<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period
ended September 30, 2000 Commission file number 33-23376
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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 October 31, 2000
-------------- --------------------
Common Stock, par value $50 55,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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PAGE
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<S> <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.................................. 14
Item 2. Management's Analysis of the Results of Operations................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 23
Item 5. Other Information.................................................... 24
Item 6. Exhibits and Reports on Form 8-K .................................... 24
Signature ...................................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 41.8 $ 44.2 $ 117.1 $ 86.6
Charges assessed against policyholders 119.9 98.6 351.0 283.1
Net investment income 231.9 230.6 681.5 668.8
Net realized capital losses (11.2) (11.1) (23.1) (5.4)
Other income 44.0 20.1 117.5 82.5
------------ ------------ ------------ ------------
Total revenue 426.4 382.4 1,244.0 1,115.6
Benefits and expenses:
Current and future benefits 199.8 201.8 598.3 564.0
Operating expenses:
Salaries and related benefits 52.3 35.0 144.0 107.7
Other 60.1 54.0 166.4 155.1
Amortization of deferred policy acquisition costs 36.8 25.9 96.4 77.6
------------ ------------ ------------ ------------
Total benefits and expenses 349.0 316.7 1,005.1 904.4
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 77.4 65.7 238.9 211.2
Income taxes 22.7 21.8 75.9 69.6
------------ ------------ ------------ ------------
Income from continuing operations 54.7 43.9 163.0 141.6
Discontinued operations, net of tax:
Amortization of deferred gain on sale 1.5 1.4 4.7 4.1
------------ ------------ ------------ ------------
Net income $ 56.2 $ 45.3 $ 167.7 $ 145.7
============ ============ ============ ============
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
ASSETS ------------- ------------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,193.0 and $11,657.9) $ 11,075.8 $ 11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $107.9 and $134.7) 101.0 130.9
Investment in affiliated mutual funds (cost: $13.0 and $63.5) 18.7 64.1
Common stock (cost: $5.6 and $6.7) 13.0 11.5
Short-term investments 81.5 74.2
Mortgage loans 4.6 6.7
Policy loans 338.6 314.0
Other investments 13.5 13.2
----------- -----------
Total investments 11,646.7 12,024.7
Cash and cash equivalents 987.3 694.4
Short-term investments under securities loan agreement 753.3 232.5
Accrued investment income 148.7 150.7
Premiums due and other receivables 97.3 298.3
Reinsurance recoverable 3,003.4 3,001.2
Deferred income taxes 93.7 150.4
Deferred policy acquisition costs 1,155.2 1,046.4
Other assets 108.3 96.5
Separate Accounts assets 40,059.6 38,692.6
----------- -----------
Total assets $ 58,053.5 $ 56,387.7
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $ 3,938.2 $ 3,850.4
Unpaid claims and claim expenses 29.3 27.3
Policyholders' funds left with the Company 10,887.4 11,121.7
----------- -----------
Total insurance reserve liabilities 14,854.9 14,999.4
Payables under securities loan agreement 753.3 232.5
Current income taxes 13.3 14.7
Other liabilities 797.9 1,062.8
Separate Accounts liabilities 40,059.6 38,692.6
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Total liabilities 56,479.0 55,002.0
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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 431.9 431.9
Accumulated other comprehensive loss (14.5) (44.8)
Retained earnings 1,154.3 995.8
----------- -----------
Total shareholder's equity 1,574.5 1,385.7
----------- -----------
Total liabilities and shareholder's equity $ 58,053.5 $ 56,387.7
=========== ===========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Shareholder's equity, beginning of period $ 1,385.7 $ 1,394.5
Comprehensive income:
Net income 167.7 145.7
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities $46.6, ($200.5)
pretax) (1) 30.3 (130.3)
----------- -----------
Total comprehensive income 198.0 15.4
----------- -----------
Other changes 0.9 0.5
Common stock dividends (10.1) (29.8)
----------- -----------
Shareholder's equity, end of period $ 1,574.5 $ 1,380.6
=========== ===========
</TABLE>
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 167.7 $ 145.7
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Net accretion of discount on investments (25.2) (20.6)
Amortization of deferred gain on sale (4.7) (4.1)
Net realized capital losses 23.1 5.4
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 2.0 (11.4)
Decrease in premiums due and other receivables 13.2 31.6
Increase in policy loans (24.6) (16.7)
Increase in deferred policy acquisition costs (108.8) (114.7)
Increase (decrease) in universal life account
balances 21.0 (220.5)
Increase in other insurance reserve liabilities 84.6 232.1
Net (decrease) in other liabilities and other assets (69.0) (75.5)
Increase (decrease) in income taxes 36.6 (280.1)
----------- -----------
Net cash provided by (used for) operating activities 115.9 (328.8)
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 9,074.5 4,017.1
Equity securities 107.4 89.9
Mortgage loans 2.1 2.3
Investment maturities and collections of:
Debt securities available for sale 488.0 995.2
Short-term investments 57.2 60.6
Cost of investment purchases in:
Debt securities available for sale (9,128.6) (4,805.5)
Equity securities (16.5) (9.4)
Short-term investments (89.9) (68.4)
Decrease in property and equipment 2.9 7.6
Other, net (4.6) 6.2
----------- -----------
Net cash provided by investing activities 492.5 295.6
----------- -----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,275.1 1,576.5
Withdrawals of investment contracts (1,606.9) (1,308.4)
Dividends paid to shareholder (10.1) (235.8)
Other, net 24.4 170.4
----------- -----------
Net cash (used for) provided by financing activities (317.5) 202.7
----------- -----------
Net increase in cash and cash equivalents 290.9 169.5
Effect of exchange rate changes on cash and cash equivalents 2.0 --
Cash and cash equivalents, beginning of period 694.4 629.4
----------- -----------
Cash and cash equivalents, end of period $ 987.3 $ 798.9
=========== ===========
Supplemental cash flow information:
Income taxes paid, net $ 39.4 $ 315.6
=========== ===========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1) BASIS OF PRESENTATION
The consolidated financial statements include Aetna Life Insurance and
Annuity Company ("ALIAC") and its wholly owned subsidiaries, Aetna
Insurance Company of America ("AICA"), Aetna Investment Adviser Holding
Company, Inc. ("IA Holdco") and Aetna Investment Services, Inc.
