<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 Commission file number
September 30, 2000 33-81010
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Aetna Insurance Company of America
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 06-1286272
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5100 West Lemon Street, Suite 213, Tampa, Florida 33609
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (860) 273-0123
-----------------------------
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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate 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 Capital Stock, par value $100 25,500
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 INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements:
Statements of Income .................................. 3
Balance Sheets ........................................ 4
Statements of Changes in Shareholder's Equity ......... 5
Statements of Cash Flows .............................. 6
Condensed Notes to Financial Statements ............... 7
Independent Auditors' Review Report ...................... 11
Item 2. Management's Analysis of the Results of Operations ....... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 16
Item 5. Other Information ........................................ 16
Item 6. Exhibits and Reports on Form 8-K ......................... 16
Signature .......................................................... 17
2
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -----------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Charges assessed against policyholders $ 4.7 $ 4.0 $ 13.6 $ 11.4
Net investment income 3.0 2.8 8.3 8.7
Net realized capital gains (losses) 0.1 (0.4) (0.8) (0.2)
Other income 0.3 0.4 1.1 1.0
-------------- -------------- -------------- ----------------
Total revenue 8.1 6.8 22.2 20.9
-------------- -------------- -------------- ----------------
Benefits and expenses:
Current and future benefits 1.8 2.0 5.7 6.0
Operating expenses:
Salaries and related benefits 0.3 0.7 0.8 2.1
Other 0.9 1.0 3.0 3.4
Amortization of deferred policy acquisition costs 1.5 1.2 4.3 3.3
-------------- -------------- -------------- ----------------
Total benefits and expenses 4.5 4.9 13.8 14.8
-------------- -------------- -------------- ----------------
Income before income taxes 3.6 1.9 8.4 6.1
Income taxes 0.8 0.6 2.4 2.0
-------------- -------------- -------------- ----------------
Net income $ 2.8 $ 1.3 $ 6.0 $ 4.1
============== ============== ============== ================
</TABLE>
See Condensed Notes to Financial Statements.
3
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
---------------- ---------------
<S> <C> <C>
Investments:
Debt securities, available for sale, at fair value
(amortized cost: $145.8 and $132.8) $ 143.5 $ 128.3
Equity securities, at fair value
Nonredeemable preferred stock (amortized cost: $1.0 and $1.0) 1.0 0.9
Short-term investments 2.7 -
Cash and cash equivalents 19.3 22.9
Short-term investments under securities loan agreement 30.3 -
Deferred policy acquisition costs 56.2 58.8
Accrued investment income 2.1 2.0
Premiums due and other receivables 3.9 9.0
Other assets 0.8 0.6
Separate Accounts assets 1,117.5 1,194.6
---------------- ---------------
Total assets $ 1,377.3 $ 1,417.1
================ ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policyholders' funds left with the Company 116.7 138.8
Payables under securities loan agreement 30.3 -
Other liabilities 21.9 6.5
Due to parent and affiliates 4.5 0.5
Income taxes:
Current 0.7 0.7
Deferred 5.3 2.6
Separate Accounts liabilities 1,117.5 1,194.6
---------------- ---------------
Total liabilities 1,296.9 1,343.7
---------------- ---------------
Shareholder's equity:
Common capital stock, par value $100 (35,000 shares
authorized, 25,500 issued and outstanding) 2.5 2.5
Paid-in capital 62.5 62.5
Accumulated other comprehensive loss (0.6) (1.6)
Retained earnings 16.0 10.0
---------------- ---------------
Total shareholder's equity 80.4 73.4
---------------- ---------------
Total liabilities and shareholder's equity $ 1,377.3 $ 1,417.1
================ ===============
</TABLE>
See Condensed Notes to Financial Statements.
4
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
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 $ 73.4 $ 70.8
Comprehensive income
Net income 6.0 4.1
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
($1.6 million and ($3.7) million, pretax) 1.0 (2.4)
--------------- ---------------
Total comprehensive income (loss) 7.0 1.7
--------------- ---------------
Common stock issued 2.4 -
Dividends paid to parent (2.4) -
--------------- ---------------
Shareholder's equity, end of period $ 80.4 $ 72.5
=============== ===============
</TABLE>
See Condensed Notes to Financial Statements.
