SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
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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
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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 MAY 11, 2001
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.
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
PAGE
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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..............................15
Item 2. Management's Analysis of the Results of Operations...............16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................26
Item 5. Other Information................................................26
Item 6. Exhibits and Reports on Form 8-K.................................26
Signature .................................................................27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(Unaudited)
(millions)
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
---- ----
Revenue:
Premiums $ 31.8 $36.0
Charges assessed against policyholders 99.7 116.0
Net investment income 224.2 228.3
Net realized capital losses (4.0) (8.9)
Other income 43.8 36.9
----------- -----------
Total revenue 395.5 408.3
Benefits and expenses:
Current and future benefits 183.4 201.2
Operating expenses:
Salaries and related benefits 44.0 44.1
Other 58.7 55.3
Amortization of deferred policy acquisition costs
and value of business acquired 30.8 31.2
Amortization of goodwill 14.3 -
----------- -----------
Total benefits and expenses 331.2 331.8
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Income from continuing operations before income taxes 64.3 76.5
Income taxes 28.2 25.1
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Income from continuing operations 36.1 51.4
Discontinued operations, net of tax:
Amortization of deferred gain on sale - 1.6
----------- -----------
Net income $36.1 $53.0
=========== ===========
See Condensed Notes to Consolidated Financial Statements.
3
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)
MARCH 31, DECEMBER 31,
ASSETS 2001 2000
- ------ ---- ----
(UNAUDITED)
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,654.5 and $11,120.0) $11,947.8 $11,244.7
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $109.1 and $109.0) 106.0 100.7
Investment in affiliated mutual funds (cost: $8.5 and $9.6) 10.5 12.7
Common stock (cost: $2.3 and $2.2) 3.4 3.5
Short-term investments 18.1 109.4
Mortgage loans 4.6 4.6
Policy loans 336.6 339.3
Other investments 13.3 13.4
Securities pledged to creditors (amortized cost: $8.9 and $126.8) 9.1 129.0
--------------- --------------
Total investments 12,449.4 11,957.3
Cash and cash equivalents 465.6 796.3
Short-term investments under securities loan agreement 9.5 131.8
Accrued investment income 155.4 147.2
Premiums due and other receivables 28.7 82.9
Reinsurance recoverable 3,005.6 3,005.8
Current income taxes - 40.6
Deferred policy acquisition costs 47.8 12.3
Value of business acquired 1,775.6 1,780.9
Goodwill 2,283.1 2,297.4
Other assets 129.8 154.7
Separate Accounts assets 32,586.0 36,745.8
--------------- --------------
Total assets $52,936.5 $57,153.0
=============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $3,986.1 $ 3,977.7
Unpaid claims and claim expenses 25.1 29.6
Policyholders' funds left with the Company 11,482.9 11,125.6
--------------- --------------
Total insurance reserve liabilities 15,494.1 15,132.9
Payables under securities loan agreement 9.5 131.8
Current income taxes 79.6 -
Deferred income taxes 222.2 248.0
Other liabilities 133.8 549.9
Separate Accounts liabilities 32,586.0 36,745.8
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Total liabilities 48,525.2 52,808.4
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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 4,303.8 4,303.8
Accumulated other comprehensive gain 56.0 25.4
Retained earnings 48.7 12.6
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Total shareholder's equity 4,411.3 4,344.6
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Total liabilities and shareholder's equity $52,936.5 $57,153.0
=============== ==============
See Condensed Notes to Consolidated Financial Statements.
4
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
(Unaudited)
(millions)
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
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Shareholder's equity, beginning of period $4,344.6 $1,385.6
Comprehensive income:
Net income 36.1 53.0
Other comprehensive income, net of tax:
Unrealized gains on securities $46.9, $5.7
pretax (1) 30.6 3.7
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Total comprehensive income 66.7 56.7
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Other changes - 0.6
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Shareholder's equity, end of period $4,411.3 $1,442.9
============= ==============
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
5
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
(Unaudited)
(millions)
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income $ 36.1 $ 53.0
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Net accretion of discount on investments (7.2) (9.0)
Amortization of deferred gain on sale - (1.6)
Net realized capital losses 4.0 8.9
Changes in assets and liabilities:
Increase in accrued investment income (8.1) (3.7)
Decrease in premiums due and other receivables 64.5 7.7
Decrease (increase) in policy loans 2.8 (3.7)
Increase in deferred policy acquisition costs (35.6) (41.6)
Decrease in value of business acquired 5.3 -
Amortization of goodwill 14.3 -
Net increase in universal life account balances 8.6 6.3
(Decrease) increase in other insurance reserve liabilities (43.3) 43.0
(Decrease) increase in other liabilities and other assets (320.7) 1.5
Increase in income taxes 77.8 24.4
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Net cash (used for) provided by operating activities (201.5) 85.2
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Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 969.1 2,870.0
Equity securities 4.3 8.9
Mortgage loans - 2.1
Investment maturities and collections of:
Debt securities available for sale 170.1 177.8
Short-term investments 96.6 43.1
Cost of investment purchases in:
Debt securities available for sale (1,544.0) (2,807.6)
Equity securities (3.9) (7.9)
Short-term investments (2.8) (13.6)
Decrease in property and equipment 3.3 3.7
Other, net 0.1 (4.7)
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Net cash (used for) provided by investing activities (307.2) 271.8
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Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 518.3 479.2
Withdrawals of investment contracts (270.0) (729.7)
Other, net (70.3) (12.1)
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Net cash provided by (used for) financing activities 178.0 (262.6)
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Net (decrease) increase in cash and cash equivalents (330.7) 94.4
Cash and cash equivalents, beginning of period 796.3 694.4
--------------- -----------------
Cash and cash equivalents, end of period $ 465.6 $ 788.8
=============== =================
Supplemental cash flow information:
Income taxes (received) paid, net $ (49.5) $ 0.5
=============== =================
See Condensed Notes to Consolidated Financial Statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, LLC ("AIS"). ALIAC, together
with its wholly owned subsidiaries, is herein called the "Company." ALIAC is
a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"),
which is a wholly owned subsidiary of Aetna Retirement Services, Inc.
