-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U7qMzVPCMliOks2e1XvgPCL/CqrtfdY2P2j1T4lkINV6l7PpMTtP9wO0+7xJPBIs eLHvZ9NJ3qVGCLsg+Niesg== 0000950146-96-000535.txt : 19960606 0000950146-96-000535.hdr.sgml : 19960606 ACCESSION NUMBER: 0000950146-96-000535 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960415 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE INSURANCE & ANNUITY CO /CT CENTRAL INDEX KEY: 0000837010 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 710294708 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1940 Act SEC FILE NUMBER: 033-64331 FILM NUMBER: 96547383 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032737834 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVENUE CITY: HARTFORD STATE: CT ZIP: 06156 POS AMI 1 AMENDMENT NO. 1 TO FORM S-2 As filed with the Securities and Exchange Registration No. 33-64331 Commission on April 15, 1996 - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Aetna Life Insurance and Annuity Company --------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Connecticut --------------------------------------------------------------------- (State or other Jurisdiction of Incorporation or Organization) 71-0294708 --------------------------------------------------------------------- (I.R.S. Employer Identification No.) 151 Farmington Avenue, Hartford, Connecticut 06156, (860) 273-7834 --------------------------------------------------------- (Address, including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices) Susan E. Bryant, Counsel Aetna Life Insurance and Annuity Company 151 Farmington Avenue, RE4C, Hartford, Connecticut 06156 (860) 273-7834 --------------------------------------------------------------------- (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service) - - ------------------------------------------------------------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [XX] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CROSS REFERENCE SHEET Pursuant to Regulation S-K Item 501(b) Form S-2 Item No. Part A (Prospectus) Location -------- ------------------ -------- 1 Forepart of the Registration Cover Page Statement and Outside Front Cover Page of Prospectus.................. 2 Inside Front and Outside Back Cover Cover Page Pages of Prospectus....................... 3 Summary Information, Risk Factors and Summary Information; Ratio of Earnings to Fixed Charges.. Description of Contracts; Financial Statements 4 Use of Proceeds..................... Investments 5 Determination of Offering Price..... Not Applicable 6 Dilution............................ Not Applicable 7 Selling Security Holders............ Not Applicable 8 Plan of Distribution................ Distribution of Contracts 9 Description of Securities to be Description of Contracts Registered.......................... 10 Interests and Named Experts and Experts Counsel............................. 11 Information with Respect to the Appendix B and C Registrant.......................... 12 Incorporation of Certain Information Incorporation of Certain by Reference........................ Document by Reference 13 Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities......................... AETNA LIFE INSURANCE AND ANNUITY COMPANY AETNA MULTI-RATE ANNUITY 151 FARMINGTON AVENUE HARTFORD, CONNECTICUT 06156 This Prospectus describes certain single purchase payment modified guaranteed deferred annuity contracts offered by Aetna Life Insurance and Annuity Company ("Company"). The contracts are issued as individual or group contracts and allow you to earn interest and accumulate amounts on a tax deferred basis. The amounts you accumulate can be used to provide annuity payments or other benefits. Individual contracts may be purchased directly or as a rollover Individual Retirement Annuity. Group contracts may be purchased for both qualified and non-qualified plans. Interests under a group contract will be evidenced by the issuance to you of a separate certificate. Individual contracts and certificates under group contracts are both referred to herein as the "Contract." This Prospectus should be read thoroughly before you purchase a Contract. A minimum single purchase payment of at least $10,000 must accompany the application for a Contract. Under the Contracts, the Company sets various rates of interest ("Guaranteed Rates") that are paid for varying periods ("Guaranteed Periods"). You choose the Guaranteed Period for which you would like to invest. At the end of that Guaranteed Period, you may reinvest your accumulated funds in another Guaranteed Period. Information concerning available Guaranteed Periods and Guaranteed Rates may be obtained by calling 1-800-531-4547. You may withdraw all or part of your accumulated funds at any time. Withdrawals prior to the end of a Guaranteed Period may be subject to a Market Value Adjustment and a surrender fee. Upon a full withdrawal, you could, therefore, receive less than your purchase payment. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. The date of this Prospectus is May 1, 1996. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith, files periodic reports and other information with the Securities and Exchange Commission (the "Commission"). Reports and other information concerning the Company may be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material also can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. This Prospectus is accompanied by a copy of the Company's annual report on Form 10-K for the year ended December 31, 1995. Reference is made to Form 10-K for a description of the Company and its business, including financial statements. The Company intends to deliver to holders of outstanding Contracts account statements at least annually and such other periodic reports as may be required by law, but it is not anticipated that any such reports will include periodic financial statements or information concerning the Company. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's latest Annual Report on Form 10-K, filed with the Commission pursuant to Section 15(d) of the Exchange Act, is incorporated by reference into this Prospectus and must accompany this Prospectus. The Form 10-K contains additional information about the Company, including certified financial statements for the Company's latest fiscal year. No other reports have been filed by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered by that Form 10-K. The Company will provide without charge to each person to whom this Prospectus is delivered, on the written or oral request of any such person, a copy of any or all of the documents incorporated by reference in the Registration Statement of which this Prospectus forms a part other than exhibits to such documents unless such exhibits are specifically incorporated by reference into such documents. Requests should be directed to Aetna Life Insurance and Annuity Company, 151 Farmington Avenue, Hartford, Connecticut 06156, telephone (800) 531-4547. 2 TABLE OF CONTENTS
PAGE AVAILABLE INFORMATION 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 2 SPECIAL TERMS 4 SUMMARY INFORMATION 5 DESCRIPTION OF CONTRACTS 6 The Application Process 6 Free Look 6 THE ACCUMULATION PERIOD 7 Guaranteed Periods and Guaranteed Rates 7 Your Choices at the End of a Guaranteed Period 8 WITHDRAWALS AND SURRENDERS 8 General 8 The Market Value Adjustment 8 Fees Applicable to Withdrawals 9 Special Withdrawals 9 The Systematic Withdrawal Option 9 The Estate Conservation Option 10 The Nursing Home Waiver 10 Payment Upon Withdrawal or Surrender 10 CHARGES AND DEDUCTIONS 10 Premium Taxes 10 Maintenance Fees 11 DEATH BENEFIT 11 Death Benefit Options Available to Your Beneficiary 11 ANNUITY PERIOD 11 Selecting an Annuity Date 11 Annuity Payments 12 Annuity Options 12 Payment Upon Death After Annuity Payments Begin 12 INVESTMENTS 13 PARTICIPANT AND BENEFICIARY RIGHTS AND PRIVILEGES 13 AMENDMENT OF THE CONTRACTS 13 DISTRIBUTION OF THE CONTRACTS 14 FEDERAL INCOME TAXES 14 The Company 14 Taxes You or Others Pay--Non-Qualified Contracts 14 Accumulation Period 14 Annuity Payments 14 Withdrawals Before the Annuity Date 15 Penalty For Premature Withdrawals and Payments 15 Partial Annuitization 15 Distribution-At-Death Rules 15 Certain Tax-Free Exchanges 15 Taxes You or Others Pay--Qualified Contracts 15 Contracts Purchased As A Rollover Individual Retirement Annuity 16 Withholding on Eligible Rollover Distributions 16 Qualified Pension, Profit-Sharing Plans, or Annuity Plans 16 Tax Sheltered Annuities 16 Withholding of Taxes 16 See Your Own Tax Adviser 16 LEGAL MATTERS 16 EXPERTS 17 FURTHER INFORMATION 17 INQUIRIES 17 APPENDIX A: Calculating A Market Value Adjustment A-1
3 SPECIAL TERMS As used in this Prospectus, the following terms have the indicated meanings: Annuitant: The person whose life is measured for purposes of the duration of annuity payments or the payment of the death benefit. This individual is designated by you in your application. Prior to the Annuity Date you may request In Writing to change the designated Annuitant, but any such change is only effective if approved by the Company. Annuity Date: The date your annuity payments start under an annuity option you elect. This date may be any time after the first year of your Contract, and will be the later of the Annuitant's 85th birthday, or the tenth anniversary of your purchase payment, unless you elect otherwise. Annuity Option: The method you select for your annuity payments to be made. Beneficiary: The person(s) entitled to receive any payment from the Contract upon your death, the death of the Annuitant if not you, or the death of a joint holder, as applicable. This person is designated by you in your application. If a joint holder dies, the surviving joint holder will be deemed the designated Beneficiary, and any other Beneficiary on record will be treated as the contingent Beneficiary. Current Value: As of any given date, your purchase payment plus interest credited, less any amount withdrawn or used to provide annuity payments. The Current Value will also reflect any deduction for premium taxes, in the event such taxes are deducted from your purchase payment, and any deduction for maintenance fees, if such fees are applicable. Guaranteed Period: The period for which Guaranteed Rates are credited. Guaranteed Rate: The interest rate that we guarantee to pay during Guaranteed Periods. In Writing: A written form satisfactory to the Company and received at its offices addressed to: Aetna Life Insurance and Annuity Company, 151 Farmington Avenue, Hartford, Connecticut 06156. Market Value Adjustment: An adjustment that may be made to the amount withdrawn from the Contract before the end of the Guaranteed Period. The adjustment reflects the change in the value of the investment due to changes in interest rates since the date of deposit and is computed using the formula given in the Contract. The adjustment is expressed as a percentage of each dollar being withdrawn. You: The person who owns and holds the Contract. You may have a joint holder, but only if such joint holder is your spouse. With respect to a group contract, "you" refers to the person or persons who has or have been issued a certificate under the group contract. Where there are joint holders of the Contract, each must join in making any request or election or to take any action pursuant to the Contract. 4 SUMMARY INFORMATION The Contract is an annuity contract issued to you by the Company that allows you to invest and accumulate funds while deferring taxes on the interest you earn. You make a single purchase payment for a Contract. The minimum purchase payment is $10,000. You may make larger payments, or you may buy more than one Contract. Purchase payments over $1,000,000 require the Company's prior approval. The interest rates that we guarantee are called Guaranteed Rates, and the fixed periods during which these rates are guaranteed are called Guaranteed Periods. When you purchase a Contract, you select the Guaranteed Period you want from among those the Company then offers. Except as described below, your purchase payment will earn interest at the Guaranteed Rate for the duration of the Guaranteed Period you select. Guaranteed Periods always start on the first business day of the month. During the period of time between the date your purchase payment is credited and the start of the Guaranteed Period you select, your purchase payment earns interest at the Guaranteed Rate applicable to the Guaranteed Period you selected. The Guaranteed Rates offered will never be less than the minimum guaranteed interest rate stated in the Contract. Guaranteed Periods are offered at the Company's discretion for various lengths of time ranging up to and including ten years. You may divide your single purchase payment among any of the various Guaranteed Periods that we offer, but you must invest at least $1,000 in any single Guaranteed Period selected. Except for Contracts issued in the State of New York, for Guaranteed Periods of greater than one year, more than one Guaranteed Rate may be applicable during a Guaranteed Period. For example, a Guaranteed Period of five years may apply one Guaranteed Rate for the first year, a different Guaranteed Rate for the next two years, and a third Guaranteed Rate for the last two years. Prior to the end of any Guaranteed Period, you can elect to reinvest the current value of your Contract in another Guaranteed Period then available, withdraw all or part of your current value, or choose to start your annuity payments, subject to certain restrictions. The Company will notify you at least 18 calendar days before the end of any Guaranteed Period in which you have current value. If you make no election, the current value of your Contract automatically will be reinvested for a Guaranteed Period equal to the one just completed, or if not available, the next shortest Guaranteed Period then available. If no such shorter Guaranteed Period is available, the next longest Guaranteed Period will be used. THE COMPANY'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED RATES TO BE DECLARED. THE COMPANY CANNOT PREDICT NOR CAN THE COMPANY GUARANTEE WHAT THE GUARANTEED RATES WILL BE FOR FUTURE GUARANTEED PERIODS UNTIL SUCH RATES ARE DECLARED. (See "Guaranteed Periods and Guaranteed Rates.") You may withdraw all or part of your Contract's current value at anytime. However, such withdrawals may be subject to a Market Value Adjustment, surrender fee, a deduction for premium taxes and maintenance fees, and/or federal income taxes and tax penalties. A Market Value Adjustment is an adjustment applied to any amounts you withdraw prior to the end of your Guaranteed Period. The Market Value Adjustment may increase or decrease the amount of your withdrawal. The Market Value Adjustment reflects the change in value of your investment in a Guaranteed Period due to changes in interest rates since the start of that Guaranteed Period. Generally, when interest rates decrease, the Market Value Adjustment amount is positive. Conversely, when interest rates increase, the Market Value Adjustment amount is negative. If interest rates increase, the amount you receive upon the withdrawal of the current value of your Contract before the end of the Guaranteed Period could be less than the amount you invested at the start of the Guaranteed Period. The amount of the Market Value Adjustment is determined by using the formula described in Appendix A. The Market Value Adjustment does not apply to Systematic Withdrawals or withdrawals under the Estate Conservation Option, but it is applicable to Special Withdrawals and withdrawals under the Nursing Home Waiver. The Market Value Adjustment also does not apply to amounts withdrawn at the end of your Guaranteed Period, provided that five days prior to the end of that Guaranteed Period we receive notice of the withdrawal In Writing. (See "Market Value Adjustment" and "The Systematic Withdrawal Option.") Except as described below, a surrender fee is imposed on any amount of your purchase payment withdrawn during the first seven years of your Contract. For purposes of this fee it is assumed that you are withdrawing all or a portion of your purchase payment first, not your earnings. The amount of the surrender fee is initially 7%, and declines periodically thereafter to 0% after the seventh year. The surrender fee is not applicable to any amounts withdrawn at the end of a Guaranteed Period if appropriate notice has been given. The surrender fee is also not applicable to any amounts used to provide annuity payments. After you own your Contract for one year, you are entitled to one Special Withdrawal per year, up to a maximum amount equal to 10% of the current value of your Contract at the time of your withdrawal. Also, if the current value of your Contract meets the minimum dollar amounts established by the Company, you can arrange a program of Systematic Withdrawals. Systematic 5 Withdrawals allow you to withdraw specified amounts or percentages of your Contract's current value or to withdraw amounts over specified time periods that you determine. Similarly, for Contracts purchased as Individual Retirement Annuities, if you are at least age 70-1/2 and the current value of your Contract meets the minimum dollar amounts established by the Company, you can arrange a program of annual withdrawals through the Estate Conservation Option. This option is designed to provide annual payments in an amount equal to the minimum distribution that is required to be withdrawn each year under the federal tax laws. Surrender fees do not apply to Special Withdrawals, Systematic Withdrawals or withdrawals under the Estate Conservation Option or the Nursing Home Waiver, but such withdrawals may be subject to taxes, penalties and withholding taxes. (See "Federal Income Taxes.") Under certain emergency conditions, the Company may defer payment of any withdrawal, including surrenders, for a period not exceeding six months from the date of receipt of a surrender request. You choose when you want your annuity payments to start. Your annuity payments can start any time after the first year of your Contract, upon your selection of an annuity option. You may use all or part of the current value of your Contract to provide annuity payments. If your annuity payments start before the end of your Guaranteed Period, a Market Value Adjustment may be applied to any amounts used to start annuity payments. The annuity option you select also determines the number, amount and frequency of your annuity payments. Your annuity payments can be for a fixed period of time, for your life, for the life of another person you select, or for the joint lives of you and another person. The Contract also provides a death benefit, which is paid if you or the annuitant die before your annuity payments start. The amount of the death benefit equals the current value of your Contract, provided that the death benefit is paid within six months of the death of the annuitant. If paid after six months of the date of death of the annuitant, or if paid upon your death and you are not the annuitant, the death benefit equals the current value of your Contract as adjusted by any applicable Market Value Adjustment. Additionally, if you die and you are not the annuitant, the death benefit payable will be subject to a surrender fee, if applicable. In certain circumstances, your beneficiary or joint holder may have the option to continue the Contract rather than receiving the death benefit. The Company currently pays all state and local premium taxes on your Contract when due. The Company recovers applicable taxes paid on your behalf by deducting an appropriate amount from the current value of your Contract when annuity payments start, or earlier upon surrender of your Contract. Currently, such taxes range up to 3.5% of the amount of current value of the Contract used for annuity payments. The Company reserves the right to deduct premium taxes at any time from your purchase payment or from the current value of your Contract based upon the Company's determination of when such tax is due. DESCRIPTION OF CONTRACTS The Application Process To begin the application process, you must submit a completed application and your purchase payment to the Company for approval. The minimum purchase payment is $10,000. The Company retains the right to limit the amount of the maximum purchase payment, and all purchase payments over $1,000,000 require the Company's approval. You may not make any additional purchase payments under an existing Contract. However, additional Contracts may be purchased by eligible persons at the then prevailing Guaranteed Rates and terms. The Company will accept or reject an application within two business days of its receipt. If the application is incomplete, the Company may hold it and any accompanying purchase payment for five days. A purchase payment may be held for longer periods only with your consent, pending acceptance of the application. If the application is accepted, a Contract will be issued to you. If the application is rejected, the application and any purchase payment will be returned to you. If your application is properly completed and accepted by the Company, your purchase payment becomes part of the Company's general assets and is credited to an account established for you. The Company will confirm the crediting of your purchase payment In Writing within five business days of receipt of your properly completed application. You start earning interest on your purchase payment beginning on the effective date of your Contract, which is the date your purchase payment is credited. A Contract may be purchased as a rollover Individual Retirement Annuity by transferring amounts previously accumulated (rollover amounts) under another Individual Retirement Annuity or an Individual Retirement Account under Section 408 of the Internal Revenue Code of 1986 ("Tax Code"), or a retirement plan qualified under Section 401 or 403 of the Tax Code. The Company reserves the right to reject an application and, in such case, any purchase payment will be returned to you without interest. The Company will deliver your Contract within a reasonable time after receipt and acceptance of your properly completed application and purchase payment. Free Look You may cancel your Contract within ten days of receiving it (or as otherwise provided by state law) by giving Aetna written notice and returning your Contract. Upon cancellation, the Company will return your purchase payment to you within seven days after it receives your notice of cancellation. 