-----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, DSZGU2LO6eNF4vsE3mGc1ied8KEyd/Sf5QrKLF8vwDrTP3/g49Sc9Yyx+id6sKpz JCPVPC4iRP0wjyXsQRbOVw== 0000950146-00-000349.txt : 20000405 0000950146-00-000349.hdr.sgml : 20000405 ACCESSION NUMBER: 0000950146-00-000349 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20000404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE INSURANCE & ANNUITY CO /CT CENTRAL INDEX KEY: 0000837010 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 710294708 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-49593 FILM NUMBER: 593528 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 AM 1 ALIAC MRA As filed with the Securities and Exchange Commission on April 4, 2000 Registration No. 333-49593 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 3 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Aetna Life Insurance and Annuity Company ------------------------------------------------------------------------------ Connecticut ------------------------------------------------------------------------------ 71-0294708 ------------------------------------------------------------------------------ 151 Farmington Avenue, Hartford, Connecticut 06156, (860) 273-4686 - -------------------------------------------------------------------------------- Julie E. Rockmore, Counsel Aetna Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 (860) 273-4686 ------------------------------------------------------------------------------ (Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service) - -------------------------------------------------------------------------------- The annuities covered by this registration statement are to be issued from time to time after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [XX] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [XX] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] _______________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______________ If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CROSS REFERENCE SHEET Pursuant to Regulation S-K Item 501(b) Form S-2 Item No. Part A (Prospectus) Location -------- ------------------- -------- Forepart of the Registration Statement and Outside Front Cover 1 Page of Prospectus.................. Outside Cover Page Inside Front and Outside Back Cover Pages Cover Page (inside front 2 of Prospectus....................... cover) Summary Information, Risk Factors and 3 Ratio of Earnings to Fixed Charges.. Contract Overview 4 Use of Proceeds..................... Purchase; Investments 5 Determination of Offering Price..... Not Applicable 6 Dilution............................ Not Applicable 7 Selling Security Holders............ Not Applicable Other Topics - Contract 8 Plan of Distribution................ Distribution Description of Securities to be Guaranteed Terms and 9 Registered.......................... Guaranteed Interest Rates 10 Interests of Named Experts and Counsel Not Applicable Information with Respect to the 11 Registrant.......................... Not Applicable Other Topics - Incorporation of Certain Information Incorporation of Certain 12 by Reference........................ Documents by Reference Disclosure of Commission Position on Indemnification for Securities Act 13 Liabilities......................... Not Applicable Prospectus - May 1, 2000 - -------------------------------------------------------------------------------- The Contract. The contract described in this prospectus is a group or individual, single purchase payment, modified, guaranteed, deferred annuity contract issued by Aetna Life Insurance and Annuity Company (the Company, we, us, our). The contract is available as a nonqualified deferred annuity. Additionally, the contract is available as a rollover to a traditional Individual Retirement Annuity (IRA) under section 408(b) of the Internal Revenue Code of 1986, as amended (Tax Code) or a rollover to a Roth IRA under Tax Code section 408A. See "Purchase" in this prospectus for additional information. - -------------------------------------------------------------------------------- Why Reading this Prospectus is Important. This prospectus contains facts about the contract that you should know before investing. The information will help you determine if the contract is right for you. Read this prospectus carefully. If you do invest in the contract, retain this document for future reference. Table of Contents . . . page 3 - -------------------------------------------------------------------------------- How it Works. Upon purchase, you may direct your purchase payment to different guaranteed terms ranging up to and including ten years. Each guaranteed term has its own guaranteed interest rate. When the guaranteed term(s) end, you can reinvest in another guaranteed term, begin receiving income phase payments, or withdraw your full account value. Withdrawals. You may withdraw all or part of your accumulated funds at any time. Withdrawals prior to the end of a guaranteed term may be subject to a market value adjustment and certain fees. Upon a full withdrawal, you could, therefore, receive less than your purchase payment. See the "Market Value Adjustment" section, p. 16, and "Fees" section, p. 10, in this prospectus for additional information. Additional Disclosure Information. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. We do not intend for this prospectus to be an offer to sell or a solicitation of an offer to buy these securities in any state that does not permit their sale. We have not authorized anyone to provide you with information different from that contained in this prospectus. The contract is not a deposit with, obligation of, or guaranteed or endorsed by any bank, nor is it insured by the FDIC. Our Home Office: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 1-800-531-4547 PROS.49593-00 THIS PAGE INTENTIONALLY LEFT BLANK 2 TABLE OF CONTENTS - -------------------------------------------------------------- Contract Overview ..................................... 4 Questions: Contacting the Company (sidebar) Contract Design Who's Who Contract Phases Contract Facts - -------------------------------------------------------------- Guaranteed Terms and Guaranteed Interest Rates ......... 6 Your Choices at the End of a Guaranteed Term ........... 8 Purchase ............................................... 8 Right to Cancel ........................................ 9 Fees ................................................... 10 Withdrawals ............................................ 13 Systematic Distribution Options ........................ 14 Market Value Adjustment (MVA) .......................... 16 Death Benefit .......................................... 17 Income Phase ........................................... 18 Investments ............................................ 21 Taxation ............................................... 23 Other Topics ........................................... 29
Contract Distribution -- Contract Modification -- Transfer of Ownership; Assignment -- Involuntary Terminations -- Legal Matters -- Experts -- Getting Further Information -- Incorporation of Certain Documents by Reference -- Inquiries Appendix I--Calculating a Market Value Adjustment (MVA) ..... 32
3 [START SIDE BAR] Questions: Contacting the Company. To answer your questions, contact your sales representative or write or call our Home Office: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, CT 06156 1-800-531-4547 [END SIDE BAR] Contract Overview - -------------------------------------------------------------------------------- The following is intended as a summary. Please read each section of this prospectus for additional detail. - -------------------------------------------------------------------------------- Contract Design - -------------------------------------------------------------------------------- The contract described in this prospectus is a group or individual, single purchase payment, modified, guaranteed, deferred annuity contract issued by Aetna Life Insurance and Annuity Company. It is intended to be used as a retirement savings vehicle that allows you to invest in fixed interest options in order to help meet long-term financial goals. - -------------------------------------------------------------------------------- Who's Who - -------------------------------------------------------------------------------- The contract holder (you): The person to whom we issue an individual contract or a certificate under a group contract. The Company (we, us, our): Aetna Life Insurance and Annuity Company. We issue the contract. The contract: Both individual contracts and certificates under a group contract are referred to in this prospectus as the contract. - -------------------------------------------------------------------------------- Contract Phases - -------------------------------------------------------------------------------- The Accumulation Phase > At Investment. Upon purchase, you may direct your purchase payment to different guaranteed terms ranging up to and including ten years. Each guaranteed term has its own guaranteed interest rate. Generally, your purchase payment will earn interest at the guaranteed interest rate(s) for the duration of the guaranteed term(s) you select. If you withdraw or transfer amounts prior to the end of a guaranteed term, those amounts may be subject to a market value adjustment and certain fees. See "Market Value Adjustment" and "Fees." > At Maturity. We will notify you at least 18 days before the guaranteed term ends. If you do not make any election before the guaranteed term ends, we will automatically renew the contract for a guaranteed term of the same or similar duration. If you do not want to automatically renew, contact us before the guaranteed term ends. Prior to the end of a guaranteed term, you can elect to reinvest in a different guaranteed term, begin income phase payments, or withdraw the full amount available at maturity. The Income Phase You may start receiving income phase payments any time after the first year of the contract. Several payment options are available. See "Income Phase." In general, you may receive payments for a specified period of time or for life; receive payments monthly, quarterly, semi-annually or annually; and select an option that provides a death benefit to beneficiaries. 4 - -------------------------------------------------------------------------------- Contract Facts - -------------------------------------------------------------------------------- Free Look/Right to Cancel: You may cancel the contract within ten days of receipt (or as otherwise provided by state law). See "Right to Cancel." Death Benefit: A beneficiary may receive a benefit in the event of your death prior to the income phase. Benefits during the income phase depend upon the payment option selected. See "Death Benefit" and " Income Phase." Withdrawals: During the accumulation phase, you may withdraw all or part of your account value. Amounts withdrawn may be subject to a market value adjustment, early withdrawal charge, maintenance fee, tax withholding and taxation. See "Market Value Adjustment," "Withdrawals," "Fees" and "Taxation." Systematic Distribution Options: You may elect to receive regular payments from your account, while retaining the account in the accumulation phase. See "Systematic Distribution Options." Fees: Certain fees may be deducted from your account value. See "Fees." Taxation: You will not generally pay taxes on any earnings from the annuity contract described in this prospectus until they are withdrawn. Tax-qualified retirement arrangements (e.g., IRAs) also defer payment of taxes on earnings until they are withdrawn. If you are considering funding a tax-qualified retirement arrangement with an annuity contract, you should know that the annuity contract does not provide any additional tax deferral of earnings beyond the tax deferral provided by the tax-qualified retirement arrangement. However, annuities do provide other features and benefits which may be valuable to you. You should discuss your alternatives with your financial representative. Taxes will generally be due when you receive a distribution. Tax penalties may apply in some circumstances. See "Taxation." Market Value Adjustment (MVA): If you withdraw all or part of your account value before a guaranteed term is completed, an MVA may apply. The MVA reflects the change in the value of the investment due to changes in interest rates since the date of investment, and may be positive or negative. See "Market Value Adjustment." 5 Guaranteed Terms and Guaranteed Interest Rates - -------------------------------------------------------------------------------- The contract offers fixed interest options called guaranteed terms. On the application or enrollment form, you select the guaranteed term(s) you want to invest in from among the guaranteed terms we offer at that time. Your purchase payment earns interest at the guaranteed interest rate applicable to that guaranteed term. Guaranteed Terms Start Date. Guaranteed terms always start on the first business day of the month. Length. Guaranteed terms are offered at our discretion for various lengths of time ranging up to and including ten years. Minimum Payments. Your single purchase payment must be at least $10,000. You may divide your single purchase payment among any of the various guaranteed terms we offer, but you must invest at least $1,000 in any single guaranteed term. Guaranteed Interest Rates We state the guaranteed interest rates as an effective annual rate of return. In other words, we credit the interest you earn on your purchase payment at a rate that provides the guaranteed rate of return over a one year period, assuming you make no withdrawals. Guaranteed interest rates will never be less than the minimum guaranteed interest rate stated in the contract. We reserve the right to offer, from time to time, guaranteed interest rates to prospective investors that are higher than those offered to current contract holders with respect to guaranteed terms of the same duration. One Guaranteed Term/Multiple Guaranteed Interest Rates. More than one guaranteed interest rate may be applicable during a guaranteed term greater than one year. For example, a guaranteed term of five years may apply one guaranteed interest rate for the first year, a different guaranteed interest rate for the next two years, and a third guaranteed interest rate for the last two years. You may not select a guaranteed term with multiple guaranteed interest rates if your contract is issued in the State of New York. Example of Interest Crediting at the Guaranteed Interest Rate. The example below shows how interest is credited during a guaranteed term. The hypothetical guaranteed interest rate used in this example is illustrative only and is not intended to predict future guaranteed interest rates to be offered under the contract. Actual guaranteed interest rates offered may be more or less than those shown. The example assumes no withdrawals of any amount during the entire seven-year guaranteed term illustrated. The example does not reflect any market value adjustment, federal income taxes, possible tax penalties, or deductions of any early withdrawal charge, premium taxes, or maintenance fees. See "Withdrawals," "Market Value Adjustment," "Fees" and "Taxation." 6 Example:
- -------------------------------------------------------------------------------- Purchase payment: $20,000 Guaranteed term: 7 years Guaranteed interest rate: 6.00% per year The guaranteed interest rate is applied in this example by using the formula: 1 + the guaranteed interest rate = 1.06 Account Value at End of Interest Earned at End of Each Contract Year Each Contract Year ------------------ ------------------ Contract year 1 = $21,200.00 Interest at end of contract year ($20,000.00 x 1.06) 1 = $1,200.00 Contract year 2 = $22,472.00 Interest at end of contract year ($21,200.00 x 1.06) 2 = $1,272.00 Contract year 3 = $23,820.32 Interest at end of contract year ($22,472.00 x 1.06) 3 = $1,348.32 Contract year 4 = $25,249.54 Interest at end of contract year ($23,820.32 x 1.06) 4 = $1,429.22 Contract year 5 = $26,764.51 Interest at end of contract year ($25,249.54 x 1.06) 5 = $1,514.97 Contract year 6 = $28,370.38 Interest at end of contract year ($26,764.51 x 1.06) 6 = $1,605.87 End of guaranteed term = $30,072.61 Interest at end of contract year ($28,370.38 x 1.06) 7 = $1,702.23 Total interest credited in guaranteed term = $10,072.61 ($30,072.61 - $20,000) - --------------------------------------------------------------------------------
Determination of Guaranteed Interest Rates. We will periodically determine the guaranteed interest rates we offer at our sole discretion. We have no specific formula for determining the rate of interest we will declare as future guaranteed interest rates. Our determination of guaranteed interest rates is influenced by, but does not necessarily correspond to, interest rates available on the types of debt instruments in which we intend to invest the amounts attributable to the contract. See "Investments." The Company's management will also consider various factors in determining guaranteed interest rates for a given guaranteed term, including some or all of the following: > Regulatory and tax requirements; > Sales commissions; > Administrative expenses; > General economic trends; and > Competitive factors. The Company's management determines the guaranteed interest rates we will offer. We cannot predict nor guarantee future levels of guaranteed interest rates above the contractually guaranteed minimum rate nor guarantee what rates will be offered in the future. 7 Your Choices at the End of a Guaranteed Term - -------------------------------------------------------------------------------- At least 18 calendar days prior to the end of a guaranteed term, we will notify you that the guaranteed term is about to end. At the end of a guaranteed term, you can do three things with the amount you have accumulated for that guaranteed term: > Reinvest all or part of it in another guaranteed term; > Withdraw all or part of it; or > Use all or part of it to start your income phase payments. These choices can also be combined. For example, you can withdraw part of the amount you have accumulated and reinvest the balance or reinvest part and use the balance to start income phase payments. Each of these choices has certain consequences, which you should consider carefully. See "Withdrawals," "Income Phase" and "Taxation." Requesting Your Choice. Once you decide what you want to do with your account value for that guaranteed term, you must advise us of your decision by completing an election form. We must receive your completed election form at least five days prior to the end of the guaranteed term to which it applies. If we do not receive your properly completed election form in time, or you do not submit an election form, your account value at the end of the guaranteed term will be automatically reinvested in the following manner: > For a guaranteed term equal to the guaranteed term just ended; > If no such guaranteed term is available, for the guaranteed term with the next shortest duration; or > If no such shorter guaranteed term is available, for the next longest guaranteed term. Your account value will then earn interest at the guaranteed interest rate applicable to the guaranteed term automatically selected for you. We will mail a confirmation statement to you the next business day after the completion of the just-ended guaranteed term advising you of the new guaranteed term and guaranteed interest rate. Purchase - -------------------------------------------------------------------------------- Contract Type. The contract may be purchased as one of the following: (1) A nonqualified deferred annuity; (2) A rollover to a traditional individual retirement annuity (IRA) under Tax Code section 408(b) (limitations apply, see "Purchasing a Traditional IRA" in this section); or (3) A rollover to a Roth IRA under Tax Code section 408A (limitations apply, see "Purchasing a Roth IRA" in this section). How to Purchase. To purchase a contract, complete an application or enrollment form and submit it to the Company along with your purchase payment. 8 Payment Methods. The following purchase payment methods are allowed: > One lump-sum payment; or > Transfer or rollover from a pre-existing plan or account. We reserve the right to reject any payments without advance notice. Payment Amount. The minimum purchase payment is $10,000. We may limit the amount of the maximum purchase payment. All purchase payments over $1,000,000 will be allowed only with our consent. You may not make any additional purchase payments under an existing contract. However, eligible persons may purchase additional contracts at the then prevailing guaranteed interest rates and guaranteed terms. Purchasing a Traditional IRA. To purchase the contract as a traditional IRA, your purchase payment must be a transfer of amounts held in one of the following: > A traditional individual retirement account under Tax Code section 408(a); > A traditional individual retirement annuity under Tax Code section 408(b); or > A retirement plan qualified under Tax Code section 401 or 403. Purchasing a Roth IRA. A contract may be purchased as a Roth IRA under Tax Code section 408A, by transferring amounts previously accumulated under another Roth IRA or from a traditional individual retirement annuity or individual retirement account, provided certain conditions are met. See "Taxation." Acceptance or Rejection of Applications or Enrollment Forms. We must accept or reject your application or enrollment form within two business days of receipt. If the application or enrollment form is incomplete, we may hold it and any accompanying purchase payment for five days. Payments may be held for longer periods only with your consent, pending acceptance of the application or enrollment form. If the application or enrollment form is accepted, a contract will be issued to you. If the application or enrollment form is rejected, we will return it and any payments to you, without interest. What Happens to Your Purchase Payment? If we accept your application or enrollment form, your purchase payment becomes part of our general assets and is credited to an account established for you. We will confirm the crediting of your purchase payment within five business days of receipt of your properly completed application or enrollment form. You start earning interest on your purchase payment beginning on the effective date of the contract, which is the date your purchase payment is credited. During the period of time between the date your purchase payment is credited and the start of the guaranteed term you selected, your purchase payment earns interest at the guaranteed interest rate applicable to the guaranteed term you selected. Right to Cancel - -------------------------------------------------------------------------------- You may cancel the contract within ten days of receiving it (or as otherwise provided by state law) by returning it to our Home Office along with a written notice of cancellation. We will issue a refund within seven days of our receipt of the contract and written notice of cancellation. The refund will equal the amount of your purchase payment. 9 Fees - -------------------------------------------------------------------------------- The following fees and other deductions may impact your account value: > Early Withdrawal Charge (see below); > Maintenance Fee (see below); > Premium Taxes (see below); > Market Value Adjustment (see "Market Value Adjustment"); and > Taxation (see "Taxation"). Early Withdrawal Charge Withdrawals of all or a portion of your account value may be subject to a charge. Amount. The amount is a percentage of the purchase payment you withdraw. The percentage will be determined by the early withdrawal charge schedule below. Purpose. This is a deferred sales charge. It reimburses some of our sales and administrative expenses associated with the contract. Early Withdrawal Charge Schedule: - -------------------------------------------------------------------------------------- Years since purchase payment credited: 0 1 2 3 4 5 6 7 Fee as a percentage of payment withdrawn: 7% 7% 6% 6% 5% 4% 2% 0% - --------------------------------------------------------------------------------------
How We Apply the Schedule. For purposes of applying the early withdrawal charge, all time periods are measured from the date your purchase payment is credited, even if you reinvest all or part of your account value in another guaranteed term. Once the early withdrawal charge declines to 0%, it no longer applies, regardless of how long you own the contract. The early withdrawal charge applies only to withdrawals of your purchase payment. However, for the purposes of this charge, we assume you are withdrawing all or part of your purchase payment first (not your earnings). This assumption is not made for tax purposes. See "Taxation." - -------------------------------------------------------------------------------- Example. Assume the first guaranteed term you select is for five years. Further assume that at the end of this five-year guaranteed term, you decide to reinvest your account value for another guaranteed term of four years. Assume you then make a withdrawal (but not a special withdrawal, as described below) during the second year of the new guaranteed term. Because six years have passed since your purchase payment was credited, you would pay a 2% early withdrawal charge, even though you could have withdrawn all or part of your account value at the end of the first five-year guaranteed term without paying an early withdrawal charge. See "Waiver of Charge," below. However, if you make a withdrawal during the third year of the new guaranteed term, or anytime thereafter, you would pay no early withdrawal charge, because seven years would have passed since your purchase payment was credited. - -------------------------------------------------------------------------------- 10 Special Withdrawals. After 12 months from the contract effective date, you may make one withdrawal equal to 10% or less of your account value during any calendar year, valued at the time we receive your withdrawal request in writing, and we will not deduct any early withdrawal charge. This special withdrawal is subject to the following restrictions: > It applies only to the first withdrawal each calendar year; > All subsequent withdrawals that calendar year are subject to an early withdrawal charge, even if you did not withdraw the full 10% with your first withdrawal; and > If your first withdrawal of the calendar year is in excess of 10% of your account value, the excess amount is subject to an early withdrawal charge. Waiver of Charge. The early withdrawal charge is waived for amounts that are: > Withdrawn at the end of a guaranteed term, provided that at least five days prior to the end of that guaranteed term we receive your withdrawal request in writing. (If you reinvest those amounts in another guaranteed term, future withdrawals will be subject to an early withdrawal charge as described above.); or > $2,500 or less, provided that no withdrawal has been made from your account during the prior 12 months; or > Withdrawn due to your election of a systematic distribution option (see "Systematic Distribution Options"); or > Withdrawn due to an involuntary termination. This may occur if your account value is less than $2,500. See "Other Topics--Involuntary Terminations." Nursing Home Waiver. If approved in your state, you may withdraw all or a portion of your account value without an early withdrawal charge if all of the following conditions are met: > More than one account year has elapsed since the date your purchase payment was credited; > The annuitant, designated under the contract, has spent at least 45 consecutive days in a licensed nursing facility (in New Hampshire, the facility may be non-licensed); and > The withdrawal is requested within three years of the designated annuitant's admission to a licensed nursing facility (in Oregon there is no three year limitation and in New Hampshire, the facility may be non-licensed). We will not waive the early withdrawal charge if the annuitant was in a licensed nursing care facility at the time you purchased the contract. The nursing home waiver may not be available in all states. Market Value Adjustment and Taxation. Except for withdrawals at the end of a guaranteed term as noted above, and withdrawals under a systematic distribution option, a market value adjustment is applicable to any amounts you withdraw. Regardless of when or how withdrawals are taken, you may also be required to pay taxes and tax penalties. See "Market Value Adjustment" and "Taxation." continued---> 11 (Fees, continued) Annual Maintenance Fee Currently we do not charge a maintenance fee. However, prior to the time you enter the income phase, an annual maintenance fee may be deducted from your account value on each anniversary of the contract's effective date and if you make a full withdrawal from the contract. The terms and conditions under which the maintenance fee may be deducted are stated in the contract. A maintenance fee would be used to reimburse us for our administrative expenses relating to establishing and maintaining the contract. Premium Taxes Maximum Amount. Some states and municipalities charge a premium tax on annuities. These taxes currently range from 0% to 4%, depending upon the jurisdiction. When/How. We reserve the right to deduct premium taxes from your account value or from your payment to the account at any time, but not before there is a tax liability under state law. Our current practice is to deduct the premium taxes at the time of a complete withdrawal or the commencement of income payments. If, at your death, your beneficiary elects to receive a lump-sum distribution, a charge will be deducted for any premium taxes paid on your behalf for which we have not been reimbursed. If we deduct premium taxes from your purchase payment, the amount invested in a guaranteed term will be equal to the amount of your purchase payment reduced by any applicable premium tax. 12 Withdrawals - -------------------------------------------------------------------------------- You may withdraw all or part of your account value at any time during the accumulation phase. Amounts are withdrawn on a pro rata basis from each of the guaranteed terms under the contract. You may request that we inform you in advance of the amount payable upon a withdrawal. Steps for Making a Withdrawal. > Select the withdrawal amount. 1) Full withdrawal: You will receive, reduced by any required withholding tax, your account value, plus or minus any applicable market value adjustment, and minus any applicable early withdrawal charge and annual maintenance fee. 2) Partial Withdrawal (Percentage or Specified Dollar Amount): You will receive, reduced by any required withholding tax, the amount you specify, subject to the value available in your account. However, the amount actually withdrawn from your account will be adjusted for any applicable early withdrawal charge and any positive or negative market value adjustment, and accordingly, may be more or less than the amount requested. > Properly complete a disbursement form and submit it to our Home Office. Delivery of Payment. Payment of withdrawal requests will be made in accordance with the SEC's requirements. Normally, payment will be sent not later than seven days following our receipt of the disbursement form in good order. However, under certain emergency situations, we may defer payment of any withdrawal for a period not exceeding six months from the date we receive your withdrawal request. Taxes, Fees and Deductions. Amounts withdrawn may be subject to one or more of the following: > Early Withdrawal Charge: Withdrawals of all or a portion of your account may be subject to an early withdrawal charge. This is a deferred sales charge that reimburses us for some of the sales and administrative expenses associated with the contract. See "Fees -- Early Withdrawal Charge." > Annual Maintenance Fee: If you make a full withdrawal from the contract, we may deduct any applicable annual maintenance fee. See "Fees -- Annual Maintenance Fee." > Market Value Adjustment (MVA): The MVA reflects changes in interest rates since the deposit period. The MVA may be positive or negative. If you make a withdrawal before the end of a guaranteed term, we will calculate an MVA and the amount withdrawn will be adjusted for any applicable positive or negative MVA. See "Market Value Adjustment." > Tax Penalty: If you make a withdrawal before you attain age 59-1/2, the amount withdrawn may be subject to a 10% penalty tax. See "Taxation." > Tax Withholding: Amounts withdrawn may be subject to withholding for federal income taxes. See "Taxation." All applicable fees and deductions are deducted from the amount of your withdrawal in accordance with the terms of the contract. Any market value adjustment applicable to your withdrawal, taxes, fees and deductions may either increase or decrease the amount paid to you. To determine which may apply, refer to the appropriate sections of this prospectus, contact your sales representative or call our Home Office at the number listed in "Contract Overview." 