SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 Commission file number 33-23376
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Aetna Life Insurance and Annuity Company
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(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
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None
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Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at April 27, 2000
- -------------- -----------------
Common Stock, par value $50 55,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements:
Consolidated Statements of Income..................................................... 3
Consolidated Balance Sheets........................................................... 4
Consolidated Statements of Changes in Shareholder's Equity............................ 5
Consolidated Statements of Cash Flows................................................. 6
Condensed Notes to Consolidated Financial Statements.................................. 7
Independent Auditors' Review Report...................................................... 12
Item 2. Management's Analysis of the Results of Operations....................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 21
Item 5. Other Information........................................................................ 21
Item 6. Exhibits and Reports on Form 8-K......................................................... 21
Signature ......................................................................................... 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
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<S> <C> <C>
Revenue:
Premiums $ 36.0 $ 23.6
Charges assessed against policyholders 116.0 88.9
Net investment income 228.3 219.8
Net realized capital (losses) gains (8.9) 4.8
Other income 36.9 29.2
---------- ----------
Total revenue 408.3 366.3
---------- ----------
Benefits and expenses:
Current and future benefits 201.2 182.8
Operating expenses:
Salaries and related benefits 44.1 35.4
Other 55.9 50.4
Amortization of deferred policy acquisition costs 31.2 24.9
---------- ----------
Total benefits and expenses 332.4 293.5
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Income from continuing operations before income taxes 75.9 72.8
Income taxes 24.9 23.9
---------- ----------
Income from continuing operations 51.0 48.9
Discontinued operations, net of tax:
Amortization of deferred gain on sale 1.6 1.3
---------- ----------
Net income $ 52.6 $ 50.2
========== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 2000 1999
- ------ ---------- ----------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,598.8 and $11,657.9) $11,400.1 $11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $135.4 and $134.7) 129.8 130.9
Investment in affiliated mutual funds (cost: $62.3 and $63.5) 65.0 64.1
Common stock (cost: $9.2 and $6.7) 15.3 11.5
Short-term investments 19.2 74.2
Mortgage loans 4.6 6.7
Policy loans 317.7 314.0
Other investments 13.1 13.2
---------- ----------
Total investments 11,964.8 12,024.7
Cash and cash equivalents 787.1 693.3
Short-term investments under securities loan agreement 879.1 232.5
Accrued investment income 154.4 150.7
Premiums due and other receivables 455.0 298.3
Reinsurance recoverable 3,008.2 3,001.2
Deferred income taxes 125.2 150.4
Deferred policy acquisition costs 1,088.0 1,046.4
Other assets 89.0 96.5
Separate Accounts assets 41,548.8 38,692.6
---------- ----------
Total assets $60,099.6 $56,386.6
========== ==========
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $3,882.2 $ 3,850.4
Unpaid claims and claim expenses 36.9 27.3
Policyholders' funds left with the Company 10,915.7 11,121.7
---------- ----------
Total insurance reserve liabilities 14,834.8 14,999.4
Payables under securities loan agreement 879.1 232.5
Current income taxes 16.3 14.7
Other liabilities 1,379.3 1,063.0
Separate Accounts liabilities 41,548.8 38,692.6
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Total liabilities 58,658.3 55,002.2
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Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 431.8 431.8
Accumulated other comprehensive loss (41.1) (44.8)
Retained earnings 1,047.8 994.6
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Total shareholder's equity 1,441.3 1,384.4
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Total liabilities and shareholder's equity $60,099.6 $56,386.6
========== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
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<S> <C> <C>
Shareholder's equity, beginning of period $1,384.4 $1,393.3
Comprehensive income:
Net income 52.6 50.2
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities ($5.7,($64.9)
pretax)(1) 3.7 (42.2)
---------- ----------
Total comprehensive income 56.3 8.0
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Other changes 0.6 (0.2)
Common stock dividends -- (4.5)
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Shareholder's equity, end of period $1,441.3 $1,396.6
========== ==========
</TABLE>
(1)Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
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<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 52.6 $ 50.2
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Net accretion of discount on investments (9.0) (5.5)
Amortization of deferred gain on sale (1.6) (1.3)
Net realized capital losses (gains) 8.9 (4.8)
Changes in assets and liabilities:
Increase in accrued investment income (3.7) (12.6)
Decrease in premiums due and other receivables 7.6 18.3
Increase in policy loans (3.7) (0.5)
Increase in deferred policy acquisition costs (41.6) (44.8)
Net increase in universal life account balances 6.3 14.2
Increase (decrease) in other insurance reserve liabilities 43.0 (23.5)
Decrease in other liabilities and other assets 1.5 4.2
Increase (decrease) in income taxes 24.3 (272.1)
--------- ---------
Net cash provided by (used for) operating activities 84.6 (278.2)
--------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 2,870.0 1,089.9