6 THE ACCUMULATION PERIOD Guaranteed Periods and Guaranteed Rates In your application you select the Guaranteed Period you want from among those Guaranteed Periods the Company then offers. Your purchase payment earns interest at the Guaranteed Rate applicable to that Guaranteed Period. Guaranteed Periods always start on the first business day of the month. During the period of time between the date your purchase payment is credited and the start of the Guaranteed Period you selected, your purchase payment earns interest at the Guaranteed Rate applicable to the Guaranteed Period you selected. Guaranteed Periods are offered at the Company's discretion for various lengths of time ranging up to and including ten years. You may divide your single purchase payment among any of the various Guaranteed Periods that we offer, but you must invest at least $1,000 in any single Guaranteed Period selected, and not less than $10,000 in all Guaranteed Periods selected. Except for Contracts issued in the State of New York, for Guaranteed Periods of greater than one year more than one Guaranteed Rate may be applicable during one Guaranteed Period. For example, a Guaranteed Period of five years may apply one Guaranteed Rate for the first year, a different Guaranteed Rate for the next two years, and a third Guaranteed Rate for the last two years. All Guaranteed Rates are stated in terms of effective annual rate of return; that is, a Guaranteed Rate reflects a full year's interest. Interest you earn is credited daily at a rate that will provide the guaranteed effective rate of return over the period of one year assuming no surrenders. Guaranteed Rates will never be less than the minimum guaranteed interest rate stated in the Contract. The Company reserves the right to offer, from time to time, Guaranteed Rates to prospective investors that are higher than those offered to current Contract owners with respect to Guaranteed Periods of the same duration. The example below shows how interest will be credited to you during each Guaranteed Period. The hypothetical interest rate used in this example is illustrative only and is not intended to predict future Guaranteed Rates to be offered under the Contract. Actual Guaranteed Rates offered may be more or less than those shown. The example assumes no withdrawals of any amount during the entire seven year Guaranteed Period illustrated. Accordingly, the example does not give effect to any Market Value Adjustment, surrender fee, deduction for premium taxes and maintenance fees, or federal income taxes or possible tax penalties. (See "Withdrawals and Surrenders," "The Market Value Adjustment," and "Premium Taxes," below, and "Federal Income Taxes.") Example of Interest Crediting at the Guaranteed Rate Purchase Payment: $20,000 Guaranteed Period: 7 years Guaranteed Rate: 6.00% per annum The Guaranteed Rate is applied in this example by using the following formula: 1 + the Guaranteed Rate = 1.06. Current Value at end of Contract Year 1 = $21,200.00 ($20,000.00 x 1.06) Current Value at end of Contract Year 2 = $22,472.00 ($21,200.00 x 1.06) Current Value at end of Contract Year 3 = $23,820.32 ($22,472.00 x 1.06) Current Value at end of Contract Year 4 = $25,249.54 ($23,820.32 x 1.06) Current Value at end of Contract Year 5 = $26,764.51 ($25,249.54 x 1.06) Current Value at end of Contract Year 6 = $28,370.38 ($26,764.51 x 1.06) Current Value at End of Guaranteed Period = $30,072.61 ($28,370.38 x 1.06) Total Interest Credited in Guaranteed Period = $10,072.61 ($30,072.61 - $20,000) The Company will determine the Guaranteed Rates it offers periodically at its sole discretion. The Company has no specific formula for determining the rate of interest that it will declare as future Guaranteed Rates. The determination of Guaranteed Rates will reflect interest rates available on the types of debt instruments in which the Company intends to invest the proceeds attributable to the Contracts. (See "Investments.") The Company's management will also consider various other factors in determining Guaranteed Rates for a given Guaranteed Period, such as regulatory and tax requirements, sales commissions and administrative expenses, general economic trends, and competitive factors. The Company's management will make the final determination as to Guaranteed Rates to be offered. The Company cannot predict nor guarantee future levels of guaranteed interest rates above a contractually guaranteed minimum rate nor guarantee what rates will be offered in the future. Your Choices at the End of a Guaranteed Period At least 18 calendar days prior to the end of a Guaranteed Period under your Contract, the Company will send you a notice that your Guaranteed Period is about to end. At the end of your Guaranteed Period, you can do three things with the amount you have accumulated for that Guaranteed Period: (1) reinvest all or part of it in another Guaranteed Period; (2) withdraw all or part of it; or (3) use all or part of it to start your annuity payments. These choices also can be used in combination. For example, you 7 could withdraw part of the amount you have accumulated, and reinvest the balance; or reinvest part, and use the balance to start annuity payments. Each of these choices has certain consequences, which you should consider carefully. (See "Withdrawals and Surrenders," below, and "Annuity Period" and "Federal Income Taxes.") Once you decide what you want to do with the Current Value for that Guaranteed Period, you must advise the Company of your decision In Writing by completing an election form. To be effective, your completed election form must be received by the Company In Writing at least five days prior to the end of the Guaranteed Period to which it applies. If you decide you want to reinvest the Current Value of your Contract for a Guaranteed Period of the same duration as the one just ending, you need not take any action. IF THE COMPANY DOES NOT RECEIVE YOUR PROPERLY COMPLETED ELECTION FORM IN TIME, YOUR CURRENT VALUE AT THE END OF THE GUARANTEED PERIOD WILL BE AUTOMATICALLY REINVESTED FOR A GUARANTEED PERIOD EQUAL TO THE GUARANTEED PERIOD JUST ENDED. If no such Guaranteed Period is then being offered, the Guaranteed Period with the next shortest duration will be used. If no such shorter Guaranteed Period is available, the next longest Guaranteed Period will be used. Your Current Value will then earn interest at the Guaranteed Rate applicable to the Guaranteed Period automatically selected for you. The Company will mail a confirmation statement to you the next business day after the completion of your just ended Guaranteed Period advising you of the new Guaranteed Period and Guaranteed Rate. WITHDRAWALS AND SURRENDERS General At any time prior to the time your annuity payments start, you may surrender all or part of the Current Value of your Contract. If, after any partial withdrawal, the Current Value of your contract is less than $2,500, the Company may terminate your Contract upon 90 days notice and refund the remaining balance to you. If you withdraw all of your Current Value, you must surrender your Contract. To make a partial or full withdrawal, you must properly complete a withdrawal request or surrender form provided by the Company, and submit it to the Company In Writing. All withdrawals may be subject to a Market Value Adjustment, a surrender fee, a deduction for premium taxes and maintenance fees, and federal income taxes and tax penalties. All applicable fees and deductions are deducted from the amount of your withdrawal in accordance with the terms of your Contract. Any Market Value Adjustment applicable to your withdrawal may either increase or decrease the amount paid to you. (See "Market Value Adjustment," below.) Accordingly, if you request that you receive a specific dollar amount upon withdrawal, the amount actually withdrawn from your Contract may be more or less than the requested dollar amount. The Company will, upon request, inform you in advance of the amount payable upon a withdrawal. Amounts are withdrawn on a pro rata basis from each of the Guaranteed Periods under the Contract. The Market Value Adjustment The amount payable upon a withdrawal before the end of a Guaranteed Period may be increased or decreased by the application of the Market Value Adjustment. When applicable, the Market Value Adjustment is applied to the amount withdrawn. If your annuity payments start before the end of your Guaranteed Period, a Market Value Adjustment may be applied to any amounts used to start annuity payments. The Market Value Adjustment will not be applied to Systematic Withdrawals, to withdrawals under the Estate Conservation Option or to a death benefit payable on death of Annuitant if paid within six months of the Annuitant's death. The Market Value Adjustment also does not apply to amounts withdrawn at the end of your Guaranteed Period, provided that five days prior to the end of that Guaranteed Period we receive notice of the withdrawal In Writing. The Market Value Adjustment reflects the change in the value of your investment due to changes in interest rates since the start of the Guaranteed Period under your Contract. When interest rates increase, the Market Value Adjustment amount is negative. Conversely, when interest rates decrease, the Market Value Adjustment amount is positive. Because a Market Value Adjustment can be positive or negative, it may increase or decrease the amount of your withdrawal before the end of a Guaranteed Period. The Company imposes a Market Value Adjustment for several reasons. Upon withdrawal of money from your Contract, the Company may need to liquidate certain assets or use existing cash flow that would otherwise be available to invest at current interest rates. The assets that are liquidated may be sold at a profit or a loss, depending upon market conditions. This profit or loss could affect the determination of Guaranteed Rates. (See "Guaranteed Periods and Guaranteed Rates," above.) To lessen this impact, certain withdrawals are subject to a Market Value Adjustment. For an explanation of how the Market Value Adjustment is calculated, see Appendix A. Fees Applicable to Withdrawals Upon any withdrawal, a surrender fee of up to 7% may be deducted from the amount withdrawn, depending on the length of time that has passed since your initial purchase payment was credited. The surrender fee only applies to the amount of your purchase payment withdrawn, but for purposes of this fee it is assumed that you are withdrawing all or a portion of your purchase 8 payment first, not your earnings. This assumption, however, does not apply for tax purposes. (See "Federal Income Taxes.") The chart below indicates the percentage fee applied to amounts you withdraw.
Surrender Fee Years since initial payment credited: 0 1 2 3 4 5 6 7 Fee as a percentage of payment withdrawn: 7% 7% 6% 6% 5% 4% 2% 0%
The surrender fee and Market Value Adjustment are waived and not applicable to any amounts withdrawn at the end of a Guaranteed Period, provided that five days prior to the end of that Guaranteed Period we receive notice of the withdrawal In Writing. The surrender fee and Market Value Adjustment, however, remain applicable to any amount you reinvest for another Guaranteed Period. For purposes of applying the surrender fee, all time periods are measured from the date your initial purchase payment is credited, even if you reinvest all or part of your Current Value in another Guaranteed Period. Once the surrender fee declines to 0%, it is no longer applicable, regardless of how long you own your Contract. For example, assume that the first Guaranteed Period you select is for 5 years. Further assume that at the end of this 5 year Guaranteed Period, you decide to reinvest the Current Value of your Contract for another Guaranteed Period of 4 years. Assume you then make a withdrawal (but not a Special Withdrawal, as described below) during the second year of the new Guaranteed Period. Because six years have passed since your purchase payment was credited, you would pay a 2% surrender fee, even though you could have withdrawn all or part of the Current Value of your Contract at the end of the first 5 year Guaranteed Period without paying a surrender fee. However, if you make a withdrawal during the third year of the new Guaranteed Period, or anytime thereafter, you would pay no surrender fee, because seven years would have passed since your purchase payment was credited. If you surrender your Contract and the Current Value is less than $2,500, the surrender fee will be waived, provided you have not withdrawn any amounts within the prior 12 months. The surrender fee is also waived if the Company terminates your Contract because its Current Value is less than $2,500. In both cases, a Market Value Adjustment will be applied, and a deduction will be made for any premium taxes and maintenance fees, if applicable. Special Withdrawals After you own your Contract for one year, you have the opportunity to make one Special Withdrawal per year without paying a surrender fee unless you have elected "SWO" or "ECO" described below. The maximum amount of the Special Withdrawal equals 10% of the Current Value of your Contract at the time the Company receives your withdrawal request In Writing. This opportunity is only available for the first withdrawal of each year, and all subsequent withdrawals during that year will be subject to the surrender fee, even if you did not withdraw the full 10% with your first withdrawal. If your first withdrawal for the year is in excess of 10% of the Current Value of your Contract, only the excess amount is subject to a surrender fee. A Market Value Adjustment is applicable to any amounts that you withdraw, and you also may be required to pay taxes and tax penalties. (See "Federal Income Taxes.") The Systematic Withdrawal Option If the Current Value of your Contract meets the minimum dollar amounts established by the Company, you can elect a program of automated partial withdrawals through the Systematic Withdrawal Option ("SWO"). SWO allows you to withdraw either a specified amount or a percentage of your Contract's value, or to withdraw amounts over a specified time period that you determine, within certain limits described in your Contract. SWO payments can be made on a monthly or quarterly basis, and the amount of each payment is determined by dividing the designated annual amount by the number of payments due each calendar year. SWO payments are withdrawn pro rata from each of the Guaranteed Periods under your Contract. SWO is available under three payment methods: the specified percentage method, the specified payment method, and the specified period method. The terms and conditions applicable to each of these payment methods are described in your Contract. Under a Contract purchased as a rollover Individual Retirement Annuity, if the SWO payment for any year is less than the minimum required distribution under the Tax Code, the SWO payment will be increased to an amount equal to the minimum distribution amount. 9 If you participate in SWO, you may not utilize a Special Withdrawal to make additional withdrawals from your Contract. Once elected, SWO may be canceled at any time by submitting a request In Writing to the Company. However, once canceled, SWO may not be elected again by you or your spousal Beneficiary. The Company reserves the right to change the terms of SWO for future elections and to discontinue the availability of this option upon notice. The Company also reserves the right to establish the date when you may first elect SWO. The Market Value Adjustment and surrender fees do not apply to withdrawals received under SWO, but you may be required to pay taxes and tax penalties on any amounts that you withdraw. (See "Federal Income Taxes.") The Estate Conservation Option If your Contract was purchased as a rollover Individual Retirement Annuity, you are at least age 70-1/2 and the Current Value of your Contract meets the minimum dollar amounts established by the Company, you can arrange a program of annual partial withdrawals through the Estate Conservation Option ("ECO"). ECO is designed to provide annual payments in an amount equal to the minimum distribution that is required to be withdrawn each year under the Tax Code. ECO payments are withdrawn pro rata from each of the Guaranteed Periods under your Contract. The Company will, upon request, inform you in advance of the amount payable under ECO. The Market Value Adjustment does not apply to withdrawals received under ECO, and surrender fees also are not applicable. You will be required to pay taxes on any amounts that you withdraw. (See "Federal Income Taxes.") If you participate in ECO, you may not utilize a Special Withdrawal to make additional withdrawals from your Contract. Once elected, ECO may be canceled at any time by submitting a request In Writing to the Company. However, once canceled, ECO may not be elected again until 36 months have elapsed. The Company reserves the right to change the terms of ECO for future elections and to discontinue the availability of this option upon notice. The Nursing Home Waiver The Nursing Home Waiver provides that if you have owned your Contract for over one year, and the Annuitant has spent at least 45 consecutive days in a licensed nursing care facility, then the surrender fee will be waived if you withdraw any portion of the Current Value of your Contract within three years of the Annuitant's admission to such licensed nursing care facility. The Market Value Adjustment applies to withdrawals under the Nursing Home Waiver, and you also may be required to pay taxes and tax penalties on any amounts that you withdraw. (See "Federal Income Taxes.") The Nursing Home Waiver may not be available in all states and does not apply if the Annuitant was in a licensed nursing care facility when you purchased your Contract. Payment Upon Withdrawal or Surrender Under certain emergency conditions, the Company may defer payment of any withdrawal for a period not exceeding six months from date of receipt of a withdrawal request. CHARGES AND DEDUCTIONS Premium Taxes Several states and local governments impose a premium or similar tax on annuities. Currently, such taxes range up to 3.5% of either your purchase payment or the amount accumulated in your Contract that you use for annuity payments. The Company initially will pay all state-imposed premium or similar taxes applicable to your Contract. These taxes will be deducted from the amounts that you use for annuity payments immediately prior to the time your annuity payments begin. If you surrender your Contract, or at your death your Beneficiary elects to receive a lump sum distribution, a charge will be deducted for any premium taxes paid on your behalf for which the Company has not been reimbursed. The Company reserves the right to deduct premium taxes at any time from your purchase payment or from the Current Value of your Contract based upon the Company's determination of when such tax is due. In the event that premium taxes are deducted from your purchase payment, the amount invested in a Guaranteed Period will be equal to the amount of your purchase payment reduced by any applicable premium tax. Maintenance Fees Prior to the time your annuity payments start, an annual maintenance fee may be deducted from the Current Value of your Contract on each anniversary of your Contract's effective date and upon the surrender of your Contract. The terms and conditions under which the maintenance fee may be deducted are stated in your Contract. 10 DEATH BENEFIT In your application to purchase a Contract, you will select a Beneficiary. If you or the Annuitant die before annuity payments begin, a death benefit will be paid to your Beneficiary in accordance with the terms of your Contract. If a joint holder dies, the surviving joint holder will be deemed the designated Beneficiary, and any other Beneficiary on record will be treated as the contingent Beneficiary. If the Contract holder is not a natural person, the death benefit will be payable at the death of the Annuitant or upon any change of the Annuitant. The amount of the death benefit equals the Current Value of your Contract, provided that the death benefit is paid within six months of the death of the Annuitant. If the death benefit is paid after six months of the date of death of the Annuitant, or if paid upon your death and you are not the Annuitant, it equals the Current Value of your contract as adjusted by any applicable Market Value Adjustment. Additionally, if you die and you are not the Annuitant, the death benefit payable will be subject to a surrender fee, if applicable. The death benefit is calculated as of the date of receipt of notification In Writing of due proof of death and the Beneficiary's claim. In certain circumstances, your Beneficiary or joint holder may have the option to continue the Contract rather than receiving the death benefit. You may change the Beneficiary you previously designated at any time by submitting notice In Writing to the Company. The change will not be effective until received and recorded by the Company. Death Benefit Options Available to Your Beneficiary If you die before annuity payments begin, or, if the Contract holder is not a natural person and the Annuitant dies before annuity payments begin, any Beneficiary under the Contract who is an individual has several options for receiving payment of the death benefit. The death benefit may be paid in one lump sum payment, or all or part of such amounts may be used to start annuity payments using the Annuity Options available under the Contract. Unless the designated Beneficiary is your spouse, all death benefits paid as a lump sum must be distributed within five years of the date of death. If the Beneficiary elects to receive a lump sum payment, a charge will be deducted for any premium taxes paid on your behalf for which the Company has not been reimbursed. A spousal Beneficiary also may elect to exercise all rights under the Contract. If you are an individual who is not the Annuitant, and the Annuitant dies, your Beneficiary may elect either to apply all of the death benefit amount to any Annuity Option available under the Contract within 60 days of the date of death, or to receive such amount as a lump sum payment. ANNUITY PERIOD Selecting an Annuity Date You select the Annuity Date for your Contract, which is the date you want your annuity payments to start under an Annuity Option that you select. This date may be any time after the first year of your Contract, and will be the later of the Annuitant's 85th birthday or the tenth anniversary of your purchase payment, unless you elect otherwise. You can change your Annuity Date by notifying the Company In Writing at least 30 days before your annuity payments are to begin. Regardless of your Annuity Date, your annuity payments will not begin until you have selected an Annuity Option. Failure to select an Annuity Option on your Annuity Date, or postponement of the Annuity Date past the later of the Annuitant's 85th birthday or the tenth anniversary of your purchase payment, may have adverse tax consequences. You should consult with a qualified tax adviser if you are considering either of these courses of action. Annuity Payments You may apply all or a portion of the Current Value of your Contract to provide annuity payments. Annuity payments are made to you unless you request otherwise. You can request that we send annuity payments to any person you name, or have the payments deposited directly in any bank account. After your death, we will send any annuity payments still due to the Beneficiary you have selected. You may be required to pay taxes on portions of the annuity payments you receive. (See "Federal Income Taxes.") Annuity payments are made monthly unless you request that annuity payments be made quarterly, semi-annually or annually. You may change your request In Writing at any time. The amount of each annuity payment depends on how much of your Current Value, less applicable premium taxes, you use to start your annuity payments, and the Annuity Option that you elect. No election 11 may be made that