031.9
Mortgage-backed securities 4,192.7 4,431.0
Other asset-backed securities 1,014.2 1,030.9
--------- ---------
Total $12,912.2 $13,463.8
========= =========
At December 31, 1997 and 1996, debt securities carried at $8.2 million and
$7.6 million, respectively, were on deposit as required by regulatory
authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 1997.
37
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
1997 1996
--------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
-------- -------- -------- --------
(millions)
Total residential CMOs(1) $2,415.9 $2,280.5 $2,309.0 $2,227.8
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 81.6% 84.2%
Supporting remaining products 18.4% 15.8%
----- -----
100.0% 100.0%
===== =====
(1) At December 31, 1997 and 1996, approximately 73% and 71%,
respectively, of the Company's residential CMO holdings were
backed by government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated. At December 31, 1997
and 1996, approximately 4% and 3%, respectively, of the Company's CMO
holdings were invested in types of CMOs which are subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
38
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in equity securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(millions)
1997
Equity Securities $210.0 $21.3 $0.1 $231.2
====== ===== ==== ======
1996
Equity Securities $184.9 $16.3 $0.8 $200.4
====== ===== ==== ======
3. Financial Instruments
Estimated Fair Value
--------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
1997 1996
-------------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ------ -------- -----
(millions)
Assets:
Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2
Liabilities:
Investment contract
liabilities:
With a fixed maturity $ 1,030.3 $1,005.4 $1,014.1 $1,028.8
Without a fixed
maturity 10,113.2 9,587.5 9,649.6 9,427.6
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.
39
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Estimated Fair Value (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
Investment contract liabilities (included in policyholders' funds left with
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1997 and 1996,
Treasury futures contracts were used to manage interest rate risk in the
Company's bond portfolio; and, in 1996, stock index futures contracts were
used to manage price risk in the Company's equity portfolio. In 1996 and
1995, interest rate swaps and forward commitments to enter into interest
rate swaps, respectively, were also used to manage interest rate risk in
the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk. Cash settlements are made daily based on changes in the prices
of the underlying assets. There were no futures contracts open as of
December 31, 1997 and 1996.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be
40
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Including Derivative
Instruments) (Continued)
exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive
fair value (market value) at the reporting date. There were no interest
rate swap agreements open as of December 31, 1997 and 1996.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1997
and 1996.
Warrants:
Warrants are instruments giving the Company the right, but not the
obligation to buy a security at a given price during a specified period. As
of December 31, 1997 and 1996, the Company had open warrants to purchase
equity securities with a fair value of $0.6 million and $0.3 million,
respectively.
Debt Instruments with Derivative Characteristics:
The Company also had investments in certain debt instruments with
derivative characteristics, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short or long term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
amortized cost and fair value of these securities, included in the debt
securities portfolio, as of December 31, 1997 was as follows:
Amortized Fair
Cost Value
--------- ----
(millions)
Residential collateralized mortgage
obligations $2,280.5 $2,415.9
Principal-only strips (included above) 59.0 67.0
Interest-only strips (included above) 12.8 24.3
Other structured securities with derivative
characteristics (1) 107.4 105.2
(1) Represents non-leveraged instruments whose fair values and credit
risk are based on underlying securities, including fixed income
securities and interest rate swap agreements.
41
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $962.8 $945.3 $891.5
Nonredeemable preferred stock 13.7 5.9 4.2
Investment in affiliated
mutual funds 4.9 14.3 14.9
Mortgage loans 1.3 2.2 1.4
Policy loans 19.9 18.4 13.7
Reinsurance loan to affiliate 37.5 44.1 46.5
Cash equivalents 44.2 29.4 38.9
Other 10.0 2.1 8.4
-------- -------- --------
Gross investment income 1,094.3 1,061.7 1,019.5
Less investment expenses (13.8) (16.1) (15.2)
-------- -------- --------
Net investment income $1,080.5 $1,045.6 $1,004.3
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $823.1 million, $787.6 million and $744.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Interest
credited to contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively.
The amount of dividends that may be paid to the shareholder in 1998 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$77.6 million.
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. Statutory net income was
$80.5 million, $57.8 million and $70.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Statutory capital and surplus was
$778.7 million and $713.6 million as of December 31, 1997 and 1996,
respectively.
As of December 31, 1997 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.
