The Company's 1996 net income includes after-tax severance and facilities charges of $39.8 million, see Note 7 in the Notes to Consolidated Financial Statements. Excluding these charges and net realized capital gains, the Company's results increased $17.8 million and $5.8 million in 1996 and 1995, respectively, reflecting improved earnings from financial services, as well as, in 1996, individual life insurance.
Assets under management, excluding the effect of FAS 115, increased by 20% during 1996 and 24% in 1995 primarily due to continued business growth and overall improvement in the stock market.
Of the $11.7 billion, $11.1 billion and $10.1 billion of fixed annuity assets under management at December 31, 1996, 1995 and 1994, respectively, 25%, 23% and 20%, respectively, were fully guaranteed, and 75%, 77% and 80% were experience rated. The average earned rate on investments supporting fully guaranteed investment contracts was 7.9%, 8.2% and 8.5% and the average earned rate on investments supporting experience rated investment contracts was 8.0%, 8.1% and 8.2% for the years ended December 31, 1996, 1995 and 1994, respectively. The average credited rate on fully guaranteed investment contracts was 6.8%, 7.0% and 6.8% and the average credited rate on experience rated investment contracts was 6.0%, 6.2% and 6.2% for the years ended December 31, 1996, 1995 and 1994, respectively. The resulting interest margins on fully guaranteed investment contracts were 1.1%, 1.2% and 1.7% and on experience rated investment contracts were 2.0%, 1.9% and 2.0% for the years ended December 31, 1996, 1995 and 1994, respectively.
Earnings, excluding the after-tax severance and facilities charge of $9.2 million (see Note 7 in the Notes to Consolidated Financial Statements) and net realized capital gains, increased by 5% in 1996. Earnings in 1995 were level with 1994. The increase in 1996 reflects favorable mortality experience in the traditional business and favorable mortality and surrender margins from the universal life block acquired in 1995, partially offset by higher amortization of deferred policy acquisition costs and by increased operating expenses associated with business growth.
Deposits relate to universal life contracts. Deposits in 1995 included the acquisition of a $172.4 million universal life block of business from an unaffiliated insurer. Excluding this amount, deposits increased 21% and 15% in 1996 and 1995, respectively, reflecting continued business growth.
The Company's investment strategies and portfolios are intended to match the duration of the related liabilities and provide sufficient cash flow to meet obligations while maintaining a competitive rate of return. The duration of these investments is monitored, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's maturing liabilities. The risks associated with investments supporting experience rated products are assumed by those customers subject to, among other things, certain minimum guarantees.
(Millions) 1996 1995 - -------------------------------------------------------------------------------- Debt securities, available for sale $12,905.5 $12,720.8 Equity securities, available for sale: Non-redeemable preferred stock 119.0 57.6 Investment in affiliated mutual funds 81.1 191.8 Common stock 0.3 8.2 Short-term investments 34.8 15.1 Mortgage loans 13.0 21.2 Policy loans 399.3 338.6 --------------------------- Total Investments $13,553.0 $13,353.3 ================================================================================
At December 31, 1996 and 1995, the Company's carrying value of investments in debt securities represented 95% of total general account invested assets for both periods. At December 31, 1996 and 1995, $10.3 billion and $10.0 billion, 80% and 79%, respectively, of total debt securities supported experience rated products.
U.S. Corporate Securities 36.8% Residential Mortgage-Backed Securities 24.6 Foreign Securities - U.S. Dollar Denominated 15.2 U.S. Treasuries/Agencies 8.4 Commercial/Multifamily Mortgage- Backed Securities 8.0 Asset-Backed Securities 6.9 Other 0.1 ----- 100.0% =====
Debt Securities Quality Ratings at December 31, 1995 - --------------------------------- AAA 46.0% AA 11.7 A 25.4 BBB 11.7 BB 4.0 B and Below 1.2 ----------- 100.0% ===========
The amount of dividends which may be paid to the shareholder without prior approval by the Insurance Commissioner of the State of Connecticut is subject to various restrictions. Based upon these restrictions, the Company is permitted a maximum of $71.1 million in dividend distributions in 1997.
