-----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, VOhSaYJe+DDnKWvPC53MQ4VFDZaJc63BGmzZTNmCIl1ECAIIAAj2G7THq0wJ4UFI A47/ggAFKaKWSL/uHKSrEw== 0000912057-01-507007.txt : 20010410 0000912057-01-507007.hdr.sgml : 20010410 ACCESSION NUMBER: 0000912057-01-507007 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20010404 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: 333-48774 FILM NUMBER: 1595644 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 a2035452zposam.txt PROSPECTUS As filed with the Securities and Exchange Registration No. 333-48774 Commission on April 4, 2001 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 2 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 - PROSPECTUS DATED MAY 1, 2001 -------- ------------------- --------------------------------------- 1 Forepart of the Registration Statement and Outside Front Cover Page of Prospectus....................... Outside Cover Page 2 Inside Front and Outside Back Cover Pages of Prospectus........................................ Cover Page (inside front cover) 3 Summary Information, Risk Factors and 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 8 Plan of Distribution................................. Other Topics - Contract Distribution 9 Description of Securities to be Registered........... Guaranteed Terms and Guaranteed Interest Rates 10 Interests of Named Experts and Counsel............... Not Applicable 11 Information with Respect to the Registrant........................................... Not Applicable 12 Incorporation of Certain Information by Reference.... Other Topics - Incorporation of Certain Documents by Reference 13 Disclosure of Commission Position on Indemnification for Securities Act Liabilities....................... Not Applicable
PROSPECTUS - MAY 1, 2001 - -------------------------------------------------------------------------------- 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 1-800-262-3862 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............. 5 YOUR CHOICES AT THE END OF A GUARANTEED TERM............... 7 PURCHASE................................................... 7 RIGHT TO CANCEL............................................ 8 FEES....................................................... 9 WITHDRAWALS................................................ 11 SYSTEMATIC DISTRIBUTION OPTIONS............................ 12 MARKET VALUE ADJUSTMENT (MVA).............................. 14 DEATH BENEFIT.............................................. 15 INCOME PHASE............................................... 16 INVESTMENTS................................................ 19 TAXATION................................................... 21 OTHER TOPICS............................................... 27 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).... 30
3 [SIDE NOTE] 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 1-800-262-3862 [END SIDE NOTE] 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. 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 4 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." 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 5 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." 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 6 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. 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 guaranteed term with the next longest duration. 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 7 (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. 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 8 the contract and written notice of cancellation. The refund will equal the amount of your purchase payment. 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. 9 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." 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 10 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 a charge for 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. For example, we may deduct a charge for premium taxes at the time of a complete withdrawal or we may reflect the cost of premium taxes in our income phase payment rates when you commence income phase payments. If, at your death, your beneficiary elects to receive a lump-sum distribution, a charge may 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. 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. 11 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." of a Systematic Distribution Optiondistribution 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. 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. These options may be exercised at any time during the accumulation phase of the contract. 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 12 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. 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." 13 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. 14 [SIDE NOTE] 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 NOTE] 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. 15 [SIDE NOTE] 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 NOTE] 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, subject to availability, 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 16 consequences. You should consult with a qualified tax adviser if you are considering either of these courses of action. 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." 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. 17 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 Life Income annuitant die prior to the second payment's due date. 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 Life Income-- years, or other periods specified in the contract. Guaranteed DEATH BENEFIT: If the annuitant dies before we have made all Payments the guaranteed 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 Two Lives surviving annuitant after the first 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 Life Income-- other periods specified in the contract. Two Lives-- CONTINUING PAYMENTS: 100% of the payment will continue to Guaranteed the surviving annuitant after the first 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 OPTIONS LENGTH OF PAYMENTS: Payments will continue for your choice of 10 through 30 years (or other periods specified in the Nonlifetime-- contract). Guaranteed DEATH BENEFIT: If the annuitant dies before we make all the Payments guaranteed payments, payment will continue to the beneficiary.
18 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; - -- 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 19 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. 20 [SIDE NOTE] 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 NOTE] 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. 21 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. 22 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 issued as 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. 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 23 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. THE RULES ARE COMPLEX AND YOU AND ANY BENEFICIARY SHOULD CONSULT WITH A TAX ADVISER BEFORE ELECTING THE METHOD OF CALCULATION TO SATISFY THE MINIMUM DISTRIBUTION REQUIREMENTS. THE RULES ARE SUBJECT TO CHANGE AS A RESULT OF NEW REGULATIONS PROPOSED BY THE INTERNAL REVENUE SERVICE ON JANUARY 17, 2001. 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. THE RULES ARE SUBJECT TO CHANGE AS A RESULT OF NEW REGULATIONS PROPOSED BY THE INTERNAL REVENUE SERVICE ON JANUARY 17, 2001. 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, 2001, your entire balance must be distributed to the beneficiary by December 31, 2006. However, if the distribution begins by December 31 of the calendar year following the calendar 24 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, 2000, your entire balance must be distributed by August 31, 2005. 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. 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 25 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. 26 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 The Company's subsidiary, Aetna Investment Services, LLC (AIS), serves as the principal underwriter for the contracts. AIS, a Delaware limited liability company, is registered as a broker-dealer with the SEC. AIS is also a member of the National Association of Securities Dealers, Inc. and the Securities Investor Protection Corporation. AIS' principal office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. The contracts are offered to the public by individuals who are registered representatives of AIS or other broker-dealers which have entered into a selling arrangement with AIS. We refer to AIS and the other broker-dealers selling the contracts as "distributors". All registered representatives selling the contracts must also be licensed as insurance agents for the Company. COMMISSION PAYMENTS. Persons who offer and sell the contracts may be paid a commission. The maximum percentage amount paid with respect to a given purchase payment is 6% of the payment to an account. Asset-based service fees may also be paid. 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. The total compensation package for sales, supervisory and management personnel of affiliated or related broker-dealers may be positively impacted if the overall amount of investments in the contracts and other products issued or advised by the Company or its affiliates increases over time. The distributor may be reimbursed for certain expenses. The name of the distributor and the registered representative responsible for your account are stated in your application. Commissions and sales related expenses are paid by us or our subsidiary and these are not deducted from payments to your account. 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 may also be contracted. 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. Such wholesalers compensation may be paid based on purchase payments for the contracts purchased through distributors selected by the wholesaler. Third parties may also be designated 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. All costs and expenses related to these services will paid by us or our subsidiary. 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 27 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 The validity of the securities offered by this prospectus has been passed upon by Counsel to the Company. EXPERTS We have incorporated by reference into Post Effective Amendment No. 2 to the Registration Statement of which this prospectus is a part and/or into this prospectus: - -- The consolidated balance sheets of the Company as of December 31, 2000 (Successor Company) and December 31, 1999 (Preacquisition Company) and the related consolidated statements of income, changes in shareholder's equity and cash flows for the period from December 1, 2000 to December 31, 2000 (Successor Company), and for the period from January 1, 2000 to November 30, 2000 and the years ended December 31, 1999 and 1998 (Preacquisition Company) and all related schedules for each of the years in the three-year period ended December 31, 2000; and - -- The reports of KPMG LLP covering the December 31, 2000 consolidated financial statements refer to the acquisition, effective November 30, 2000, by ING America Insurance Holdings Inc. of all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. 28 These statements are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. We have relied upon the reports of KPMG LLP, independent certified public accountants, and upon their authority as experts in accounting and auditing. 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 SEC Public Reference Room 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 SEC Public Reference Room. You may obtain information on the operation of the SEC Public Reference Room by calling the SEC at 1-800-SEC-0330 or 1-202-942-8090. You may also find more information about the Company at www.aetnafinancial.com. A copy of the Company's annual report on Form 10-K for the year ended December 31, 2000 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 1-800-262-3862 INQUIRIES You may contact us directly by writing or calling us at the address or phone number shown above. 29 APPENDIX I CALCULATING A MARKET VALUE ADJUSTMENT (MVA) - ------------------------------------------------------------------ MARKET VALUE ADJUSTMENT FORMULA The mathematical formula used to determine the MVA is: x ---- 365 { (1+i) } { } ------ { (1+j) }
Where: - -- i is the deposit period yield; - -- j is the current yield; and - -- x is the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed 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. 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 30 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 ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.08) } = { } ----- { (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 increased 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 ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.05) } = { } ----- { (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 increased to compensate for the negative 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. 31 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 ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.10) } = { } ----- { (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 ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.05) } = { } ----- { (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. 32 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, ING Groep N.V. 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 (1) Underwriting Agreement dated November 17, 2000 between Aetna Life Insurance and Annuity Company and Aetna Investment Services, LLC(1) (4)(a) Group Annuity Contract (Form No. G1-MGA-95)(2) (4)(b) Individual Annuity Contract (Form No. I1-MGA-95)(3) (4)(c) Certificate (G1CC-MGA-95) to Group Annuity Contract Form No. G1-MGA-95(4) (4)(d) Endorsement (E1-MGAIRA-95-2) to Group Annuity Contract Form No. G1-MGA-95 and Certificate No. G1CC-MGA-95(4) (4)(e) Endorsement (E1-MGAROTH-97) to Group Annuity Contract Form No. G1-MGA-95 and Certificate No. G1CC-MGA-95(4) (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, 2000 (File No. 33-23376), as filed with the commission on March 30, 2001. 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, 2000 (23)(a) Consent of Independent Auditors (23)(b) Consent of Legal Counsel (included in Exhibit (5) above) (24)(a) Powers of Attorney(5) (24)(b) Certificate of Resolution Authorizing Signature by Power of Attorney(6)
Exhibits other than these listed are omitted because they are not required or are not applicable. 1. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 33-49176), as filed on November 30, 2000. 2. Incorporated by reference to the Registration Statement on Form S-2 (File No. 33-64331), as filed on November 16, 1995. 3. 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. 4. 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. 5. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (File No. 333-34014), as filed on April 4, 2001. 6. 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. 2 to the Registration Statement on Form S-2 (File No. 333-48774) 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, 2001. 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. 2 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 ) ) Wayne R. Huneke* Director and Chief Financial Officer ) April - ----------------------------------- ) 4, 2001 Wayne R. Huneke ) ) Randy Lowery* Director ) - ----------------------------------- ) Phillip R. Lowery ) ) Robert C. Salipante* Director ) - ----------------------------------- ) Robert C. Salipante ) ) Mark A. Tullis* Director ) - ----------------------------------- ) Mark A. Tullis ) ) Deborah Koltenuk* Corporate Controller ) - ----------------------------------- ) Deborah Koltenuk )
By: /s/ Michael A. Pignatella ---------------------------------------------------------- Michael A. Pignatella *Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT - ----------- ------- 16(5) Opinion re: Legality -------------- 16(13) Aetna Life Insurance and Annuity Company Form 10-K for the fiscal year ended December 31, 2000 -------------- 16(23)(a) Consent of Independent Auditors -------------- 16(23)(b) Consent of Legal Counsel *
*Included in Exhibit 16(5) above EX-16.(5) 2 a2035452zex-16_5.txt EX 16(5) LEGAL OPINION [ING LOGO] AMERICAS US Legal Services MICHAEL A. PIGNATELLA COUNSEL (860) 273-0261 FAX: (860) 273-9407 PignatellaM@ING-AFS.com April 4, 2001 Securities and Exchange Commission 450 Fifth Street N.W. Washington, DC 20549 RE: AETNA LIFE INSURANCE AND ANNUITY COMPANY POST-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT ON FORM S-2 PROSPECTUS TITLE: AETNA MULTI-RATE ANNUITY FILE NO.: 333-48774 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"), and the Form S-2 Registration Statement relating to the Multi-Rate Annuity. In connection with this opinion, I have reviewed the Post-Effective Amendment No. 2 to 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 Post-Effective Amendment No. 2 to the Registration Statement. Sincerely, /s/ Michael A. Pignatella Michael A. Pignatella Hartford Site ING North America Insurance Corporation 151 Farmington Avenue, TS31 Hartford, CT 06156-8975 EX-16.(13) 3 a2035452zex-16_13.txt EX 16(13) 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, 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 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 March 28, 2001, 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, 2000 TABLE OF CONTENTS