42
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
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 on investments were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $22.5 $11.1 $32.8
Equity securities 9.9 8.6 8.3
Other 3.6 -- 0.2
------ -------- ------
Pretax realized capital gains $36.0 $19.7 $41.3
====== ======== ======
After tax realized capital gains $23.2 $13.0 $25.8
====== ======== ======
Net realized capital gains of $96.1 million, $53.1 million and $61.1
million for 1997, 1996 and 1995, respectively, allocable to experience
rated contracts, were deducted from net realized capital gains and an
offsetting amount was reflected in policyholders' funds left with the
Company. Net unamortized gains were $138.1 million and $53.3 million at
December 31, 1997 and 1996, respectively.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1997 1996 1995
----- ----- ----
(millions)
Proceeds on Sales $5,311.3 $5,182.2 $4,207.2
Gross Gains 25.8 24.3 44.6
Gross Losses 3.3 13.2 11.8
43
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
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:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $44.3 $(100.1) $255.9
Equity securities 5.6 (10.5) 27.3
Limited partnership -- -- 1.8
----- ------- ------
49.9 (110.6) 285.0
Increase (decrease) in deferred
income taxes (See Note 8) 17.5 (38.6) (36.5)
----- ------- ------
Net changes in accumulated other
comprehensive income $32.4 $(72.0) $321.5
===== ======= ======
Net unrealized capital gains allocable to experience rated contracts of
$356.7 million and $72.6 million at December 31, 1997 and $245.2 million
and $43.3 million at December 31, 1996 are reflected on the Consolidated
Balance Sheets in policyholders' funds left with the Company and future
policy benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience rated
contractholders, at December 31:
1997 1996 1995
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $140.6 $101.7 $179.3
Gross unrealized capital losses (18.4) (23.8) (1.3)
----- ----- -----
122.2 77.9 178.0
Equity securities
Gross unrealized capital gains 21.2 16.3 27.2
Gross unrealized capital losses (0.1) (0.8) (1.2)
---- ---- -----
21.1 15.5 26.0
Deferred income taxes (See Note 8) 50.4 32.9 71.5
---- ---- -----
Net accumulated other
comprehensive income $92.9 $60.5 $132.5
==== ==== =====
44
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
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:
1997 1996 1995
---- ---- ----
(millions)
Unrealized holding gains (losses)
arising during the period (1) $98.8 $(14.8) $390.5
Less: reclassification adjustment
for gains and other items included
in net income (2) 66.4 57.2 69.0
----- ------ ------
Net unrealized gains (losses)
on securities $32.4 $(72.0) $321.5
===== ====== ======
(1) Pretax unrealized holding gains (losses) arising during the
period were $152.0 million, ($22.8) million and $600.8 million
for 1997, 1996 and 1995, respectively.
(2) Pretax reclassification adjustments for gains and other items
included in net income were $102.4 million, $87.7 million and
$107.5 million for 1997, 1996 and 1995, respectively.
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included
the following (pretax):
Vacated
Asset Leased Corporate
(Millions) Severance Write-off Property Other Allocation Total
-------------------------- --------- --------- --------- ----- ---------- ---------
Financial Services $29.1 $1.0 $1.3 $1.7 $ -- $33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
--------- --------- --------- ----- ---------- ---------
Total Company $41.6 $1.4 $1.8 $2.5 $14.0 $61.3
-------------------------- --------- --------- --------- ----- ---------- ---------
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally related to actions taken or
expected to be taken to improve its cost structure relative to its
competitors. The severance portion of the charge is based on a plan to
eliminate 702 positions (primarily customer service, sales and information
technology support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
45
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges (Continued)
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations,
which were sold in April 1996. The cost allocated to the Company associated
with this charge was $9.1 million after tax ($14.0 million pretax).
Activity for 1997 and 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
(Millions) Reserve Positions
----------------------------------- ---------- ---------
Balance at December 31, 1995 $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
---------- ---------
Balance at December 31, 1996 47.9 524
Actions taken (1) (27.1) (163)
---------- ---------
Balance at December 31, 1997 $20.8 361
========== =========
(1) Includes $15.9 million and $8.0 million in 1997 and 1996,
respectively, of severance-related actions and $7.9 million and $4.1
million in 1997 and 1996, respectively, of corporate
allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
46
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
Illinois Unitary return and the Connecticut and the New York combined state
income tax returns 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 federal income tax return.