(collectively, the "Company"). ALIAC is a wholly owned subsidiary of Aetna
Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary
of Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc.
("Aetna"). On June 30, 2000 HOLDCO contributed Aetna Investment Services,
Inc. ("AISI") to the Company. (Refer to note 2). The Company has two
business segments: Financial Products and Investment Management Services.
On October 1, 1998, the Company sold its individual life insurance business
to Lincoln National Corporation ("Lincoln") and accordingly, it is now
classified as Discontinued Operations.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. The
contribution of IA Holdco to the Company, which occurred on July 1, 1999,
and the contribution of AISI to the Company were each accounted for in a
manner similar to that of a pooling-of-interests and, accordingly, the
Company's historical consolidated financial statements have been restated
to include the accounts and results of operations of IA Holdco and AISI.
Certain reclassifications have been made to 1999 financial information to
conform to the 2000 presentation. These interim statements necessarily rely
heavily on estimates, including assumptions as to annualized tax rates. In
the opinion of management, all adjustments necessary for a fair statement
of results for the interim periods have been made. All such adjustments are
of a normal, recurring nature. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes as presented in ALIAC's 1999 Annual
Report on Form 10-K. Certain financial information that is normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles, but that is not required for
interim reporting purposes, has been condensed or omitted.
2) CONTRIBUTION OF AISI FROM HOLDCO
On June 30, 2000, HOLDCO contributed AISI to the Company. AISI is
registered with the Securities Exchange Commission as a broker/dealer and
is a member of the National Association of Securities Dealers, Inc. It is
also registered with the appropriate state securities authorities as a
broker/dealer. The principal operation of AISI is the sale of fixed and
variable annuities and mutual funds through its registered representatives.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
3) RECENT DEVELOPMENTS
AGREEMENT TO SELL AETNA FINANCIAL SERVICES AND AETNA INTERNATIONAL
On July 20, 2000, Aetna Inc. ("Aetna"), the ultimate parent of the Company,
announced that it reached a definitive agreement to sell its Aetna
Financial Services and Aetna International businesses to ING Groep N.V.
("ING") in a transaction valued at approximately $7.7 billion. The Company
is part of the Aetna Financial Services business and will be included in
the sale to ING. Under the terms of the agreement, in two effectively
simultaneous steps: (1) Aetna will spin off to its shareholders the shares
of a standalone health company that will be comprised primarily of its
Aetna U.S. Healthcare and Large Case Pensions businesses; and (2) Aetna,
which then will be comprised of Aetna Financial Services and Aetna
International, will merge with a newly formed subsidiary of ING.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well
as other closing conditions, by year-end 2000. An Aetna shareholders'
meeting has been scheduled for November 30, 2000 to consider the
transaction and certain other matters. The full impact of the sale to ING
on the Company's financial position and results of operations cannot be
determined at this time.
4) NEW ACCOUNTING STANDARD
On January 1, 2000, the Company adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified
Public Accountants. This statement provides guidance on how to account for
all insurance and reinsurance contracts that do not transfer insurance
risk, except for long-duration life and health insurance contracts. The
adoption of this standard had no impact on the Company's financial position
or results of operations.