Form 10-K Item No. Page - --------- ---- PART I Item 1. Business**.............................. 3 Item 2. Properties**............................ 12 Item 3. Legal Proceedings....................... 13 Item 4. Submission of Matters to a Vote of Security Holders*....................... 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 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....................... 26 Item 8. Financial Statements and Supplementary Data.................................... 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 65 PART III Item 10. Directors and Executive Officers of the Registrant*............................. 65 Item 11. Executive Compensation*................. 65 Item 12. Security Ownership of Certain Beneficial Owners and Management*.................. 65 Item 13. Certain Relationships and Related Transactions*........................... 65 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K..................................... 65 Index to Consolidated Financial Statement Schedules..................... 70 Signatures.............................. 75
* 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. 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"), Aetna Investment Adviser Holding Company, Inc. ("IA Holdco") and Aetna Investment Services, LLC ("AIS") is herein called the "Company". ALIAC is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"), which is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is ultimately owned by ING Groep N.V. ("ING"). On December 13, 2000, ING America Insurance Holdings, Inc., an indirect wholly owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial Services business, of which the Company is a part, and Aetna International businesses, for approximately $7.7 billion. The purchase price was comprised of approximately $5.0 billion in cash and the assumption of $2.7 billion of outstanding debt and other net liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion entered into certain transition services agreements with a former related party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former Aetna"). Refer to Note 1 of the Notes to Consolidated Financial Statements. HOLDCO contributed AIS to the Company on June 30, 2000 and contributed IA Holdco to the Company on July 1, 1999 (refer to Note 2 of the Notes to Consolidated Financial Statements). As a result of the contribution of IA Holdco, 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. Refer to Note 3 of the 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), variable and fixed investment options. Financial Products includes 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. 3 ITEM 1. BUSINESS. (continued) FINANCIAL PRODUCTS (continued) INVESTMENT OPTIONS The Financial Products segment offers customers products that contain variable and/or fixed investment options. Variable options 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 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 and expense charges, investment management fees and 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 asset-based insurance and expense fees. In addition, where the customer selects a mutual fund managed by Aeltus as a variable funding option, Aeltus receives an advisory fee. Aeltus then pays ALIAC half of this advisory fee, which is reflected in the Financial Products segment's results. Aeltus, whose operating results are reported in the Investment Management Services' segment, records the advisory fees net of the amount it pays to ALIAC. In the case of the variable option mutual 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. If the customer selects an unaffiliated mutual fund as a variable funding option, 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 (i.e., 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 $53.3 billion, $54.8 billion and $44.5 billion at December 31, 2000, 1999, and 1998, respectively. 4 ITEM 1. BUSINESS. (continued) FINANCIAL PRODUCTS (continued) Financial Products' assets under management include assets that are also reported in the Investment Management Services segment. Both segments report certain assets under management because they each earn a different component of 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 94% and 95% of assets under management at December 31, 2000 and 1999, respectively, allowed for contractholder withdrawal. Approximately 86% and 85% of assets under management at December 31, 2000 and 1999, 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. 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 59 1/2 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 gains and losses 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) 2000 1999 1998 - -------------------------------------------------------------------- Corporate pensions $17,628.1 $16,974.9 $14,450.4 Not-for-profit organizations 22,872.6 24,721.1 19,611.5 Individuals 12,761.7 13,116.8 10,414.1 - -------------------------------------------------------------------- Total (1) $53,262.4 $54,812.8 $44,476.0 - --------------------------------------------------------------------
(1) Excludes net unrealized capital gains of $126.9 million at December 31, 2000, net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million at December 31, 1998. Deposits, which are not included in premiums or revenue, are shown in the following table:
(Millions) 2000 1999 1998 - ----------------------------------------------------------------- Corporate pensions $2,700.1 $2,444.2 $1,871.0 Not-for-profit organizations 1,930.4 2,638.7 1,591.7 Individuals 1,527.3 1,824.8 1,305.6 - ----------------------------------------------------------------- Total $6,157.8 $6,907.7 $4,768.3 - -----------------------------------------------------------------
A portion of the Financial Products' fee revenue is also based on assets under administration. Assets under administration are assets for which the Company provides administrative services only. Assets 5 ITEM 1. BUSINESS. (continued) FINANCIAL PRODUCTS (continued) under administration were $8.3 billion at December 31, 2000, $4.4 billion at December 31, 1999 and $2.9 billion at December 31, 1998. 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, 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 and mortality, including a margin for adverse deviation which is assumed to provide for expenses. 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 the Notes to Consolidated Financial Statements. 6 ITEM 1. BUSINESS. (continued) INVESTMENT MANAGEMENT SERVICES (continued) 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 Company products; and trustee, administrative and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian. 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 investments of the Company, which collectively represent substantially all assets under management. During the second quarter of 2001, ING Investment Management, LLC, an affiliate of the Company, will become the advisor of the Company's general account investments. 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 $55.6 billion, $55.0 billion and $47.8 billion at December 31, 2000, 1999, and 1998, 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 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, 2000 and 1999 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. For withdrawal characteristics on assets under management invested through the Financial Products segment refer to "Financial Products" in the Business section. The following table summarizes assets under management for the principal business channels of the Investment Management Services segment. Amounts reflected exclude net unrealized capital gains and losses related to fair value adjustments required by FAS No. 115. Refer to "Overview" and 7 ITEM 1. BUSINESS. (continued) INVESTMENT MANAGEMENT SERVICES (continued) "Investment Management Services" in Management's Analysis of the Results of Operations for further discussion on assets under management.
(Millions) 2000 1999 1998 - -------------------------------------------------------------------- Plan sponsored (1) $15,719.4 $14,244.5 $11,581.5 Collateralized bond obligations 2,020.7 2,051.8 1,492.8 Retail mutual funds 1,670.0 1,447.7 616.6 - -------------------------------------------------------------------- Subtotal $19,410.1 $17,744.0 $13,690.9 - -------------------------------------------------------------------- Invested through products of the Financial Products segment: Variable annuity mutual funds $16,327.1 $18,144.2 $15,423.3 Fixed annuities (2) 12,450.3 12,641.1 12,131.1 Plan sponsored and other 7,441.8 6,466.9 6,542.8 - -------------------------------------------------------------------- Subtotal 36,219.2 37,252.2 34,097.2 - -------------------------------------------------------------------- Total $55,629.3 $54,996.2 $47,788.1 ====================================================================
(1) As of December 31, 2000, 1999 and 1998, amounts included $5,837.1 million, $6,986.3 million and $7,809.3 million, respectively, of assets managed for Aetna Life Insurance Company, a former affiliate of the Company (refer to Note 1 of the Notes to Consolidated Financial Statements). (2) Excludes net unrealized capital gains of $126.9 million at December 31, 2000, net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million at December 31, 1998. PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION Investment Management Services' products and services are offered primarily to pension plans (e.g. corporate, public, health care, religious), non-profit organizations (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. 8 ITEM 1. BUSINESS. (continued) DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE (continued) 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 life insurance business on October 1, 1998, substantially all of the in force amounts shown in the table have been ceded to Lincoln.
Life Insurance In Force at December 31, ---------------------------- (Billions, except as noted below) 2000 1999 1998 - ----------------------------------------------------------------- Direct: Permanent $ 34.1 $ 36.1 $ 37.8 Term 1.6 3.6 5.1 Assumed: Permanent 0.7 0.9 0.9 Term 1.2 1.5 1.6 - ----------------------------------------------------------------- Total $ 37.6 $ 42.1 $ 45.4 ================================================================= Number of direct policies in force, end of year (thousands) 359.7 390.2 419.8 ================================================================= Average size of direct policy in force, end of year (thousands) $ 99.3 $101.7 $102.2 =================================================================
ASSETS UNDER MANAGEMENT No assets under management were reported for the years presented due to the sale of the domestic individual life business to Lincoln on October 1, 1998. RESERVES 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. The domestic individual life business sold consisted of universal life business and other fixed individual life business. Reserves for universal life products, are equal to cumulative deposits less withdrawals and charges plus credited interest for fixed options. Reserves for all other fixed individual life contracts, which are ceded under the sale agreement, 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. 9 ITEM 1. BUSINESS. (continued) DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE (continued) 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. 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. The Company's general account investments are currently managed by Aeltus. During the second quarter of 2001, ING Investment Management, LLC, an affiliate of the Company, will become the advisor of the Company's general account investments. See "General Account Investments" in Management's Analysis of the Results of Operations for a further discussion of investments. OTHER MATTERS REGULATION The Company's operations are subject to comprehensive regulation throughout the United States. The laws of the various jurisdictions establish supervisory agencies, including the state insurance 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, Florida 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. 10 ITEM 1. BUSINESS. (continued) OTHER MATTERS (continued) 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. a) 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. b) Insurance Holding Company Laws A number of states, including Connecticut and Florida, 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 the Notes to Consolidated Financial Statements. 11 ITEM 1. BUSINESS. (continued) OTHER MATTERS (continued) c) 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 2000, 1999 and 1998. 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 businesses, see Management's Analysis of the Results of Operations--Forward-Looking Information/Risk Factors. RATINGS The Company's financial strength ratings at March 28, 2001 and November 8, 2000 are as follows:
Rating Agencies -------------------------------------------------- Moody's Standard & A.M. Best Fitch Investors Service Poor's - ---------------------------------------------------------------------------------- March 28, 2001 (1) A+ AA+ Aa2 AA+ November 8, 2000 A AA Aa3 AA- - ----------------------------------------------------------------------------------
(1) Company ratings were upgraded by each of the rating agencies shown in the table upon completion of ING's acquisition of Aetna Financial Services businesses on December 13, 2000 (refer to Note 1 of the Consolidated Notes to Financial Statements). MISCELLANEOUS The Company had approximately 3,100 employees at December 31, 2000. Management believes that the Company's computer facilities, systems and related procedures are adequate to meet its business needs. The Company's data processing systems and backup and security policies, practices and procedures are regularly evaluated by the Company's management and internal auditors and are modified as considered necessary. The Company is not dependent upon any single customer and no single customer accounted for more than 10% of consolidated revenue in 2000. 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 ALIAC's home office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. All Company office space is leased or subleased by ALIAC or other affiliates. ALIAC pays substantially all expenses associated with its leased and subleased office properties. Expenses not paid directly by ALIAC are paid by an affiliate and allocated back to ALIAC. 12 ITEM 3. LEGAL PROCEEDINGS In recent years, a number of life insurance companies have been named as defendants in class action lawsuits relating to life insurance sales practices. The Company is currently a defendant in one such lawsuit. 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 other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of these other lawsuits cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, these other lawsuits are not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction I(2)(c) of Form 10-K. 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 ING. For information on dividends refer to Note 7 of the Notes to Consolidated Financial Statements. For information on capital contributions refer to Note 12 of the Notes to the Consolidated Financial Statements. 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. 13 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) OVERVIEW RECENT DEVELOPMENTS On December 13, 2000, ING America Insurance Holdings, Inc., an indirect wholly owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial Services business, of which the Company is a part, and Aetna International businesses, for approximately $7.7 billion. The purchase price was comprised of approximately $5.0 billion in cash and the assumption of $2.7 billion of outstanding debt and other net liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). Refer to Note 1 of the Notes to Consolidated Financial Statements. HOLDCO contributed AIS to the Company on June 30, 2000 and contributed IA Holdco to the Company on July 1, 1999. Refer to Note 2 of the Notes to Consolidated Financial Statements. 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 $6 million (after tax) and $5 million (after tax) of the deferred gain was recognized during 2000 and 1999, respectively. 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 $13 million (after tax) to $65 million at December 31, 1999. In conjunction with the accounting for the acquisition of the Aetna Financial Services business, of which the Company is a part, the deferred gain, which was previously part of other liabilities, was written off. Refer to Note 3 of the 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. CONTINUING OPERATIONS Income from continuing operations increased $2 million and $9 million in 2000 and 1999, respectively. Income from continuing operations includes Year 2000 costs of $18 million in 1999 and $22 million in 1998. Excluding net realized capital losses of $23 million and $14 million in 2000 and 1999, respectively, and net realized capital gains of $7 million in 1998, income from continuing 14 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) OVERVIEW (continued) operations increased $11 million in 2000 and $30 million in 1999. These increases in income excluding net realized capital losses and gains in 2000 and 1999 primarily reflect an increase in charges assessed against policyholders and other income resulting from higher levels of assets under management and administration partially offset by higher operating expenses. 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 prior years, assets under management and administration at December 31, 2000 and 1999 increased 5% and 26%. The increase in 2000 is primarily due to 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. This increase was partially offset by the stock market decline in the last half of 2000. The increase in 1999 is primarily due to appreciation in the stock market, new investment advisory and administrative contracts and additional net deposits (i.e., deposits less surrenders). 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. The group of assets that are reported in both segments must be deducted from the aggregate segment assets to determine the consolidated assets under management of the Company.
(Millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- Assets under management: Financial Products $ 53,262.4 $ 54,812.8 $ 44,476.0 Investment Management Services 55,629.3 54,996.2 47,788.1 Consolidating adjustment (1) (36,219.2) (37,252.2) (34,097.1) - --------------------------------------------------------------------------------------------------- Total--assets under management (2) (3) (4) $ 72,672.5 $ 72,556.8 $ 58,167.0 Assets under administration: (5) Financial Products $ 8,293.7 $ 4,441.7 $ 2,860.1 - --------------------------------------------------------------------------------------------------- Assets under management and administration $ 80,966.2 $ 76,998.5 $ 61,027.1 ===================================================================================================
(1) Represents consolidating adjustment related to the assets under management reported by both the Financial Products and Investment Management segments. (2) Includes $13,492.1 million, $13,472.4 million and $7,467.5 million at December 31, 2000, 1999 and 1998, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (3) Excludes net unrealized capital gains of $126.9 million at December 31, 2000, net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million at December 31, 1998. (4) As of December 31, 2000, 1999 and 1998, amounts included $5,837.1 million, $6,986.3 million and $7,809.3 million of assets managed for Aetna Life Insurance Company, a former affiliate of the Company refer to Note 1 of the Notes to Consolidated Financial Statements). (5) Represents assets for which the Company provides administrative services only. Salaries and related benefits in the years ended December 31, 2000 and 1999 increased 42% and 9%, respectively, over the prior years. The increase in 2000 primarily reflects higher staffing levels needed to support business growth and the implementation of strategic business initiatives and higher variable compensation triggered in certain compensation plans when ING purchased the Company. The increase in 1999 primarily reflects business growth. Other operating expenses for the years ended 15 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) OVERVIEW (continued) December 31, 2000 and 1999 increased 15% and 7%, respectively, over prior years. The increase in 2000 is also primarily due to business growth and implementation of strategic business initiatives and the increase in 1999 is primarily due to business growth. Other operating expenses in 1999 and 1998 include Year 2000 costs, before tax, of approximately $27 million and $35 million, respectively. Year 2000 costs for 1999 and 1998 are not allocated to the Company's segments. 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. The recent acquisition of the Company by ING presents opportunities for improved execution of this strategy. Integration with ING's current businesses, technology platforms and distribution channels will provide the Company with increased business scale as well as expanded brokerage and distribution capabilities and allow it to explore cross-selling opportunities with other affiliates. Additionally, as a result of the integration with ING's businesses, it is anticipated that the Company will not continue to actively market certain single premium deferred annuity products. See "Forward-Looking Information/Risk Factors" regarding other important factors that may materially affect the Company. 16 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) FINANCIAL PRODUCTS OPERATING SUMMARY
(Millions) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- Premiums (1) $ 154.2 $ 107.5 $ 79.4 Charges assessed against policyholders 461.0 388.3 324.3 Net investment income 905.8 881.5 865.3 Net realized capital (losses) gains (35.6) (21.5) 10.4 Other income 76.9 55.3 41.9 - -------------------------------------------------------------------------------------------------------- Total revenue 1,562.3 1,411.1 1,321.3 - -------------------------------------------------------------------------------------------------------- Current and future benefits 795.6 746.2 714.4 Operating expenses: Salaries and related benefits 172.6 127.9 123.4 Other 218.0 177.3 156.7 Amortization of deferred policy acquisition costs and value of business acquired 115.6 93.4 80.3 - -------------------------------------------------------------------------------------------------------- Total benefits and expenses 1,301.8 1,144.8 1,074.8 - -------------------------------------------------------------------------------------------------------- Income from operations before income taxes 260.5 266.3 246.5 Income taxes 79.0 87.5 68.2 - -------------------------------------------------------------------------------------------------------- Net income (2) $ 181.5 $ 178.8 $ 178.3 ======================================================================================================== Net realized capital (losses) gains, net of tax (included above) $ (23.1) $ (14.0) $ 7.3 ======================================================================================================== Deposits (not included in premiums above) Annuities--fixed options $ 1,479.1 $ 1,973.2 $ 1,125.6 Annuities--variable options 4,678.7 4,934.5 3,642.7 - -------------------------------------------------------------------------------------------------------- Total--deposits $ 6,157.8 $ 6,907.7 $ 4,768.3 ======================================================================================================== Assets Under Management (3) Annuities--fixed options (4) $12,450.3 $12,641.1 $12,131.1 Annuities--variable options (5) 33,084.0 35,352.9 25,527.0 - -------------------------------------------------------------------------------------------------------- Subtotal--annuities 45,534.3 47,994.0 37,658.1 Plan Sponsored and Other 7,728.1 6,818.8 6,817.9 - -------------------------------------------------------------------------------------------------------- Total--assets under management 53,262.4 54,812.8 44,476.0 Assets under administration (6) 8,293.7 4,441.7 2,860.1 - -------------------------------------------------------------------------------------------------------- Total assets under management and administration $61,556.1 $59,254.5 $47,336.1 ========================================================================================================
(1) Includes $107.8 million in 2000, $71.5 million in 1999 and $67.4 million in 1998 for annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies. (2) Year 2000 costs incurred in 1999 and 1998 are not allocated to segment operating expenses; and, therefore, excluded in the determination of segment net income. (3) Includes $36,219.2 million, $37,252.2 million, and $34,097.1 million of assets under management that are also reported in the Investment Management Services segment at December 31, 2000, 1999 and 1998, respectively (refer to "Overview"). (4) Excludes net unrealized capital gains of $126.9 million at December 31, 2000, net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million at December 31, 1998. (5) Includes $13,492.1 million at December 31, 2000, $13,472.4 million at December 31, 1999, and $7,467.5 million at December 31, 1998 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 $3 million in 2000 and $1 million in 1999. Excluding net realized capital losses and gains, net income increased $12 million, or 6%, in 2000 and $22 million, or 17 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) FINANCIAL PRODUCTS (continued) 13% in 1999. The increase in net income excluding net realized capital losses and gains primarily reflects an increase in charges assessed against policyholders and other income partially offset by an increase in operating expenses. 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 prior years, assets under management and administration at December 31, 2000 and 1999 increased 4% and 25%. The increase in 2000 is primarily due to 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). This increase was partially offset by the stock market decline in the last half of 2000. The increase in 1999 is primarily due to appreciation in the stock market, new investment advisory and administration contracts and additional net deposits. Annuity deposits relate to annuity contracts not containing life contingencies. Compared to prior years, deposits decreased 11% for the year ended December 31, 2000 and increased 45%, for the year ended December 31, 1999. The decrease for the year ended December 31, 2000 results from the fact that net deposits in 1999 included the plan assets from two large new cases and higher individual annuity sales due to a new mutual fund offering. These same factors contributed to the increase in net deposits in 1999 compared to 1998. Salaries and related benefits for the year ended December 31, 2000 and 1999 increased 35% and 3%, respectively, over prior years. The increase in 2000 primarily reflects higher staffing levels needed to support business growth and the implementation of strategic business initiatives, particularly improving system infrastructures and adding new distribution capabilities. The increase in 1999 reflects business growth. Other operating expenses for the year ended December 31, 2000 and 1999 increased 23% and 13%, respectively, over prior years. The increase in 2000 is also primarily due to business growth and implementation of strategic business initiatives and the increase in 1999 is primarily due to business growth. Of the $12.5 billion at December 31, 2000, $12.6 billion at December 31, 1999 and $12.1 billion at December 31, 1998 of fixed annuity assets under management, 25% were fully guaranteed and 75% were experienced rated for each of the three years. The average earned rate on investments supporting fully guaranteed investment contracts was 7.5%, 7.4% and 7.6%, and the average annualized earned rate on investments supporting experience rated investment contracts was 7.7%, 7.6% and 7.8% for the years ended December 31, 2000, 1999 and 1998, respectively. The average credited rate on fully guaranteed investment contracts was 6.2%, 6.3% and 6.5%, and the average credited rate on experience rated investment contracts was 5.6%, 5.6% and 5.8% for the years ended December 31, 2000, 1999 and 1998, respectively. The resulting interest margins on fully guaranteed investment contracts were 1.3%, 1.1% and 1.1% and on experience rated investment contracts were 2.1%, 2.0%, and 2.0% for the years ended December 31, 2000, 1999 and 1998, respectively. 18 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) INVESTMENT MANAGEMENT SERVICES OPERATING SUMMARY
(Millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Net investment income $ 2.8 $ 1.5 $ 1.5 Net realized capital gains 0.2 -- -- Other income (1) 138.2 118.3 96.7 - ------------------------------------------------------------------------------------------------ Total revenue 141.2 119.8 98.2 - ------------------------------------------------------------------------------------------------ Operating expenses: Salaries and related benefits 44.9 25.1 17.7 Other 77.5 50.1 41.8 - ------------------------------------------------------------------------------------------------ Total operating expenses 122.4 75.2 59.5 - ------------------------------------------------------------------------------------------------ Income from operations before income taxes 18.8 44.6 38.7 Income taxes 9.0 16.5 14.7 - ------------------------------------------------------------------------------------------------ Net income (2) $ 9.8 $ 28.1 $ 24.0 ================================================================================================ Net realized capital gains, net of tax (included above) $ 0.1 -- -- - ------------------------------------------------------------------------------------------------ Assets under management: Retail mutual funds $ 1,670.0 $ 1,447.7 $ 616.6 Plan sponsored (3) 15,719.4 14,244.5 11,581.5 Collateralized bond obligations 2,020.7 2,051.8 1,492.8 - ------------------------------------------------------------------------------------------------ Subtotal $19,410.1 $17,744.0 $13,690.9 - ------------------------------------------------------------------------------------------------ Invested through products of the Financial Products segment: (4) Variable annuity mutual funds $16,327.1 $18,144.2 $15,423.3 Fixed annuities (5) 12,450.3 12,641.1 12,131.1 Plan sponsored and other 7,441.8 6,466.9 6,542.8 - ------------------------------------------------------------------------------------------------ Subtotal $36,219.2 $37,252.2 $34,097.2 - ------------------------------------------------------------------------------------------------ Total assets under management $55,629.3 $54,996.2 $47,788.1 ================================================================================================
(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) As of December 31, 2000, 1999 and 1998, amounts included $5,837.1 million, $6,986.3 million and $7,809.3 million of assets managed for Aetna Life Insurance Company, a former affiliate of the Company (refer to Note 1 of the Notes to Consolidated Financial Statements). (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 gains of $126.9 million at December 31, 2000, net unrealized capital losses of $247.9 million at December 31, 1999 and net unrealized capital gains of $496.9 million at December 31, 1998. For the Investment Management Services segment, net income excluding realized capital gains in 2000 decreased $18 million, or 65%, for the year ended December 31, 2000, and increased $4 million, or 17%, for the year ended December 31, 1999. The decrease in net income excluding realized capital gains for the year ended December 31, 2000 primarily reflects an increase in operating expenses. The increase in net income for the year ended December 31, 1999 primarily reflects an increase in investment advisory fees partially offset by higher operating expenses. Investment advisory fees, reported in "other income" are calculated based on assets under management. At December 31, 2000, assets under management increased 1% over the prior year due to additional net sales. This increase was partially offset by the stock market decline in the last half of 2000. At December 31, 1999, assets under management increased 15% over the prior year 19 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) INVESTMENT MANAGEMENT SERVICES (continued) primarily due to appreciation in the stock market and, to a lesser extent, additional net deposits (i.e. deposits, including new contracts, less surrenders). For the years ended December 31, 2000 and 1999, salaries and related benefits increased 79% and 42%, respectively, because of higher variable compensation expense caused by change in control provisions in certain compensation plans, which were triggered by ING's purchase of the Company, and business growth. For the same periods, other operating expenses increased 55% and 20%, respectively, due to business growth. DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln. See "Overview" in Management's Analysis of the Results of Operations and Note 3 of the 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 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. Customers assume the risks associated with the investments supporting experience rated products subject to, among other things, certain minimum guarantees. The Company's invested assets were comprised of the following:
(Millions) December 31, 2000 December 31, 1999 - ------------------------------------------------------------------------------------ Debt securities, available for sale, at fair value (1) $11,371.4 $11,410.1 Equity securities, at fair value: Nonredeemable preferred stock 100.7 130.9 Investment in affiliated mutual funds 12.7 64.1 Common stock 3.5 11.5 Short-term investments (2) 111.7 74.2 Mortgage loans 4.6 6.7 Policy loans 339.3 314.0 Other investments 13.4 13.2 - ------------------------------------------------------------------------------------ Total Investments $11,957.3 $12,024.7 ====================================================================================