Equity securities 8.9 27.3
Mortgage loans 2.1 1.8
Investment maturities and collections of:
Debt securities available for sale 177.8 287.2
Short-term investments 43.1 17.0
Cost of investment purchases in:
Debt securities available for sale (2,807.6) (1,076.2)
Equity securities (7.9) (1.1)
Short-term investments (13.6) (15.0)
Decrease (increase) in property and equipment 3.7 (2.6)
Other, net (4.7) 4.8
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Net cash provided by investing activities 271.8 333.1
--------- ---------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 479.2 629.0
Withdrawals of investment contracts (729.7) (518.0)
Dividends paid to shareholder - (210.5)
Other, net (12.1) 63.4
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Net cash used for financing activities (262.6) (36.1)
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Net increase in cash and cash equivalents 93.8 18.8
Cash and cash equivalents, beginning of period 693.3 628.3
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Cash and cash equivalents, end of period $ 787.1 $ 647.1
========= =========
Supplemental cash flow information:
Income taxes paid, net $ 0.5 $ 261.0
========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1) Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company ("ALIAC") and its wholly owned subsidiaries, Aetna
Insurance Company of America ("AICA") and Aetna Investment Adviser Holding
Company, Inc. ("IA Holdco") (collectively, the "Company"). ALIAC is a
wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO").
HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc.,
whose ultimate parent is Aetna Inc. ("Aetna"). The Company has two business
segments: Financial Products and Investment Management Services. On October
1, 1998, the Company sold its individual life insurance business to Lincoln
National Corporation ("Lincoln") and accordingly, it is now classified as
Discontinued Operations.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. The
contribution of IA Holdco to the Company, which occurred on July 1, 1999,
was accounted for in a manner similar to that of a pooling-of-interests
and, accordingly, the Company's historical consolidated financial
statements have been restated to include the accounts and results of
operations of IA Holdco. Certain reclassifications have been made to 1999
financial information to conform to the 2000 presentation. These interim
statements necessarily rely heavily on estimates, including assumptions as
to annualized tax rates. In the opinion of management, all adjustments
necessary for a fair statement of results for the interim periods have been
made. All such adjustments are of a normal, recurring nature. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes as
presented in ALIAC's 1999 Annual Report on Form 10-K. Certain financial
information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles, but
that is not required for interim reporting purposes, has been condensed or
omitted.
2) Recent Developments
-------------------
On March 12, 2000, Aetna announced that it plans to separate its health and
financial services businesses into two independent publicly-traded
companies (the "Separation"). One company will consist of Aetna's health
and group life and disability businesses that comprise its Aetna U.S.
Healthcare segment, Aetna's Large Case Pensions segment and the health
businesses reported in the Aetna International segment, excluding any of
Aetna International's health businesses that are sold prior to the
Separation. The other company will consist of Aetna's financial services
businesses that comprise its Aetna Financial Services segment and the
financial services businesses reported in its Aetna International segment,
excluding any of Aetna International's financial services businesses that
are sold prior to the Separation. The Company is currently part of the
Aetna Financial Services segment and will be part of the financial services
company after the Separation.
7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
2) Recent Developments (continued)
-------------------------------
Aetna has stated its intention to complete the Separation as soon as it can
be achieved in an orderly manner, with the goal of completing the
Separation by year end 2000. However, completion of the Separation remains
subject to a number of conditions, including final approval by Aetna's
Board of Directors. These conditions also include obtaining regulatory
approvals and satisfying certain tax and other legal requirements. The full
impact of the Separation on the Company's financial position, results of
operations and cash flows and assets under management and administration
cannot be predicted at this time.
3) New Accounting Standard
-----------------------
On January 1, 2000, the Company adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified
Public Accountants. This statement provides guidance on how to account for
all insurance and reinsurance contracts that do not transfer insurance
risk, except for long-duration life and health insurance contracts. The
adoption of this standard had no impact on the Company's financial position
or results of operations.
4) Future Accounting Standard
--------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard requires companies to
record all derivatives on the balance sheet as either assets or liabilities
and measure those instruments at fair value. The manner in which companies
are to record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, this standard is effective for the Company's financial
statements beginning January 1, 2001, with early adoption permitted. The
impact of FAS No. 133 on the Company's financial statements will vary based
on certain factors including future interpretive guidance from the FASB,
the extent of the Company's hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. The Company is
evaluating the impact of the adoption of this standard and currently does
not believe that this standard will have a material effect on the Company's
financial position or results of operations.