5) FUTURE ACCOUNTING STANDARD
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities which
replaces FAS No. 125, Accounting for Transfers and Services of Financial
Assets and Extinguishments of Liabilities. This standard revises the
methods for accounting for securitizations and other transfers of financial
assets and collateral as outlined in
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
5) FUTURE ACCOUNTING STANDARD (continued)
FAS No. 125, and requires certain additional disclosures. For transfers and
servicing of financial assets and extinguishments of liabilities, this
standard will be effective for the Company's June 30, 2001 financial
statements. However, for disclosures regarding securitizations and
collateral, as well as recognition and reclassification of collateral, this
standard will be effective for the Company's December 31, 2000 financial
statements. The Company is currently evaluating the impact of the adoption
of this standard, however it does not expect the adoption of this standard
to have a material effect on its financial position or results of
operations.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, further guidance related
to accounting for derivative instruments and hedging activities was
provided when the FASB issued FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133. This standard, as amended, requires companies to
record all derivatives on the balance sheet as either assets or liabilities
and measure those instruments at fair value. The manner in which companies
are to record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, this standard is effective for the Company's financial
statements beginning January 1, 2001, with early adoption permitted. The
impact of FAS No. 133, as amended, on the Company's financial statements
will vary based on certain factors including future interpretive guidance
from the FASB, the extent of the Company's hedging activities, the types of
hedging instruments used and the effectiveness of such instruments. The
Company is evaluating the impact of the adoption of this standard, as
amended, and currently does not believe that it will have a material effect
on the Company's financial position or results of operations.
6) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) related to changes
in unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders) were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
(Millions) 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $ 31.7 $ (120.4)
Less: reclassification adjustments for accretion of net
investment discounts and gains included in net income (2) 1.4 9.9
-------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 30.3 $ (130.3)
===================================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$48.7 million and $(185.3) million for the nine months ended September 30,
2000 and September 30, 1999, respectively.
(2) Pretax reclassification adjustments for accretion of net investment
discounts and gains included in net income for the period were $2.1 million
and $15.2 million for the nine months ended September 30, 2000 and
September 30, 1999, respectively.
9
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
7) SEGMENT INFORMATION
Summarized financial information for the Company's principal operations for
the three months ended September 30, was as follows:
<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 $ 182.4 $ 36.4 $ -- $ (13.1) $ 205.7
Net investment income 230.0 0.9 -- 1.0 231.9
-----------------------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital losses $ 412.4 $ 37.3 $ -- $ (12.1) $ 437.6
=======================================================================================================================
Operating earnings (2) $ 55.0 $ 9.2 $ -- $ (2.2) $ 62.0
Net realized capital losses, net of tax (7.3) -- -- -- (7.3)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 47.7 9.2 -- (2.2) 54.7
Discontinued operations, net of tax:
Amortization of deferred gain on sale -- -- 1.5 -- 1.5
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 47.7 $ 9.2 $ 1.5 $ (2.2) $ 56.2
=======================================================================================================================
1999
Revenues from external customers $ 144.1 $ 29.8 $ -- $ (11.0) $ 162.9
Net investment income 229.3 0.4 -- 0.9 230.6
-----------------------------------------------------------------------------------------------------------------------
Total revenue excluding net realized
capital losses $ 373.4 $ 30.2 $ -- $ (10.1) $ 393.5
=======================================================================================================================
Operating earnings (2) $ 47.9 $ 7.5 $ -- $ (4.3) $ 51.1
Net realized capital losses , net of tax (7.2) -- -- (7.2)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 40.7 7.5 -- (4.3) 43.9
Discontinued operations, net of tax:
Amortization of deferred gain on sale -- -- 1.4 -- 1.4
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 40.7 $ 7.5 $ 1.4 $ (4.3) $ 45.3
=======================================================================================================================
</TABLE>
(1) Financial Products include: deferred and immediate annuity contracts;
mutual funds; distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment
Management Services include the following services: investment advisory
services to affiliated and unaffiliated institutional and retail
clients; underwriting; distribution for Company mutual funds and an
affiliate's separate accounts; and trustee, administrative and other
services to retirement plans. Discontinued Operations include life
insurance products. Other includes consolidating adjustments and Year
2000 costs of $2.6 million in 1999.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses. While operating earnings is the
measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
10
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
7) SEGMENT INFORMATION (continued)
Summarized financial information for the Company's principal operations for
the nine months ended September 30, was as follows:
<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 $ 519.6 $ 104.2 $ -- $ (38.2) $ 585.6
Net investment income 676.4 2.1 -- 3.0 681.5
-----------------------------------------------------------------------------------------------------------------
Total revenue excluding net realized
capital (losses) gains $ 1,196.0 $ 106.3 $ -- $ (35.2) $ 1,267.1
=================================================================================================================
Operating earnings (2) $ 158.1 $ 25.7 $ -- $ (5.8) $ 178.0
Net realized capital (losses)
gains, net of tax (15.1) 0.1 -- -- (15.0)
-----------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 143.0 25.8 -- (5.8) 163.0
Discontinued operations, net of tax:
Amortization of deferred gain on sale -- -- 4.7 -- 4.7
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 143.0 $ 25.8 $ 4.7 $ (5.8) $ 167.7
=================================================================================================================
1999
Revenues from external customers $ 399.1 $ 86.4 $ -- $ (33.3) $ 452.2
Net investment income 665.2 1.0 -- 2.6 668.8
-----------------------------------------------------------------------------------------------------------------
Total revenue excluding net realized
capital losses $ 1,064.3 $ 87.4 $ -- $ (30.7) $ 1,121.0
=================================================================================================================
Operating earnings (2) $ 142.6 $ 21.1 $ -- $ (18.6) $ 145.1
Net realized capital losses , net of tax (3.5) -- -- -- (3.5)
-----------------------------------------------------------------------------------------------------------------
Income from continuing operations 139.1 21.1 -- (18.6) 141.6
Discontinued operations, net of tax:
Amortization of deferred gain on sale -- -- 4.1 -- 4.1
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 139.1 $ 21.1 $ 4.1 $ (18.6) $ 145.7
=================================================================================================================
</TABLE>
(1) Financial Products include: deferred and immediate annuity contracts;
mutual funds; distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment
Management Services include the following services: investment advisory
services to affiliated and unaffiliated institutional and retail
clients; underwriting; distribution for Company mutual funds and an
affiliate's separate accounts; and trustee, administrative and other
services to retirement plans. Discontinued Operations include life
insurance products. Other includes consolidating adjustments and Year
2000 costs of $13.0 million in 1999.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses. While operating earnings is the
measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
11
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
8) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments between the time that the
Company enters into the commitments and the specified future date on which
the Company must purchase or sell the securities, as the case may be. As of
September 30, 2000, there were no such off-balance sheet commitments.
