-----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, M8a4TcttA076gqQ/z+vtd4NNg00nhv3jg4naN8bluhXeD1F0+Al2xfXBcb4JswB2 S04Xrx4iRbnGPcM3n0ccbg== /in/edgar/work/0000912057-00-048239/0000912057-00-048239.txt : 20001110 0000912057-00-048239.hdr.sgml : 20001110 ACCESSION NUMBER: 0000912057-00-048239 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20001109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AETNA LIFE INSURANCE & ANNUITY CO /CT CENTRAL INDEX KEY: 0000837010 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 710294708 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 812-12098 FILM NUMBER: 757462 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 10-Q 1 a2030008z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 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 ----------------------------- NONE - -------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Title of Class At October 31, 2000 - -------------- -------------------- Common Stock, par value $50 55,000 The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q 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.)
TABLE OF CONTENTS ----------------- PAGE ---- PART I. FINANCIAL INFORMATION (Unaudited) Item 1. Financial Statements: Consolidated Statements of Income ................................. 3 Consolidated Balance Sheets........................................ 4 Consolidated Statements of Changes in Shareholder's Equity......... 5 Consolidated Statements of Cash Flows.............................. 6 Condensed Notes to Consolidated Financial Statements............... 7 Independent Auditors' Review Report.................................. 14 Item 2. Management's Analysis of the Results of Operations................... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 23 Item 5. Other Information.................................................... 24 Item 6. Exhibits and Reports on Form 8-K .................................... 24 Signature ...................................................................... 25
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Income (millions)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenue: Premiums $ 41.8 $ 44.2 $ 117.1 $ 86.6 Charges assessed against policyholders 119.9 98.6 351.0 283.1 Net investment income 231.9 230.6 681.5 668.8 Net realized capital losses (11.2) (11.1) (23.1) (5.4) Other income 44.0 20.1 117.5 82.5 ------------ ------------ ------------ ------------ Total revenue 426.4 382.4 1,244.0 1,115.6 Benefits and expenses: Current and future benefits 199.8 201.8 598.3 564.0 Operating expenses: Salaries and related benefits 52.3 35.0 144.0 107.7 Other 60.1 54.0 166.4 155.1 Amortization of deferred policy acquisition costs 36.8 25.9 96.4 77.6 ------------ ------------ ------------ ------------ Total benefits and expenses 349.0 316.7 1,005.1 904.4 ------------ ------------ ------------ ------------ Income from continuing operations before income taxes 77.4 65.7 238.9 211.2 Income taxes 22.7 21.8 75.9 69.6 ------------ ------------ ------------ ------------ Income from continuing operations 54.7 43.9 163.0 141.6 Discontinued operations, net of tax: Amortization of deferred gain on sale 1.5 1.4 4.7 4.1 ------------ ------------ ------------ ------------ Net income $ 56.2 $ 45.3 $ 167.7 $ 145.7 ============ ============ ============ ============
See Condensed Notes to Consolidated Financial Statements. 3 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Balance Sheets (millions, except share data)
September 30, December 31, 2000 1999 ASSETS ------------- ------------ Investments: Debt securities available for sale, at fair value (amortized cost: $11,193.0 and $11,657.9) $ 11,075.8 $ 11,410.1 Equity securities, at fair value: Nonredeemable preferred stock (cost: $107.9 and $134.7) 101.0 130.9 Investment in affiliated mutual funds (cost: $13.0 and $63.5) 18.7 64.1 Common stock (cost: $5.6 and $6.7) 13.0 11.5 Short-term investments 81.5 74.2 Mortgage loans 4.6 6.7 Policy loans 338.6 314.0 Other investments 13.5 13.2 ----------- ----------- Total investments 11,646.7 12,024.7 Cash and cash equivalents 987.3 694.4 Short-term investments under securities loan agreement 753.3 232.5 Accrued investment income 148.7 150.7 Premiums due and other receivables 97.3 298.3 Reinsurance recoverable 3,003.4 3,001.2 Deferred income taxes 93.7 150.4 Deferred policy acquisition costs 1,155.2 1,046.4 Other assets 108.3 96.5 Separate Accounts assets 40,059.6 38,692.6 ----------- ----------- Total assets $ 58,053.5 $ 56,387.7 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits $ 3,938.2 $ 3,850.4 Unpaid claims and claim expenses 29.3 27.3 Policyholders' funds left with the Company 10,887.4 11,121.7 ----------- ----------- Total insurance reserve liabilities 14,854.9 14,999.4 Payables under securities loan agreement 753.3 232.5 Current income taxes 13.3 14.7 Other liabilities 797.9 1,062.8 Separate Accounts liabilities 40,059.6 38,692.6 ----------- ----------- Total liabilities 56,479.0 55,002.0 ----------- ----------- 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 431.9 431.9 Accumulated other comprehensive loss (14.5) (44.8) Retained earnings 1,154.3 995.8 ----------- ----------- Total shareholder's equity 1,574.5 1,385.7 ----------- ----------- Total liabilities and shareholder's equity $ 58,053.5 $ 56,387.7 =========== ===========
See Condensed Notes to Consolidated Financial Statements. 4 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) 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)
Nine Months Ended September 30, ----------------------------------- 2000 1999 ----------- ----------- Shareholder's equity, beginning of period $ 1,385.7 $ 1,394.5 Comprehensive income: Net income 167.7 145.7 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities $46.6, ($200.5) pretax) (1) 30.3 (130.3) ----------- ----------- Total comprehensive income 198.0 15.4 ----------- ----------- Other changes 0.9 0.5 Common stock dividends (10.1) (29.8) ----------- ----------- Shareholder's equity, end of period $ 1,574.5 $ 1,380.6 =========== ===========
(1) Net of reclassification adjustments. See Condensed Notes to Consolidated Financial Statements. 5 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Cash Flows (millions)