8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
5) Additional Information - Accumulated Other Comprehensive (Loss) Income
----------------------------------------------------------------------
Changes in accumulated other comprehensive income (loss) related to changes
in unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders) were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Millions) 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $ 3.8 $ (35.5)
Less: reclassification adjustments for amortization of net investment
discounts and gains included in net income (2) 0.1 6.7
------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 3.7 $ (42.2)
============================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$5.8 million and $(54.6) million for 2000 and 1999, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income for the period were $0.1
million and $10.3 million for 2000 and 1999, respectively.
9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
6) Segment Information
-------------------
Summarized financial information for the Company's principal operations for
the three months ended March 31, was as follows:
<TABLE>
<CAPTION>
Investment
Financial Management Discontinued
(Millions) Products(1) Services(1) Operations(1) Other(1) Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Revenues from external customers $ 167.7 $ 33.2 $ - $ (12.0) $ 188.9
Net investment income 226.7 0.6 - 1.0 228.3
----------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
(losses) gains $ 394.4 $ 33.8 $ - $ (11.0) $ 417.2
================================================================================================================
Operating earnings(2) $ 51.2 $ 7.4 $ - $ (1.8) $ 56.8
Realized capital (losses) gains, net of tax (5.9) 0.1 - - (5.8)
----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 45.3 7.5 - (1.8) 51.0
Discontinued operations, net of tax:
Deferred gain on sale - - 1.6 - 1.6
----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 45.3 $ 7.5 $ 1.6 $ (1.8) $ 52.6
================================================================================================================
1999
Revenues from external customers $ 124.2 $ 28.2 $ - $ (10.7) $ 141.7
Net investment income 218.7 .3 - 0.8 219.8
----------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
gains $ 342.9 $ 28.5 $ - $ (9.9) $ 361.5
================================================================================================================
Operating earnings(2) $ 46.3 $ 6.7 $ - $ (7.2) $ 45.8
Realized capital gains, net of tax 3.1 - - - 3.1
----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 49.4 6.7 - (7.2) 48.9
Discontinued operations, net of tax:
Deferred gain on sale - - 1.3 - 1.3
----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 49.4 $ 6.7 $ 1.3 $ (7.2) $ 50.2
================================================================================================================
</TABLE>
(1) Financial Products include: deferred and immediate annuity
contracts; mutual funds; and programs offered to qualified plans
and nonqualified deferred compensation plans that package
administrative and recordkeeping services along with a menu of
investment options, investment advisory services and pension plan
administrative services. Investment Management Services include
the following services: investment advisory services to
affiliated and unaffiliated institutional and retail clients;
underwriting; distribution for Company products; and trustee,
administrative and other fiduciary services to retirement plans.
Discontinued Operations include life insurance products. Other
includes consolidating adjustments and Year 2000 costs of $5.5
million in 1999.
(2) Operating earnings is comprised of net income (loss) excluding
net realized capital gains and losses. While operating earnings
is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does
not replace operating income or net income as a measure of
profitability.
10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
7) Commitments and Contingent Liabilities
--------------------------------------
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments between the time that the
Company enters into the commitments and the specified future date on which
the Company must purchase or sell the securities, as the case may be. As of
March 31, 2000, the Company had commitments to purchase investments of
$160.0 million. The fair value at March 31, 2000 of the investments to be
purchased approximated $160.7 million.
Litigation
In recent years, several life insurance and annuity companies have been
named as defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity pricing and sales practices. A purported
class action complaint was filed in the Circuit Court of Lauderdale County,
Alabama on March 28, 2000 by Loretta Shaner against ALIAC (the "Shaner
Complaint"). On April 27, 2000, the case was removed to the United States
District Court for the Northern District of Alabama. The Shaner Complaint
seeks unspecified compensatory damages from ALIAC and unnamed affiliates of
ALIAC. The Shaner Complaint claims that ALIAC's sale of deferred annuity
products for use as investments in tax-deferred contributory retirement
plans (e.g., IRAs) is improper. This litigation is in the preliminary
stages. The Company intends to defend the action vigorously.
The Company is also involved in numerous other lawsuits arising, for the
most part, in the ordinary course of its business operations. While the
ultimate outcome of the litigation against the Company referred to in this
paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the litigation referred to in this
paragraph is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect
results of operations in future periods.