LITIGATION
In recent years, several life insurance and annuity companies have been
named as defendants in class action lawsuits relating to life insurance and
annuity pricing and sales practices. The Company has been a defendant in
two such lawsuits.
A purported class action complaint was filed in the Circuit Court of
Lauderdale County, Alabama on March 28, 2000 by Loretta Shaner against
ALIAC (the "Shaner Complaint"). This case was removed to the United States
District Court for the Northern District of Alabama. The Shaner Complaint
sought unspecified compensatory damages from ALIAC and unnamed affiliates
of ALIAC. The Shaner Complaint claimed that ALIAC's sale of deferred
annuity products for use as investments in tax-deferred contributory
retirement plans (e.g., IRAs) was improper. On August 31, 2000, the Court
entered an order and judgement dismissing the case. The case has been
refiled as an individual action in the Alabama state court.
A purported class action complaint was filed in the United States District
Court for the Middle District of Florida on June 30, 2000, by Helen Reese,
Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese
Complaint"). The Reese Complaint seeks compensatory and punitive damages
and injunctive relief from ALIAC. The Reese Complaint claims that ALIAC
engaged in unlawful sales practices in marketing life insurance policies.
ALIAC has moved to dismiss the Reese Complaint for failure to state a claim
upon which relief can be granted. This litigation is in the preliminary
stages. The Company intends to defend the action vigorously.
12
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
8) COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The Company is also involved in numerous other lawsuits arising, for the
most part, in the ordinary course of its business operations. While the
outcome of the litigation against the Company referred to in this paragraph
cannot be determined at this time, after consideration of the defenses
available to the Company, applicable insurance coverage and any related
reserves established, the litigation referred to in this paragraph is not
expected to result in liability for amounts material to the financial
condition of the Company, although it may adversely affect results of
operations in future periods.
9) DIVIDENDS
During 2000, the Company paid $10.1 million in dividends to HOLDCO, which
did not require approval from the Insurance Commissioner of the State of
Connecticut.
13
<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 September 30, 2000,
and the related condensed consolidated statements of income for the three-month
and nine-month periods ended September 30, 2000 and 1999 and the related
condensed consolidated statements of changes in shareholder's equity and cash
flows for the nine-month periods ended September 30, 2000 and 1999. These
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Life Insurance and Annuity
Company and Subsidiaries as of December 31, 1999, and the related consolidated
statements of income, changes in shareholder's equity and cash flows for the
year then ended (not presented herein); and in our report dated February 7,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
Hartford, Connecticut
October 31, 2000
14
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
The following analysis presents a review of the Company for the three month and
nine month periods ended September 30, 2000 and 1999. This review should be read
in conjunction with the consolidated financial statements and other data
presented herein as well as the "Management's Analysis of the Results of
Operations" section contained in ALIAC's 1999 Annual Report on Form 10-K.
OVERVIEW
Recent Developments
On July 20, 2000, Aetna, the ultimate parent of the Company, announced that it
reached a definitive agreement to sell its Aetna Financial Services and Aetna
International businesses to ING in a transaction valued at approximately $7.7
billion. The Company is part of the Aetna Financial Services business and will
be included in the sale to ING. Under the terms of the agreement, in two
effectively simultaneous steps: (1) Aetna will spin off to its shareholders the
shares of a standalone health company that will be comprised primarily of its
Aetna U.S. Healthcare and Large Case Pensions businesses; and (2) Aetna, which
then will be comprised of Aetna Financial Services and Aetna International, will
merge with a newly formed subsidiary of ING.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well as
other closing conditions, by year-end 2000. An Aetna shareholders' meeting has
been scheduled for November 30, 2000 to consider the transaction and certain
other matters. The full impact of the sale to ING on the Company's financial
position and results of operations cannot be predicted at this time.
Consolidated Results
Consolidated results include results from continuing operations and discontinued
operations. Results of continuing operations are comprised of the results of the
Financial Products and Investment Management Services segments plus certain
items not directly allocable to the business segments. Refer to Note 7 of
Condensed Notes to Consolidated Financial Statements.