Nine Months Ended September 30, ------------------------------------ 2000 1999 ------------ ----------- Cash Flows from Operating Activities: Net income $ 167.7 $ 145.7 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Net accretion of discount on investments (25.2) (20.6) Amortization of deferred gain on sale (4.7) (4.1) Net realized capital losses 23.1 5.4 Changes in assets and liabilities: Decrease (increase) in accrued investment income 2.0 (11.4) Decrease in premiums due and other receivables 13.2 31.6 Increase in policy loans (24.6) (16.7) Increase in deferred policy acquisition costs (108.8) (114.7) Increase (decrease) in universal life account balances 21.0 (220.5) Increase in other insurance reserve liabilities 84.6 232.1 Net (decrease) in other liabilities and other assets (69.0) (75.5) Increase (decrease) in income taxes 36.6 (280.1) ----------- ----------- Net cash provided by (used for) operating activities 115.9 (328.8) ----------- ----------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 9,074.5 4,017.1 Equity securities 107.4 89.9 Mortgage loans 2.1 2.3 Investment maturities and collections of: Debt securities available for sale 488.0 995.2 Short-term investments 57.2 60.6 Cost of investment purchases in: Debt securities available for sale (9,128.6) (4,805.5) Equity securities (16.5) (9.4) Short-term investments (89.9) (68.4) Decrease in property and equipment 2.9 7.6 Other, net (4.6) 6.2 ----------- ----------- Net cash provided by investing activities 492.5 295.6 ----------- ----------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,275.1 1,576.5 Withdrawals of investment contracts (1,606.9) (1,308.4) Dividends paid to shareholder (10.1) (235.8) Other, net 24.4 170.4 ----------- ----------- Net cash (used for) provided by financing activities (317.5) 202.7 ----------- ----------- Net increase in cash and cash equivalents 290.9 169.5 Effect of exchange rate changes on cash and cash equivalents 2.0 -- Cash and cash equivalents, beginning of period 694.4 629.4 ----------- ----------- Cash and cash equivalents, end of period $ 987.3 $ 798.9 =========== =========== Supplemental cash flow information: Income taxes paid, net $ 39.4 $ 315.6 =========== ===========
See Condensed Notes to Consolidated Financial Statements. 6 ITEM 1. FINANCIAL STATEMENTS (continued) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements 1) BASIS OF PRESENTATION The consolidated financial statements include Aetna Life Insurance and Annuity Company ("ALIAC") and its wholly owned subsidiaries, Aetna Insurance Company of America ("AICA"), Aetna Investment Adviser Holding Company, Inc. ("IA Holdco") and Aetna Investment Services, Inc. (collectively, 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., whose ultimate parent is Aetna Inc. ("Aetna"). On June 30, 2000 HOLDCO contributed Aetna Investment Services, Inc. ("AISI") to the Company. (Refer to note 2). 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. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are unaudited. The contribution of IA Holdco to the Company, which occurred on July 1, 1999, and the contribution of AISI to the Company were each 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 and AISI. Certain reclassifications have been made to 1999 financial information to conform to the 2000 presentation. These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as presented in ALIAC's 1999 Annual Report on Form 10-K. Certain financial information that is normally included in annual financial statements prepared in accordance with generally accepted accounting principles, but that is not required for interim reporting purposes, has been condensed or omitted. 2) CONTRIBUTION OF AISI FROM HOLDCO On June 30, 2000, HOLDCO contributed AISI to the Company. AISI is registered with the Securities Exchange Commission as a broker/dealer and is a member of the National Association of Securities Dealers, Inc. It is also registered with the appropriate state securities authorities as a broker/dealer. The principal operation of AISI is the sale of fixed and variable annuities and mutual funds through its registered representatives. 7 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (continued) 3) RECENT DEVELOPMENTS AGREEMENT TO SELL AETNA FINANCIAL SERVICES AND AETNA INTERNATIONAL On July 20, 2000, Aetna Inc. ("Aetna"), the ultimate parent of the Company, announced that it reached a definitive agreement to sell its Aetna Financial Services and Aetna International businesses to ING Groep N.V. ("ING") in a transaction valued at approximately $7.7 billion. The Company is part of the Aetna Financial Services business and will be included in the sale to ING. Under the terms of the agreement, in two effectively simultaneous steps: (1) Aetna will spin off to its shareholders the shares of a standalone health company that will be comprised primarily of its Aetna U.S. Healthcare and Large Case Pensions businesses; and (2) Aetna, which then will be comprised of Aetna Financial Services and Aetna International, will merge with a newly formed subsidiary of ING. Aetna's goal is to close the transaction, which is subject to receipt of required shareholder, regulatory and other consents and approvals, as well as other closing conditions, by year-end 2000. An Aetna shareholders' meeting has been scheduled for November 30, 2000 to consider the transaction and certain other matters. The full impact of the sale to ING on the Company's financial position and results of operations cannot be determined at this time. 4) NEW ACCOUNTING STANDARD On January 1, 2000, the Company adopted Statement of Position 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, issued by the American Institute of Certified Public Accountants. This statement 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. The adoption of this standard had no impact on the Company's financial position or results of operations. 5) FUTURE ACCOUNTING STANDARD In September 2000, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities which replaces FAS No. 125, Accounting for Transfers and Services of Financial Assets and Extinguishments of Liabilities. This standard revises the methods for accounting for securitizations and other transfers of financial assets and collateral as outlined in 8 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (continued) 5) FUTURE ACCOUNTING STANDARD (continued) FAS No. 125, and requires certain additional disclosures. For transfers and servicing of financial assets and extinguishments of liabilities, this standard will be effective for the Company's June 30, 2001 financial statements. However, for disclosures regarding securitizations and collateral, as well as recognition and reclassification of collateral, this standard will be effective for the Company's December 31, 2000 financial statements. The Company is currently evaluating the impact of the adoption of this standard, however it does not expect the adoption of this standard to have a material effect on its financial position or results of operations. In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000, further guidance related to accounting for derivative instruments and hedging activities was provided when the FASB issued FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133. This standard, as amended, 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, as amended, on the Company's financial statements will vary based on certain factors including future interpretive 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 the adoption of this standard, as amended, and currently does not believe that it will have a material effect on the Company's financial position or results of operations. 6) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Changes in accumulated other comprehensive income (loss) related to changes in unrealized gains (losses) on securities (excluding those related to experience-rated contractholders) were as follows:
Nine Months Ended September 30, ---------------------------------------- (Millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the period (1) $ 31.7 $ (120.4) Less: reclassification adjustments for accretion of net investment discounts and gains included in net income (2) 1.4 9.9 - ------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on securities $ 30.3 $ (130.3) ===================================================================================================================
(1) Pretax unrealized holding gains (losses) arising during the period were $48.7 million and $(185.3) million for the nine months ended September 30, 2000 and September 30, 1999, respectively. (2) Pretax reclassification adjustments for accretion of net investment discounts and gains included in net income for the period were $2.1 million and $15.2 million for the nine months ended September 30, 2000 and September 30, 1999, respectively. 9 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (continued) 7) SEGMENT INFORMATION Summarized financial information for the Company's principal operations for the three months ended September 30, was as follows:
Investment Financial Management Discontinued (Millions) Products (1) Services (1) Operations (1) Other (1) Total ----------------------------------------------------------------------------------------------------------------------- 2000 Revenues from external customers $ 182.4 $ 36.4 $ -- $ (13.1) $ 205.7 Net investment income 230.0 0.9 -- 1.0 231.9 ----------------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital losses $ 412.4 $ 37.3 $ -- $ (12.1) $ 437.6 ======================================================================================================================= Operating earnings (2) $ 55.0 $ 9.2 $ -- $ (2.2) $ 62.0 Net realized capital losses, net of tax (7.3) -- -- -- (7.3) ----------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 47.7 9.2 -- (2.2) 54.7 Discontinued operations, net of tax: Amortization of deferred gain on sale -- -- 1.5 -- 1.5 ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 47.7 $ 9.2 $ 1.5 $ (2.2) $ 56.2 ======================================================================================================================= 1999 Revenues from external customers $ 144.1 $ 29.8 $ -- $ (11.0) $ 162.9 Net investment income 229.3 0.4 -- 0.9 230.6 ----------------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital losses $ 373.4 $ 30.2 $ -- $ (10.1) $ 393.5 ======================================================================================================================= Operating earnings (2) $ 47.9 $ 7.5 $ -- $ (4.3) $ 51.1 Net realized capital losses , net of tax (7.2) -- -- (7.2) ----------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 40.7 7.5 -- (4.3) 43.9 Discontinued operations, net of tax: Amortization of deferred gain on sale -- -- 1.4 -- 1.4 ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 40.7 $ 7.5 $ 1.4 $ (4.3) $ 45.3 =======================================================================================================================
(1) Financial Products include: deferred and immediate annuity contracts; mutual funds; distribution services for annuities and mutual funds and 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 services to affiliated and unaffiliated institutional and retail clients; underwriting; distribution for Company mutual funds and an affiliate's separate accounts; and trustee, administrative and other services to retirement plans. Discontinued Operations include life insurance products. Other includes consolidating adjustments and Year 2000 costs of $2.6 million in 1999. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses. 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. 10 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (continued) 7) SEGMENT INFORMATION (continued) Summarized financial information for the Company's principal operations for the nine months ended September 30, was as follows:
Investment Financial Management Discontinued (Millions) Products (1) Services (1) Operations (1) Other (1) Total ----------------------------------------------------------------------------------------------------------------- 2000 Revenues from external customers $ 519.6 $ 104.2 $ -- $ (38.2) $ 585.6 Net investment income 676.4 2.1 -- 3.0 681.5 ----------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital (losses) gains $ 1,196.0 $ 106.3 $ -- $ (35.2) $ 1,267.1 ================================================================================================================= Operating earnings (2) $ 158.1 $ 25.7 $ -- $ (5.8) $ 178.0 Net realized capital (losses) gains, net of tax (15.1) 0.1 -- -- (15.0) ----------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 143.0 25.8 -- (5.8) 163.0 Discontinued operations, net of tax: Amortization of deferred gain on sale -- -- 4.7 -- 4.7 ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ 143.0 $ 25.8 $ 4.7 $ (5.8) $ 167.7 ================================================================================================================= 1999 Revenues from external customers $ 399.1 $ 86.4 $ -- $ (33.3) $ 452.2 Net investment income 665.2 1.0 -- 2.6 668.8 ----------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital losses $ 1,064.3 $ 87.4 $ -- $ (30.7) $ 1,121.0 ================================================================================================================= Operating earnings (2) $ 142.6 $ 21.1 $ -- $ (18.6) $ 145.1 Net realized capital losses , net of tax (3.5) -- -- -- (3.5) ----------------------------------------------------------------------------------------------------------------- Income from continuing operations 139.1 21.1 -- (18.6) 141.6 Discontinued operations, net of tax: Amortization of deferred gain on sale -- -- 4.1 -- 4.1 ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ 139.1 $ 21.1 $ 4.1 $ (18.6) $ 145.7 =================================================================================================================