Consolidated Balance Sheets as of December 31, 1996 and 1995 26
We have audited the accompanying consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1996 and 1995, 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, 1996. 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.
Income taxes 57.8 87.3 75.6 ------- ------- ------- Net income $141.1 $175.9 $145.3 ======= ======= =======
Cash and cash equivalents 459.1 568.8 Accrued investment income 159.0 175.5 Premiums due and other receivables 26.6 37.3 Deferred policy acquisition costs 1,515.3 1,341.3 Reinsurance loan to affiliate 628.3 655.5 Other assets 33.7 26.2 Separate Account assets 15,318.3 10,987.0 --------- --------- Total assets $31,693.3 $27,144.9 ========= =========
Liabilities: Future policy benefits $3,617.0 $3,594.6 Unpaid claims and claim expenses 28.9 27.2 Policyholders' funds left with the Company 10,663.7 10,500.1 --------- --------- Total insurance reserve liabilities 14,309.6 14,121.9 Other liabilities 354.7 257.2 Income taxes: Current 20.7 26.2 Deferred 80.5 169.6 Separate Account liabilities 15,318.3 10,987.0 --------- --------- Total liabilities 30,083.8 25,561.9 --------- ---------
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 418.0 407.6 Net unrealized capital gains 60.5 132.5 Retained earnings 1,128.2 1,040.1 --------- --------- Total shareholder's equity 1,609.5 1,583.0 --------- ---------
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries (collectively, the "Company") is a provider of financial services and life insurance products in the United States. The Company has two business segments: financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and non-qualified annuity contracts. These contracts may be deferred or immediate ("payout annuities"). Financial services also include investment advisory services, financial planning and pension plan administrative services.
The consolidated financial statements include Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company of America and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996. This statement provides accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. Transactions covered by this statement would include securitizations, sales of partial interests in assets, repurchase agreements and securities lending. This statement requires that after a transfer of financial assets, an entity would recognize any assets it controls and liabilities it has incurred. An entity would not recognize assets when control has been surrendered or liabilities have been satisfied. Portions of this statement are effective for each of 1997 and 1998 financial statements and early adoption is not permitted. The Company does not expect adoption of this statement to have a material effect on its financial position or results of operations.
Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Deferred gains or losses on such futures contracts are amortized over the life of the acquired asset or liability as a yield adjustment or through net realized capital gains or losses upon disposal of an asset. Changes in the fair value of futures contracts that do not qualify as hedges are recorded in net realized capital gains or losses. Hedge designation requires specific asset or liability identification, a probability at inception of high correlation with the position underlying the hedge, and that high correlation be maintained throughout the hedge period. If a hedging instrument ceases to be highly correlated with the position underlying the hedge, hedge accounting ceases at that date and excess gains and losses on the hedging instrument are reflected in net realized capital gains or losses.
Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses.
The amortized cost and fair value of debt securities for the year ended December 31, 1996 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
Amortized Fair Cost Value --------- ----- (millions) Due to mature: One year or less $ 424.4 $ 425.7 After one year through five years 2,162.4 2,194.2 After five years through ten years 2,467.4 2,509.6 After ten years 2,568.4 2,675.4 Mortgage-backed securities 4,028.7 4,204.3 Other asset-backed securities 887.8 896.3 --------- --------- Total $12,539.1 $12,905.5 ========= =========
The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Collateral, primarily cash, which is in excess of the market value of the loaned securities, is deposited by the borrower with a lending agent, and retained and invested by the lending agent to generate additional income for the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. At December 31, 1996 and 1995, the Company had loaned securities (which are reflected as invested assets) with a market value of approximately $444.7 million and $264.5 million, respectively.
At December 31, 1996 and 1995, debt securities carried at $7.6 million and $7.4 million, respectively, were on deposit as required by regulatory authorities.