Results of discontinued operations for the three and nine months ended September
30, 2000 and 1999 consist of the recognized portion of the deferred gain
relating to the sale of the domestic individual life insurance business that
occurred on October 1, 1998. Refer to "Discontinued Operations" in this report
and to Note 3 of Notes to Consolidated Financial Statements and "Overview" in
ALIAC's 1999 Annual Report on Form 10-K.
15
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (continued)
On June 30, 2000, HOLDCO contributed AISI to the Company. AISI is registered
with the Securities Exchange Commission as a broker/dealer and is a member of
the National Association of Securities Dealers, Inc. It is also registered with
the appropriate state securities authorities as a broker/dealer. The principal
operation of AISI is the sale of fixed and variable annuities and mutual funds
through its registered representatives. The contribution of AISI to the Company
was accounted for in a manner similar to that of a pooling-of-interests and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of HOLDCO. AISI's financial
results are included in the Financial Products segment.
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The contribution
of IA Holdco to the Company was accounted for in a manner similar to that of a
pooling-of-interests and, accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results of
IA Holdco.
Continuing Operations
Income from continuing operations increased $11 million for the three months
ended September 30, 2000 compared to the corresponding period in 1999. Income
from continuing operations includes Year 2000 costs of $3 million in 1999.
Excluding net realized capital losses of $7 million in both 2000 and 1999,
earnings from continuing operations for the three months ended September 30,
2000 increased $11 million, or 21%, compared to the same period in 1999.
Income from continuing operations increased $21 million for the nine months
ended September 30, 2000 compared to the corresponding period in 1999. Income
from continuing operations includes Year 2000 costs of $13 million in 1999.
Excluding net realized capital losses of $15 million in 2000 and $4 million in
1999, earnings from continuing operations for the nine months ended September
30, 2000 increased $33 million, or 23%, compared to the same period in 1999.
The increase in earnings for the three and nine month periods ended September
30, 2000 primarily reflects an increase in charges assessed against
policyholders and other income resulting from higher levels of assets under
management and administration partially offset by higher salaries and related
benefits.
Substantially all of the charges assessed against policyholders and other income
reported for continuing operations are derived from assets under management and
administration. Compared to September 30, 1999, assets under management and
administration at September 30, 2000 increased 25% primarily due to appreciation
in the stock market, new investment advisory and administrative contracts
(including approximately $3 billion of plan assets from a new large case, which
closed in the second quarter of 2000) and additional net deposits (i.e.,
deposits less surrenders).
16
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW (continued)
Assets under management and administration for continuing operations are shown
in the table below. Certain assets under management are reported for both the
Financial Products and the Investment Management Services segments, because each
segment reports a different component of the revenue generated from this
particular group of assets. This group of assets must be deducted from the
aggregate segment assets to determine the consolidated assets under management
of the Company.
<TABLE>
<CAPTION>
(Millions) September 30, 2000 September 30, 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets under management:
Financial Products $ 56,558.4 $ 48,508.7
Investment Management Services (1) 57,354.2 51,421.9
Consolidating adjustment (2) (36,999.5) (35,114.5)
-----------------------------------------------------------------------------------------------------
Total assets under management (3) (4) $ 76,913.1 $ 64,816.1
-----------------------------------------------------------------------------------------------------
Assets under administration: (5)
Financial Products 8,654.6 3,581.8
-----------------------------------------------------------------------------------------------------
Assets under management and administration $ 85,567.7 $ 68,397.9
=====================================================================================================
</TABLE>
(1) Includes $6,871.2 million and $7,360.0 million of assets managed for Aetna
Life Insurance Company, an affiliate of the Company, as of September 30,
2000 and 1999, respectively. (Aetna Inc. reports these assets in its Large
Case Pensions segment.)
(2) Assets under management reported in both the Financial Products and
Investment Management Services segments must be deducted from the aggregate
segment assets to determine the consolidated assets under management of the
Company.
(3) Includes $15,439.3 million and $10,138.7 million at September 30, 2000 and
1999, respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(4) Excludes net unrealized capital losses of $117.2 million at September 30,
2000 and $132.1 million at September 30, 1999 on assets invested through
annuities with fixed options.
(5) Represents assets for which the Company provides administrative services
only.
For continuing operations, salaries and related benefits in the three and nine
month periods ended September 30, 2000 increased 49% and 34%, respectively, over
the corresponding periods in 1999. These increases primarily reflect higher
staffing levels, which are attributable to business growth and the
implementation of strategic business initiatives, particularly improving system
infrastructures and adding new distribution capabilities. Compared to the same
periods in 1999, other operating expenses for the three and nine month periods
ended September 30, 2000 increased 11% and 7%, respectively, primarily due to
business growth. For the three and nine month periods ended September 30, 1999,
other operating expenses include Year 2000 costs, before tax, of approximately
$4 million and $20 million, respectively. Year 2000 costs for 1999 are not
allocated to the Company's segments.
Outlook
As discussed above, Aetna has agreed to sell its Aetna Financial Services
business, which includes the Company, to ING. Refer to "Overview-Outlook" and
"Forward-Looking Information/Risk Factors" in ALIAC's 1999 Annual Report on Form
10-K and "Forward-Looking Information/Risk Factors" in ALIAC's report on Form
10-Q for the quarter ending June 30, 2000.