(1) Financial Products include: deferred and immediate annuity contracts; mutual funds; distribution services for annuities and mutual funds and 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 services to affiliated and unaffiliated institutional and retail clients; underwriting; distribution for Company mutual funds and an affiliate's separate accounts; and trustee, administrative and other services to retirement plans. Discontinued Operations include life insurance products. Other includes consolidating adjustments and Year 2000 costs of $13.0 million in 1999. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses. 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. 11 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (continued) 8) 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 between the time that the Company enters into the commitments and the specified future date on which the Company must purchase or sell the securities, as the case may be. As of September 30, 2000, there were no such off-balance sheet commitments. LITIGATION In recent years, several life insurance and annuity companies have been named as defendants in class action lawsuits relating to life insurance and annuity pricing and sales practices. The Company has been a defendant in two such lawsuits. A purported class action complaint was filed in the Circuit Court of Lauderdale County, Alabama on March 28, 2000 by Loretta Shaner against ALIAC (the "Shaner Complaint"). This case was removed to the United States District Court for the Northern District of Alabama. The Shaner Complaint sought unspecified compensatory damages from ALIAC and unnamed affiliates of ALIAC. The Shaner Complaint claimed that ALIAC's sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (e.g., IRAs) was improper. On August 31, 2000, the Court entered an order and judgement dismissing the case. The case has been refiled as an individual action in the Alabama state court. A purported class action complaint was filed in the United States District Court for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint"). The Reese Complaint seeks compensatory and punitive damages and injunctive relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful sales practices in marketing life insurance policies. ALIAC has moved to dismiss the Reese Complaint for failure to state a claim upon which relief can be granted. This litigation is in the preliminary stages. The Company intends to defend the action vigorously. 12 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Condensed Notes to Consolidated Financial Statements (continued) 8) COMMITMENTS AND CONTINGENT LIABILITIES (continued) The Company is also involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of the litigation against the Company referred to in this paragraph cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, the litigation referred to in this paragraph 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. 9) DIVIDENDS During 2000, the Company paid $10.1 million in dividends to HOLDCO, which did not require approval from the Insurance Commissioner of the State of Connecticut. 13 INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors Aetna Life Insurance and Annuity Company: We have reviewed the accompanying condensed consolidated balance sheet of Aetna Life Insurance and Annuity Company and Subsidiaries as of September 30, 2000, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2000 and 1999 and the related condensed consolidated statements of changes in shareholder's equity and cash flows for the nine-month periods ended September 30, 2000 and 1999. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1999, and the related consolidated statements of income, changes in shareholder's equity and cash flows for the year then ended (not presented herein); and in our report dated February 7, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP Hartford, Connecticut October 31, 2000 14 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS The following analysis presents a review of the Company for the three month and nine month periods ended September 30, 2000 and 1999. This review should be read in conjunction with the consolidated financial statements and other data presented herein as well as the "Management's Analysis of the Results of Operations" section contained in ALIAC's 1999 Annual Report on Form 10-K. OVERVIEW Recent Developments On July 20, 2000, Aetna, the ultimate parent of the Company, announced that it reached a definitive agreement to sell its Aetna Financial Services and Aetna International businesses to ING in a transaction valued at approximately $7.7 billion. The Company is part of the Aetna Financial Services business and will be included in the sale to ING. Under the terms of the agreement, in two effectively simultaneous steps: (1) Aetna will spin off to its shareholders the shares of a standalone health company that will be comprised primarily of its Aetna U.S. Healthcare and Large Case Pensions businesses; and (2) Aetna, which then will be comprised of Aetna Financial Services and Aetna International, will merge with a newly formed subsidiary of ING. Aetna's goal is to close the transaction, which is subject to receipt of required shareholder, regulatory and other consents and approvals, as well as other closing conditions, by year-end 2000. An Aetna shareholders' meeting has been scheduled for November 30, 2000 to consider the transaction and certain other matters. The full impact of the sale to ING on the Company's financial position and results of operations cannot be predicted at this time. Consolidated Results Consolidated results include results from continuing operations and discontinued operations. Results of continuing operations are comprised of the results of the Financial Products and Investment Management Services segments plus certain items not directly allocable to the business segments. Refer to Note 7 of Condensed Notes to Consolidated Financial Statements. Results of discontinued operations for the three and nine months ended September 30, 2000 and 1999 consist of the recognized portion of the deferred gain relating to the sale of the domestic individual life insurance business that occurred on October 1, 1998. Refer to "Discontinued Operations" in this report and to Note 3 of Notes to Consolidated Financial Statements and "Overview" in ALIAC's 1999 Annual Report on Form 10-K. 15 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) OVERVIEW (continued) On June 30, 2000, HOLDCO contributed AISI to the Company. AISI is registered with the Securities Exchange Commission as a broker/dealer and is a member of the National Association of Securities Dealers, Inc. It is also registered with the appropriate state securities authorities as a broker/dealer. The principal operation of AISI is the sale of fixed and variable annuities and mutual funds through its registered representatives. The contribution of AISI 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 HOLDCO. AISI's financial results are included in the Financial Products segment. On July 1, 1999, HOLDCO contributed IA Holdco to the Company. 