Included in the Company's total debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
(1) At December 31, 1996 and 1995, approximately 71% and 81%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, FHLMC.
At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of the Company's CMO holdings were in planned amortization class ("PAC") and sequential structure tranches, which are subject to less prepayment and extension risk than other types of CMO instruments. At December 31, 1996 and 1995, approximately 3% of the Company's CMO holdings were in the interest-only ("IOs") and principal-only ("POs") tranches, which are subject to more prepayment and extension risks than other types of CMO instruments. Remaining CMO holdings are in other tranches that have prepayment and extension risks which fall between the degree of risk associated with PACs and sequentials, and IOs and POs.
The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 1996 and 1995 were as follows:
The Company uses off-balance-sheet and other financial instruments primarily to manage portfolio risks, including interest rate, prepayment/call, credit, price, and liquidity risks. In 1996, Treasury futures contracts were used to manage interest rate risk in the Company's bond portfolio and stock index futures contracts were used to manage price risk in the Company's equity portfolio. In 1996 and 1995, interest rate swaps and forward commitments to enter into interest rate swaps, respectively, were also used to manage interest rate risk in the Company's bond portfolio.
During 1995, the Company received $0.4 million for writing call options on underlying securities. The Company did not write any call options in 1996. As of December 31, 1996 and 1995, there were no option contracts outstanding.
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, 1996 was as follows:
Residential collateralized mortgage obligations $ 2,227.8 $ 2,309.0 Principal-only strips (included above) 44.5 53.3 Interest-only strips (included above) 10.3 22.8 Other structured securities with derivative characteristics (1) 126.3 129.2
Sources of net investment income were as follows: 1996 1995 1994 ---- ---- ---- (millions)
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the Company dividended $2.9 million in the form of two of its subsidiaries, Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
The amount of dividends that may be paid to the shareholder in 1997 without prior approval by the Insurance Commissioner of the State of Connecticut is $71.1 million.
The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and shareholder's capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from generally accepted accounting principles. Statutory net income was $57.8 million, $70.0 million and $64.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. Statutory capital and surplus was $713.6 million and $670.7 million as of December 31, 1996 and 1995, respectively.
Debt securities $ 11.1 $ 32.8 $ 1.0 Equity securities 8.6 8.3 0.2 Mortgage loans -- 0.2 0.3 -------- -------- ------- Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5 ======== ======= ======= After tax realized capital gains $ 13.0 $ 25.8 $ 1.0 ======== ======= =======
Net realized capital gains of $53.1 million and $61.1 million for 1996 and 1995, respectively, and net realized capital losses of $29.1 million for 1994, allocable to experience rated contracts, were deducted from net realized capital gains (losses) and an offsetting amount was reflected in policyholder funds' left with the Company. Net unamortized gains were $53.3 million and $7.3 million at December 31, 1996 and 1995, respectively.
Proceeds from the sale of available for sale debt securities and the related gross gains and losses were as follows:
Changes in shareholder's equity related to changes in unrealized capital gains (losses), (excluding those related to experience rated contractholders), were as follows:
Shareholder's equity included the following unrealized capital gains (losses), which are net of amounts allocable to experience rated contractholders, at December 31:
Deferred income taxes (See Note 8) 32.9 71.5 108.0 ------ ------ --------
Severance and facilities charges during 1996, as described below, included the following (pretax):
In addition to the above charge, Aetna recorded a facilities and severance charge in the second quarter of 1996, primarily as a result of actions taken or expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by Aetna's property-casualty operations. The cost allocated to the Company associated with this charge was $9.1 million after tax ($14.0 million pretax).
The activity during 1996 within the severance and facilities reserve (pretax, in millions) and the number of positions eliminated related to such actions were as follows:
(1) Includes $8.0 million of severance-related actions and $4.1 million of corporate allocation-related actions.