would result in a first annuity payment of less than $50 or total yearly annuity payments of less than $250. If the amount you have accumulated in your Contract as of the Annuity Date is insufficient to elect an Annuity Option for the minimum amount specified, you will receive a lump sum payment. After any two full consecutive years, measured from the anniversary of the effective date of your Contract, and upon 90 days notice to you, the Company may terminate a rollover Individual Retirement Annuity Contract if the paid-up benefit at maturity would be less than $20 per month. Instead of electing annuity payments, you may request that the Company make a lump sum payment. No surrender fee will be applied to any amounts used to start annuity payments, although a Market Value Adjustment may be applicable. Annuity Options You can elect to have your annuity payments made: (1) for the life of your designated Annuitant or joint Annuitant; (2) for the life of the Annuitant but guaranteed for a minimum of 5, 10, 15 or 20 years; (3) for the life of two Annuitants; or (4) for a stated period of time (10 to 30 years). You must notify the Company In Writing of the Annuity Option elected at least 30 days prior to the Annuity Date. You may change your election at any time up to 30 days before your annuity payments start. If your annuity payments start before the end of your Guaranteed Period, a Market Value Adjustment will be applied to any amounts used to start annuity payments. If the Annuity Option selected is one of the first three listed above (i.e., a lifetime annuity), only a positive Market Value Adjustment will be applied. Once you elect for annuity payments to begin, you may not elect to instead receive a lump sum payment. If you choose an annuity for life but guaranteed for a minimum number of years, when the annuity payments start, the age of the Annuitant plus the number of years for which payments are guaranteed must not exceed 95. Additionally, federal income tax requirements currently applicable to Individual Retirement Annuities provide that the period of years guaranteed may not be any greater than the joint life expectancies of the payee and his or her designated Beneficiary. Further, if you choose an annuity for the life of two Annuitants, annuity payments will continue until both Annuitants have died. When this Annuity Option is chosen, you must choose one of the following: (1) 100% of the payment to continue after the first death; (2) 66-2/3% of the payment to continue after the first death; (3) 50% of the payment to continue after the first death; (4) Payments for a minimum of 120 months, with 100% of the payment to continue after the first death; or (5) 100% of the payment to continue at the death of the second Annuitant and 50% of the payment to continue at the death of the Annuitant. Payment Upon Death After Annuity Payments Begin Upon the death of either the Annuitant or the surviving joint Annuitant after annuity payments start, the amount payable, if any, to your Beneficiary depends on the Annuity Option currently in force. Any amounts payable must be paid at least as rapidly as under the method of distribution in effect at the Annuitant's death. If you die after annuity payments start and you are not the Annuitant, any remaining payments will continue to be made to your Beneficiary at least as rapidly as under the method of distribution in effect at your death. INVESTMENTS Purchase payments received under the Contracts and allocated to Guaranteed Periods will be invested by the Company under the laws of the State of Connecticut. You have no priority claims on, or participation in the performance of, such assets. All such assets are the property of the Company and available to meet the guarantees under the Contracts and the general obligations of the Company. The assets of the Company will be invested in accordance with the requirements established by applicable state laws regarding the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. In general, these laws permit investments, within specified limits and subject 12 to certain qualifications, in federal, state, and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, and certain other investments. The Company has no specific formula for establishing the Guaranteed Rates for the Guaranteed Periods. The Company expects the rates to be influenced by, but not necessarily correspond to, the yields on the fixed income securities to be acquired with amounts that are allocated to the Guaranteed Periods at the time that the Guaranteed Rates are established. The Company intends to invest in assets which, in the aggregate, have characteristics, especially cash flow patterns, reasonably related to the characteristics of the liabilities. Various immunization techniques will be used to achieve the objective of close aggregate matching of assets and liabilities. The Company will primarily invest in investment-grade fixed income securities including: (bullet) Securities issued by the United States Government or its agencies or instrumentalities, which issues may or may not be guaranteed by the United States Government. (bullet) Debt securities that are rated, at the time of purchase, within the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating organizations. (bullet) Other debt instruments, including, but not limited to, issues of or guaranteed by banks or bank holding companies and of corporations, which obligations, although not rated by Moody's, Standard & Poor's, or other nationally recognized rating organizations, are deemed by the Company's management to have an investment quality comparable to securities which may be purchased as stated above. (bullet) Commercial paper, cash or cash equivalents, and other short-term investments having a maturity of less than one year which are considered by the Company's management to have investment quality comparable to securities which may be purchased as stated above. In addition, the Company may invest in futures and options. Financial futures and related options thereon and options on securities are purchased solely for nonspeculative hedging purposes. In the event the securities prices are anticipated to decline, the Company may sell a futures contract or purchase a put option on futures or securities to protect the value of securities it holds. Similarly, if securities prices are expected to rise, the Company may purchase a futures contract or a call option thereon against anticipated positive cash flow or may purchase options on securities. WHILE THE FOREGOING GENERALLY DESCRIBES THE COMPANY'S INVESTMENT STRATEGY, THE COMPANY IS NOT OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACTS ACCORDING TO ANY PARTICULAR STRATEGY, EXCEPT AS MAY BE REQUIRED BY CONNECTICUT AND OTHER STATE INSURANCE LAWS, NOR WILL THE GUARANTEED RATES THE COMPANY ESTABLISHES NECESSARILY RELATE TO THE INVESTMENT PERFORMANCE THE COMPANY EXPERIENCES. PARTICIPANT AND BENEFICIARY RIGHTS AND PRIVILEGES You have the sole and absolute power to exercise all rights and privileges under the Contract, except as otherwise provided by the Contract. Your rights under the Contract may be assigned or transferred. The Company will not be bound by an assignment unless and until notice of such assignment is submitted In Writing and such assignment is accepted by the Company. The Company assumes no responsibility for the validity or effect of any assignment. The Company reserves the right not to accept any assignment or transfer to a nonnatural person. In some cases, an assignment may have adverse tax consequences. You should consult a tax adviser regarding the consequences of an assignment. AMENDMENT OF THE CONTRACTS Only an authorized officer of the Company may change the terms of the Contract. The Company will notify you In Writing of any such change. The Company reserves the right to modify the Contract to meet the requirements of applicable state or federal laws or regulations. DISTRIBUTION OF THE CONTRACTS The Company will serve as the underwriter of the securities being sold by this Prospectus. The Company is registered as a broker-dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. ("NASD"). As underwriter, the Company will contract with one or more other registered broker-dealers who are NASD members ("Distributors") to offer and sell the Contracts. Sales compensation paid to Distributors will not exceed 6-1/2 percent of the purchase payment made for a Contract. Alternatively, the Company may pay asset-based sales compensation annually to Dis- 13 tributors that will not exceed 1-1/4 percent of the assets held under a Contract. At its discretion, the Company may also pay sales compensation to Dealers based on both a percentage of the purchase payment and the assets held annually under a Contract. From time to time, customers of certain Broker-Dealers and other entities may be offered special initial Guaranteed Rates and negotiated commissions. The Company and one or more affiliates may also sell the Contracts directly. All registered representatives of the Distributors must also be licensed as insurance agents to sell the Contracts. The Company may also contract with independent third party broker-dealers who will act as wholesalers by assisting the Company in finding broker-dealers interested in acting as Distributors of the Contract. These wholesalers may also provide training, marketing and other sales related functions for the Company and the Distributors and may provide certain administrative services to the Company in connection with the Contracts. The Company may pay such wholesalers compensation based on purchase payments for the Contracts purchased through Distributors selected by the wholesaler. The Company may also designate third parties to provide services in connection with the Contracts such as reviewing applications for completeness and compliance with insurance requirements and providing the Distributors with approved marketing material, prospectuses or other supplies. These parties will also receive payments based on purchase payments for their services, to the extent such payments are allowed by applicable securities laws and NASD rules. All costs and expenses related to these services will be paid by the Company. FEDERAL INCOME TAXES The Company The Company is taxed as a life insurance company under the Tax Code. The assets underlying the Contracts will be owned by the Company. The income earned on such assets will be the Company's income. The Company assumes no responsibility for determining whether a particular individual retirement annuity plan satisfies the applicable requirements of the Tax Code or whether a particular person is eligible for such a plan. Taxes You or Others Pay--Non-Qualified Contracts Non-qualified Contracts are those used other than in connection with a rollover Individual Retirement Annuity or tax-favored retirement program such as an employee benefit plan. Accumulation Period The Contracts are considered annuity contracts under Section 72 of the Tax Code. Currently, no Federal income tax is payable on increases in the value of the Contract (such as interest credited to you) until payments are made to you or another payee under such Contract. However, a Contract owned other than by a natural person is not generally an annuity for tax purposes and any increase in value thereunder is currently taxable as ordinary income. Annuity Payments Annuity payments are in part taxable to you or another payee as ordinary income, and in part nontaxable. The nontaxable portion of each annuity payment is that portion of your purchase payment returned to you. This nontaxable portion is determined by dividing the "investment in the contract" (generally, your purchase payment with certain adjustments) by the amount of "expected return" during the time that periodic payments are to be made, and then multiplying by the amount of the payment. The balance of the annuity payment is taxable. Non-Natural Holders of a Non-Qualified Contract If you are not a natural person, a Non-qualified Contract is not treated as an annuity for income tax purposes and the "income on the contract" for the taxable year is currently taxable as ordinary income. "Income on the contract" is any increase over the year in the amount payable upon the withdrawal of all or any portion of the Current Value, adjusted for amounts previously distributed and amounts previously included in income. There are some exceptions to the rule, and a non-natural person should consult with its tax adviser prior to purchasing this Contract. A non-natural person exempt from federal income taxes should consult with its tax adviser regarding treatment of "income on the contract" for purposes of the unrelated business income tax. Withdrawals Before the Annuity Date Partial withdrawals prior to the Annuity Date, other than those used to provide annuity payments, and total surrenders at any time, will be taxable to you as ordinary income to the extent that the Contract's Current Value exceeds your "investment in the contract" at that time. For tax purposes, it is assumed that you are withdrawing all or a portion of your earnings first, not your purchase payment. 14 If you assign or pledge any part of your Current Value, the value so pledged or assigned is treated like a withdrawal for tax purposes. Transfer of ownership without full and adequate consideration is treated for income tax purposes as a taxable surrender of the Contract. Transfers between spouses or incident to divorce are not subject to this rule. The tax treatment of withdrawals from each Contract may be affected if you own other annuity contracts issued by us (or our affiliates) that were purchased on or after October 21, 1988. (See the Contract Prospectus.) Penalty For Premature Withdrawals and Payments In addition to being included in ordinary income, the taxable portion of any withdrawal or payment made before you reach age 59-1/2 may be subject to a 10 percent penalty tax. The penalty tax does not apply to, among other things, payments made on account of your death or becoming disabled, or to payments made in substantially equal periodic payments, not less than annually, over the life (or life expectancy) of the payee or over the joint lives (or life expectancies) of the payee and a designated Beneficiary. Partial Annuitization Prior to the Annuity Date, you may withdraw a portion of your Account Value and use it to provide annuity payments, while leaving the remaining portion of your Account Value invested in one or more Guaranteed Periods. The Tax Code and the regulations thereunder do not specifically address the tax treatment applicable to payments provided pursuant to the exercise of this type of option. The Company takes the position that payments provided pursuant to this option are taxable as annuity payments, and not as a withdrawal. However, because the tax treatment of such payments is currently unclear, you should consult with a qualified tax adviser if you are considering a partial annuitization of your Contract. Distribution-At-Death Rules In order to be treated for tax purposes as a non-qualified annuity Contract, a non-qualified Contract must provide the following two distribution rules: (a) if you die on or after the Annuity Date, and before the entire interest in the Contract has been distributed, the remainder of your interest will be distributed at least as quickly as the method in effect on your death; and (b) if you die before the Annuity Date, your entire interest must generally be distributed within five years after the date of death, or if the interest is payable to a designated Beneficiary, such interest must be annuitized over the life of that Beneficiary or a period not extending beyond the life expectancy of that Beneficiary, beginning within one year after the date of death. A "designated Beneficiary" is any individual designated as a Beneficiary by you. If the designated Beneficiary is your spouse, the Contract (together with the deferral of tax on the accrued and future income thereunder) may be continued in the name of the spouse. Where the holder of the Contract is not an individual, the primary Annuitant is considered the owner, solely for the purpose of the distribution-at-death rules. The primary Annuitant is the individual the events in whose life are of primary importance in affecting the timing and payment under a Contract. In addition, when the holder of the Contract is not an individual, a change in the primary Annuitant is treated as the death of the holder of the Contract. Certain Tax-Free Exchanges Section 1035 of the Tax Code provides generally that no gain or loss will be recognized under the exchange of a life insurance, endowment or annuity contract for an annuity contract. Thus, a properly completed exchange from one of these types of products into a Contract pursuant to the special annuity contract exchange form the Company provides for this purpose is not generally a taxable event under the Tax Code, and the investment in the Contract will be the same as in the exchanged product. Because of the complexity of these and other tax aspects in connection with an exchange, a tax adviser should be consulted before any exchange is made. Taxes You or Others Pay--Qualified Contracts Contracts may also be used with several types of tax-favored retirement programs, such as a rollover Individual Retirement Annuity or an employee benefit plan. The tax rules applicable to participants in such programs vary according to the type of program and the terms and conditions of the program itself. Contracts Purchased As A Rollover Individual Retirement Annuity The Contract may be purchased as a rollover Individual Retirement Annuity, by transferring amounts previously accumulated (rollover amounts) under another Individual Retirement Annuity, an Individual Retirement Account (as defined by the Tax Code), or a retirement plan qualified under Sections 401 or 403 of the Tax Code. For Contracts purchased as a rollover Individual Retirement Annuity, the Tax Code requires that minimum distributions must begin no later than April 1 of the year following the year in which you attain age 70-1/2. When payments under an Individual Retire 15 ment Annuity Contract are made in the form of an annuity, or in a single sum such as on surrender of the Contract or by withdrawal, the entire payment is generally taxed as ordinary income. As in the case of non-qualified Contracts, certain distributions, such as those made prior to your reaching 59-1/2, may be subject to a 10% penalty. Withholding on Eligible Rollover Distributions If you wish to rollover your entire Current Value to or from a rollover Individual Retirement Annuity, you should have it paid directly to the successor plan. Otherwise, your distribution will be subject to 20% withholding. Consult a qualified tax adviser before taking such a distribution. Qualified Pension, Profit-Sharing Plans, or Annuity Plans Sections 401(a) and 403(a) of the Tax Code permit corporate employers and self-employed individuals to establish various types of retirement plans for employees. Such retirement plans may permit the purchase of Contracts to provide benefits thereunder. The plan trustee must be the Contract holder and Beneficiary of Contracts used in such plans. The Tax Code contains requirements with respect to commencement of minimum distributions and premature withdrawals similar to those applicable to rollover Individual Retirement Annuities. Tax Sheltered Annuities Tax Code Section 403(b) permits the purchase of Contracts by employees of public schools and certain charitable, educational and scientific organizations described in Tax Code Section 501(c)(3). These qualifying employers may make contributions to the Contracts for the benefit of their employees. Such contributions are not includible in the gross income of the employee until the employee receives distributions from the Contract. The amount of contributions to the Contract used in connection with Tax Code Section 403(b) is limited to certain maximums imposed by the Tax Code. Furthermore, the Tax Code sets forth additional restrictions governing such items as transferability, distributions, non-discrimination and withdrawals. The Tax Code contains requirements with respect to commencement of minimum distributions and premature withdrawals similar to those applicable to rollover Individual Retirement Annuities. Withholding of Taxes The Company is obligated to withhold taxes from certain payments unless the recipient elects otherwise. The withholding rate varies depending upon the nature and the amount of the distribution. The Company will notify you or another payee in advance of the first payment of his or her right to elect out of withholding and furnish a form on which the election may be made. Any election must be received by the Company In Writing in advance of the payment in order to avoid withholding. See Your Own Tax Adviser The above description of Federal income tax consequences of owning a Contract and of the qualified retirement plans which may be funded by the Contracts is only a brief summary and is not intended as tax advice. The tax rules applicable to the Contracts and to tax qualified plans are extremely complex and often difficult to understand. Anything less than full compliance with the applicable rules, all of which are subject to change from time to time, can have adverse tax consequences. The taxation of an Annuitant or other payee has become so complex and confusing that great care must be taken to avoid adverse tax consequences. For further information you should consult a qualified tax adviser. LEGAL MATTERS The validity of the interests under the Contracts offered hereby has been passed upon for the Company by Susan E. Bryant, Esq. EXPERTS The consolidated financial statements of the Company and related consolidated financial statement schedules as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, have been incorporated by reference herein to the Company's Form 10-K for the year ended December 31, 1995 upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. The reports of KPMG Peat Marwick LLP on the above-mentioned consolidated financial statements and related consolidated financial statement schedules refer to a change in 1993 in the Company's methods of accounting for certain investments in debt and equity securities. 16 FURTHER INFORMATION This Prospectus does not contain all of the information contained in the registration statement of which the Prospectus is a part, and certain portions of the registration statement have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The information so omitted may be obtained from the offices of the Commission, as set forth under "Available Information," upon payment of the prescribed fee. INQUIRIES You may direct inquiries by writing directly to us at the address shown on the cover page of this Prospectus or by calling 1-800-531-4547. 