(1) Includes $126.7 million of debt securities pledged to creditors at December 31, 2000. Refer to "Investments" in Note 1 of Notes to Consolidated Financial Statements. (2) Includes $2.3 million of short-term investments pledged to creditors at December 31, 2000. Refer to "Investments" in Note 1 of Notes to Consolidated Financial Statements 20 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) GENERAL ACCOUNT INVESTMENTS (continued) DEBT SECURITIES At December 31, 2000 and 1999, the Company's carrying value of available for sale debt securities including debt securities pledged to creditors (herein after referred to as "total debt securities") represented 95% of the general account invested assets. For the same periods, $8.9 billion, or 79% of total debt securities, and $8.9 billion, or 78% of total debt securities supported experience rated products. Total debt securities reflected net unrealized capital gains of $126.9 million at December 31, 2000 and net unrealized capital losses of $247.9 million at December 31, 1999. 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, 2000 and 1999 was AA. The percentage of total debt securities investments by quality rating category is as follows:
December 31, 2000 December 31, 1999 - ------------------------------------------------------------------------------------ AAA 53.2% 48.4% AA 9.1 9.5 A 23.5 24.5 BBB 9.9 11.1 BB 1.5 2.5 B and Below 2.8 4.0 - ------------------------------------------------------------------------------------ Total 100.0% 100.0% ====================================================================================
The portfolio of debt securities at December 31, 2000 and 1999 included $482 million (4.3% of the total debt securities) and $739 million (6.5% 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, 2000 December 31, 1999 - ------------------------------------------------------------------------------------ U.S. Corporate 43.0% 40.6% Residential Mortgage-Backed 27.1 23.9 Commercial/Multifamily Mortgage-Backed 9.8 8.6 U.S. Treasuries/Agencies 8.4 9.4 Asset-Backed 6.7 6.1 Foreign (1) 5.0 11.4 - ------------------------------------------------------------------------------------ Total 100.0% 100.0% ====================================================================================
(1) Substantially all U.S. Dollar Denominated 21 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) GENERAL ACCOUNT INVESTMENTS (continued) 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 Notes 1 and 5 of the Notes to Consolidated Financial Statements for additional information.) 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 an immediate increase of 100 basis points in interest rates and an immediate decrease of 10% in prices for domestic equity securities were to occur (sensitivity analysis). The instruments included in this analysis 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. 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 $44 million (after tax) at December 31, 2000 and $12 million (after tax) at December 31, 1999. 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 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. 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 22 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) GENERAL ACCOUNT INVESTMENTS (continued) 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. 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 $2 million (after tax) at December 31, 2000 and $5 million (after tax) at December 31, 1999. 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. 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. 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 high quality of the debt securities portfolio (see "General Account Investments"), management expects the vast majority of the Company's investments in debt securities to be repaid in accordance with contractual terms. In addition, most of the debt securities in the portfolio are highly marketable and can be sold to enhance cash flow before maturity. In 2000, the Company received capital contributions of $73.5 million in cash and $56.0 million in assets from HOLDCO. The Company did not receive any capital contributions in 1999, but it received a capital contribution of $9.3 million in cash from HOLDCO in 1998. 23 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) LIQUIDITY AND CAPITAL RESOURCES (continued) The Company paid $10.1 million, $255.7 million and $570.0 million in cash dividends to HOLDCO in 2000, 1999 and 1998, respectively. Of the $255.7 million paid in 1999, $206.0 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 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 28, 2001, the Company had not exceeded such statutory limit. See "Consolidated Statements of Cash Flows" for additional information. YEAR 2000 As of March 28, 2001, 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 has reassigned its Year 2000 personnel and transferred 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. YEAR 2000 COSTS Year 2000 costs for the year ended December 31, 2000 were immaterial. Total Year 2000 project costs were $18 million (after tax) for the year ended December 31, 1999 and $22 million (after tax) for the year ended December 31, 1998. The Company funded these costs through operating cash flows. 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 24 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) FORWARD-LOOKING INFORMATION/RISK FACTORS (continued) 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: - - Expects - Plans - - Projects - Believes - - Anticipates - Seeks - - Intends - 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. CERTAIN FACTORS PARTICULAR TO THE COMPANY'S OPERATIONS 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. 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 25 ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued) FORWARD-LOOKING INFORMATION/RISK FACTORS (continued) 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 the Notes to Consolidated Financial Statements and Legal Proceedings for information regarding litigation. 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: - - Increases in minimum capital and other financial viability requirements for insurance operations; - - Changes in the taxation of insurance companies; and - - 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. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report...................... 28 Consolidated Financial Statements: Consolidated Statements of Income for the One Month Ended December 31, 2000, the Eleven Months Ended November 30, 2000 and for the Years Ended December 31, 1999 and 1998..... 29 Consolidated Balance Sheets as of December 31, 2000 and 1999................. 30 Consolidated Statements of Changes in Shareholder's Equity for the One Month Ended December 31, 2000, the Eleven Months Ended November 30, 2000 and for the Years Ended December 31, 1999 and 1998........... 31 Consolidated Statements of Cash Flows for the One Month Ended December 31, 2000, the Eleven Months Ended November 30, 2000 and for the Years Ended December 31, 1999 and 1998....................................... 32 Notes to Consolidated Financial Statements.... 33
27 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, 2000 ("Successor Company") and December 31, 1999 ("Preacquisition Company"), and the related consolidated statements of income, changes in shareholder's equity and cash flows for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 and the years ended December 31, 1999 and 1998 ("Preacquisition Company"). These consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Successor Company's consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the period from December 1, 2000 to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Preacquisition Company's consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiaries at December 31, 1999, and the results of their operations and their cash flows for the period from January 1, 2000 to November 30, 2000, and the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective November 30, 2000, ING America Insurance Holdings Inc. acquired all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut March 27, 2001 28 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF INCOME (millions)
Preacquisition ------------------------------------------- One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, 2000 2000 1999 1998 ------------- ------------- ------------- ------------- Revenue: Premiums $ 16.5 $ 137.7 $ 107.5 $ 79.4 Charges assessed against policyholders 36.4 424.6 388.3 324.3 Net investment income 78.6 833.8 886.3 871.8 Net realized capital (losses) gains 1.8 (37.2) (21.5) 10.4 Other income 13.4 148.7 129.7 100.2 ------ -------- -------- -------- Total revenue 146.7 1,507.6 1,490.3 1,386.1 ------ -------- -------- -------- Benefits and expenses: Current and future benefits 68.9 726.7 746.2 714.4 Operating expenses: Salaries and related benefits 29.9 187.5 153.0 141.0 Other 19.2 227.1 213.7 199.6 Amortization of deferred policy acquisition costs and value of business acquired 10.2 116.7 104.9 91.2 ------ -------- -------- -------- Total benefits and expenses 128.2 1,258.0 1,217.8 1,146.2 ------ -------- -------- -------- Income from continuing operations before income taxes 18.5 249.6 272.5 239.9 Income taxes 5.9 78.1 90.6 67.1 ------ -------- -------- -------- Income from continuing operations 12.6 171.5 181.9 172.8 Discontinued operations, net of tax: Income from operations -- -- -- 61.8 Amortization of deferred gain on sale -- 5.7 5.7 -- Immediate gain on sale -- -- -- 59.0 ------ -------- -------- -------- Net income $ 12.6 $ 177.2 $ 187.6 $ 293.6 ====== ======== ======== ========
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 BALANCE SHEETS (millions, except share data)
December 31, December 31, 2000 1999 --------------- --------------- ASSETS Investments: Debt securities available for sale, at fair value (amortized cost: $11,120.0 and $11,657.9) $11,244.7 $11,410.1 Equity securities, at fair value: Nonredeemable preferred stock (cost: $109.0 and $134.7) 100.7 130.9 Investment in affiliated mutual funds (cost: $9.6 and $63.5) 12.7 64.1 Common stock (cost: $2.2 and $6.7) 3.5 11.5 Short-term investments 109.4 74.2 Mortgage loans 4.6 6.7 Policy loans 339.3 314.0 Other investments 13.4 13.2 Securities pledged to creditors (amortized cost: $126.8) 129.0 -- --------- --------- Total investments 11,957.3 12,024.7 Cash and cash equivalents 796.3 694.4 Short-term investments under securities loan agreement 131.8 238.8 Accrued investment income 147.2 150.7 Premiums due and other receivables 82.9 298.3 Reinsurance recoverable 3,005.8 3,001.2 Current income taxes 40.6 -- Deferred income taxes -- 150.4 Deferred policy acquisition costs 12.3 1,046.4 Value of business acquired 1,780.9 -- Goodwill 2,297.4 -- Other assets 154.7 96.5 Separate Accounts assets 36,745.8 38,692.6 --------- --------- Total assets $57,153.0 $56,394.0 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits $ 3,977.7 $ 3,850.4 Unpaid claims and claim expenses 29.6 27.3 Policyholders' funds left with the Company 11,125.6 11,121.7 --------- --------- Total insurance reserve liabilities 15,132.9 14,999.4 Payables under securities loan agreement 131.8 238.8 Current income taxes -- 14.7 Deferred income taxes 248.0 -- Other liabilities 549.9 1,062.8 Separate Accounts liabilities 36,745.8 38,692.6 --------- --------- Total liabilities 52,808.4 55,008.3 --------- --------- 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 4,303.8 431.9 Accumulated other comprehensive gain (loss) 25.4 (44.8) Retained earnings 12.6 995.8 --------- --------- Total shareholder's equity 4,344.6 1,385.7 --------- --------- Total liabilities and shareholder's equity $57,153.0 $56,394.0 ========= =========
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 CHANGES IN SHAREHOLDER'S EQUITY (millions)
Preacquisition ------------------------------------------- One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, 2000 2000 1999 1998 ------------- ------------- ------------- ------------- Shareholder's equity, beginning of period $4,313.4 $1,385.7 $1,394.5 $1,853.3 Comprehensive income: Net income 12.6 177.2 187.6 293.6 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities ($28.7, $79.4, ($230.2), $18.2 pretax) (1) 18.6 51.6 (149.6) 11.9 -------- -------- -------- -------- Total comprehensive income 31.2 228.8 38.0 305.5 -------- -------- -------- -------- Capital contributions: Cash -- 73.5 -- 9.3 Assets -- 56.0 -- -- -------- -------- -------- -------- Total capital contributions -- 129.5 -- 9.3 -------- -------- -------- -------- Other changes -- 0.8 2.9 2.4 -------- -------- -------- -------- Common stock dividends -- (10.1) (49.7) (776.0) -------- -------- -------- -------- Adjustment for purchase accounting -- 2,578.7 -- -- -------- -------- -------- -------- Shareholder's equity, end of period $4,344.6 $4,313.4 $1,385.7 $1,394.5 ======== ======== ======== ========
(1) Net of reclassification adjustments. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 31 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (millions)
Preacquisition ----------------------------------------------- One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, 2000 2000 1999 1998 --------------- ------------- --------------- --------------- Cash Flows from Operating Activities: Net income $ 12.6 $ 177.2 $ 187.6 $ 293.6 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Net accretion of discount on investments (2.7) (32.6) (26.5) (29.5) Amortization of deferred gain on sale -- (5.7) (5.7) 0.0 Immediate gain on sale -- -- -- (59.0) Net realized capital gains (losses) (1.8) 37.2 21.5 (11.1) Changes in assets and liabilities: Decrease (increase) in accrued investment income 6.6 (3.1) 0.9 11.4 Decrease (increase) in premiums due and other receivables 31.1 (23.7) 23.3 (24.0) Decrease (increase) in policy loans 0.1 (25.4) (21.8) 177.4 Increase in deferred policy acquisition costs/value of business acquired (12.2) (136.6) (153.3) (132.8) Decrease in reinsurance loan to affilitate -- -- -- 397.2 Net (decrease) increase in universal life account balances (3.8) 23.8 55.7 122.9 (Decrease) increase in other insurance reserve liabilities (5.3) 85.6 (28.6) (41.8) Increase (decrease) in other liabilities and other assets 103.9 (75.2) (42.5) (35.3) (Decrease) increase in income taxes (14.3) 23.1 (259.8) 106.5 ------- ---------- --------- --------- Net cash provided by (used for) operating activities 114.2 44.6 (249.2) 775.5 ------- ---------- --------- --------- Cash Flows from Investing Activities: Proceeds from sales of fixed maturities Debt securities available for sale 233.0 10,083.2 5,890.1 6,790.2 Equity securities 1.5 118.4 111.2 150.1 Mortgage loans 0.1 2.1 6.1 0.3 Life Business -- -- -- 966.5 Investment maturities and collections of: Debt securities available for sale 53.7 573.1 1,216.5 1,296.3 Short-term investments 0.4 59.9 80.6 135.3 Cost of investment purchases in: Debt securities available for sale (230.7) (10,505.5) (7,099.7) (6,706.4) Equity securities (27.8) (17.6) (13.0) (125.7) Short-term investments (10.0) (113.1) (106.0) (83.9) Decrease (increase) in property and equipment 1.9 5.4 (5.7) Other, net 0.3 (4.0) 3.7 (2,725.9) ------- ---------- --------- --------- Net cash provided by (used for) investing activities 22.4 201.9 83.8 (312.2) ------- ---------- --------- --------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 164.2 1,529.7 2,040.2 1,571.1 Withdrawals of investment contracts (156.3) (1,832.6) (1,680.8) (1,393.1) Capital contribution from HOLDCO -- 73.5 -- 9.3 Return of capital to Separate Account -- -- -- 1.7 Dividends paid to shareholder -- (10.1) (255.7) (570.0) Other, net (73.6) 22.0 126.7 (34.3) ------- ---------- --------- --------- Net cash (used for) provided by financing activities (65.7) (217.5) 230.4 (415.3) ------- ---------- --------- --------- Net increase in cash and cash equivalents 70.9 29.0 65.0 48.0 Effect of exchange rate changes on cash and cash equivalents -- 2.0 -- -- Cash and cash equivalents, beginning of period 725.4 694.4 629.4 581.4 ------- ---------- --------- --------- Cash and cash equivalents, end of period $ 796.3 $ 725.4 $ 694.4 $ 629.4 ======= ========== ========= ========= Supplemental cash flow information: Income taxes paid, net $ 20.3 $ 39.9 $ 316.9 $ 60.9 ======= ========== ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32 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). On December 13, 2000, ING America Insurance Holdings, Inc., an indirect wholly owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial Services business, of which the Company is a part, and the Aetna International business, for approximately $7.7 billion. The purchase price was comprised of approximately $5.0 billion in cash and the assumption of $2.7 billion of outstanding debt and other net liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion entered into certain transition services agreements with a former related party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former Aetna"). For accounting purposes, the acquisition has been accounted for