("ARSI"). ARSI is owned by ING Groep N.V. ("ING"). On June 30, 2000 HOLDCO
contributed AIS to the Company. (Refer to note 4).
The Company has three business segments: Worksite Products, Individual
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 accounting principles generally accepted in the United States of
America and are unaudited. The contribution of AIS 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 operations of AIS.
Certain reclassifications have been made to 2000 financial information to
conform to the 2001 presentation. These interim financial 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 2000 Annual Report on Form 10-K. Certain financial
information that is normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but that is not required for interim reporting
purposes, has been condensed or omitted.
2. NEW ACCOUNTING STANDARD
As of January 1, 2001, the Company adopted FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted by
FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, FAS No 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities
- an Amendment of FASB Statement No 133, and certain FAS No 133
implementation issues. 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 fair values of
those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. NEW ACCOUNTING STANDARD (continued)
Adoption of FAS No. 133 did not have a material effect on the Company's
financial position or results of operations given the Company's limited
derivative and embedded derivative holdings. (Refer to Note 5.)
The Company utilizes futures contracts, options, interest rate swap
agreements and warrants in order to manage interest rate and price risk
(collectively, market risk). These financial exposures are monitored and
managed by the Company as an integral part of its overall risk management
program. (Refer to Note 5.) Derivatives are recognized on the balance sheet
at their fair value. The Company chose not to designate its derivative
instruments as part of hedge transactions. Therefore changes in the fair
value of the Company's derivative instruments are recorded immediately in
the consolidated statements of income as part of realized capital gains and
losses.
Warrants are carried at fair value and are recorded as either derivative
instruments or FAS No. 115 available for sale securities. Warrants that are
considered derivatives are carried at fair value if they are readily
convertible to cash. The values of these warrants can fluctuate given that
the companies which underlie the warrants are non-public companies. At March
31, 2001, the estimated value of these warrants was approximately $0.3
million. These warrants will be revalued each quarter and the change in the
value of the warrants will be included in the consolidated statements of
income.
The Company, at times, may own warrants on common stock which are not
readily convertible to cash as they contain certain conditions which
preclude their convertibility and therefore, will not be included in assets
or liabilities as derivatives. If conditions are satisfied and the
underlying stocks become marketable, the warrants would be reclassified as
derivatives and recorded at fair value as an adjustment through current
period results of operations.
The Company occasionally purchases a financial instrument that contains a
derivative instrument that is "embedded" in the instrument. The Company's
insurance products are reviewed to determine whether they contain an
embedded derivative. The Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument or insurance product (i.e., the host contract) and whether a
separate instrument with the same terms as the embedded instrument would
meet the definition of a derivative instrument. When it is determined that
the embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract and that a separate instrument with the same terms would qualify as
a derivative instrument, the embedded derivative is separated from the host
contract and carried at fair value. However, in cases where the host
contract is measured at fair value, with changes in fair value reported in
current period earnings or the Company is unable to reliably identify and
measure the embedded derivative for separation from its host contract, the
entire contract is carried on the balance sheet at fair value and is not
designated as a hedging instrument. The Company had no material amounts of
embedded derivatives at March 31, 2001.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. SALE OF AETNA FINANCIAL SERVICES AND AETNA INTERNATIONAL
On December 13, 2000, ING America Insurance Holdings, Inc., an indirect
wholly owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna
Financial Services business, of which the Company is a part, and the Aetna
International business, for approximately $7.7 billion. The purchase price
was comprised of approximately $5.0 billion in cash and the assumption of
$2.7 billion of outstanding debt and other net liabilities. In connection
with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc.
("Lion"). At the time of the sale, Lion entered into certain transition
services agreements with a former related party, Aetna U.S. Healthcare,
which was renamed Aetna Inc. ("former Aetna").
For accounting purposes, the acquisition was accounted for as of November
30, 2000 using the purchase method. The application of the purchase method,
including the recognition of goodwill was pushed down and reflected on the
financial statements of certain ARSI subsidiaries, including the Company.
The purchase price was allocated to assets and liabilities based on their
respective fair values. This revaluation resulted in a net increase to
assets, excluding the effects of goodwill, of $592.0 million and a net
increase to liabilities of $310.6 million. . Additionally, the Company
established goodwill of $2.3 billion. Goodwill is being amortized over a
period of 40 years. The allocation of the purchase price to assets and
liabilities is subject to further refinement.
Unaudited proforma consolidated income from continuing operations and net
income of the Company for three months ended March 31, 2000, assuming that
the acquisition of the Company occurred at the beginning of 2000, would each
have been approximately $36.9 million. The pro forma adjustments, which do
not affect revenues, reflect primarily goodwill amortization, amortization
of a favorable lease asset and the elimination of amortization of the
deferred gain on the sale of the life business.
4. CONTRIBUTION OF AIS FROM HOLDCO
On June 30, 2000, HOLDCO contributed AIS to the Company. AIS 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 AIS is the sale of fixed and
variable annuities and mutual funds through its registered representatives.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments to manage interest rate and
equity price risks. By using derivative instruments to manage exposures in
these risks, the Company exposes itself to credit risk and market risk.