17 APPENDIX A CALCULATING A MARKET VALUE ADJUSTMENT The Market Value Adjustment Formula The mathematical formula used to determine the Market Value Adjustment is: (1 + i)(x) (365) (1 + j) Where: i is the Deposit Period Yield; j is the Current Yield; and x is the number of days remaining (computed from Wednesday of the week of withdrawal) in the Guaranteed Period. Explanation of the Market Value Adjustment Formula The Market Value Adjustment essentially involves a comparison of two yields: the yield available at the start of the current Guaranteed Period of your Contract (the "Deposit Period Yield") and the yield currently available (the "Current Yield"). An adjustment is needed to reflect the period of time remaining in the Guaranteed Period of your contract. The Market Value Adjustment depends on the relationship of the Deposit Period Yield of U.S. Treasury Notes that mature in the last quarter of the Guaranteed Period, to the Current Yield of such U.S. Treasury Notes at the time of withdrawal. In general, if the Current Yield is the lesser of the two, the Market Value Adjustment will decrease the amount withdrawn from the Contract to satisfy the withdrawal request; if the Current Yield is the higher of the two, the Market Value Adjustment will increase the amount withdrawn from the Contract to satisfy the withdrawal request. As a result of the Market Value Adjustment imposed, the amount withdrawn from the Contract prior to the Maturity Date may be less than the amount paid into the Contract. To determine the Deposit Period Yield and the Current Yield, certain information must be obtained about the prices of outstanding U.S. Treasury issues. This information may be found each business day in publications such as The Wall Street Journal. This newspaper publishes the yield-to-maturity percentages for all Treasury Notes as of the preceding business day. These percentages are used in determining the Deposit Period Yield and the Current Yield for the Market Value Adjustment calculation. Deposit Period Yield Determining the Deposit Period Yield in the Market Value Adjustment calculation involves consideration of interest rates prevailing at the start of the Guaranteed Period from which the withdrawal will be made. First, the Treasury Notes that mature in the last three months of the Guaranteed Period are identified, and then, the yield-to-maturity percentages of these Treasury Notes for the last business day of each week in the "Deposit Period" are determined. The resulting percentages are then averaged to determine the Deposit Period Yield. The Deposit Period is the period of time during which the purchase payment or any reinvestment may be made to available Guaranteed Periods. A Deposit Period may be a month, a calendar quarter, or any other period of time specified by the Company. Current Yield To determine the Current Yield, use the same Treasury Notes identified for the Deposit Period Yield: Treasury Notes that mature in the last three months of the Guaranteed Period. However, the yield-to-maturity percentages used are those for the last business day of the week preceding the withdrawal. Average these percentages to determine the Current Yield. The following are examples of Market Value Adjustment ("MVA") calculations using several hypothetical Deposit Period Yields and Current Yields. These examples do not include the effect of any surrender fee that may be assessed under the Contract upon withdrawal. A-1 EXAMPLE I Assumptions: i, the Deposit Period Yield, is 8% j, the Current Yield, is 10% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the Guaranteed Period, is 927. MVA = (1+i)(x) (365) (1+j) = 1.08(927) (365) 1.10 = .9545 In this example the Deposit Period Yield of 8% is less than the Current Yield of 10%, therefore, the Market Value Adjustment is less than 1. The amount withdrawn from the Guaranteed Period is multiplied by this Market Value Adjustment. If a withdrawal of a stated percentage is requested, the value withdrawn from a Guaranteed Period will reflect the deduction of the negative Market Value Adjustment amount. However, if a withdrawal request of a specific dollar amount is requested, the amount withdrawn from a Guaranteed Period will be increased to compensate for the negative Market Value Adjustment amount. For example, a withdrawal request to receive a check for $2,000 would result in a $2,095.34 withdrawal from the Guaranteed Period. Assumptions: i, the Deposit Period Yield, is 5% j, the Current Yield, is 6% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the Guaranteed Period, is 927. MVA = (1+i)(x) (365) (1+j) = 1.05(927) (365) 1.06 = .9762 In this example the Deposit Period Yield of 5% is less than the Current Yield of 6%, therefore, the Market Value Adjustment is less than 1. The amount withdrawn from the Guaranteed Period is multiplied by this Market Value Adjustment. If a withdrawal of a stated percentage is requested, the value withdrawn from a Guaranteed Period will reflect the deduction of the negative Market Value Adjustment amount. However, if a withdrawal request of a specific dollar amount is requested, the amount withdrawn from a Guaranteed Period will be increased to compensate for the negative Market Value Adjustment amount. For example, a withdrawal request to receive a check for $2,000 would result in a $2,048.76 withdrawal from the Guaranteed Period. A-2 EXAMPLE II Assumptions: i, the Deposit Period Yield, is 10% j, the Current Yield, is 8% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the Guaranteed Period, is 927. MVA = (1+i)(x) (365) (1+j) = 1.10(927) (365) 1.08 = 1.0477 In this example the Deposit Period Yield of 10% is greater than the Current Yield of 8%, therefore, the Market Value Adjustment is greater than 1. The amount withdrawn from the Guaranteed Period is multiplied by this Market Value Adjustment. If a withdrawal of a stated percentage is requested, the value withdrawn from a Guaranteed Period will reflect the addition of the positive Market Value Adjustment amount. However, if a withdrawal request of a specific dollar amount is requested, the amount withdrawn from a Guaranteed Period will be decreased to reflect the positive Market Value Adjustment amount. For example, a withdrawal request to receive a check for $2,000 would result in a $1,908.94 withdrawal from the Guaranteed Period. Assumptions: i, the Deposit Period Yield, is 5% j, the Current Yield, is 4% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the Guaranteed Period, is 927. MVA = (1+i)(x) (365) (1+j) = 1.05(927) (365) 1.04 = 1.0246 In this example the Deposit Period Yield of 5% is greater than the Current Yield of 4%, therefore, the Market Value Adjustment is greater than 1. The amount withdrawn from the Guaranteed Period is multiplied by this Market Value Adjustment. If a withdrawal of a stated percentage is requested, the value withdrawn from a Guaranteed Period will reflect the addition of the positive Market Value Adjustment amount. However, if a withdrawal of a specific dollar amount is requested, the amount withdrawn from a Guaranteed Period will be decreased to reflect the positive Market Value Adjustment amount. For example, a withdrawal request to receive a check for $2,000 would result in a $1,951.98 withdrawal from the Guaranteed Period. A-3 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 The registrant meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. For the fiscal year ended DECEMBER 31, 1995 Commission file number 33-23376 AETNA LIFE INSURANCE AND ANNUITY COMPANY - - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) CONNECTICUT 71-0294708 - - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156 - - ------------------------------------------------------------------------------ (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (860)273-0978 ------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No _______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 29, 1996 there were 55,000 shares of common stock outstanding, par value $50 per share, all of which shares were held by Aetna Retirement Services, Inc. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Aetna Life and Casualty Company's 1994 Proxy Statement filed on March 18, 1994, its 1992 Form 10-K filed on March 17, 1993 and its 1993 Form 10-K filed on March 18, 1994 are incorporated by reference into Part IV of this report. (1) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Annual Report For 1995 on Form 10-K TABLE OF CONTENTS PART I PAGE Item 1. Business**........................................... 3 Item 2. Properties**.......................................... 10 Item 3. Legal Proceedings..................................... 10 Item 4. Submission of Matters to a Vote of Security Holders* PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................... 11 Item 6. Selected Financial Data* Item 7. Management's Analysis of the Results of Operations**.. 12 Item 8. Financial Statements and Supplementary Data........... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 48 PART III Item 10. Directors and Executive Officers of the Registrant* Item 11. Executive Compensation* Item 12. Security Ownership of Certain Beneficial Owners and Management* Item 13. Certain Relationships and Related Transactions* PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K............................... 48 Index to Consolidated Financial Statement Schedules............ 51 Signatures..................................................... 56 ** Item prepared in accordance with General Instruction J(2) of Form 10-K. * Omitted pursuant to General Instruction J(2) of Form 10-K. (2) PART I Item 1. Business Aetna Life Insurance and Annuity Company is a stock life insurance company organized in 1976 under the insurance laws of Connecticut. Aetna Life Insurance and Annuity Company, together with its two wholly owned subsidiaries, Aetna Insurance Company of America and Aetna Private Capital, Inc., is herein called the "Company". The Company is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a wholly owned subsidiary of Aetna Life and Casualty Company ("Aetna") which, with Aetna's subsidiaries, constitutes one of the nation's largest insurance/financial services organizations based on its assets at December 31, 1994. Two subsidiaries, Systematized Benefits Administrators, Inc. ("SBA") and Aetna Investment Services, Inc. ("AISI"), which were previously reported with the Company's operations were distributed in the form of dividends 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 markets a variety of life insurance, retirement and other savings and investment products including individual and group annuities, financial services and mutual funds. The Company's products are designed for individuals, pension plans, small businesses and employer-sponsored groups. The Company's operations are reported through two major business segments: financial services and life insurance. FINANCIAL SERVICES SEGMENT The financial services segment includes individual and group annuity products which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under Internal Revenue Code Sections 401, 403, 408, and 457, and individual and group nonqualified annuity contracts. These contracts may be immediate or deferred and 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 markets. The Company also offers life insurance supplemental contracts. Financial services also include pension plan administrative services. In 1995, the Company discontinued writing structured settlements of certain liabilities. Annuity products typically offer fixed (fully guaranteed and experience rated) investment options and variable investment options (discussed below). For fully guaranteed and experience rated options the Company earns a spread representing the difference between income on investments and interest credited to customer reserves. (3) The Company's variable products (variable annuity and variable life contracts) utilize Separate Accounts to provide contractholders with a vehicle for investments under which the contractholders assume the investment risks as well as the benefit of favorable performance. Assets held under these products are invested, as designated by the contractholder or participant under a contract, in Separate Accounts, which in turn invest in shares of mutual funds that are managed by the Company or other selected mutual funds that are not managed by the Company. The Company acts as an investment adviser for its affiliated mutual funds (a retail fund - Aetna Series Fund, Inc. and variable products funds - Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Aetna Get Fund Series B) and receives advisory fees for its investment management services. The Company also receives from the Aetna Series Fund, Inc. service fees for providing administrative and shareholder services and distribution fees for promoting sales of the Adviser Class shares. The Company is compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable annuity contracts (actuarial margin) (see Note 8 of the Notes to the Consolidated Financial Statements). Product retention is a key driver of profitability for annuity products. To encourage product retention, annuity contracts typically impose a surrender charge on policyholder balances withdrawn for a period of time after the contract's inception. The period of time and level of the charge vary by product. In addition, a new approach being incorporated into recent variable contracts with fixed interest account investment 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 an additional disincentive to premature surrenders of annuity balances, but do not impede transfers of those balances to products of other competitors. Certain of the Company's annuity products allow customers to borrow against their policies. Outstanding policy loans on annuity policies at December 31, 1995 were $181.3 million. Net investment income on annuity policy loans was $4.0 million for the year ended December 31, 1995. In the financial services segment markets, competition arises from other insurance companies, banks, mutual funds and other investment managers. Principal competitive factors are cost, service, level of investment performance and the perceived financial strength of the investment manager or sponsor. Competition in financial services markets may affect, among other matters, both business growth and the pricing of the Company's products and services. 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. Products sold in the not-for-profit organization market are distributed primarily through dedicated career agents, registered life brokers and broker/dealers. Products sold in the individual market are distributed primarily through dedicated career agents, registered life brokers, banks and broker/dealers. (4) Reserves for limited payment contracts (immediate annuities with life contingent payout) are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation), which generally 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 less 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 Financial Accounting Standard ("FAS") No. 115 (see Note 1 of the Notes to the Consolidated Financial Statements). The following table summarizes assets under management for the principal customer groups of the financial services segment. Amounts reflected exclude unrealized gains (losses) of $689.9 million and $(337.7) million at December 31, 1995 and 1994, respectively, related to market value adjustments required under FAS 115. See Management's Analysis of the Results of Operations and Note 1 for further discussion on assets under management and FAS 115, respectively. - - ---------------------------------------------------------------------------- (Millions) 1995 1994 1993 - - ---------------------------------------------------------------------------- Corporate pensions $ 4,233.5 $ 3,217.4 $ 2,886.2 Not-for-profit organizations 12,086.1 10,025.9 9,087.1 Individuals 6,214.8 4,879.6 3,981.0 ------------------------------------------------ Total $22,534.4 $18,122.9 $15,954.3 - - ---------------------------------------------------------------------------- Deposits, which are not included in premiums or revenue, are shown in the following table for the years indicated: - - ---------------------------------------------------------------------------- (Millions) 1995 1994 1993 - - ---------------------------------------------------------------------------- Corporate pensions $ 1,075.9 $ 890.3 $ 714.5 Not-for-profit organizations 1,093.0 1,093.3 1,107.8 Individuals 1,200.6 670.2 460.9 ------------------------------------------------ Total $ 3,369.5 $ 2,653.8 $ 2,283.2 - - ---------------------------------------------------------------------------- LIFE INSURANCE SEGMENT The life insurance segment includes universal life, variable universal life, interest-sensitive whole life and term insurance. These products are offered primarily to individuals, small businesses, employer-sponsored groups and executives of Fortune 2000 companies. The Company's universal life insurance product accounted for approximately 92% of individual life insurance sales in 1995. The Company's in-force block of insurance includes a sizable block of traditional ordinary life insurance originally written by an affiliate, Aetna Life Insurance Company ("Aetna Life"), and transferred to the Company via a reinsurance agreement in 1988 (see Note 8 of the Notes to the Consolidated Financial Statements). This closed book of business contributed 29% of the life insurance segment's earnings in 1995. (5) Universal life products include a cash value component that is credited with interest at competitive rates. The Company earns the spread between investment income and interest credited on customer cash values. Universal life cash values are charged for cost of insurance coverage and for administrative expenses. The Company is also compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable universal life contracts. Life insurance products typically require high costs to acquire business. As with the financial services segment, retention is an important driver of profitability and is encouraged through product features. For example, universal and interest-sensitive whole life insurance contracts typically impose a surrender charge on policyholder balances withdrawn within seven to twenty years of the contract's inception or for variable life within ten years. 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. Certain of the Company's life insurance products allow customers to borrow against their policies. Outstanding policy loans on individual life policies at December 31, 1995 were $157.3 million. Net investment income on individual life policy loans was $9.7 million for the year ended December 31, 1995. The markets for life insurance products are highly competitive among insurance companies. Competition largely is based upon product features and prices. Competition in life insurance markets may affect, among other matters, both business growth and the pricing of the Company's products and services. Life insurance products are marketed by managing general agents, regional brokers, banks and broker/dealers. Reserves for universal life and interest-sensitive whole life products (which are all experience-rated) are equal to cumulative deposits less withdrawals and charges, plus credited interest 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 115. Reserves for all other fixed individual life contracts are computed on the basis of assumed investment yield, mortality, morbidity and expenses (including a margin for adverse deviation), which generally 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 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 $2.0 million (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements). (6) Life Insurance in Force and Other Statistical Data* The following table summarizes changes in individual life insurance in force before deductions for reinsurance ceded to other companies for the years indicated:
(millions, except as noted below) 1995 1994 1993 - - ------------------------------------------------------------------------------------------ Sales and additions: Direct: Permanent......................................... $ 3,757.9 $ 3,369.4 $ 2,767.0 Term.............................................. 2,600.4 559.9 237.2 Assumed: Permanent......................................... 1,358.5 - - ---------------------------------- Total........................................... $ 7,716.8 $ 3,929.3 $ 3,004.2 ---------------------------------- ---------------------------------- Terminations: Direct: Surrenders and Conversions........................ $ 1,467.0 $ 1,316.4 $ 1,632.6 Lapses............................................ 891.4 860.9 816.7 Other............................................. 152.7 170.0 170.6 Assumed: Surrenders and Conversions........................ 53.6 59.4 80.3 Lapses............................................ 331.8 303.9 376.2 Other............................................. 54.2 57.9 55.1 ---------------------------------- Total........................................... $ 2,950.7 $ 2,768.5 $ 3,131.5 ---------------------------------- ---------------------------------- In force: Direct: Permanent......................................... $32,333.2 $30,563.0 $29,507.1 Term.............................................. 3,698.3 1,621.3 1,095.2 Assumed: Permanent......................................... 2,392.9 1,244.8 1,344.9 Term.............................................. 1,203.8 1,433.0 1,754.1 ---------------------------------- Total........................................... $39,628.2 $34,862.1 $33,701.3 ---------------------------------- ---------------------------------- Number of direct policies in force (thousands)......... 378.1 378.3 384.6 ---------------------------------- ---------------------------------- Average size of direct policy in force (thousands)..... $ 95.3 $ 85.1 $ 79.6 ---------------------------------- ----------------------------------