13 Systematic Distribution Options - -------------------------------------------------------------------------------- Features of a Systematic Distribution Option A systematic distribution option allows you to receive regular payments from the contract without moving into the income phase. By remaining in the accumulation phase, certain rights and flexibility not available during the income phase are retained. The following systematic distribution options may be available: > SWO--Systematic Withdrawal Option. SWO is a series of automatic partial withdrawals from your account based on a payment method you select. It is designed for those who want a periodic income while retaining investment flexibility for amounts accumulated under the contract. SWO allows you to withdraw either a specified amount or a specified percentage of the contract's value, or to withdraw amounts over a specified time period that you determine, within certain limits described in the contract. SWO payments can be made on a monthly or quarterly basis, and the amount of each payment is determined by dividing the designated annual amount by the number of payments due each calendar year. SWO payments are withdrawn pro rata from each of the guaranteed terms under the contract. Under a contract purchased as a traditional IRA, if the SWO payment for any year is less than the minimum required distribution under the Tax Code, the SWO payment will be increased to an amount equal to the minimum distribution amount. If you participate in SWO, you may not utilize a special withdrawal to make additional withdrawals from the contract. See "Withdrawals -- Special Withdrawals." > ECO--Estate Conservation Option. ECO offers the same investment flexibility as SWO, but is designed for those who want to receive only the minimum distribution the Tax Code requires each year. Under ECO, we calculate the minimum distribution amount required by law, and pay you that amount once a year. ECO is not available under nonqualified contracts or under Roth IRA contracts. ECO payments are withdrawn pro rata from each of the guaranteed terms under the contract. We will, upon request, inform you in advance of the amount payable under ECO. If you participate in ECO, you may not utilize a special withdrawal to make additional withdrawals from the contract. See "Withdrawals -- Special Withdrawals." > Other Systematic Distribution Options. We may add additional systematic distribution options from time to time. You may obtain additional information relating to any of the systematic distribution options from your sales representative or from our Home Office. Availability. If allowed by applicable law, we reserve the right to discontinue the availability of one or all of the systematic distribution options for new elections at any time and to change the terms of future elections. 14 Eligibility. To exercise one of these options you must meet certain age criteria and your account value must meet certain minimum requirements. To determine if you meet the age and account value criteria and to assess terms and conditions that may apply, contact your sales representative or our Home Office. Termination. You may revoke a systematic distribution option at any time by submitting a written request to our Home Office. However, once cancelled, you or your spousal beneficiary may not elect SWO again. In addition, once cancelled, ECO may not be elected again until 36 months have elapsed. Deductions and Taxation. When you elect a systematic distribution option, your account value remains in the accumulation phase and subject to the applicable charges and deductions described in "Fees." However, we will not apply an early withdrawal charge or market value adjustment to any part of your account value paid under SWO or ECO. Taking a withdrawal through a systematic distribution option may have tax consequences. If you are concerned about tax implications consult a tax adviser before one of these options is elected. See "Taxation." 15 Market Value Adjustment (MVA) - -------------------------------------------------------------------------------- Purpose of the MVA. If you make an early withdrawal from the contract, we may need to liquidate certain assets or use existing cash flow that would otherwise be available to invest at current interest rates. The assets we may liquidate to provide your withdrawal amount may be sold at a profit or a loss, depending upon market conditions. To lessen this impact, certain withdrawals are subject to an MVA. What is an MVA? In certain situations described below, including when you make a withdrawal before the end of a guaranteed term, we will calculate an MVA and either add or deduct that value from the amount withdrawn. The calculation we use to determine the MVA reflects the change in the value of your investment due to changes in interest rates since the start of the guaranteed term under the contract. When these interest rates increase, the value of the investment decreases, and the MVA amount may be negative and cause a deduction from your withdrawal amount. Conversely, when these interest rates decrease, the value of the investment increases, and the MVA amount may be positive and cause an increase in your withdrawal amount. Calculation of the MVA. For a further explanation of how the MVA is calculated, see Appendix I. When Does an MVA Apply? An MVA may apply when: > You request a withdrawal before the end of a guaranteed term. In this case the withdrawal amount may be increased or decreased by the application of the MVA. > You initiate income phase payments before the end of your guaranteed term. In this case an MVA may be applied to any amounts used to start income phase payments. While either a positive or negative MVA may apply to amounts used to start a nonlifetime payment option, only a positive MVA will apply to amounts used to start a lifetime payment option. See "Income Phase." > We terminate the contract because your account value is less than $2,500. > You cancel the contract. > A death benefit is paid upon the death of the annuitant, more than six months after the annuitant's death. See "Death Benefit." > A death benefit is paid upon the death of a person other than the annuitant. When Does an MVA Not Apply? An MVA will not be applied to: > Withdrawals under the Systematic Withdrawal Option or Estate Conservation Option as described in "Systematic Distribution Options." > A death benefit payable upon death of an annuitant, if paid within six months of the annuitant's death. See "Death Benefit." > Amounts withdrawn at the end of a guaranteed term, provided that at least five days prior to the end of that guaranteed term we receive your withdrawal request in writing. The MVA, however, remains applicable to any amount you reinvest for another guaranteed term. 16 [START SIDE BAR] This section provides information about the death benefit during the accumulation phase. For death benefit information applicable to the income phase, see "Income Phase." Annuitant: The person(s) on whose life expectancy we calculate the income phase payments. [END SIDE BAR] Death Benefit - -------------------------------------------------------------------------------- During the Accumulation Phase Who Receives the Benefit? If you or the annuitant die during the accumulation phase, a death benefit will be paid to your beneficiary in accordance with the terms of the contract subject to the following: > Upon the death of a joint contract holder, the surviving joint contract holder will be deemed the designated beneficiary, and any other beneficiary on record will be treated as the beneficiary at the death of the surviving joint contract holder. > If you are not a natural person, the death benefit will be payable at the death of the annuitant designated under the contract or upon any change of the annuitant. > If you die and no beneficiary exists, the death benefit will be paid in a lump sum to your estate. Designating a Beneficiary(ies). You may designate a beneficiary on your application or enrollment form, or by providing a written request in good order to our Home Office. Calculation of the Benefit. The death benefit is calculated as of the date proof of death and the beneficiary's right to receive the death benefit are received in good order at our Home Office. The amount of the death benefit is determined as follows: > If the death benefit is paid within six months of the death of the annuitant, the amount equals your account value. > If the death benefit is paid more than six months after the date of death of the annuitant, or if paid upon your death and you are not the annuitant, it equals your account value as adjusted by any applicable market value adjustment. > If you are not the annuitant, the death benefit payable may be subject to an early withdrawal charge. Benefit Payment Options. If you are the annuitant and you die before income phase payments begin, or if you are not a natural person and the annuitant dies before income phase payments begin, any beneficiary under the contract who is an individual has several options for receiving payment of the death benefit. The death benefit may be paid: > In one lump-sum payment; > In accordance with any of the available income phase payment options. See "Income Phase--Payment Options"; or > In certain circumstances, your beneficiary, spousal beneficiary or joint contract holder may have the option to continue the contract rather than receive the death benefit. Taxation. The Tax Code requires distribution of death benefit proceeds within a certain period of time. Failure to begin receiving death benefit payments within those time periods can result in tax penalties. Regardless of the method of payment, death benefit proceeds will generally be taxed to the beneficiary in the same manner as if you had received those payments. See "Taxation" for additional information. Change of Beneficiary. You may change the beneficiary previously designated at any time by submitting notice in writing to our Home Office. The change will not be effective until we receive and record it. 17 [START SIDE BAR] We may have used the following terms in prior prospectuses: Annuity Phase--Income Phase Annuity Option--Payment Option Annuity Payment--Income Phase Payment Annuitization--Initiating Income Phase Payments [END SIDE BAR] Income Phase - -------------------------------------------------------------------------------- During the income phase you receive payments from your accumulated account value. You may apply all or a portion of your account value to provide these payments. Income phase payments are made to you or you can request that payments be deposited directly to your bank account. After your death, we will send your designated beneficiary any income phase payments still due. You may be required to pay taxes on all or a portion of the income phase payments you receive. See "Taxation." Partial Entry into the Income Phase. You may elect a payment option for a portion of your account value, while leaving the remaining portion in a guaranteed term(s). Whether the Tax Code considers such payments taxable as annuity payments or as withdrawals is currently unclear; therefore, you should consult with a qualified tax adviser before electing this option. Initiating Income Phase Payments. At least 30 days prior to the date you want to start receiving income phase payments, you must notify us in writing of the following: > Start date; > Payment option (see the payment options table in this section); and > Payment frequency (i.e., monthly, quarterly, semi-annually or annually). The account will continue in the accumulation phase until you properly initiate income phase payments. You may change your payment option election up to 30 days before income phase payments begin. Once you elect for income phase payments to begin, you may not elect a different payment option or elect to receive a lump-sum payment. What Affects Income Phase Payment Amounts? Some of the factors that may affect payment amounts include your age, your gender, your account value, the payment option selected and number of guaranteed payments (if any) selected. Minimum Income Phase Payment Amounts. The payment option you select must result in one or both of the following: > A first payment of at least $50. > Total yearly payments of at least $250. If your account value is too low to meet these minimum payment amounts, you must elect a lump-sum payment. We reserve the right to increase the minimum payment amount based upon increases in the Consumer Price Index--Urban. Payment Start Date. Income phase payments may start any time after the first year of the contract, and will start the later of the annuitant's 85th birthday or the tenth anniversary of your purchase payment, unless you elect otherwise. Regardless of your income phase payment start date, your income phase payments will not begin until you have selected an income phase payment option. Failure to select a payment option by your payment start date, or postponement of the start date past the later of the annuitant's 85th birthday or the tenth anniversary of your purchase payment, may have adverse tax consequences. You should consult with a qualified tax adviser if you are considering either of these courses of action. 18 Payment Length. If you choose a lifetime income phase payment option with guaranteed payments, the age of the annuitant plus the number of years for which payments are guaranteed must not exceed 95 at the time payments begin. Additionally, federal income tax requirements currently applicable to traditional IRAs provide that the period of years guaranteed may not be greater than the joint life expectancies of the payee and his or her designated beneficiary. Charges Deducted. No early withdrawal charge will be applied to amounts used to start income phase payments, although a market value adjustment may be applicable. Market Value Adjustment. If your income phase payments start before the end of your guaranteed term, a market value adjustment will be applied to any amounts used to start income phase payments. If you select a lifetime payment option, only a positive market value adjustment will be applied. See "Market Value Adjustment." Death Benefit During the Income Phase. Upon the death of either the annuitant or the surviving joint annuitant, the amount payable, if any, to your beneficiary depends on the payment option currently in force. Any amounts payable must be paid at least as rapidly as under the method of distribution in effect at the annuitant's death. If you die and you are not the annuitant, any remaining payments will continue to be made to your beneficiary at least as rapidly as under the method of distribution in effect at your death. Taxation. To avoid certain tax penalties, you or your beneficiary must meet the distribution rules imposed by the Tax Code. See "Taxation." continued---> 19 (Income Phase, continued) Income Phase Payment Options The following table lists the income phase payment options and accompanying death benefits that may be available during the income phase. We may offer additional payment options under the contract from time to time. Terms Used in the Tables: Annuitant: The person(s) on whose life expectancy the income phase payments are calculated. Beneficiary: The person designated to receive the death benefit payable under the contract.
- ------------------------------------------------------------------------------------------------------------------------- Lifetime Income Phase Payment Options - ------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as the annuitant lives. It is possible only one payment will be made should the annuitant die prior to the second payment's due date. Life Income Death Benefit--None: All payments end upon the annuitant's death. - ------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as the annuitant lives, with payments guaranteed for your choice of 5, 10, 15, or 20 years, or other periods specified in the contract. Life Income-- Guaranteed Death Benefit: If the annuitant dies before we have made all the guaranteed payments, payments Payments will continue to the beneficiary. - ------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as either annuitant lives. It is possible only one payment will be made should both the annuitant and joint annuitant die before the second payment's due date. Continuing Payments: When you select this option, you will also choose either: Life Income-- (a) 100%, 66-2/3%, or 50% of the payment to continue to the surviving annuitant after the first Two Lives death; or (b) 100% of the payment to continue to the first annuitant on the second annuitant's death, and 50% of the payment to continue to the second annuitant on the first annuitant's death. Death Benefit--None: Payments cease upon the death of both annuitants. - ------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as either annuitant lives, with payments guaranteed for a minimum of 120 months, or other periods specified in the contract. Life Income-- Two Lives-- Continuing Payments: 100% of the payment will continue to the surviving annuitant after the first Guaranteed death. Payments Death Benefit: If both annuitants die before the guaranteed payments have all been paid, payments will continue to the beneficiary. - -------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- Nonlifetime Income Phase Payment Option - ------------------------------------------------------------------------------------------------------------------------- Length of Payments: Payments will continue for your choice of 10 through 30 years (or other periods specified in the contract). Nonlifetime-- Guaranteed Death Benefit: If the annuitant dies before we make all the guaranteed payments, payment will Payments continue to the beneficiary. - -------------------------------------------------------------------------------------------------------------------------
20 Investments - -------------------------------------------------------------------------------- Separate Account. Purchase Payments received under the contract and allocated to guaranteed terms will be deposited to and accounted for in a nonunitized separate account that we established under Connecticut law. A nonunitized separate account is a separate account in which you do not participate in the performance of the assets through unit values or any other interest. Persons allocating amounts to the nonunitized separate account do not receive a unit value of ownership of assets accounted for in the separate account. The assets accrue solely to our benefit and we bear the entire risk of investment gain or loss. All of our obligations due to allocations to the nonunitized separate account are contractual guarantees we have made and are accounted for in the separate account. All of our general assets are available to meet the guarantees under the contracts. However, to the extent provided for in the applicable contracts, assets of the nonunitized separate account are not chargeable with liabilities arising out of any other business we conduct. Income, gains or losses of the separate account are credited to or charged against the assets of the separate account without regard to other income, gains or losses of the Company. Setting Guaranteed Interest Rates. We do not have any specific formula for setting guaranteed interest rates for the guaranteed terms. We expect the guaranteed interest rates to be influenced by, but not necessarily correspond to, yields on fixed income securities we acquire with amounts allocated to the guaranteed terms when the guaranteed interest rates are set. Types of Investments. Our assets will be invested in accordance with the requirements established by applicable state laws regarding the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state, and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, and certain other investments. We intend to invest in assets which, in the aggregate, have characteristics, especially cash flow patterns, reasonably related to the characteristics of the liabilities. Various immunization techniques will be used to achieve the objective of close aggregate matching of assets and liabilities. We will primarily invest in investment-grade fixed income securities including: > Securities issued by the United States Government or its agencies or instrumentalities, which issues may or may not be guaranteed by the United States Government; > Debt securities that are rated, at the time of purchase, within the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating organizations; continued---> 21 (Investments, continued) > Other debt instruments including those issued or guaranteed by banks or bank holding companies and of corporations, which although not rated by Moody's, Standard & Poor's, or other nationally recognized rating organizations, are deemed by the Company's management to have an investment quality comparable to securities which may be purchased as stated above; and > Commercial paper, cash or cash equivalents, and other short-term investments having a maturity of less than one year which are considered by the Company's management to have investment quality comparable to securities which may be purchased as stated above. In addition, we may invest in futures and options. We purchase financial futures and related options and options on securities solely for nonspeculative hedging purposes. In the event securities prices are anticipated to decline, we may sell a futures contract or purchase a put option on futures or securities to protect the value of securities held in or to be sold for the nonunitized separate account. Similarly, if securities prices are expected to rise, we may purchase a futures contract or a call option against anticipated positive cash flow or we may purchase options on securities. While this section generally describes our investment strategy, we are not obligated to invest the assets attributable to the contract according to any particular strategy, except as may be required by Connecticut and other state insurance laws. The guaranteed interest rates we establish need not relate to the investment performance of the nonunitized separate account. 22 [START SIDE BAR] In This Section > Introduction > The Contract > Taxation of Withdrawals and Other Distributions > 10% Penalty Tax > Withholding for Federal Income Tax Liability > Minimum Distribution Requirements > More Rules Specific to IRAs > More Rules Specific to Nonqualified Contracts > Taxation of the Company When consulting a tax adviser, be certain he or she has expertise in the Tax Code sections applicable to your tax concerns. [END SIDE BAR] Taxation - -------------------------------------------------------------------------------- Introduction This section discusses our understanding of current federal income tax laws affecting the contract. You should keep the following in mind when reading it: > Your tax position (or the tax position of the beneficiary, as applicable) determines federal taxation of amounts held or paid out under the contract. > Tax laws change. It is possible a future change could affect contracts issued in the past. > This section addresses federal income tax rules and does not discuss federal estate and gift tax implications, state and local taxes or any other tax provisions. > We do not make any guarantee about the tax treatment of the contract or transactions involving the contract. - -------------------------------------------------------------------------------- We do not intend this information to be tax advice. For advice about the effect of federal income taxes or any other taxes on amounts held or paid out under the contract, consult a tax adviser. - -------------------------------------------------------------------------------- Taxation of Gains Prior to Distribution. You will not generally pay taxes on any earnings from the annuity contract described in this prospectus until they are withdrawn. Tax-qualified retirement arrangements under Tax Code sections 408(b) and 408A also generally defer payment of taxes on earnings until they are withdrawn. (See "Taxation of Withdrawals and Other Distributions" later in this "Taxation" section for a discussion of how distributions under the various types of plans are taxed.) If you are considering funding one of these tax- qualified retirement arrangements with an annuity contract, you should know that the annuity contract does not provide any additional tax deferral of earnings beyond the tax deferral provided by the tax-qualified retirement arrangement. However, annuities do provide other features and benefits which may be valuable to you. You should discuss your alternatives with your financial representative. The Contract The contract is designed for use on a non-tax-qualified basis as a nonqualified contract, or with certain retirement arrangements that qualify under Tax Code sections 408(b) or 408A. The tax rules vary according to whether the contract is a nonqualified contract or used with a retirement arrangement. If used with a retirement arrangement, you need to know the Tax Code section under which your arrangement qualifies. Contact your sales representative or our Home Office to learn which Tax Code section applies to your arrangement. Contract holders are responsible for determining that contributions, distributions and other transactions satisfy applicable laws. Legal counsel and a tax adviser should be consulted regarding the suitability of the contract. continued---> 23 (Taxation, continued) Taxation of Withdrawals and Other Distributions Certain tax rules apply to distributions from the contract. A distribution is any amount taken from the contract including withdrawals, income payments, rollovers, exchanges and death benefit proceeds. We report the taxable portion of all distributions to the IRS. Nonqualified Contracts. A full withdrawal of a nonqualified contract is taxable to the extent the amount received exceeds the investment in the contract. A partial withdrawal is taxable to the extent the account value immediately before the withdrawal exceeds the investment in the contract. In other words, a partial withdrawal is treated first as a withdrawal of taxable earnings. For income phase payments, a portion of each payment that represents the investment in the contract is not taxable. An exclusion ratio is calculated to determine the nontaxable portion. For fixed income phase payments, in general, there is no tax on the portion of each payment which represents the same ratio that the investment in the contract bears to the total dollar amount of the expected payments as defined in Tax Code section 72(c). The entire income phase payment will be taxable once the recipient has recovered the investment in the contract. All deferred nonqualified annuity contracts that are issued by the Company (or its affiliates) to the same contract holder during any calendar year are treated as one annuity contract for purposes of determining the amount includible in gross income under Tax Code section 72(e). In addition, the Treasury Department has specific authority to issue regulations that prevent the avoidance of Tax Code section 72(e) through the serial purchase of annuity contracts or otherwise. 408(b) IRA. All distributions from a 408(b) traditional individual retirement annuity (IRA) are taxed as received unless one of the following applies: > The distribution is rolled over to another traditional IRA or, if the IRA contains only amounts previously rolled over from a 401(a), 401(k), or 403(b) plan, to another plan of the same type. > You made after-tax contributions to the plan. In this case, the distribution will be taxed according to rules detailed in the Tax Code. 408A Roth IRA. A qualified distribution from a Roth IRA is not taxed when it is received. A qualified distribution is a distribution that meets both of the following requirements: > Made after the five-taxable year period beginning with the first taxable year for which a contribution was made. > Made after you attain age 59-1/2, die, become permanently and totally disabled, or for a qualified first-time home purchase. If a distribution is not qualified, the accumulated earnings are taxable. A partial distribution will first be treated as a return of contributions, which is not taxable. Taxation of Death Benefit Proceeds. In general, payments received by your beneficiaries after your death are taxed in the same manner as if you had received those payments. 24 10% Penalty Tax Under certain circumstances, the Tax Code may impose a 10% penalty tax on the taxable portion of any distribution from a nonqualified contract or from a contract used with a 408A Roth IRA or 408(b) traditional IRA. Nonqualified Contract. The 10% penalty tax applies to the taxable portion of a distribution from a nonqualified annuity unless one or more of the following have occurred: > The taxpayer has attained age 59-1/2; > The taxpayer has become disabled within the meaning of the Tax Code; > The contract holder has died; > The distribution is made in substantially equal periodic payments (at least annually) over the life or life expectancy of the taxpayer or the joint lives or joint life expectancies of the taxpayer and beneficiary; or > The distribution is allocable to investment in the contract before August 14, 1982. 408(b) Traditional IRA and 408A Roth IRA. The 10% penalty tax applies to the taxable portion of a distribution from a 408(b) or 408A IRA, unless one or more of the following have occurred: > You have attained age 59-1/2; > You have become disabled within the meaning of the Tax Code; > You have died; > The distribution is rolled over in accordance with the Tax Code; > The distribution is made in substantially equal periodic payments (at least annually) over your life or life expectancy or the joint lives or joint life expectancies of you and your beneficiary; > The distribution is equal to unreimbursed medical expenses that qualify for deduction as specified in the Tax Code; > The distribution is used to pay for health insurance premiums for certain unemployed individuals; > The amount is withdrawn for a first-time home purchase; or > The amount withdrawn is for higher education expenses. These exceptions also apply to a distribution from a Roth IRA that is not a qualified distribution or a rollover to a Roth IRA that is not a qualified rollover contribution. Withholding for Federal Income Tax Liability Any distributions under the contract are generally subject to withholding. Federal income tax liability rates vary according to the type of distribution and the recipient's tax status: > Nonqualified Contracts, 408(b) and 408A IRAs. Generally, you or a beneficiary may elect not to have tax withheld from distributions. > Non-resident Aliens. If you or your beneficiary are a non-resident alien, then any withholding is governed by Tax Code section 1441 based on the individual's citizenship, the country of domicile and treaty status. continued---> 25 (Taxation, continued) Minimum Distribution Requirements If your contract is a 408(b) traditional IRA, to avoid certain tax penalties, you and any beneficiary must meet the minimum distribution requirements imposed by the Tax Code. The requirements do not apply to nonqualified contracts or Roth IRA contracts, except with regard to death benefits. These rules may dictate one or more of the following: > Start date for distributions; > The time period in which all amounts in your account(s) must be distributed; and > Distribution amounts. Start Date. If your contract is a 408(b) IRA, generally you must begin receiving distributions by April 1 of the calendar year following the calendar year in which you attain age 70-1/2. Time Period. We must pay out distributions from 408(b) IRA contracts over a period not longer than one of the following time periods: > Over your life or the joint lives of you and your beneficiary; or > Over a period not greater than your life expectancy or the joint life expectancies of you and your beneficiary. 50% Excise Tax. If you fail to receive the minimum required distribution for any tax year from a 408(b) IRA, a 50% excise tax is imposed on the required amount that was not distributed. Minimum Distribution of Death Benefit Proceeds (Except Nonqualified Contracts). The following applies to 408(b) and 408A IRAs. Different distribution requirements apply if your death occurs: > After you begin receiving minimum distributions under the contract; or > Before you begin receiving such distributions. If your death occurs after you begin receiving minimum distributions under the contract, distributions must be made at least as rapidly as under the method in effect at the time of your death. Tax Code section 401(a)(9) provides specific rules for calculating the minimum required distributions at your death. The rules differ, dependent upon both of the following: > Whether your minimum required distribution was calculated each year based on your single life expectancy or the joint life expectancies of you and your beneficiary; and > Whether life expectancy was recalculated. The rules are complex and any beneficiary should consult with a tax adviser before electing the method of calculation to satisfy the minimum distribution requirements. If your death occurs before you begin receiving minimum distributions under the contract, your entire balance must be distributed by December 31 of the calendar year containing the fifth anniversary of the date of your death. For example, if you die on September 1, 2000, your entire balance must be distributed to the beneficiary by December 31, 2005. However, if the 26 distribution begins by December 31 of the calendar year following the calendar year of your death, then payments may be made in either of the following time-frames: > Over the life of the beneficiary; or > Over a period not extending beyond the life expectancy of the beneficiary. Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, the distribution must begin on or before the later of the following: > December 31 of the calendar year following the calendar year of your death; or > December 31 of the calendar year in which you would have attained age 70-1/2. Special Rule for IRA Spousal Beneficiaries. In lieu of taking a distribution under these rules, a spousal beneficiary may elect to treat the account as his or her own IRA and defer taking a distribution until he or she reaches age 70-1/2. The surviving spouse is deemed to have made such an election if the surviving spouse makes a rollover to or from the account or fails to take a distribution within the required time period. Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts) Death of Contract Holder. The following requirements apply to nonqualified contracts at the death of the contract holder. Different distribution requirements apply if you are the contract holder and your death occurs: > After you begin receiving income phase payments under the contract; or > Before you begin receiving such distributions. If your death occurs after you begin receiving income phase payments, distribution must be made at least as rapidly as under the method in effect at the time of your death. If your death occurs before you begin receiving income phase payments, your entire balance must be distributed within five years after the date of your death. For example, if you die on September 1, 1999, your entire balance must be distributed by August 31, 2004. However, if the distribution begins within one year of your death, then payments may be made in one of the following time-frames: > Over the life of the beneficiary; or > Over a period not extending beyond the life expectancy of the beneficiary. Spousal Beneficiaries. If the beneficiary is your spouse, the account may be continued with the surviving spouse as the new contract holder. Death of Annuitant. If the contract holder is a non-natural person and the annuitant dies, the same rules apply as outlined above for death of the contract holder. If the contract holder is a natural person but not the annuitant and the annuitant dies, the beneficiary must elect an income phase payment option within 60 days of the date of death, or any gain under the contract will be includible in the beneficiary's income in the year the annuitant dies. continued---> 27 (Taxation, continued) More Rules Specific to IRAs Tax Code section 408(b) permits eligible individuals to contribute to an IRA on a pre-tax (deductible) basis. Employers may establish Simplified Employee Pension (SEP) plans and contribute to a traditional IRA owned by the employee. Tax Code section 408A permits eligible individuals to contribute to a Roth IRA on an after-tax (nondeductible) basis. Assignment or Transfer of Contracts. Adverse tax consequences may result if you assign or transfer your interest in the contract to persons other than your spouse incident to a divorce. Eligibility. Eligibility to contribute to a traditional 408(b) IRA on a pre-tax basis or to establish a Roth IRA or to rollover or transfer from a traditional 408(b) IRA to a Roth IRA depends on your adjusted gross income. Rollovers and Transfers. Rollovers and direct transfers are permitted from a 401, 403(a) or a 403(b) arrangement to a traditional 408(b) IRA. Distributions from these arrangements are not permitted to be transferred or rolled over to a Roth IRA. A Roth IRA can accept transfers/rollovers only from a traditional 408(b) IRA, subject to ordinary income tax, or from another Roth IRA. More Rules Specific to Nonqualified Contracts In General. Tax Code section 72 governs taxation of annuities in general. A contract holder under a nonqualified contract who is a natural person generally is not taxed on increases in the account value until distribution occurs by withdrawing all or part of such account value. The taxable portion of a distribution is taxable as ordinary income. Non-Natural Contract Holders of a Nonqualified Contract. If the contract holder is not a natural person, a nonqualified contract generally is not treated as an annuity for income tax purposes and the income on the contract for the taxable year is currently taxable as ordinary income. Income on the contract is any increase over the year in the full withdrawal value, adjusted for purchase payments made during the year, amounts previously distributed and amounts previously included in income. There are some exceptions to the rule and a non-natural person should consult with its tax adviser prior to purchasing this contract. A non-natural person exempt from federal income taxes should consult with its tax adviser regarding treatment of income on the contract for purposes of the unrelated business income tax. When the contract holder is not a natural person, a change in annuitant is treated as the death of the contract holder. Transfers, Assignments or Exchanges of a Nonqualified Contract. A transfer of ownership of a nonqualified contract, the designation of an annuitant, payee or other beneficiary who is not also the contract holder, the selection of certain annuity dates, or the exchange of a contract may result in certain tax consequences. The assignment, pledge, or agreement to assign or pledge any portion of the account value generally will be treated as a distribution. Anyone contemplating any such designation, transfer, assignment, selection, or exchange should contact a tax adviser regarding the potential tax effects of such a transaction. 28 Taxation of the Company We are taxed as a life insurance company under the Tax Code. We own all assets supporting the obligations of the contracts. Any income earned on these assets is considered income to the Company. Other Topics - -------------------------------------------------------------------------------- Contract Distribution We will serve as the principal underwriter for the securities sold by this prospectus. We are registered as a broker-dealer with the SEC and are a member of the National Association of Securities Dealers, Inc. (NASD). As principal underwriter, we will enter into arrangements with one or more registered broker-dealers, including at least one of our affiliates, to offer and sell the contracts described in this prospectus. We call these entities "distributors." We and one or more of our affiliates may also sell the contracts directly. All individuals offering and selling the contracts must be registered representatives of a broker-dealer and must be licensed as insurance agents to sell annuity contracts. Commission Payments. We may pay commissions to persons who offer and sell the contracts. The maximum percentage amount paid with respect to a given purchase payment is 6% of the payment to an account. We may also pay asset-based service fees. Asset-based service fees will not exceed 1-1/4% of the assets held under a contract. Some sales personnel may receive various types of non-cash compensation as special sales incentives, including trips and educational and/or business seminars. However, any such compensation will be paid in accordance with NASD rules. In addition, we may provide additional compensation to our supervisory and other management personnel if the overall investments in funds advised by the Company or our affiliates increases over time. We may reimburse the distributor for certain expenses. The name of the distributor and the registered representative responsible for your account are stated in your application. We pay any commissions and sales related expenses and these are not deducted from payments to your account. We may also contract with independent third party broker-dealers who will act as wholesalers by assisting us in finding broker-dealers interested in acting as distributors of the contracts. These wholesalers may also provide training, marketing and other sales related functions for us and for the distributors and may provide certain administrative services to us in connection with the contracts. We may pay such wholesalers compensation based on purchase payments for the contracts purchased through distributors selected by the wholesaler. We may also designate third parties to provide services in connection with the contracts, such as reviewing applications for completeness and compliance with insurance requirements and providing the distributors with approved marketing material, prospectuses or other supplies. These parties will also receive payments based on purchase payments for their services, to the extent applicable securities laws and NASD rules allow such payments. We will pay all costs and expenses related to these services. 29 Contract Modification Only an authorized officer of the Company may change the terms of the contract. We may change the contract as required by federal or state law. In addition, we may, upon 30 days' written notice to the contract holder, make other changes to group contracts that would apply only to individuals who become participants under that contract after the effective date of such changes. If the group contract holder does not agree to a change, we reserve the right to refuse to establish new accounts under the contract. Certain changes will require the approval of appropriate state or federal regulatory authorities. Transfer of Ownership; Assignment Your rights under a nonqualified contract may be assigned or transferred. An assignment of a contract will only be binding on us if it is made in writing and sent to and accepted by us at our Home Office. We will use reasonable procedures to confirm the assignment is authentic, including verification of signature. If we fail to follow our own procedures, we will be liable for any losses to you directly resulting from the failure. Otherwise, we are not responsible for the validity of any assignment. The rights of the contract holder and the interest of the annuitant and any beneficiary will be subject to the rights of any assignee we have on our records. We reserve the right not to accept any assignment or transfer to a non-natural person. In some cases, an assignment may have adverse tax consequences. You should consult a tax adviser. Involuntary Terminations We reserve the right to terminate any account with a value of $2,500 or less immediately following a partial withdrawal. However, an IRA may only be closed out when payments to the contract have not been received for a 24-month period and the paid-up annuity benefit at maturity would be less than $20 per month. If such right is exercised, you will be given 90 days' advance written notice. No early withdrawal charge will be deducted for involuntary terminations. We do not intend to exercise this right in cases where the account value is reduced to $2,500 or less solely due to investment performance. Legal Matters Counsel of the Company has passed upon the validity of the interests under the contracts offered through this prospectus. Experts We have incorporated by reference into Post Effective Amendment No. 3 to the Registration Statement of which this prospectus is a part and/or into this prospectus: > The balance sheets of the Company as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in shareholder's equity and cash flows and all related schedules for each of the years in the three-year period ended December 31, 1999. > The reports of KPMG LLP. These statements are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. We have relied upon the reports of KPMG LLP, independent certified public accountants, and upon their authority as experts in accounting and auditing. 30 Getting Further Information This prospectus does not contain all of the information contained in the registration statement of which this prospectus is a part. Portions of the registration statement have been omitted from this prospectus as allowed by the Securities and Exchange Commission (SEC). You may obtain the omitted information from the offices of the SEC, as described below. We are required by the Securities Exchange Act of 1934 to file periodic reports and other information with the SEC. You may inspect or copy information concerning the Company at the Public Reference Room of the SEC at: Securities and Exchange Commission 450 Fifth Street NW Washington, DC 20549 You may also obtain copies of these materials at prescribed rates from the Public Reference Room of the above office. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also find more information about the Company at www.aetna.com. A copy of the Company's annual report on Form 10-K for the year ended December 31, 1999 accompanies this prospectus. We refer to Form 10-K for a description of the Company and its business, including financial statements. We intend to send contract holders annual account statements and other such legally required reports. We do not anticipate such reports will include periodic financial statements or information concerning the Company. You can find this prospectus and other information the Company files electronically with the SEC on the SEC'S web site at www.sec.gov. Incorporation of Certain Documents by Reference We have incorporated by reference the Company's latest Annual Report on Form 10-K, as filed with the SEC and in accordance with the Securities and Exchange Act of 1934. The Annual Report must accompany this prospectus. Form 10-K contains additional information about the Company including certified financial statements for the latest fiscal year. We have not filed any other reports pursuant to Sections 13(a) or 15(d) of the Securities and Exchange Act since the end of the fiscal year covered by that Form 10-K. The registration statement for this prospectus incorporates some documents by reference. We will provide a free copy of any such documents upon the written or oral request of anyone who has received this prospectus. We will not include exhibits to those documents unless they are specifically incorporated by reference into the document. Direct requests to: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, CT 06156 1-800-531-4547 Inquiries You may contact us directly by writing or calling us at the address or phone number shown above. 31 Appendix I Calculating a Market Value Adjustment (MVA) - -------------------------------------------------------------------------------- Market Value Adjustment Formula The mathematical formula used to determine the MVA is: x ---- (1 + i) 365 --------- { (1 + j) }
Where: > i is the deposit period yield; > j is the current yield; and > x is the number of days remaining (computed from Wednesday of the week of withdrawal) in a the guaranteed term. We make an adjustment in the formula of the MVA to reflect the period of time remaining in the guaranteed term from the Wednesday of the week of a withdrawal. Explanation of the Market Value Adjustment Formula The MVA essentially involves a comparison of two yields: the yield available at the start of the current guaranteed term of the contract (the deposit period yield) and the yield currently available (the current yield). The MVA depends on the relationship between the following: > The deposit period yield of U.S. Treasury Notes that mature in the last quarter of the guaranteed term; and > The current yield of these U.S. Treasury Notes at the time of withdrawal. If the current yield is the lesser of the two, the MVA will decrease the amount withdrawn from the contract to satisfy the withdrawal request (the MVA will be positive). If the current yield is the higher of the two, the MVA will increase the amount withdrawn from the contract to satisfy the withdrawal request (the MVA will be negative, or detrimental to the investor). As a result of the MVA imposed, the amount withdrawn from the contract prior to the maturity date may be less than the amount paid into the contract. To determine the deposit period yield and the current yield, certain information must be obtained about the prices of outstanding U.S. Treasury Notes. This information may be found each business day in publications such as the Wall Street Journal, which publishes the yield-to-maturity percentages for all Treasury Notes as of the preceding business day. These percentages are used in determining the deposit period yield and the current yield for the MVA calculation. Deposit Period Yield Determining the deposit period yield in the MVA calculation involves consideration of interest rates prevailing at the start of the guaranteed term from which the withdrawal will be made, as follows: > We identify the Treasury Notes that mature in the last three months of the guaranteed term; and > We determine the yield-to-maturity percentages of these Treasury Notes for the last business day of each week in the deposit period. The resulting percentages are then averaged to determine the deposit period yield. The deposit period is the period of time during which the purchase payment or any reinvestment may be made to available guaranteed terms. A deposit period may be a month, a calendar quarter, or any other period of time we specify. 32 Current Yield To determine the current yield, we use the same Treasury Notes identified for the deposit period yield --Treasury Notes that mature in the last three months of the guaranteed term. However, the yield-to-maturity percentages used are those for the last business day of the week preceding the withdrawal. We average these percentages to determine the current yield. Examples of MVA Calculations The following are examples of MVA calculations using several hypothetical deposit period yields and current yields. These examples do not include the effect of any early withdrawal charge that may be assessed under the contract upon withdrawal. Example I. Assumptions: i, the deposit period yield, is 8% j, the current yield, is 10% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x --- (1 + i) 365 ------- MVA = { (1 + j) } 927 (1.08) --- ----- 365 = { (1.10) } = .9545
In this example the deposit period yield of 8% is less than the current yield of 10%, therefore, the MVA is less than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to compensate for the negative MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $2,095.34 withdrawal from the guaranteed term. Assumptions: i, the deposit period yield, is 5% j, the current yield, is 6% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x --- (1 + i) 365 ------- MVA = { (1 + j) } 927 --- (1.05) 365 ----- = { (1.06) } = .9762
In this example the deposit period yield of 5% is less than the current yield of 6%, therefore, the MVA is less than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to compensate for the positive MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $2,048.76 withdrawal from the guaranteed term. continued---> 33 (Appendix I, continued) Example II. Assumptions: i, the deposit period yield, is 10% j, the current yield, is 8% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x --- (1 + i) 365 ------- MVA = { (1 + j) } 927 --- (1.10) 365 ----- = { (1.08) } = 1.0477
In this example the deposit period yield of 10% is greater than the current yield of 8%, therefore, the MVA is greater than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to compensate for the positive MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $1,908.94 withdrawal from the guaranteed term. Assumptions: i, the deposit period yield, is 5% j, the current yield, is 4% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x --- (1 + i) 365 ------- MVA = { (1 + j) } 927 --- (1.05) 365 ----- = { (1.04) } = 1.0246
In this example the deposit period yield of 5% is greater than the current yield of 4%, therefore, the MVA is greater than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to compensate for the positive MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $1,951.98 withdrawal from the guaranteed term. PROS.49593-00 34 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution - ---------------------------------------------------- Not Applicable Item 15. Indemnification of Directors and Officers - -------------------------------------------------- Section 21 of Public Act No. 97-246 of the Connecticut General Assembly (the "Act") provides that a corporation may provide indemnification of or advance expenses to a director, officer, employee or agent only as permitted by Sections 33-770 to 33-778, inclusive, of the Connecticut General Statutes, as amended by Sections 12 to 20, inclusive, of this Act. Reference is hereby made to Section 33-771(e) of the Connecticut General Statutes ("CGS") regarding indemnification of directors and Section 33-776(d) of CGS regarding indemnification of officers, employees and agents of Connecticut corporations. These statutes provide in general that Connecticut corporations incorporated prior to January 1, 1997 shall, except to the extent that their certificate of incorporation expressly provides otherwise, indemnify their directors, officers, employees and agents against "liability" (defined as the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding) when (1) a determination is made pursuant to Section 33-775 that the party seeking indemnification has met the standard of conduct set forth in Section 33-771 or (2) a court has determined that indemnification is appropriate pursuant to Section 33-774. Under Section 33-775, the determination of and the authorization for indemnification are made (a) by the disinterested directors, as defined in Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in the case of indemnification of an officer, agent or employee of the corporation, by the general counsel of the corporation or such other officer(s) as the board of directors may specify. Also, Section 33-772 provides that a corporation shall indemnify an individual who was wholly successful on the merits or otherwise against reasonable expenses incurred by him in connection with a proceeding to which he was a party because he was a director of the corporation. Pursuant to Sections 33-771(d), in the case of a proceeding by or in the right of the corporation or with respect to conduct for which the director, officer, agent or employee was adjudged liable on the basis that he received a financial benefit to which he was not entitled, indemnification is limited to reasonable expenses incurred in connection with the proceeding against the corporation to which the individual was named a party. The statute does specifically authorize a corporation to procure indemnification insurance on behalf of an individual who was a director, officer, employer or agent of the corporation. Consistent with the statute, Aetna Inc. has procured insurance from Lloyd's of London and several major United States excess insurers for its directors and officers and the directors and officers of its subsidiaries, including the Depositor. Item 16. Exhibits - ----------------- (4)(a) Group Annuity Contract (Form No. G1-MGA-95)(1) (4)(b) Individual Annuity Contract (Form No. I1-MGA-95)(2) (4)(c) Certificate (G1CC-MGA-95) to Group Annuity Contract Form No. G1-MGA-95(3) (4)(d) Endorsement (E1-MGAIRA-95-2) to Group Annuity Contract Form No. G1-MGA-95 and Certificate No. G1CC-MGA-95(3) (4)(e) Endorsement (E1-MGAROTH-97) to Group Annuity Contract Form No. G1-MGA-95 and Certificate No. G1CC-MGA-95(3) (5) Opinion as to Legality (10) Material contracts are listed under Item 14(a)10 in the Company's Form 10-K for the fiscal year ended December 31, 1999 (File No. 33-23376), as filed with the commission on March 22, 2000. Each of the Exhibits so listed is incorporated by reference as indicated in the Form 10-K (13) Aetna Life Insurance and Annuity Company Form 10-K for the fiscal year ended December 31, 1999 (23)(a) Consent of Independent Auditors (23)(b) Consent of Legal Counsel (included in Exhibit (5) above) (24)(a) Powers of Attorney(4) (24)(b) Certificate of Resolution Authorizing Signature by Power of Attorney(5) (27) Financial Data Schedule Exhibits other than these listed are omitted because they are not required or are not applicable. 1. Incorporated by reference to the Registration Statement on Form S-2 (File No. 33-64331), as filed 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 on January 17, 1996. 3. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-2 (File No. 33-64331), as filed on November 24, 1997. 4. Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000. 5. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 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. Item 18. Financial Statements and Schedules - ------------------------------------------- Not Applicable SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Post-Effective Amendment No. 3 to the Registration Statement on Form S-2 (File No. 333-49593) to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hartford, State of Connecticut, on this 4th day of April, 2000. AETNA LIFE INSURANCE AND ANNUITY COMPANY (REGISTRANT) By: Thomas J. McInerney* ------------------------------------------ Thomas J. McInerney President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 3 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- Thomas J. McInerney* Director and President ) - -------------------------- (principal executive officer) ) Thomas J. McInerney ) ) Catherine H. Smith* Director and Chief Financial Officer ) - -------------------------- ) April Catherine H. Smith ) 4, 2000 ) Shaun P. Mathews* Director ) - -------------------------- ) Shaun P. Mathews ) ) Deborah Koltenuk* Vice President, Corporate Controller, and ) - -------------------------- Assistant Treasurer ) Deborah Koltenuk )
By: /s/ Michael A. Pignatella -------------------------- Michael A. Pignatella *Attorney-in-Fact Exhibit Index
Exhibit No. Exhibit - ----------- ------- 16(5) Opinion re: Legality ---------- Aetna Life Insurance and Annuity Company Form 10-K for 16(13) the fiscal year ended December 31, 1999 ---------- 16(23)(a) Consent of Independent Auditors ---------- 16(23)(b) Consent of Legal Counsel (included in Exhibit 16(5) above) ---------- 16(27) Financial Data Schedule ----------
EX-99.B.16(5) 2 OPINION OF COUNSEL [Aetna logo] Aetna Inc. Financial Services 151 Farmington Avenue Hartford, CT 06156-8975 Michael A. Pignatella Counsel AFS Law, TS31 April 4, 2000 (860) 273-0261 Fax: (860) 273-9407 Securities and Exchange Commission 450 Fifth Street N.W. Washington, DC 20549 Re: Aetna Life Insurance and Annuity Company Post-Effective Amendment No. 3 to Registration Statement on Form S-2 Prospectus Title: Aetna Multi-Rate Annuity File No.: 333-49593 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 "Multi-Rate Annuity"), a multi-rate interest option available under certain variable annuity contracts, and the Form S-2 Registration Statement relating to such account. In connection with this opinion, I have reviewed the Registration Statement on Form S-2 for the Multi-Rate Annuity, including the prospectus, and relevant proceedings of the Board of Directors. Based upon this review, and assuming the securities represented by the Multi-Rate Annuity 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. Sincerely, /s/ Michael A. Pignatella - ------------------------- Michael A. Pignatella Counsel EX-99.B.16(13) 3 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 Commission file number 33-23376 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) 273-0123 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 29, 2000 there were 55,000 shares of common stock outstanding, par value $50 per share, all of which shares were held by Aetna Retirement Holdings, Inc. Reduced Disclosure Format: - -------------------------- The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Annual Report on Form 10-K For the year ended December 31, 1999 TABLE OF CONTENTS
Form 10-K Item No. Page - ------------- ---- PART I Item 1. Business** ................................................... 3 Item 2. Properties** ................................................. 12 Item 3. Legal Proceedings ............................................ 12 Item 4. Submission of Matters to a Vote of Security Holders* ......... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .......................................... 13 Item 6. Selected Financial Data* ..................................... 13 Item 7. Management's Analysis of the Results of Operations** ......... 13 Item 7A. Quantitative and Qualitative Disclosure About Market Risk .... 25 Item 8. Financial Statements and Supplementary Data .................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................... 58 PART III Item 10. Directors and Executive Officers of the Registrant* .......... 58 Item 11. Executive Compensation* ...................................... 58 Item 12. Security Ownership of Certain Beneficial Owners and Management*.. ................................................ 58 Item 13. Certain Relationships and Related Transactions* .............. 58 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K ...................................... 58 Index to Consolidated Financial Statement Schedules .......... 64 Signatures ................................................... 69
* Item omitted pursuant to General Instruction I(2) of Form 10-K ** Item prepared in accordance with General Instruction I(2) of Form 10-K 2 PART I Item 1. Business A. Organization of Business Aetna Life Insurance and Annuity Company ("ALIAC") is a Connecticut stock life insurance company which was originally organized in 1976. ALIAC, together with its wholly owned subsidiaries, Aetna Insurance Company of America ("AICA") and Aetna Investment Adviser Holding Company, Inc. is herein called the "Company". ALIAC is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI") whose ultimate parent is Aetna Inc. (together with its subsidiaries, "Aetna"). On July 1, 1999, HOLDCO contributed Aetna Investment Adviser Holding Company, Inc., and its subsidiaries (collectively, "IA Holdco") to the Company (refer to Note 2 of Notes to Consolidated Financial Statements). As a result, the Company has two business segments: Financial Products and Investment Management Services. On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln National Corporation ("Lincoln") and accordingly, such business was classified as Discontinued Operations. See "Overview" in Management's Analysis of the Results of Operations and Note 3 of Notes to Consolidated Financial Statements for further discussion on the sale. Financial Products Products and Services The Financial Products segment includes annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, nonqualified annuity contracts and mutual funds. Annuity contracts may be deferred or immediate ("payout annuities"). These products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, including mutual funds (both Company and nonaffiliated mutual funds), and variable and fixed investment options. Financial Products may also include wrapper agreements entered into with retirement plans which contain certain benefit responsive guarantees (i.e. liquidity guarantees of principal and previously accrued interest for benefits paid under the terms of the plan) with respect to portfolios of plan-owned assets not invested with the Company. Financial Products also include investment advisory services and pension plan administrative services. Investment Options The Financial Products segment offers customers products that contain variable and/or fixed investment options. Variable options and mutual funds generally provide for full assumption (and, in limited cases, provide for partial assumption) by the customer of investment risks. Assets supporting variable annuity options are held in separate accounts that invest in Company mutual funds and/or unaffiliated mutual funds. Company mutual funds include funds managed by Aeltus Investment Management, Inc. ("Aeltus"), an indirect wholly owned subsidiary of ALIAC, and, 3 Item 1. Business. (continued) Financial Products (continued) beginning in November 1997, funds managed by ALIAC and subadvised by outside investment advisors. Variable separate account investment income and realized capital gains and losses are not reflected in the Company's consolidated statements of income. Fixed options can be either "fully-guaranteed" or "experience-rated". Fully-guaranteed options provide guarantees on investment return, maturity values and, if applicable, benefit payments. Experience-rated options require the customer to assume investment (including realized capital gains and losses) and other risks subject to, among other things, certain minimum guarantees. As long as minimum guarantees are not triggered, the effect of experience-rated products' investment performance does not impact the Company's consolidated results. Fees and Investment Margins Insurance charges, investment management or other fees earned by the Company vary by product and depend on, among other factors, the funding option selected by the customer under the product. For annuity products where assets are allocated to variable funding options, the Company may charge the separate account an asset-based insurance and expense fee. In addition, where the customer selects a Company mutual fund as a variable funding option, the Company receives a participation fee from Aeltus and, in the case of those funds advised by ALIAC and subadvised by outside managers, the Company receives an investment advisory fee from the fund and pays a subadvisory fee to the fund manager. This participation fee is eliminated in the computation of the Company's consolidated earnings. (Refer to Note 11 of Notes to Consolidated Financial Statements for information on other related party fees.) For unaffiliated mutual funds, the Company receives distribution fees and/or expense reimbursements. For fixed funding options, the Company earns an investment margin, which is based on the difference between income earned on the investments supporting the liability and interest credited to customers. The Company may also receive other fees or charges depending on the nature of the products. Assets Under Management and Administration The substantial portion of the Company's fees or other charges and investment margins are based on assets under management. Assets under management are principally affected by net deposits (i.e., deposits, including new contracts, less surrenders), investment growth (e.g., interest credited to customer accounts for fixed options or market performance for variable options) and customer retention. Financial Products' assets under management, excluding net unrealized capital gains and losses on debt securities that support fixed annuities, were $54.5 billion, $44.2 billion and $37.2 billion at December 31, 1999, 1998, and 1997, respectively. Financial Products' assets under management include assets which are also reported in the Investment Management Services segment. Both segments report certain assets under management because they each earn a different component of the revenue derived from these assets. Refer to "Overview-Continuing Operations" in Management's Analysis of the Results of Operations for the elimination adjustment required to calculate consolidated assets under management. Approximately 95% and 94% of assets under management at December 31, 1999 and 1998, respectively, allowed for contractholder withdrawal. Approximately 85% and 81% of assets under 4 Item 1. Business. (continued) Financial Products (continued) management at December 31, 1999 and 1998, respectively, are subject to market value adjustments and/or deferred surrender charges. To encourage customer retention and recover acquisition expenses, contracts typically impose a surrender charge on policyholder balances withdrawn within a period of time after the contract's inception. The period of time and level of the charge vary by product. This charge may be waived from time to time at the Company's discretion. In addition, an approach incorporated into recent variable annuity contracts with fixed funding options allows contractholders to receive an incremental interest rate if withdrawals from the fixed account are spread over a period of five years. Further, more favorable credited rates may be offered after policies have been in force for a period of time. Existing tax penalties on annuity and certain custodial account distributions prior to age 591/2 provide further disincentive to customers for premature surrenders of account balances, but generally do not impede transfers of those balances to products of competitors. The following table summarizes assets under management for the principal customer groups of the Financial Products segment excluding net unrealized capital losses and gains related to fair value adjustments required under Financial Accounting Standard ("FAS") No. 115. Refer to "Overview" and "Financial Products" in Management's Analysis of the Results of Operations for further discussion of assets under management.
