-----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, AqHPRIvs9LdIm3vVNhzlk6AO+vZDdbOXLpaldHQGXEfFRLmukkGnNzJcerccPmZz TSFkyb31By90SJ5Mn9nDzw== 0000912057-01-507323.txt : 20010410 0000912057-01-507323.hdr.sgml : 20010410 ACCESSION NUMBER: 0000912057-01-507323 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20010406 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: 033-60477 FILM NUMBER: 1597219 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 a2035440zposam.txt POS AM As filed with the Securities and Exchange Registration No. 33-60477 Commission on April 6, 2001 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 10 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 Location - Prospectus Item No. Information Required in Prospectus Dated May 1, 2001 -------- ---------------------------------- ---------------------- 1 Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.............................. Outside Front Cover 2 Inside Front and Outside Back Cover Pages of Prospectus.................................... Table of Contents (inside front cover) 3 Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges....................................... Summary 4 Use of Proceeds........................................ Other Topics - Investments 5 Determination of Offering Price........................ Not Applicable 6 Dilution............................................... Not Applicable 7 Selling Security Holders............................... Not Applicable 8 Plan of Distribution................................... Other Topics - Distribution of Contracts 9 Description of Securities to be Registered............. Description of the Guaranteed Accumulation Account - Guaranteed Terms and Guaranteed Interest Rates 10 Interests of Named Experts and Counsel................. Not Applicable
Form S-2 Location - Prospectus Item No. Information Required in Prospectus Dated May 1, 2001 -------- ---------------------------------- ---------------------- 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
GUARANTEED ACCUMULATION ACCOUNT - MAY 1, 2001 - ----------------------------------------------------------------------- INTRODUCTION The Guaranteed Accumulation Account (GAA) is a fixed interest option available during the accumulation phase of certain variable annuity contracts issued by Aetna Life Insurance and Annuity Company (the Company, we, us, our). Read this prospectus carefully before investing in GAA and save it for future reference. GENERAL DESCRIPTION GAA offers investors the opportunity to earn specified guaranteed rates of interest for specified periods of time, called guaranteed terms. We generally offer several guaranteed terms at any one time for those considering investing in GAA. Each guaranteed term offers a guaranteed interest rate for investments that remain in GAA for the duration of the specific guaranteed term. The guaranteed term establishes both the length of time for which we agree to credit a guaranteed interest rate and how long your investment must remain in GAA in order to receive the guaranteed interest rate. We guarantee both principal and interest if, and only if, your investment remains invested for the full guaranteed term. Charges related to the contract, such as a maintenance fee or early withdrawal charge, may still apply even if you do not withdraw until the end of a guaranteed term. INVESTMENTS TAKEN OUT OF GAA PRIOR TO THE END OF A GUARANTEED TERM MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT WHICH MAY RESULT IN AN INVESTMENT GAIN OR LOSS. SEE "MARKET VALUE ADJUSTMENT", PAGE 12. This prospectus will explain: - -- Guaranteed interest rates and guaranteed terms; - -- Contributions to GAA; - -- Types of investments available, and how they are classified; - -- How rates are offered; - -- How there can be an investment risk, and how we calculate gain or loss; - -- Contract charges that can affect your account value in GAA; - -- Taking investments out of GAA; and - -- How to reinvest or withdraw at maturity. 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 or jurisdiction that does not permit their sale. We have not authorized anyone to provide you with information that is different than that contained in this prospectus. Our Home Office: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 (800)-262-3862 TABLE OF CONTENTS SUMMARY..................................................... 3 DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT.......... 6 General, Contributions to GAA, Deposit Period, Guaranteed Terms, Guaranteed Term Classifications, Guaranteed Interest Rates, Maturity Value Transfer Provision TRANSFERS................................................... 9 Transfers from GAA, Transfers Between Guaranteed Term Classifications WITHDRAWALS................................................. 10 Deferral of Payments, Reinvestment Privilege MARKET VALUE ADJUSTMENT (MVA)............................... 12 Calculation of the MVA, Deposit Period Yield, Current Yield, MVA Formula CONTRACT CHARGES............................................ 13 OTHER TOPICS................................................ 14 The Company--Income Phase--Contract Loans--Investments--Distribution of Contracts--Taxation--Experts--Legal Matters--Further Information--Incorporation of Certain Documents by Reference--Inquiries APPENDIX I--EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS................................................ 18 APPENDIX II--EXAMPLES OF MARKET VALUE ADJUSTMENT YIELDS..... 20
[SIDE NOTE] QUESTIONS: CONTACTING THE COMPANY. To answer your questions, contact your sales representative or write or call our Home Office at: ING Aetna Financial Services Annuity Services 151 Farmington Avenue Hartford, CT 06156 1-800-262-3862 [END SIDE NOTE] SUMMARY - ---------------------------------------------- GAA is a fixed interest option that may be available during the accumulation phase of your variable annuity contract. The following is a summary of certain facts about GAA. IN GENERAL. Amounts that you invest in GAA will earn a guaranteed interest rate if left in GAA for a specified period of time (the guaranteed term). You must invest amounts in GAA for the full guaranteed term in order to receive the quoted guaranteed interest rate. If you withdraw or transfer those amounts before the end of the guaranteed term, we may apply a "market value adjustment," which may be positive or negative. DEPOSIT PERIODS. A deposit period is the time during which we offer a specific guaranteed interest rate if you deposit dollars for a specific guaranteed term. For a particular guaranteed interest rate and guaranteed term to apply to your account dollars, you must invest them during the deposit period in which that rate and term are offered. GUARANTEED TERMS. A guaranteed term is the period of time account dollars must be left in GAA in order to earn the guaranteed interest