* Only nonparticipating business is written by the Company. (7) GENERAL ACCOUNT INVESTMENTS Consistent with the nature of the contract obligations involved in the Company's operations, the majority of the general account assets are invested in long-term, debt securities such as corporate debt securities, residential mortgage-backed securities, commercial and multifamily mortgage-backed securities, other asset-backed securities and 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. Please see Investments on pages 17 and 18 of the Management's Analysis of the Results of Operations for a further discussion of investments. For information concerning the valuation of investments, see Notes 1, 2 and 3 of the Notes to Consolidated Financial Statements. OTHER MATTERS REGULATION The insurance business of the Company is subject to comprehensive, detailed regulation throughout the United States. The laws of the various jurisdictions establish supervisory agencies with broad authority to regulate, among other things, the granting of licenses to transact business, trade practices, agent licensing, policy forms, underwriting and claims practices, reserve adequacy, insurer solvency, the maximum interest rates that can be charged on life insurance policy loans, the minimum rates that must be provided for accumulation of surrender values, the form and content of required financial statements and the type and amounts of investments permitted. The Company is required to file detailed reports with supervisory agencies in each of the jurisdictions in which it does business, and its operations and accounts are subject to examination by such agencies at regular intervals. Although the federal government does not directly regulate the business of insurance, many federal laws do affect the business. Existing or recently proposed federal laws that may significantly affect or would affect, if passed, the insurance business cover such matters as pensions and other employee benefits, removal of barriers preventing banks from engaging in the insurance and mutual fund businesses, the taxation of insurance companies, and the tax treatment of insurance products. Material changes in applicable federal and state laws and regulations could adversely affect the Company's business operations, although the Company is unable to predict whether any such changes will be implemented. Several states, including Connecticut, regulate affiliated groups of insurers such as the Company and its affiliates under insurance holding company statutes. Under such laws, intercorporate asset transfers and dividend payments from insurance subsidiaries may require prior notice to or approval of the insurance regulators, depending on the size of such transfers and payments relative to the financial position of the Company making the transfer. Changes in control also are regulated under these laws. As a Connecticut-domiciled insurance company, the Company is subject to comprehensive regulation under the Connecticut insurance laws and by the Connecticut Insurance Department. (8) In recent years, state insurance regulators have been considering changes in statutory accounting practices and other initiatives to strengthen solvency regulation. The National Association of Insurance Commissioners (NAIC) has adopted risk-based capital ("RBC") standards for life insurers. The RBC formula is a regulatory tool designed to identify weakly capitalized companies by comparing the adjusted surplus to the required surplus, which reflects the risk profile of the Company (RBC ratio). Within certain ratio changes, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action ranging from requiring insurers to submit a comprehensive plan to the state insurance commissioner to when the state insurance commissioner places the insurer under regulatory control. The Company's RBC ratio at December 31, 1995 was significantly above the levels which would require regulatory action. Rating agencies also use their own risk-based capital standards as part of determining a company's rating. The NAIC also is considering several other solvency-related regulations including the development of a model investment law and amendments to the model insurance holding company law which would limit types and amounts of insurance company investments. In addition, in recent years there has been growing interest among certain members of Congress concerning possible federal roles in the regulation of the insurance industry. Because these other initiatives are in a preliminary stage, management cannot assess the potential impact of their adoption on the Company. 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, 1995, 1994 and 1993 were $1.4 million, $0.6 million and $0.9 million, respectively. The amounts ultimately assessed may differ from the amounts charged to earnings thus far because such assessments may not be made for several years and will depend upon the final outcome of regulatory proceedings. 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 the non-guaranteed portion of a group pension contract issued to the plan 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. The Company and other insurers are seeking clarification from the DOL of the effects, if any, of the decision on their businesses, as well as pursuing clarification of the decision through Federal legislation. Management is not currently able to predict how the decision, or the outcome of any legislative or regulatory initiatives, will ultimately affect its business. Aetna Life Insurance and Annuity Company is regulated by the Securities and Exchange Commission ("SEC") and some state securities regulators as a broker-dealer and investment adviser. The Company's variable products involve investments through Separate Accounts, some of which are registered as investment companies with the SEC, as are the retail mutual funds and the variable mutual funds offered by the Company. Additionally, interests in some of the Separate Accounts, the retail mutual funds, the variable product mutual funds and certain other products used as funding vehicles for the Company's variable products are registered with the SEC. Shares of the retail mutual funds are also registered with all fifty of the state securities regulators. (9) MISCELLANEOUS According to the Fortune Service 500, as of December 31, 1994, the Company ranked 19th and 22nd among all United States domiciled life insurance companies based upon total assets and premium income, respectively. As of December 31, 1995, the Company had approximately 2,700 employees. The Company's rating at February 6, 1996 by A.M. Best was A+ (Superior). 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. The Company is not dependent upon any single customer and no single customer accounted for more than 10% of revenue in 1995. In addition, neither segment of the Company's business is dependent upon a single customer or a few customers, the loss of which would have a significant impact on the segment. See Note 12 of the Notes to the Consolidated Financial Statements regarding segment information. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 ("the Act") provides a new "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, 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 the new "safe harbor" provisions of the Act. Certain information contained herein, particularly the information appearing under the heading "Outlook" contained in Item 7-Management's Analysis of the Results of Operations, is forward-looking. Information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appear together with such statement within this section and within Item 7-Management's Analysis of the Results of Operations. Item 2. Properties The Company occupies office space which is owned or leased by Aetna Life Insurance Company or other affiliates. Expenses associated with these offices are allocated on a direct and indirect basis to the Company and the other subsidiaries of Aetna. Item 3. Legal Proceedings The Company and its Board of Directors know of no material legal proceedings pending to which the Company is a party or which would materially affect the Company. (10) 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 ARSI, which is a wholly owned subsidiary of Aetna. The shares were contributed to ARSI by Aetna in December, 1995. The Company distributed $2.9 million in the form of dividends of two of its subsidiaries, SBA and AISI, to ARSI in 1995. Prior to the distribution of all of the Company's outstanding shares of SBA and AISI to ARSI in December, 1995, and for the years ended 1994 and 1993, the Company did not pay dividends to Aetna. The amount of dividends which may be paid by the Company to ARSI 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 $70.0 million in dividend distributions in 1996. (11) Item 7. Management's Analysis of the Results of Operations CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
Operating Summary (millions) 1995 1994 1993 - - ----------------------------------------------------------------------------------------------- Premiums $ 130.8 $ 124.2 $ 82.1 Charges assessed against policyholders 318.9 279.0 251.5 Net investment income 1,004.3 917.2 911.9 Net realized capital gains 41.3 1.5 9.5 Other income 42.0 10.3 9.5 ---------------------------------------------------------------------------------------- Total revenue 1,537.3 1,332.2 1,264.5 ---------------------------------------------------------------------------------------- Current and future benefits 915.3 854.1 818.4 Operating expenses 318.7 235.2 207.2 Amortization of deferred policy acquisition costs 43.3 26.4 19.8 ---------------------------------------------------------------------------------------- Total benefits and expenses 1,277.3 1,115.7 1,045.4 ---------------------------------------------------------------------------------------- Income before federal income taxes 260.0 216.5 219.1 Federal income taxes 84.1 71.2 76.2 ---------------------------------------------------------------------------------------- Net income $ 175.9 $ 145.3 $ 142.9 ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- Deposits not included in premiums above: Fully guaranteed $ 415.7 $ 249.0 $ 263.7 Experience-rated 1,428.0 1,351.4 1,216.8 Non-guaranteed 2,059.1 1,365.9 1,062.5 ----------------------------------------------------- Total $ 3,902.8 $ 2,966.3 $ 2,543.0 - - ------------------------------------------------------------------------------------------------ Assets under management: (1) Fully guaranteed $ 3,399.6 $ 2,620.3 $ 2,423.5 Experience-rated 10,999.9 9,272.0 9,241.5 Non-guaranteed 11,522.9 8,064.6 7,111.0 ------------------------------------------------------ Total $25,922.4 $19,956.9 $18,776.0 - - ------------------------------------------------------------------------------------------------
(1) Included above are net unrealized capital gains (losses) of $797.1 million, $(386.4) million and $747.1 million at December 31, 1995, 1994 and 1993, respectively. OVERVIEW The Company's adjusted earnings (after-tax) follow (in millions): 1995 1994 1993 ---------------------------------- Net Income $175.9 $145.3 $142.9 Less: Net realized capital gains 26.8 1.0 6.2 ---------------------------------- Adjusted earnings $149.1 $144.3 $136.7 ---------------------------------- ---------------------------------- The Company's adjusted earnings increased 3% in 1995 following a 6% increase in 1994. Results in 1995 reflected improved earnings in the financial services segment, while earnings in the life insurance segment were level with the prior year. The improvement in earnings related to the financial services segment reflected an increase in charges assessed against policyholders and increased net investment income related to the growth in assets under management which were partially offset by an increase in operating expenses. This increase in operating expenses primarily reflects continued business growth. The improvement in 1994 adjusted earnings reflected an increase in charges assessed against policyholders, primarily due to an increase in the volume of business in force, partially offset by increases in operating expenses, primarily related to the implementation of a new contract administration system. Assets under management, excluding the effect of FAS 115, at December 31, 1995 of $25.1 billion, were 24% above 1994 levels, primarily reflecting continued business growth and overall improvement in the stock and bond markets. (12) The Company's contracts typically impose surrender fees which decline over the duration of the contract. Assets held under experience rated general account options have transfer and withdrawal limitations. Withdrawals from the fully guaranteed accumulation options prior to maturity include an adjustment intended to reflect the estimated fair value of the assets supporting the contract at the time of withdrawal. Approximately 91% and 90% of assets under management at December 31, 1995 and 1994, respectively, allowed for contractholder withdrawal, 63% and 57% of which, respectively, are subject to market value adjustments or deferred surrender charges at December 31, 1995. SEGMENT RESULTS FINANCIAL SERVICES SEGMENT
Operating Summary (millions) 1995 1994 1993 - - ----------------------------------------------------------------------------------------------- Premiums $ 82.6 $ 70.2 $ 32.0 Charges assessed against policyholders 150.4 126.6 109.4 Net investment income 823.3 745.9 739.2 Net realized capital gains 37.8 1.4 9.1 Other income 35.4 2.0 3.1 ----------------------------------------------------------------------------------------- Total revenue 1,129.5 946.1 892.8 ----------------------------------------------------------------------------------------- Current and future benefits 704.4 639.9 624.1 Operating expenses 256.5 176.9 149.0 Amortization of deferred policy acquisition costs 10.5 9.6 (1.4) ----------------------------------------------------------------------------------------- Total benefits and expenses 971.4 826.4 771.7 ----------------------------------------------------------------------------------------- Income before federal income taxes 158.1 119.7 121.1 Federal income taxes 44.3 34.2 34.3 ----------------------------------------------------------------------------------------- Net income $ 113.8 $ 85.5 $ 86.8 ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- Deposits not included in premiums above: Fully guaranteed $ 415.7 $ 249.0 $ 263.7 Experience-rated 934.4 1,064.3 979.4 Non-guaranteed 2,019.4 1,340.5 1,040.1 ------------------------------------------------------ Total $ 3,369.5 $ 2,653.8 $ 2,283.2 - - ------------------------------------------------------------------------------------------------ Assets under management: (1) Fully guaranteed $ 2,789.4 $ 1,999.1 $ 1,758.0 Experience-rated 9,034.5 7,803.2 7,801.1 Non-guaranteed 11,400.4 7,982.9 7,041.4 ------------------------------------------------------- Total $23,224.3 $17,785.2 $16,600.5 - - ------------------------------------------------------------------------------------------------
(1) Included above are net unrealized capital gains (losses) of $689.9 million, $(337.7) million and $646.2 million at December 31, 1995, 1994 and 1993, respectively. Adjusted earnings in the Financial Services segment (after-tax) follow (in millions): 1995 1994 1993 ------------------------------------ Net Income $113.8 $85.6 $86.8 Less: Net realized capital gains 24.6 0.9 5.9 ------------------------------------ Adjusted earnings $ 89.2 $84.6 $80.9 ------------------------------------ ------------------------------------ Effective January 1, 1995 the Company assumed responsibility for two service organizations, a plan administration service organization and a payment and retiree administration service organization, from an affiliate, with year-to-date combined adjusted income of $0.2 million. As a result, other income and operating expenses include $39.1 million and $38.8 million, respectively, for the year ended December 31, 1995. (13) Adjusted earnings increased 5% in both 1995 and 1994. The 1995 improvement in adjusted earnings reflected an increase in charges assessed against policyholders and increased net investment income related to the growth in assets under management which were partially offset by an increase in operating expenses. The 1994 improvement in adjusted earnings reflected an increase in assets under management offset in part by an increase in operating expenses. Premiums, related to annuity contracts containing life contingencies, increased by 18% in 1995, following a 119% increase in 1994. The 1995 and 1994 increases resulted primarily from increases in immediate annuity sales. Deposits, related to annuity contracts not containing life contingencies, reflected a 27% increase in 1995 following a 16% increase in 1994. Deposits in 1995 included the assumption of a $300.1 million variable annuity block of business from an unaffiliated insurer. Deposits in 1994 included the $205.0 million acquisition of a block of primarily individual annuity business from an unaffiliated insurer. Charges assessed against policyholders for certain annuity contracts increased by 19% and 16% in 1995 and 1994, respectively, reflecting the increase in assets under management. Net investment income increased by 10% in 1995, reflecting the increase in assets under management. Net investment income increased by 1% in 1994, reflecting the increase in assets under management offset by a downward trend in the net investment yield on the Company's portfolio of investments. Current and future benefits increased by 10% and 3% in 1995 and 1994, respectively, reflecting the increase in assets under management. Operating expenses, excluding the impact of moving the two service organizations into the Company as discussed above, increased by 23% in 1995 and 19% in 1994. The 1995 increase primarily reflects continued business growth. The 1994 increase primarily reflected expenses associated with the implementation of the new contract administration system. Assets under management, excluding the effect of FAS 115, at December 31, 1995 of $22.5 billion, were 24% above 1994 levels, primarily reflecting continued business growth and overall improvement in the stock and bond markets. OUTLOOK Sales of tax-qualified annuities are expected to continue to be strong in 1996. Sales of non-qualified products are expected to significantly exceed 1995 levels as relationships formed with broker/dealers and banks in 1995 build sales momentum. The Company intends to expand its retirement planning capabilities. The Company expects to evaluate opportunities for growth of its financial services businesses and strengthen their competitive position. (14) LIFE INSURANCE SEGMENT
Operating Summary (millions) 1995 1994 1993 - - --------------------------------------------------------------------------------------------- Premiums $ 48.2 $ 54.0 $ 50.1 Charges assessed against policyholders 168.5 152.4 142.1 Net investment income 181.0 171.3 172.7 Net realized capital gains 3.5 0.1 0.4 Other income 6.6 8.3 6.4 -------------------------------------------------------------------------------------- Total revenue 407.8 386.1 371.7 -------------------------------------------------------------------------------------- Current and future benefits 210.9 214.2 194.3 Operating expenses 62.2 58.3 58.2 Amortization of deferred policy acquisition costs 32.8 16.8 21.2 -------------------------------------------------------------------------------------- Total benefits and expenses 305.9 289.3 273.7 -------------------------------------------------------------------------------------- Income before federal income taxes 101.9 96.8 98.0 Federal income taxes 39.8 37.0 41.9 -------------------------------------------------------------------------------------- Net income $ 62.1 $ 59.8 $ 56.1 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------- Deposits not included in premiums above: Experience-rated $ 493.6 $ 287.1 $ 237.4 Non-guaranteed 39.7 25.4 22.4 ---------------------------------------------------- Total $ 533.3 $ 312.5 $ 259.8 - - --------------------------------------------------------------------------------------------- Assets under management: (1) Fully guaranteed $ 610.2 $ 621.2 $ 665.5 Experience-rated 1,965.4 1,468.8 1,440.4 Non-guaranteed 122.5 81.7 69.6 ---------------------------------------------------- Total $2,698.1 $2,171.7 $2,175.5 - - ---------------------------------------------------------------------------------------------
(1) Included above are net unrealized capital gains (losses) of $107.2 million, $(48.7) million and $100.9 million at December 31, 1995, 1994 and 1993, respectively. Adjusted earnings in the Life Insurance segment (after-tax) follow (in millions): 1995 1994 1993 --------------------------------- Net Income $62.1 $59.8 $56.1 Less: Net realized capital gains 2.2 0.1 0.3 --------------------------------- Adjusted earnings $59.9 $59.7 $55.8 --------------------------------- --------------------------------- Adjusted earnings in 1995 remained level with the prior year adjusted earnings, reflecting an increase in the volume of business in force as a result of strong sales offset by an increase in operating expenses. Adjusted earnings in 1994 increased 7% when compared to 1993 adjusted earnings. The 1994 adjusted earnings improvement reflected higher business in force offset in part by lower net investment income. Premiums, related to term and whole life insurance, decreased by 11% in 1995 following an 8% increase in 1994. The decrease in premiums in 1995 is primarily due to lower whole life insurance premiums. Deposits, related to universal life and interest-sensitive whole life insurance, grew by 71% and 20% in 1995 and 1994, respectively. Deposits in 1995 included the assumption of a $172.4 million universal life block of business from an unaffiliated insurer and also reflected strong first year sales and retention. The increase in premiums and deposits in 1994 reflected strong first year sales and retention. Charges assessed against policyholders for universal life and interest-sensitive whole life insurance increased 11% in 1995 and 7% in 1994 reflecting an increase in the volume of business in force. (15) Net investment income increased by 6% in 1995, reflecting an increase in universal life assets under management offset in part by the downward trend in the net investment yield on the Company's portfolio of investments. Net investment income decreased 1% in 1994, reflecting the downward trend in the net investment yield on the Company's portfolio of investments, offset by the increase in universal life assets under management. Current and future benefits decreased 2% in 1995 following a 10% increase in 1994, reflecting improved mortality experience related to universal life insurance. The increase in 1994 reflected higher mortality related to universal life insurance. Amortization of deferred policy acquisition costs increased by 95% in 1995, reflecting the growth in current and estimated future gross profit margins related to universal life insurance. Amortization of deferred policy acquisition costs decreased 21% in 1994, primarily reflecting lower mortality margins related to universal life insurance. Operating expenses increased 7% in 1995, reflecting continued business growth. Operating expenses were level in 1994, reflecting savings from previous restructurings. Assets under management, excluding the effect of FAS 115, at December 31, 1995 of $2.6 billion, were 17% above 1994 levels, primarily reflecting continued business growth and overall improvement in the stock and bond markets. OUTLOOK Sales of life products through traditional channels (managing general agents and regional brokers) are expected to continue to be strong in 1996. Sales of life products through non-traditional distribution channels (banks, broker/dealers, worksite), are expected to significantly exceed 1995 levels as the Company's retirement planning emphasis begins to build momentum. (16) 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. (Millions) 1995 1994 - - ------------------------------------------------------------------------- Debt securities $12,720.8 $10,191.4 Equity securities: Non-redeemable preferred stock 57.6 47.2 Investment in affiliated mutual funds 191.8 181.9 Common stock 8.2 - Short-term investments 15.1 98.0 Mortgage loans 21.2 9.9 Policy loans 338.6 248.7 Limited partnership - 24.4 ------------------------ Total Investments 13,353.3 10,801.5 Cash and cash equivalents 568.8 623.3 ------------------------ Total Investments and Cash and Cash Equivalents $13,922.1 $11,424.8 - - ------------------------------------------------------------------------- - - ------------------------------------------------------------------------- At December 31, 1995 and 1994, the Company's carrying value of investments in debt securities were $12.7 billion and $10.2 billion, 95% and 94%, respectively, of total general account invested assets. At December 31, 1995 and 1994, $10.0 billion and $8.0 billion, 79% and 78%, 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 was AA- at December 31, 1995 and AA at December 31, 1994.