Income taxes for the years ended December 31, consist of:
1997 1996 1995
---- ---- ----
(millions)
Current taxes:
Income Taxes:
Federal income tax $64.5 $50.9 $82.9
State income tax 3.7 3.7 3.2
Net realized capital gains 45.6 25.3 28.5
----- ---- ----
113.8 79.9 114.6
----- ---- -----
Deferred taxes (benefits):
Income taxes:
Federal 8.4 (3.5) (14.4)
Net realized capital gains (losses) (32.8) (18.6) (12.9)
----- ----- -----
(24.4) (22.1) (27.3)
----- ----- -----
Total $89.4 $57.8 $87.3
===== ===== =====
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1997 1996 1995
---- ---- ----
(millions)
Income before income taxes $294.7 $198.9 $263.2
Tax rate 35% 35% 35%
------- ------- -------
Application of the tax rate 103.1 69.6 92.1
------- ------- -------
Tax effect of:
State income tax, net of
federal benefit 2.4 2.4 2.1
Excludable dividends (15.9) (8.7) (9.3)
Other, net (0.2) (5.5) 2.4
------- ------- --------
Income taxes $89.4 $57.8 $87.3
======= ======= ========
47
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. 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:
1997 1996
---- ----
(millions)
Deferred tax assets:
Insurance reserves $415.8 $344.6
Unrealized gains allocable to
experience rated contracts 150.1 100.8
Investment losses 6.6 7.5
Postretirement benefits other
than pensions 26.3 27.0
Deferred compensation 31.2 25.0
Pension (3.6) 7.6
Restructuring charge 9.5 17.6
Depreciation 3.9 2.6
Other 8.8 9.1
--------- --------
Total gross assets 648.6 541.8
Deferred tax liabilities:
Deferred policy acquisition costs 515.6 482.1
Market discount 5.1 6.8
Net unrealized capital gains 200.5 133.7
Other (0.6) (0.3)
--------- ---------
Total gross liabilities 720.6 622.3
--------- ---------
Net deferred tax liability $72.0 $80.5
========= =========
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. As of December 31, 1997 and 1996, no
valuation allowances were required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1997. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions under
which such taxes would become payable are remote.
48
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. 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 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to amounts that are tax-deductible. As of
December 31, 1997, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate
share of the projected benefit obligation and plan assets is not available.
The accumulated benefit obligation and plan assets are recorded by Aetna.
As of the measurement date (i.e., September 30), the accumulated plan
assets exceeded accumulated plan benefits. Allocated pretax charges to
operations for the pension plan (based on the Company's total salary cost
as a percentage of Aetna's total salary cost) were $2.7 million, $4.3
million and $6.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides certain health care and life insurance
benefits for retired employees. A comprehensive medical and dental plan is
offered to all full-time employees retiring at age 50 with 15 years of
service or at age 65 with 10 years of service. There is a cap on the
portion of the cost paid by the Company relating to medical and dental
benefits. Retirees are generally required to contribute to the plans based
on their years of service with Aetna. The costs to the Company associated
with the Aetna postretirement plans for 1997, 1996 and 1995 were $2.7
million, $1.8 million and $1.4 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$77.7 million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously
recorded by Aetna. The after tax amount of this transfer (approximately
$50.5 million) is reported as a reduction in retained earnings. In 1997,
other changes in shareholder's equity includes an additional $0.8 million
reduction reflecting revisions to the allocation of these accrued
liabilities.
Agent Pension Plans - The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
49
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1997, 1996 and 1995 were $0.6 million,
$0.7 million and $0.8 million, respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $4.4 million, $5.4 million and $4.9
million in 1997, 1996 and 1995, respectively.
Stock Plans - Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to certain key employees. Executive and middle management
employees may be granted options to purchase common stock of Aetna at or
above the market price on the date of grant. Options generally become 100%
vested three years after the grant is made, with one-third of the options
vesting each year. Aetna does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. In addition, executives may be granted incentive
units which are rights to receive common stock or an equivalent value in
cash. The incentive units may vest within a range from 0% to 175% at the
end of a four year period based on the attainment of performance goals. The
costs to the Company associated with the Aetna stock plans for 1997, 1996
and 1995, were $2.9 million, $8.1 million and $6.3 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$1.1 million of deferred tax benefits related to stock options. This amount
is reported as an increase in retained earnings. In 1997, other changes in
shareholder's equity include an additional increase of $2.3 million
reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from 0.10% to
1.90% of their average daily net assets. The Company also receives fees
from Aetna managed mutual funds for serving as investment adviser. Under
the advisory agreements, these funds pay the Company a daily fee which, on
an annual basis, ranges, depending on the fund, from 0.25% to 0.85% of
their average daily net assets. The Company also receives fees (expressed
as a percentage of the average daily net assets) from some of its funds for
providing administration services, and from The Aetna Series Fund for
providing shareholder services and promoting sales. The amount of
compensation and fees received from the Separate Accounts and mutual funds,
included in charges assessed against policyholders, amounted to $271.2
million, $186.8 million and $128.1 million in 1997, 1996 and 1995,
respectively. The Company may waive advisory fees at its discretion.