rate specified for that guaranteed term. We offer different guaranteed terms at different times. Check with your representative or the Company to learn the details about the guaranteed term(s) currently offered. We reserve the right to limit the number of guaranteed terms or the availability of certain guaranteed terms. Some variable annuity contracts that offer GAA distinguish between short-and long-term classifications of GAA. Under those contracts, we make the following distinction: - -- Short-term classification--three years or less. - -- Long-term classification--between three and ten years. GUARANTEED INTEREST RATES. We guarantee different interest rates, depending upon when account dollars are invested in GAA. The interest rate we guarantee is an annual effective yield; that means that the rate reflects a full year's interest. We credit interest at a rate that will provide the guaranteed annual effective yield over one year. The guaranteed interest rate(s) is guaranteed for that deposit period and for the length of the guaranteed term. The guaranteed interest rates we offer will always meet or exceed the minimum interest rates agreed to in the contract. Apart from meeting the contractual minimum interest rates, we can in no way guarantee any aspect of future offerings. FEES AND OTHER DEDUCTIONS. We do not make deductions from amounts in GAA to cover mortality and expense risks. Rather, we consider these risks when determining the credited rate. The following other types of charges may be deducted from amounts held in, withdrawn or transferred from GAA: - -- Market Value Adjustment (MVA). An MVA may be applied to amounts transferred or withdrawn prior to the end of a guaranteed term, which reflects changes in interest rates since the deposit period. The MVA may be positive or negative, and therefore may increase or decrease the amount withdrawn to satisfy a transfer or withdrawal request. See "Market Value Adjustment." - -- Tax Penalties and/or Tax Withholding. Amounts withdrawn may be subject to withholding for federal income taxes, as well as a 10% penalty tax for 3 amounts withdrawn prior to your having attained age 59 1/2. See "Taxation"; see also the "Taxation" section of the contract prospectus. - -- Early Withdrawal Charge. An early withdrawal charge, which is a deferred sales charge, may apply to amounts withdrawn from the contract, in order to reimburse us for some of the sales and administrative expenses associated with the contract. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Maintenance Fee. A maintenance fee of up to $30 may be deducted, on an annual basis, pro rata from all funding options including GAA. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Transfer Fees. Under some contracts, during the accumulation phase, transfer fees of up to $10 per transfer may be deducted from amounts held in or transferred from GAA. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Premium Taxes. We may deduct a charge for premium taxes of up to 4% from amounts in GAA. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Front End Sales Charges. Under some contracts, we may deduct front end sales charges of up to 6%. See "Contract Charges"; see also the "Fees" section of the contract prospectus. MARKET VALUE ADJUSTMENT (MVA). If you withdraw or transfer all or part of your account value from GAA before the guaranteed term is complete, 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 deposit. The MVA may be positive or negative depending upon interest rate activity at the time of withdrawal or transfer. MVAs applied to withdrawals or transfers from GAA will be calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to the withdrawal (see sidebar on page 12 for an example of the calculation of the aggregate MVA). The following withdrawals will be subject to an aggregate MVA only if it is positive: - -- Withdrawals due to the election of a lifetime income option; and - -- Withdrawals due to the death of the participant (if paid within the first six months following death). All other withdrawals will be subject to an aggregate MVA, regardless of whether it is positive or negative, including: - -- Withdrawals due to the election of a nonlifetime income option; - -- Payments due to the death of the participant, if paid more than six months following death; and - -- Full or partial withdrawals during the accumulation phase (except for withdrawals at the end of a guaranteed term or pursuant to the maturity value transfer provision, see Maturity of a Guaranteed Term and Maturity Value Transfer Provision). See "Description of the Guaranteed Accumulation Account" and "Market Value Adjustment." MATURITY OF A GUARANTEED TERM. On or before the end of a guaranteed term, the contract holder or you, if applicable, may instruct us to: - -- Transfer the matured amount to one or more new guaranteed terms available under the current deposit period; 4 - -- Transfer the matured amount to other available investment options; or - -- Withdraw the matured amount. Amounts withdrawn may be subject to an early withdrawal charge, maintenance fee, tax withholding and, if you are under age 59 1/2, tax penalties. (See "Contract Charges"; see also the "Fees" and "Taxation" sections of the contract prospectus.) When a guaranteed term ends, if we have not received instructions, we will automatically reinvest the maturing investment into a guaranteed term available in the current deposit period. (See "Maturity of a Guaranteed Term" and "Maturity Value Transfer Provision.") For contracts that distinguish between short-term and long-term classifications, we will generally transfer the maturing investment to the available deposit period for the guaranteed term having the shortest maturity within the same classification. For other contracts, we will generally transfer the maturing investment in the following manner based upon availability: - -- To a guaranteed term of the same duration, if available; or - -- To a guaranteed term with the next shortest duration, if available; or - -- To a guaranteed term with the next longest duration. If you do not provide instructions concerning the maturing amount on or before the end of a guaranteed term, and this amount is automatically reinvested as noted above, the maturity value transfer provision will apply. MATURITY VALUE TRANSFER PROVISION. If we automatically transfer the matured investment into the current deposit period, the contract holder or you, if applicable, may, for a limited time, transfer or withdraw all or a portion of the matured investment that was transferred without an MVA. As described in "Fees and Other Deductions" above, other fees, including an early withdrawal charge and a maintenance fee, may be assessed on amounts withdrawn. See "Maturity Value Transfer Provision." TRANSFER OF ACCOUNT DOLLARS. Generally, account dollars invested in GAA may be transferred