5
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 6.0 $ 4.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized capital losses 0.8 0.2
Changes in assets and liabilities:
(Increase) decrease in accrued investment income (0.1) 0.2
Decrease in deferred policy acquisition costs 2.6 -
Net change in amounts due to/from parent and affiliates 4.0 3.1
Net decrease in other assets and liabilities 1.6 5.7
Increase in income taxes 2.1 3.0
----------- -----------
Net cash provided by operating activities 17.0 16.3
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 101.5 17.1
Short-term investments 0.1 2.0
Investment maturities and repayments of:
Debt securites available for sale 5.9 16.2
Cost of investment purchases in:
Debt securities available for sale (105.7) (36.6)
Short-term investments (2.8) -
----------- -----------
Net cash used for investing activities (1.0) (1.3)
----------- -----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 6.2 9.7
Withdrawal of investment contracts (30.2) (13.1)
Proceeds from issuance of common stock 2.4 -
Dividends paid to parent (2.4) -
Other, net 4.4 5.7
----------- -----------
Net cash (used for) provided by financing activities (19.6) 2.3
----------- -----------
Net (decrease) increase in cash and cash equivalents (3.6) 17.3
Cash and cash equivalents, beginning of period 22.9 16.5
Cash and cash equivalents, end of period $ 19.3 $ 33.8
=========== ===========
Supplemental cash flow information:
Income taxes paid (received), net $ 0.2 $ (0.9)
=========== ===========
</TABLE>
See Condensed Notes to Financial Statements.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Condensed Notes to Financial Statements
1) BASIS OF PRESENTATION
Aetna Insurance Company of America (the "Company") is a stock life insurance
company organized in 1990 under the insurance laws of the state of
Connecticut. Effective January 5, 2000, the Company changed its state of
domicile from Connecticut to Florida. The Company is a wholly owned
subsidiary of Aetna Life Insurance and Annuity Company ("ALIAC"). 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 one operating
segment and all revenue reported by the Company comes from external
customers.
The financial statements have been prepared in accordance with generally
accepted accounting principles and are unaudited. Certain reclassifications
have been made to the 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 financial statements should be read in
conjunction with the financial statements and related notes as presented in
the Company'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
AGREEMENT TO SELL AETNA FINANCIAL SERVICES AND AETNA INTERNATIONAL
On July 20, 2000, Aetna 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.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Condensed Notes to Financial Statements (continued)
2) RECENT DEVELOPMENTS (CONTINUED)
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.
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 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 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.
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Condensed Notes to Financial Statements (continued)
4) FUTURE ACCOUNTING STANDARD (continued)
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, these standards are 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 and currently does not believe that this standard will have a
material effect on the Company's financial position or results of
operations.
5) 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) $ 0.5 $ (2.5)
Less: reclassification adjustments for losses and other items
included in net income (2) (0.5) (0.1)
----------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 1.0 $ (2.4)
================================================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$0.8 million and $(3.9) million for 2000 and 1999, respectively.
(2) Pretax reclassification adjustments for gains and other items included
in net income were $(0.8) million and $(0.2) million for 2000 and 1999,
respectively.
9
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Condensed Notes to Financial Statements (continued)
6) SHAREHOLDER'S EQUITY
At the time of the re-domestication of the Company to Florida, which
occurred during the first quarter of 2000, the par value of the Company's
common stock was changed from $2,000 per share to $100 per share to comply
with Florida law. This revaluation caused the Company's common capital stock
to decrease by $2.4 million and its paid-in capital to increase by the same
amount and had no net effect on total shareholder's equity.
On September 7, 2000, in order to comply with the requirements of certain
other states where the Company is licensed, the Company made two cash
transactions that had no net effect on total shareholder's equity. First,
the Company made a dividend in the amount of $2.4 million to ALIAC that was
approved by the Florida Department of Insurance. This was in the form of a
return of capital and reduced paid-in capital. Then, the Company amended its
articles of incorporation to authorize 35,000 shares and issue 24,225
additional shares of capital stock at $100 par value to ALIAC, which
purchased the additional shares at par value . Upon completion of the latter
transaction, the Company's common capital stock was restored to $2.5
million.