50
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor for affiliated mutual funds and adviser for most of the
General Account assets. Fees paid by the Company to Aeltus, included in
both charges assessed against policyholders and net investment income, on
an annual basis, range from 0.06% to 0.55% of the average daily net assets
under management. For the years ended December 31, 1997 and 1996, the
Company paid $45.5 million and $16.0 million in such fees.
The Company may, from time to time, make reimbursements to an Aetna managed
mutual fund for some or all of its operating expenses. Reimbursement
arrangements may be terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by Aetna
Life prior to 1981 was assumed by the Company. A $6.1 million and a $108.0
million commission, paid by the Company to Aetna Life in 1996 and 1988,
respectively, was capitalized as deferred policy acquisition costs. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance
reserves. Effective January 1, 1997, this agreement has been amended to
transition (based on underlying investment rollover in Aetna Life) from a
modified coinsurance to a coinsurance arrangement. As a result of this
change, reserves will be ceded to the Company from Aetna Life as investment
rollover occurs and the loan previously established will be reduced. The
Company maintained insurance reserves of $574.5 million ($397.2 million
relating to the modified coinsurance agreement and $177.3 million relating
to the coinsurance agreement) and $628.3 million as of December 31, 1997
and 1996, respectively, relating to the business assumed. The fair value of
the loan relating to assets held by Aetna Life was $412.3 million and
$625.3 million as of December 31, 1997 and 1996, respectively, and is based
upon the fair value of the underlying assets. Premiums of $176.7 million,
$25.3 million and $28.0 million and current and future benefits of $183.9
million, $39.5 million and $43.0 million were assumed in 1997, 1996 and
1995, respectively.
Investment income of $37.5 million, $44.1 million and $46.5 million was
generated from the reinsurance loan to affiliate in 1997, 1996 and 1995,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made
to annuitants receiving variable payments. Reserves of $32.5 million and
$28.9 million were maintained for this contract as of December 31, 1997 and
1996, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this
51
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
limit, up to a maximum of $8.0 million on any new individual life business,
on a yearly renewable term basis. Premium amounts related to this agreement
were $5.9 million, $5.2 million and $3.2 million for 1997, 1996 and 1995,
respectively.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of
its participating life insurance, on a yearly renewable term basis. Premium
amounts related to this agreement were $0.7 million in 1997.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1997 or
1995.
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively. In 1995, the Company dividended $2.9
million in the form of two of its subsidiaries, Systematized Benefits
Administrators, Inc. and Aetna Investment Services, Inc., to Aetna
Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $37.0 million and $2.8 million
due from affiliates in 1997 and 1996, respectively. Other liabilities
include $1.2 million and $10.7 million due to affiliates for 1997 and 1996,
respectively.
As of December 31, 1997, Aetna transferred to the Company $2.5 million
based on its decision not to settle state tax liabilities for the years
1996 and 1997. This amount has been reported as an other increase in
retained earnings.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
52
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
(millions)
------- ------------- ----------- ---------
1997
----
Premiums:
Life Insurance $ 35.7 $15.1 $177.4 $198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
------- ------------- ----------- ---------
Total earned premiums $109.2 $20.7 $178.6 $267.1
======= ============= =========== =========
1996
----
Premiums:
Life Insurance $ 34.6 $11.2 $25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
------- ------------- ----------- ---------
Total earned premiums $125.2 $17.5 $25.9 $133.6
======= ============= =========== =========
1995
----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
------- ------------- ----------- ---------
Total earned premiums $200.3 $16.1 $28.5 $212.7
======= ============= =========== =========
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1997, the
Company had commitments to purchase investments of $38.7 million. The fair
value of the investments at December 31, 1997 approximated $39.0 million.