Debt Securities Quality Ratings Debt Securities Investments by Market Sector 12/31/95 12/31/95 - - ------------------------------- ------------------------------------------------------- AAA 46.0% U.S. Corporate Securities 44.7% AA 11.7 Residential Mortgage-Backed Securities 25.2 A 25.4 Foreign Securities - U.S. Dollar Denominated 11.1 BBB 11.7 Asset-Backed Securities 7.9 BB 4.0 Commercial/Multifamily Mortgage- B and Below 1.2 Backed Securities 6.1 ---------- U.S. Treasuries/Agencies 4.6 100.0% Other 0.4 ---------- -------- ---------- 100.0% -------- --------
(17)
Debt Securities Quality Ratings Debt Securities Investments by Market Sector 12/31/94 12/31/94 - - ------------------------------- ------------------------------------------------------- AAA 56.7% U.S. Corporate Securities 34.2% AA 8.3 Residential Mortgage-Backed Securities 32.1 A 23.3 U.S. Treasuries/Agencies 12.9 BBB 8.5 Foreign Securities - U.S. Dollar Denominated 9.7 BB 2.5 Asset-Backed Securities 6.7 B and Below 0.7 Commercial/Multifamily Mortgage- -------- Backed Securities 4.0 100.0% Other 0.4 -------- -------- -------- 100.0% -------- --------
In 1995, as a result of a change in investment strategy, the Company reduced its investments in U.S. Treasuries/Agencies and residential mortgage-backed securities and increased its investments in U.S. Corporate securities (see Note 2 of the Notes to the Consolidated Financial Statements). Investments in U.S. dollar denominated foreign corporations and governments, asset-backed, and commercial/multifamily mortgage-backed securities also increased. Asset-backed securities (securities backed by auto loans, credit card receivables, etc.) and commercial/multifamily mortgage-backed securities (securitized pools of mortgages) are predominantly AAA rated, and are not subject to the prepayment risk of residential mortgage-backed securities. OUTLOOK In 1996, the Company does not anticipate any major changes in market sector weightings, but will continue to marginally increase exposure to diversifying asset classes, such as securitized commercial mortgage-backed securities. The average quality rating of the Company's portfolio is not expected to change significantly. Duration is anticipated to remain fairly constant and will be monitored and maintained in line with liability duration to minimize interest rate risk. (18) Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements INDEX PAGE Independent Auditors' Report 20 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 21 Consolidated Balance Sheets as of December 31, 1995 and 1994 22 Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31, 1995, 1994 and 1993 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 24 Notes to Consolidated Financial Statements 25 (19) INDEPENDENT AUDITORS' REPORT The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: We have audited the accompanying consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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 statement 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 Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its methods of accounting for certain investments in debt and equity securities. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 6, 1996 (20) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Statements of Income (millions)
Years Ended December 31, ---------------------------- 1995 1994 1993 ---- ---- ---- Revenue: Premiums $ 130.8 $124.2 $ 82.1 Charges assessed against policyholders 318.9 279.0 251.5 Net investment income 1,004.3 917.2 911.9 Net realized capital gains 41.3 1.5 9.5 Other income 42.0 10.3 9.5 -------- -------- -------- Total revenue 1,537.3 1,332.2 1,264.5 -------- -------- -------- Benefits and expenses: Current and future benefits 915.3 854.1 818.4 Operating expenses 318.7 235.2 207.2 Amortization of deferred policy acquisition costs 43.3 26.4 19.8 -------- -------- -------- Total benefits and expenses 1,277.3 1,115.7 1,045.4 -------- -------- -------- Income before federal income taxes 260.0 216.5 219.1 Federal income taxes 84.1 71.2 76.2 -------- -------- -------- Net income $175.9 $145.3 $142.9 -------- -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements. (21) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Balance Sheets (millions)
December 31, ------------------- ASSETS 1995 1994 ---- ---- Investments: Debt securities, available for sale: (amortized cost: $11,923.7 and $10,577.8) $12,720.8 $10,191.4 Equity securities, available for sale: Non-redeemable preferred stock (cost: $51.3 and $43.3) 57.6 47.2 Investment in affiliated mutual funds (cost: $173.4 and $187.1) 191.8 181.9 Common stock (cost: $6.9 at December 31, 1995) 8.2 - Short-term investments 15.1 98.0 Mortgage loans 21.2 9.9 Policy loans 338.6 248.7 Limited partnership - 24.4 --------- --------- Total investments 13,353.3 10,801.5 Cash and cash equivalents 568.8 623.3 Accrued investment income 175.5 142.2 Premiums due and other receivables 37.3 75.8 Deferred policy acquisition costs 1,341.3 1,164.3 Reinsurance loan to affiliate 655.5 690.3 Other assets 26.2 15.9 Separate Accounts assets 10,987.0 7,420.8 --------- --------- Total assets $27,144.9 $20,934.1 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits $ 3,594.6 $ 2,912.7 Unpaid claims and claim expenses 27.2 23.8 Policyholders' funds left with the Company 10,500.1 8,949.3 --------- --------- Total insurance reserve liabilities 14,121.9 11,885.8 Other liabilities 259.2 302.1 Federal income taxes: Current 24.2 3.4 Deferred 169.6 233.5 Separate Accounts liabilities 10,987.0 7,420.8 --------- --------- Total liabilities 25,561.9 19,845.6 --------- --------- 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 407.6 407.6 Net unrealized capital gains (losses) 132.5 (189.0) Retained earnings 1,040.1 867.1 --------- --------- Total shareholder's equity 1,583.0 1,088.5 --------- --------- Total liabilities and shareholder's equity $27,144.9 $20,934.1 --------- --------- --------- ---------
See Notes to Consolidated Financial Statements. (22) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Statements of Changes in Shareholder's Equity (millions)
Years Ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- Shareholder's equity, beginning of year $1,088.5 $1,246.7 $990.1 Net change in unrealized capital gains (losses) 321.5 (303.5) 113.7 Net income 175.9 145.3 142.9 Common stock dividends declared (2.9) - - -------- -------- -------- Shareholder's equity, end of year $1,583.0 $1,088.5 $1,246.7 -------- -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements. (23) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Statements of Cash Flows (millions)
Years Ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- Cash Flows from Operating Activities: Net income $ 175.9 $ 145.3 $ 142.9 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (33.3) (17.5) (11.1) Decrease (increase) in premiums due and other receivables 25.4 1.3 (5.6) Increase in policy loans (89.9) (46.0) (36.4) Increase in deferred policy acquisition costs (177.0) (105.9) (60.5) Decrease in reinsurance loan to affiliate 34.8 27.8 31.8 Net increase in universal life account balances 393.4 164.7 126.4 Increase in other insurance reserve liabilities 79.0 75.1 86.1 Net increase in other liabilities and other assets 15.0 53.9 7.0 Decrease in federal income taxes (6.5) (11.7) (3.7) Net accretion of discount on bonds (66.4) (77.9) (88.1) Net realized capital gains (41.3) (1.5) (9.5) Other, net - (1.0) 0.2 ---------- --------- -------- Net Cash provided by operating activities 309.1 206.6 179.5 ---------- --------- -------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 4,207.2 3,593.8 473.9 Equity securities 180.8 93.1 89.6 Mortgage loans 10.7 - - Limited partnership 26.6 - - Investment maturities and collections of: Debt securities available for sale 583.9 1,289.2 2,133.3 Short-term investments 106.1 30.4 19.7 Cost of investment purchases in: Debt securities (6,034.0) (5,621.4) (3,669.2) Equity securities (170.9) (162.5) (157.5) Short-term investments (24.7) (106.1) (41.3) Mortgage loans (21.3) - - Limited partnership - (25.0) - ---------- --------- -------- Net cash used for investing activities (1,135.6) (908.5) (1,151.5) ---------- --------- -------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,884.5 1,737.8 2,117.8 Withdrawals of investment contracts (1,109.6) (948.7) (1,000.3) Dividends paid to shareholder (2.9) - - ---------- --------- -------- Net cash provided by financing activities 772.0 789.1 1,117.5 ---------- --------- -------- Net (decrease) increase in cash and cash equivalents (54.5) 87.2 145.5 Cash and cash equivalents, beginning of year 623.3 536.1 390.6 ---------- --------- -------- Cash and cash equivalents, end of year $568.8 $623.3 $536.1 ---------- --------- -------- ---------- --------- -------- Supplemental cash flow information: Income taxes paid, net $90.2 $82.6 $79.9 ---------- --------- -------- ---------- --------- --------
See Notes to Consolidated Financial Statements. (24) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 1. Summary of Significant Accounting Policies Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries (collectively, the "Company") is a provider of financial services and life insurance products in the United States. The Company has two business segments, financial services and life insurance. The financial services products include individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under Internal Revenue Code Sections 401, 403, 408 and 457, and individual and group non-qualified annuity contracts. These contracts may be immediate or deferred and 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 markets. Financial services also include pension plan administrative services. The life insurance products include universal life, variable universal life, interest sensitive whole life and term insurance. These products are offered primarily to individuals, small businesses, employer sponsored groups and executives of Fortune 2000 companies. BASIS OF PRESENTATION The consolidated financial statements include Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company of America and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a wholly owned subsidiary of Aetna Life and Casualty Company ("Aetna"). Two subsidiaries, Systematized Benefits Administrators, Inc. ("SBA"), and Aetna Investment Services, Inc. ("AISI"), which were previously reported in the consolidated financial statements were distributed in the form of dividends to ARSI in December of 1995. The impact to the Company's financial statements of distributing these dividends was immaterial. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Intercompany transactions have been eliminated. Certain reclassifications have been made to 1994 and 1993 financial information to conform to the 1995 presentation. (25) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) ACCOUNTING CHANGES Accounting for Certain Investments in Debt and Equity Securities On December 31, 1993, the Company adopted Financial Accounting Standard ("FAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires the classification of debt securities into three categories: "held to maturity", which are carried at amortized cost; "available for sale", which are carried at fair value with changes in fair value recognized as a component of shareholder's equity; and "trading", which are carried at fair value with immediate recognition in income of changes in fair value. Initial adoption of this standard resulted in a net increase of $106.8 million, net of taxes of $57.5 million, to net unrealized gains in shareholder's equity. These amounts exclude gains and losses allocable to experience-rated (including universal life) contractholders. Adoption of FAS No. 115 did not have a material effect on deferred policy acquisition costs. 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 ninety days or less when purchased. INVESTMENTS Debt Securities At December 31, 1995 and 1994, all of the Company's debt securities are classified as available for sale and carried at fair value. These securities are written down (as realized losses) for other than temporary decline in value. Unrealized gains and losses related to these securities, after deducting amounts allocable to experience-rated contractholders and related taxes, are reflected in shareholder's equity. Fair values for debt 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. (26) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Purchases and sales of debt securities are recorded on the trade date. Equity Securities Equity securities are classified as available for sale and carried at fair value based on quoted market prices or dealer quotations. Equity securities are written down (as realized losses) for other than temporary declines in value. Unrealized gains and losses related to such securities are reflected in shareholder's equity. Purchases and sales are recorded on the trade date. The investment in affiliated mutual funds represents an investment in the Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the Company, and is carried at fair value. Mortgage Loans and Policy Loans Mortgage loans and policy loans are carried at unpaid principal balances net of valuation reserves, which approximates fair value, and are generally secured. Purchases and sales of mortgage loans are recorded on the closing date. Limited Partnership The Company's limited partnership investment was carried at the amount invested plus the Company's share of undistributed operating results and unrealized gains (losses), which approximates fair value. The Company disposed of the limited partnership during 1995. Short-Term Investments Short-term investments, consisting primarily of money market instruments and other debt issues purchased with an original maturity of over ninety days and less than one year, are considered available for sale and are carried at fair value, which approximates amortized cost. DEFERRED POLICY ACQUISITION COSTS Certain costs of acquiring insurance business have been deferred. These costs, all of which vary with and are primarily related to the production of new 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. For universal life and certain annuity contracts, such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits. These costs are amortized over twenty years for annuity pension contracts, and over the contract period for universal life contracts. (27) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits would not be adequate to cover related losses and expenses. INSURANCE RESERVE LIABILITIES The Company's liabilities include reserves related to fixed ordinary life, fixed universal life and fixed annuity contracts. Reserves for future policy benefits for fixed ordinary life contracts are computed on the basis of assumed investment yield, assumed mortality, withdrawals and expenses, including a margin for adverse deviation, which generally vary by plan, year of issue and policy duration. Reserve interest rates range from 2.25% to 10.00%. Assumed 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. Reserves for fixed universal life (included in Future Policy Benefits) and fixed deferred annuity contracts (included in Policyholders' Funds Left With the Company) are equal to the fund value. The fund value is equal to cumulative deposits less charges plus credited interest thereon, without reduction for possible future penalties assessed on premature withdrawal. For guaranteed interest options, the interest credited ranged from 4.00% to 6.38% in 1995 and 4.00% to 5.85% in 1994. For all other fixed options, the interest credited ranged from 5.00% to 7.00% in 1995 and 5.00% to 7.50% in 1994. Reserves for fixed annuity contracts in the annuity period and for future amounts due under settlement options are computed actuarially using the 1971 Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality Table, the 1983 Group Annuity Mortality Table and, in some cases, mortality improvement according to scales G and H, at assumed interest rates ranging from 3.5% to 9.5%. Reserves relating to contracts with life contingencies are included in Future Policy Benefits. For other contracts, the reserves are reflected in Policyholders' Funds Left With the Company. Unpaid claims for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. PREMIUMS, CHARGES ASSESSED AGAINST POLICYHOLDERS, BENEFITS AND EXPENSES Premiums are recorded as revenue when due for fixed ordinary life contracts. Charges assessed against policyholders' funds for cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue for universal life and certain annuity contracts. Policy benefits and expenses are recorded in relation to the associated premiums or gross profit so as to result in recognition of profits over the expected lives of the contracts. (28) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) SEPARATE ACCOUNTS Assets held under variable universal life, variable 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 Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna Series Fund Inc., 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 which is offered through a Separate Account. The assets of the Separate Account supporting the guaranteed interest option are carried at an amortized cost of $322.2 million for 1995 (fair value $343.9 million) and $149.7 million for 1994 (fair value $146.3 million), since the Company bears the investment risk where the contract is held to maturity. Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 4.5% to 8.38% in both 1995 and 1994. 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 (losses) of the Separate Accounts are not reflected in the Consolidated Statements of Income (with the exception of realized capital gains (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. FEDERAL 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 benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. (29) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments Investments in debt securities available for sale as of December 31, 1995 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- --------- ----- (millions) U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 539.5 $ 47.5 $ -- $ 587.0 Obligations of states and political subdivisions 41.4 12.4 -- 53.8 U.S. Corporate securities: Financial 2,764.4 110.3 2.1 2,872.6 Utilities 454.4 27.8 1.0 481.2 Other 2,177.7 159.5 1.2 2,336.0 --------- ------ ----- --------- Total U.S. Corporate securities 5,396.5 297.6 4.3 5,689.8 Foreign securities: Government 316.4 26.1 2.0 340.5 Financial 534.2 45.4 3.5 576.1 Utilities 236.3 32.9 -- 269.2 Other 215.7 15.1 -- 230.8 --------- ------ ----- --------- Total Foreign securities 1,302.6 119.5 5.5 1,416.6 Residential mortgage-backed securities: Residential pass-throughs 556.7 99.2 1.8 654.1 Residential CMOs 2,383.9 167.6 2.2 2,549.3 --------- ------ ----- --------- Total Residential mortgage- backed securities 2,940.6 266.8 4.0 3,203.4 Commercial/Multifamily mortgage- backed securities 741.9 32.3 0.2 774.0 --------- ------ ----- --------- Total Mortgage-backed securities 3,682.5 299.1 4.2 3,977.4 Other asset-backed securities 961.2 35.5 0.5 996.2 --------- ------ ----- --------- Total debt securities available for sale $11,923.7 $811.6 $14.5 $12,720.8 --------- ------ ----- --------- --------- ------ ----- ---------
(30) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Investments in debt securities available for sale as of December 31, 1994 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- --------- ----- (millions) U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9 Obligations of states and political subdivisions 37.9 1.2 -- 39.1 U.S. Corporate securities: Financial 2,216.9 3.8 109.4 2,111.3 Utilities 100.1 -- 7.9 92.2 Other 1,344.3 6.0 67.9 1,282.4 --------- ------ ------ --------- Total U.S. Corporate securities 3,661.3 9.8 185.2 3,485.9 Foreign securities: Government 434.4 1.2 33.9 401.7 Financial 368.2 1.1 23.0 346.3 Utilities 204.4 2.5 9.5 197.4 Other 46.3 0.8 1.5 45.6 --------- ------ ------ --------- Total Foreign securities 1,053.3 5.6 67.9 991.0 Residential mortgage-backed securities: Residential pass-throughs 627.1 81.5 5.0 703.6 Residential CMOs 2,671.0 32.9 139.4 2,564.5 --------- ------ ------ --------- Total Residential mortgage- backed securities 3,298.1 114.4 144.4 3,268.1 Commercial/Multifamily mortgage- backed securities 435.0 0.2 21.3 413.9 --------- ------ ------ --------- Total Mortgage-backed securities 3,733.1 114.6 165.7 3,682.0 Other asset-backed securities 696.1 0.2 16.8 679.5 --------- ------ ------ --------- Total debt securities available for sale $10,577.8 $133.4 $519.8 $10,191.4 --------- ------ ------ --------- --------- ------ ------ ---------