Credit risk is the failure of the counterparty to perform under the terms of
the derivative contract. When the fair value of a derivative contract is
positive, the counterparty owes the Company, which creates credit risk for
the Company. The Company generally does not require collateral or other
security to support the types of financial instruments presented below.
However, the Company minimizes its credit risk exposure by entering into
transactions with high credit quality counterparties, limiting the amount of
exposure to each counterparty and monitoring the financial condition of its
counterparties. At March 31, 2001, such counterparties' credit ratings
averaged A- or higher.
Market risk is the risk of change in the market price of the underlying
instrument and the related derivative instrument. Such price changes result
from movements in interest rates and equity markets as well as time value
and volatility considerations. The Company's exposure to market risk for
changes in interest rates and equity prices relates primarily to the
Company's investment portfolio and debt obligations. The portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity.
The Company maintains an interest rate risk management strategy that uses
derivatives instruments to minimize significant unanticipated earnings
fluctuations caused by interest rate volatility. As a result of interest
rate fluctuations, assets and liabilities will appreciate or depreciate in
market value. Income or loss on the derivative instruments that are linked
to the related assets or liabilities will generally offset the effect of
this unrealized appreciation or depreciation. The Company views this
strategy as a prudent management of interest rate sensitivity, such that
earnings are not exposed to undue risk presented by changes in interest
rates.
The notional amounts, carrying amounts and estimated fair values of the
Company's financial instruments at March 31, were as follows:
2001 2000
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NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
(MILLIONS) AMOUNTS AMOUNTS FAIR VALUE AMOUNTS AMOUNTS FAIR VALUE
----------------------------------------------------------------------------------------------------------------
Futures contracts to sell
securities $ - $ - $ - $ 54.7 $ (0.2) $ (0.2)
Warrants - 0.3 0.3 - 0.3 0.3
Embedded Derivatives - 1.9 1.9 - 2.0 2.0
The fair value of these instruments was estimated based on quoted market
prices, dealer quotations or internal price estimates believed to be
comparable to dealer quotations. These fair value amounts reflect the
estimated amounts that the Company would have to pay or would receive if the
contracts were terminated.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. DERIVATIVE INSTRUMENTS (continued)
FUTURES CONTRACTS
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk. Cash settlements are made daily based on changes in the prices
of the underlying assets.
OPTION CONTRACTS
Options are contracts that grant the purchaser, for a fee, the right but not
the obligation, to buy or sell a security at a contracted price on or before
a specified date. The option writer is obligated to buy or sell the security
if the purchaser chooses to exercise the option. The purchaser pays a
nonrefundable fee (premium) to the writer of the option. The buyer of the
option has limited risk. The maximum loss to the buyer is the premium paid.
As of March 31, 2001, the Company did not have any investment income or loss
for writing call options on underlying securities and, as of March 31, 2000,
had a $1.1 million investment loss for writing call options on underlying
securities.
WARRANTS
Warrants are instruments that give the holder the right, but not the
obligation, to buy or sell a fixed amount of an underlying asset at a fixed
price in the future.
6. ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income related to changes in
unrealized gains on securities (excluding those related to experience-rated
contractholders) were as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
(MILLIONS) 2001 2000
-----------------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during the period (1) $ 32.6 $ 3.8
Less: reclassification adjustments for accretion of net investment
discounts and gains included in net income (2) 2.1 0.1
-----------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities $30.5 $ 3.7
=================================================================================================================
(1) Pretax unrealized holding gains arising during the period were
$50.1 million and $5.8 million for the three months ended March 31, 2001
and March 31, 2000, respectively.
(2) Pretax reclassification adjustments for accretion of net investment
discounts and gains included in net income for the period were
$3.2 million and $0.1 million for the three months ended March 31, 2001
and March 31, 2000, respectively.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
7. VALUE OF BUSINESS ACQUIRED
Value of business acquired ("VOBA") is an asset and represents the present
value of estimated net cash flows embedded in the Company's contracts
acquired by ING. VOBA is amortized in proportion to estimated gross profits
and adjusted to reflect actual gross profits over the contracts (up to 30
years for annuity contracts and pension contracts).
Activity for the three months ended March 31, 2001 within VOBA was as
follows:
(MILLIONS)
--------------------------------------------------------------------
Balance at December 31, 2000 $ 1,780.9
Additions 25.1
Interest accrued at 7 % 30.3
Amortization (60.7)
--------------------------------------------------------------------
Balance at March 31, 2001 $1,775.6
====================================================================
8. SEVERANCE
In December 2000, the Company, in accounting for its acquisition by ING,
established a severance liability related to actions taken or expected to be
taken with respect to the integration of the Company's and ING's businesses.
Activity for the three months ended March 31, 2001 within the severance
liability and positions eliminated related to such actions was as follows:
SEVERANCE POSITIONS
(MILLIONS) LIABILITY
-------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 10.7 175
Actions taken (1.7) (24)
-------------------------------------------------------------------------------------
Balance at March 31, 2001 $ 9.0 151
=====================================================================================
Severance actions are expected to be substantially completed by March 31,
2002.