53
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance. Summarized financial
information for the Company's principal operations was as follows:
1997 1996 1995
--------- --------- ---------
(millions)
Revenue:
Financial Services $1,277.9 $1,195.1 $1,211.3
Individual Life Insurance 620.4 445.7 407.9
--------- --------- ---------
Total revenue $1,898.3 $1,640.8 $1,619.2
========= ========= =========
Income before income taxes: (2)
Financial Services $188.2 $129.9 $160.1
Individual Life Insurance 106.5 83.0 103.1
--------- --------- ---------
Total income before
income taxes $294.7 $212.9 $263.2
========= ========= =========
Net income: (2)
Financial Services $137.5 $94.3 $113.8
Individual Life Insurance 67.8 55.9 62.1
--------- --------- ---------
Net income $205.3 $150.2 $175.9
========= ========= =========
Assets under management: (3)
Financial Services (4) $37,609.3 $27,268.1 $22,534.4
Individual Life Insurance 3,096.1 2,830.5 2,590.9
--------- --------- ---------
Total assets under management 40,705.4 $30,098.6 $25,125.3
========= ========= =========
(1) The 1996 results include severance and facilities charges of
$30.7 million, after tax. Of this charge $21.5 million related to
the Financial Services segment and $9.2 million related to the
Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance
charge recorded in 1996 which is not directly allocable to the
Financial Services and Individual Life Insurance segments. (Refer
to Note 7).
(3) Excludes net unrealized capital gains (losses) of $551.5 million,
$366.4 million and $797.1 million at December 31, 1997, 1996 and
1995, respectively.
(4) The December 31, 1997 balance includes the transfer of $4,078.5
million of assets under management that were previously reported
by an affiliate.
54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to General Instruction I(2) of Form 10-K .
Item 11. Executive Compensation.
Omitted pursuant to General Instruction I(2) of Form 10-K .
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to General Instruction I(2) of Form 10-K .
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to General Instruction I(2) of Form 10-K .
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports
on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 24.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 59.
3. Exhibits:
3(i)(a) Certificate of Incorporation
Incorporated herein by reference to post-effective
amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-60477) as filed electronically with the Securities
and Exchange Commission on April 15, 1996 (Accession No.
0000950146-96-00534).
3(i)(b) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company
Incorporated herein by reference to post-effective
amendment No. 12 to Registration Statement on Form N-4
(File No. 33-75964) as filed electronically on February 11,
1997 (Accession No. 0000950146-97-000159).
3(ii) By-Laws, as amended September 17, 1997.
Incorporated herein by reference to post-effective
amendment No. 12 to Registration Statement on Form N-4
(File No. 33-91846) as filed electronically with the
Securities
55
and Exchange Commission on October 30, 1997 (Accession No.
0000950146-97-001589).
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K. (Continued)
4. Instruments Defining the Rights of Security Holders,
Including Indentures (Annuity Contracts)
Incorporated herein by reference to Form N-4, File No.
33-75980, as amended, and filed most recently on August 19,
1997 (Accession No. 0000950146-97-001310).
Incorporated herein by reference to Form N-4, File No.
33-75986, as amended and filed most recently on February
12, 1998 (Accession No. 0000950146-98-000193).
Incorporated herein by reference to Form N-4, File No.
33-34370, as amended and filed most recently on February
27, 1998 (Accession No. 0000950146-98-000311).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-81216, as amended and filed most
recently on November 17, 1997 (Accession No.
0000950146-97-001749).
Incorporated herein by reference to Registration Statement
Form N-4, File No. 33-88722, as amended and filed most
recently on August 20, 1997 (Accession No.
0000950146-97-001319).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75974, as amended and filed most
recently on July 29, 1997 (Accession No.
0000950146-97-001102).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75982, as amended and filed most
recently on August 19, 1997 (Accession No.
0000950146-97-001304).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75996, as amended and filed most
recently on August 21, 1997 (Accession No.
0000950146-97-001326).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75992, as amended and filed most
recently on August 20, 1997 (Accession No.
0000950146-97-001312).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-91846, as amended and filed most
recently on October 30, 1997 (Accession No.
0000950146-97-001589).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75988, as amended and filed most
recently on October 30, 1997 (Accession No.
0001029869-97-001251).
56
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-88720, as amended and filed most
recently on August 19, 1997 (Accession No.
0000950146-97-001360).
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K. (Continued)
4 Instruments Defining the Rights of Security Holders,
Including Indentures (Annuity Contracts) (Continued)
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75964, as amended and filed most
recently on February 9, 1998 (Accession No.
0000950146-98-000179).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-79122, as amended and filed most
recently on April 22, 1997 (Accession No.
0000950146-97-000631).
Incorporated herein by reference to Registration Statement on
Form N-4, File No. 33-62473, as amended and filed most
recently on February 16, 1996.
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 333-01107, as amended and filed most
recently on February 19, 1998 (Accession No.
0000950146-98-000248).