1996 1995 1994 ---- ---- ---- (millions) Current taxes (benefits): Income Taxes: Federal $ 50.9 $ 82.9 $ 78.7 State 3.7 3.2 4.4 Net realized capital gains (losses) 25.3 28.5 (33.2) ------ ------ ------ 79.9 114.6 49.9 ------ ------ ------ Deferred taxes (benefits): Income Taxes: Federal (3.5) (14.4) (8.0) Net realized capital gains (losses) (18.6) (12.9) 33.7 ------ ------ ------ (22.1) (27.3) 25.7 ------ ------ ------ Total $ 57.8 $ 87.3 $ 75.6 ====== ====== ======
1996 1995 ---- ---- (millions) Deferred tax assets: Insurance reserves $ 344.6 $ 290.4 Unrealized gains allocable to experience rated contracts 100.8 216.7 Investment losses 7.5 7.3 Postretirement benefits other than pensions 27.0 7.7 Deferred compensation 25.0 18.9 Pension 7.6 5.7 Other 29.3 9.2 ------- ------- Total gross assets 541.8 555.9
Deferred tax liabilities: Deferred policy acquisition costs 482.1 433.0 Market discount 6.8 4.4 Net unrealized capital gains 133.7 288.2 Other (0.3) (0.1) ------- ------- Total gross liabilities 622.3 725.5 ------- ------- Net deferred tax liability $ 80.5 $ 169.6 ======= =======
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, 1996. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes the conditions under which such taxes would become payable are remote.
Employee Pension Plans - The Company, in conjunction with Aetna, has noncontributory defined benefit pension plans covering substantially all employees. The plans provide pension benefits based on years of service and average annual compensation (measured over 60 consecutive months of highest earnings in a 120-month period). Contributions are determined using the Projected Unit Credit Method and, for qualified plans subject to ERISA requirements, are limited to the amounts that are tax-deductible. As of December 31, 1996, Aetna's accrued pension cost has been allocated to its subsidiaries, including the Company, under an allocation based on eligible salaries. Data on a separate company basis regarding the proportionate share of the projected benefit obligation and plan assets is not available. The accumulated benefit obligation and plan assets are recorded by Aetna. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. Allocated pretax charges to operations for the pension plan (based on the Company's total salary cost as a percentage of Aetna's total salary cost) were $4.3 million, $6.1 million and $5.5 million for the years ended December 31, 1996, 1995 and 1994, 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 $5.4 million, $4.9 million and $3.3 million in 1996, 1995 and 1994, respectively.
Effective February 1, 1992, the Company increased its retention limit per individual life to $2.0 million and entered into a reinsurance agreement with Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0 million on any new individual life business, on a yearly renewable term basis. Premium amounts related to this agreement were $5.2 million, $3.2 million and $1.3 million for 1996, 1995 and 1994, respectively.
The Company received a capital contribution of $10.4 million in cash from HOLDCO in 1996. The Company received no capital contributions in 1995 or 1994.
Premiums due and other receivables include $2.8 million and $5.7 million due from affiliates in 1996 and 1995, respectively. Other liabilities include $10.7 million and $12.4 million due to affiliates for 1996 and 1995, respectively.
The following table includes premium amounts ceded/assumed to/from affiliated companies as discussed in Note 10 above.
Ceded to Assumed Direct Other from Other Net Amount Companies Companies Amount ------ --------- --------- ------ (millions) Premiums: Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7 Accident and Health Insurance 6.3 6.3 -- -- Annuities 84.3 -- 0.6 84.9 ======= ======= ======= ======= Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6 ======= ======= ======= ======= Premiums: Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2 Accident and Health Insurance 7.5 7.5 -- -- Annuities 164.0 -- 0.5 164.5 ======= ======= ======= ======= Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7 ======= ======= ======= ======= Premiums: Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1 Accident and Health Insurance 9.3 9.3 -- -- Annuities 137.3 -- 0.2 137.5 ======= ======= ======= ======= Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6 ======= ======= ======= =======
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, 1996, the Company had commitments to purchase investments of $17.9 million. The fair value of the investments at December 31, 1996 approximated $18.3 million.