(31) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of $797.1 million and $(386.4) million, respectively, on available for sale debt securities included $619.1 million and $(308.6) million, respectively, related to experience-rated contractholders, which were not included in shareholder's equity. The amortized cost and fair value of debt securities for the year ended December 31, 1995 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 $ 348.8 $ 351.1 After one year through five years 2,100.2 2,159.5 After five years through ten years 2,516.0 2,663.4 After ten years 2,315.0 2,573.2 Mortgage-backed securities 3,682.5 3,977.4 Other asset-backed securities 961.2 996.2 --------- --------- Total $11,923.7 $12,720.8 --------- --------- --------- --------- The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Cash collateral, which is in excess of the market value of the loaned securities, is deposited by the borrower with a lending agent, and retained and invested by the lending agent to generate additional income for the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. At December 31, 1995, the Company had loaned securities (which are reflected as invested assets on the Consolidated Balance Sheets) with a market value of approximately $264.5 million. At December 31, 1995 and 1994, debt securities carried at $7.4 million and $7.0 million, respectively, were on deposit as required by regulatory authorities. The valuation reserve for mortgage loans was $3.1 million at December 31, 1994. There was no valuation reserve for mortgage loans at December 31, 1995. The carrying value of non-income producing investments was $0.1 million and $0.2 million at December 31, 1995 and 1994, respectively. (32) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) 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, 1995 are as follows: Debt Securities Amortized Fair Cost Value --------- ------ (millions) General Electric Corporation $314.9 $329.3 General Motors Corporation 273.9 284.5 Associates Corporation of North America 230.2 239.1 Society National Bank 203.5 222.3 Ciesco, L.P. 194.9 194.9 Countrywide Funding 171.2 172.7 Baxter International 168.9 168.9 Time Warner 158.6 166.1 Ford Motor Company 156.7 162.6 The portfolio of debt securities at December 31, 1995 and 1994 included $662.5 million and $318.3 million, respectively, (5% and 3%, 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. The increase in below investment grade securities is the result of a change in investment strategy, which has reduced the Company's holdings in residential mortgage-back securities and increased the Company's holdings in corporate securities. Residential mortgage-back securities are subject to higher prepayment risk and lower credit risk, while corporate securities earning a comparable yield are subject to higher credit risk and lower prepayment risk. We expect the percentage of below investment grade securities will increase in 1996, but we expect that the overall average quality of the portfolio of debt securities will remain at AA-. Of these below investment grade assets, $14.5 million and $31.8 million, at December 31, 1995 and 1994, respectively, were investments that were purchased at investment grade, but whose ratings have since been downgraded. Included in residential mortgage-back securities are collateralized mortgage obligations ("CMOs") with carrying values of $2.5 billion and $2.6 billion at December 31, 1995 and 1994, respectively. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the CMOs would be subject to repayments of principal earlier or later than originally anticipated. At December 31, 1995 and 1994, approximately 79% and 85%, respectively, of the Company's CMO holdings consisted of sequential and planned amortization class debt securities which are subject to less prepayment and extension risk than other CMO instruments. At December 31, 1995 and 1994, approximately 81% and 82%, respectively, of the Company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest was backed by specified government agencies (e.g., GNMA, FNMA, FHLMC). (33) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) If due to declining interest rates, principal was to be repaid earlier than originally anticipated, the Company could be affected by a decrease in investment income due to the reinvestment of these funds at a lower interest rate. Such prepayments may result in a duration mismatch between assets and liabilities which could be corrected as cash from prepayments could be reinvested at an appropriate duration to adjust the mismatch. Conversely, if due to increasing interest rates, principal was to be repaid slower than originally anticipated, the Company could be affected by a decrease in cash flow which reduces the ability to reinvest expected principal repayments at higher interest rates. Such slower payments may result in a duration mismatch between assets and liabilities which could be corrected as available cash flow could be reinvested at an appropriate duration to adjust the mismatch. At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of the Company's CMO holdings consisted of interest-only strips ("IOs") or principal-only strips ("POs"). IOs receive payments of interest and POs receive payments of principal on the underlying pool of mortgages. The risk inherent in holding POs is extension risk related to dramatic increases in interest rates whereby the future payments due on POs could be repaid much slower than originally anticipated. The extension risks inherent in holding POs was mitigated somewhat by offsetting positions in IOs. During dramatic increases in interest rates, IOs would generate more future payments than originally anticipated. The risk inherent in holding IOs is prepayment risk related to dramatic decreases in interest rates whereby future IO cash flows could be much less than originally anticipated and in some cases could be less than the original cost of the IO. The risks inherent in IOs are mitigated somewhat by holding offsetting positions in POs. During dramatic decreases in interest rates POs would generate future cash flows much quicker than originally anticipated. Investments in available for sale equity securities were as follows: Gross Gross Fair Cost Unrealized Unrealized Value Gains Losses ---- ---------- ---------- ----- (millions) 1995 ---- Equity Securities $231.6 $27.2 $1.2 $257.6 ------ ----- ---- ------ ------ ----- ---- ------ 1994 ---- Equity Securities $230.5 $ 6.5 $7.9 $229.1 ------ ----- ---- ------ ------ ----- ---- ------ (34) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 3. Capital Gains and Losses on Investment Operations Realized capital gains or losses are the difference between proceeds received from investments sold or prepaid, and amortized cost. Net realized capital gains as reflected in the Consolidated Statements of Income are after deductions for net realized capital gains (losses) allocated to experience-rated contracts of $61.1 million, $(29.1) million and $(54.8) million for the years ended December 31, 1995, 1994, and 1993, respectively. Net realized capital gains (losses) allocated to experience-rated contracts are deferred and subsequently reflected in credited rates on an amortized basis. Net unamortized gains (losses), reflected as a component of Policyholders' Funds Left With the Company, were $7.3 million and $(50.7) million at the end of December 31, 1995 and 1994, respectively. Changes to the mortgage loan valuation reserve and writedowns on debt securities are included in net realized capital gains (losses) and amounted to $3.1 million, $1.1 million and $(98.5) million, of which $2.2 million, $0.8 million and $(91.5) million were allocable to experience-rated contractholders, for the years ended December 31, 1995, 1994 and 1993, respectively. The 1993 losses were primarily related to writedowns of interest-only mortgage-backed securities to their fair value. Net realized capital gains (losses) on investments, net of amounts allocated to experience-rated contracts, were as follows: 1995 1994 1993 ---- ---- ---- (millions) Debt securities $32.8 $1.0 $9.6 Equity securities 8.3 0.2 0.1 Mortgage loans 0.2 0.3 (0.2) ----- ---- ------ Pretax realized capital gains $41.3 $1.5 $9.5 ----- ---- ------ ----- ---- ------ After-tax realized capital gains $25.8 $1.0 $ 6.2 ----- ---- ------ ----- ---- ------ Gross gains of $44.6 million, $26.6 million and $33.3 million and gross losses of $11.8 million, $25.6 million and $23.7 million were realized from the sales of investments in debt securities in 1995, 1994 and 1993, respectively. (35) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 3. Capital Gains and Losses on Investment Operations (Continued) Changes in unrealized capital gains (losses), excluding changes in unrealized capital gains (losses) related to experience-rated contracts, for the years ended December 31, were as follows: 1995 1994 1993 ---- ---- ---- (millions) Debt securities $255.9 $(242.1) $164.3 Equity securities 27.3 (13.3) 10.6 Limited partnership 1.8 (1.8) -- ------ -------- ------ 285.0 (257.2) 174.9 Deferred federal income taxes (See Note 6) (36.5) 46.3 61.2 ------ -------- ------ Net change in unrealized capital gains (losses) $321.5 $(303.5) $113.7 ------ -------- ------ ------ -------- ------ Net unrealized capital gains (losses) allocable to experience-rated contracts of $515.0 million and $104.1 million at December 31, 1995 and $(260.9) million and $(47.7) million at December 31, 1994 are reflected on the Consolidated Balance Sheet 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 unrealized capital gains (losses), which are net of amounts allocable to experience-rated contractholders, at December 31: 1995 1994 1993 ---- ---- ---- (millions) Debt securities Gross unrealized capital gains $179.3 $ 27.4 $164.3 Gross unrealized capital losses (1.3) (105.2) -- ------ ------- ------ 178.0 (77.8) 164.3 ------ ------- ------ Equity securities Gross unrealized capital gains 27.2 6.5 12.0 Gross unrealized capital losses (1.2) (7.9) (0.1) ------ ------- ------ 26.0 (1.4) 11.9 Limited Partnership Gross unrealized capital gains -- -- -- Gross unrealized capital losses -- (1.8) -- ------ ------- ------ -- (1.8) -- Deferred federal income taxes (See Note 6) 71.5 108.0 61.7 ------ ------- ------ Net unrealized capital gains (losses) $132.5 $(189.0) $114.5 ------ ------- ------ ------ ------- ------ (36) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 4. Net Investment Income Sources of net investment income were as follows: 1995 1994 1993 ---- ---- ---- (millions) Debt securities $891.5 $823.9 $828.0 Preferred stock 4.2 3.9 2.3 Investment in affiliated mutual funds 14.9 5.2 2.9 Mortgage loans 1.4 1.4 1.5 Policy loans 13.7 11.5 10.8 Reinsurance loan to affiliate 46.5 51.5 53.3 Cash equivalents 38.9 29.5 16.8 Other 8.4 6.7 7.7 -------- ------ ------ Gross investment income 1,019.5 933.6 923.3 Less investment expenses (15.2) (16.4) (11.4) -------- ------ ------ Net investment income $1,004.3 $917.2 $911.9 -------- ------ ------ -------- ------ ------ Net investment income includes amounts allocable to experience-rated contractholders of $744.2 million, $677.1 million and $661.3 million for the years ended December 31, 1995, 1994 and 1993, respectively. Interest credited to contractholders is included in Current and Future Benefits. 5. Dividend Restrictions and Shareholder's Equity The Company distributed $2.9 million in the form of dividends of two of its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995. The amount of dividends that may be paid to the shareholder in 1996 without prior approval by the Insurance Commissioner of the State of Connecticut is $70.0 million. The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and shareholder's equity 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 $70.0 million, $64.9 million and $77.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. Statutory shareholder's equity was $670.7 million and $615.0 million as of December 31, 1995 and 1994, respectively. At December 31, 1995 and December 31, 1994, the Company does not utilize any statutory accounting practices which are not prescribed by insurance regulators that, individually or in the aggregate, materially affect statutory shareholder's equity. (37) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Federal Income Taxes The Company is included in the consolidated federal income tax return of Aetna. Aetna allocates to each member an amount approximating the tax it would have incurred were it not a member of the consolidated group, and credits the member for the use of its tax saving attributes in the consolidated return. In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted which resulted in an increase in the federal corporate tax rate from 34% to 35% retroactive to January 1, 1993. The enactment of OBRA resulted in an increase in the deferred tax liability of $3.4 million at date of enactment, which is included in the 1993 deferred tax expense. Components of income tax expense (benefits) were as follows: 1995 1994 1993 ---- ---- ---- (millions) Current taxes (benefits): Income from operations $ 82.9 $ 78.7 $ 87.1 Net realized capital gains 28.5 (33.2) 18.1 ------ ------ ------ 111.4 45.5 105.2 ------ ------ ------ Deferred taxes (benefits): Income from operations (14.4) (8.0) (14.2) Net realized capital gains (12.9) 33.7 (14.8) ------ ------ ------ (27.3) 25.7 (29.0) ------ ------ ------ Total $ 84.1 $ 71.2 $ 76.2 ------ ------ ------ ------ ------ ------ Income tax expense was different from the amount computed by applying the federal income tax rate to income before federal income taxes for the following reasons: 1995 1994 1993 ---- ---- ---- (millions) Income before federal income taxes $260.0 $216.5 $219.1 Tax rate 35% 35% 35% Application of the tax rate 91.0 75.8 76.7 ------ ------ ------ Tax effect of: Excludable dividends (9.3) (8.6) (8.7) Tax reserve adjustments 3.9 2.9 4.7 Reinsurance transaction (0.5) 1.9 (0.2) Tax rate change on deferred liabilities -- -- 3.7 Other, net (1.0) (0.8) -- ------ ------ ------ Income tax expense $ 84.1 $ 71.2 $ 76.2 ------ ------ ------ ------ ------ ------ (38) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Federal 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: 1995 1994 ---- ---- Deferred tax assets: (millions) Insurance reserves $290.4 $211.5 Net unrealized capital losses -- 136.3 Unrealized gains allocable to experience-rated contracts 216.7 -- Investment losses not currently deductible 7.3 15.5 Postretirement benefits other than pensions 7.7 8.4 Other 32.0 28.3 ------ ------ Total gross assets 554.1 400.0 Less valuation allowance -- 136.3 ------ ------ Deferred tax assets, net of valuation 554.1 263.7 Deferred tax liabilities: Deferred policy acquisition costs 433.0 385.2 Unrealized losses allocable to experience-rated contracts -- 108.0 Market discount 4.4 3.6 Net unrealized capital gains 288.2 -- Other (1.9) 0.4 ------ ------ Total gross liabilities 723.7 497.2 ------ ------ Net deferred tax liability $169.6 $233.5 ------ ------ ------ ------ Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized capital losses were reflected in shareholder's equity without deferred tax benefits. As of December 31, 1995, no valuation allowance was required for unrealized capital gains and losses. The reversal of the valuation allowance had no impact on net income in 1995. 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, 1995. 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. (39) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Federal Income Taxes (Continued) The Internal Revenue Service ("Service") has completed examinations of the consolidated federal income tax returns of Aetna through 1986. Discussions are being held with the Service with respect to proposed adjustments. However, management believes there are adequate defenses against, or sufficient reserves to provide for, such challenges. The Service has commenced its examinations for the years 1987 through 1990. 7. Benefit Plans Employee Pension Plans - The Company, in conjunction with Aetna, has non-contributory defined benefit pension plans covering substantially all employees. The plans provide pension benefits based on years of service and average annual compensation (measured over sixty 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 the amounts that are currently deductible for tax reporting purposes. The accumulated benefit obligation and plan assets are recorded by Aetna. The accumulated plan assets exceed accumulated plan benefits. There has been no funding to the plan for the years 1993 through 1995, and therefore, no expense has been recorded by the Company. 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. The accumulated plan assets exceed accumulated plan benefits. There has been no funding to the plan for the years 1993 through 1995, and therefore, no expense has been recorded by the Company. Employee Postretirement Benefits - In addition to providing pension benefits, Aetna also provides certain postretirement health care and life insurance benefits, subject to certain caps, for retired employees. Medical and dental benefits are offered to all full-time employees retiring at age 50 with at least 15 years of service or at age 65 with at least 10 years of service. Retirees are required to contribute to the plans based on their years of service with Aetna. The cost to the Company associated with the Aetna postretirement plans for 1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million, respectively. Agent Postretirement Benefits - The Company, in conjunction with Aetna, also provides certain postemployment health care and life insurance benefits for certain agents. The cost to the Company associated to the agents' postretirement plans for 1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million, respectively. Incentive Savings Plan - Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of Aetna or certain other investments, are matched, up to 5% of compensation, by Aetna. Pretax charges to operations for the incentive savings plan were $4.9 million, $3.3 million and $3.1 million in 1995, 1994 and 1993, respectively. (40) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 7. Benefit Plans (Continued) Stock Plans - Aetna has a stock incentive plan that provides for stock options and deferred contingent common stock or cash awards to certain key employees. Aetna also has a stock option plan under which executive and middle management employees of Aetna may be granted options to purchase common stock of Aetna at the market price on the date of grant or, in connection with certain business combinations, may be granted options to purchase common stock on different terms. The cost to the Company associated with the Aetna stock plans for 1995, 1994 and 1993, was $6.3 million, $1.7 million and $0.4 million, respectively. 8. 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 .25% to 1.80% of their average daily net assets. The Company also receives fees from the variable life and annuity mutual funds and The Aetna Series Fund for serving as investment adviser. Under the advisory agreements, the Funds pay the Company a daily fee which, on an annual basis, ranges, depending on the fund, from .25% to 1.00% of their average daily net assets. The advisory agreements also call for the variable funds to pay their own administrative expenses and for The Aetna Series Fund to pay certain administrative expenses. The Company also receives fees (expressed as a percentage of the average daily net assets) from The Aetna Series Fund for providing administration, shareholder services and promoting sales. The amount of compensation and fees received from the Separate Accounts and Funds, included in Charges Assessed Against Policyholders, amounted to $128.1 million, $104.6 million and $93.6 million in 1995, 1994 and 1993, respectively. The Company may waive advisory fees at its discretion. The Company may, from time to time, make reimbursements to a Fund for some or all of its operating expenses. Reimbursement arrangements may be terminated at any time without notice. (41) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Related Party Transactions (Continued) 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 $108.0 million commission, paid by the Company to Aetna Life in 1988, was capitalized as deferred policy acquisition costs. The Company maintained insurance reserves of $655.5 million and $690.3 million as of December 31, 1995 and 1994, respectively, relating to the business assumed. 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. The loan is being reduced in accordance with the decrease in the reserves. The fair value of this loan was $663.5 million and $630.3 million as of December 31, 1995 and 1994, respectively, and is based upon the fair value of the underlying assets. Premiums of $28.0 million, $32.8 million and $33.3 million and current and future benefits of $43.0 million, $43.8 million and $55.4 million were assumed in 1995, 1994 and 1993, respectively. Investment income of $46.5 million, $51.5 million and $53.3 million was generated from the reinsurance loan to affiliate in 1995, 1994 and 1993, respectively. Net income of approximately $18.4 million, $25.1 million and $13.6 million resulted from this agreement in 1995, 1994 and 1993, 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 $28.0 million and $24.2 million were maintained for this contract as of December 31, 1995 and 1994, 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 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 $3.2 million, $1.3 million and $0.6 million for 1995, 1994 and 1993, respectively. The Company received no capital contributions in 1995, 1994 or 1993. The Company distributed $2.9 million in the form of dividends of two of its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995. Premiums due and other receivables include $5.7 million and $27.6 million due from affiliates in 1995 and 1994, respectively. Other liabilities include $12.4 million and $27.9 million due to affiliates for 1995 and 1994, respectively. (42) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Related Party Transactions (Continued) 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. 9. 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. The following table includes premium amounts ceded/assumed to/from affiliated companies as discussed in Note 8 above. Ceded to Assumed Direct Other from Other Net Amount Companies Companies Amount ------ --------- ---------- ------ (millions) 1995 ---- Premiums: Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2 Accident and Health 7.5 7.5 -- -- Insurance Annuities 82.1 -- 0.5 82.6 --------------------------------------------- Total earned premiums $118.4 $16.1 $28.5 $130.8 --------------------------------------------- --------------------------------------------- 1994 ---- Premiums: Life Insurance $ 27.3 $ 6.0 $32.8 $ 54.1 Accident and Health 9.3 9.3 -- -- Insurance Annuities 69.9 -- 0.2 70.1 --------------------------------------------- Total earned premiums $106.5 $15.3 $33.0 $124.2 --------------------------------------------- --------------------------------------------- 1993 ---- Premiums: Life Insurance $22.4 $ 5.6 $33.3 $ 50.1 Accident and Health 12.9 12.9 -- -- Insurance Annuities 31.3 -- 0.7 32.0 --------------------------------------------- Total earned premiums $66.6 $18.5 $34.0 $82.1 --------------------------------------------- (43) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Financial Instruments ESTIMATED FAIR VALUE The carrying values and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 were as follows: 1995 1994 ----------------- --------------- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- (millions) Assets: Cash and cash equivalents $ 568.8 $ 568.8 $ 623.3 $ 623.3 Short-term investments 15.1 15.1 98.0 98.0 Debt securities 12,720.8 12,720.8 10,191.4 10,191.4 Equity securities 257.6 257.6 229.1 229.1 Limited partnership -- -- 24.4 24.4 Mortgage loans 21.2 21.9 9.9 9.9 Liabilities: Investment contract liabilities: With a fixed maturity 989.1 1,001.2 826.7 833.5 Without a fixed maturity 9,511.0 9,298.4 8,122.6 7,918.2 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 expected 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 and liquidity risk, the fair values of all assets and liabilities should be taken into consideration, not only those above. The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: SHORT-TERM INSTRUMENTS: Fair values are based on quoted market prices or dealer quotations. Where quoted market prices are not available, the carrying amounts reported in the Consolidated Balance Sheets approximates fair value. Short-term instruments have a maturity date of one year or less and include cash and cash equivalents, and short-term investments. (44) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Financial Instruments (Continued) DEBT AND EQUITY SECURITIES: Fair values are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair value is estimated by using quoted market prices for similar securities or discounted cash flow methods. MORTGAGE LOANS: Fair value is 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. The fair value estimate of mortgage loans of lower quality, including problem and restructured loans, is based on the estimated fair value of the underlying collateral. 