12
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
9. SEGMENT INFORMATION
Summarized financial information for the Company's principal operations for
the three months ended March 31, was as follows:
INVESTMENT
WORKSITE INDIVIDUAL MANAGEMENT DISCONTINUED
(MILLIONS) PRODUCTS (1) PRODUCTS (1) SERVICES (1) OPERATIONS (1) OTHER (1) TOTAL
-------------------------------------------------------------------------------------------------------------------------
2001
Revenues from external customers $ 124.1 $ 28.9 $ 32.5 $ - $(10.2) $ 175.3
Net investment income 196.6 25.9 0.4 1.3 224.2
-------------------------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital losses $ 320.7 $ 54.8 $ 32.9 $ - $ (8.9) $ 399.5
=========================================================================================================================
Operating earnings (2) $ 40.4 $ 8.3 $ 8.0 $ - $(18.1) $ 38.6
Net realized capital losses, net of
tax (2.3) (0.2) - - - (2.5)
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 38.1 $ 8.1 $ 8.0 $ $(18.1) $ 36.1
=========================================================================================================================
2000
Revenues from external customers $ 140.8 $ 26.9 $ 33.2 $ - $(12.0) $ 188.9
Net investment income 200.1 26.6 0.6 1.0 228.3
-------------------------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital (losses) gains $ 340.9 $ 53.5 $ 33.8 $ - $(11.0) $ 417.2
=========================================================================================================================
Operating earnings (2) $ 42.5 $ 6.8 $ 7.4 $ $ 0.5 $ 57.2
Net realized capital (losses) gains,
net of tax (4.7) (1.2) 0.1 - - (5.8)
-------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 37.8 5.6 7.5 - 0.5 51.4
Discontinued operations, net of tax:
Amortization of deferred gain on
sale - - - 1.6 1.6
-------------------------------------------------------------------------------------------------------------------------
Net income $ 37.8 $ 5.6 $ 7.5 $ 1.6 $ 0.5 $ 53.0
=========================================================================================================================
(1) Worksite Products include: defined contribution and immediate annuity
contracts; mutual funds; distribution services for annuities and mutual
funds; programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping
services along with a menu of investment options; wrapper agreements
containing certain benefit response guarantees that are entered into
with retirement plans, whose assets are not invested with the Company;
investment advisory services and pension plan administrative services.
Individual Products include deferred and immediate annuity contracts,
both qualified and nonqualified, that are sold to individuals and
provide variable or fixed investment options or a combination of both.
Investment Management Services include: investment advisory services to
affiliated and unaffiliated institutional and retail clients;
underwriting; distribution for Company mutual funds and a former
affiliate's separate accounts; and trustee, administrative and other
services to retirement plans. Discontinued Operations include life
insurance products. In 2001, Other includes: consolidating adjustments,
amortization of goodwill and ING corporate expense. In 2000 Other
includes: consolidating adjustments and taxes not allocated back to
segment.
(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 net income as a measure of profitability.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
10. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value of
the securities underlying the commitments between the time that the Company
enters into the commitments and the specified future date on which the
Company must purchase or sell the securities, as the case may be. As of
March 31, 2001, there were no such off-balance sheet commitments.
LITIGATION
In recent years, a number of life insurance companies have been named as
defendants in class action lawsuits relating to life insurance sales
practices. The Company is currently a defendant in one such lawsuit.
A purported class action complaint was filed in the United States District
Court for the Middle District of Florida on June 30, 2000, by Helen Reese,
Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese
Complaint"). The Reese Complaint seeks compensatory and punitive damages and
injunctive relief from ALIAC. The Reese Complaint claims that ALIAC engaged
in unlawful sales practices in marketing life insurance policies. ALIAC has
moved to dismiss the Reese Complaint for failure to state a claim upon which
relief can be granted. This litigation is in the preliminary stages. The
Company intends to defend the action vigorously.
The Company is also involved in other lawsuits arising, for the most part,
in the ordinary course of its business operations. While the outcome of
these other lawsuits cannot be determined at this time, after consideration
of the defenses available to the Company, applicable insurance coverage and
any related reserves established, these other lawsuits are not currently
expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.
14
INDEPENDENT ACCOUNTANTS' 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 (the "Company") as of March
31, 2001, and the related condensed consolidated statements of income, changes
in shareholder's equity and cash flows for the three-month period then ended.
These financial statements are the responsibility of the Company's management.
The condensed consolidated balance sheet and the related condensed consolidated
statements of income, changes in shareholder's equity and cash flows as of
March 31, 2000, and for the three-month period then ended were reviewed by
other accountants whose report (dated April 26, 2000) stated that they were not
aware of any material modifications that should be made to those statements for
them to be in conformity with accounting principles generally accepted in the
United States.
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 auditing standards generally accepted in the United States, which will be
performed for the full year with the objective of expressing 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 referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Hartford, Connecticut
May 11, 2001
15
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
The following analysis presents a review of the Company for the three-month
periods ended March 31, 2001 and 2000. 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 2000 Annual Report on Form 10-K.
OVERVIEW
RECENT DEVELOPMENTS
On December 13, 2000, ING America Insurance Holdings, Inc., an indirect
wholly owned subsidiary of ING Groep N.V. ("ING"), acquired Aetna Inc.,
comprised of the Aetna Financial Services business, of which the Company
is a part, and the Aetna International business, for approximately $7.7
billion. The purchase price was comprised of approximately $5.0 billion in
cash and the assumption of $2.7 billion of outstanding debt and other net
liabilities. In connection with the acquisition, Aetna Inc. was renamed
Lion Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion
entered into certain transition services agreements with a former related
party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former
Aetna"). Refer to Note 3 of Condensed Notes to Consolidated Financial
Statements.
As a result of ING's purchase of the Aetna Financial Services business, the
Company's Financial Products segment was realigned into two new segments,
Worksite Products and Individual Products. Accordingly, the financial results of
the prior period were restated.