among guaranteed terms offered through GAA, and/or to other investment options offered through the contract. However: - -- Transfers may not be made during the deposit period in which your account dollars are invested in GAA or for 90 days after the close of that deposit period; and - -- We may apply an MVA to transfers made before the end of a guaranteed term. INVESTMENTS. Guaranteed interest rates credited during any guaranteed term do not necessarily relate to investment performance. Deposits received into GAA, regardless of the length of the guaranteed term or, where applicable, guaranteed term classification, will generally be invested in federal, state and municipal obligations, corporate bonds, preferred stocks, real estate mortgages, real estate, certain other fixed income investments, and cash or cash equivalents. All of our general assets are available to meet guarantees under GAA. Amounts allocated to GAA are held in a nonunitized separate account established by the Company under Connecticut law. To the extent provided for in the contract, assets of the separate account are not chargeable with liabilities arising out of any other business that we conduct. See "Investments." NOTIFICATION OF MATURITY. We will notify you at least 18 calendar days prior to the maturity of a guaranteed term. We will include information relating to the 5 current deposit period's guaranteed interest rates and the available guaranteed terms. You may obtain information concerning available deposit periods, guaranteed interest rates, and guaranteed terms by telephone five business days prior to the maturity date (1-800-GAA-FUND or 1-800-422-3863). (See "Description of the Guaranteed Accumulation Account--General" and "Maturity of a Guaranteed Term.") DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT - ---------------------------------------------- GENERAL GAA offers guaranteed interest rates for specific guaranteed terms. For a particular guaranteed interest rate and guaranteed term to apply to your account dollars, you must invest them during the deposit period during which that rate and term are offered. Each deposit period may offer more than one guaranteed term. Guaranteed terms may be classified according to length of time to maturity, and each deposit period may offer various guaranteed terms within these classifications. MVAs applied to withdrawals or transfers from GAA will be calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to the withdrawal (see sidebar on page 12 for an example of the calculation of the aggregate MVA). The following withdrawals will be subject to an aggregate MVA only if it is positive: - -- Withdrawals due to the election of a lifetime income option; and - -- Withdrawals due to the death of the participant (if paid within the first six months following death). All other withdrawals will be subject to an aggregate MVA, regardless of whether it is positive or negative, including: - -- Withdrawals due to the election of a nonlifetime income option; - -- Payments due to the death of the participant, if paid more than six months following death; and - -- Full or partial withdrawals during the accumulation phase (except for withdrawals at the end of a guaranteed term or pursuant to the maturity value transfer provision, see Maturity of a Guaranteed Term and Maturity Value Transfer Provision). We maintain a toll-free telephone number for those wishing to obtain information concerning available deposit periods, guaranteed interest rates, and guaranteed terms. The telephone number is 1-800-GAA-FUND (1-800-422-3863). At least 18 calendar days before a guaranteed term matures, we will notify the contract holder or you, if applicable, of the upcoming deposit period dates and the current guaranteed interest rates, guaranteed terms and projected matured guaranteed term values. 6 CONTRIBUTIONS TO GAA The contract holder or you, if applicable, may invest in the guaranteed terms available in the current deposit period by allocating new purchase payments to GAA or by transferring a sum from other funding options available under the contract or from other guaranteed terms. Though we may require a minimum payment(s) to a contract, we do not require a minimum investment for a guaranteed term. Refer to the contract prospectus. We reserve the right to establish a minimum amount for transfers from other funding options. Investments may not be transferred from a guaranteed term during the deposit period in which the investment is applied or during the first 90 days after the close of the deposit period. This restriction does not apply to amounts transferred or withdrawn under the maturity value transfer provision. See "Maturity Value Transfer Provision." DEPOSIT PERIOD The deposit period is the period of time during which the contract holder or you, if applicable, may direct investments to a particular guaranteed term(s) and receive a stipulated guaranteed interest rate(s). Each deposit period may be a month, a calendar quarter, or any other period of time we specify. GUARANTEED TERMS A guaranteed term is the time we specify during which we credit the guaranteed interest rate. We will offer at least one guaranteed term of three years or less and one guaranteed term of more than three years in any deposit period. We offer guaranteed terms at our discretion for various periods ranging from one to ten years. GUARANTEED TERM CLASSIFICATIONS Some contracts distinguish between long-term and short-term guaranteed term classifications. The following are the guaranteed term classifications: - -- Short-term--All guaranteed terms of three years or less. - -- Long-term--All guaranteed terms of between three and ten years. During each deposit period, we may offer more than one guaranteed term within each guaranteed term classification. The contract holder or you, if applicable, may allocate investments to guaranteed terms within one or both guaranteed term classifications during a deposit period. GUARANTEED INTEREST RATES Guaranteed interest rates are the rates that we guarantee will be credited on amounts applied during a deposit period for a specific guaranteed term. Guaranteed interest rates are annual effective yields, reflecting a full year's interest. We credit interest at a rate that will provide the guaranteed annual effective yield over one year. Guaranteed interest rates are credited according to the length of the guaranteed term as follows: GUARANTEED TERMS OF ONE YEAR OR LESS: The guaranteed interest rate is credited from the date of deposit to the last day of the guaranteed term. GUARANTEED TERMS OF GREATER THAN ONE YEAR: Several different guaranteed interest rates may be applicable during a guaranteed term of more than one 7 year. The initial guaranteed interest rate is credited from the date of deposit to the end of a specified period within the guaranteed term. We may credit several different