11
<PAGE>
Independent Auditors' Review Report
The Board of Directors
Aetna Life Insurance and Annuity Company:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Life Insurance and Annuity Company and Subsidiaries as of March 31, 2000, and
the related condensed consolidated statements of income, changes in
shareholder's equity and cash flows for the three-month periods ended March 31,
2000 and 1999. These condensed consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Life Insurance and Annuity
Company and Subsidiaries as of December 31, 1999, and the related consolidated
statements of income, changes in shareholder's equity and cash flows for the
year then ended (not presented herein); and in our report dated February 7,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
Hartford, Connecticut
April 26, 2000
12
<PAGE>
Item 2. Management's Analysis of the Results of Operations
The following analysis presents a review of the Company for the three months
ended March 31, 2000 and 1999. This review should be read in conjunction with
the consolidated financial statements and other data presented herein as well as
the "Management's Analysis of the Results of Operations" section contained in
ALIAC's 1999 Annual Report on Form 10-K.
Overview
Recent Developments
On March 12, 2000, Aetna Inc. ("Aetna"), the ultimate parent of the Company,
announced that it plans to separate its health and financial services businesses
into two independent publicly-traded companies (the "Separation"). One company
will consist of Aetna's health and group life and disability businesses that
comprise its Aetna U.S. Healthcare segment, Aetna's Large Case Pensions segment
and the health businesses reported in its Aetna International segment, excluding
any of Aetna International's health businesses that are sold prior to the
Separation. The other company will consist of Aetna's financial services
businesses that comprise its Aetna Financial Services segment and the financial
services businesses reported in its Aetna International segment, excluding any
of Aetna International's financial services businesses that are sold prior to
the Separation. The Company is currently part of the Aetna Financial Services
segment and will be part of the financial services company after the Separation.
Aetna has stated its intention to complete the Separation as soon as it can
be achieved in an orderly manner, with the goal of completing the
Separation by year end 2000. However, completion of the Separation remains
subject to a number of conditions, including final approval by Aetna's
Board of Directors. These conditions also include obtaining regulatory
approvals and satisfying certain tax and other legal requirements. The full
impact of the Separation on the Company's financial position, results of
operations and cash flows and assets under management and administration
cannot be predicted at this time.
Consolidated Results
Consolidated results include results from continuing operations and discontinued
operations. Results of continuing operations are comprised of the results of the
Financial Products and Investment Management Services segments plus certain
items not directly allocable to the business segments.
Results of discontinued operations for the three months ended March 31, 2000 and
1999 consist of the recognized portion of the deferred gain relating to the sale
of the domestic individual life insurance business that occurred on October 1,
1998. Refer to "Discontinued Operations" in this report and to Note 3 of Notes
to the Consolidated Financial Statements and "Overview" in ALIAC's 1999 Annual
Report on Form 10-K.
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The contribution
of IA Holdco to the Company was accounted for in a manner similar to that of a
pooling-of-interests and, accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results of
IA Holdco.
13
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
Continuing Operations
Income from continuing operations increased $2 million for the three months
ended March 31, 2000 compared to the corresponding period in 1999. Income from
continuing operations includes Year 2000 costs of $6 million in 1999. Excluding
net realized capital losses of $6 million in 2000 and net realized capital gains
of $3 million in 1999, earnings from continuing operations for the three months
ended March 31, 2000 increased $11 million, or 24%, compared to the same period
in 1999. The increase in earnings primarily reflects increased fee income from
higher levels of assets under management and administration partially offset by
higher operating expenses.
Assets under management and administration increased primarily due to
appreciation in the stock market and, to a lesser extent, because of
additional net deposits (i.e., deposits, including new contracts, 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. This group of
assets must be deducted from the aggregate segment assets to determine the
consolidated assets under management of the Company.
<TABLE>
<CAPTION>
(Millions) March 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets under management:
Financial Products $57,167.4 $46,549.2
Investment Management Services(1) 56,374.7 49,693.7
Consolidating adjustment(2) (36,939.7) (35,080.5)
- ------------------------------------------------------------------------------------------------------------------
Total - assets under management(3)(4) $76,602.4 $61,162.4
- ------------------------------------------------------------------------------------------------------------------
Assets under administration:(5)
Financial Products 5,034.1 3,085.2
- ------------------------------------------------------------------------------------------------------------------
Assets under management and administration $81,636.5 $64,247.6
==================================================================================================================
</TABLE>
(1) Includes $7,182.0 million and $7,682.0 million of assets managed for
Aetna Life Insurance Company, an affiliate of the Company, as of
March 31, 2000 and 1999, respectively. (Aetna Inc. reports these assets
in its Large Case Pensions segment - refer to "Recent Developments" in
this Report.)