Incorporated by reference to Registration Statement on Form
S-2, File No. 33-64331, as filed electronically on November
16, 1995 (Accession No. 0000908634-95-000119) and as
amended and filed most recently on April 4, 1997 (Accession
No. 0000950146-97-000535).
Incorporated by reference to Pre-Effective Amendment No. 2
to Registration Statement on Form S-2 File No. 33-64331, as
filed electronically on January 17, 1996 (Accession No.
0000908634-96-000006), and as amended and filed most
recently on April 4, 1997 (Accession No.
0000950146-97-000535).
Incorporated herein by reference to Registration Statement
on Form N-4, File No. 33-75962, as amended and filed most
recently on November 13, 1997 (Accession No.
0000950146-97-001681).
10 Material Contracts (Management contracts / compensatory
plans or arrangements)
The Aetna Inc. Annual Incentive Plan, incorporated by
reference to Aetna Inc.'s Registration Statement on Form
S-4 (Registration No. 333-5791) filed on June 12, 1996.*
The Supplemental Pension Benefit Plan for Certain Employees
of Aetna Services, Inc., incorporated herein by reference
to Aetna Inc.'s Form 10-Q filed on October 25, 1996.*
Amendment No. 1 dated as of December 31, 1996 to the
Supplemental Pension Benefit Plan for Certain Employees of
Aetna Services, Inc. - Incorporated herein by reference to
Aetna Inc.'s Form 10-Q as filed electronically on May 6,
1997.*
57
Amendment No. 2 dated as of February 28, 1997 to the
Supplemental Pension Benefit Plan of Certain Employees of
Aetna Services, Inc. - Incorporated herein by reference to
Aetna Inc.'s Form 10-Q as filed electronically on May 6,
1997.*
The Aetna Inc. 1996 Stock Incentive Plan, incorporated
herein by reference 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*
Employment Agreement, dated as of December 21, 1995, by and
between Aetna Services, Inc. and Thomas McInerney, as
amended - Incorporated herein by reference to Aetna Inc.'s
Form 10-K filed on March 3, 1998 (Accession No.
0000950123-98-002224).*
* Management contract or compensatory plan or arrangement
21 Subsidiaries of the Registrant
Incorporated by reference to Exhibit Item 26 of
Post-Effective Amendment No. 16 to Registration Statement
on Form N-4 (File Number 33-75964) as filed electronically
on February 9, 1998 (Accession No. 0000950146-98-000179).
24 Power of Attorney
Filed herein 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.
58
Index to Consolidated Financial Statement Schedules
Page
Independent Auditors' Report............................................ 60
I. Summary of Investments - Other than Investments in
Affiliates as of December 31, 1997............................... 61
III. Supplementary Insurance Information as of and for the years
ended December 31, 1997, 1996, 1995................. ........... 62
IV. Reinsurance for the years ended December 31, 1997,
1996, 1995....................................................... 63
Schedules other than those listed above are omitted because they are not
required or are not applicable.
59
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
Under date of February 3, 1998, we reported on the consolidated balance sheets
of Aetna Life Insurance and Annuity Company and Subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1997, as included herein. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedules as listed in the
accompanying index. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
60
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned
subsidiary of Aetna Retirement Holdings, Inc.)
Schedule I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 1997
Amount at
Which Shown
in the
Type of Investment Cost Value* Balance Sheet
------------------ ------------- ------------ ---------------
(millions)
Debt Securities:
U.S. government and government
agencies and authorities $ 1,219.7 $ 1,293.6 1,293.6
States, municipalities and political
subdivisions 0.3 0.3 0.3
U.S. corporate securities 4,837.4 5,033.4 5,033.4
Foreign securities (1) 1,647.9 1,674.6 1,674.6
Residential mortgage-backed securities 3,064.9 3,269.6 3,269.6
Commercial/Multifamily mortgage-backed
securities 1,127.8 1,161.4 1,161.4
Other asset-backed securities 1,014.2 1,030.9 1,030.9
------------- ------------- -------------
Total debt securities 12,912.2 13,463.8 13,463.8
============= ============= =============
Equity securities:
Non-redeemable preferred stock 131.7 147.6 147.6
Investment in affiliated mutual funds 78.1 83.0 83.0
Common stock 0.2 0.6 0.6
------------- ------------- -------------
Total equity securities 210.0 231.2 231.2
============= ============= =============
Short-term investments 95.6 95.6
Mortgage loans 12.8 12.8
Policy loans 469.6 469.6
------------- -------------
Total investments $ 13,700.2 $14,273.0
============= =============
* See Notes 1 and 2 to the Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. All of the Company's foreign securities are denominated in U.S.
dollars.