- -------------------------------------------------------------------------------- (Millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Corporate pensions $ 15,806.9 $ 13,603.5 $ 10,955.8 Not-for-profit organizations 24,434.6 19,333.8 16,828.8 Individuals 14,284.8 11,261.1 9,394.6 - -------------------------------------------------------------------------------- Total (1) $ 54,526.3 $ 44,198.4 $ 37,179.2 - --------------------------------------------------------------------------------
(1) Excludes net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million and $471.3 million at December 31, 1998 and 1997, respectively. Deposits, which are not included in premiums or revenue, are shown in the following table:
- -------------------------------------------------------------------------------- (Millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Corporate pensions $ 2,444.2 $ 1,871.0 $ 1,634.6 Not-for-profit organizations 2,638.7 1,591.7 1,404.4 Individuals 1,824.8 1,305.6 1,443.6 - -------------------------------------------------------------------------------- Total $ 6,907.7 $ 4,768.3 $ 4,482.6 - --------------------------------------------------------------------------------
A portion of the segment's fee revenue is also based on assets under administration. Assets under administration are assets for which the Company provides administrative services only. Assets under administration were $4.4 billion at December 31, 1999, $2.9 billion at December 31, 1998 and $2.3 billion at December 31, 1997. Principal Markets and Method of Distribution Products and services of the Financial Products segment are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, 5 Item 1. Business. (continued) Financial Products (continued) education (collectively "not-for-profit" organizations) and corporate markets. The Company's products generally are sold through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents and financial planners. Competition Competition arises from other insurance companies and from an array of financial services companies including banks and mutual funds, as well as other investment managers. Principal competitive factors are reputation for investment performance, product features, service, cost and the perceived financial strength of the investment manager or sponsor. Competition may affect, among other matters, both business growth and the pricing of the Company's products and services. Reserves Reserves for limited payment contracts (i.e. annuities with life contingent payout) are computed on the basis of assumed investment yield, mortality, and expenses including a margin for adverse deviation. The assumptions vary by plan, year of issue and policy duration. Reserves for investment contracts (i.e. deferred annuities and immediate annuities without life contingent payouts) are equal to cumulative deposits plus credited interest for fixed options less withdrawals and charges thereon. Of those investment contracts which are experience-rated, the reserves also reflect net realized capital gains/losses, which the Company reflects through credited rates on an amortized basis, and unrealized capital gains/losses related to FAS No. 115. Reserves, as described above, are computed amounts that, with additions from premiums and deposits to be received and with interest on such reserves compounded annually at assumed rates, are expected to be sufficient to meet the Company's policy obligations at their maturities or to pay expected death or retirement benefits or other withdrawal requests. Investment Management Services The Investment Management Services segment primarily consists of the operations of Aeltus, the primary operating subsidiary of IA Holdco, which has two wholly-owned operating subsidiaries: Aeltus Capital, Inc. ("ACI"), a broker dealer, and Aeltus Trust Company ("ATC"), a limited purpose banking entity. IA Holdco was contributed to ALIAC on July 1, 1999 by HOLDCO. Refer to Note 2 of Notes to Consolidated Financial Statements. Products and Services Investment Management Services provides investment advisory services to affiliated and unaffiliated institutional and retail clients on a fee-for-service basis; underwriting services to the Aetna Series Fund, Inc.; distribution services for other Aetna products; and trustee, administrative and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian. 6 Item 1. Business. (continued) Investment Management Services (continued) Fees Investment management fees earned by the Company depend primarily on the investment style (e.g. equity vs. fixed income) and the service level (e.g. asset allocation service) selected by the client, as well as the size (measured by assets under management) of the account. Fees are generated by client money invested in advisory accounts, individual and pooled trust accounts, collateralized bond obligations, affiliated mutual funds and separate accounts, and the general account assets of ALIAC and AICA, which collectively represent substantially all assets under management. Assets Under Management Fee income is substantially derived from a charge assessed on assets under management. Assets under management are principally affected by net deposits (i.e., deposits, including new contracts, less surrenders), market performance and customer retention. Investment Management Services' assets under management, excluding net unrealized capital gains and losses on debt securities that support fixed annuities, were $55.0 billion, $47.8 billion and $41.5 billion at December 31, 1999, 1998, and 1997, respectively. Investment Management Services' assets under management include assets which are also reported in the Financial Products segment. Both segments report certain assets under management because they each earn a different component of the revenue derived from these assets. Refer to "Overview-Continuing Operations" in Management's Analysis of the Results of Operations for the elimination adjustment required to calculate consolidated assets under management. Substantially all assets under management invested through the products of the Investment Management Services segment at December 31, 1999 and 1998 allowed for contractholder withdrawal subject to market value adjustments and/or deferred contingent sales charges. Collaterized bond obligations managed by the segment are generally not withdrawable. To encourage customer retention and recover acquisition expenses, certain mutual fund assets under management are subject to deferred contingent sales charges on balances withdrawn within a period of time after contribution to the fund. This charge may be waived from time to time at the Company's discretion. For withdrawal characteristics on assets under management invested through the Financial Products segment, refer to "Financial Products". The following table summarizes assets under management for the principal business channels of the Investment Management Services segment. Amounts reflected exclude net unrealized capital losses and gains related to fair value adjustments required by FAS No. 115. Refer to "Overview" and "Investment Management Services" in Management's Analysis of the Results of Operations for further discussion on assets under management. 7 Item 1. Business. (continued) Investment Management Services (continued)
- ----------------------------------------------------------------------------------------- (Millions) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Retail mutual funds $ 1,447.7 $ 616.6 $ 564.6 Plan sponsored (1) 14,244.5 11,581.5 10,273.7 Collateralized bond obligations and other 2,338.3 1,770.5 711.3 - ----------------------------------------------------------------------------------------- Subtotal $ 18,030.5 $ 13,968.6 $ 11,549.6 - ----------------------------------------------------------------------------------------- Invested through products of the Financial Products segment: Variable annuity mutual funds $ 18,144.2 $ 15,423.3 $ 12,996.9 Fixed annuities (2) 12,641.1 12,131.1 12,056.3 Plan sponsored and other 6,180.4 6,265.1 4,896.8 - ----------------------------------------------------------------------------------------- Subtotal 36,965.7 33,819.5 29,950.0 - ----------------------------------------------------------------------------------------- Total $ 54,996.2 $ 47,788.1 $ 41,499.6 =========================================================================================
(1) Includes $6,986.3 million, $7,809.3 million and $7,679.1 million of assets managed for Aetna Life Insurance Company, an affiliate of the Company, as of December 31, 1999, 1998 and 1997, respectively. (2) Excludes net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million and $471.3 million at December 31, 1998 and 1997, respectively. Principal Markets and Method of Distribution Products and services of the Investment Management Services segment are offered primarily to pension plans (e.g., corporate, public, health care, religious), non-profit (e.g., endowments, foundations), taxable entities (e.g., corporate, health care), corporate sponsored retirement plans and individual investors. The Company's products are sold through an in-house sales force utilizing consultant relationships, affiliated and unaffiliated brokers, banks, and financial planners. Competition Competition arises from an array of financial services companies including banks, mutual funds and other investment managers. Principal competitive factors are reputation for investment performance, product features, service, cost and the perceived financial strength of the investment manager or sponsor. Competition may affect, among other matters, both business growth and the pricing of the Company's products and services. Discontinued Operations--Domestic Individual Life Insurance Products and Services Discontinued Operations include universal life and variable universal life products, which have both life insurance and investment characteristics, traditional whole life and term insurance. Life Insurance In Force and Other Statistical Data The table below summarizes nonparticipating life insurance in force before deductions for reinsurance ceded to other companies. As a result of the sale of the Company's domestic individual 8 Item 1. Business. (continued) Discontinued Operations--Domestic Individual Life Insurance (continued) life insurance business on October 1, 1998, substantially all of the in force amounts shown in the table for the years 1999 and 1998 have been ceded to Lincoln.
- --------------------------------------------------------------------------------------- (Billions, except as noted below) 1999 1998 1997 - --------------------------------------------------------------------------------------- In force, end of year Direct: Permanent $ 36.1 $ 37.8 $ 37.1 Term 3.6 5.1 5.0 Assumed: Permanent .9 .9 1.0 Term 1.5 1.6 1.0 - --------------------------------------------------------------------------------------- Total $ 42.1 $ 45.4 $ 44.1 ======================================================================================= Number of direct policies in force, end of year (thousands) 390.2 419.8 452.5 ======================================================================================= Average size of direct policy in force, end of year (thousands) $ 101.7 $ 102.2 $ 93.1 =======================================================================================
Assets Under Management No assets under management were reported for the years ended December 31, 1999 and 1998 due to the sale of the domestic individual life business to Lincoln on October 1, 1998. Assets under management, excluding net unrealized capital gains on debt securities related to the fair value adjustments required under FAS No. 115, were $2.7 billion at December 31, 1997. Reserves Prior to the sale of the domestic individual life insurance business on October 1, 1998, reserves for universal life products were equal to cumulative deposits less withdrawals and charges plus credited interest for fixed options thereon, plus/less net realized capital gains/losses (which the Company reflected through credited rates on an amortized basis). These reserves also included net unrealized capital gains/losses related to FAS No. 115. As a result of the sale and transfer of assets supporting the business, reserves for universal life products will no longer include net realized capital gains/losses and unrealized capital gains/losses related to FAS No. 115 for the years ended December 31, 1998 and beyond. Reserves for all other fixed individual life contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses including a margin for adverse deviation. These assumptions vary by plan, year of issue and policy duration. Because the sale of the domestic individual life business was substantially in the form of an indemnity reinsurance agreement, the Company reported an addition to its reinsurance recoverable approximating the total domestic individual life insurance reserves at the sale date. Reserves, as described above, are computed amounts that, with additions from premiums and deposits to be received and with interest on such reserves compounded annually at assumed rates, 9 Item 1. Business. (continued) Discontinued Operations--Domestic Individual Life Insurance (continued) are expected to be sufficient to meet the Company's policy obligations at their maturities or to pay expected death or retirement benefits or other withdrawal requests. General Account Investments Consistent with the nature of the contract obligations involved in the Company's operations, the majority of the general account assets are invested in long-term debt securities such as: U.S. corporate debt securities, residential mortgage-backed securities, foreign government and foreign corporate debt securities, commercial and multifamily mortgage-backed securities, other asset-backed securities and U.S. government securities. It is management's objective that the portfolios be of high quality while achieving competitive investment yields and returns. Investment portfolios generally match the duration of the insurance liabilities they support. The general account of the Company has been segmented to improve the asset/liability matching process. The duration of investments is monitored and security purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's maturing liabilities. See "General Account Investments" in Management's Analysis of the Results of Operations for a further discussion of investments. Other Matters a. Regulation The Company's operations are subject to comprehensive regulation throughout the United States. The laws of the various jurisdictions establish supervisory agencies, including the state insurance departments, with broad authority to grant licenses to transact business and regulate many aspects of the products and services offered by the Company, as well as solvency and reserve adequacy. Many agencies also regulate investment activities on the basis of quality, diversification, and other quantitative criteria. The Company's operations and accounts are subject to examination at regular intervals by certain of these regulators. Operations conducted by the Company are subject to regulation by various insurance agencies where the Company conducts business, in particular the insurance departments of Connecticut and New York. Among other matters, these agencies may regulate premium rates, trade practices, agent licensing, policy forms, underwriting and claims practices and the maximum interest rates that can be charged on policy loans. The Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD") and, to a lesser extent, the states regulate the sales and investment management activities and operations of the Company. Regulations of the SEC, Department of Labor ("DOL") and Internal Revenue Service also impact certain of the Company's annuity, life insurance and other investment and retirement products. These products involve Separate Accounts and mutual funds registered under the Investment Company Act of 1940. 10 Item 1. Business. (continued) Other Matters (continued) Federal Employee Benefit Regulation The Company provides a variety of products and services to employee benefit plans that are covered by the Employee Retirement Income Security Act of 1974 ("ERISA"). In December 1993, in a case involving an employee benefit plan and an insurance company, the United States Supreme Court ruled that assets in the insurance company's general account that were attributable to a portion of a group pension contract issued to the plan that was not a "guaranteed benefit policy" were "plan assets" for purposes of ERISA and that the insurance company had fiduciary responsibility with respect to those assets. In reaching its decision, the Court declined to follow a 1975 DOL interpretive bulletin that had suggested that insurance company general account assets were not plan assets. The Small Business Job Protection Act (the "Act"), was signed into law in 1996. The Act created a framework for resolving potential issues raised by the Supreme Court decision. The Act provides that, absent criminal conduct, insurers generally will not have liability with respect to general account assets held under contracts that are not guaranteed benefit policies based on claims that those assets are plan assets. The relief afforded extends to conduct that occurred before the date that is eighteen months after the DOL issues final regulations required by the Act, except as provided in the anti-avoidance portion of the regulations. The regulations, which were issued on January 5, 2000, address ERISA's application to the general account assets of insurers attributable to policies issued on or before December 31, 1998 that are not guaranteed benefit policies. The conference report relating to the Act states that policies issued after December 31, 1998 that are not guaranteed benefit policies will be subject to ERISA's fiduciary obligations. The Company is not currently able to predict how these matters may ultimately affect its businesses. Insurance Holding Company Laws A number of states, including Connecticut, regulate affiliated groups of insurers such as the Company under holding company statutes. These laws, among other things, place certain restrictions on transactions between affiliates such as dividends and other distributions that may be paid to the Company's parent corporation. For information regarding payments of dividends by the Company, refer to "Liquidity & Capital Resources" in Management's Analysis of the Results of Operations and Note 7 of Notes to Consolidated Financial Statements. Insurance Company Guaranty Fund Assessments Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. There were no material charges to earnings for guaranty fund obligations during 1999, 1998 and 1997. While the Company has historically recovered more than half of its guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future efforts to recover such assessments. For information regarding certain other potential regulatory changes relating to the Company's 11 Item 1. Business. (continued) Other Matters (continued) businesses, see Management's Analysis of the Results of Operations-- Forward-Looking Information/Risk Factors (Refer to Note 1 of Notes to Consolidated Financial Statements for new accounting standards related to guaranty fund assessments.) b. Ratings The Company's financial strength ratings at October 27, 1999 and March 21, 2000 are as follows:
Rating Agencies ---------------------------------------------------------- Duff & Moody's Standard & A.M. Best Phelps Investors Service Poor's - --------------------------------------------------------------------------------- October 27, 1999 A AA Aa3 AA- March 21, 2000 (1) A AA Aa3 AA- - ---------------------------------------------------------------------------------
(1) A. M. Best has placed the Company's rating under review with developing implications. Duff & Phelps has placed the Company's rating on "Rating Watch - Uncertain". Moody's Investors Service has the Company's rating on review, direction uncertain. Standard & Poor's has the Company's rating on Credit Watch with "developing" implications. c. Miscellaneous The Company had approximately 2,900 employees at December 31, 1999. Management believes that the Company's computer facilities, systems and related procedures are adequate to meet its business needs. The Company's data processing systems and backup and security policies, practices and procedures are regularly evaluated by the Company's management and internal auditors and are modified as considered necessary. See Management's Analysis of the Results of Operations for information regarding the Company's Year 2000 status. The Company is not dependent upon any single customer and no single customer accounted for more than 10% of consolidated revenue in 1999. In addition, the loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the earnings of the Company. Item 2. Properties. The Company's home office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. All Company office space is owned or leased by Aetna Life Insurance Company ("Aetna Life") or other affiliates. Expenses associated with these offices are allocated on a direct and indirect basis to the Company and the other subsidiaries of Aetna. Item 3. Legal Proceedings. The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related services established, it is not expected to result in liability for amounts material to the 12 Item 3. Legal Proceedings (continued) financial condition of the Company, although it may adversely affect results of operations in future periods. Item 4. Submission of Matters to a Vote of Security Holders. Omitted pursuant to General Instruction I(2)(c) of Form 10-K. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. All of the Company's outstanding shares are directly owned by HOLDCO, which is a wholly owned subsidiary of ARSI whose ultimate parent is Aetna. The shares were contributed to HOLDCO in 1996 from ARSI. The Company paid $255 million, $570 million and $34 million in cash dividends to HOLDCO in 1999, 1998 and 1997, respectively. Of the $255 million paid in 1999, $206 million was accrued for in 1998. Of the $776 million dividends paid or accrued in 1998, $756 million (all of which was approved by the Insurance Commissioner of the State of Connecticut) was attributable to proceeds from the sale of the domestic individual life insurance business. The Company may not pay distributions, including dividends, to HOLDCO in excess of a statutory limit unless approved in advance by the Insurance Commissioner of the State of Connecticut. As of March 21, 2000, the Company had not exceeded such statutory limit. The Company received no capital contributions in 1999. In 1998, the Company received a capital contribution of approximately $9 million in cash from HOLDCO. In 1997, the Company returned capital of $5 million to HOLDCO. Item 6. Selected Financial Data. Omitted Pursuant to General Instruction I(2)(a) of Form 10-K. Item 7. Management's Analysis of the Results of Operations. Management's narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction I(2)(a) of Form 10-K. Overview Recent Developments On February 25, 2000, William H. Donaldson became Chairman, President and Chief Executive Officer of Aetna Inc. He replaced Richard L. Huber, who resigned. On March 12, 2000, Aetna Inc. announced that, among other things, it plans to separate its global health and global financial 13 Item 7. Management's Analysis of the Results of Operations. (continued) Overview (continued) services businesses into two independent publicly traded companies as soon as an orderly separation can be achieved. Sale of the Domestic Individual Life Insurance Business On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The sale resulted in an after-tax gain of approximately $117 million. Since the principal agreement to sell this business was generally in the form of an indemnity reinsurance arrangement, the Company deferred approximately $58 million of the gain and was recognizing it over approximately 15 years. Approximately $5 million of the deferred gain was recognized during 1999. During the fourth quarter of 1999, the Company refined certain accrual and tax estimates which had been established in connection with the recording of the deferred gain. As a result, the deferred gain was increased by $12 million (after tax) to $65 million at December 31, 1999. The remaining deferred gain will be recognized over approximately 14 years. Revenues from the business sold were $652 million for 1998 through the sale date, $620 million for 1997. For more details about the transaction and the indemnity reinsurance arrangement, refer to Note 3 of Notes to Consolidated Financial Statements. Consolidated Results Consolidated results include results from continuing operations and discontinued operations. Continuing operations is comprised of the Financial Products and Investment Management Services segments plus certain items not directly allocable to the business segments. Discontinued Operations is comprised of the domestic individual life insurance business. All prior year income statement data has been restated to reflect the presentation as Discontinued Operations. Continuing Operations Income from continuing operations increased $9 million and $4 million in 1999 and 1998, respectively. Income from continuing operations includes Year 2000 costs of $18 million in 1999 and $22 million in 1998. Excluding Year 2000 costs, net realized capital losses of $14 million in 1999 and net realized capital gains of $7 million and $19 million in 1998 and 1997, respectively, earnings from continuing operations increased $26 million in 1999 and $39 million in 1998. The increases in 1999 and 1998 earnings primarily reflect increased fee income from higher levels of assets under management and administration. Assets under management and administration for continuing operations are shown in the table below. Because Financial Products and Investment Management Services report different components of the revenues generated by a particular group of assets under management, this group of assets is included in the assets reported by both segments. These assets must be eliminated from combined segment assets to determine the consolidated assets under management of the Company. 14 Item 7. Management's Analysis of the Results of Operations. (continued) Overview (continued)
(Millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------- Assets under management: Financial Products $ 54,526.3 $ 44,198.4 $ 37,179.2 Investment Management Services (1) 54,996.2 47,788.1 41,499.6 Consolidating adjustment (2) (36,965.7) (33,819.5) (29,950.0) - --------------------------------------------------------------------------------------------- Total--assets under management (3) (4) $ 72,556.8 $ 58,167.0 $ 48,728.8 - --------------------------------------------------------------------------------------------- Assets under administration: (5) Financial Products $ 4,441.7 $ 2,860.1 $ 2,285.8 - --------------------------------------------------------------------------------------------- Assets under management and administration $ 76,998.5 $ 61,027.1 $ 51,014.6 =============================================================================================
(1) Includes $6,986.3 million, $7,809.3 million and $7,679.1 million of assets managed for Aetna Life Insurance Company, an affiliate of the Company, as of December 31, 1999, 1998 and 1997, respectively. (2) Represents consolidating adjustment related to the assets under management reported by both the Financial Products and Investment Management segments. (3) Includes $13,472.4 million, $7,467.5 million and $5,070.0 million at December 31, 1999, 1998 and 1997, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (4) Excludes net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million and $471.3 million at December 31, 1998 and 1997, respectively. (5) Represents assets for which the Company provides administrative services only. Outlook The Company's strategy is to increase assets under management and administration and improve profitability by focusing on strategic markets and products in its businesses. In doing so, the Company may take a variety of actions intended to improve its investment and product management, marketing, distribution and customer service. For example, the Company plans to improve its operational efficiency and further leverage and expand its internet capability over time through increased spending for improved technology and operating platforms. The Company also anticipates enhancing its product distribution capabilities through adding new sales representatives and increasing relationships with advisors, brokers and wholesalers. The Company also may seek acquisitions or divestitures in order to align its businesses with strategic and financial targets or build scale. See "Forward-Looking Information/Risk Factors" regarding other important factors that may materially affect the Company. 15 Item 7. Management's Analysis of the Results of Operations. (continued) Financial Products Operating Summary