The Worksite Products segment offers annuity contracts that include a variety of
funding and payout options for employer-sponsored retirement plans qualified
under Internal Revenue Code Sections 401, 403, 408 and 457, as well as
nonqualified deferred compensation plans. Annuity contracts may be deferred or
immediate (payout annuities). These products also include programs offered to
qualified plans and nonqualified deferred compensation plans that package
administrative and recordkeeping services along with a menu of investment
options, including Company and nonaffiliated mutual funds and variable and fixed
investment options. The Worksite Products segment also includes wrapper
agreements entered into with retirement plans which contain certain benefit
responsive guarantees (i.e.liquidity guarantees of principal and previously
accrued interest for benefits paid under the terms of the plan) with respect to
portfolios of plan-owned assets not invested with the Company. The Worksite
Products segment also offers pension plan administrative services.
The Individual Products segment includes qualified and nonqualified annuity
contracts that are offered for sale to individuals and may provide variable or
fixed investment options, or a combination of both. These annuity contracts may
be deferred or immediate (payout annuities).
Investment Management Services provides investment advisory services to
affiliated and unaffiliated institutional and retail clients on a
fee-for-service basis; underwriting services to the Aetna Series Fund, Inc.;
distribution services for other Company products; and trustee, administrative
and other fiduciary services to retirement plans requiring or otherwise
utilizing a trustee or custodian.
16
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
OVERVIEW (continued)
On June 30, 2000, HOLDCO contributed Aetna Investment Services, LLC ("AIS") to
the Company. AIS's financial results are included in the Worksite Products
segment. Refer to Note 4 of Condensed Notes to Consolidated Financial
Statements.
CONSOLIDATED RESULTS
Consolidated results include results from continuing operations and discontinued
operations. Results of continuing operations are comprised of the results of the
Worksite Products, Individual Products and Investment Management Services
segments plus certain items not directly allocable to the business segments.
Refer to Note 9 of Condensed Notes to Financial Statements.
17
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
CONSOLIDATED RESULTS (continued)
OPERATING SUMMARY
THREE MONTHS ENDED MARCH 31,
----------------------------------
(MILLIONS) 2001 2000
- ----------------------------------------------------------------------------------------------------
Premiums (1) $ 31.8 $ 36.0
Charges assessed against policyholders 99.7 116.0
Net investment income 224.2 228.3
Net realized capital losses (4.0) (8.9)
Other income 43.8 36.9
- ----------------------------------------------------------------------------------------------------
Total revenue 395.5 408.3
- ----------------------------------------------------------------------------------------------------
Current and future benefits 183.4 201.2
Operating expenses:
Salaries and related benefits 44.0 44.1
Other 58.7 55.3
Amortization of deferred policy acquisition costs and value of
business acquired 30.8 31.2
Amortization of goodwill 14.3 -
- ----------------------------------------------------------------------------------------------------
Total benefits and expenses 331.2 331.8
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 64.3 76.5
Income taxes 28.2 25.1
- ----------------------------------------------------------------------------------------------------
Income from continuing operations $ 36.1 $ 51.4
Discontinued operations, net of tax:
Amortization of deferred gain on sale - 1.6
- ----------------------------------------------------------------------------------------------------
Net Income 36.1 53.0
====================================================================================================
Net realized capital losses, net of tax (included above) $ (2.5) $ (5.8)
====================================================================================================
Deposits (not included in premiums above)
Annuities -fixed options $ 410.3 $ 452.3
Annuities -variable options 1,230.8 1,324.2
- ----------------------------------------------------------------------------------------------------
Total - deposits $ 1,641.1 $ 1,776.5
====================================================================================================
Assets under management:
Worksite Products $ 41,986.4 $ 48,256.7
Individual Products 7,739.6 8,910.7
Investment Management Services (2) 53,302.9 56,374.7
Consolidating adjustment (3) (35,456.4) (36,939.7)
- ----------------------------------------------------------------------------------------------------
Total assets under management (4) (5) 67,572.5 76,602.4
- ----------------------------------------------------------------------------------------------------
Assets under administration: (6)
Worksite Products 8,636.5 5,034.1
- ----------------------------------------------------------------------------------------------------
Assets under management and administration $ 76,209.0 $ 81,636.5
====================================================================================================
(1) Includes $24.2 million and $28.3 million for the three months ended March
31, 2001 and 2000, respectively, for annuity premiums on contracts
converting from the accumulation phase to payout options with life
contingencies.
(2) Includes $5,461.4 million and $7,182.0 million of assets managed for Aetna
Life Insurance Company, a former affiliate of the Company, as of March 31,
2001 and 2000, respectively.
(3) Assets under management reported in either the Worksite Products or the
Individual Products segments and also in the Investment Management Services
segments must be deducted from the aggregate segment assets to determine
the Company's consolidated assets under management.
(4) Includes $11,392.6 million and $15,730.8 million at March 31, 2001 and
2000, respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) Excludes net unrealized capital gains of $293.5 million at March 31, 2001
and net unrealized capital losses of $198.7 million at March 31, 2000 on
assets invested through annuities with fixed options.
(6) Represents assets for which the Company provides administrative
services only.
18
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
OVERVIEW (continued)
CONTINUING OPERATIONS
Income from continuing operations decreased $12 million for the three months
ended March 31, 2001 compared to the same period in 2000. Excluding goodwill
amortization of $14 million in 2001 and net realized capital losses in 2001 and
2000, income from continuing operations for the three months ended March 31,
2001 decreased $4 million, or 7%, compared to the same period in 2000.
The decrease in earnings for the three months ended March 31, 2001 primarily
reflects a decrease in charges assessed against policyholders resulting from
lower levels of assets under management and administration and an increase in
the effective tax rate.