as of November 30, 2000 using the purchase method. The application of the purchase method, including the recognition of goodwill, is being pushed down and reflected on the financial statements of certain ARSI (a subsidiary of Lion) subsidiaries, including the Company. The Balance Sheet changes related to accounting for this purchase were entirely non-cash in nature and accordingly have been excluded from the pre-acquisition Consolidated Statement of Cash Flow for the eleven months ended November 30, 2000. The purchase price was allocated to assets and liabilities based on their respective fair values. This revaluation resulted in a net increase to assets, excluding the effects of goodwill, of $592.0 million and a net increase to liabilities of $310.6 million. The allocation of the purchase price to assets and liabilities is subject to further refinement. The net increase to assets reflects the write off of deferred acquisition costs of $1,183.0 million, which was the balance as of November 30, 2000, the establishment of value of business acquired of $1,780.9, an increase to other assets of $6.0 million and a decrease of $12.0 million in current income taxes. The increase to other assets reflects the write down of certain fixed assets and capitalized software costs resulting from conforming accounting policies, the establishment of a favorable lease asset and the reclassification of certain pension assets (previously reflected in other liabilities). The balances in other assets and current income taxes prior to push down accounting were $148.7 million and $52.6 million, respectively. The net increase to liabilities reflects an increase to insurance reserves of $60.0 million representing the revaluation of the reserves using current assumptions, an increase to deferred tax liabilities of $266.4 million primarily representing the deferred tax effect of the purchase accounting adjustments and a decrease to other liabilities of $15.8 million. The decrease in other liabilities includes the write-off of the deferred gain related to the sale of the individual life insurance business (refer to Note 3) partially offset by the establishment of a severance liability 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) and the revaluation of certain benefit plan liabilities. The balances in insurance reserves and other liabilities prior to push down accounting were $15,072.9 million and $565.7 million. With respect to deferred taxes, prior to push down accounting, the Company had a deferred tax asset of $18.4 million. As a result of the application of push down accounting, retained earnings immediately prior to the sale was reclassified to paid-in capital. Additionally, the Company established goodwill of $2.3 billion. Goodwill is being amortized over a period of 40 years. Unaudited proforma consolidated income from continuing operations and net income of the Company for the period from January 1, 2000 to November 30, 2000 and for the year-ended December 31, 1999, assuming that the acquisition of the Company occurred at the beginning of each period, would have been approximately $118.1 million and $123.5 million, respectively. The pro forma adjustments, which do not affect revenues, reflect primarily goodwill amortization, amortization of the favorable lease asset and the elimination of amortization of the deferred gain on sale associated with the life business. 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 company 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"), Aetna Investment Adviser Holding Company, Inc. ("IA Holdco") and Aetna Investment Services, LLC ("AIS"). ALIAC is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"), which is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is ultimately owned by ING Groep N.V. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (ING). HOLDCO contributed AIS to the Company on June 30, 2000 and contributed IA Holdco to the Company on July 1, 1999 (refer to Note 2). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The contributions of AIS and IA Holdco to the Company were 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 both companies. Certain reclassifications have been made to 1999 and 1998 financial information to conform to the 2000 presentation. NEW ACCOUNTING STANDARDS ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In September 2000, the Financial Accounting Standard 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 Servicing of Financial Assets and Extinguishments of Liabilities. This standard revises the accounting for securitizations, other financial asset transfers and collateral associated with securities lending transactions and requires certain additional disclosures. FAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and disclosure of collateral and for additional disclosures related to securitization transactions, FAS No. 140 was effective for the Company's December 31, 2000 financial statements. With respect to the provisions effective December 31, 2000, the Company reclassified debt securities on loan to other institutions from "Debt Securities" to "Securities Pledged to Creditors" on the Company's Consolidated Balance Sheet. The Company does not expect the adoption of those provisions effective after March 31, 2001 to have a material effect on its financial position or results of operations (Refer to Note 4). DEPOSIT ACCOUNTING: ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS THAT DO NOT TRANSFER INSURANCE RISK 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. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) FUTURE APPLICATION OF ACCOUNTING STANDARDS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This 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 to the Company, of the adoption of this standard, as amended, will not have a material effect on the Company's financial position or results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. INVESTMENTS Debt and equity securities are classified as available for sale and carried at fair value. 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 policyholders' 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 shareholder's equity, net of related income taxes. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. In September 2000, the FASB issued FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In accordance with this new standard, general account securities on loan are reflected on the balance sheet as "Securities pledged to creditors", which includes the following:
Gross Gross December 31, 2000 Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value --------------------------------------------------------------------------- Debt securities $124.5 $5.3 $3.1 $126.7 Short-term investments 2.3 -- -- 2.3 --------------------------------------------------------------------------- Total securities pledged to creditors $126.8 $5.3 $3.1 $129.0 ---------------------------------------------------------------------------
At December 31, 1999, the Company had securities pledged to creditors with a fair value of approximately $232.5 million reflected as debt securities. The investment in affiliated mutual funds represents an investment in Aetna managed mutual funds by the Company, and is carried at fair value. Mortgage loans and policy loans are carried at unpaid principal balances, net of impairment reserves. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. GOODWILL Goodwill, which represents the excess of cost over the fair value of net assets acquired, is amortized on a straight-line basis over 40 years. The Company regularly evaluates the recoverability of goodwill. The carrying value of goodwill would be reduced through a direct write-off, if, in management's judgement, it was probable that projected future operating income (before amortization of goodwill) would not be sufficient on an undiscounted basis to recover the carrying value. Operating earnings considered in such an analysis are those of the entity acquired, if separately identifiable, or the business segment that acquired the entity if the entity's earnings are not separately identifiable. 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 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 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. 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. Refer to "Principles of Consolidation" within Note 1 for related discussions regarding the application of the purchase method to deferred policy acquisition costs. VALUE OF BUSINESS ACQUIRED Value of business acquired ("VOBA") is an asset and represents the present value ofestimated net cash flows embedded in the Company's contracts acquired by ING. VOBA is amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits over the contracts (up to 30 years for annuity contracts and pension contracts). VOBA is written off to the extent that it is determined that gross profits are not adequate to recover the asset. The estimated amount of VOBA to be amortized, net of interest, over the next five years is $104.3 million, $112.6 million, $114.3 million, $110.8 million and $106.3 million for the years 2001, 2002, 2003, 2004 and 2005, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results. 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 2.0% to 9.5% for all years presented. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Company 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 2.0% to 14.0% 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 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 Account 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. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Separate Accounts assets are carried at fair value. At December 31, 2000 and 1999, unrealized gains of $9.5 million and unrealized losses of $8.0 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 3.8% to 14.0% in 2000 and 3.7% to 12.0% in 1999. 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 balances 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, 2000 and 1999, $2,991 million and $2,989 million, respectively, is related to the reinsurance recoverable from Lincoln arising from the sale of the Company's domestic life insurance business. (Refer to Note 3). INCOME TAXES The Company is included in the consolidated federal income tax return of Lion through December 13, 2000. Subsequent to December 13, 2000 the Company will file a consolidated return with AICA. 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. RECENT DEVELOPMENTS CONTRIBUTIONS OF AIS AND IA HOLDCO FROM HOLDCO On June 30, 2000, HOLDCO contributed AIS to the Company. AIS is registered with the Securities and 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 and is a Registered Investment Advisor. The principal operation of 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. RECENT DEVELOPMENTS (continued) AIS is acting as underwriter for ALIAC's manufactured products, as well as the sale of fixed and variable annuities and mutual funds through its registered representatives. 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, serves as underwriter to the Aetna Series Fund, Inc. and provides distribution services for other Company 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 was recognized immediately in net income and was largely attributed to access to the agency sales force and brokerage distribution channel. Approximately $5.7 million and $5.2 million (after tax) of the deferred gain was recognized during 2000 and 1999, respectively. 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. In conjunction with the accounting for the acquisition of the Aetna Financial Services business, of which the Company is a part, the deferred gain, which was previously part of other liabilities, was written off. (Refer to Note 1). The operating results of the domestic individual life insurance business are presented as Discontinued Operations. Revenues for the individual life segment were $652.2 million for 1998. Premiums ceded and reinsurance recoveries made in 2000 totaled $419.1 million and $416.1 million, respectively, and in 1999 totaled $476.5 million and $513.4 million, respectively. 42 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 2000 (Millions) Cost Gains Losses Value ----------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 920.8 $ 34.3 $ 2.1 $ 953.0 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Utilities 282.2 13.8 6.2 289.8 Financial 1,753.1 33.8 21.2 1,765.7 Transportation/capital goods 660.2 21.4 11.3 670.3 Health care/consumer products 758.9 16.2 27.9 747.2 Natural resources 499.3 7.6 15.6 491.3 Other corporate securities 972.0 7.1 52.3 926.8 ----------------------------------------------------------------------------- Total U.S. corporate securities 4,925.7 99.9 134.5 4,891.1 ----------------------------------------------------------------------------- Foreign securities: Government, including political subdivisions 384.7 23.9 4.3 404.3 Utilities 122.9 18.6 -- 141.5 Other 31.2 -- 9.3 21.9 ----------------------------------------------------------------------------- Total foreign securities 538.8 42.5 13.6 567.7 ----------------------------------------------------------------------------- Residential mortgage-backed securities: Pass-throughs 1,390.3 37.1 4.1 1,423.3 Collateralized mortgage obligations 1,606.6 61.2 7.1 1,660.7 ----------------------------------------------------------------------------- Total residential mortgage-backed securities 2,996.9 98.3 11.2 3,084.0 ----------------------------------------------------------------------------- Commercial/Multifamily mortgage-backed securities 1,108.3 27.5 24.2 1,111.6 Other asset-backed securities 753.7 13.4 3.4 763.7 ----------------------------------------------------------------------------- Total debt securities, including debt securities pledged to creditors 11,244.5 315.9 189.0 11,371.4 Less: Debt securities pledged to creditors 124.5 5.3 3.1 126.7 ----------------------------------------------------------------------------- Debt securities $11,120.0 $310.6 $185.9 $11,244.7 =============================================================================
43 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 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 ----------------------------------------------------------------------------- Debt securities $11,657.9 $112.8 $360.6 $11,410.1 =============================================================================
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. INVESTMENTS (continued) At December 31, 2000 and 1999, net unrealized appreciation (depreciation) of $126.9 million and $(247.8) million, respectively, on available-for-sale debt securities including debt securities pledged to creditors, herein after referred to as "total debt securities", included $92.9 million and $(189.7) 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 total debt securities for the year ended December 31, 2000 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 $ 405.4 $ 405.9 After one year through five years 2,272.8 2,299.2 After five years through ten years 1,754.3 1,731.5 After ten years 1,953.1 1,975.6 Mortgage-backed securities 4,105.2 4,195.5 Other asset-backed securities 753.7 763.7 -------------------------------------------------------------- Less: Debt securities pledged to creditors 124.5 126.7 ============================================================== Debt securities $11,120.0 $11,244.7 ==============================================================
At December 31, 2000 and 1999, debt securities carried at fair value of $8.6 million and $8.7 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, 2000. Included in the Company's total debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
2000 1999 ------------------- ------------------- Amortized Fair Amortized Fair (Millions) Cost Value Cost Value ------------------------------------------------------------------------ Total residential CMOs (1) $1,606.6 $1,660.7 $1,683.1 $1,670.5 ======================================================================== Percentage of total: Supporting experience rated products 80.6% 80.7% Supporting remaining products 19.4% 19.3% ------------------------------------------------------------------------ 100.0% 100.0% ========================================================================
(1) At December 31, 2000 and 1999, approximately 84% and 81%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, and FHLMC. 45 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, 2000 and 1999, approximately 2% and 1%, 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 as of December 31 were as follows:
(Millions) 2000 1999 -------------------------------------------------------- Amortized Cost $120.8 $204.9 Gross unrealized gains 6.0 12.5 Gross unrealized losses 9.9 10.9 -------------------------------------------------------- Fair Value $116.9 $206.5 ========================================================
5. FINANCIAL INSTRUMENTS ESTIMATED FAIR VALUE The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 2000 and 1999 were as follows:
2000 1999 ------------------- ------------------- Carrying Fair Carrying Fair (Millions) Value Value Value Value ------------------------------------------------------------------------ Assets: Mortgage loans $ 4.6 $ 4.5 $ 6.7 $ 6.8 Liabilities: Investment contract liabilities: With a fixed maturity 1,041.0 982.3 1,055.3 991.0 Without a fixed maturity 10,084.6 9,549.9 10,066.4 9,452.8 ------------------------------------------------------------------------
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. 46 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. WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable to the contractholder upon demand. However, the Company has the right under such contracts to delay payment of withdrawals which may ultimately result in paying an amount different than that determined to be payable on demand. OFF-BALANCE-SHEET AND OTHER FINANCIAL INSTRUMENTS 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 at December 31, 2000 and 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 at December 31, 2000 were both $0.3 million. The carrying values and estimated fair values at December 31, 1999 were both $6.5 million. OPTIONS: As of December 31, 2000 and 1999, the Company earned $1.1 million and $0.4 million respectively, of investment income for writing call options on underlying securities. At December 31, 2000 and 1999, there were no option contracts outstanding. 47 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, 2000 was as follows:
Amortized Fair (Millions) Cost Value ------------------------------------------------------------- Residential collateralized mortgage obligations $1,606.6 $1,660.7 Principal-only strips (included above) 28.1 32.1 Interest-only strips (included above) 8.2 9.7 Other structured securities with derivative characteristics (1) 51.5 51.5 -------------------------------------------------------------
(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:
One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, (Millions) 2000 2000 1999 1998 ------------------------------------------------------------------------------------------------ Debt securities $70.3 $768.9 $823.3 $798.8 Nonredeemable preferred stock 1.8 9.5 17.1 18.4 Investment in affiliated mutual funds 0.5 2.1 2.4 6.6 Mortgage loans 0.1 0.5 1.1 0.6 Policy loans 0.7 7.9 7.7 7.2 Cash equivalents 4.4 50.3 39.0 46.1 Other 2.6 13.1 15.3 15.5 ------------------------------------------------------------------------------------------------ Gross investment income 80.4 852.3 905.9 893.2 Less: investment expenses (1.8) (18.5) (19.6) (21.4) ------------------------------------------------------------------------------------------------ Net investment income $78.6 $833.8 $886.3 $871.8 ================================================================================================
Net investment income includes amounts allocable to experience rated contractholders of $55.9 million and $622.2 million for the one month and eleven month periods ended December 31, 2000 and November 30, 2000, respectively, and $659.6 million and $655.6 million for the years ended December 31, 1999 and 1998, respectively. Interest credited to contractholders is included in current and future benefits. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY The Company paid $10.1 million, $255.7 million and $570.0 million in cash dividends to HOLDCO in 2000, 1999 and 1998, respectively. Of the $255.7 million paid in 1999, $206.0 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 Insurance Department of the State of Connecticut (the "Department") recognizes as net income and 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 $100.6 million, $133.9 million and $148.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. Statutory capital and surplus was $931.1 million and $844.9 million as of December 31, 2000 and 1999, respectively. As of December 31, 2000, 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. For 2001, the Company is required to implement statutory accounting changes ratified by the NAIC and state insurance departments ("Codification"). The cumulative effect of Codification to the Company's statutory surplus as of January 1, 2001 is estimated to be an increase of $27.4 million. 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 gains (losses) on investments were as follows:
One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, (Millions) 2000 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Debt securities $1.2 $(36.3) $(23.6) $ 7.4 Equity securities 0.6 (0.9) 2.1 3.0 - ------------------------------------------------------------------------------------------------ Pretax realized capital gains (losses) $1.8 $(37.2) $(21.5) $10.4 ================================================================================================ After-tax realized capital gains (losses) $1.3 $(24.3) $(14.0) $ 7.3 ================================================================================================
Net realized capital (losses) gains of $(16.8) million, $(36.7) million and $15.0 million for 2000, 1999 and 1998, 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 $45.1 million and $68.5 million at December 31, 2000 and 1999, respectively. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued) Proceeds from the sale of total debt securities and the related gross gains and losses were as follows:
One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, (Millions) 2000 2000 1999 1998 ------------------------------------------------------------------------------------------------ Proceeds on sales $233.0 $10,083.2 $5,890.1 $6,790.2 Gross gains 1.4 2.5 10.5 98.8 Gross losses -- 39.0 34.1 91.4 ------------------------------------------------------------------------------------------------
Changes in shareholder's equity related to changes in accumulated other comprehensive income (unrealized capital gains and losses on securities including securities pledged to creditors, excluding those related to experience-rated contractholders) were as follows:
(Millions) 2000 1999 1998 ------------------------------------------------------------ Debt securities $ 92.1 $(199.2) $ 18.9 Equity securities (5.5) (3.4) (16.1) Other 21.5 (27.6) 15.4 ------------------------------------------------------------ Subtotal 108.1 (230.2) 18.2 Increase (decrease) in deferred income taxes (Refer to Note 10) 37.9 (80.6) 6.3 ------------------------------------------------------------ Net changes in accumulated other comprehensive income (loss) $ 70.2 $(149.6) $ 11.9 ============================================================
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued) Net unrealized capital gains (losses) allocable to experience-rated contracts of $92.9 million and $(189.7) million at December 31, 2000 and 1999, respectively, are reflected on the Consolidated Balance Sheets in Policyholders' funds left with the Company and are not included in shareholder's equity. 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) 2000 1999 1998 ----------------------------------------------------------- Total debt securities: Gross unrealized capital gains $ 78.5 $ 18.6 $157.3 Gross unrealized capital losses (44.5) (76.7) (16.2) ----------------------------------------------------------- 34.0 (58.1) 141.1 ----------------------------------------------------------- Equity securities: Gross unrealized capital gains 6.0 12.5 13.1 Gross unrealized capital losses (9.9) (10.9) (8.1) ----------------------------------------------------------- (3.9) 1.6 5.0 ----------------------------------------------------------- Other: Gross unrealized capital gains 15.0 1.3 17.1 Gross unrealized capital losses (5.9) (13.7) (1.8) ----------------------------------------------------------- 9.1 (12.4) 15.3 ----------------------------------------------------------- Deferred income taxes (Refer to Note 10) 13.8 (24.1) 56.6 ----------------------------------------------------------- Net accumulated other comprehensive income (loss) $ 25.4 $(44.8) $104.8 ===========================================================
Changes in accumulated other comprehensive income related to changes in unrealized gains (losses) on securities, including securities pledged to creditors (excluding those related to experience-rated contractholders) were as follows:
(Millions) 2000 1999 1998 ---------------------------------------------------------- Unrealized holding gains (losses) arising during the year (1) $70.1 $(146.3) $38.3 Less: reclassification adjustment for (losses) gains and other items included in net income (2) (0.1) 3.3 26.4 ========================================================== Net unrealized gains (losses) on securities $70.2 $(149.6) $11.9 ==========================================================
(1) Pretax unrealized holding gains (losses) arising during the year were $108.0 million, $(225.2) million and $58.8 million for 2000, 1999 and 1998, respectively. (2) Pretax reclassification adjustments for (losses) gains and other items included in net income were $(0.1) million, $5.0 million and $40.6 million for 2000, 1999 and 1998, respectively. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. SEVERANCE In December 2000, the Company, in accounting for its acquisition by ING, established a severance liability of $10.7 million related to actions taken or expected to be taken with respect to the integration of the Company's and ING's businesses. The severance liability is based on a plan to eliminate approximately 175 positions (primarily in the retail annuity operations). The severance liability is reflected in other liabilities in the Consolidated Balance Sheets. Severance actions are expected to be substantially completed by December 31, 2001. No significant severance actions took place in 2000. 10. INCOME TAXES The Company is included in the consolidated federal income tax return of Lion through December 13, 2000. For tax settlements related to tax periods ending on or prior to December 13, 2000, the purchase agreement between ING America Insurance Holdings, Inc. and the former Aetna provides for the settlement of balances owed by the Company based on an amount approximating the tax the Company would have incurred were it not a member of the consolidated group, and owed to the Company for the use of its tax saving attributes in the consolidated federal income tax return. Subsequent to December 13, 2000, as a result of the sale, the Company will be filing a consolidated return with AICA. The Company allocates to each member, an amount approximating the tax the member would have incurred were it not a member of the consolidated group, and credits the member for use of its tax saving attributes in the consolidated federal income tax return. Income taxes from continuing operations consist of the following:
One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, (Millions) 2000 2000 1999 1998 - ------------------------------------------------------------------------------------------------ Current taxes (benefits): Federal $ 9.4 $ 5.3 $ 64.3 $ 257.9 State 0.2 2.6 2.5 3.0 Net realized capital (losses) gains 0.3 (11.5) (20.1) 16.8 - ------------------------------------------------------------------------------------------------ 9.9 (3.6) 46.7 277.7 - ------------------------------------------------------------------------------------------------ Deferred taxes (benefits): Federal (4.3) 83.2 31.3 (196.7) Net realized capital gains (losses) 0.3 (1.5) 12.6 (13.9) - ------------------------------------------------------------------------------------------------ (4.0) 81.7 43.9 (210.6) - ------------------------------------------------------------------------------------------------ Total $ 5.9 $ 78.1 $ 90.6 $ 67.1 ================================================================================================
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES (continued) 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:
One month Eleven months ended ended Year ended Year ended December 31, November 30, December 31, December 31, (Millions) 2000 2000 1999 1998 -------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes $ 18.5 $ 249.6 $ 272.5 $ 239.9 Tax rate 35% 35% 35% 35% -------------------------------------------------------------------------------------------------- Application of the tax rate 6.4 87.4 95.4 84.0 Tax effect of: State income tax, net of federal benefit 0.1 1.7 1.6 2.0 Excludable dividends (0.9) (12.6) (6.1) (17.1) Other, net 0.3 1.6 (0.3) (1.8) -------------------------------------------------------------------------------------------------- Income taxes $ 5.9 $ 78.1 $ 90.6 $ 67.1 ==================================================================================================
53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. 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) 2000 1999 --------------------------------------------------------- Deferred tax assets: Deferred policy acquisition costs $ 44.8 $ -- Insurance reserves 306.3 323.1 Unrealized gains allocable to experience rated contracts 32.5 -- Net unrealized capital losses -- 90.5 Investment losses 9.0 1.3 Postretirement benefits other than pensions 5.8 24.8 Deferred compensation 65.6 42.5 Sale of individual life insurance business -- 44.9 Other 21.1 23.7 --------------------------------------------------------- Total gross assets 485.1 550.8 --------------------------------------------------------- Deferred tax liabilities: Value of business acquired 623.3 -- Deferred policy acquisition costs -- 324.0 Market discount 4.9 6.5 Net unrealized capital gains 46.3 -- Unrealized losses allocable to experience rated contracts -- 66.4 Depreciation 4.4 3.5 Sale of Individual life insurance business 15.1 -- Excludable dividends 5.0 -- Other 34.1 -- --------------------------------------------------------- Total gross liabilities 733.1 400.4 --------------------------------------------------------- Net deferred tax (liability) asset $(248.0) $150.4 =========================================================
Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. As of December 31, 2000 and 1999, no valuation allowance was required for unrealized capital gains and losses. The "Policyholders' Surplus Account," which arose under prior tax law, is generally that portion of a life insurance company's statutory income that has not been subject to taxation. As of December 31, 1983, no further additions could be made to the Policyholders' Surplus Account for tax return purposes under the Deficit Reduction Act of 1984. The balance in such account was approximately $17.2 million at December 31, 2000. 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. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES (continued) The Internal Revenue Service (the "Service") has completed examinations of the consolidated federal income tax returns of Lion 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. 11. BENEFIT PLANS ALIAC, in conjunction with ING, 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 amount that are tax-deductible. The accumulated benefit obligation and plan assets are recorded by ALIAC. As of the measurement date (i.e. December 13, 2000), fair value of plan assets exceed projected benefit obligations. Allocated pretax charges to operations for the former Aetna pension plan (based on the Company's total salary cost as a percentage of former Aetna's total salary cost) were $3.7 million and $6.6 million for the years ended December 31, 2000 and 1999, respectively. There were no charges in 1998 due to favorable plan asset performance. Effective January 1, 1999 ALIAC, in conjunction with former Aetna, changed the formula for providing pension benefits from the existing final average pay formula to a cash balance formula, which credits 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 will not have a material effect on ALIAC's results of operations, liquidity or financial condition. In addition to providing pension benefits, ALIAC, in conjunction with ING, 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. There is a cap on the portion of the cost paid by the Company relating to medical and dental benefits. Retirees are generally required to contribute to the plans based on their years of service with the Company. The costs to the Company associated with the former Aetna postretirement plans for 2000, 1999 and 1998 were $1.2 million, $2.1 million and $1.0 million, respectively. ALIAC, in conjunction with ING, has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. As of the measurement date (i.e. December 13, 2000), the projected benefit obligation exceeded the fair value of plan assets. The Company, in conjunction with ING, 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 2000, 1999 and 1998 were $1.4 million, $2.1 million and $1.4 million, respectively. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. BENEFIT PLANS (continued) Incentive Savings Plan--Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in certain investments are matched, up to 5% of compensation, by ING. Pretax charges to operations for former Aetna the incentive savings plan were $9.0 million, $7.7 million and $5.3 million in 2000, 1999 and 1998, respectively. Stock Plans--ALIAC, in conjunction with former Aetna, had a stock incentive plan that provided for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to employees. Certain executive, middle management and non-management employees were granted options to purchase common stock of former Aetna at or above the market price on the date of grant. Options generally became 100% vested three years after the grant was made, with one-third of the options vesting each year. The former Aetna did 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 were, from time to time, granted incentive units which were rights to receive common stock or an equivalent value in cash. The sale of ALIAC to ING America Insurance Holdings, Inc by former Aetna caused all outstanding stock options to vest immediately. The costs to the Company associated with the former Aetna stock plans for 2000, 1999 and 1998, were $2.7 million, $0.4 million and $4.2 million, respectively. During 2001, the benefits plans offered by ALIAC to its employees and agents will be transitioned to plans directly offered by ING. These plans are substantially similar to those offered by ALIAC, in conjunction with ING, and any differences are not expected to be material in nature. Effective January 1, 1998, Aeltus established an additional deferred incentive compensation plan, designed to attract, retain and incent key members of Aeltus. The plan had a five year vesting period. Payments under the plan were conditioned upon continued employment and were based upon an imputed share price of Aeltus at the end of the vesting period. The plan value was determined annually and the cost of the plan was expensed ratably over the vesting period. A change in control at Aeltus, as defined in the plan, would cause immediate full vesting of all outstanding shares. The purchase of Aetna Inc. by ING meets this definition. As a result, all outstanding shares became fully vested based on Aeltus's imputed value at the date of the sale and were subsequently paid out in early 2001. The appropriate annual share of the cost of the plan, including the additional cost in 2000 associated with this full vesting, has been reflected in salaries and related benefits in the Consolidated Statements of Income for each of the three years ended December 31, 2000. The costs to Aeltus associated with the deferred incentive compensation plan for 2000, 1999 and 1998, were $42.2 million, $4.7 million and $3.1 million, respectively. 12. RELATED PARTY TRANSACTIONS INVESTMENT ADVISORY AND OTHER FEES ALIAC and Aeltus serve as investment advisors and administrators to the Company's mutual funds and variable funds (collectively, the Funds). Company Funds pay Aeltus or ALIAC, as 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. RELATED PARTY TRANSACTIONS (continued) investment advisor or administrator, a daily fee which, on an annual basis, ranged, depending on the fund, from 0.33% to 1.15% of their average daily net assets. All of the funds managed by ALIAC and certain of the Funds managed by Aeltus are subadvised by investment advisors, in which case, Aeltus or ALIAC pays a subadvisory fee to the investment advisors. 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 3.40% 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 $506.3 million, $424.2 million and $349.0 million in 2000, 1999 and 1998, respectively. CAPITAL TRANSACTIONS The Company received capital contributions in the form of cash and assets of $73.5 million, and $56.0 million, respectively from HOLDCO in 2000. In 1998, the Company received capital contributions in the form of cash of $9.3 million from HOLDCO. The Company received no capital contribution in 1999. Refer to Note 7 for dividends paid to HOLDCO. OTHER Premiums due and other receivables include $4.7 million and $10.5 million due from affiliates in 2000 and 1999, respectively. Other liabilities include $4.1 million and $1.9 million due to affiliates for 2000 and 1999, respectively. Former Aetna transferred to the Company $.4 million, $.8 million and $1.7 million based on its decision not to settle state tax liabilities for the years 2000, 1999 and 1998, respectively, as permitted under the tax sharing arrangement, which is reported in other changes in retained earnings. Certain administrative and support functions of the Company are provided by former Aetna and its affiliates for a specified transition period. At the end of the transition period, these functions will be provided by ING affiliates. The financial statements reflect allocated charges for these services based upon measures appropriate for the type and nature of the service provided. 13. 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). 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. 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. Effective December 31, 1988, the Company entered into a modified coinsurance reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna Life"), (formerly an affiliate of the 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, with the exception of certain supplementary contracts with reserves of $74.9 million and $81.9 million as of December 31, 2000 and 1999, respectively, was sold to Lincoln (refer to Note 3). The operating results of the domestic individual life business are presented as Discontinued Operations. Premiums of $15.8 million, $17.9 million and $336.3 million and current and future benefits of $34.6 million, $8.6 million and $341.1 million, were assumed in 2000, 1999 and 1998, respectively. Investment income of $17.0 million was generated from a reinsurance loan to affiliate for the year ended December 31, 1998. 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 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. The premium amount related to this agreement was $2.0 million for 1998. This agreement was terminated effective October 1, 1998. Effective October 1, 1997, the Company entered into a reinsurance agreement with Aetna Life, (formerly an affiliate of the Company) 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 in 1998. 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, (formerly an affiliate of the Company) 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 $29.2 million and $33.4 million were maintained for this contract as of December 31, 2000 and 1999, respectively. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. REINSURANCE (continued) The following table includes premium amounts ceded/assumed.
Ceded to Assumed Direct Other from Other Net (Millions) Amount Companies Companies Amount ---------------------------------------------------------------------- 2000 ------------------------------ Premiums: Discontinued Operations $366.6 $382.4 $ 15.8 $ -- Accident and Health Insurance 15.2 15.2 -- -- Annuities 160.4 7.1 0.9 154.2 ---------------------------------------------------------------------- Total earned premiums $542.2 $404.7 $ 16.7 $154.2 ====================================================================== 1999 ------------------------------ Premiums: Discontinued Operations $460.1 $478.0 $ 17.9 $ -- Accident and Health Insurance 33.4 33.4 -- -- Annuities 111.5 4.9 0.9 107.5 ---------------------------------------------------------------------- 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 ======================================================================
59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. SEGMENT INFORMATION Summarized financial information for the Company's principal operations was as follows:
Investment Year ended December 31, 2000 Financial Management Discontinued (Millions) (1) Products (2) Services (2) Operations (2) Other (2) Total ------------------------------------------------------------------------------------------------- Revenue from external customers $ 692.1 $138.2 -- $(53.0) $ 777.3 Net investment income 905.8 2.8 -- 3.8 912.4 ------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital (losses) gains $ 1,597.9 $141.0 -- $(49.2) $ 1,689.7 ================================================================================================= Amortization of deferred policy acquisition costs $ 115.6 $ 11.3 $ 126.9 ------------------------------------------------------------------------------------------------- Income taxes (benefits) $ 79.0 $ 9.0 -- $ (4.0) $ 84.0 ------------------------------------------------------------------------------------------------- Operating earnings (losses) (3) $ 204.7 $ 9.7 -- $ (7.3) $ 207.1 Net realized capital (losses) gains, net of tax (23.1) 0.1 -- -- (23.0) ------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 181.6 9.8 -- (7.3) 184.1 Discontinued operations, net of tax: Amortization of deferred gain on sale (4) -- -- $ 5.7 -- 5.7 ------------------------------------------------------------------------------------------------- Net income (loss) $ 181.6 $ 9.8 $ 5.7 $ (7.3) $ 189.8 ================================================================================================= Segment assets $54,117.7 $ 44.1 $2,991.2 -- $57,153.0 ------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (5) -- -- -- $ 3.4 $ 3.4 ------------------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- $ 54.3 $ 54.3 -------------------------------------------------------------------------------------------------
(1) Year ended 2000 data reflects an aggregation of the pre-acquisition period of the eleven months ended November 30, 2000 and the post-acquisition period of one month ended December 31, 2000. (2) 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 to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company's mutual funds and affiliate's separate accounts; and trustee, administrative and other 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. (3) 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. (4) Taxes on the amortization of deferred gain on sale amounted to $3.3 million. (5) Expenditures of long-lived assets represent additions to property and equipment not allocable to business segments. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. SEGMENT INFORMATION (continued)
Investment Year ended December 31, 1999 Financial Management Discontinued (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) $ 87.5 $ 16.5 -- $(13.4) $ 90.1 - ------------------------------------------------------------------------------------------------- Operating earnings (losses) (2) $ 192.8 $ 28.1 -- $ (7.5) $ 213.4 Other item (3) -- -- -- (17.5) (17.5) Net realized capital losses, net of tax (14.0) -- -- -- (14.0) - ------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 178.8 28.1 -- (25.0) 181.9 Discontinued operations, net of tax: Amortization of deferred gain on sale (4) -- -- $ 5.7 -- 5.7 - ------------------------------------------------------------------------------------------------- Net income (loss) $ 178.8 $ 28.1 $ 5.7 $(25.0) $ 187.6 ================================================================================================= Segment assets $53,362.1 $ 36.6 $2,989.0 -- $56,387.7 - ------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (5) -- -- -- $ 3.9 $ 3.9 - ------------------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- $ 12.2 $ 12.2 - -------------------------------------------------------------------------------------------------
(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 to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company's mutual funds and affiliate's separate accounts; and trustee, administrative and other 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. (4) Taxes on the amortization of deferred gain on sale amounted to $3.2 million. (5) Expenditures of long-lived assets represent additions to property and equipment not allocable to business segments. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. SEGMENT INFORMATION (continued)
Investment Year ended December 31, 1998 Financial Management Discontinued (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) $ 68.2 $14.7 -- $(15.8) $ 67.1 ------------------------------------------------------------------------------------------------- Operating earnings (2) $ 171.0 $24.0 -- $ (7.1) $ 187.9 Other item (3) -- -- -- (22.4) (22.4) Net realized capital gains, net of tax 7.3 -- -- -- 7.3 ------------------------------------------------------------------------------------------------- Income from continuing operations 178.3 24.0 -- (29.5) 172.8 Discontinued operations, net of tax: Income from operations (4) -- -- $ 61.8 -- 61.8 Immediate gain on sale (4) -- -- 59.0 -- 59.0 ------------------------------------------------------------------------------------------------- Net income (loss) $ 178.3 $24.0 $ 120.8 $(29.5) $ 293.6 ================================================================================================= Segment assets $44,367.4 $13.4 $2,946.4 -- $47,327.2 ------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (5) -- -- -- $ 6.4 $ 6.4 ------------------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- $ 12.2 $ 12.2 -------------------------------------------------------------------------------------------------
(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 to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company's mutual funds and affiliate's separate accounts; and trustee, administrative and other 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. (4) Taxes on the income from operations and the immediate gain on sale amounted to $32.1million and $29.3 million, respectively. (5) Expenditures of long-lived assets represent additions to property and equipment not allocable to business segments. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. COMMITMENTS AND CONTINGENT LIABILITIES LEASES In conjunction with the acquisition by ING, the Company entered into with or assumed from a former affiliate operating leases for office space. Since December 13, 2000, rent expense for these leases was immaterial. The future net minimum payments under noncancelable leases for 2001 through 2005 are estimated to be $25.5 million, $24.5 million, $21.5 million, $19.1 million and $16.3 million, respectively, and 29.9 million, thereafter. 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, 2000 and 1999, there were no off-balance sheet commitments. LITIGATION In recent years, life insurance companies have been named as defendants in class action lawsuits relating to life insurance sales practices. The Company is currently a defendant in one such lawsuit. 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 other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of these other lawsuits cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, these other lawsuits are 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. 63 QUARTERLY DATA (UNAUDITED)
2000 (Millions) First Second Third Fourth ---------------------------------------------------------------- Total Revenue $408.3 $409.3 $426.4 $410.3 ---------------------------------------------------------------- Income from continuing operations before income taxes $ 76.5 $ 85.0 $ 77.4 $ 29.2 Income Taxes 25.1 28.1 22.7 8.1 ---------------------------------------------------------------- Income from continuing operations $ 51.4 $ 56.9 $ 54.7 $ 21.1 Income from discontinued operations 1.6 1.6 1.5 1.0 ---------------------------------------------------------------- Net income $ 53.0 $ 58.5 $ 56.2 $ 22.1 ================================================================
(1) Fourth quarter data reflects an aggregation of the pre-acquisition period of the eleven months ended November 30, 2000 and the post acquisition period of one month ended December 31, 2000.