guaranteed interest rates for subsequent specific periods of time within the guaranteed term. For example, for a five-year guaranteed term we may guarantee 5% for the first year, 4.75% for the next two years, and 4.5% for the remaining two years. We will not guarantee or credit a guaranteed interest rate below the minimum rate specified in the contract, nor will we credit interest at a rate above the guaranteed interest rate we announce prior to the start of a deposit period. Our guaranteed interest rates are influenced by, but do not necessarily correspond to, interest rates available on fixed income investments we may buy using deposits directed to GAA (see "Investments"). We consider other factors when determining guaranteed interest rates including regulatory and tax requirements, sales commissions and administrative expenses borne by the Company, general economic trends, and competitive factors. WE MAKE THE FINAL DETERMINATION REGARDING GUARANTEED INTEREST RATES. WE CANNOT PREDICT THE LEVEL OF FUTURE GUARANTEED INTEREST RATES. MATURITY OF A GUARANTEED TERM. At least 18 calendar days prior to the maturity of a guaranteed term, we will notify the contract holder or you, if applicable, of the upcoming deposit period, the projected value of the amount maturing at the end of the guaranteed term, and the guaranteed interest rate(s) and guaranteed term(s) available for the current deposit period. When a guaranteed term matures, the amounts in any maturing guaranteed term may be: - -- Transferred to one or more new guaranteed terms available under the current deposit period; or - -- Transferred to other available investment options; or - -- Withdrawn from the contract. We do not apply an MVA to amounts transferred or surrendered from a guaranteed term on the date the guaranteed term matures. Amounts withdrawn, however, may be subject to an early withdrawal charge, a maintenance fee, taxation, and if you are under age 59 1/2, tax penalties. If we have not received direction from the contract holder or you, if applicable, by the maturity date of a guaranteed term, we will automatically transfer the matured value to one of the following: - -- For contracts distinguishing between short- and long-term classifications, we will generally transfer the amount maturing to the available deposit period for the guaranteed term having the shortest maturity within the same classification, though it may be different than the maturing term; or - -- For contracts that do not distinguish between short- and long-term classifications, we will generally transfer the maturing amount as follows: - To a guaranteed term of the same duration, if available; or - To a guaranteed term with the next shortest duration, if available; or - To a guaranteed term with the next longest duration. The contract holder or you, if applicable, will receive a confirmation statement, plus information on the new guaranteed interest rate(s) and guaranteed terms. MATURITY VALUE TRANSFER PROVISION If we automatically reinvest the proceeds from a matured guaranteed term, the contract holder or you, if applicable, may transfer or withdraw from GAA the 8 [SIDE NOTE] BUSINESS DAY--any day on which the New York Stock Exchange is open. [END SIDE NOTE] amount that was reinvested without an MVA. An early withdrawal charge and maintenance fee may apply to withdrawals. If the full amount reinvested is transferred or withdrawn, we will include interest credited to the date of the transfer or withdrawal. This provision is only available until the last business day of the month following the maturity date of the prior guaranteed term. This provision only applies to the first transfer or withdrawal request received from the contract holder or you, if applicable, with respect to a particular matured guaranteed term value, regardless of the amount involved in the transaction. TRANSFERS - ---------------------------------------------- We allow the contract holder or you, if applicable, to transfer all or a portion of your account value to GAA or to other investment options under the contract. We do not allow transfers from any guaranteed term to any other guaranteed term or investment option during the deposit period for that guaranteed term or for 90 days following the close of that deposit period, except for amounts transferred under the maturity value transfer provision. We do not apply an MVA to the value transferred upon maturity of a guaranteed term nor for values transferred under the maturity value transfer provision. We do not count either of these types of transfers as one of the 12 free transfers allowed per calendar year by those contracts allowing only 12 free transfers. When the contract holder or you, if applicable, request the transfer of a specific dollar amount, we account for any applicable MVA in determining the amount to be withdrawn from a guaranteed term(s) to fulfill the request. Therefore, the amount we actually withdraw from the guaranteed term(s) may be more or less than the requested dollar amount. (See "Appendix I" for an example.) For more information on transfers, see the contract prospectus. TRANSFERS FROM GAA For contracts that do not distinguish between short- and long-term classifications, the contract holder or you, if applicable, may choose the guaranteed term from which funds will be first withdrawn. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. If we do not receive directions, we will withdraw funds pro rata from each guaranteed term in which you are invested. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. For contracts that distinguish between short- and long-term classifications, the contract holder or you, if applicable, may choose the guaranteed term classification from which funds will be first withdrawn. We will withdraw funds starting from the oldest guaranteed term that has not reached maturity within the classification chosen. If we do not receive directions, we will withdraw funds pro rata from the guaranteed term classifications, starting with the oldest guaranteed term that has not reached maturity, and any other investment options. We will apply an MVA to transfers made before the end of a guaranteed term. (See "Market Value Adjustment.") 