17
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL PRODUCTS
OPERATING SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
(Millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums (1) $ 41.8 $ 44.2 $ 117.1 $ 86.6
Charges assessed against policyholders 119.9 98.6 351.0 283.1
Net investment income 230.0 229.3 676.4 665.2
Net realized capital losses (11.2) (11.1) (23.3) (5.4)
Other income 20.7 1.3 51.5 29.4
-------------------------------------------------------------------------------------------------------------------
Total revenue 401.2 362.3 1,172.7 1,058.9
-------------------------------------------------------------------------------------------------------------------
Current and future benefits 199.8 201.8 598.3 564.0
Operating expenses:
Salaries and related benefits 43.4 29.1 120.7 90.2
Other 57.7 47.7 159.0 129.5
Amortization of deferred policy acquisition costs 33.7 23.3 87.5 69.1
-------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 334.6 301.9 965.5 852.8
-------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 66.6 60.4 207.2 206.1
Income taxes 18.9 19.7 64.2 67.0
-------------------------------------------------------------------------------------------------------------------
Net income (2) $ 47.7 $ 40.7 $ 143.0 $ 139.1
====================================================================================================================
Net realized capital losses, net of tax (included
above) $ (7.3) $ (7.2) $ (15.1) $ (3.5)
====================================================================================================================
Deposits (not included in premiums above)
Annuities - fixed options $ 337.1 $ 524.2 $ 1,151.7 $ 1,518.5
Annuities - variable options 1,095.4 1,330.3 3,577.6 3,875.4
-------------------------------------------------------------------------------------------------------------------
Total deposits $ 1,432.5 $1,854.5 $ 4,729.3 $ 5,393.9
====================================================================================================================
Assets under management
Annuities - fixed options (3) $12,396.4 $12,557.2
Annuities - variable options (4) 36,649.2 29,583.0
-------------------------------------------------------------------------------------------------------------------
Total annuities 49,045.6 42,140.2
Plan sponsored and other 7,512.8 6,368.5
-------------------------------------------------------------------------------------------------------------------
Total assets under management (5) 56,558.4 48,508.7
Assets under administration (6) 8,654.6 3,581.8
-------------------------------------------------------------------------------------------------------------------
Total assets under management and administration $65,213.0 $52,090.5
====================================================================================================================
</TABLE>
(1) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $29.3 million for the
three months ended September 30, 2000, $15.9 million for the three months
ended September 30, 1999, $84.5 million for the nine months ended September
30, 2000 and $53.9 million for the nine months ended September 30, 1999.
(2) Year 2000 costs for 1999 are not allocated to segment operating expenses
and, therefore, are excluded in the determination of segment net income.
(3) Excludes net unrealized capital losses of $117.2 million at September 30,
2000 and $132.1 million at September 30, 1999.
(4) Includes $15,439.3 million and $10,138.7 million at September 30, 2000 and
1999, respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) Includes $36,999.5 million and $35,114.5 million at September 30, 2000 and
1999, respectively, of assets under management that are also reported in
the Investment Management Services segment (Refer to "Overview-Continuing
Operations").
(6) Represents assets for which the Company provides administrative services
only.
Financial Products' net income for the three months ended September 30, 2000
increased $7 million compared to the corresponding period in 1999. Excluding net
realized capital losses, results for the three months ended September 30, 2000
increased $7 million, or 15%, compared to the corresponding period in 1999.
18
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL PRODUCTS (continued)
Net income for the nine months ended September 30, 2000 increased $4 million
compared to the same period in 1999. Excluding net realized capital losses,
results for the nine months ended September 30, 2000 increased $16 million, or
11%, compared to the first nine months of 1999.
This increase in earnings for both the three and nine month periods ended
September 30, 2000 primarily reflects an increase in charges assessed against
policyholders and other income offset by an increase in salaries and related
benefits.
Substantially all of the charges assessed against policyholders and other income
reported for the segment are calculated based on assets under management and
administration. Compared to September 30, 1999, assets under management and
administration at September 30, 2000 increased 25% primarily due to appreciation
in the stock market, new investment advisory and administration contracts
(including approximately $3.0 billion of plan assets from a new large case,
which closed in the second quarter of 2000) and additional net deposits (i.e.,
deposits less surrenders). Deposits for the three and nine months ended
September 30, 2000 decreased 23% and 12%, respectively, compared to the
corresponding periods in 1999. The decrease for the three months ended September
30, 2000 is primarily due to the inclusion of plan assets from a large new case
and higher individual annuity sales resulting from a new mutual fund offering in
the third quarter of 1999. In addition to the factors contributing to the three
month decrease, the decrease for the nine months ended September 30, 2000 is
attributable to the inclusion of plan assets from a large new case in the first
quarter of 1999.
Salaries and related benefits in the three and nine month periods ended
September 30, 2000 increased 49% and 34%, respectively, over the corresponding
periods in 1999. These increases primarily reflect higher staffing levels, which
are attributable to business growth and the implementation of strategic business
initiatives, particularly improving system infrastructures and adding new
distribution capabilities.