(2) Assets under management reported in both the Financial Products and
Investment Management segments must be deducted from the aggregate
segment assets to determine the consolidated assets under management of
the Company.
(3) Includes $15,730.8 million and $8,404.7 million at March 31, 2000 and
1999, respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(4) Excludes net unrealized capital losses of $198.7 million at March 31, 2000
and net unrealized capital gains of $305.7 million at March 31, 1999 on
assets invested through annuities with fixed options.
(5) Represents assets for which the Company provides administrative services
only.
For the three months ended March 31, 2000, operating expenses for continuing
operations were higher than those for the same period in 1999 due to business
growth and the redeployment of Year 2000 resources to improve systems
infrastructures and add new distribution capabilities. The increase in other
operating expenses for the three months ended March 31, 2000, compared to the
same period in 1999, is less than the corresponding increase in other operating
expenses for the Financial Products segment primarily because approximately $8
million (before tax) of Year 2000 costs, which are not allocated to the
Financial Products segment, are included in the 1999 results for continuing
operations.
14
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
Outlook
Refer to "Forward-Looking Information/Risk Factors" in this Report and
"Overview-Outlook" and "Forward-Looking Information/Risk Factors" in ALIAC's
1999 Annual Report on Form 10-K.
Financial Products
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums(1) $ 36.0 $ 23.6
Charges assessed against policyholders 116.0 88.9
Net investment income 226.7 218.7
Net realized capital (losses) gains (9.0) 4.8
Other income 15.7 11.7
- --------------------------------------------------------------------------------------------------
Total revenue 385.4 347.7
- --------------------------------------------------------------------------------------------------
Current and future benefits 201.2 182.8
Operating expenses:
Salaries and related benefits 36.6 29.6
Other 52.4 39.9
Amortization of deferred policy acquisition costs 28.4 22.4
- --------------------------------------------------------------------------------------------------
Total benefits and expenses 318.6 274.7
- --------------------------------------------------------------------------------------------------
Income from operations before income taxes 66.8 73.0
Income taxes 21.5 23.6
- --------------------------------------------------------------------------------------------------
Net income(2) $ 45.3 $ 49.4
==================================================================================================
Net realized capital (losses) gains, net of tax (included above) $ (5.9) $ 3.1
==================================================================================================
Deposits (not included in premiums above)
Annuities - fixed options $ 452.3 $ 545.2
Annuities - variable options 1,324.1 1,484.1
- --------------------------------------------------------------------------------------------------
Total - deposits $ 1,776.4 $ 2,029.3
==================================================================================================
Assets Under Management
Annuities - fixed options(3) $ 12,404.0 $ 12,305.8
Annuities - variable options(4) 38,181.8 27,238.7
- --------------------------------------------------------------------------------------------------
Subtotal - annuities 50,585.8 39,544.5
Plan Sponsored and Other 6,581.6 7,004.7
- --------------------------------------------------------------------------------------------------
Total assets under management(5) 57,167.4 46,549.2
Assets under administration(6) 5,034.1 3,085.2
- --------------------------------------------------------------------------------------------------
Total assets under management and administration $ 62,201.5 $ 49,634.4
==================================================================================================
</TABLE>
(1) Includes $28.3 million for the three months ended March 31, 2000 and $21.7
million for the three months ended March 31, 1999 of annuity premiums on
contracts converting from the accumulation phase to payout options with
life contingencies.
(2) Year 2000 costs for 1999 are not allocated to segment operating expenses
and, therefore, are excluded in the determination of segment net income.
(3) Excludes net unrealized capital losses of $198.7 million at March 31, 2000
and net unrealized capital gains of $305.7 million at March 31, 1999.
(4) Includes $15,730.8 million and $8,404.7 million at March 31, 2000 and 1999,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) Includes $36,939.7 million and $35,080.5 million at March 31, 2000 and
1999, respectively, of assets under management that are also reported in
the Investment Management Services segment (Refer to "Overview-Continuing
Operations").
(6) Represents assets for which the Company provides administrative services
only.