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 March 31, 2000, assets under management and
administration at March 31, 2001 decreased 7% primarily due to a decline in the
stock market partially offset by the addition of approximately $3 billion of
assets related to a new large case, which closed in the second quarter of 2000,
and additional net deposits (i.e., deposits less surrenders).
Certain assets under management that are reported in the Worksite Products and
the Individual Products segments are also reported in the Investment Management
Services segment, because Investment Management Services reports a different
component of the revenue generated by these particular assets under management.
A consolidating adjustment, which eliminates the duplication of such assets, is
recorded in order to determine consolidated assets under management of the
Company.
Annuity deposits relate to annuity contracts not containing life contingencies.
Compared to the first quarter of 2000, deposits for the three months ended
March 31, 2001 decreased 8%. This decrease is primarily due to a decrease in
individual annuity sales partially offset by higher sales in the corporate
(i.e., 401(k)) market during the first quarter of 2001.
The increase in the effective tax rate for the first quarter of 2001 is
primarily related to the disallowance of goodwill amortization as a deduction
and a decrease in the deduction for dividends received.
DISCONTINUED OPERATIONS
Results of discontinued operations for the three months ended March 31, 2000
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. In conjunction with the accounting for the acquisition of the Aetna
Financial Services business, of which the Company is a part, the deferred gain
was written off. Refer to Note 3 of the Condensed Notes to Consolidated
Financial Statements.
19
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
WORKSITE PRODUCTS
OPERATING SUMMARY
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
(MILLIONS)
- ------------------------------------------------------------------------------------------------------
Premiums (1) $ 31.8 $ 36.0
Charges assessed against policyholders 74.0 90.1
Net investment income 196.6 200.1
Net realized capital losses (3.6) (7.2)
Other income 18.3 14.7
- ------------------------------------------------------------------------------------------------------
Total revenue 317.1 333.7
- ------------------------------------------------------------------------------------------------------
Current and future benefits 163.9 181.8
Operating expenses:
Salaries and related benefits 32.0 31.1
Other 46.9 45.2
Amortization of deferred policy acquisition costs and value of
business acquired 15.7 17.4
- ------------------------------------------------------------------------------------------------------
Total benefits and expenses 258.5 275.5
- ------------------------------------------------------------------------------------------------------
Income from operations before income taxes 58.6 58.2
Income taxes 20.5 20.4
- ------------------------------------------------------------------------------------------------------
Net income $ 38.1 $ 37.8
======================================================================================================
Net realized capital losses, net of tax (included above) $ (2.3) $ (4.7)
======================================================================================================
Deposits (not included in premiums above)
Annuities - fixed options $ 210.0 $ 180.2
Annuities - variable options 1,131.4 1,129.4
- ------------------------------------------------------------------------------------------------------
Total - deposits $ 1,341.4 $ 1,309.6
======================================================================================================
Assets Under Management (2)
Annuities - fixed options (3) $ 10,573.8 $ 10,183.3
Annuities - variable options (4) 23,232.3 31,491.9
- ------------------------------------------------------------------------------------------------------
Subtotal - annuities 33,806.1 41,675.2
Plan Sponsored and Other 8,180.3 6,581.5
- ------------------------------------------------------------------------------------------------------
Total - assets under management 41,986.4 48,256.7
Assets under administration (5) 8,636.5 5,034.1
- ------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 50,622.9 $ 53,290.8
======================================================================================================
(1) Includes $24.2 million and $28.3 million for the three months ended March
31, 2001 and 2000, respectively, for annuity premiums on contracts
converting from the accumulation phase to payout options with life
contingencies.
(2) Includes $31,053.6 million at March 31, 2001 and $32,557.3 million at March
31, 2000 of assets under management that are also reported in the
Investment Management Services segment (refer to "Overview").
(3) Excludes net unrealized capital gains of $259.0 million at March 31, 2001
and net unrealized capital losses of $166.0 at March 31, 2000.
(4) Includes $8,459.0 million at March 31, 2001 and $11,822.0 million at March
31, 2000 related to assets invested through the Company's products in
unaffiliated mutual funds.
(5) Represents assets for which the Company provides administrative
services only.
Worksite Products' net income reflected a slight increase for the three months
ended March 31, 2001 compared to the same period in 2000. Excluding net realized
capital losses, net income for the three months ended March 31, 2001 decreased
$2 million, or 5%, compared to the same period in 2000. This decrease is
primarily the result of a decrease in charges assessed against policyholders
that were due to lower levels of assets under management.
20
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
WORKSITE PRODUCTS (continued)
Substantially all of the charges assessed against policyholders and a majority
of other income reported for the Worksite Products segment are calculated based
on assets under management and administration. Assets under management and
administration at March 31, 2001 decreased 5% compared to March 31, 2000. The
decrease in 2001 is primarily due to a decline in the stock market partially
offset by the addition of approximately $3 billion of assets related to a new
large case, which closed in the second quarter of 2000, and additional net
deposits (i.e., deposits less surrenders).
Annuity deposits relate to annuity contracts not containing life contingencies.
Compared to the first quarter of 2000, deposits for the three months ended March
31, 2001 increased 2%. This increase is primarily due to higher sales in the
corporate (i.e., 401(k)) market.