9 TRANSFERS BETWEEN GUARANTEED TERM CLASSIFICATIONS (For contracts that distinguish between short-term and long-term classifications only) The contract holder or you, if applicable, may transfer amounts from short-term guaranteed terms to available long-term guaranteed terms of the current deposit period, or from long-term guaranteed terms to available short-term guaranteed terms of the current deposit period. For example, funds may be transferred from a three-year guaranteed term (any time after 90 days from the close of the deposit period applicable to that three-year guaranteed term) to the open deposit period of a seven-year guaranteed term. Funds will be first transferred from the oldest deposit period for which the guaranteed term has not reached maturity and we will assess an MVA on the transferred amount. These transfers are counted toward the 12 free transfers allowed per calendar year by those contracts allowing only 12 free transfers. We do not permit the transfer of value from one guaranteed term prior to its maturity to another guaranteed term within the same classification. For example, we do not permit transfers from one-year to three-year, one-year to one-year, five-year to seven-year, or ten-year to seven-year guaranteed terms. WITHDRAWALS - ---------------------------------------------- The contract allows for full or partial withdrawals from GAA at any time during the accumulation phase. To make a full or partial withdrawal, a request form (available from us) must be properly completed and submitted to our Home Office (or other designated office as provided in the contract). Partial withdrawals are made pro rata from funding options unless the contract holder or you, if applicable, request otherwise. For contracts that do not distinguish between short- and long-term classifications, each guaranteed term is considered a separate funding option for the purpose of a partial withdrawal. The contract holder or you, if applicable, may choose the guaranteed term from which funds will be withdrawn. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. If no guaranteed term is elected, we will withdraw funds pro rata from each guaranteed term in which you are invested. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. For contracts distinguishing between short- and long-term classifications, each guaranteed term classification is considered a separate funding option for the purpose of a partial withdrawal. The contract holder or you, if applicable, may elect to take a partial withdrawal from either guaranteed term classification. We will first withdraw funds from the oldest guaranteed term that has not reached maturity within the chosen classification. If no guaranteed term classification is elected, we will withdraw funds pro rata from each classification (starting with the oldest guaranteed term which has not reached maturity) and other funding options. We may apply an MVA to withdrawals made prior to the end of a guaranteed term, except for withdrawals made under the maturity value transfer provision. (See "Market Value Adjustment.") We may deduct an early withdrawal charge 10 and a maintenance fee depending upon the terms of the contract. The early withdrawal charge is a deferred sales charge which may be deducted upon withdrawal to reimburse us for some of the sales and administrative expenses associated with the contract. A maintenance fee, up to $30, may be deducted pro rata from each of the funding options, including GAA. Refer to the contract prospectus for a description of these fees. When a request for a partial withdrawal of a specific dollar amount is made, we will include the MVA in determining the amount to be withdrawn from the guaranteed term(s) to fulfill the request. Therefore, the amount we actually take from the guaranteed term(s) may be more or less than the dollar amount requested. (See "Appendix I" for an example.) DEFERRAL OF PAYMENTS Under certain emergency conditions, we may defer payment of a GAA withdrawal for up to six months. Refer to the contract prospectus for more details. REINVESTMENT PRIVILEGE The contract holder or you, if applicable, may elect to reinvest all or a portion of a full withdrawal during the 30 days following such a withdrawal. We must receive amounts for reinvestment within 60 days of the withdrawal. We will apply reinvested amounts to the current deposit period. This means that the guaranteed annual interest rate and guaranteed terms available on the date of reinvestment will apply. Amounts are reinvested in the guaranteed term classifications, where applicable, in the same proportion as prior to the full withdrawal. Any negative MVA we applied to a withdrawal or any taxes that were withheld will not be refunded. Refer to the contract prospectus for further details. 11 [SIDE NOTE] AGGREGATE MVA is the total of all MVAs applied due to a transfer or withdrawal. CALCULATION OF THE AGGREGATE MVA--In order to satisfy a transfer or withdrawal, amounts may be withdrawn from more than one guaranteed term, with more than one guaranteed interest rate. In order to determine the MVA applicable to such a transfer or withdrawal, the MVAs applicable to each GUARANTEED TERM will be added together, in order to determine the "aggregate MVA." Example: $1,000 withdrawal, two guaranteed terms, MVA1 = $10, MVA2 = $-30 $10 + $-30 = $-20. Aggregate MVA =$-20. Example: $1,000 withdrawal, two guaranteed terms, MVA1 = $30, MVA2 = $-10 $30 + $-10 = $20. Aggregate MVA =$20. [END SIDE NOTE] MARKET VALUE ADJUSTMENT (MVA) - ---------------------------------------------- We apply an MVA to amounts transferred or withdrawn from GAA prior to the end of a guaranteed term. To accommodate early withdrawals or transfers, we may need to liquidate certain assets or use cash that could otherwise be invested at current interest rates. When we sell assets prematurely we could realize a profit or loss depending upon market conditions. The MVA reflects changes in interest rates since the deposit period. When interest rates increase after the deposit period, the value of the investment decreases and the market value adjustment amount may be negative. Conversely, when interest rates decrease after the deposit period, the value of the investment increases and the market value adjustment amount may be positive. Therefore, the application of an MVA may increase or decrease the amount withdrawn from a guaranteed term to satisfy a withdrawal or transfer request. MVAs applied to withdrawals or transfers from GAA will be calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to the withdrawal (see sidebar on this page for an example of the calculation of the aggregate MVA). The following withdrawals will be subject to an aggregate MVA only if it is positive: - -- Withdrawals due to the election of a lifetime income option; and - -- Withdrawals due to the death of the participant (if paid within the first six months following death). All other withdrawals will be subject to an aggregate MVA, regardless of whether it is positive or negative, including: - -- Withdrawals due to the election of a nonlifetime income option; - -- Payments due to the death of the participant, if paid more than six months following death; and - -- Full or partial withdrawals during the accumulation phase (except for withdrawals at the end of a guaranteed term or pursuant to the maturity value transfer provision, see Maturity of a Guaranteed Term and Maturity Value Transfer Provision). Should two or more consecutive guaranteed terms have the same guaranteed interest rate