15
<PAGE>
Item 2. Management's Analysis of the Results of Operations. (continued)
Financial Products (continued)
Financial Products' net income for the three months ended March 31, 2000
decreased $4 million compared to the corresponding period in 1999 due to
realized capital losses. Excluding net realized capital gains or losses, results
for the three months ended March 31, 2000 increased $5 million, or 11%, compared
to the corresponding period in 1999. This increase in earnings primarily
reflects an increase in charges assessed against policyholders and other income
offset by increases in operating expenses.
Substantially all of charges assessed against policyholders and other income are
calculated based on assets under management and administration. Assets under
management and administration at March 31, 2000 increased 25% compared to March
31, 1999 primarily due to appreciation in the stock market and, to a lesser
extent, because of additional net deposits (i.e., deposits, including new
contracts, less surrenders).
Deposits for the three months ended March 31, 2000 were less than deposits for
the corresponding period in 1999 primarily because the prior period deposits
reflected plan assets of a large new case. Excluding this large case, deposits
for the three months ended March 31, 2000 would have increased 31% compared to
the corresponding period in 1999.
The increase in operating expenses for the three months ended March 31, 2000
compared to the same period in 1999 reflects business growth and the
redeployment of Year 2000 resources to improve systems infrastructures and add
new distribution capabilities. The increase in other operating expenses for the
three months ended March 31, 2000 compared to the same period in 1999 is higher
than the corresponding increase in other operating expenses for continuing
operations because Year 2000 costs of approximately $8 million (before tax),
which are included in 1999 results for continuing operations, are not allocated
to 1999 segment results. Despite this overall increase, annuity operating
expenses as a percentage of assets under management decreased.
Of the $12.4 billion and $12.3 billion of fixed annuity assets under management
at March 31, 2000 and 1999, respectively, 25% were fully guaranteed and 75% were
experience-rated in each period. The average annualized earned rate on
investments supporting fully guaranteed investment contracts was 7.5% and 7.4%
for the three months ended March 31, 2000 and 1999, respectively, and the
average annualized earned rate on investments supporting experience-rated
investment contracts was 7.6% for both periods. The average annualized credited
rate on fully guaranteed investment contracts was 6.3% and the average
annualized credited rate on experience-rated investment contracts was 5.6% for
each of the three month periods ended March 31, 2000 and 1999. The resulting
annualized interest margins on fully guaranteed investment contracts were 1.2%
and 1.1% for the three months ended March 31, 2000 and 1999, respectively, and
were 2.0% for both periods on experience-rated investment contracts.
16
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Investment Management Services
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(Millions) 2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 0.6 $ 0.3
Net realized capital gains 0.1 -
Other income(1) 33.2 28.2
- --------------------------------------------------------------------------------------------------
Total revenue 33.9 28.5
- --------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related benefits 7.5 5.8
Other 14.5 12.0
Income from operations before income taxes 11.9 10.7
Income taxes 4.4 4.0
- --------------------------------------------------------------------------------------------------
Net income(2) $ 7.5 $ 6.7
==================================================================================================
Net realized capital gains, net of tax (included above) $ 0.1 -
==================================================================================================
Assets under management:
Retail mutual funds $ 1,555.0 $ 701.2
Plan sponsored(3) 15,835.0 11,837.0
Collateralized bond obligations and other 2,045.0 2,075.0
- --------------------------------------------------------------------------------------------------
Subtotal $ 19,435.0 $ 14,613.2
- --------------------------------------------------------------------------------------------------
Invested through products of the Financial Products
segment(4)
Variable annuity mutual funds $ 18,342.7 $ 16,064.5
Fixed annuities(5) 12,404.0 12,305.8
Plan sponsored and other 6,193.0 6,710.2
- --------------------------------------------------------------------------------------------------
Subtotal $ 36,939.7 $ 35,080.5
- --------------------------------------------------------------------------------------------------
Total assets under management $ 56,374.7 $ 49,693.7
==================================================================================================
</TABLE>
(1) Primarily includes investment advisory fees earned on assets
under management.
(2) Year 2000 costs for 1999 are not allocated to segment operating expenses
and, therefore, are excluded in the determination of segment net income.
(3) Includes $7,182.0 million and $7,682.0 million of assets managed for Aetna
Life Insurance Company, an affiliate of the Company, as of March 31, 2000
and 1999, respectively. (Aetna Inc. reports these assets in its Large Case
Pensions segment - refer to "Recent Developments" in this Report.)
(4) The Investment Management Services segment earns investment advisory fees
on these assets, which are also reported in the Financial Products segment.
(5) Excludes net unrealized capital losses of $198.7 million at March 31, 2000
and net unrealized capital gains of $305.7 million at March 31, 1999.