21
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
INDIVIDUAL PRODUCTS
OPERATING SUMMARY
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2000
(MILLIONS)
- ------------------------------------------------------------------------------------------------------
Charges assessed against policyholders $ 25.7 $ 25.9
Net investment income 25.9 26.6
Net realized capital losses (0.4) (1.8)
Other income 3.2 1.0
- ------------------------------------------------------------------------------------------------------
Total revenue 54.4 51.7
- ------------------------------------------------------------------------------------------------------
Current and future benefits 19.5 19.4
Operating expenses:
Salaries and related benefits 4.0 5.5
Other 6.8 7.2
Amortization of deferred policy acquisition costs and value of
business acquired 11.7 11.0
- ------------------------------------------------------------------------------------------------------
Total benefits and expenses 42.0 43.1
- ------------------------------------------------------------------------------------------------------
Income from operations before income taxes 12.4 8.6
Income taxes 4.3 3.0
- ------------------------------------------------------------------------------------------------------
Net income $ 8.1 $ 5.6
======================================================================================================
Net realized capital losses, net of tax (included above) $ (0.2) $ (1.2)
======================================================================================================
Deposits (not included in premiums above)
Annuities - fixed options $ 200.3 $ 272.1
Annuities - variable options 99.4 194.8
- ------------------------------------------------------------------------------------------------------
Total - deposits $ 299.7 $ 466.9
======================================================================================================
Assets Under Management (1)
Annuities - fixed options (2) $ 2,197.0 $ 2,220.8
Annuities - variable options (3) 5,542.6 6,689.9
- ------------------------------------------------------------------------------------------------------
Total - assets under management $ 7,739.6 $ 8,910.7
======================================================================================================
(1) Includes $4,402.8 million at March 31, 2001 and $4,382.4 million at March
31, 2000 of assets under management that are also reported in the
Investment Management Services segment (refer to "Overview").
(2) Excludes net unrealized capital gains of $34.5 million at March 31, 2001
and net unrealized capital losses of $32.7 at March 31, 2000.
(3) Includes $2,933.6 million at March 31, 2001 and $3,908.8 million at March
31, 2000 related to assets invested through the Company's products in
unaffiliated mutual funds.
Individual Products' net income increased $3 million for the three months ended
March 31, 2001 compared to the same period in 2000. Excluding net realized
capital losses, net income increased $2 million, or 22%, for the three months
ended March 31, 2001 compared to the same period in 2000. This increase is
primarily the result of an increase in other income and a decrease in operating
expenses.
Substantially all of the charges assessed against policyholders reported for the
Individual Products segment are calculated based on assets under management.
Assets under management at March 31, 2001 decreased 13% compared to March 31,
2000. This decrease is primarily due to a decline in the stock market partially
offset by additional net deposits (i.e., deposits less surrenders).
Annuity deposits relate to annuity contracts not containing life contingencies.
Compared to the prior quarter, deposits decreased 36% for the three months ended
March 31, 2001 due to a decrease in individual annuity sales.
22
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
INVESTMENT MANAGEMENT SERVICES
OPERATING SUMMARY
THREE MONTHS ENDED MARCH 31,
------------------------------
(MILLIONS) 2001 2000
- ------------------------------------------------------------------------------------------------
Net investment income $ 0.4 $ 0.6
Net realized capital gains - 0.1
Other income (1) 32.5 33.2
- ------------------------------------------------------------------------------------------------
Total revenue 32.9 33.9
- ------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related benefits 8.0 7.5
Other 12.3 14.5
- ------------------------------------------------------------------------------------------------
Total operating expenses 20.3 22.0
- ------------------------------------------------------------------------------------------------
Income from operations before income taxes 12.6 11.9
Income taxes 4.6 4.4
- ------------------------------------------------------------------------------------------------
Net income $ 8.0 $ 7.5
================================================================================================
Net realized capital gains, net of tax (included above) $ - $ 0.1
================================================================================================
Assets under management:
Retail mutual funds $ 1,607.3 $ 1,555.0
Plan sponsored (2) 14,213.2 15,835.0
Collateralized bond obligations 2,026.0 2,045.0
- ------------------------------------------------------------------------------------------------
Subtotal 17,846.5 19,435.0
- ------------------------------------------------------------------------------------------------
Invested through products offered by the Worksite
Products and Individual Products segments: (3)
Variable annuity mutual funds 14,749.5 18,342.7
Fixed annuities (4) 12,770.9 12,404.0
Plan sponsored and other 7,936.0 6,193.0
- ------------------------------------------------------------------------------------------------
Subtotal 35,456.4 36,939.7
- ------------------------------------------------------------------------------------------------
Total assets under management $ 53,302.9 $ 56,374.7
================================================================================================
(1) Primarily includes investment advisory fees earned on assets under
management.
(2) Includes $5,461.4 million and $7,182.0 million of assets managed for Aetna
Life Insurance Company, a former affiliate of the Company, as of March 31,
2001 and 2000, respectively.
(3) The Investment Management Services segment earns investment advisory fees
on these assets, which are also reported in the Financial Products segment.
(4) Excludes net unrealized capital gains of $293.5 million at March 31, 2001
and net unrealized capital losses of $198.7 million at March 31, 2000.
For the three months ended March 31, 2001, the Investment Management Services
segment's net income excluding net realized capital gains in 2000, increased $1
million, or 8%, compared to the same period in 2000. This increase in earnings
primarily reflects a decrease in other operating expenses partially offset by a
decrease in investment advisory fees.
Investment advisory fees are calculated based on assets under management. The
decrease in advisory fee income is due to lower levels of assets under
management. At March 31, 2001, assets under management decreased 5% over those
reported as of March 31, 2000. This decrease was primarily due to a decline in
the stock market partially offset by additional net sales.