and mature on the same date, we will calculate an MVA applicable to each. We will apply the MVA that is more favorable to you to any withdrawal or transfer from either guaranteed term prior to their maturity. Under some contracts, election of a Systematic Distribution Option, as described in the contract prospectus, will not result in an MVA being applied to amounts withdrawn from GAA. CALCULATION OF THE MVA The amount of the MVA depends on the relationship between: - -- The deposit period yield of U.S. Treasury Notes that will mature in the last quarter of the guaranteed term; and - -- The current yield of such U. S. Treasury Notes at the time of withdrawal. If the current yield is less than the deposit period yield, the MVA will decrease the amount withdrawn from a guaranteed term to satisfy a transfer or withdrawal request (the MVA will be positive). If the current yield is greater than the deposit period yield, the MVA will increase the amount withdrawn from a guaranteed term (the MVA will be negative or detrimental to the investor). 12 DEPOSIT PERIOD YIELD We determine the deposit period yield used in the MVA calculation by considering interest rates prevailing during the deposit period of the guaranteed term from which the transfer or withdrawal will be made. First, we identify the Treasury Notes that mature in the last three months of the guaranteed term. Then, we determine their yield-to-maturity percentages for the last business day of each week in the deposit period. We then average the resulting percentages to determine the deposit period yield. Treasury Note 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. CURRENT YIELD We use the same Treasury Notes identified for the deposit period yield to determine the current yield--Treasury Notes that mature in the last three months of the guaranteed term. However, we use the yield-to-maturity percentages for the last business day of the week preceding the withdrawal and average those percentages to get the current yield. MVA 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. (For examples of how we calculate MVA, refer to Appendix I.) 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. CONTRACT CHARGES - ---------------------------------------------- Certain charges may be deducted directly or indirectly from the funding options available under the contract, including GAA. The contract may have a maintenance fee of up to $30 that we will deduct, on an annual basis, pro rata from all funding options including GAA. We may also deduct a maintenance fee upon full withdrawal of a contract. The contract may have an early withdrawal charge that we will deduct, if applicable, upon a full or partial withdrawal from the contract. If the withdrawal occurs prior to the maturity of a guaranteed term, both the early withdrawal charge and an MVA may be assessed. We do not deduct mortality and expense risk charges and other asset-based charges that may apply to variable funding options from GAA. These charges are only applicable to the variable funding options. We may deduct a charge for premium taxes of up to 4% from amounts in GAA, and, under some contracts, front end sales charges of up to 6%. 13 Under certain contracts, we reserve the right to charge $10 for each transfer of accumulated value between available investment options over 12. Refer to the contract prospectus for further details on contract deductions. OTHER TOPICS - ---------------------------------------------- THE COMPANY We are a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of ING Groep N.V., a global financial institution active in the fields of insurance, banking and asset management. Through a merger our operations include the business of Aetna Variable Annuity Life Insurance Company (formerly known as Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). Our principal executive offices are located at: 151 Farmington Avenue Hartford, Connecticut 06156 INCOME PHASE GAA may not be used as a funding option during the income phase. Amounts invested in guaranteed terms must be transferred to one or more of the options available to fund income payments before income payments can begin. An aggregate MVA, as previously described, may be applied to amounts transferred to fund income payments before the end of a guaranteed term. Amounts used to fund lifetime income payments will only receive an aggregate MVA to the extent it is positive; however amounts transferred to fund a nonlifetime income payment option may receive either a positive or negative aggregate MVA. Refer to the contract prospectus for a further discussion of the income phase. CONTRACT LOANS (403(b) and some 401(a) Plans Only) The contract holder or you, if applicable, may not take a loan from amounts held in GAA, but we include amounts invested in GAA when calculating the account value which determines the amount available for a loan. Amounts held in GAA must be transferred to a funding option available for loans in order to be received as a loan. (Refer to the contract prospectus for more information on contract loans.) We will apply an MVA to amounts transferred from guaranteed terms due to a loan request. INVESTMENTS Amounts applied to GAA will be deposited in a nonunitized separate account established under Connecticut law. A nonunitized separate account is a separate account in which neither the contract holder nor you participate in the performance of the assets through unit values or any other interest. Contract holders and participants allocating funds to the nonunitized separate account do not receive a unit value of ownership of assets accounted for in this separate account. The risk of 14 investment gain or loss is borne entirely by the Company. All Company obligations due to allocations to the nonunitized separate account are contractual guarantees of the Company and are accounted for in the separate account. All of the general assets of the Company are available to meet our contractual guarantees. To the extent provided for in the applicable contract, the assets of the nonunitized separate account are not chargeable with liabilities resulting from any other business of the Company. Income, gains and losses of the separate account are credited to or charged against the separate account without regard to other income, gains or losses of the Company. TYPES OF INVESTMENTS. We intend to invest primarily in investment-grade fixed income securities including: - -- Securities issued by the United States Government; - -- Issues of U.S. Government agencies or instrumentalities (these issues may or may not be guaranteed by the United States Government); - -- Debt securities which have an investment grade, at the time of purchase, within the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating service; - -- 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 services, are deemed by the Company's management