61
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned
subsidiary of Aetna Retirement Holdings, Inc.)
Schedule III
Supplementary Insurance Information
As of and for the years ended December 31, 1997, 1996 and 1995
(Millions)
Policy-
Deferred Unpaid holders'
policy Future claims Unearned funds left
acquisition policy and claim premiums with the Premium
Segment costs benefits expenses (1) Company revenue
- -------------- ----------- ---------- ----------- ----------- ----------- --------
1997
- ----
Financial $ 799.6 $ 948.0 $ 0.8 $ - $ 11,116.8 $ 69.1
Services
Individual
Life 855.0 2,814.6 37.2 1.1 26.7 198.0
Insurance
----------- ---------- ----------- ----------- ----------- --------
Total $ 1,654.6 $ 3,762.6 $ 38.0 $ 1.1 $ 11,143.5 $ 267.1
=========== ========== =========== =========== =========== ========
1996
- ----
Financial $ 715.2 $ 960.0 $ 0.5 $ - $ 10,648.5 $ 84.9
Services
Individual
Life 800.1 2,655.8 28.4 1.2 15.2 48.7
Insurance
----------- ---------- ----------- ----------- ----------- --------
Total $1,515.3 $ 3,615.8 $ 28.9 $ 1.2 $ 10,663.7 $ 133.6
=========== ========== =========== =========== =========== ========
1995
- ----
Financial $ 602.5 $ 1,018.9 $ 1.0 $ - $ 10,483.3 $ 164.4
Services
Individual
Life 738.8 2,574.3 26.2 1.4 16.8 48.3
Insurance
----------- ---------- ----------- ----------- ----------- --------
Total $1,341.3 $ 3,593.2 $ 27.2 $ 1.4 $ 10,500.1 $ 212.7
=========== ========== =========== =========== =========== ========
Other
income
including Amor-
Current tization
realized of deferred
Net capital Current policy Other
investment gains and and future acquisition operating
Segment income (2) losses) benefits costs expenses (3)
- ------------------------- ---------- ----------- ------------- --------------
1997
- ----
Financial $ 878.8 $ 330.0 $ 720.4 $ 82.8 $ 286.5
Services
Individual
Life 201.7 220.7 407.4 45.6 60.9
Insurance
----------- ---------- ----------- ------------- --------------
Total $ 1,080.5 $ 550.7 $ 1,127.8 $ 128.4 $ 347.4
=========== ========== =========== ============= ==============
1996
- ----
Financial $ 852.6 $ 257.6 $ 728.3 $ 28.0 $ 308.9
Services
Individual
Life 193.0 204.0 240.3 41.8 80.6
Insurance
----------- ---------- ----------- ------------- --------------
Total $ 1,045.6 $ 461.6 $ 968.6 $ 69.8 $ 389.5
=========== ========== =========== ============= ==============
1995
- ----
Financial $ 823.3 $ 223.6 $ 786.3 $ 10.5 $ 254.4
Services
Individual
Life 181.0 178.6 210.9 37.5 56.4
Insurance
----------- ---------- ----------- ------------- --------------
Total $ 1,004.3 $ 402.2 $ 997.2 $ 48.0 $ 310.8
=========== ========== =========== ============= ==============
(1) Included in future policy benefits on the Company's Consolidated Balance
Sheets.
(2) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(3) Includes operating expenses and severance and facilities charges. Excludes
any effect of the corporate facilities and severance charge recorded in
1996 which is not directly allocable to the Financial Services and
Individual Life Insurance segments.
62
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned
subsidiary of Aetna Retirement Holdings, Inc.)
Schedule IV
Reinsurance
For the years ended December 31,
(Millions)
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed to
Amount Companies Companies Amount Net
----------- ----------- ----------- ----------- -----------
1997
----
Life insurance in force $ 42,133.4 $ 3,547.4 $ 2,006.2 $ 40,592.2 4.9%
---------------------------------------------------------------
Premiums:
Life Insurance $ 35.7 $ 15.1 $ 177.4 $ 198.0 89.6
Accident and Health Insurance 5.6 5.6 - - -
Annuities 67.9 - 1.2 69.1 1.7
---------------------------------------------------------------
Total earned premiums $ 109.2 $ 20.7 $ 178.6 $ 267.1 66.9
===============================================================
1996
----
Life insurance in force $ 40,276.3 $ 2,416.0 $ 2,076.3 $ 39,936.6 5.2%
===============================================================
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7 52.0
Accident and Health Insurance 6.3 6.3 - - -
Annuities 84.3 - 0.6 84.9 0.7
---------------------------------------------------------------
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6 19.4
================================================================
1995
----
Life insurance in force $ 36,031.5 $ 1,846.8 $ 3,596.7 $ 37,781.4 9.5%
================================================================
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2 58.1
Accident and Health Insurance 7.5 7.5 - - -
Annuities 164.0 - 0.5 164.5 0.3
---------------------------------------------------------------
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7 13.4
===============================================================
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
Date March 25, 1998 By /s/ Deborah Koltenuk
--------------- -------------- ----------------------------------
Deborah Koltenuk
Vice President and Treasurer,
Corporate Controller
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 25, 1998.