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 IA Holdco. Continuing Operations Income from continuing operations increased $11 million for the three months ended September 30, 2000 compared to the corresponding period in 1999. Income from continuing operations includes Year 2000 costs of $3 million in 1999. Excluding net realized capital losses of $7 million in both 2000 and 1999, earnings from continuing operations for the three months ended September 30, 2000 increased $11 million, or 21%, compared to the same period in 1999. Income from continuing operations increased $21 million for the nine months ended September 30, 2000 compared to the corresponding period in 1999. Income from continuing operations includes Year 2000 costs of $13 million in 1999. Excluding net realized capital losses of $15 million in 2000 and $4 million in 1999, earnings from continuing operations for the nine months ended September 30, 2000 increased $33 million, or 23%, compared to the same period in 1999. The increase in earnings for the three and nine month periods ended September 30, 2000 primarily reflects an increase in charges assessed against policyholders and other income resulting from higher levels of assets under management and administration partially offset by higher salaries and related benefits. Substantially all of the charges assessed against policyholders and other income reported for continuing operations are derived from assets under management and administration. Compared to September 30, 1999, assets under management and administration at September 30, 2000 increased 25% primarily due to appreciation in the stock market, new investment advisory and administrative contracts (including approximately $3 billion of plan assets from a new large case, which closed in the second quarter of 2000) and additional net deposits (i.e., deposits less surrenders). 16 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) OVERVIEW (continued) Assets under management and administration for continuing operations are shown in the table below. Certain assets under management are reported for both the Financial Products and the Investment Management Services segments, because each segment reports a different component of the revenue generated from this particular group of assets. This group of assets must be deducted from the aggregate segment assets to determine the consolidated assets under management of the Company.
(Millions) September 30, 2000 September 30, 1999 - ----------------------------------------------------------------------------------------------------- Assets under management: Financial Products $ 56,558.4 $ 48,508.7 Investment Management Services (1) 57,354.2 51,421.9 Consolidating adjustment (2) (36,999.5) (35,114.5) - ----------------------------------------------------------------------------------------------------- Total assets under management (3) (4) $ 76,913.1 $ 64,816.1 - ----------------------------------------------------------------------------------------------------- Assets under administration: (5) Financial Products 8,654.6 3,581.8 - ----------------------------------------------------------------------------------------------------- Assets under management and administration $ 85,567.7 $ 68,397.9 =====================================================================================================
(1) Includes $6,871.2 million and $7,360.0 million of assets managed for Aetna Life Insurance Company, an affiliate of the Company, as of September 30, 2000 and 1999, respectively. (Aetna Inc. reports these assets in its Large Case Pensions segment.) (2) Assets under management reported in both the Financial Products and Investment Management Services segments must be deducted from the aggregate segment assets to determine the consolidated assets under management of the Company. (3) Includes $15,439.3 million and $10,138.7 million at September 30, 2000 and 1999, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (4) Excludes net unrealized capital losses of $117.2 million at September 30, 2000 and $132.1 million at September 30, 1999 on assets invested through annuities with fixed options. (5) Represents assets for which the Company provides administrative services only. For continuing operations, salaries and related benefits in the three and nine month periods ended September 30, 2000 increased 49% and 34%, respectively, over the corresponding periods in 1999. These increases primarily reflect higher staffing levels, which are attributable to business growth and the implementation of strategic business initiatives, particularly improving system infrastructures and adding new distribution capabilities. Compared to the same periods in 1999, other operating expenses for the three and nine month periods ended September 30, 2000 increased 11% and 7%, respectively, primarily due to business growth. For the three and nine month periods ended September 30, 1999, other operating expenses include Year 2000 costs, before tax, of approximately $4 million and $20 million, respectively. Year 2000 costs for 1999 are not allocated to the Company's segments. Outlook As discussed above, Aetna has agreed to sell its Aetna Financial Services business, which includes the Company, to ING. Refer to "Overview-Outlook" and "Forward-Looking Information/Risk Factors" in ALIAC's 1999 Annual Report on Form 10-K and "Forward-Looking Information/Risk Factors" in ALIAC's report on Form 10-Q for the quarter ending June 30, 2000. 17 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) FINANCIAL PRODUCTS OPERATING SUMMARY