(Millions) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Premiums (1) $ 107.5 $ 79.4 $ 69.1 Charges assessed against policyholders 388.3 324.3 262.0 Net investment income 881.5 865.3 876.7 Net realized capital (losses) gains (21.5) 10.4 29.7 Other income 55.3 41.9 40.4 - ----------------------------------------------------------------------------------------------------------------- Total revenue 1,411.1 1,321.3 1,277.9 - ----------------------------------------------------------------------------------------------------------------- Current and future benefits 746.2 714.4 720.4 Operating expenses 306.4 281.3 286.5 Amortization of deferred policy acquisition costs 93.4 80.3 57.2 - ----------------------------------------------------------------------------------------------------------------- Total benefits and expenses 1,146.0 1,076.0 1,064.1 - ----------------------------------------------------------------------------------------------------------------- Income from operations before income taxes 265.1 245.3 213.8 Income taxes 87.0 67.7 59.7 - ----------------------------------------------------------------------------------------------------------------- Net income (2) $ 178.1 $ 177.6 $ 154.1 ================================================================================================================= Net realized capital (losses) gains, net of tax (included above) $ (14.0) $ 7.3 $ 19.2 ================================================================================================================= Deposits (not included in premiums above) Annuities--fixed options $ 1,973.2 $ 1,125.6 $ 1,191.4 Annuities--variable options 4,934.5 3,642.7 3,291.2 - ----------------------------------------------------------------------------------------------------------------- Total--deposits $ 6,907.7 $ 4,768.3 $ 4,482.6 ================================================================================================================= Assets Under Management (3) Annuities--fixed options (4) $ 12,641.1 $ 12,131.1 $ 12,056.3 Annuities--variable options (5) 35,352.9 25,527.0 20,076.9 - ----------------------------------------------------------------------------------------------------------------- Subtotal--annuities 47,994.0 37,658.1 32,133.2 Plan Sponsored and Other 6,532.3 6,540.3 5,046.0 - ----------------------------------------------------------------------------------------------------------------- Total--assets under management 54,526.3 44,198.4 37,179.2 Assets under administration (6) 4,441.7 2,860.1 2,285.8 - ----------------------------------------------------------------------------------------------------------------- Total assets under management and administration $ 58,968.0 $ 47,058.5 $ 39,465.0 =================================================================================================================
(1) Includes $71.5 million in 1999, $67.4 million in 1998 and $64.8 million in 1997 for annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies. (2) Year 2000 costs are not allocated to segment operating expenses; and, therefore, excluded in the determination of segment net income. (3) Includes $36,965.7 million, $33,819.5 million and $29,950.0 million of assets under management that are also reported in the Investment Management Services segment (refer to the assets under management section of "Overview"). (4) Excludes net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million and $471.3 million at December 31, 1998 and 1997, respectively. (5) Includes $13,472.4 million at December 31, 1999, $7,467.5 million at December 31, 1998 and $5,069.9 million at December 31, 1997 related to assets invested through the Company's products in unaffiliated mutual funds. (6) Represents assets for which the Company provides administrative services only. Financial Products' net income increased $1 million in 1999 and $24 million in 1998. Excluding net realized capital losses and gains, earnings increased $22 million, or 13%, in 1999 and $35 million, or 26%, in 1998. The increase in earnings primarily reflects increased fee income from higher levels of assets under management and administration. 16 Item 7. Management's Analysis of the Results of Operations. (continued) Financial Products (continued) Assets under management and administration increased 25% in 1999 and 19% in 1998. The increases in assets under management and administration were due to appreciation in the stock market and, to a lesser extent, additional net deposits (i.e. deposits, including new contracts, less surrenders). Partially offsetting the increase in fee income were increased operating expenses resulting from business growth. However, for annuity products, operating expenses as a percentage of assets under management declined in both years. Premiums relate to annuity products containing life contingencies. Premiums increased by $28 million in 1999 following an increase of $10 million in 1998. The increase in 1999 was due to the acquisition of a block of payout annuity business and, to a lesser extent, additional sales. The increase in 1998 was due to additional sales. Annuity deposits relate to annuity contracts not containing life contingencies. Deposits increased 45% and 6% in 1999 and 1998, respectively, reflecting business growth. Of the $12.6 billion at December 31, 1999 and $12.1 billion at December 31, 1998 and 1997 of fixed annuity assets under management, 25% were fully guaranteed and 75% were experienced rated. The average earned rate on investments supporting fully guaranteed investment contracts was 7.4%, 7.6% and 7.8%, and the average annualized earned rate on investments supporting experience rated investment contracts was 7.6%, 7.8% and 7.9% for the years ended December 31, 1999, 1998 and 1997, respectively. The average credited rate on fully guaranteed investment contracts was 6.3%, 6.5% and 6.6%, and the average credited rate on experience rated investment contracts was 5.6%, 5.8% and 5.9% for the years ended December 31, 1999, 1998 and 1997, respectively. The resulting interest margins on fully guaranteed investment contracts were 1.1%, 1.1% and 1.2% and on experience rated investment contracts were 2.0% for the years ended December 31, 1999, 1998 and 1997, respectively. The duration of the investment portfolios supporting the Company's liabilities is regularly monitored and adjusted in order to maintain an aggregate duration that is within 0.5 years of the estimated duration of the underlying liabilities. Refer to "General Account Investments" for further information on the Company's investments. 17 Item 7. Management's Analysis of the Results of Operations (continued) Investment Management Services Operating Summary
(Millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Net investment income $ 1.5 $ 1.5 $ 1.4 Other income (1) 118.3 96.7 80.3 - ---------------------------------------------------------------------------------------------------------------- Total revenue 119.8 98.2 81.7 Operating expenses 75.2 59.5 50.1 - ---------------------------------------------------------------------------------------------------------------- Income from operations before income taxes 44.6 38.7 31.6 Income taxes 16.5 14.7 11.9 - ---------------------------------------------------------------------------------------------------------------- Net income (2) $ 28.1 $ 24.0 $ 19.7 ================================================================================================================ Assets under management: Retail mutual funds $ 1,447.7 $ 616.6 $ 564.6 Plan sponsored (3) 14,244.5 11,581.5 10,273.7 Collateralized bond obligations and other 2,338.3 1,770.5 711.3 - ---------------------------------------------------------------------------------------------------------------- Subtotal $ 18,030.5 $ 13,968.6 $ 11,549.6 - ---------------------------------------------------------------------------------------------------------------- Invested through products of the Financial Products segment (4) Variable annuity mutual funds $ 18,144.2 $ 15,423.3 $ 12,996.9 Fixed annuities (5) 12,641.1 12,131.1 12,056.3 Plan sponsored and other 6,180.4 6,265.1 4,896.8 - ---------------------------------------------------------------------------------------------------------------- Subtotal $ 36,965.7 $ 33,819.5 $ 29,950.0 - ---------------------------------------------------------------------------------------------------------------- Total assets under management (6) $ 54,996.2 $ 47,788.1 $ 41,499.6 ================================================================================================================
(1) Primarily includes investment advisory fees earned on assets under management. (2) Year 2000 costs are not allocated to segment operating expenses and, therefore, excluded in the determination of segment net income. (3) Includes $6,986.3 million, $7,809.3 million and $7,679.1 million of assets managed for Aetna Life Insurance Company, an affiliate of the Company, as of December 31, 1999, 1998 and 1997, respectively. (4) The Investment Management Services segment earns investment advisory fees on these assets. Such assets are also reported in the Financial Products segment. (5) Excludes net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million and $471.3 million at December 31, 1998 and 1997, respectively. (6) Excludes $2.7 billion of assets managed by Aeltus which were reported in Discontinued Operations at December 31, 1997. Net income from the Investment Management Services segment increased $4 million for the year ended December 31, 1999, or 17%, and increased $4 million, or 22%, for the year ended December 31, 1998. The increase in earnings primarily reflects increased fee income from higher levels of assets under management. Assets under management increased 15% and 16% for the years ended December 31, 1999 and 1998, respectively. The increase in these assets was primarily due to appreciation in the stock market and, to a lesser extent, additional net deposits (i.e. deposits, including new contracts, less surrenders). Partially offsetting the increase in fee income were increased operating expenses resulting from business growth. 18 Item 7. Management's Analysis of the Results of Operations. (continued) Discontinued Operations--Domestic Individual Life Insurance On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln. See "Overview" and Note 3 of Notes to Consolidated Financial Statements for further discussion on the sale. General Account Investments The Company's investment strategies and portfolios are intended to match the duration of the related liabilities and provide sufficient cash flow to meet obligations while maintaining a competitive rate of return. The duration of these investments is monitored, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's maturing liabilities. The risks associated with investments supporting experience rated products are assumed by those customers subject to, among other things, certain minimum guarantees. The Company's invested assets were comprised of the following:
(Millions) December 31, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------ Debt securities, available for sale, at fair value $ 11,410.1 $ 12,068.2 Equity securities, available for sale: Nonredeemable preferred stock 130.9 203.3 Investment in affiliated mutual funds 64.1 100.1 Common stock 11.5 2.0 Short-term investments 74.2 48.9 Mortgage loans 6.7 12.7 Policy loans 314.0 292.2 Other investments 13.2 12.7 - ------------------------------------------------------------------------------------------------ Total Investments $ 12,024.7 $ 12,740.1 ================================================================================================
Total investments decreased in 1999 primarily due to a decrease in the fair value of the Company's debt securities held at the end of the year. This decrease is the result of an increase in interest rates that occurred during 1999. Debt Securities At December 31, 1999 and 1998, the Company's carrying value of investments in debt securities represented 95% of the total general account invested assets. For the same periods, $8.7 billion, or 76% of total debt securities, and $9.1 billion, or 76% of total debt securities, supported experience rated products. It is management's objective that the portfolio of debt securities be of high quality and be well-diversified by market sector. The debt securities in the Company's portfolio are generally rated by external rating agencies, and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. The average quality rating of the Company's debt security portfolio at December 31, 1999 and 1998 was AA-. 19 Item 7. Management's Analysis of the Results of Operations. (continued) General Account Investments (continued) The percentage of total debt securities by quality rating category is as follows:
December 31, 1999 December 31, 1998 - --------------------------------------------------------- AAA 48.4% 43.3% AA 9.5 11.0 A 24.5 24.4 BBB 11.1 14.4 BB 2.5 3.7 B and Below 4.0 3.2 - --------------------------------------------------------- Total 100.0% 100.0% =========================================================
The portfolio of debt securities at December 31, 1999 and 1998 included $739 million (6.5% of the total debt securities) and $839 million (6.9% of the total debt securities), respectively, of investments that are considered "below investment grade". "Below investment grade" securities are defined to be securities that carry a rating below BBB- and Baa3, by Standard & Poor's and Moody's Investors Services, respectively. The percentage of total debt securities investments by market sector is as follows:
December 31, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------- U.S. Corporate Securities 40.6% 45.7% Residential Mortgage-Backed Securities 23.9 22.4 Foreign Securities--U.S. Dollar Denominated 11.4 10.0 Commercial/Multifamily Mortgage-Backed Securities 8.6 9.4 U.S. Treasuries/Agencies 9.4 6.4 Asset-Backed Securities 6.1 6.1 - ----------------------------------------------------------------------------------------- Total 100.0% 100.0% =========================================================================================
Risk Management and Market Sensitive Instruments The Company regularly evaluates the appropriateness of investments relative to its management approved investment guidelines and the business objective of the portfolios. The Company manages interest rate risk by seeking to maintain a tight duration band, while credit risk is managed by maintaining high average quality ratings and diversified sector exposure within the debt securities portfolio. In connection with its investment and risk management objectives, the Company also uses financial instruments whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), duration, exchange rates, prepayment rates, equity markets or credit ratings/spreads. The Company's use of derivatives is generally limited to hedging purposes and has principally consisted of using futures contracts to hedge interest rate and equity price risk. When used for hedging, the expectation is that these instruments would reduce overall risk. (Refer to Note 5 of Notes to Consolidated Financial Statements for additional information.) 20 Item 7. Management's Analysis of the Results of Operations. (continued) General Account Investments (continued) The risks associated with investments supporting experience rated pension and annuity products are assumed by those contractholders, not by the Company (subject to, among other things, certain minimum guarantees). Risks associated with the investments and liabilities related to experience-rated pension and annuity products are not included in the sensitivity analysis presented below. The following discussion about the Company's risk management activities includes "forward-looking statements" that involve risk and uncertainties. Set forth below are management's projections of hypothetical net losses in fair value of shareholder's equity of the Company's market sensitive instruments if certain assumed changes in market rates and prices were to occur (sensitivity analysis). These instruments are not leveraged and are held for purposes other than trading. While the Company believes that the assumed market rate changes are reasonably possible in the near term, actual results may differ, particularly as a result of any management actions that would be taken to mitigate such hypothetical losses in fair value of shareholder's equity. Based on the Company's overall exposure to interest rate risk and equity price risk, the Company believes that these changes in market rates and prices would not materially affect the consolidated near-term financial position, results of operations or cash flows of the Company. Interest Rate Risk Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in fair value of shareholder's equity related to financial and derivative instruments is estimated to be $12 million (after tax), (0.9% of total shareholder's equity) at December 31, 1999 and $39 million (after tax), (2.9% of total shareholder's equity) at December 31, 1998. The Company believes that an interest rate shift of this magnitude represents a moderately adverse scenario, and is approximately equal to the historical annual volatility of interest rate movements for the Company's intermediate term available-for-sale debt securities. The Company has included corresponding changes in certain insurance liabilities in this sensitivity analysis. The potential effect of interest rate risk on near-term net income, cash flow and fair value was determined based on commonly used models. The models project the impact of interest rate changes on a wide range of factors, including duration, prepayment, put options and call options. Fair value was estimated based on the net present value of cash flows or duration estimates, using a representative set of likely future interest rate scenarios. Equity Price Risk The Company's available-for-sale equity securities are comprised primarily of domestic stocks. Assuming an immediate decrease of 10% in equity prices for domestic equity securities, the hypothetical loss in fair value of shareholder's equity related to financial and derivative instruments is estimated to be $5 million (after tax), (0.4% of total shareholder's equity) at December 31, 1999 and $7 million (after tax), (0.5% of total shareholder's equity) at December 31, 1998. 21 Item 7. Management's Analysis of the Results of Operations. (continued) Liquidity and Capital Resources Generally, the Company meets its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and using overall cash flows from premiums, deposits, asset maturities and income received on investments. Cash provided from these sources is used primarily for benefit payments, contract withdrawals and operating expenses. Subsequent to the close of the sale of the domestic individual life insurance business on October 1, 1998, premiums received and benefits paid on policies assumed under the sale agreement are generally deposited to or paid out of Lincoln funds. Debt securities and mortgage loans have durations that were selected to approximate the durations of the liabilities they support. The general account of the Company has been segmented to improve the asset/liability matching process. The duration of these investments is monitored, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's maturing liabilities. As the Company's investment strategy focuses on matching asset and liability durations, and not specific cash flows, and since these duration assessments are dependent on numerous cash flow assumptions, asset sales may, from time to time, be required to satisfy liability obligations and/or rebalance asset portfolios. The investment portfolios are closely monitored to assess asset and liability matching in order to rebalance the portfolios as conditions warrant. Given the quality ratings of the Company's debt securities portfolio (see "General Account Investments"), management expects the vast majority of the Company's investments in debt securities to be repaid in accordance with contractual terms. In addition, most of the debt securities in the portfolio are highly marketable and can be sold to enhance cash flow before maturity. The Company received no capital contributions in 1999. In 1998, the Company received capital a contribution of approximately $9 million in cash from HOLDCO. In 1997, the Company returned capital of $5 million to HOLDCO. The Company paid $255 million, $570 million and $34 million in cash dividends to HOLDCO in 1999, 1998 and 1997, respectively. Of the $255 million paid in 1999, $206 million was accrued for in 1998. Of the $776 million dividends paid or accrued in 1998, $756 million (all of which was approved by the Insurance Commissioner of the State of Connecticut) was attributable to proceeds from the sale of the domestic individual life insurance business. The Company may not pay distributions, including dividends, to HOLDCO in excess of a statutory limit unless approved by the Insurance Commissioner of the State of Connecticut. As of March 21, 2000, the Company had not exceeded such statutory limit. See "Consolidated Statements of Cash Flows" for additional information. Year 2000 The Company relies heavily on information technology ("IT") systems and other systems and facilities, such as telephones, building access control systems and heating and ventilation 22 Item 7. Management's Analysis of the Results of Operations. (continued) Year 2000 (continued) equipment ("embedded systems") to conduct its business. The Company also has business relationships with financial institutions, financial intermediaries, public utilities and other critical vendors, as well as regulators and customers who are themselves reliant on IT and embedded systems to conduct their businesses. Current Status After the Year 2000 rollover, either the Company or Aetna conducted a series of quality control checks on its mission-critical IT systems and embedded systems. These systems operated as planned, in all material respects, and there were no significant interruptions in the Company's operations. Data within the Company's IT systems was up-to-date and customers were able to access information electronically. As of March 22, 2000 the Company has not experienced any material difficulties with its mission-critical IT systems, embedded systems, suppliers, or customers due to Year 2000 issues. The Company is in the process of reassigning its Year 2000 personnel and transferring Year 2000 related responsibilities to its businesses. The Company remains Year 2000 vigilant and any potential future Year 2000 issues will be addressed by IT personnel within the Company's business segments. Future Risks and Contingency/Recovery Planning The Company currently does not expect any future material Year 2000 issues. However, the Company cannot guarantee that it will not have any future material Year 2000 issues due to the cyclical nature of certain of the Company's business processes and those of its critical suppliers or customers. The Company has developed contingency/recovery plans aimed at sustaining the continuity of critical business functions in the event of future Year 2000 issues. As part of its contingency planning process, the Company developed contingency plans for those failure scenarios it believes could have a significant impact on the Company's operations. Those plans remain in effect. The scenarios the Company has planned for include, but are not limited to, limitations on providers', suppliers' and customers' ability to interact electronically with the Company, Year 2000 related failures at key external relationships, limitations on the Company's suppliers' or customers' ability to move funds electronically, failures in pricing securities and increased call volumes. The Company's planned responses to these scenarios include, but are not limited to, reallocation of existing resources, use of alternative processes and procedures, use of outside providers to supplement internal capabilities and use of alternative suppliers. Year 2000 Costs Total Year 2000 project costs were $18 million (after tax) in 1999, $22 million (after tax) in 1998, and were not material in 1997. The Company expects that Year 2000 costs in 2000 will be immaterial. The Company expenses these costs as incurred and funds these costs through operating cash flows. See "Forward-Looking Information/Risk Factors" for factors that could cause actual Year 2000 results to differ from the Company's expectations. 23 Item 7. Management's Analysis of the Results of Operations. (continued) Forward-Looking Information/Risk Factors The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements, so long as (1) those statements are identified as forward-looking, and (2) the statements are accompanied by meaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions. Certain information contained in this Management's Analysis of the Results of Operations is forward-looking within the meaning of the 1995 Act or Securities and Exchange Commission rules. This information includes, but is not limited to the information that appears under the headings: (1) Overview--Outlook, (2) General Account Investments--Risk Management and Market Sensitive Instruments/Interest Rate Risk/Equity Price Risk and (3) "Year 2000." In writing this Management's Analysis of the Results of Operations, we also used the following words, or variations of these words and similar expressions, where we intended to identify forward-looking statements: o Expects o Plans o Projects o Believes o Anticipates o Seeks o Intends o Estimates
These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of significant uncertainties and other factors, many of which are outside our control, that could cause actual results to differ materially from these statements. You should not put undue reliance on these forward-looking statements. We disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Set forth below are certain important risk factors that, in addition to general economic conditions and other factors (some of which are discussed elsewhere in this report), may affect these forward-looking statements and our businesses generally. Significant changes in financial markets could affect earnings. Significant changes in financial markets could impact the level of assets under management and administration in our businesses, and, in turn, our level of asset-based fees in those businesses. For example, significant increases in interest rates or decreases in equity markets would directly affect the level of assets under management and administration and, in addition, may increase the level of withdrawals and decrease the level of deposits by customers. Customers under those circumstances may seek to diversify among asset managers or seek investment alternatives that we do not offer. Significant declines in the value of investments also may affect our ability to pass through investment losses to certain experience rated customers, whether due to triggering minimum guarantees or other business reasons. 24 Item 7. Management's Analysis of the Results of Operations. (continued) Forward-Looking Information/Risk Factors (continued) Decreases in ratings could affect assets under management. Decreases in the claims-paying ratings of the Company could have the effect of decreasing new sales and deposits and increasing withdrawals and surrenders in our businesses. Such changes in sales and deposits, withdrawals and surrenders would adversely affect the level of asset-based fees of our businesses. The claims-paying ratings are periodically reviewed and subject to changes, in certain cases, based on factors beyond our control. Early withdrawal of assets could affect earnings. We incur up-front costs, such as commissions, when we sell our annuity and other financial services products. We generally defer these costs and recognize them over time. As a result, the retention of assets under these products is an important component of profitability. We generally seek to structure our products and sales to encourage retention of assets under management and administration or recover costs, through surrender charges, higher credited rates to customers if we retain their assets for longer periods, paying renewal commissions, paying service fees or other terms. However, if customers withdraw assets earlier than we anticipated when we priced the products, it would adversely affect profitability. We could also experience competitive pressure to lower margins. Litigation can adversely affect us. Litigation also could adversely affect us, both through costs of defense and adverse results or settlements. Refer to Note 14 of Notes to Consolidated Financial Statements and Legal Proceedings for information regarding litigation. Year 2000 related issues could affect operations and results of operations. As of March 22, 2000, we have not experienced any material Year 2000 related difficulties. However, our operations and results of operations could be materially and adversely affected if we or any of our mission-critical suppliers were to experience significant Year 2000 related difficulties. Adverse changes in regulation could affect the operations of each of our businesses. Each of our businesses is subject to comprehensive regulation. These businesses could be adversely affected by: o Increases in minimum capital and other financial viability requirements for insurance operations; o Changes in the taxation of insurance companies. For example, the President of the United States' revenue proposal would require life insurance companies to pay tax on certain income earned prior to 1984. Under current law, that income is deferred for tax purposes. If this tax change, which currently is just a proposal, were enacted, then we would recognize a one-time charge to income in the amount of the tax; and o Changes in the tax treatment of annuity, pension and other insurance products as well as changes in capital gains tax rates. Certain of these changes, should they occur, could affect the attractiveness to customers of our financial services products. Item 7A. Quantitative and Qualitative Disclosure About Market Risk. See "General Account Investments" in Management's Analysis of the Results of Operations. 25 Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements
Page ---- Independent Auditors' Report........................................................ 27 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997.................................................................. 28 Consolidated Balance Sheets as of December 31, 1999 and 1998..................... 29 Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31, 1999, 1998 and 1997............................................... 30 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................................................................... 31 Notes to Consolidated Financial Statements....................................... 32
26 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, 1999 and 1998, 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, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Hartford, Connecticut February 7, 2000 27 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Income (millions)
Years Ended December 31, ----------------------------------------- 1999 1998 1997 ----------- ------------ ------------ Revenue: Premiums $ 107.5 $ 79.4 $ 69.1 Charges assessed against policyholders 388.3 324.3 262.0 Net investment income 886.3 871.8 881.7 Net realized capital (losses) gains (21.5) 10.4 29.7 Other income 129.7 100.2 96.8 -------- -------- -------- Total revenue 1,490.3 1,386.1 1,339.3 -------- -------- -------- Benefits and expenses: Current and future benefits 746.2 714.4 720.4 Operating expenses: Salaries and related benefits 153.0 141.0 133.5 Other 214.9 200.8 182.8 Amortization of deferred policy acquisition costs 104.9 91.2 66.3 -------- -------- -------- Total benefits and expenses 1,219.0 1,147.4 1,103.0 -------- -------- -------- Income from continuing operations before income taxes 271.3 238.7 236.3 Income taxes 90.1 66.6 68.4 -------- -------- -------- Income from continuing operations 181.2 172.1 167.9 Discontinued operations, net of tax: Income from operations -- 61.8 67.8 Amortization of deferred gain on sale 5.7 -- -- Immediate gain on sale -- 59.0 -- -------- -------- -------- Net income $ 186.9 $ 292.9 $ 235.7 ======== ======== ========
See Notes to Consolidated Financial Statements 28 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Balance Sheets (millions, except share data)
December 31, December 31, 1999 1998 ------------- -------------- Assets Investments: Debt securities available for sale, at fair value (amortized cost: $11,657.9 and $11,571.3) $11,410.1 $12,068.2 Equity securities, available for sale: Nonredeemable preferred stock (cost: $134.7 and $202.6) 130.9 203.3 Investment in affiliated mutual funds (cost: $63.5 and $96.8) 64.1 100.1 Common stock (cost: $6.7 and $1.0) 11.5 2.0 Short-term investments 74.2 48.9 Mortgage loans 6.7 12.7 Policy loans 314.0 292.2 Other investments 13.2 12.7 ----------- ----------- Total investments 12,024.7 12,740.1 Cash and cash equivalents 693.3 628.3 Short-term investments under securities loan agreement 232.5 277.3 Accrued investment income 150.7 151.6 Premiums due and other receivables 298.3 61.1 Reinsurance recoverable 3,001.2 2,959.8 Deferred income taxes 150.4 114.3 Deferred policy acquisition costs 1,046.4 893.1 Other assets 96.5 70.4 Separate Accounts assets 38,692.6 29,430.2 ----------- ----------- Total assets $56,386.6 $47,326.2 =========== =========== Liabilities and Shareholder's Equity Liabilities: Future policy benefits $ 3,850.4 $ 3,815.9 Unpaid claims and claim expenses 27.3 18.8 Policyholders' funds left with the Company 11,121.7 11,305.6 ----------- ----------- Total insurance reserve liabilities 14,999.4 15,140.3 Payables under securities loan agreement 232.5 277.3 Current income taxes 14.7 279.6 Other liabilities 1,063.0 805.5 Separate Accounts liabilities 38,692.6 29,430.2 ----------- ----------- Total liabilities 55,002.2 45,932.9 ----------- ----------- 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 431.8 431.8 Accumulated other comprehensive (loss) income (44.8) 104.8 Retained earnings 994.6 853.9 ----------- ----------- Total shareholder's equity 1,384.4 1,393.3 ----------- ----------- Total liabilities and shareholder's equity $56,386.6 $47,326.2 =========== ===========
See Notes to Consolidated Financial Statements 29 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Changes in Shareholder's Equity (millions)
Years Ended December 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Shareholder's equity, beginning of year $1,393.3 $1,852.8 $1,618.3 Comprehensive income: Net income 186.9 292.9 235.7 Other comprehensive income, net of tax: Unrealized (losses) gains on securities ($(230.2), $18.2 $49.9, pretax)(1) (149.6) 11.9 32.4 ---------- ---------- ---------- Total comprehensive income 37.3 304.8 268.1 ---------- ---------- ---------- Capital contribution -- 9.3 (5.0) Other changes 2.8 2.4 5.7 ---------- ---------- ---------- Common stock dividends (49.0) (776.0) (34.3) ---------- ---------- ---------- Shareholder's equity, end of year $1,384.4 $1,393.3 $1,852.8 ========== ========== ==========
(1) Net of reclassification adjustments. See Notes to Consolidated Financial Statements 30 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Cash Flows (millions)
Years Ended December 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Cash Flows from Operating Activities: Net income $ 186.9 $ 292.9 $ 235.7 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Net accretion of discount on investments (26.5) (29.5) (66.8) Amortization of deferred gain on sale ( 5.7) -- -- Immediate gain on sale -- (59.0) -- Net realized capital losses (gains) 21.5 (11.1) (36.0) Changes in assets and liabilities: Decrease (increase) in accrued investment income 0.9 11.4 ( 4.0) Increase in premiums due and other receivables 23.3 (23.7) (30.0) (Increase) decrease in policy loans (21.8) 177.4 (70.3) Increase in deferred policy acquisition costs (153.3) (132.8) (155.8) Decrease in reinsurance loan to affiliate -- 397.2 231.1 Net increase in universal life account balances 55.7 122.9 157.1 Decrease in other insurance reserve liabilities (28.6) (41.8) (120.3) Decrease in other liabilities and other assets (53.9) (53.6) (74.0) (Decrease) increase in income taxes (259.8) 106.4 (25.8) ---------- ---------- ---------- Net cash (used for) provided by operating activities (261.3) 756.7 40.9 ---------- ---------- ---------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 5,890.1 6,790.2 5,311.4 Equity securities 111.2 150.1 103.1 Mortgage loans 6.1 0.3 0.2 Life Business -- 966.5 -- Investment maturities and collections of: Debt securities available for sale 1,216.5 1,296.3 1,212.7 Short-term investments 80.6 135.3 108.4 Cost of investment purchases in: Debt securities available for sale (7,099.7) (6,706.4) (6,734.8) Equity securities (13.0) (125.7) (113.3) Short-term investments (106.0) (83.9) (167.1) Increase in property and equipment 5.7 9.0 10.0 Other, net 3.7 (2,725.9) -- ---------- ---------- ---------- Net cash provided by (used for) investing activities 95.2 (294.2) (269.4) ---------- ---------- ---------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 2,040.2 1,571.1 1,621.2 Withdrawals of investment contracts (1,680.8) (1,393.1) (1,256.3) Capital contribution to Separate Account -- -- (25.0) Return of capital from Separate Account -- 1.7 12.3 Capital contribution from HOLDCO -- 9.3 (5.0) Dividends paid to shareholder (255.0) (570.0) (34.3) Other, net 126.7 (34.3) 26.4 ---------- ---------- ---------- Net cash provided by (used for) financing activities 231.1 (415.3) 339.3 ---------- ---------- ---------- Net increase in cash and cash equivalents 65.0 47.2 110.8 Cash and cash equivalents, beginning of year 628.3 581.1 470.3 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 693.3 $ 628.3 $ 581.1 ========== ========== ========== Supplemental cash flow information: Income taxes paid, net $ 316.5 $ 60.5 $ 130.3 ========== ========== ==========
See Notes to Consolidated Financial Statements 31 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Aetna Life Insurance and Annuity Company ("ALIAC") and its wholly owned subsidiaries (collectively, the "Company") are providers of financial products and services and investment management services in the United States. The Company has two business segments: Financial Products and Investment Management Services. On October 1, 1998, the Company sold its individual life insurance business to Lincoln National Corporation ("Lincoln") and accordingly, it is now classified as Discontinued Operations (refer to note 3). Financial Products include annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, nonqualified annuity contracts and mutual funds. Annuity contracts may be deferred or immediate ("payout annuities"). These products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, including mutual funds (both ALIAC and nonaffiliated mutual funds), variable and fixed investment options. Financial Products also include investment advisory services and pension plan administrative services. Investment Management Services provides: investment advisory services to affiliated and unaffiliated institutional and retail clients on a fee-for-service basis; underwriting services to the Aetna Series Fund Inc.; distribution services for other Aetna products; and trustee, administrative, and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian. Discontinued Operations include universal life, variable universal life, traditional whole life and term insurance. Principles of Consolidation The consolidated financial statements include ALIAC and its wholly owned subsidiaries, Aetna Insurance Company of America ("AICA") and Aetna Investment Adviser Holding Company, Inc. ("IA Holdco"). ALIAC is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc. whose ultimate parent is Aetna Inc. ("Aetna"). On July 1, 1999, HOLDCO contributed IA Holdco to the Company (refer to note 2). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The contribution of IA Holdco to the Company was accounted for in a manner similar to that of a pooling-of-interests and accordingly, the Company's historical consolidated financial statements have been restated to include the accounts and results of operations of IA Holdco. Certain reclassifications have been made to 1998 and 1997 financial information to conform to the 1999 presentation. 32 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) New Accounting Standards Accounting by Insurance and Other Enterprises for Insurance-Related Assesments As of January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, issued by the American Institute of Certified Public Accountants ("AICPA"). This statement provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund and other insurance-related assessments and guidance for measuring the liability. The adoption of this standard did not have a material effect on the Company's financial position or results of operations, as the Company had previously accounted for guaranty-fund and other insurance-related assessments in a manner consistent with this standard. Future Application of Accounting Standards Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which provides guidance on how to account for all insurance and reinsurance contracts that do not transfer insurance risk, except for long-duration life and health insurance contracts. This statement is effective for the Company's financial statements beginning January 1, 2000. The Company does not expect the adoption of this standard to have a material effect on its financial position and results of operations. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. As amended by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, this standard is effective for the Company's financial statements beginning January 1, 2001, with early adoption permitted. The impact of FAS No. 133 on the Company's financial statements will vary based on certain factors including future interpretative guidance from the FASB, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. The Company is evaluating the impact of adoption of this standard and currently does not believe that it will have a material effect on its financial position and results of operations. 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 33 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) financial statements and accompanying notes. Actual results could differ from reported results using those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. Investments Debt and equity securities are classified as available for sale and carried at fair value. Securities are written down (as realized capital losses) for other than temporary declines in value. Included in available-for-sale securities are investments that support experience-rated products. Experience-rated products are products where the customer, not the Company, assumes investment (including realized capital gains and losses) and other risks, subject to, among other things, minimum guarantees. As long as minimum guarantees are not triggered, the effect of experience- rated products' investment performance does not impact the Company's results of operations. Realized and unrealized capital gains and losses on investments supporting these products are reflected in policyholder's funds left with the Company. Realized capital gains and losses on all other investments are reflected in the Company's results of operations. Unrealized capital gains and losses on all other investments are reflected in shareholders' equity, net of related income taxes. Purchases and sales of debt and equity securities are recorded on the trade date. Sales of mortgage loans are recorded on the closing date. Fair values for debt and equity securities are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair values are measured utilizing quoted market prices for similar securities or by using discounted cash flow methods. Cost for mortgage-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. The Company does not accrue interest on problem debt securities when management believes the collection of interest is unlikely. The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of a loaned domestic security and 105% of the market value of a loaned foreign security. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company's guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. At December 31, 1999 and 1998, the Company loaned securities (which are reflected as invested assets) with a fair value of approximately $232.5 million and $277.3 million, respectively. The investment in affiliated mutual funds represents an investment in Aetna managed mutual funds which have been seeded by the Company, and is carried at fair value. 34 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Mortgage loans and policy loans are carried at unpaid principal balances, net of impairment reserves. Short-term investments, consisting primarily of money market instruments and other debt issues purchased with an original maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. The Company utilizes futures contracts for other than trading purposes in order to hedge interest rate risk (i.e. market risk, refer to note 5.) Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts allocable to experience rated contracts are deducted from capital gains and losses with an offsetting amount reported in future policy benefits. Changes in the fair value of futures contracts allocable to non-experienced-rated contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Deferred gains or losses on such futures contracts are amortized over the life of the acquired asset or liability as a yield adjustment or through net realized capital gains or losses upon disposal of an asset. Changes in the fair value of futures contracts that do not qualify as hedges are recorded in net realized capital gains or losses. Hedge designation requires specific asset or liability identification, a probability at inception of high correlation with the position underlying the hedge, and that high correlation be maintained throughout the hedge period. If a hedging instrument ceases to be highly correlated with the position underlying the hedge, hedge accounting ceases at that date and excess gains or losses on the hedging instrument are reflected in net realized capital gains or losses. Included in common stock are warrants which represent the right to purchase specific securities. Upon exercise, the cost of the warrants is added to the basis of the securities purchased. On occasion, the Company sells call options written on underlying securities which are carried at fair value. Changes in fair value of these options are recorded in net realized capital gains or losses. Deferred Policy Acquisition Costs Certain costs of acquiring certain insurance business are deferred. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain expenses of underwriting and issuing contracts, and certain agency expenses. For certain annuity and pension contracts, such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits over the life of the contracts (up to 20 years for annuity and pension contracts.) Periodically, modifications may be made to deferred annuity contract features, such as shortening the surrender charge period or waiving the surrender charge, changing the mortality and expense fees, etc. Unamortized deferred policy acquisition costs associated with these modified contracts are not written off, but rather, continue to be associated with the original block of business to 35 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) which these costs were previously recorded. Such costs are amortized based on revised estimates of expected gross profits based upon the contract after the modification. Unamortized deferred policy acquisition costs related to deferred annuity products were approximately $1.0 billion and $893 million as of December 31, 1999 and 1998, respectively. Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related expenses. Insurance Reserve Liabilities Future policy benefits include reserves for universal life, immediate annuities with life contingent payouts and traditional life insurance contracts. Reserves for universal life products are equal to cumulative deposits less withdrawals and charges plus credited interest thereon. Reserves for traditional life insurance contracts represent the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. Reserves for immediate annuities with life contingent payouts contracts are computed on the basis of assumed investment yield, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by plan, year of issue and policy duration. Reserve interest rates range from 1.50% to 11.25% for all years presented. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant Aetna experience and are periodically reviewed against both industry standards and experience. Because the sale of the domestic individual life insurance business was substantially in the form of an indemnity reinsurance agreement, the Company reported an addition to its reinsurance recoverable approximating the Company's total individual life reserves at the sale date. Policyholders' funds left with the Company include reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts. Reserves on such contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon (rates range from 1.50% to 11.25% for all years presented) net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. These reserves also include unrealized gains/losses related to FAS No. 115. Reserves on contracts subject to experience rating reflect the rights of contractholders, plan participants and the Company. Unpaid claims for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. Revenue Recognition For certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in charges assessed against policyholders. Other amounts received for these contracts are reflected as deposits 36 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) and are not recorded as revenue. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments with life contingencies begin under contracts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity and reflected as an offsetting amount in both premiums and current and future benefits in the Consolidated Statements of Income. Separate Accounts Separate Accounts assets and liabilities generally represent funds maintained to meet specific investment objectives of contractholders who bear the investment risk, subject, in some cases, to minimum guaranteed rates. Investment income and investment gains and losses generally accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate Accounts assets supporting variable options under universal life and annuity contracts are invested, as designated by the contractholder or participant under a contract (who bears the investment risk subject, in limited cases, to minimum guaranteed rates) in shares of mutual funds which are managed by the Company, or other selected mutual funds not managed by the Company. Separate Accounts assets are carried at fair value. At December 31, 1999 and 1998 , unrealized losses of $8.0 million and unrealized gains of $10.0 million, respectively, after taxes, on assets supporting a guaranteed interest option are reflected in shareholder's equity. Separate Accounts liabilities are carried at fair value, except for those relating to the guaranteed interest option. Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 3.70% to 12.00% in 1999 and 3.00 to 8.10% in 1998. Separate Accounts assets and liabilities are shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Financial Statements (with the exception of realized and unrealized capital gains and losses on the assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. 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 recoverable deemed probable of recovery are reflected as assets on the Company's Consolidated Balance Sheets. Of the reinsurance recoverable on the Consolidated Balance Sheets at December 31, 1999 and 1998, $2,989 million and $2,946 million, respectively, is related to the reinsurance recoverable from Lincoln arising from the sale of the domestic life insurance business. (Refer to note 3) 37 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Income Taxes The Company is included in the consolidated federal income tax return of Aetna. The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. 2. Contribution of IA Holdco from HOLDCO On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The primary operating subsidiary of IA Holdco is Aeltus Investment Management, Inc. ("Aeltus") which has two wholly-owned operating subsidiaries: Aeltus Capital, Inc. ("ACI"), a broker dealer, and Aeltus Trust Company ("ATC"), a limited purpose banking entity. Aeltus is a registered investment advisor under the Investment Advisers Act of 1940 and provides investment advisory services to institutional and retail clients on a fee-for-service basis. In addition, Aeltus, through its ACI subsidiary, provides distribution services for certain Aetna mutual funds and other Aetna products. Aeltus' ATC subsidiary provides trustee, administrative, and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian. 3. Discontinued Operations-Individual Life Insurance On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction was generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. Assets related to and supporting the life policies were transferred to Lincoln and the Company recorded a reinsurance recoverable from Lincoln. The transaction resulted in an after-tax gain on the sale of approximately $117 million, of which $57.7 million was deferred and was being recognized over approximately 15 years. The remaining portion of the gain is recognized immediately in net income and was largely attributed to access to the agency sales force and brokerage distribution channel. Approximately $5.2 million (after tax) of the deferred gain was recognized during 1999. During the fourth quarter of 1999, the Company refined certain accrual and tax estimates which had been established in connection with the recording of the deferred gain. As a result, the deferred gain was increased by $12.9 million (after tax) to $65.4 million at December 31, 1999. The remaining deferred gain will be recognized over approximately 14 years. The unamortized portion of the deferred gain is presented in other liabilities on the Consolidated Balance Sheets. The operating results of the domestic individual life insurance business are presented as Discontinued Operations. All prior year income statement data has been restated to reflect the presentation as Discontinued Operations. Revenues for the individual life segment were $652.2 million and $620.4 million for 1998 and 1997. Premiums ceded and reinsurance recoveries made in 1999 totaled $476.5 million and $513.4 million, respectively, and in 1998 totaled $153.4 million and $70.5 million, respectively. 38 Notes to Consolidated Financial Statements (continued) 4. Investments Debt securities available for sale as of December 31 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair 1999 (Millions) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 1,087.2 $ 4.6 $ 22.1 $ 1,069.7 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Utilities 514.5 5.6 12.7 507.4 Financial 1,869.8 8.2 44.7 1,833.3 Transportation/capital goods 623.4 .9 39.0 585.3 Health care/consumer products 1,138.7 9.3 51.3 1,096.7 Natural resources 424.6 1.3 15.4 410.5 Other corporate securities 214.0 1.0 14.9 200.1 - ---------------------------------------------------------------------------------------------------------------- Total U.S. corporate securities 4,785.0 26.3 178.0 4,633.3 - ---------------------------------------------------------------------------------------------------------------- Foreign securities: Government, including political subdivisions 364.6 17.1 11.9 369.8 Utilities 196.4 7.3 .4 203.3 Other 748.2 8.9 34.3 722.8 - ---------------------------------------------------------------------------------------------------------------- Total foreign securities 1,309.2 33.3 46.6 1,295.9 - ---------------------------------------------------------------------------------------------------------------- Residential mortgage-backed securities: Pass-throughs 1,055.9 19.8 17.6 1,058.1 Collateralized mortgage obligations 1,683.1 25.1 37.7 1,670.5 - ---------------------------------------------------------------------------------------------------------------- Total residential mortgage-backed securities 2,739.0 44.9 55.3 2,728.6 - ---------------------------------------------------------------------------------------------------------------- Commercial/Multifamily mortgage-backed securities 1,031.5 3.4 48.7 986.2 Other asset-backed securities 705.7 0.3 9.9 696.1 - ---------------------------------------------------------------------------------------------------------------- Total debt securities $ 11,657.9 $ 112.8 $ 360.6 $ 11,410.1 ================================================================================================================
39 Notes to Consolidated Financial Statements (continued) 4. Investments (continued) Debt securities available for sale as of December 31 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair 1998 (Millions) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 718.9 $ 60.4 $ 0.2 $ 779.1 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Utilities 615.2 29.8 4.1 640.9 Financial 2,260.2 94.6 5.6 2,349.2 Transportation/capital goods 580.8 33.0 1.1 612.7 Healthcare/consumer products 1,328.2 69.8 4.8 1,393.2 Natural resources 254.5 6.9 2.3 259.1 Other corporate securities 261.7 5.8 7.4 260.1 - ---------------------------------------------------------------------------------------------------------------- Total U.S. corporate securities 5,300.6 239.9 25.3 5,515.2 - ---------------------------------------------------------------------------------------------------------------- Foreign securities: Government, including political subdivisions 507.6 30.4 32.9 505.1 Utilities 147.0 32.4 -- 179.4 Other 511.2 14.9 1.8 524.3 - ---------------------------------------------------------------------------------------------------------------- Total foreign securities 1,165.8 77.7 34.7 1,208.8 - ---------------------------------------------------------------------------------------------------------------- Residential mortgage-backed securities: Pass-throughs 671.9 38.4 2.9 707.4 Collateralized mortgage obligations 1,879.6 119.7 10.4 1,988.9 - ---------------------------------------------------------------------------------------------------------------- Total residential mortgage-backed securities 2,551.5 158.1 13.3 2,696.3 - ---------------------------------------------------------------------------------------------------------------- Commercial/Multifamily mortgage-backed securities 1,114.9 30.9 9.8 1,136.0 Other asset-backed securities 719.3 13.8 0.6 732.5 - ---------------------------------------------------------------------------------------------------------------- Total debt securities $ 11,571.3 $ 580.8 $ 83.9 $ 12,068.2 ================================================================================================================