Effective April 1, 2001, ING Investment Management, LLC, an affiliate of the
Company, became the advisor of the Company's general account investments. As a
result of this new agreement, the Investment Management Services segment will
not report any fixed annuities assets under
23
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
INVESTMENT MANAGEMENT SERVICES (continued)
management, approximately $12.8 billion at March 31, 2001, and will not receive
advisory fees related to these assets after the first quarter. Effective at the
end of May, an unaffiliated investment manager will become the advisor for
certain collateralized bond obligation assets under management reported by the
Investment Management Services segment. Accordingly, this segment will not
report these assets, approximately $0.4 billion at March 31, 2001, and will not
receive advisory fees related to these assets after the end of May.
DISCONTINUED OPERATIONS - DOMESTIC INDIVIDUAL LIFE INSURANCE
Results of discontinued operations consist solely of the amortization of the
deferred gain from the sale of the domestic individual life insurance business.
The after tax amortization recognized during the three months ended March 31,
2000 was $1.6 million. In conjunction with the accounting for the acquisition of
the Aetna Financial Services business, of which the Company is a part, the
deferred gain relating to the sale of the domestic individual life insurance
business was written off.
Individual life insurance coverage in force was approximately $38 billion at
March 31, 2001. 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 Condensed Notes to Consolidated Financial
Statements in the Company's 2000 Annual Report on Form 10-K.
GENERAL ACCOUNT INVESTMENTS
The Company's invested assets were comprised of the following:
(MILLIONS) MARCH 31, 2001 DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------------------------
Debt securities, available for sale, at fair value (1) $ 11,956.9 $ 11,371.4
Equity securities, at fair value:
Nonredeemable preferred stock 106.0 100.7
Investment in affiliated mutual funds 10.5 12.7
Common stock 3.4 3.5
Short-term investments (2) 18.1 111.7
Mortgage loans 4.6 4.6
Policy loans 336.6 339.3
Other investments 13.3 13.4
-------------------------------------------------------------------------------------------------------------------
Total Investments $ 12,449.4 $ 11,957.3
===================================================================================================================
(1) At March 31, 2001 and 2000, $9.1 million and $126.7 million,
respectively, of debt securities were pledged to creditors.
(2) At December 31, 2000, $2.3 million of short-term investments were
pledged to creditors; and, at March 31, 2001, there were no short-term
investments pledged to creditors.
24
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
GENERAL ACCOUNT INVESTMENTS (continued)
DEBT SECURITIES
At March 31, 2001 and December 31, 2000, the Company's carrying value of
available for sale debt securities including debt securities pledged to
creditors (herein after referred to as "total debt securities") represented 96%
and 95% of the total general account invested assets, respectively. At March 31,
2001 and December 31, 2000, $9.4 billion, or 79% of total debt securities, and
$8.9 billion, or 79% of total debt securities, respectively, supported
experience-rated contracts. The carrying value of the Company's total debt
securities included net unrealized capital gains of $293.5 million and $126.9
million at March 31, 2001 and December 31, 2000, respectively.
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 March 31, 2001 and AA at December 31, 2000.
The percentage of total debt securities by quality rating category is as
follows:
MARCH 31, 2001 DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------
AAA 53.8% 53.2%
AA 8.3 9.1
A 23.5 23.5
BBB 10.3 9.9
BB 1.4 1.5
B and Below 2.7 2.8
- ------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
================================================================================================
The percentage of total debt securities by market sector is as follows:
MARCH 31, 2001 DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------
U.S. Corporate 43.0% 43.0%
Residential Mortgage-backed 26.8 27.1
U.S. Treasuries/Agencies 10.0 8.4
Commercial/Multi-family Mortgage-backed 9.3 9.8
Asset-backed 6.3 6.7
Foreign (1) 4.6 5.0
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
==================================================================================================================
(1) Primarily U.S. dollar denominated
FORWARD-LOOKING INFORMATION/RISK FACTORS
The "Forward-Looking Information/Risk Factors" section of ALIAC's 2000 Annual
Report on Form 10-K contains discussions of important risk factors related to
the Company's businesses.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In recent years, a number of life insurance companies have been named as
defendants in class action lawsuits relating to life insurance sales practices.
The Company is currently a defendant in one such lawsuit.
A purported class action complaint was filed in the United States District Court
for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard
Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint").
The Reese Complaint seeks compensatory and punitive damages and injunctive
relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful
sales practices in marketing life insurance policies. ALIAC has moved to dismiss
the Reese Complaint for failure to state a claim upon which relief can be
granted. This litigation is in the preliminary stages. The Company intends to
defend the action vigorously.
The Company is also involved in other lawsuits arising, for the most part, in
the ordinary course of its business operations. While the outcome of these other
lawsuits cannot be determined at this time, after consideration of the defenses
available to the Company, applicable insurance coverage and any related reserves
established, these other lawsuits are not currently expected to result in
liability for amounts material to the financial condition of the Company,
although they may adversely affect results of operations in future periods.
ITEM 5. OTHER INFORMATION
RATINGS
The Company's financial strength ratings at May 11, 2001 and March 28, 2001 are
as follows:
RATING AGENCIES
--------------------------------------------------------------------------------
MOODY'S INVESTORS STANDARD &
A.M. BEST FITCH SERVICE POOR'S
- ----------------------------------------------------------------------------------------------------------------
May 11, 2001 A+ AA+ Aa2 AA+
March 28, 2001 (1) A+ AA+ Aa2 AA+
- ----------------------------------------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
None
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
----------------------------------------
(Registrant)
May 14, 2001 By /s/ Deborah Koltenuk
- ---------------------- ----------------------------------------
(Date) Deborah Koltenuk
Vice President and Corporate Controller
(Chief Accounting Officer)
27