Compared to the same periods in 1999, other operating expenses for the three and
nine months ended September 30, 2000 increased 21% and 23%, respectively,
primarily because of business growth. These increases for other operating
expenses are higher than the corresponding changes for other operating expenses
discussed in "Overview/Continuing Operations" because Year 2000 costs for 1999
are not allocated to the Financial Products segment. Despite these increases,
annuity operating expenses as a percentage of assets under management decreased
as of September 30, 2000 compared to September 30, 1999.
Of the $12.4 billion and $12.6 billion of fixed annuity assets under management
at September 30, 2000 and 1999, respectively, 25% were fully guaranteed and 75%
were experience-rated in each period. The average annualized earned rate on
investments supporting fully guaranteed investment contracts was 7.5% and 7.3%
for the nine months ended September 30, 2000 and 1999, respectively, and the
average annualized earned rate on investments supporting experience-rated
investment contracts was 7.7% and 7.6% for the nine months ended September 30,
2000 and 1999, respectively. The average annualized credited rate on fully
guaranteed investment contracts was 6.2% and 6.3% for the nine months ended
September 30, 2000 and 1999, respectively, and the average annualized credited
rate on experience-rated investment contracts was 5.6% for both periods. The
resulting annualized interest margins on fully guaranteed investment contracts
were 1.3% and 1.0%, and on experience-rated investment contracts were 2.1% and
2.0% for the nine months ended September 30, 2000 and 1999, respectively.
19
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
INVESTMENT MANAGEMENT SERVICES
Operating Summary
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------- --------------- --------------- --------------
(Millions) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 0.9 $ 0.4 $ 2.1 $ 1.0
Net realized capital gains - - 0.2 -
Other income (1) 36.4 29.8 104.2 86.4
----------------------------------------------------------------------------------------------------------------------------
Total revenue 37.3 30.2 106.5 87.4
----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related benefits 8.9 5.9 23.3 17.5
Other 14.3 12.4 42.6 36.4
----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 23.2 18.3 65.9 53.9
----------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 14.1 11.9 40.6 33.5
Income taxes 4.9 4.4 14.8 12.4
----------------------------------------------------------------------------------------------------------------------------
Net income (2) $ 9.2 $ 7.5 $ 25.8 $ 21.1
============================================================================================================================
Net realized capital gains, net of tax (included above) $ - $ - $ 0.1 $ -
============================================================================================================================
Assets under management:
Retail mutual funds $ 1,607.5 $ 1,076.4
Plan sponsored (3) 16,724.0 13,174.5
Collateralized bond obligations and other 2,023.2 2,056.5
----------------------------------------------------------------------------------------------------------------------------
Subtotal $20,354.7 $16,307.4
----------------------------------------------------------------------------------------------------------------------------
Invested through products of the Financial Products
segment (4)
Variable annuity mutual funds $17,450.8 $16,509.2
Fixed annuities (5) 12,396.4 12,557.2
Plan sponsored and other 7,152.3 6,048.1
----------------------------------------------------------------------------------------------------------------------------
Subtotal $36,999.5 $35,114.5
----------------------------------------------------------------------------------------------------------------------------
Total assets under management $57,354.2 $51,421.9
============================================================================================================================
</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 $6,871.2 million and $7,360.0 million of assets managed for Aetna
Life Insurance Company, an affiliate of the Company, as of September 30,
2000 and 1999, respectively. (Aetna Inc. reports these assets in its Large
Case Pensions segment.)
(4) The Investment Management Services segment earns investment advisory fees
on these assets, which are also reported in the Financial Products segment.
(5) Excludes net unrealized capital losses of $117.2 million at September 30,
2000 and $132.1 million at September 30, 1999.
For the Investment Management Services segment, net income excluding realized
capital gains in 2000, increased $2 million, or 23%, for the three months ended
September 30, 2000 and $5 million, or 22%, for the nine months ended September
30, 2000 compared to the same periods in 1999. The increases in earnings for the
three and nine month periods ended September 30, 2000 primarily reflects an
increase in investment advisory fees partially offset by higher operating
expenses.
Investment advisory fees are calculated based on assets under management. The
increase in advisory fee income is due to higher levels of assets under
management. At September 30, 2000, assets under management increased 12% over
those reported as of September 30, 1999. This increase was primarily due to
appreciation in the stock market and, to a lessor extent, additional net sales.
The increase in operating expenses for the three and nine months ended September
30, 2000, compared to the corresponding periods in 1999, reflects business
growth.
20
<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 1, 1998. The after-tax gain recognized during the three months ended
September 30, 2000 and 1999 was $1.5 million and $1.4 million, respectively. The
after-tax gain recognized during the nine months ended September 30, 2000 and
1999 was $4.7 million and $4.1 million, respectively.
Individual life insurance coverage in force was approximately $40 billion at
September 30, 2000. The entire amount of this coverage in force has been ceded
to Lincoln under the indemnity reinsurance arrangement entered into as part of
the sale.
For more details about the transaction and the indemnity reinsurance
arrangement, refer to Note 3 of Notes to Consolidated Financial Statements in
the Company's 1999 Annual Report on Form 10-K.