40 Notes to Consolidated Financial Statements (continued) 4. Investments (continued) At December 31, 1999 and 1998, net unrealized (depreciation) appreciation of $(247.8) million and $496.9 million, respectively, on available-for-sale debt securities included $(189.7) million and $355.8 million, respectively, related to experience-rated contracts, which were not reflected in shareholder's equity but in insurance reserves. The amortized cost and fair value of debt securities for the year ended December 31, 1999 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
Amortized Fair (Millions) Cost Value - ------------------------------------------------------------------------- Due to mature: One year or less $ 266.4 $ 266.5 After one year through five years 2,838.4 2,798.7 After five years through ten years 1,718.0 1,674.6 After ten years 2,351.4 2,250.1 Mortgage-backed securities 3,776.5 3,722.3 Other asset-backed securities 707.2 697.9 - ------------------------------------------------------------------------- Total $ 11,657.9 $ 11,410.1 =========================================================================
At December 31, 1999 and 1998, debt securities carried at fair value of $8.7 million and $8.8 million, respectively, were on deposit as required by regulatory authorities. The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company's shareholder's equity at December 31, 1999. Included in the Company's debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
1999 1998 ----------------------------- -------------------------- Amortized Fair Amortized Fair (Millions) Cost Value Cost Value - ----------------------------------------------------------------------------------------------------- Total residential CMOs (1) $ 1,683.1 $ 1,670.5 $ 1,879.6 $ 1,988.9 ===================================================================================================== Percentage of total: Supporting experience rated products 80.7% 81.7% Supporting remaining products 19.3% 18.3% - ----------------------------------------------------------------------------------------------------- 100.0% 100.0% =====================================================================================================
(1) At December 31, 1999 and 1998, approximately 81% and 66%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, FHLMC. 41 Notes to Consolidated Financial Statements (continued) 4. Investments (continued) There are various categories of CMOs which are subject to different degrees of risk from changes in interest rates and, for CMO's that are not agency-backed, defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the repayment of principal from the underlying mortgages either earlier or later than originally anticipated. At December 31, 1999 and 1998, approximately 1% and 2%, respectively, of the Company's CMO holdings were invested in types of CMOs which are subject to more prepayment and extension risk than traditional CMOs (such as interest- or principal-only strips). Investments in equity securities available for sale as of December 31 were as follows:
(Millions) 1999 1998 - ---------------------------------------------------- Amortized Cost $ 204.9 $ 300.4 Gross unrealized gains 12.5 13.1 Gross unrealized losses 10.9 8.1 - ---------------------------------------------------- Fair Value $ 206.5 $ 305.4 ====================================================
5. Financial Instruments Estimated Fair Value The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 1999 and 1998 were as follows:
1999 1998 -------------------------- ---------------------- Carrying Fair Carrying Fair (Millions) Value Value Value Value - ------------------------------------------------------------------------------------------ Assets: Mortgage loans $ 6.7 $ 6.8 $ 12.7 $ 12.3 Liabilities: Investment contract liabilities: With a fixed maturity 1,055.3 991.0 1,063.9 984.3 Without a fixed maturity 10,066.4 9,452.8 10,241.7 9,686.2 - ------------------------------------------------------------------------------------------
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 future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument. In evaluating the Company's management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. 42 Notes to Consolidated Financial Statements (continued) 5. Financial Instruments (continued) The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates which reflect the rates at which similar loans would be made to similar borrowers. The rates reflect management's assessment of the credit quality and the remaining duration of the loans. Investment contract liabilities (included in Policyholders' funds left with the Company): With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, the Company for similar contracts. Off-Balance-Sheet and Other Financial Instruments 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. Futures Contracts: Futures contracts are used to manage interest rate risk in the Company's bond portfolio. Futures contracts represent commitments to either purchase or sell securities at a specified future date and at a specified price or yield. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. Cash settlements are made daily based on changes in the prices of the underlying assets. The notional amounts, carrying values and estimated fair values of the Company's open treasury futures as of December 31, 1998 were $250.9 million, $.1 million, and $.1 million, respectively. There were no open treasury futures as of December 31, 1999. Warrants: Included in common stocks are warrants which are instruments giving the Company the right, but not the obligation to buy a security at a given price during a specified period. The carrying values and estimated fair values of the Company's warrants to purchase equity securities as of December 31, 1999 were both $6.5 million. The carrying values and estimated fair values as of December 31, 1998 were both $1.5 million. Options: During 1999, the Company earned $0.4 million of investment income for writing call options on underlying securities. The Company did not write any call options in 1998. As of December 31, 1999 and 1998, there were no option contracts outstanding. 43 Notes to Consolidated Financial Statements (continued) 5. Financial Instruments (continued) Debt Instruments with Derivative Characteristics: The Company also had investments in certain debt instruments with derivative characteristics, including those whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short- or long-term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the debt securities portfolio, as of December 31, 1999 was as follows:
Amortized Fair (Millions) Cost Value - -------------------------------------------------------------------------------- Residential collateralized mortgage obligations $ 1,683.1 $ 1,670.5 Principal-only strips (included above) 9.2 9.7 Interest-only strips (included above) 10.7 14.6 Other structured securities with derivative characteristics (1) 81.7 67.2 - --------------------------------------------------------------------------------
(1) Represents non-leveraged instruments whose fair values and credit risk are based on underlying securities, including fixed income securities and interest rate swap agreements. 6. Net Investment Income Sources of net investment income were as follows:
(Millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Debt securities $ 823.3 $ 798.8 $ 814.6 Nonredeemable preferred stock 17.1 18.4 12.9 Investment in affiliated mutual funds 2.4 6.6 3.8 Mortgage loans 1.1 0.6 0.3 Policy loans 7.7 7.2 5.7 Reinsurance loan to affiliate -- 2.3 5.5 Cash equivalents 39.0 46.1 40.2 Other 15.3 13.2 16.1 - -------------------------------------------------------------------------------- Gross investment income 905.9 893.2 899.1 Less: investment expenses (19.6) (21.4) (17.4) - -------------------------------------------------------------------------------- Net investment income $ 886.3 $ 871.8 $ 881.7 ================================================================================
Net investment income includes amounts allocable to experience rated contractholders of $659.6 million, $655.6 million and $673.8 million for the years ended December 31, 1999, 1998 and 1997, respectively. Interest credited to contractholders is included in current and future benefits. 44 Notes to Consolidated Financial Statements (continued) 7. Dividend Restrictions and Shareholder's Equity The Company paid $255.0 million, $570.0 million and $34.3 million in cash dividends to HOLDCO in 1999,1998 and 1997, respectively. Of the $255.0 million paid in 1999, $206 million was accrued for in 1998. Of the $776.0 million dividends paid or accrued in 1998, $756.0 million (all of which was approved by the Insurance Commissioner of the State of Connecticut) was attributable to proceeds from the sale of the domestic individual life insurance business. The Department recognizes as net income and shareholder's capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from generally accepted accounting principles. Statutory net income was $133.9 million, $148.1 million and $80.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. Statutory capital and surplus was $845.2 million and $773.0 million as of December 31, 1999 and 1998, respectively. As of December 31, 1999, the Company does not utilize any statutory accounting practices which are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. 8. Capital Gains and Losses on Investment Operations Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Net realized capital (losses) gains on investments were as follows:
(Millions) 1999 1998 1997 - ---------------------------------------------------------------------------------- Debt securities $ (23.6) $ 7.4 $ 21.1 Equity securities 2.1 3.0 8.6 - ---------------------------------------------------------------------------------- Pretax realized capital (losses) gains $ (21.5) $ 10.4 $ 29.7 ================================================================================== After-tax realized capital (losses) gains $ (14.0) $ 7.3 $ 19.2 ==================================================================================
Net realized capital (losses) gains of $(36.7) million, $15.0 million and $83.7 million for 1999, 1998 and 1997, respectively, allocable to experience rated contracts, were deducted from net realized capital gains and an offsetting amount was reflected in Policyholders' funds left with the Company. Net unamortized gains allocable to experienced-rated contractholders were $68.5 million and $118.6 million at December 31, 1999 and 1998, respectively. 45 Notes to Consolidated Financial Statements (continued) 8. Capital Gains and Losses on Investment Operations (continued) Proceeds from the sale of available-for-sale debt securities and the related gross gains and losses were as follows:
(Millions) 1999 1998 1997 - ------------------------------------------------------------------ Proceeds on sales $ 5,890.1 $ 6,790.2 $ 5,311.3 Gross gains 10.5 98.8 23.8 Gross losses 34.1 91.4 2.7 - ------------------------------------------------------------------
Changes in shareholder's equity related to changes in accumulated other comprehensive income (unrealized capital gains and losses on securities, excluding those related to experience-rated contractholders) were as follows:
(Millions) 1999 1998 1997 - ------------------------------------------------------------------------------------- Debt securities $ (199.2) $ 18.9 $ 44.3 Equity securities (3.4) (16.1) 5.6 Other (27.6) 15.4 -- - ------------------------------------------------------------------------------------- Subtotal (230.2) 18.2 49.9 (Decrease) increase in deferred income taxes (Refer to note 9) (80.6) 6.3 17.5 - ------------------------------------------------------------------------------------- Net changes in accumulated other comprehensive (loss) income $ (149.6) $ 11.9 $ 32.4 =====================================================================================
Net unrealized capital (losses) gains allocable to experience-rated contracts of $(189.7) and $355.8 million at December 31, 1999 and December 31, 1998 respectively, are reflected on the Consolidated Balance Sheets in Policyholders' funds left with the Company and are not included in shareholder's equity. 46 Notes to Consolidated Financial Statements (continued) 8. Capital Gains and Losses on Investment Operations (continued) Shareholder's equity included the following accumulated other comprehensive (loss) income, which is net of amounts allocable to experience-rated contractholders, at December 31:
(Millions) 1999 1998 1997 - ----------------------------------------------------------------------------------- Debt securities: Gross unrealized capital gains $ 18.6 $ 157.3 $ 140.6 Gross unrealized capital losses (76.7) (16.2) (18.4) - ----------------------------------------------------------------------------------- (58.1) 141.1 122.2 - ----------------------------------------------------------------------------------- Equity securities: Gross unrealized capital gains 12.5 13.1 21.2 Gross unrealized capital losses (10.9) (8.1) (0.1) - ----------------------------------------------------------------------------------- 1.6 5.0 21.1 - ----------------------------------------------------------------------------------- Other: Gross unrealized capital gains 1.3 17.1 -- Gross unrealized capital losses (13.7) (1.8) -- - ----------------------------------------------------------------------------------- (12.4) 15.3 -- - ----------------------------------------------------------------------------------- Deferred income taxes (Refer to note 9) (24.1) 56.6 50.4 - ----------------------------------------------------------------------------------- Net accumulated other comprehensive (loss) income $ (44.8) $ 104.8 $ 92.9 ===================================================================================
Changes in accumulated other comprehensive income related to changes in unrealized gains (losses) on securities (excluding those related to experience-rated contractholders) were as follows:
(Millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Unrealized holding (losses) gains arising during the year (1) $ (146.3) $ 38.3 $ 99.2 Less: reclassification adjustment for gains and other items included in net income (2) 3.3 26.4 66.8 ======================================================================================== Net unrealized (losses) gains on securities $ (149.6) $ 11.9 $ 32.4 ========================================================================================
(1) Pretax unrealized holding (losses) gains arising during the year were $(225.2) million, $58.8 million and $152.7 million for 1999, 1998 and 1997, respectively. (2) Pretax reclassification adjustments for gains and other items included in net income were $5.0 million, $40.6 million and $102.8 million for 1999, 1998 and 1997, respectively. 47 Notes to Consolidated Financial Statements (continued) 9. Income Taxes The Company is included in the consolidated federal income tax return, the combined New York return, and Illinois unitary state income tax return of Aetna. Aetna allocates to each member, as permitted under a tax sharing arrangement, 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 federal income tax return. Income taxes from continuing operations consist of the following:
(Millions) 1999 1998 1997 - ----------------------------------------------------------------------------- Current taxes (benefits): Federal $ 63.8 $ 257.4 $ 40.0 State 2.5 3.0 3.3 Net realized capital (losses) gains (20.1) 16.8 39.1 - ----------------------------------------------------------------------------- 46.2 277.2 82.4 - ----------------------------------------------------------------------------- Deferred taxes (benefits): Federal 31.3 (196.7) 14.3 Net realized capital gains (losses) 12.6 (13.9) (28.3) - ----------------------------------------------------------------------------- 43.9 (210.6) (14.0) - ----------------------------------------------------------------------------- Total $ 90.1 $ 66.6 $ 68.4 =============================================================================
Income taxes were different from the amount computed by applying the federal income tax rate to income from continuing operations before income taxes for the following reasons:
(Millions) 1999 1998 1997 - ------------------------------------------------------------------------------------ Income from continuing operations before income taxes $ 271.3 $ 238.7 $ 236.3 Tax rate 35% 35% 35% - ------------------------------------------------------------------------------------ Application of the tax rate 95.0 83.5 82.7 Tax effect of: State income tax, net of federal benefit 1.6 2.0 2.1 Excludable dividends (6.1) (17.1) (15.6) Other, net (0.4) (1.8) (0.8) - ------------------------------------------------------------------------------------ Income taxes $ 90.1 $ 66.6 $ 68.4 =====================================================================================
48 Notes to Consolidated Financial Statements (continued) 9. 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:
(Millions) 1999 1998 - --------------------------------------------------------------------------------------- Deferred tax assets: Insurance reserves $ 323.1 $ 324.1 Unrealized gains allocable to experience rated contracts -- 124.5 Net unrealized capital losses 90.5 -- Investment losses 1.3 -- Postretirement benefits other than pensions 24.8 27.6 Deferred compensation 42.5 37.3 Sale of individual life 44.9 48.9 Other 20.2 20.4 - --------------------------------------------------------------------------------------- Total gross assets 547.3 582.8 - --------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred policy acquisition costs 324.0 282.9 Market discount 6.5 4.5 Net unrealized capital gains -- 181.1 Unrealized losses allocable to experience rated contracts 66.4 -- - --------------------------------------------------------------------------------------- Total gross liabilities 396.9 468.5 - --------------------------------------------------------------------------------------- Net deferred tax asset $ 150.4 $ 114.3 =======================================================================================
Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. Management believes that it is more likely than not that the Company will realize the benefit of the net deferred tax asset. The Company expects sufficient taxable income in the future to realize the net deferred tax asset because of the Company's long-term history of having taxable income, which is projected to continue. 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, 1999. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes under current tax law the conditions under which such taxes would become payable are remote. The Internal Revenue Service (the "Service") has completed examinations of the consolidated federal income tax returns of Aetna through 1994. Discussions are being held with the Service with respect to proposed adjustments. Management believes there are adequate defenses against, or sufficient reserves to provide for, any such adjustments. The Service has commenced its examinations for the years 1995 through 1997. 49 Notes to Consolidated Financial Statements (continued) 10. Benefit Plans Aetna has noncontributory defined benefit pension plans covering substantially all employees. Aetna's accrued pension cost has been allocated to its subsidiaries, including the Company, under an allocation based on eligible salaries. Data on a separate company basis regarding the proportionate share of the projected benefit obligation and plan assets is not available. The accumulated benefit obligation and plan assets are recorded by Aetna. As of the measurement date (September 30), fair value of plan assets exceed projected benefit obligations. Allocated pretax charges to operations for the pension plan (based on the Company's total salary cost as a percentage of Aetna's total salary cost) were $6.6 million and $3.0 million for the years ended December 31, 1999 and 1997, respectively. There were no charges in 1998 due to favorable plan asset performance. Effective January 1, 1999, the Company, in conjunction with Aetna, changed the formula from the previous final average pay formula to a cash balance formula, which will credit employees annually with an amount equal to a percentage of eligible pay based on age and years of service as well as an interest credit based on individual account balances. The formula also provides for a transition period until December 1, 2006, which allows certain employees to receive vested benefits at the higher of the final average pay or cash balance formula. The changing of this formula did not have a material effect on the Company's results of operations, liquidity or financial condition. In addition to providing pension benefits, Aetna currently provides certain health care and life insurance benefits for retired employees. A comprehensive medical and dental plan is offered to all full-time employees retiring at age 45 with 10 years of service. The company provides subsidized benefits to employees whose sum of age and service is at least equal to 65. There is a cap on the portion of the cost paid by the Company relating to medical and dental benefits. The costs to the Company associated with the Aetna postretirement plans for 1999, 1998 and 1997 were $2.1 million, $1.0 million and $2.4 million, respectively. The Company, in conjunction with Aetna, has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. As of the measurement date (September 30), accumulated benefit obligations exceeded fair value of plan assets. The Company, in conjunction with Aetna, also provides certain postretirement health care and life insurance benefits for certain agents. The costs to the Company associated with the agents' postretirement plans for 1999, 1998 and 1997 were $2.1 million, $1.4 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 $7.7 million, $5.3 million and $5.0 million in 1999, 1998 and 1997, respectively. Stock Plans--Aetna has a stock incentive plan that provides for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to employees. Executive, middle 50 Notes to Consolidated Financial Statements (continued) 10. Benefit Plans (continued) management and non-management employees may be granted options to purchase common stock of Aetna at or above the market price on the date of grant. Options generally become 100% vested three years after the grant is made, with one-third of the options vesting each year. Aetna does not recognize compensation expense for stock options granted at or above the market price on the date of grant under its stock incentive plans. In addition, executives may, from time to time, be granted incentive units which are rights to receive common stock or an equivalent value in cash. The incentive units may vest within a range from 0% to 175% at the end of a four year period based on the attainment of performance goals. The costs to the Company associated with the Aetna stock plans for 1999, 1998 and 1997, were $0.4 million, $4.2 million and $2.9 million, respectively. 11. Related Party Transactions Investment Advisory and Other Fees The Company serves as investment advisor to the Aetna managed mutual funds and variable funds (collectively, the Funds). Under the advisory agreements, the Funds pay the Company a daily fee which, on an annual basis, ranged, depending on the fund, from 0.25% to 0.95% of their average daily net assets. The Company is also compensated by the Separate Accounts (variable funds) for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance and annuity contracts, the Separate Accounts pay the Company a daily fee which, on an annual basis is, depending on the product, up to 2.15% of their average daily net assets. The amount of compensation and fees received from the Funds and Separate Accounts, included in charges assessed against policyholders and other income, amounted to $424.2 million, $349.0 million and $271.2 million in 1999, 1998 and 1997, respectively. Reinsurance Transactions Effective December 31, 1988, the Company entered into a modified coinsurance reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna Life"), an affiliate company, 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. Effective January 1, 1997, this agreement was amended to transition (based on underlying investment rollover in Aetna Life) from a modified coinsurance arrangement to a coinsurance agreement. As a result of this change, reserves were ceded to the Company from Aetna Life as investment rollover occurred. Effective October 1, 1998, this agreement was fully transitioned to a coinsurance arrangement and this business along with the Company's direct individual non-participation life insurance business was sold to Lincoln. (Refer to note 3). The operating results of the domestic individual life business are presented as Discontinued Operations. Premiums of $17.9 million, $336.3 million and $176.7 million and current and future benefits of $8.6 million, $341.1 million and $183.9 million, were assumed in 1999, 1998 and 1997, respectively. Investment income of $17.0 million and $37.5 million was generated from a reinsurance loan to affiliate for the years ended December 31, 1998 and 1997, respectively. Prior to the sale of the domestic individual life insurance business to Lincoln on October 1, 1998, the Company's retention limit per individual life was $2.0 million and amounts in excess of this 51 Notes to Consolidated Financial Statements (continued) 11. Related Party Transactions (continued) limit, up to a maximum of $8.0 million on any new individual life business was reinsured with Aetna Life on a yearly renewable term basis. Premium amounts related to this agreement were $2.0 million and $5.9 million for 1998 and 1997, respectively. This agreement was terminated effective October 1, 1998. Effective October 1, 1997, the Company entered into a reinsurance agreement with Aetna Life to assume amounts in excess of $0.2 million for certain of its participating life insurance, on a yearly renewable term basis. Premium amounts related to this agreement were $4.4 million in1998. The business assumed under this agreement was retroceded to Lincoln effective October 1, 1998. 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 is also responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $115.3 million and $87.8 million were maintained for this contract as of December 31, 1999 and 1998, respectively. Capital Transactions The Company received no capital contributions in 1999. In 1998, the Company received a capital contribution of $9.3 million in cash from HOLDCO. In 1997, the Company returned capital of $5.0 million to HOLDCO. Refer to note 7 for dividends paid to HOLDCO. Other Premiums due and other receivables include $10.5 million and $1.6 million due from affiliates in 1999 and 1998, respectively. Other liabilities include $1.9 million and $2.2 million due to affiliates for 1999 and 1998, respectively. Aetna transferred to the Company $0.8 million, $1.7 million and $3.8 million based on its decision not to settle state tax liabilities for the years 1999, 1998 and 1997, respectively, as permitted under the tax sharing arrangement, which is reported in other changes in retained earnings. Substantially all of the administrative and support functions of the Company are provided by Aetna and its affiliates. The financial statements reflect allocated charges for these services based upon measures appropriate for the type and nature of service provided. 12. Reinsurance On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction is generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. (Refer to note 3) 52 Notes to Consolidated Financial Statements (continued) 12. Reinsurance (continued) Effective January 1, 1998, 90% of the mortality risk on substantially all individual universal life product business written from June 1, 1991 through October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90% of new business written on these products was reinsured externally. Effective October 1, 1998 this agreement was assigned from the third party reinsurer to Lincoln. The following table includes premium amounts ceded/assumed as discussed in note 11.