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ---------------------------- (Millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Premiums (1) $ 41.8 $ 44.2 $ 117.1 $ 86.6 Charges assessed against policyholders 119.9 98.6 351.0 283.1 Net investment income 230.0 229.3 676.4 665.2 Net realized capital losses (11.2) (11.1) (23.3) (5.4) Other income 20.7 1.3 51.5 29.4 - ------------------------------------------------------------------------------------------------------------------- Total revenue 401.2 362.3 1,172.7 1,058.9 - ------------------------------------------------------------------------------------------------------------------- Current and future benefits 199.8 201.8 598.3 564.0 Operating expenses: Salaries and related benefits 43.4 29.1 120.7 90.2 Other 57.7 47.7 159.0 129.5 Amortization of deferred policy acquisition costs 33.7 23.3 87.5 69.1 - ------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 334.6 301.9 965.5 852.8 - ------------------------------------------------------------------------------------------------------------------- Income from operations before income taxes 66.6 60.4 207.2 206.1 Income taxes 18.9 19.7 64.2 67.0 - ------------------------------------------------------------------------------------------------------------------- Net income (2) $ 47.7 $ 40.7 $ 143.0 $ 139.1 ==================================================================================================================== Net realized capital losses, net of tax (included above) $ (7.3) $ (7.2) $ (15.1) $ (3.5) ==================================================================================================================== Deposits (not included in premiums above) Annuities - fixed options $ 337.1 $ 524.2 $ 1,151.7 $ 1,518.5 Annuities - variable options 1,095.4 1,330.3 3,577.6 3,875.4 - ------------------------------------------------------------------------------------------------------------------- Total deposits $ 1,432.5 $1,854.5 $ 4,729.3 $ 5,393.9 ==================================================================================================================== Assets under management Annuities - fixed options (3) $12,396.4 $12,557.2 Annuities - variable options (4) 36,649.2 29,583.0 - ------------------------------------------------------------------------------------------------------------------- Total annuities 49,045.6 42,140.2 Plan sponsored and other 7,512.8 6,368.5 - ------------------------------------------------------------------------------------------------------------------- Total assets under management (5) 56,558.4 48,508.7 Assets under administration (6) 8,654.6 3,581.8 - ------------------------------------------------------------------------------------------------------------------- Total assets under management and administration $65,213.0 $52,090.5 ====================================================================================================================
(1) Includes annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies of $29.3 million for the three months ended September 30, 2000, $15.9 million for the three months ended September 30, 1999, $84.5 million for the nine months ended September 30, 2000 and $53.9 million for the nine months ended September 30, 1999. (2) Year 2000 costs for 1999 are not allocated to segment operating expenses and, therefore, are excluded in the determination of segment net income. (3) Excludes net unrealized capital losses of $117.2 million at September 30, 2000 and $132.1 million at September 30, 1999. (4) Includes $15,439.3 million and $10,138.7 million at September 30, 2000 and 1999, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (5) Includes $36,999.5 million and $35,114.5 million at September 30, 2000 and 1999, respectively, of assets under management that are also reported in the Investment Management Services segment (Refer to "Overview-Continuing Operations"). (6) Represents assets for which the Company provides administrative services only. Financial Products' net income for the three months ended September 30, 2000 increased $7 million compared to the corresponding period in 1999. Excluding net realized capital losses, results for the three months ended September 30, 2000 increased $7 million, or 15%, compared to the corresponding period in 1999. 18 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) FINANCIAL PRODUCTS (continued) Net income for the nine months ended September 30, 2000 increased $4 million compared to the same period in 1999. Excluding net realized capital losses, results for the nine months ended September 30, 2000 increased $16 million, or 11%, compared to the first nine months of 1999. This increase in earnings for both the three and nine month periods ended September 30, 2000 primarily reflects an increase in charges assessed against policyholders and other income offset by an increase in salaries and related benefits. Substantially all of the charges assessed against policyholders and other income reported for the segment are calculated based on assets under management and administration. Compared to September 30, 1999, assets under management and administration at September 30, 2000 increased 25% primarily due to appreciation in the stock market, new investment advisory and administration contracts (including approximately $3.0 billion of plan assets from a new large case, which closed in the second quarter of 2000) and additional net deposits (i.e., deposits less surrenders). Deposits for the three and nine months ended September 30, 2000 decreased 23% and 12%, respectively, compared to the corresponding periods in 1999. The decrease for the three months ended September 30, 2000 is primarily due to the inclusion of plan assets from a large new case and higher individual annuity sales resulting from a new mutual fund offering in the third quarter of 1999. In addition to the factors contributing to the three month decrease, the decrease for the nine months ended September 30, 2000 is attributable to the inclusion of plan assets from a large new case in the first quarter of 1999. Salaries and related benefits in the three and nine month periods ended September 30, 2000 increased 49% and 34%, respectively, over the corresponding periods in 1999. These increases primarily reflect higher staffing levels, which are attributable to business growth and the implementation of strategic business initiatives, particularly improving system infrastructures and adding new distribution capabilities. Compared to the same periods in 1999, other operating expenses for the three and nine months ended September 30, 2000 increased 21% and 23%, respectively, primarily because of business growth. These increases for other operating expenses are higher than the corresponding changes for other operating expenses discussed in "Overview/Continuing Operations" because Year 2000 costs for 1999 are not allocated to the Financial Products segment. Despite these increases, annuity operating expenses as a percentage of assets under management decreased as of September 30, 2000 compared to September 30, 1999. Of the $12.4 billion and $12.6 billion of fixed annuity assets under management at September 30, 2000 and 1999, respectively, 25% were fully guaranteed and 75% were experience-rated in each period. The average annualized earned rate on investments supporting fully guaranteed investment contracts was 7.5% and 7.3% for the nine months ended September 30, 2000 and 1999, respectively, and the average annualized earned rate on investments supporting experience-rated investment contracts was 7.7% and 7.6% for the nine months ended September 30, 2000 and 1999, respectively. The average annualized credited rate on fully guaranteed investment contracts was 6.2% and 6.3% for the nine months ended September 30, 2000 and 1999, respectively, and the average annualized credited rate on experience-rated investment contracts was 5.6% for both periods. The resulting annualized interest margins on fully guaranteed investment contracts were 1.3% and 1.0%, and on experience-rated investment contracts were 2.1% and 2.0% for the nine months ended September 30, 2000 and 1999, respectively. 