1999 (Millions) First Second Third Fourth ---------------------------------------------------------------- Total Revenue $366.3 $366.9 $382.4 $374.7 ---------------------------------------------------------------- Income from continuing operations before income taxes $ 73.3 $ 72.2 $ 65.7 $ 61.3 Income Taxes 24.1 23.7 21.8 21.0 ---------------------------------------------------------------- Income from continuing operations $ 49.2 $ 48.5 $ 43.9 $ 40.3 Income from discontinued operations 1.3 1.4 1.4 1.6 ---------------------------------------------------------------- Net income $ 50.5 $ 49.9 $ 45.3 $ 41.9 ================================================================
64 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 27. 2. Financial statement schedules. See Index to Consolidated Financial Statement Schedules on Page 70. 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. 65 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. 66 ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (continued) Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1996. 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 19, 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. 67 ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (continued) 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. 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. 18 to Registration Statement on Form N-4 (File No. 33-56297), as filed on August 30, 2000. 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 10.1 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.) 10.2 Distribution Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. and Aetna Inc. 10.3 Employee Benefits Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. and Aetna Inc. 10.4 Tax Sharing Agreement, dated as of December 13, 2000, among Lion Connecticut Holdings Inc., Aetna Inc. and ING America Insurance Holdings, Inc. 10.5 Transition Services Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. and Aetna Inc. 10.6 Lease Agreement, dated as of December 13, 2000, by and between Aetna Life Insurance Company and Aetna Life Insurance and Annuity Company 68 ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (continued) 10.7 Real Estate Services Agreement, dated as of December 13, 2000, between Aetna Inc. and Aetna Life Insurance and Annuity Company 10.8 10 State House Square Services Agreement, dated as of December 13, 2000, between Aetna Inc. and Lion Connecticut Holdings Inc. 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 33-81216), as filed on January 19, 2001. 24 Power of Attorney (Filed herein immediately after Signature page.) Exhibits, other than these listed, are omitted because they are not required or not applicable. (b) Reports on Form 8-K. None. 69 INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page ---- Independent Auditors' Report...................... 71 I. Summary of Investments--Other than Investments in Affiliates as of December 31, 2000..................... 72 III. Supplementary Insurance Information as of and for the years ended December 31, 2000, 1999 and 1998...... 73
Schedules other than those listed above are omitted because they are not required or are not applicable. 70 INDEPENDENT AUDITORS' REPORT The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: Under date of March 27, 2001, we reported on the consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 2000 ("Successor Company") and December 31, 1999 ("Preacquisition Company"), and the related consolidated statements of income, changes in shareholder's equity and cash flows for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 and the years ended December 31, 1999 and 1998 ("Preacquisition Company"), as included herein. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such 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. As discussed in Note 1 to the consolidated financial statements, effective November 30, 2000, ING America Insurance Holdings Inc. acquired all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut March 27, 2001 71 SCHEDULE I Summary of Investments--Other than Investments in Affiliates As of December 31, 2000 (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 $ 920.8 $ 953.0 $ 953.0 States, municipalities and political subdivisions 0.3 0.3 0.3 U.S. corporate securities 4,925.7 4,891.1 4,891.1 Foreign securities (1) 538.8 567.7 567.7 Residential mortgage-backed securities 2,996.9 3,084.0 3,084.0 Commercial/Multifamily mortgage-backed securities 1,108.3 1,111.6 1,111.6 Other asset-backed securities 753.7 763.7 763.7 Less: debt securities pledged to creditors 124.5 126.7 126.7 --------- --------- --------- Total debt securities 11,120.0 11,244.7 11,244.7 --------- --------- --------- Equity securities: Non-redeemable preferred stock 109.0 100.7 100.7 Investment in affiliated mutual funds 9.6 12.7 12.7 Common stock 2.2 3.5 3.5 --------- --------- --------- Total equity securities 120.8 116.9 116.9 --------- --------- --------- Short-term investments 109.4 109.4 109.4 Mortgage loans 4.6 4.5 4.6 Policy loans 339.3 339.3 339.3 Other 13.4 13.4 13.4 Securities pledges to creditors 126.8 129.0 129.0 --------- --------- --------- Total investments $11,834.3 $11,957.2 $11,957.3 ========= ========= =========
* 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. Substantially all of the Company's foreign securities are denominated in U.S. dollars. 72 SCHEDULE III Supplementary Insurance Information As of and for the years ended December 31, 2000, 1999 and 1998 (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 - -------------------------------------------------------------------------------------- 2000 Financial Products $ 13.0 $1,017.4 $ 7.2 $1.0 $11,116.2 Investment Management Services -- -- -- -- -- Other (0.7) -- -- -- 9.4 Discontinued Operations (2) -- 2,959.3 22.4 -- -- - -------------------------------------------------------------------------------------- Total $ 12.3 $3,976.7 $29.6 $1.0 $11,125.6 ====================================================================================== 1999 Financial Products $1,080.8 $ 889.8 $ 7.4 $1.0 $11,112.2 Investment Management Services -- -- -- -- -- Other (34.4) -- -- -- -- Discontinued Operations (2) -- 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 (22.9) -- -- -- -- Discontinued Operations (2) -- 2,936.8 18.5 -- 10.5 - -------------------------------------------------------------------------------------- Total $ 893.1 $3,814.8 $18.8 $1.1 $11,305.6 ======================================================================================
NOTES TO SCHEDULE III: (1) Included in future policy benefits on the Company's Consolidated Balance Sheets. (2) Domestic individual life insurance business. 73 SCHEDULE III (continued) Supplementary Insurance Information As of and for the years ended December 31, 2000, 1999 and 1998 (in millions)
Amortization of deferred Net Current policy Other Premium investment Other and future acquisition Operating Segment Revenue income (3) Income (4) benefits costs Expenses (5) - -------------------------------------------------------------------------------------------------- 2000 (6) Financial Products $154.2 $905.8 $502.3 $795.6 $115.6 $390.6 Investment Management Services -- 2.8 138.4 -- -- 122.3 Other (7) -- 3.8 (53.0) -- 11.3 (49.2) - -------------------------------------------------------------------------------------------------- Continuing Operations $154.2 $912.4 $587.7 $795.6 $126.9 $463.7 ================================================================================================== Discontinued Operations (8) -- -- $ 9.0 -- -- -- ================================================================================================== 1999 Financial Products $107.5 $881.5 $422.1 $746.2 $ 93.4 $305.2 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 $366.7 ================================================================================================== Discontinued Operations (8) -- -- $ 8.7 -- -- -- ================================================================================================== 1998 Financial Products $ 79.4 $865.3 $376.6 $714.4 $ 80.3 $280.3 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 $340.6 ================================================================================================== Discontinued Operations (8) $342.0 $146.1 $164.1 $482.4 $ 34.7 $ 41.3 ==================================================================================================
NOTES TO SCHEDULE III (continued): (3) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (4) Includes net realized capital losses and gains and charges assessed against policyholders. (5) Year 2000 costs are not included in the amounts reported for the Financial Products and Investment Management Services segments. (6) Year ended 2000 data reflects an aggregation of the pre-acquisition period of the eleven months ended November 30, 2000 and the post acquisition period of one month ended December 31, 2000. (7) Includes consolidating adjustments and Year 2000 costs. (8) Domestic individual life insurance business 74 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 30, 2001 By /s/ Deborah Koltenuk ---------------------------- ----------------------------------------------- Deborah Koltenuk Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30th, 2001.
SIGNATURES TITLE - ---------------------------------------------- Wayne R. Huneke Director and Chief Financial Officer (Principal Financial Officer) - ---------------------------------------------- P. Randall Lowery Director - ---------------------------------------------- Thomas J. McInerney Director and President (Principal Executive Officer) - ---------------------------------------------- Robert C. Salipante Director - ---------------------------------------------- Mark A. Tullis Director /s/ Deborah Koltenuk Vice President and Corporate Controller - ---------------------------------------------- Deborah Koltenuk
* By: /s/ Paula Cludray-Engelke ------------------------------------------------ Paula Cludray-Engelke Attorney-in-fact 75 POWER OF ATTORNEY We, the undersigned directors and officers of Aetna Life Insurance and Annuity Company, hereby severally constitute and appoint Paula Cludray-Engelke 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 2000 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 30th day of March, 2001.
SIGNATURES TITLE /s/ Wayne R. Huneke - ------------------------------------------- Wayne R. Huneke Director and Chief Financial Officer /s/ P. Randall Lowery - ------------------------------------------- P. Randall Lowery Director /s/ Thomas J. McInerney - ------------------------------------------- Thomas J. McInerney Director and President /s/ Robert C. Salipante - ------------------------------------------- Robert C. Salipante Director /s/ Mark A. Tullis - ------------------------------------------- Mark A. Tullis Director /s/ Deborah Koltenuk - ------------------------------------------- Deborah Koltenuk Vice President and Corporate Controller
76 ASSISTANT CORPORATE SECRETARY'S CERTIFICATE AETNA LIFE INSURANCE AND ANNUITY COMPANY I, Lena A.Rabbitt, 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 30th day of March, 2001. By: /s/ Lena A. Rabbitt ------------------------------------------------- (Corporate Seal) Lena A. Rabbitt Assistant Corporate Secretary Aetna Life Insurance and Annuity Company
77 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. 78 EX-16.(23)(A)CONSENT 4 a2035452zex-16_23aconsent.txt EX-16(23)(A) CONSENT OF INDEPENDENT EX. 16(23)(a) CONSENT OF INDEPENDENT AUDITORS The Shareholder and Board of Directors of Aetna Life Insurance and Annuity Company: We consent to incorporation by reference in the registration statement No. 333-48774 on Post-Effective Amendment No. 6 on Form S-2 of Aetna Life Insurance and Annuity Company and Subsidiaries (the "Company") of our reports dated March 27, 2001, relating to the consolidated balance sheets of the Company as of December 31, 2000 ("Successor Company") and December 31, 1999 ("Preacquisition Company"), and the related statements of income, changes in shareholder's equity and cash flows for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 and the years ended December 31, 1999 and 1998 ("Preacquisition Company"), and all related schedules, which reports appear in the December 31, 2000, annual report on Form 10-K of the Company and to the reference to our firm under the heading "Experts" in the prospectus. Our reports refer to the acquisition, effective November 30, 2000, by ING America Insurance Holdings Inc. of all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut April 4, 2001 -----END PRIVACY-ENHANCED MESSAGE-----