7) 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. A purported class action complaint (the
"Shaner Complaint") was filed in the Circuit Court of Lauderdale County,
Alabama on March 28, 2000 by Loretta Shaner against ALIAC, the parent of the
Company, which serves as principal underwriter for the securities sold by
the Company. 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.
The Company is not currently involved in any other material litigation.
10
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Aetna Insurance Company of America:
We have reviewed the accompanying condensed balance sheet of Aetna Insurance
Company of America as of September 30, 2000, and the related condensed
statements of income for the three-month and nine-month periods ended September
30, 2000 and 1999 and the related condensed statements of changes in
shareholder's equity and cash flows for the nine-month periods ended September
30, 2000 and 1999. These condensed 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 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 balance sheet of Aetna Insurance Company of America as of
December 31, 1999, and the related statements of income, changes in
shareholder's equity and cash flows for the year then ended (not presented
herein); and in our report dated March 22, 2000, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of December 31, 1999, is fairly
presented, in all material respects, in relation to the balance sheet from which
it has been derived.
/s/ KPMG LLP
Hartford, Connecticut
October 31, 2000
11
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
The following analysis presents a review of the Company for the three months and
nine months ended September 30, 2000 and September 30, 1999. This review should
be read in conjunction with the financial statements and other data presented
herein as well as in the "Management's Analysis of the Results of Operations"
section of the Company'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.
12
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------
(Millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charges assessed against policyholders $ 4.7 $ 4.0 $ 13.6 $ 11.4
Net investment income 3.0 2.8 8.3 8.7
Net realized capital (losses) gains 0.1 (0.4) (0.8) (0.2)
Other income 0.3 0.4 1.1 1.0
---------------------------------------------------------------------------------------------------------------------
Total revenue 8.1 6.8 22.2 20.9
---------------------------------------------------------------------------------------------------------------------
Current and future benefits 1.8 2.0 5.7 6.0
Operating expenses:
Salaries and related benefits 0.3 0.7 0.8 2.1
Other 0.9 1.0 3.0 3.4
Amortization of deferred policy acquisition costs 1.5 1.2 4.3 3.3
---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 4.5 4.9 13.8 14.8
---------------------------------------------------------------------------------------------------------------------
Income before income taxes 3.6 1.9 8.4 6.1
Income taxes 0.8 0.6 2.4 2.0
---------------------------------------------------------------------------------------------------------------------
Net income $ 2.8 $ 1.3 $ 6.0 $ 4.1
====================================================================================================================
Net realized capital (losses) gains, net of tax
(included above) $ 0.1 $ (0.3) $ (0.5) $ (0.1)
====================================================================================================================
Deposits not included above:
Annuities - fixed options $ 0.7 $ 1.0 $ 2.3 $ 7.5
Annuities - variable options 2.1 3.2 7.9 18.2
---------------------------------------------------------------------------------------------------------------------
Total $ 2.8 $ 4.2 $ 10.2 $ 25.7
====================================================================================================================
Assets under management:
Annuities - fixed options (1)(2) $ 193.9 $ 226.5
Annuities - variable options (3) 1,041.5 942.4
---------------------------------------------------------------------------------------------------------------------
Total (4) $ 1,235.4 $ 1,168.9
====================================================================================================================
</TABLE>
(1) Excludes net unrealized capital losses of $2.3 million and $3.6 million at
September 30, 2000 and September 30, 1999, respectively.
(2) Includes $72.7 million and $80.3 million related to the assets supporting a
guaranteed interest option at September 30, 2000 and September 30, 1999,
respectively.
(3) Includes $802.9 million and $734.3 million at September 30, 2000 and
September 30, 1999, respectively, of assets invested through the Company's
products in unaffiliated mutual funds.
(4) Includes $310.2 million and $337.8 million of assets managed by Aeltus
Investment Management, Inc., an affiliate of the Company, at September 30,
2000 and September 30, 1999, respectively, and includes $122.3 million and
$96.7 million of assets managed by the Company's parent, ALIAC, at
September 30, 2000 and September 30, 1999, respectively.
The Company reported net income of $2.8 million and $1.3 million for the three
months ended September 30, 2000 and September 30, 1999, respectively. Excluding
net realized capital gains and losses, results for the three months ended
September 30, 2000 increased $1.1 million compared to the corresponding period
in 1999.