to have an investment quality comparable to securities which may be purchased as stated above; or - -- 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. We may invest in futures and options. We purchase financial futures, related options and options on securities solely for non-speculative hedging purposes. Should securities prices be expected 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 may purchase options on securities. WE ARE NOT OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACTS ACCORDING TO ANY PARTICULAR STRATEGY, EXCEPT AS REQUIRED BY CONNECTICUT AND OTHER STATE INSURANCE LAWS. THE GUARANTEED INTEREST RATES ESTABLISHED BY THE COMPANY MAY NOT NECESSARILY RELATE TO THE PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT. DISTRIBUTION OF CONTRACTS Our subsidiary, Aetna Investment Services, LLC (AIS), serves as principal underwriter for the contracts. AIS, a Delaware limited liability company, is registered as a broker-dealer with the Securities and Exchange Commission (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. As principal underwriter, AIS may enter into arrangements with one or more registered broker-dealers to offer and sell the contracts. We and our affiliate(s) may also sell the contracts directly. All individuals offering and selling the contracts must be registered representatives of a broker-dealer and must be licensed as insurance agents to sell variable annuity contracts. For additional information, see the contract prospectus. 15 TAXATION You should seek advice from your tax adviser as to the application of federal (and where applicable, state and local) tax laws to amounts paid to or distributed under the contracts. Refer to the applicable contract prospectus for a further discussion of tax considerations. TAXATION OF THE COMPANY. We are taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code. The Company owns all assets supporting the contract obligations of GAA. Any income earned on such assets is considered income to the Company. We do not intend to make any provision or impose a charge under the contracts with respect to any tax liability of the Company. TAXATION OF PAYMENTS AND DISTRIBUTIONS. For information concerning the tax treatment of payments to and distributions from the contracts, please refer to the applicable contract prospectus. EXPERTS We have incorporated by reference into Post Effective Amendment No. 10 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. 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. LEGAL MATTERS The validity of the securities offered by this prospectus has been passed upon by Counsel to the Company. 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. 16 We are required by the Securities Exchange Act of 1934 to file periodic reports and other information with the SEC. You may inspect or copy information concerning the Company at the Public Reference Room of the SEC at: Securities and Exchange Commission 450 Fifth Street NW Washington, DC 20549 You may also obtain copies of these materials at prescribed rates from the Public Reference Room of the above office. You may obtain information on the operation of the Public Reference Room by calling the SEC at either 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 were not required to file 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 800-262-3862 INQUIRIES You may contact us directly by writing or calling to us at the address or phone number shown above. 17 APPENDIX I EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS - ------------------------------------------------------------------ The following are examples of market value adjustment ("MVA") calculations using several hypothetical deposit period yields and current yields. These examples do not include the effect of any early withdrawal charge or other fees 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 request 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 request 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. 18 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 request of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to reflect 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 request of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to reflect 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. 19 APPENDIX II EXAMPLES OF MARKET VALUE ADJUSTMENT YIELDS - ------------------------------------------------------------------ The following hypothetical examples show the market value adjustment based on a given current yield at various times remaining in the guaranteed term. Table A illustrates the application of the market value adjustment based on a deposit period yield of 10%; Table B illustrates the application of the market value adjustment based on a deposit period yield of 5%. The market value adjustment will have either a positive or negative influence on the amount withdrawn from or remaining in a guaranteed term. Also, the amount of the market value adjustment generally decreases as the end of the guaranteed term approaches. TABLE A: DEPOSIT PERIOD YIELD OF 10%
CHANGE IN DEPOSIT CURRENT PERIOD TIME REMAINING TO YIELD YIELD MATURITY OF GUARANTEED TERM - ------- --------- --------------------------------------------------------------- 8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS -------- -------- -------- -------- -------- -------- 15% +5% -29.9% -23.4% -16.3% -8.5% -4.3% -1.1% 13% +3% -19.4 -14.9 -10.2 -5.2 -2.7 -0.7 12% +2% -13.4 -10.2 -7.0 -3.5 -1.8 -0.4 11% +1% -7.0 -5.3 -3.6 -1.8 -0.9 -0.2 9% -1% 7.6 5.6 3.7 1.8 0.9 0.2 8% -2% 15.8 11.6 7.6 3.7 1.9 0.5 7% -3% 24.8 18.0 11.7 5.7 2.8 0.7 5% -5% 45.1 32.2 20.5 9.8 4.8 1.2
TABLE B: DEPOSIT PERIOD YIELD OF 5%
CHANGE IN DEPOSIT CURRENT PERIOD TIME REMAINING TO YIELD YIELD MATURITY OF GUARANTEED TERM - ------- --------- --------------------------------------------------------------- 8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS -------- -------- -------- -------- -------- -------- 9% +4% -25.9% -20.1% -13.9% -7.2% -3.7% -0.9% 8% +3% -20.2 -15.6 -10.7 -5.5 -2.8 -0.7 7% +2% -14.0 -10.7 -7.3 -3.7 -1.9 -0.5 6% +1% -7.3 -5.5 -3.7 -1.9 -0.9 -0.2 4% -1% 8.0 5.9 3.9 1.9 1.0 0.2 3% -2% 16.6 12.2 8.0 3.9 1.9 0.5 2% -3% 26.1 19.0 12.3 6.0 2.9 0.7 1% -4% 36.4 26.2 16.8 8.1 4.0 1.0