Signature Title
*
- -------------------------
Thomas J. McInerney President and Director
(Principal Executive Officer)
*
- --------------------------
Catherine H. Smith Senior Vice President, Chief Financial Officer,
and Director (Principal Financial Officer)
*
- --------------------------
Shaun P. Mathews Senior Vice President and Director
/s/ Deborah Koltenuk
- --------------------------
Deborah Koltenuk Vice President and Treasurer, Corporate
Controller (Principal Accounting Officer)
* By: /s/ Kirk P. Wickman
---------------------
Kirk P. Wickman
Vice President, General Counsel and Secretary
64
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life Insurance and Annuity
Company, hereby severally constitute and appoint Kirk P. Wickman and Deborah
Koltenuk and each of them individually, our true and lawful attorneys, with full
power to them and each of them to sign for us, and in our names and in the
capacities indicated below, the 1997 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 25th day of March, 1998.
Signature Title
/s/ Thomas J. McInerney
- -------------------------
Thomas J. McInerney President and Director
(Principal Executive Officer)
/s/ Catherine H. Smith
- --------------------------
Catherine H. Smith Senior Vice President, Chief Financial Officer,
and Director (Principal Financial Officer)
/s/ Shaun P. Mathews
- --------------------------
Shaun P. Mathews Senior Vice President and Director
/s/ Deborah Koltenuk
- --------------------------
Deborah Koltenuk Vice President and Treasurer, Corporate
Controller (Principal Accounting Officer)
65
SECRETARY CERTIFICATE
I, Rose-Marie DeRensis, the duly appointed Assistant Corporate Secretary
of Aetna Life Insurance and Annuity Company (the "Company"), hereby certify that
the attached resolutions titled "Company Name, Authority to Sign (Duplicate
Corporate Seals)" adopted by the Board of Directors on June 22, 1995, are
currently in full force and effect, and have not been amended, restated, or
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 24th day of March, 1998.
/s/ Rose-Marie DeRensis
------------------------------
(corporate seal) Rose-Marie DeRensis
Assistant Corporate Secretary
Aetna Life Insurance and Annuity Company
66
AETNA LIFE INSURANCE AND ANNUITY COMPANY
COMPANY NAME, AUTHORITY TO
SIGN (DUPLICATE CORPORATE SEALS)
June 22, 1995
RESOLVED: That the following officers:
President
Senior Vice President
Vice President
General Counsel
Corporate Secretary
Treasurer
Assistant Corporate Secretary
(1) are hereby severally authorized to sign in the Company's name:
(a) insurance contracts of every type and description which the
Company is authorized to write;
(b) agreements relating to the purchase, sale, or exchange of
securities including any consents and modifications given or made
under such agreements;
(c) conveyances and leases of real estate or any interest therein
including any modifications thereof;
(d) assignments and releases of mortgages and other liens, claims or
demands;
(e) any other written instrument which they are authorized to approve
in the normal course of Company business; and
(f) any other written instrument when specifically authorized by the
Board of Directors or the President;
and are further severally authorized (i) to delegate all or any part
of the foregoing authority to one or more officers, employees or
agents of this Company, provided that each such delegation is in
writing and a copy thereof is filed in the Office of the Corporate
Secretary, or (ii) to designate any attorney at law representing this
Company on a matter under their direction, to so sign this Company's
name;
(2) are hereby severally authorized to possess the Company's duplicate
seals and to affix the same to items (a) through (f) above;
and are further severally authorized to designate any Company officer
under their direction to possess and to so affix the Company's
duplicate seals; and
that the Senior Vice President, Investments is hereby authorized to
designate any officer, employee or agent of this Company under his
direction to sign the Company's name and to affix the Company's seal
to any and all documents required in connection with any investment
transaction in which the Company has an interest.
67