GENERAL ACCOUNT INVESTMENTS
The Company's invested assets were comprised of the following:
<TABLE>
<CAPTION>
(Millions) September 30, 2000 December 31, 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities, available for sale, at fair value $ 11,075.8 $ 11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock 101.0 130.9
Investment in affiliated mutual funds 18.7 64.1
Common stock 13.0 11.5
Short-term investments 81.5 74.2
Mortgage loans 4.6 6.7
Policy loans 338.6 314.0
Other investments 13.5 13.2
-------------------------------------------------------------------------------------------------------------------
Total Investments $ 11,646.7 $ 12,024.7
===================================================================================================================
</TABLE>
Debt Securities
At September 30, 2000 and December 31, 1999, the Company's carrying value of
investments in debt securities represented 95% of the total general account
invested assets. At September 30, 2000 and December 31, 1999, $8.6 billion, or
78% of total debt securities, and $8.9 billion, or 78% of total debt securities,
respectively, supported experience-rated contracts.
Debt securities reflected net unrealized capital losses of approximately $117.2
million and approximately $247.8 million at September 30, 2000 and December 31,
1999, respectively. Of the total net unrealized capital losses at September 30,
2000, a net unrealized capital loss of $91.5 million relates to assets
supporting experience-rated contracts.
21
<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 September 30, 2000 and December 31, 1999 was AA-.
The percentage of total debt securities by quality rating category is as
follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
--------------------------------------------------------------------------------
<S> <C> <C>
AAA 51.8% 48.4%
AA 9.8 9.5
A 22.4 24.5
BBB 11.2 11.1
BB 1.8 2.5
B and Below 3.0 4.0
--------------------------------------------------------------------------------
Total 100.0% 100.0%
================================================================================
</TABLE>
The percentage of total debt securities by market sector is as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Corporate Securities 44.4% 40.6%
Residential Mortgage-Backed Securities 26.5 23.9
Commercial/Multi-family Mortgage-Backed Securities 9.7 8.6
U.S. Treasuries/Agencies 7.9 9.4
Asset-Backed Securities 6.8 6.1
Foreign Securities (1) 4.7 11.4
-----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
=======================================================================================================================
</TABLE>
(1) Primarily U.S. dollar denominated
FORWARD-LOOKING INFORMATION/RISK FACTORS
The "Forward-Looking Information/Risk Factors" sections of ALIAC's 1999 Annual
Report on Form 10-K and reports on Form 10-Q for the quarterly periods ended
March 31, 2000 and June 30, 2000 contain discussions of important risk factors
related to the Company's businesses.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In recent years, several life insurance and annuity companies have been named as
defendants in class action lawsuits relating to life insurance and annuity
pricing and sales practices. The Company has been a defendant in two such
lawsuits.
A purported class action complaint was filed in the Circuit Court of Lauderdale
County, Alabama on March 28, 2000 by Loretta Shaner against ALIAC (the "Shaner
Complaint"). This case was removed to the United States District Court for the
Northern District of Alabama. The Shaner Complaint sought unspecified
compensatory damages from ALIAC and unnamed affiliates of ALIAC. The Shaner
Complaint claimed that ALIAC's sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (e.g., IRAs) was
improper. On August 31, 2000, the Court entered an order and judgement
dismissing the case. The case has been refiled as an individual action in the
Alabama state court.
A purported class action complaint was filed in the United States District Court
for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard
Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint").
The Reese Complaint seeks compensatory and punitive damages and injunctive
relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful
sales practices in marketing life insurance policies. ALIAC has moved to dismiss
the Reese Complaint for failure to state a claim upon which relief can be
granted. This litigation is in the preliminary stages. The Company intends to
defend the action vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations. While the outcome of
the litigation against the Company referred to in this paragraph cannot be
determined at this time, after consideration of the defenses available to the
Company, applicable insurance coverage and any related reserves established, the
litigation referred to in this paragraph is not expected to result in liability
for amounts material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
23
<PAGE>
ITEM 5. OTHER INFORMATION
RATINGS
The Company's financial strength ratings at August 9, 2000 and November 8, 2000
are as follows:
<TABLE>
<CAPTION>
Rating Agencies
------------------------------------------------------------------------------------
Moody's Investors Standard &
A.M. Best Fitch Service Poor's
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
August 9, 2000 A AA Aa3 AA-
November 8, 2000 (1) A AA Aa3 AA-
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As a result of Aetna's announcement that it had reached a definitive
agreement to sell its Aetna Financial Services and Aetna International
businesses to ING, A. M. Best has placed the Company's rating under review
with positive implications; Fitch has placed the Company's rating on watch,
positive; Moody's Investors Service has placed the Company's rating on
review, upgrade; and Standard & Poor's has placed the Company's rating on
CreditWatch positive.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None
24
<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)
NOVEMBER 9, 2000 By /s/ Deborah Koltenuk
--------------------- --------------------------------
(Date) Deborah Koltenuk
Vice President, Corporate Controller and
Assistant Treasurer
(Chief Accounting Officer)
25