20 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 Exhibits (4) Instruments Defining the Rights of Security Holders(1) (a) Variable Annuity Contract (G-CDA-HF)(2) (b) Variable Annuity Contract Certificate (GTCC-HF)(3) (c) Variable Annuity Contract (GIT-CDA-HO)(4) (d) Variable Annuity Contract (G-CDA-IA(RP))(5) (e) Variable Annuity Contract Certificate (GTCC-IA(RP))(6) (f) Variable Annuity Contract (G-CDA(99))(7) (g) Variable Annuity Contract Certificate (CDACERT (99))(7) (h) Variable Annuity Contract (GLIT-CDA-HO)(4) (i) Variable Annuity Contract (GST-CDA-HO)(4) (j) Variable Annuity Contract (IP-CDA-IB)(8) (k) Variable Annuity Contract (I-CDA-IA(RP))(5) (l) Variable Annuity Contract (I-CDA-HD)(4) (m) Variable Annuity Contract (GIH-CDA-HB)(3) (n) Variable Annuity Contract (IMT-CDA-HO)(3) (o) Variable Annuity Contract (G-401-IB(X/M))(9) (p) Variable Annuity Contract (G-CDA-IB(XC/SM))(9) (q) Variable Annuity Contracts (G-CDA-IB(ATORP)) and (G-CDA-IB(AORP))(10) (r) Variable Annuity Contract (G-CDA-96(TORP))(11) (s) Group Combination Annuity Contract (Nonparticipating) (A001RP95)(12) (t) Group Combination Annuity Contract (Nonparticipating) (A007RC95)(12) (u) Group Combination Annuity Certificate (Nonparticipating) (A020RV95)(12) (v) Group Combination Annuity Certificate (Nonparticipating) (A027RV95)(12) (w) Variable Annuity Contract (GID-CDA-HO)(13) (x) Variable Annuity Contract (GSD-CDA-HO)(13) (y) Variable Annuity Contract (IST-CDA-HO)(14) (z) Variable Annuity Contract (I-CDA-HD(XC))(14) (aa) Variable Annuity Contract (HR1O-DUA-GIA)(15) (bb) Variable Annuity Contract (GA-UPA-GO)(15) (cc) Variable Annuity Contracts (G-TDA-HH(XC/M)) and (G-TDA-HH(XC/S))(16) (dd) Variable Annuity Certificate (GTCC-HH(XC/M))(17) (ee) Variable Annuity Certificate (GTCC-HH(XC/S))(17) (ff) Variable Annuity Contract (IA-CDA-IA)(2) (gg) Variable Annuity Contract (GLID-CDA-HO)(13) (hh) Variable Annuity Contract (G-CDA-HD)(18) (ii) Variable Annuity Contract Certificate (GTCC-HD)(6) (jj) Variable Annuity Contract (G-CDA-IA(RPM/XC))(4) (kk) Variable Annuity Contracts and Certificate (G-CDA-95(ORP)), (G-CDA-95(TORP)) and (GTCC-95 (ORP))(10) (ll) Variable Annuity Contracts and Certificate (G-CDA-ORP), (CDA-IB(TORP)) and (GTCC-95(TORP))(10) (mm) Variable Annuity Contract (IRA-CDA-IC)(5) (nn) Variable Annuity Contract (GIP-CDA-HB)(19) (oo) Variable Annuity Contract (I-CDA-98(ORP))(6) (pp) Variable Annuity Contract (G-CDA(12/99))(20) (qq) Variable Annuity Contract Certificate (C-CDA(12/99))(20) (rr) Variable Annuity Contract (G-CDA-99(NY))(20) (ss) Variable Annuity Contract Certificate (C-CDA-99(NY))(20) (tt) Variable Annuity Contract (G-CDA(99))(20) (uu) Variable Annuity Contract Certificate (C-CDA(99))(20) (vv) Variable Annuity Contract Certificate (GDCC-HF)(20) (ww) Variable Annuity Contract Certificate (GDCC-HD)(20) (xx) Variable Annuity Contract (G-CDA-HD(XC)(20) (yy) Variable Annuity Contract Certificate (GDCC-HO)(20) (zz) Variable Annuity Contract Certificate (GDCC-HD(XC))(20) (a1) Variable Annuity Contract Certificate (GTCC-HD(XC))(20) (b1) Variable Annuity Contract Certificate (GTCC-HO)(20) (c1) Variable Annuity Contract Certificate (GTCC-96(ORP))(20) (d1) Variable Annuity Contract G-CDA-96(ORP))(20) (e1) Variable Annuity Contract Certificate (GTCC-96(TORP))(20) (f1) Variable Annuity Contract Certificate (GTCC-IB(ATORP))(20) (g1) Variable Annuity Contract Certificate (GTCC-IB(AORP)(20) (h1) Variable Annuity Contract (ISE-CDA-HO)(21) (i1) Variable Annuity Contract (G-CDA-IB(ORP))(10) (j1) Variable Annuity Contract (G-CDA-IB(TORP))(10) (5) Opinion re 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 (b) Consent of Legal Counsel (included in Exhibit (5) above) (24) (a) Powers of Attorney(22) (b) Certificate of Resolution Authorizing Signature by Power of Attorney(5) Exhibits other than those listed above are omitted because they are not required or are not applicable. 1. Incorporated 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. 2. 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. 3. 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. 4. Incorporated by reference to Post-Effective Amendment No. 12 to the Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. 5. Incorporated by reference to Post-Effective Amendment No. 5 to the Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. 6. Incorporated by reference to Post-Effective Amendment No. 11 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 4, 1999. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 21, 1996. 13. 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. 14. 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. 15. 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. 16. 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. 17. 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. 18. 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. 19. 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. 20. Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. 21. 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. 22. 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. 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. 10 to the Registration Statement on Form S-2 (File No. 33-60477) to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hartford, State of Connecticut, on this 6th 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. 10 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 - ----------------------------------- ) 6, 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 a2035440zex-16_5.txt EXHIBIT 16(5) Exhibit 16(5) Opinion and Consent of Counsel [ING logo] AMERICAS US Legal Services Michael A. Pignatella Counsel (860) 273-0261 Fax: (860) 273-9407 PignatellaM@ING-AFS.com April 6, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 RE: AETNA LIFE INSURANCE AND ANNUITY COMPANY POST-EFFECTIVE AMENDMENT NO. 10 TO REGISTRATION STATEMENT ON FORM S-2 PROSPECTUS TITLE: GUARANTEED ACCUMULATION ACCOUNT FILE NO. 33-60477 Dear Sir or Madam: As Counsel of Aetna Life Insurance and Annuity Company, a Connecticut life insurance company (the "Company"), I have represented the Company in connection with the Guaranteed Accumulation Account (the "Account") available under certain variable annuity contracts and the S-2 Registration Statement relating to such Account. In connection with this opinion, I have reviewed Post-Effective Amendment No. 10 to the Registration Statement on Form S-2 relating to such Account, including the prospectus, and relevant proceedings of the Board of Directors. Based upon this review, and assuming the securities represented by the Company are issued in accordance with the provisions of the prospectus, I am of the opinion that the securities, when sold, will have been legally issued, and will constitute a legal and binding obligation of the Company. Hartford Site ING North America Insurance Corporation 151 Farmington Avenue, TS31 Hartford, CT 06156-8975 I further consent to the use of this opinion as an exhibit to Post-Effective Amendment No. 10 to the Registration Statement. Sincerely, /s/ Michael A. Pignatella Michael A. Pignatella Counsel EX-16.(13) 3 a2035440zex-16_13.txt EXHIBIT 16(13) 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) 4 a2035440zex-16_23a.txt EXHIBIT 16(23)(A) Exhibit 16(23)(a): Consent of Independent Auditors 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. 33-60477 on Post-Effective Amendment No. 10 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-----