Net income from the Investment Management Services segment increased $1 million
for the three months ended March 31, 2000, or 12%, compared to the same period
in 1999. The increase in earnings primarily reflects an increase in investment
advisory fees offset by higher operating expenses.
Investment advisory fees are calculated based on the assets under
management. The increase in fee income is due to higher levels of assets
under management. At March 31, 2000, assets under management increased 13%
over those reported as of March 31, 1999. The increase in these assets was
due to appreciation in the stock market partially offset by net
withdrawals.
The increase in operating expenses for the three months ended March 31, 2000,
compared to the same period in 1999, reflects business growth.
17
<PAGE>
Item 2. Management's Analysis of the Results of Operations. (continued)
Discontinued Operations - Domestic Individual Life Insurance
Results of discontinued operations consist solely of the deferred gain
recognized from the sale of the domestic individual life insurance business on
October 31, 1998. The gain recognized during the three months ended March 31,
2000 and 1999 was $2 million and $1 million, respectively.
Individual life insurance coverage in force was approximately $41 billion at
March 31, 2000. The entire amount of this coverage in force has been ceded to
Lincoln under the indemnity reinsurance arrangement entered into as part of the
sale.
For more details about the transaction and the indemnity reinsurance
arrangement, refer to Note 3 of Notes to the Consolidated Financial Statement in
the Company's 1999 Annual Report on Form 10-K.
General Account Investments
The Company's invested assets were comprised of the following:
<TABLE>
<CAPTION>
(Millions) March 31, 2000 December 31, 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities, available for sale, at fair value $ 11,400.1 $ 11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock 129.8 130.9
Investment in affiliated mutual funds 65.0 64.1
Common stock 15.3 11.5
Short-term investments 19.2 74.2
Mortgage loans 4.6 6.7
Policy loans 317.7 314.0
Other investments 13.1 13.2
- ------------------------------------------------------------------------------------------------------
Total Investments $ 11,964.8 $ 12,024.7
======================================================================================================
</TABLE>
Debt Securities
At March 31, 2000 and December 31, 1999, the Company's carrying value of
investments in debt securities represented 95% of the total general account
invested assets. For the same periods, $8.9 billion, or 78% of total debt
securities, and $8.7 billion, or 76% of total debt securities, respectively,
supported experience-rated contracts.
Debt securities reflected net unrealized capital losses of $198.7 million and
$247.8 million at March 31, 2000 and December 31, 1999, respectively. Of the
total net unrealized capital losses at March 31, 2000, a net unrealized loss of
$144.3 million relates to assets supporting experience-rated contracts.
18
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
It is management's objective that the portfolio of debt securities be of high
quality and be well diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio at March 31, 2000 and December 31, 1999 was AA-.
The percentage of total debt securities by quality rating category is as
follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
- -----------------------------------------------------------------------------------------
<S> <C> <C>
AAA 50.2% 48.4%
AA 7.7 9.5
A 24.8 24.5
BBB 10.5 11.1
BB 2.7 2.5
B and Below 4.1 4.0
- -----------------------------------------------------------------------------------------
Total 100.0% 100.0%
=========================================================================================
</TABLE>
The percentage of total debt securities by market sector is as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Corporate Securities 39.1% 40.6%
Residential Mortgage-Backed Securities 26.5 23.9
Foreign Securities (1) 11.1 11.4
Commercial/Multifamily Mortgage-Backed Securities 8.7 8.6
U.S. Treasuries/Agencies 8.6 9.4
Asset-Backed Securities 6.0 6.1
- ----------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
=====================================================================================================
</TABLE>
(1) Primarily U.S. dollar denominated
Forward-Looking Information/Risk Factors
The "Forward-Looking Information/Risk Factors" portion of ALIAC's 1999 Annual
Report on Form 10-K contains a discussion of important risk factors related to
the Company's businesses.
We also face certain risks related to Aetna's pending Separation into
independent health and wealth businesses. The full impact of the Separation on
the Company's financial position, results of operations and cash flows and
assets under management and administration cannot be predicted at this time.
19
<PAGE>
Item 2. Management's Analysis of the Results of Operations (continued)
Forward-Looking Information/Risk Factors (continued)
Aetna's ability to complete the Separation is subject to, among other things,
receipt of required regulatory approvals and satisfaction of certain tax and
other legal requirements. Aetna cannot control the timing of those matters.
Completion of the Separation, therefore, could be delayed beyond the end of
2000, which could, among other things, increase the cost to Aetna of
implementing the Separation. It cannot yet be determined how this delay could
affect us.