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 FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS) During 1995, the Company received $0.4 million for writing call options on underlying securities. As of December 31, 1995 there were no option contracts outstanding. At December 31, 1995, the Company had a forward swap agreement with a notional amount of $100.0 million and a fair value of $0.1 million. The Company did not have transactions in derivative instruments in 1994. (45) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Financial Instruments (Continued) The Company also holds investments in certain debt and equity securities with derivative characteristics (i.e., including the fact that their market value is at least partially determined by, among other things, levels of or changes in interest rates, prepayment rates, equity markets or credit ratings/spreads). The amortized cost and fair value of these securities, included in the $13.4 billion investment portfolio, as of December 31, 1995 was as follows: Amortized Fair (Millions) Cost Value --------- ----- Collateralized mortgage obligations $2,383.9 $2,549.3 Principal-only strips (included above) 38.7 50.0 Interest-only strips (included above) 10.7 20.7 Structured Notes (1) 95.0 100.3 (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. 11. 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, 1995, the Company had commitments to purchase investments of $31.4 million. The fair value of the investments at December 31, 1995 approximated $31.5 million. There were no outstanding forward commitments at December 31, 1994. LITIGATION There were no material legal proceedings pending against the Company as of December 31, 1995 or December 31, 1994 which were beyond the ordinary course of business. The Company is involved in lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. (46) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (Continued) 12. Segment Information The Company's operations are reported through two major business segments: Life Insurance and Financial Services. Summarized financial information for the Company's principal operations was as follows: (Millions) 1995 1994 1993 - - ----------------------------------------------------------------------------- Revenue: Financial services $ 1,129.4 $ 946.1 $ 892.8 Life insurance 407.9 386.1 371.7 --------------------------------- Total revenue $ 1,537.3 $ 1,332.2 $ 1,264.5 - - ------------------------------------------------------------------------------ Income before federal income taxes: Financial services $ 158.0 $ 119.7 $ 121.1 Life insurance 102.0 96.8 98.0 --------------------------------- Total income before federal $ 260.0 $ 216.5 $ 219.1 income taxes - - ----------------------------------------------------------------------------- Net income: Financial services $ 113.8 $ 85.5 $ 86.8 Life insurance 62.1 59.8 56.1 --------------------------------- Net income $ 175.9 $ 145.3 $ 142.9 - - ----------------------------------------------------------------------------- (Millions) 1995 1994 1993 Assets under management, at fair value: Financial services $23,224.3 $17,785.2 $16,600.5 Life insurance 2,698.1 2,171.7 2,175.5 - - ----------------------------------------------------------------------------- Total assets under management $25,922.4 $19,956.9 $18,776.0 - - ----------------------------------------------------------------------------- (47) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 19. 2. Financial statement schedules. See Index to Consolidated Financial Statement Schedules on Page 51. 3. Exhibits: 3(a) Certificate of Incorporation Incorporated herein by reference to post-effective amendment No. 58 to Registration Statement on Form N-4 (File No. 2-52449) as filed with the Securities and Exchange Commission on February 28, 1994. 3(b) By-Laws Incorporated herein by reference to post-effective amendment No. 58 to Registration Statement on Form N-4 (File No. 2-52449) as filed with the Securities and Exchange Commission on February 28, 1994. 4 Instruments Defining the Rights of Security Holders, Including Indentures (Annuity Contracts) Incorporated herein by reference to Form S-1, File No. 33-42555, as amended, originally filed with the Securities and Exchange Commission on January 4, 1989 and most recently amended and filed on April 4, 1995. Incorporated herein by reference to Form S-1, File No. 33-34583, as amended, originally filed with the Securities and Exchange Commission on January 4, 1989 and most recently amended and filed on April 4, 1995. Incorporated herein by reference to Form N-4, File No. 2-52448, as amended and filed most recently on April 28, 1995. Incorporated herein by reference to Form N-4, File No. 33-34370, as amended and filed most recently on February 27, 1996. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-81216, as amended and filed most recently on August 21, 1995. Incorporated herein by reference to Registration Statement Form N-4, File No. 33-88722, as amended and filed most recently on November 30, 1995. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-75954, as amended and filed most recently on April 28, 1995. (48) 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. 33-75996, as amended and filed most recently on February 16, 1996. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-75956, as amended and filed most recently on April 28, 1995. Incorporated herein by reference to Registration Statement on Form N-4, File No. 2-52449, as amended and filed most recently on February 28, 1996. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-75988, as amended and filed most recently on February 22, 1996. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-75976, as amended and filed most recently on May 19, 1995. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-75984, as amended and filed most recently on April 28, 1995. Incorporated herein by reference to Registration Statement on Form N-4, File No. 33-79122, as amended and filed most recently on August 16, 1995. 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 filed on February 21, 1996. Incorporated herein by reference to Registration Statement on Form S-2, File No. 33-64331, as filed on November 16, 1995. Incorporated herein by reference to Pre-Effective Amendment No. 2 to Registration Statement on Form S-2, File No. 33-64331, as filed on January 17, 1996. 10 Material Contracts (Management contracts/compensatory plans or arrangements) * The 1984 Stock Option Plan of Aetna Life and Casualty Company and the amendments thereto; incorporated by reference to Aetna Life and Casualty Company's 1992 Form 10-K, filed on March 17, 1993. Commission File Number 1-5704 * Aetna Life and Casualty Company's Supplemental Incentive Savings Plan; incorporated by reference to Aetna Life and Casualty Company's 1992 Form 10-K, filed on March 17, 1993. Commission File Number 1-5704 (49) Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K (Continued) 10 Material Contracts (Management contracts/compensatory plans or arrangements) (Continued) * Aetna Life and Casualty Company's Supplemental Pension Benefit Plan; incorporated by reference to Aetna Life and Casualty Company's 1992 Form 10-K, filed on March 17, 1993. Commission File Number 1-5704 * Aetna Life and Casualty Company's 1986 Management Incentive Plan as amended effective February 25, 1994; incorporated by reference to Aetna Life and Casualty Company's 1993 Form 10-K, filed on March 18, 1994. Commission File Number 1-5704 * Aetna Life and Casualty Company's 1994 Stock Incentive Plan; incorporated by reference to 1994 Proxy Statement of Aetna Life and Casualty Company. * Management contract or compensatory plan or arrangement 21 Subsidiaries of the Registrant Incorporated by reference to Exhibit Item 26 to Registration Statement on Form N-4 (File Number 33-75982) as filed on February 20, 1996. 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. (50) Index to Consolidated Financial Statement Schedules Page ---- Independent Auditors' Report 52 I. Summary of Investments - Other than Investments in Affiliates as of December 31, 1995 53 III. Supplementary Insurance Information as of and for the years ended December 31, 1995, 1994, 1993 54 IV. Reinsurance for the years ended December 31, 1995, 1994, 1993 55 Schedules other than those listed above are omitted because they are not required or are not applicable. (51) INDEPENDENT AUDITORS' REPORT The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: Under date of February 6, 1996, we reported on the consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and 1994, 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, 1995, 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 as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the financial statements, in 1993 the Company changed its methods of accounting for certain investments in debt and equity securities. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 6, 1996 (52) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Schedule I Summary of Investments - Other than Investments in Affiliates December 31, 1995
Amount at Which Shown in the Type of Investment Cost Value* Balance Sheet ------------------ ---- ------ ------------- (millions) Debt Securities: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 539.5 $ 587.0 $ 587.0 Obligations of states and political subdivisions 41.4 53.8 53.8 U.S. Corporate securities 5,396.5 5,689.8 5,689.8 Foreign securities (1) 1,302.6 1,416.6 1,416.6 Residential mortgage-backed securities 2,940.6 3,203.4 3,203.4 Commercial/Multifamily mortgage-backed securities 741.9 774.0 774.0 Other asset-backed securities 961.2 996.2 996.2 --------- --------- --------- Total debt securities 11,923.7 12,720.8 12,720.8 --------- --------- --------- Equity securities: Non-redeemable preferred stocks 51.3 57.6 57.6 Investment in affiliated mutual funds 173.4 191.8 191.8 Common stock 6.9 8.2 8.2 --------- --------- --------- Total equity securities 231.6 257.6 257.6 --------- --------- --------- Short-term investments 15.1 --------- 15.1 Mortgage loans 21.2 21.2 Policy loans 338.6 338.6 --------- --------- Total investments $12,530.2 $13,353.3 --------- --------- --------- ---------
* See Notes 1, 2 and 10 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. (53) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Schedule III Supplementary Insurance Information As of and for the years ended December 31, 1995, 1994 and 1993
(Millions) Deferred Unpaid Policyholders' policy Future claims funds left Net acquisition policy and claim Unearned with the Premium investment Segment costs benefits expenses premiums company revenue income (1) - - ------------------------------------------------------------------------------------------------------------------------------- 1995 - - ---- Financial Services $ 602.5 $1,018.9 $ 1.0 $ - $10,483.3 $ 82.6 $ 823.3 Life Insurance 738.8 2,574.3 26.2 1.4 16.8 48.2 181.0 ---------------------------------------------------------------------------------------------------------- Total $1,341.3 $3,593.2 $27.2 $1.4 $10,500.1 $130.8 $1,004.3 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 1994 - - ---- Financial Services $ 516.8 $ 773.7 $ 1.4 $ - $ 8,942.9 $ 70.2 $ 745.9 Life Insurance 647.5 2,137.3 22.4 1.7 6.4 54.0 171.3 ---------------------------------------------------------------------------------------------------------- Total $1,164.3 $2,911.0 $23.8 $1.7 $ 8,949.3 $124.2 $ 917.2 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 1993 - - ---- Financial Services $ 440.8 $ 720.3 $ 1.2 $ - $ 8,898.8 $ 32.0 $ 739.2 Life Insurance 610.8 2,109.3 26.0 1.7 6.2 50.1 172.7 ---------------------------------------------------------------------------------------------------------- Total $1,051.6 $2,829.6 $27.2 $1.7 $ 8,905.0 $ 82.1 $ 911.9 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- Amortization Other income of deferred (including Current policy Other realized capital and future acquisition operating gains and losses) benefits costs expenses - - --------------------------------------------------------------------------------------- 1995 - - ---- Financial Services $223.6 $704.4 $10.5 $256.5 Life Insurance 178.6 210.9 32.8 62.2 ----------------------------------------------------------------- Total $402.2 $915.3 $43.3 $318.7 ------------------------------------------------------------------ ------------------------------------------------------------------ 1994 - - ---- Financial Services $130.0 $639.9 $ 9.6 $176.9 Life Insurance 160.8 214.2 16.8 58.3 ----------------------------------------------------------------- Total $290.8 $854.1 $26.4 $235.2 ------------------------------------------------------------------ ------------------------------------------------------------------ 1993 - - ---- Financial Services $121.6 $624.1 $(1.4) $149.0 Life Insurance 148.9 194.3 21.2 58.2 ----------------------------------------------------------------- Total $270.5 $818.4 $19.8 $207.2 ------------------------------------------------------------------ ------------------------------------------------------------------
(1) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (54) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, 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 ------ --------- ---------- ------ ---------- 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 82.1 - 0.5 82.6 0.6 - ------------------------------------------------------ Total earned premiums $ 118.4 $ 16.1 $ 28.5 $ 130.8 21.8 ----------------------------------------------------- ----------------------------------------------------- 1994 ---- Life insurance in force $32,184.3 $1,423.0 $2,677.8 $33,439.1 8.0% ----------------------------------------------------- ----------------------------------------------------- Premiums: Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1 60.6 Accident and Health Insurance 9.3 9.3 - - - Annuities 69.9 - 0.2 70.1 0.3 - ----------------------------------------------------- Total earned premiums $ 106.5 $ 15.3 $ 33.0 $ 124.2 26.6 ----------------------------------------------------- ----------------------------------------------------- 1993 ---- Life insurance in force $30,602.3 $1,210.2 $3,099.0 $32,491.1 9.5% ----------------------------------------------------- ----------------------------------------------------- Premiums: Life Insurance $ 22.4 $ 5.6 $ 33.3 $ 50.1 66.5 Accident and Health Insurance 12.9 12.9 - - - Annuities 31.3 - 0.7 32.0 2.2 - ------------------------------------------------------ Total earned premiums $ 66.6 $ 18.5 $ 34.0 $ 82.1 41.4 ----------------------------------------------------- -----------------------------------------------------
(55) PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The expenses payable by the Company in connection with the offering are set forth in the table below. SEC registration fee $ 20,000 Printing $ 25,000 Legal Fees and expenses $ 50,000 Accounting fees and expenses $ 5,000 Miscellaneous ___________ Total $ 100,000 Item 15. Indemnification of Directors and Officers Reference is hereby made to Section 33-320a of the Connecticut General Statutes ("C.G.S.") regarding indemnification of directors and officers of Connecticut corporations. The statute provides in general that Connecticut corporations shall indemnify their officers, directors, employees, agents, and certain other defined individuals against judgments, fines, penalties, amounts paid in settlement and reasonable expenses actually incurred in connection with proceedings against the corporation. The corporation's obligation to provide such indemnification does not apply unless (1) the individual is successful on the merits in the defense of any such proceeding; or (2) a determination is made (by a majority of the board of directors not a party to the proceeding by written consent; by independent legal counsel selected by a majority of the directors not involved in the proceeding; or by a majority of the shareholders not involved in the proceeding) that the individual acted in good faith and in the best interests of the corporation; or (3) the court, upon application by the individual, determines in view of all the circumstances that such person is reasonably entitled to be indemnified. C.G.S. Section 33-320a provides an exclusive remedy: a Connecticut corporation cannot indemnify a director or officer to an extent either greater or less than that authorized by the statute, e.g., pursuant to its certificate of incorporation, bylaws, or any separate contractual arrangement. However, the statute does specifically authorize a corporation to procure indemnification insurance to provide greater indemnification rights. The premiums for such insurance may be shared by the corporation with the insured individuals on an agreed basis. Consistent with the statute, Aetna Life and Casualty Company has procured insurance from Lloyd's of London and several major United States excess insurers for its directors and officers and the directors and officers of its subsidiaries, including the Registrant, which supplements the indemnification rights provided by C.G.S. Section 33-320a to the extent such coverage does not violate public policy. Item 16. Exhibits and Financial Statement Schedules (4)(a) Form of Group Annuity Contract (Form No. G1-MGA-95)1 (4)(b) Form of Individual Annuity Contract (Form No. I1-MGA-95)2 (5) Opinion as to Legality (10) Material contracts are listed under exhibit 10 in the Company's Form 10-K for the fiscal year ended December 31, 1995 (File No. 33-23376), as filed electronically with the Commission on March 29, 1996. Each of the exhibits so listed is incorporated by reference as indicated in the Form 10-K. (23)(a) Consent of Independent Auditors (23)(b) Consent of Counsel (included in Exhibit 16(5) above) (24) Powers of Attorney3 Exhibits other than these listed are omitted because they are not required or are not applicable. 1. Incorporated by reference to the Registration Statement on Form S-2 (File No. 33-64331), as filed electronically on November 16, 1995. 2. Incorporated by reference to Pre-Effective Amendment No. 2 to Registration Statement on Form S-2 (File No. 33-64331), as filed electronically on January 17, 1996. 3. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-75974), as filed electronically on April 9, 1996. Item 17. Undertakings The undersigned registrant hereby undertakes as follows, pursuant to Item 512 of Regulation S-K: (a) Rule 415 offerings: (1) To file, during any period in which offers or sales of the registered securities are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material changes to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (h) Request for Acceleration of Effective Date: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 33-64331.DOC SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement on Form S-2 (File No. 33-64331) to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hartford, State of Connecticut, on this 15th day of April, 1996. By: AETNA LIFE INSURANCE AND ANNUITY COMPANY By: Daniel P. Kearney* ------------------------------------------- Daniel P. Kearney President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to Registration Statement on Form S-2 has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date Daniel P. Kearney* Director and President ) - - ------------------------- (principal executive officer) ) Daniel P. Kearney ) Timothy A. Holt* Director and Chief Financial Officer ) April - - ------------------------- Timothy A. Holt ) 15, 1996 ) Christopher J. Burns* Director ) - - ------------------------- Christopher J. Burns ) ) Laura R. Estes* Director ) - - ------------------------- Laura R. Estes ) ) Gail P. Johnson* Director ) - - ------------------------- Gail P. Johnson ) ) John Y. Kim* Director ) - - ------------------------- John Y. Kim ) ) Shaun P. Mathews* Director ) - - ------------------------- Shaun P. Mathews ) ) Glen Salow* Director ) - - ------------------------- Glen Salow ) ) Creed R. Terry* Director ) - - ------------------------- Creed R. Terry ) ) Eugene M. Trovato* Vice President and Treasurer, Corporate - - ------------------------- Controller ) Eugene M. Trovato ) By: /s/ Julie E. Rockmore ------------------------------------------ Julie R. Rockmore *Attorney-in-Fact 33-64331.DOC EXHIBIT INDEX Exhibit No. Exhibit Page 99-4.a Form of Group Annuity Contract (Form No. G1-MGA-95) * 99-4.b Form of Individual Annuity Contract (Form No. * I1-MGA-95) 99-5 Opinion as to Legality -------- 99-10 Material Contracts * 99-23.a Consent of Independent Auditors -------- 99-23.b Consent of Counsel (included in Exhibit 16(5) above) * 24 Powers of Attorney * *Incorporated by reference EX-99.5 2 OPINION 151 Farmington Avenue Susan E. Bryant Hartford, CT 06156 Counsel Law & Regulatory Affairs, RE4C (860) 273-7834 Fax: (860) 273-8340 April 15, 1996 Securities and Exchange Commission 450 Fifth Street N.W. Washington, DC 20549 Re: Aetna Life Insurance and Annuity Company Post-Effective Amendment No. 1 to Registration Statement on Form S-2 File No. 33-64331 Prospectus Title: Aetna Multi-Rate Annuity Dear Sirs: As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I have represented the Company in connection with the Aetna Multi-Rate Annuity (the "Aetna Multi-Rate Annuity"), under the Securities Act of 1933, as amended. In connection with such representation, I have reviewed Post-Effective Amendment No. 1 to the Registration Statement on Form S-2 relating to such annuity, including the prospectus, and relevant proceedings of the Board of Directors. Based upon this review, and assuming the securities represented by the Company are issued in accordance with the provisions of the prospectus, I am of the opinion that the securities, when sold, will have been legally issued, and will constitute a legal and binding obligation of the Company. I further consent to the use of this opinion as an exhibit to the Registration Statement and to my being named under the caption "Legal Matters" therein. Sincerely, /s/ Susan E. Bryant Susan E. Bryant Counsel Aetna Life Insurance and Annuity Company EX-99.23(A) 3 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Certified Public Accountants The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: We consent to the use of our reports incorporated herein by reference and to the reference to our firm under the heading "Experts" in the Prospectus. Our reports refer to a change in 1993 in the Company's methods of accounting for certain investments in debt and equity securities. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Hartford, Connecticut April 15, 1996 -----END PRIVACY-ENHANCED MESSAGE-----