19 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) INVESTMENT MANAGEMENT SERVICES Operating Summary
Three Months Ended Nine Months Ended September 30 September 30 --------------- --------------- --------------- -------------- (Millions) 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Net investment income $ 0.9 $ 0.4 $ 2.1 $ 1.0 Net realized capital gains - - 0.2 - Other income (1) 36.4 29.8 104.2 86.4 - ---------------------------------------------------------------------------------------------------------------------------- Total revenue 37.3 30.2 106.5 87.4 - ---------------------------------------------------------------------------------------------------------------------------- Operating expenses: Salaries and related benefits 8.9 5.9 23.3 17.5 Other 14.3 12.4 42.6 36.4 - ---------------------------------------------------------------------------------------------------------------------------- Total operating expenses 23.2 18.3 65.9 53.9 - ---------------------------------------------------------------------------------------------------------------------------- Income from operations before income taxes 14.1 11.9 40.6 33.5 Income taxes 4.9 4.4 14.8 12.4 - ---------------------------------------------------------------------------------------------------------------------------- Net income (2) $ 9.2 $ 7.5 $ 25.8 $ 21.1 ============================================================================================================================ Net realized capital gains, net of tax (included above) $ - $ - $ 0.1 $ - ============================================================================================================================ Assets under management: Retail mutual funds $ 1,607.5 $ 1,076.4 Plan sponsored (3) 16,724.0 13,174.5 Collateralized bond obligations and other 2,023.2 2,056.5 - ---------------------------------------------------------------------------------------------------------------------------- Subtotal $20,354.7 $16,307.4 - ---------------------------------------------------------------------------------------------------------------------------- Invested through products of the Financial Products segment (4) Variable annuity mutual funds $17,450.8 $16,509.2 Fixed annuities (5) 12,396.4 12,557.2 Plan sponsored and other 7,152.3 6,048.1 - ---------------------------------------------------------------------------------------------------------------------------- Subtotal $36,999.5 $35,114.5 - ---------------------------------------------------------------------------------------------------------------------------- Total assets under management $57,354.2 $51,421.9 ============================================================================================================================
(1) Primarily includes investment advisory fees earned on assets under management. (2) Year 2000 costs for 1999 are not allocated to segment operating expenses and, therefore, are excluded in the determination of segment net income. (3) Includes $6,871.2 million and $7,360.0 million of assets managed for Aetna Life Insurance Company, an affiliate of the Company, as of September 30, 2000 and 1999, respectively. (Aetna Inc. reports these assets in its Large Case Pensions segment.) (4) The Investment Management Services segment earns investment advisory fees on these assets, which are also reported in the Financial Products segment. (5) Excludes net unrealized capital losses of $117.2 million at September 30, 2000 and $132.1 million at September 30, 1999. For the Investment Management Services segment, net income excluding realized capital gains in 2000, increased $2 million, or 23%, for the three months ended September 30, 2000 and $5 million, or 22%, for the nine months ended September 30, 2000 compared to the same periods in 1999. The increases in earnings for the three and nine month periods ended September 30, 2000 primarily reflects an increase in investment advisory fees partially offset by higher operating expenses. Investment advisory fees are calculated based on assets under management. The increase in advisory fee income is due to higher levels of assets under management. At September 30, 2000, assets under management increased 12% over those reported as of September 30, 1999. This increase was primarily due to appreciation in the stock market and, to a lessor extent, additional net sales. The increase in operating expenses for the three and nine months ended September 30, 2000, compared to the corresponding periods in 1999, reflects business growth. 20 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) DISCONTINUED OPERATIONS - DOMESTIC INDIVIDUAL LIFE INSURANCE Results of discontinued operations consist solely of the deferred gain recognized from the sale of the domestic individual life insurance business on October 1, 1998. The after-tax gain recognized during the three months ended September 30, 2000 and 1999 was $1.5 million and $1.4 million, respectively. The after-tax gain recognized during the nine months ended September 30, 2000 and 1999 was $4.7 million and $4.1 million, respectively. Individual life insurance coverage in force was approximately $40 billion at September 30, 2000. The entire amount of this coverage in force has been ceded to Lincoln under the indemnity reinsurance arrangement entered into as part of the sale. For more details about the transaction and the indemnity reinsurance arrangement, refer to Note 3 of Notes to Consolidated Financial Statements in the Company's 1999 Annual Report on Form 10-K. GENERAL ACCOUNT INVESTMENTS The Company's invested assets were comprised of the following:
(Millions) September 30, 2000 December 31, 1999 ------------------------------------------------------------------------------------------------------------------- Debt securities, available for sale, at fair value $ 11,075.8 $ 11,410.1 Equity securities, at fair value: Nonredeemable preferred stock 101.0 130.9 Investment in affiliated mutual funds 18.7 64.1 Common stock 13.0 11.5 Short-term investments 81.5 74.2 Mortgage loans 4.6 6.7 Policy loans 338.6 314.0 Other investments 13.5 13.2 ------------------------------------------------------------------------------------------------------------------- Total Investments $ 11,646.7 $ 12,024.7 ===================================================================================================================
Debt Securities At September 30, 2000 and December 31, 1999, the Company's carrying value of investments in debt securities represented 95% of the total general account invested assets. At September 30, 2000 and December 31, 1999, $8.6 billion, or 78% of total debt securities, and $8.9 billion, or 78% of total debt securities, respectively, supported experience-rated contracts. Debt securities reflected net unrealized capital losses of approximately $117.2 million and approximately $247.8 million at September 30, 2000 and December 31, 1999, respectively. Of the total net unrealized capital losses at September 30, 2000, a net unrealized capital loss of $91.5 million relates to assets supporting experience-rated contracts. 21 ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED) GENERAL ACCOUNT INVESTMENTS (continued) 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 September 30, 2000 and December 31, 1999 was AA-. The percentage of total debt securities by quality rating category is as follows:
September 30, 2000 December 31, 1999 - -------------------------------------------------------------------------------- AAA 51.8% 48.4% AA 9.8 9.5 A 22.4 24.5 BBB 11.2 11.1 BB 1.8 2.5 B and Below 3.0 4.0 - -------------------------------------------------------------------------------- Total 100.0% 100.0% ================================================================================
The percentage of total debt securities by market sector is as follows:
September 30, 2000 December 31, 1999 - ----------------------------------------------------------------------------------------------------------------------- U.S. Corporate Securities 44.4% 40.6% Residential Mortgage-Backed Securities 26.5 23.9 Commercial/Multi-family Mortgage-Backed Securities 9.7 8.6 U.S. Treasuries/Agencies 7.9 9.4 Asset-Backed Securities 6.8 6.1 Foreign Securities (1) 4.7 11.4 - ----------------------------------------------------------------------------------------------------------------------- Total 100.0% 100.0% =======================================================================================================================
(1) Primarily U.S. dollar denominated FORWARD-LOOKING INFORMATION/RISK FACTORS The "Forward-Looking Information/Risk Factors" sections of ALIAC's 1999 Annual Report on Form 10-K and reports on Form 10-Q for the quarterly periods ended March 31, 2000 and June 30, 2000 contain discussions of important risk factors related to the Company's businesses. 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In recent years, several life insurance and annuity companies have been named as defendants in class action lawsuits relating to life insurance and annuity pricing and sales practices. The Company has been a defendant in two such lawsuits. A purported class action complaint was filed in the Circuit Court of Lauderdale County, Alabama on March 28, 2000 by Loretta Shaner against ALIAC (the "Shaner Complaint"). This case was removed to the United States District Court for the Northern District of Alabama. The Shaner Complaint sought unspecified compensatory damages from ALIAC and unnamed affiliates of ALIAC. The Shaner Complaint claimed that ALIAC's sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (e.g., IRAs) was improper. On August 31, 2000, the Court entered an order and judgement dismissing the case. The case has been refiled as an individual action in the Alabama state court. A purported class action complaint was filed in the United States District Court for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint"). The Reese Complaint seeks compensatory and punitive damages and injunctive relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful sales practices in marketing life insurance policies. ALIAC has moved to dismiss the Reese Complaint for failure to state a claim upon which relief can be granted. This litigation is in the preliminary stages. The Company intends to defend the action vigorously. The Company is also involved in numerous other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of the litigation against the Company referred to in this paragraph cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, the litigation referred to in this paragraph 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. 23 ITEM 5. OTHER INFORMATION RATINGS The Company's financial strength ratings at August 9, 2000 and November 8, 2000 are as follows:
Rating Agencies ------------------------------------------------------------------------------------ Moody's Investors Standard & A.M. Best Fitch Service Poor's - -------------------------------------------------------------------------------------------------------------------- August 9, 2000 A AA Aa3 AA- November 8, 2000 (1) A AA Aa3 AA- - --------------------------------------------------------------------------------------------------------------------
(1) As a result of Aetna's announcement that it had reached a definitive agreement to sell its Aetna Financial Services and Aetna International businesses to ING, A. M. Best has placed the Company's rating under review with positive implications; Fitch has placed the Company's rating on watch, positive; Moody's Investors Service has placed the Company's rating on review, upgrade; and Standard & Poor's has placed the Company's rating on CreditWatch positive. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedule. (b) Reports on Form 8-K. None 24 SIGNATURE Pursuant to the requirements 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) NOVEMBER 9, 2000 By /s/ Deborah Koltenuk --------------------- -------------------------------- (Date) Deborah Koltenuk Vice President, Corporate Controller and Assistant Treasurer (Chief Accounting Officer) 25 EX-27 2 a2030008zex-27.txt EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 FOR THE AETNA LIFE INSURANCE AND ANNUITY COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 11,076 0 0 133 5 0 11,647 987 3,003 1,155 58,054 3,937 1 29 10,887 0 0 0 3 1,572 58,054 117 682 (23) 118 598 96 0 239 76 163 5 0 0 168 0 0 0 0 0 0 0 0 0
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