Uncertainty resulting from Aetna's March 12, 2000 announcement of the Separation
may negatively influence our customers' and potential customers' decisions to
select the Company's products and/or services, which could have an adverse
effect on our results of operations and otherwise adversely affect us.
In order for us to achieve the benefits we expect from the Separation, including
among other things improved performance, Aetna must be able to, among other
things, successfully separate its businesses in a manner that does not
significantly increase overall expenses for the financial services company while
at the same time replicate in the financial services company the functions that
currently are performed in Aetna's Corporate segment.
Recent regulatory developments could adversely affect our businesses. As
described in ALIAC's 1999 Annual Report on Form 10-K, additional legislation or
regulation related to our businesses has been enacted or is being considered by
the federal government and many states and this could adversely impact our
operations and results of operations. It is uncertain whether we can recoup,
through higher fees, premiums or other measures, the increased costs that may
result from these types of legislation.
For example, President Clinton has signed the Gramm-Leach-Bliley Act (the "GLB
Act"), which permits affiliations among banks, insurance companies and
securities firms. The GLB Act may have competitive, operational, financial and
other implications for us. In particular, the GLB Act includes privacy
protections requiring all financial services providers to disclose their privacy
policies and restrict the sharing of personal information for marketing
purposes. Various states are considering even more restrictive privacy measures
that could potentially affect our operations and results of operations.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In recent years, several life insurance and annuity companies have been named as
defendants in lawsuits, including class action lawsuits, relating to life
insurance and annuity pricing and sales practices. A purported class action
complaint was filed in the Circuit Court of Lauderdale County, Alabama on March
28, 2000 by Loretta Shaner against ALIAC (the "Shaner Complaint"). On April 27,
2000, the case was removed to the United States District Court for the Northern
District of Alabama. The Shaner Complaint seeks unspecified compensatory damages
from ALIAC and unnamed affiliates of ALIAC. The Shaner Complaint claims that
ALIAC's sale of deferred annuity products for use as investments in tax-deferred
contributory retirement plans (e.g., IRAs) is improper. This litigation is in
the preliminary stages. The Company intends to defend the action vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations. While the ultimate
outcome of the litigation against the Company referred to in this paragraph
cannot be determined at this time, after consideration of the defenses available
to the Company and any related reserves established, and after consultation with
counsel, the litigation referred to in this paragraph is not expected to result
in liability for amounts material to the financial condition of the Company,
although it may adversely affect results of operations in future periods.
Item 5. Other Information.
Ratings
The Company's financial strength ratings at March 22, 2000 and May 10, 2000 are
as follows:
<TABLE>
<CAPTION>
Rating Agencies
-----------------------------------------------------------------------------------
Moody's Investors Standard &
A.M. Best Duff & Phelps Service Poor's
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 22, 2000 A AA Aa3 AA-
May 10, 2000 (1) A AA Aa3 AA-
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A. M. Best has placed the Company's rating under review with developing
implications. Duff & Phelps Credit Rating Company has placed the Company's
rating on "Rating Watch-Uncertain". Moody's Investors Service has the
Company's rating on review, direction uncertain. Standard & Poor's has the
Company's rating on Credit Watch with developing implications.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
----------------------------------------
(Registrant)
May 11, 2000 By /s/ Deborah Koltenuk
- ----------- --------------------------------------------
(Date) Deborah Koltenuk
Vice President, Corporate Controller and
Assistant Treasurer
(Chief Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The condensed consolidated financial statements contained in the form 10-Q
for the 3 months ended March 31, 2000 for the Aetna Life Insurance and
Annuity Company.
</LEGEND>
<CIK> 0000837010
<NAME> Aetna Life Insurance and Annuity Company
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 11,400
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 210
<MORTGAGE> 5
<REAL-ESTATE> 0
<TOTAL-INVEST> 11,965
<CASH> 787
<RECOVER-REINSURE> 3,008
<DEFERRED-ACQUISITION> 1,088
<TOTAL-ASSETS> 60,100
<POLICY-LOSSES> 3,881
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 37
<POLICY-HOLDER-FUNDS> 10,916
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,438
<TOTAL-LIABILITY-AND-EQUITY> 60,100
36
<INVESTMENT-INCOME> 228
<INVESTMENT-GAINS> (9)
<OTHER-INCOME> 37
<BENEFITS> 201
<UNDERWRITING-AMORTIZATION> 31
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 76
<INCOME-TAX> 25
<INCOME-CONTINUING> 51
<DISCONTINUED> 2
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