Ceded to Assumed Direct Other from Other Net (Millions) Amount Companies Companies Amount - --------------------------------------------------------------------------------------- 1999 ---- Premiums: Discontinued Operations $ 460.1 $ 478.0 $ 17.9 $ -- Accident and Health Insurance 33.4 33.4 -- -- Annuities 111.5 4.9 .9 107.5 - --------------------------------------------------------------------------------------- Total earned premiums $ 605.0 $ 516.3 $ 18.8 $ 107.5 ======================================================================================= 1998 ---- Premiums: Discontinued Operations $ 166.8 $ 165.4 $ 340.6 $ 342.0 Accident and Health Insurance 16.3 16.3 -- -- Annuities 80.8 2.9 1.5 79.4 - --------------------------------------------------------------------------------------- Total earned premiums $ 263.9 $ 184.6 $ 342.1 $ 421.4 ======================================================================================= 1997 ---- Premiums: Discontinued Operations $ 35.7 $ 15.1 $ 177.4 $ 198.0 Accident and Health Insurance 5.6 5.6 -- -- Annuities 67.9 -- 1.2 69.1 - --------------------------------------------------------------------------------------- Total earned premiums $ 109.2 $ 20.7 $ 178.6 $ 267.1 =======================================================================================
53 Notes to Consolidated Financial Statements (continued) 13. Segment Information Summarized financial information for the Company's principal operations was as follows:
Investment Year ended December 31, Financial Management Discontinued 1999 (Millions) Products (1) Services (1) Operations (1) Other (1) Total - --------------------------------------------------------------------------------------------------------- Revenue from external customers $ 551.1 $ 118.3 -- $ (43.9) $ 625.5 Net investment income 881.5 1.5 -- 3.3 886.3 - --------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital losses $ 1,432.6 $ 119.8 -- $ (40.6) $ 1,511.8 ========================================================================================================= Amortization of deferred policy acquisition costs $ 93.4 $ 11.5 $ 104.9 - --------------------------------------------------------------------------------------------------------- Income taxes (benefits) $ 87.0 $ 16.5 $ (13.4) $ 90.1 - --------------------------------------------------------------------------------------------------------- Operating earnings (losses) (2) $ 192.1 $ 28.1 -- $ (7.5) $ 212.7 Other item (3) -- -- (17.5) (17.5) Net realized capital losses, net of tax (14.0) -- -- (14.0) - --------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 178.1 28.1 -- (25.0) 181.2 Discontinued operations, net of tax: Amortization of deferred gain on sale -- $ 5.7 -- 5.7 - --------------------------------------------------------------------------------------------------------- Net income (loss) $ 178.1 $ 28.1 $ 5.7 $ (25.0) $ 186.9 ========================================================================================================= Segment assets $ 53,324.4 $ 73.2 $ 2,989.0 $ 56,386.6 - --------------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (4) -- -- -- $ 5.7 $ 5.7 - --------------------------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- $ 16.5 $ 16.5 - ---------------------------------------------------------------------------------------------------------
(1) Financial Products include: deferred and immediate annuity contracts, mutual funds, programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, investment advisory services and pension plan administrative services. Investment Management Services include the following services: investment advisory to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company products and trustee, administrative and other fiduciary services to retirement plans. (Refer to notes 1 and 2.) Discontinued operations include life insurance products. (Refer to note 3.) Other includes consolidating adjustments and Year 2000 costs. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses and any other items. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace operating income or net income as a measure of profitability. (3) Other item excluded from operating earnings represents after-tax Year 2000 costs of $17.5 million (4) Expenditures of long-lived assets represents additions to property and equipment not allocable to business segments. 54 Notes to Consolidated Financial Statements (continued) 13. Segment Information (continued)
Investment Year ended December 31, Financial Management Discontinued 1998 (Millions) Products (1) Services (1) Operations (1) Other (1) Total - -------------------------------------------------------------------------------------------------------- Revenue from external customers $ 445.6 $ 96.7 -- $ (38.4) $ 503.9 Net investment income 865.3 1.5 -- 5.0 871.8 - -------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital gains $ 1,310.9 $ 98.2 -- $ (33.4) $ 1,375.7 ======================================================================================================== Amortization of deferred policy acquisition costs $ 80.3 -- -- $ 10.9 $ 91.2 - -------------------------------------------------------------------------------------------------------- Income Taxes (benefits) $ 67.7 $ 14.7 -- $ (15.8) $ 66.6 - --------------------------------- ---------- ------- -- ------- ---------- Operating earnings (2) $ 170.3 $ 24.0 -- $ (7.1) $ 187.2 Other item (3) -- -- -- (22.4) (22.4) Net realized capital gains, net of tax 7.3 -- -- -- 7.3 - -------------------------------------------------------------------------------------------------------- Income from continuing operations 177.6 24.0 -- (29.5) 172.1 Discontinued operations, net of tax: Income from operations -- -- $ 61.8 -- 61.8 Immediate gain on sale -- -- 59.0 -- 59.0 - -------------------------------------------------------------------------------------------------------- Net income (loss) $ 177.6 $ 24.0 $ 120.8 $ (29.5) $ 292.9 ======================================================================================================== Segment assets $ 44,366.4 $ 13.4 $ 2,946.4 $ 47,326.2 - -------------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (4) -- -- -- $ 9.0 $ 9.0 - -------------------------------------------------------------------------------------------------------- Balance of long-lived assets $ 14.8 $ 14.8 - --------------------------------------------------------------------------------------------------------
(1) Financial products include: deferred and immediate annuity contracts, mutual funds, programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, investment advisory services and pension plan administrative services. Investment Management Services include the following services: investment advisory to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company products and trustee, administrative and other fiduciary services to retirement plans. (Refer to notes 1 and 2.) Discontinued operations include life insurance products. (Refer to note 3.) Other includes consolidating adjustments and Year 2000 costs. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses and any other items. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace operating income or net income as a measure of profitability. (3) Other item excluded from operating earnings represents after-tax Year 2000 costs of $22.4 million (4) Expenditures of long-lived assets represents additions to property and equipment not allocable to business segments. 55 Notes to Consolidated Financial Statements (continued) 13. Segment Information (continued)
Investment Year ended December 31, Financial Management Discontinued 1997 (Millions) Products (1) Services (1) Operations (1) Other (1) Total - -------------------------------------------------------------------------------------------------------- Revenue from external customers $ 371.5 $80.3 -- $(23.9) $ 427.9 Net investment income 876.7 1.4 -- 3.6 881.7 - -------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital gains $ 1,248.2 $81.7 -- $(20.3) $ 1,309.6 ======================================================================================================== Amortization of deferred policy acquisition costs $ 57.2 -- -- $ 9.1 $ 66.3 - -------------------------------------------------------------------------------------------------------- Income Taxes (benefits) $ 59.7 $11.9 -- $ (3.2) $ 68.4 - -------------------------------------------------------------------------------------------------------- Operating earnings (2) $ 134.9 $19.7 -- $ (5.9) $ 148.7 Net realized capital gains, net of tax 19.2 -- -- -- 19.2 - -------------------------------------------------------------------------------------------------------- Income from continuing operations 154.1 $19.7 -- (5.9) 167.9 Discontinued operations, net of tax: Income from operations -- -- $ 67.8 -- 67.8 Deferred gain on sale -- -- -- -- -- - -------------------------------------------------------------------------------------------------------- Net income (loss) $ 154.1 $19.7 $ 67.8 $ (5.9) $ 235.7 ======================================================================================================== Segment assets $ 36,379.5 $17.9 $ 3,792.5 -- $ 40,189.9 - -------------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (3) -- -- -- $ 10.0 $ 10.0 - -------------------------------------------------------------------------------------------------------- Balance of long-lived assets $ 12.7 $ 12.7 - --------------------------------------------------------------------------------------------------------
(1) Financial products include: deferred and immediate annuity contracts, mutual funds, programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, investment advisory services and pension plan administrative services. Investment Management Services include the following services: investment advisory to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company products and trustee, administrative and other fiduciary services to retirement plans. (Refer to notes 1 and 2.) Discontinued operations include life insurance products. (Refer to note 3.) Other includes consolidating adjustments and Year 2000 costs. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses and any other items. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace operating income or net income as a measure of profitability. (3) Expenditures of long-lived assets represents additions to property and equipment not allocable to business segments. 56 Notes to Consolidated Financial Statements (continued) 14. 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 31,1998, the Company had off-balance sheet commitments to purchase investments of $68.7 million with an estimated fair value of $68.9 million. At December 31, 1999, there were no off-balance sheet commitments. Litigation The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, it is not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. Omitted pursuant to General Instruction I(2) of Form 10-K. Item 11. Executive Compensation. Omitted pursuant to General Instruction I(2) of Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management. Omitted pursuant to General Instruction I(2) of Form 10-K. Item 13. Certain Relationships and Related Transactions. Omitted pursuant to General Instruction I(2) of Form 10-K. PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial statements. See Item 8 on Page 26. 2. Financial statement schedules. See Index to Consolidated Financial Statement Schedules on Page 64. 3. Exhibits: 3(i)(a) Certificate of Incorporation Incorporated herein by reference to post-effective amendment No. 1 to Registration Statement on Form S-1 (File No. 33-60477) as filed on April 15, 1996. 3(i)(b) Amendment of Certificate of Incorporation of Aetna Life Insurance and Annuity Company Incorporated herein by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964) as filed on February 11, 1997. 3(ii) By-Laws, as amended September 17, 1997. Incorporated herein by reference to post-effective amendment No. 12 to Registration Statement on Form N-4 (File No. 33-91846) as filed on October 30, 1997. 58 Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. (continued) 4. Instruments Defining the Rights of Security Holders, Including Indentures (Annuity Contracts) Incorporated by reference to Post-Effective Amendment No. 14 to Registration Statement on Form N-4 (File No. 33-75964), as filed on July 29, 1997. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75980), as filed on February 12, 1997. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 4, 1999. Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 15, 1996. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 7, 1996. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-91846), as filed on April 15, 1996. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-91846), as filed on August 6, 1996. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 21, 1996. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75982), as filed on February 20, 1997. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form N-4 (File No. 33-75992), as filed on February 13, 1997. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75974), as filed on February 28, 1997. Incorporated by reference to Post-Effective Amendment No. 15 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1996. 59 Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. (continued) Incorporated by reference to Post-Effective Amendment No. 14 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1998. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75982), as filed on April 22, 1996. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 33-75980), as filed on August 19, 1997. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-79122), as filed on August 16, 1995. Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-34370), as filed on December 16, 1997. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-34370), as filed on September 29, 1997. Incorporated by reference to Post-Effective Amendment No. 26 to Registration Statement on Form N-4 (File No. 33-34370), as filed on February 21, 1997. Incorporated by reference to Post-Effective Amendment No. 35 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 17, 1998. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 33-87932), as filed on September 15, 1995. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 33-79122), as filed on April 17, 1998. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form N-4 (File No. 33-79122), as filed on April 22, 1997. Incorporated by reference to Post-Effective Amendment No. 21 to Registration Statement on Form N-4 (File No. 33-75996), as filed on February 16, 2000. Incorporated by reference to Post-Effective Amendment No. 11 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 4, 1999. Incorporated by reference to Post-Effective Amendment No. 13 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 7, 1999. 60 Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. (continued) Incorporated by reference to Post-Effective Amendment No. 37 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 9, 1999. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-87305), as filed on December 13, 1999. Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 333-56297), as filed on February 16, 1999. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 25, 1999. Incorporated by reference to Post-Effective Amendment No. 11 to Registration Statement on Form N-4 (File No. 333-56297), as filed on November 23, 1999. Incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-4 (File No. 33-75988), as filed on August 24, 1999. Incorporated by reference to Post-Effective Amendment No. 17 to Registration Statement on Form N-4 (File No. 33-75996), as filed on April 7, 1999. Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on From N-4 (File No. 333-01107), as filed on February 16, 2000. 10 Material Contracts (Management contracts / compensatory plans or arrangements) The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to Exhibit 10.6 to Aetna Inc.'s Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12, 1996.* The Aetna Services, Inc. Supplemental Incentive Savings Plan Amended and Restated as of January 1, 1999, incorporated herein by reference to Exhibit 10.2 to Aetna Inc.'s Form 10-Q filed on July 29, 1999.* The Aetna Services, Inc. Supplemental Pension Benefit Plan Amended and Restated as of January 1, 1999, incorporated herein by reference to Exhibit 10.1 to Aetna Inc.'s Form 10-Q filed on July 29, 1999. * The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.5 to Aetna Inc.'s Registration Statement on Form S-4 (Registration Statement No. 333-5791) filed on June 12, 1996.* The Aetna Inc. 1998 Stock Incentive Plan, incorporated herein by reference to Exhibit 4.4 to Aetna Inc.'s Registration Statement on Form S-8 (Registration Statement No. 333-68881) filed on December 14, 1998.* 61 Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. (continued) Employment Agreement, dated as of December 19, 1995 between Aetna Services, Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Services, Inc.'s 1995 Form 10-K* Amendment dated as of July 22, 1996 to Employment Agreement dated as of December 19, 1995 between Aetna Services, Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997* Amendment dated as of September 8, 1997 to Employment Agreement dated as of December 19, 1995 between Aetna Services, Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on November 4, 1997* Letter Agreement, dated as of April 6, 1999, between Aetna Inc. and Thomas J. McInerney, incorporated herein by reference to Exhibit 10.4 to Aetna Inc.'s Form 10-Q filed on July 29, 1999.* Description of certain arrangements not embodied in formal documents, as described under the heading "Executive Compensation", are incorporated herein by reference to Aetna Inc.'s 2000 Proxy Statement. Amended and Restated Asset Purchase Agreement by and among Aetna Life Insurance Company, Aetna Life Insurance and Annuity Company, The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York, dated May 21, 1998, incorporated herein by reference to the Company's Form 10-Q filed on August 8, 1998. (The Company will provide to the Securities and Exchange Commission a copy of omitted schedules or similar attachments upon request.) * Management contract or compensatory plan or arrangement 62 Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. (continued) 21 Subsidiaries of the Registrant Incorporated by reference to Exhibit Item 24 of Post-Effective Amendment No.38 to Registration Statement on Form N-1A (File Number 33-41694), as filed on February 23, 2000. 24 Power of Attorney (Filed herein immediately after Signature page.) 27 Financial Data Schedules Exhibits, other than these listed, are omitted because they are not required or not applicable. (b) Reports on Form 8-K. None. 63 Index to Consolidated Financial Statement Schedules Page ---- Independent Auditors' Report ..................................... 65 I. Summary of Investments--Other than Investments in Affiliates as of December 31, 1999 .......................................... 66 III. Supplementary Insurance Information as of and for the years ended December 31, 1999, 1998 and 1997 ........................ 67
Schedules other than those listed above are omitted because they are not required or are not applicable. 64 Independent Auditors' Report The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: Under date of February 7, 2000, we reported on the consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1999 and 1998, 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, 1999, as included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Hartford, Connecticut February 7, 2000 65 Schedule I Summary of Investments--Other than Investments in Affiliates As of December 31, 1999 (in millions)
Amount at Which Shown in the Type of Investment Cost Value* Balance Sheet ------------------ ---- ------ ------------- Debt Securities: U.S. government and government agencies and authorities $ 1,087.2 $ 1,069.7 $ 1,069.7 States, municipalities and political subdivisions 0.3 0.3 0.3 U.S. corporate securities 4,785.0 4,633.3 4,633.3 Foreign securities (1) 1,309.2 1,295.9 1,295.9 Residential mortgage-backed securities 2,739.0 2,728.6 2,728.6 Commercial/Multifamily mortgage- backed securities 1,031.5 986.2 986.2 Other asset-backed securities 705.7 696.1 696.1 ---------- ---------- ---------- Total debt securities 11,657.9 11,410.1 11,410.1 ---------- ---------- ---------- Equity securities: Non-redeemable preferred stock 134.7 130.9 130.9 Investment in affiliated mutual funds 63.5 64.1 64.1 Common stock 6.7 11.5 11.5 ---------- ---------- ---------- Total equity securities 204.9 206.5 206.5 ---------- ---------- ---------- Short-term investments 74.2 74.2 74.2 Mortgage loans 6.7 6.8 6.7 Policy loans 314.0 314.0 314.0 Other investments 13.2 13.2 13.2 ---------- ---------- ---------- Total investments $ 12,270.9 $ 12,024.8 $ 12,024.7 ========== ========== ==========
* See Notes 1 and 4 of Notes to 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. 66 Schedule III Supplementary Insurance Information As of and for the years ended December 31, 1999, 1998 and 1997 (in millions)
Policy- Deferred Unpaid holders' policy Future claims funds left acquisition policy and claim Unearned with the Segment costs benefits expenses premiums (1) Company - ---------------------------------------------------------------------------------------------------- 1999 Financial Products $ 1,080.8 $ 889.8 $ 7.4 $ 1.0 $ 11,112.2 Investment Management Services -- -- -- -- -- Other (2) ( 34.4) -- -- -- -- Discontinued Operations (3) -- 2,959.6 19.9 -- 9.5 - ---------------------------------------------------------------------------------------------------- Total $ 1,046.4 $ 3,849.4 $ 27.3 $ 1.0 $ 11,121.7 ==================================================================================================== 1998 Financial Products $ 916.0 $ 878.0 $ 0.3 $ 1.1 $ 11,295.1 Investment Management Services -- -- -- -- -- Other (2) ( 22.9) -- -- -- -- Discontinued Operations (3) -- 2,936.8 18.5 -- 10.5 - ---------------------------------------------------------------------------------------------------- Total $ 893.1 $ 3,814.8 $ 18.8 $ 1.1 $ 11,305.6 ==================================================================================================== 1997 Financial Products $ 824.9 $ 948.0 $ 0.8 $ 1.1 $ 11,116.8 Investment Management Services -- -- -- -- -- Other (2) ( 11.7) -- -- -- -- Discontinued Operations (3) 855.0 2,814.6 37.2 -- 26.7 - ---------------------------------------------------------------------------------------------------- Total $ 1,668.2 $ 3,762.6 $ 38.0 $ 1.1 $ 11,143.5 ====================================================================================================
Notes to Schedule III: (1) Included in future policy benefits on the Company's Consolidated Balance Sheets. (2) Includes consolidating adjustments. (3) Domestic individual life insurance business. 67 Schedule III (continued) Supplementary Insurance Information As of and for the years ended December 31, 1999, 1998 and 1997 (in millions)
Amortization of deferred Net Current policy Other Premium investment Other and future acquisition Operating Segment Revenue income (4) Income (5) benefits costs Expenses (6) - ------------------------------------------------------------------------------------------------------ 1999 Financial Products $ 107.5 $ 881.5 $ 422.1 $ 746.2 $ 93.4 $ 306.4 Investment Management Services -- 1.5 118.3 -- -- 75.2 Other (7) -- 3.3 ( 43.9) -- 11.5 ( 13.7) - ---------------------------------------------------------------------------------------------------- Continuing Operations $ 107.5 $ 886.3 $ 496.5 $ 746.2 $ 104.9 $ 367.9 ==================================================================================================== Discontinued Operations (8) -- -- $ 8.7 -- -- -- ==================================================================================================== 1998 Financial Products $ 79.4 $ 865.3 $ 376.6 $ 714.4 $ 80.3 $ 281.3 Investment Management Services -- 1.5 96.7 -- -- 59.5 Other (7) -- 5.0 ( 38.4) -- 10.9 1.0 - ---------------------------------------------------------------------------------------------------- Continuing Operations $ 79.4 $ 871.8 $ 434.9 $ 714.4 $ 91.2 $ 341.8 ==================================================================================================== Discontinued Operations (8) $ 342.0 $ 146.1 $ 164.1 $ 482.4 $ 34.7 $ 41.3 ==================================================================================================== 1997 Financial Products $ 69.1 $ 876.7 $ 332.1 $ 720.4 $ 57.2 $ 286.5 Investment Management Services -- 1.4 80.3 -- -- 50.1 Other (7) -- 3.6 ( 23.9) -- 9.1 ( 20.3) - ---------------------------------------------------------------------------------------------------- Continuing Operations $ 69.1 $ 881.7 $ 388.5 $ 720.4 $ 66.3 $ 316.3 ==================================================================================================== Discontinued Operations (8) $ 198.0 $ 201.7 $ 220.7 $ 407.4 $ 45.6 $ 60.9 ====================================================================================================
Notes to Schedule III (continued): (4) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (5) Includes net realized capital losses and gains and charges assessed against policyholders. (6) Year 2000 costs are not included in the amounts reported for the Financial Products and Investment Management Services segments. (7) Includes consolidating adjustments and Year 2000 costs. (8) Domestic individual life insurance business. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AETNA LIFE INSURANCE AND ANNUITY COMPANY (Registrant) Date March 22, 2000 By /s/ Deborah Koltenuk -------------- -------------------- Deborah Koltenuk Vice President, Corporate Controller and Assistant Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 22, 2000.
Signature Title * - ------------------------------------- Thomas J. McInerney President and Director (Principal Executive Officer) * - ------------------------------------- Catherine H. Smith Senior Vice President, Chief Financial Officer, and Director (Principal Financial Officer) * - ------------------------------------- Shaun P. Mathews Senior Vice President and Director /s/ Deborah Koltenuk - ------------------------------------- Deborah Koltenuk Vice President, Corporate Controller and Assistant Treasurer (Principal Accounting Officer)
* By: /s/ Kirk P. Wickman ------------------- Kirk P. Wickman, Senior Vice President, General Counsel and Corporate Secretary 69 POWER OF ATTORNEY We, the undersigned directors and officers of Aetna Life Insurance and Annuity Company, hereby severally constitute and appoint Kirk P. Wickman and Deborah Koltenuk and each of them individually, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names and in the capacities indicated below, the 1999 Form 10-K and any and all amendments thereto to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, hereby ratifying and confirming our signatures as they may be signed by our said attorney to the Form 10-K and any and all amendments thereto. WITNESS our hands and common seal on this 22nd day of March, 2000.
Signature Title /s/ Thomas J. McInerney - ------------------------------------- Thomas J. McInerney President and Director (Principal Executive Officer) /s/ Catherine H. Smith - ------------------------------------- Catherine H. Smith Senior Vice President, Chief Financial Officer, and Director (Principal Financial Officer) /s/ Shaun P. Mathews - ------------------------------------- Shaun P. Mathews Senior Vice President and Director /s/ Deborah Koltenuk - ------------------------------------- Deborah Koltenuk Vice President, Corporate Controller and Assistant Treasurer (Principal Accounting Officer)
70 SECRETARY CERTIFICATE AETNA LIFE INSURANCE AND ANNUITY COMPANY I, Rose-Marie DeRensis, the duly elected Assistant Corporate Secretary of Aetna Life Insurance and Annuity Company (the "Company"), do hereby certify that the attached resolutions entitled "Company Name, Authority to Sign (Duplicate Corporate Seals)" adopted by the Board of Directors on June 22, 1995, are currently in full force and effect, and have not been amended, restated, or superceded. IN WITNESS WHEREOF, I have affixed my name as Assistant Corporate Secretary and have caused the corporate seal of said Company to be hereunto affixed this 22nd day of March, 2000. By: /s/ Rose-Marie DeRensis (corporate seal) --------------------------- Rose-Marie DeRensis Assistant Corporate Secretary 71 AETNA LIFE INSURANCE AND ANNUITY COMPANY COMPANY NAME, AUTHORITY TO SIGN (DUPLICATE CORPORATE SEALS) June 22, 1995 RESOLVED: That the following officers: President Senior Vice President Vice President General Counsel Corporate Secretary Treasurer Assistant Corporate Secretary (1) are hereby severally authorized to sign in the Company's name: (a) insurance contracts of every type and description which the Company is authorized to write; (b) agreements relating to the purchase, sale, or exchange of securities including any consents and modifications given or made under such agreements; (c) conveyances and leases of real estate or any interest therein including any modifications thereof; (d) assignments and releases of mortgages and other liens, claims or demands; (e) any other written instrument which they are authorized to approve in the normal course of Company business; and (f) any other written instrument when specifically authorized by the Board of Directors or the President; and are further severally authorized (i) to delegate all or any part of the foregoing authority to one or more officers, employees or agents of this Company, provided that each such delegation is in writing and a copy thereof is filed in the Office of the Corporate Secretary, or (ii) to designate any attorney at law representing this Company on a matter under their direction, to so sign this Company's name; (2) are hereby severally authorized to possess the Company's duplicate seals and to affix the same to items (a) through (f) above; and are further severally authorized to designate any Company officer under their direction to possess and to so affix the Company's duplicate seals; and that the Senior Vice President, Investments is hereby authorized to designate any officer, employee or agent of this Company under his direction to sign the Company's name and to affix the Company's seal to any and all documents required in connection with any investment transaction in which the Company has an interest. 72 EX-99.B.16(23)(A) 4 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors The Shareholder and Board of Directors of Aetna Life Insurance and Annuity Company: We consent to the incorporation by reference in the registration statement No. 333-49593 on Post Effective Amendment No. 3 on Form S-2 of Aetna Life Insurance and Annuity Company and Subsidiaries (the "Company") of our audit reports dated February 7, 2000 relating to the consolidated balance sheets of the Company as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholder's equity and cash flows and all related schedules for each of the years in the three-year period ended December 31, 1999, which reports appear in the December 31, 1999 annual report on Form 10-K of the Company and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Hartford, Connecticut April 4, 2000 EX-27 5 ALIAC FDS
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 FOR THE AETNA LIFE INSURANCE AND ANNUITY COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000837010 AETNA LIFE INSURANCE AND ANNUITY COMPANY 1,000,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 11,410 0 0 207 7 0 12,025 693 3,001 1,046 56,387 3,849 1 27 11,122 0 0 0 3 1,381 56,387 108 886 (22) 130 746 105 0 271 90 181 6 0 0 187 0 0 0 0 0 0 0 0 0
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