13
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
The Company reported net income of $6.0 million and $4.1 million for the nine
months ended September 30, 2000 and September 30, 1999, respectively. Excluding
net realized capital losses, results for the nine months ended September 30,
2000 increased $2.3 million compared to the corresponding period in 1999.
The increases in net income excluding net realized capital gains and losses for
the three and nine month periods ended September 30, 2000 are due primarily to
increased fee income from higher levels of assets under management and lower
operating expenses as a result of the Company's decision to not actively market
its annuity products to individuals. Refer to "Outlook".
As of the end of the third quarter of 2000, assets under management were 6%
higher than those at the end of the corresponding period in 1999 primarily due
to appreciation in the stock market. Net deposits (i.e., deposits less
surrenders) decreased for the three and nine month periods ended September 30,
2000 compared to the corresponding periods in 1999 primarily due to decreases in
deposits from new contracts resulting from the Company's decision to not
actively market its annuity products to individuals. Refer to "Outlook" below.
The decline in the effective tax rate for the three and nine month periods
ended September 30, 2000 is primarily related to the deduction allowed for
dividends received and a favorable prior period adjustment.
OUTLOOK
As of the end of the third quarter of 2000, the Company's strategy is to
increase assets under management and improve profitability by focusing on new
distribution opportunities, primarily in Florida. As part of this strategy,
effective January 5, 2000, the Company changed its state of domicile from
Connecticut to Florida. The Company has begun to focus its marketing efforts
principally on expanding its group annuity sales with the offering, through
dedicated agents, of contracts to public, tax exempt and private employers
sponsoring retirement plans. The Company also plans to explore alternative
methods of distribution, such as direct marketing.
Although the Company has offered annuities marketed to individuals, principally
non-qualified annuities and qualified individual retirement annuities, it is not
actively marketing these products. The Company plans, however, to continue to
make them available through dedicated agents, although some sales may be made
through brokering agents and certain banks that have selling agreements with the
Company.
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 $ 143.5 $ 128.3
Nonredeemable preferred stock, at fair value 1.0 0.9
-----------------------------------------------------------------------------------------------------------------
Total investments $ 144.5 $ 129.2
=================================================================================================================
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
GENERAL ACCOUNT INVESTMENTS (continued)
DEBT SECURITIES
At September 30, 2000 and December 31, 1999, debt securities equal to $130.7
million (91% of the total debt securities) and $116.4 million (91% of the total
debt securities), respectively, supported experience-rated contracts.
Debt securities reflected net unrealized capital losses of $2.3 million and $4.5
million, respectively at September 30, 2000 and at December 31, 1999. At
September 30, 2000, all of the net unrealized capital losses related to the debt
securities that support experience-rated contracts.
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 was AA- at September 30, 2000 and AA at December 31,
1999.
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 49.2% 39.0%
AA 8.1 8.8
A 28.0 35.3
BBB 14.7 16.9
---------------------------------------------------------------------
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 52.8% 55.8%
U.S. Treasuries/Agencies 16.8 16.5
Residential Mortgage-Backed 15.5 7.9
Asset-Backed 7.4 4.9
Commercial/Multi-family Mortgage-Backed 6.1 6.8
Foreign - U.S. Dollar Denominated 1.4 8.1
--------------------------------------------------------------------------------------------
Total 100.0% 100.0%
============================================================================================
</TABLE>
FORWARD-LOOKING INFORMATION/RISK FACTORS
The "Forward-Looking Information/Risk Factors" portion of AICA's 1999 Annual
Report on Form 10-K and report 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.
15
<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. A purported class action complaint (the "Shaner
Complaint") was filed in the Circuit Court of Lauderdale County, Alabama on
March 28, 2000 by Loretta Shaner against ALIAC, the parent of the Company, which
serves as principal underwriter for the securities sold by the Company. 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.
The Company is not currently involved in any other material litigation.
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 Standard &
A.M. Best Fitch Investors 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 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.
16
<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 INSURANCE COMPANY OF AMERICA
----------------------------------
(Registrant)
November 13, 2000 By /s/ Deborah Koltenuk
--------------------- --------------------------------------
(Date) Deborah Koltenuk
Vice President, Corporate Controller
and Assistant Treasurer
(Chief Accounting Officer)
17
