<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 June 30, 2001 Commission file number 33-23376
------------- --------
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 71-0294708
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (860) 273-0123
-----------------------------
NONE
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at August 09, 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.
<Page>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income 3
Consolidated Balance Sheet 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 17
Item 2. Management's Analysis of the Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
2
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(Unaudited)
(millions)
<Table>
<Caption>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue:
Premiums $29.1 $39.3 $ 60.9 $75.3
Charges assessed against policyholders 97.8 115.1 197.5 231.1
Net investment income 215.5 221.3 439.7 449.6
Net realized capital gains (losses) 24.3 (3.0) 20.3 (11.9)
Other income 45.2 36.6 89.0 73.5
------------ ----------- ----------- ------------
Total revenue 411.9 409.3 807.4 817.6
Benefits and expenses:
Current and future benefits 182.0 197.3 365.4 398.5
Operating expenses:
Salaries and related benefits 42.9 47.6 86.9 91.7
Other 49.5 51.0 108.2 106.3
Amortization of deferred policy acquisition costs
and value of business acquired 27.9 28.4 58.7 59.6
Amortization of goodwill 14.6 - 28.9 -
------------ ----------- ----------- ------------
Total benefits and expenses 316.9 324.3 648.1 656.1
------------ ----------- ----------- ------------
Income from continuing operations before income taxes 95.0 85.0 159.3 161.5
Income taxes 39.1 28.1 67.3 53.2
------------ ----------- ----------- ------------
Income from continuing operations 55.9 56.9 92.0 108.3
Discontinued operations, net of tax:
Amortization of deferred gain on sale - 1.6 - 3.2
------------ ----------- ----------- ------------
Net income $55.9 $ 58.5 $92.0 $111.5
============ =========== =========== ============
</Table>
See Condensed Notes to Consolidated Financial Statements.
3
<Page>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<Table>
<Caption>
June 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,698.8 and $11,120.0) $12,845.7 $11,244.7
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $27.6 and $109.0) 25.0 100.7
Investment in affiliated mutual funds (cost: $8.5 and $9.6) 11.6 12.7
Common stock (cost: $6.9 and $2.2) 5.1 3.5
Short-term investments 135.6 109.4
Mortgage loans 6.7 4.6
Policy loans 335.8 339.3
Other investments 13.2 13.4
Securities pledged to creditors 491.5 129.0
----------------- ------------------
Total investments 13,870.2 11,957.3
Cash and cash equivalents 415.4 796.3
Short-term investments under securities loan agreement 505.3 131.8
Accrued investment income 154.9 147.2
Premiums due and other receivables 320.8 82.9
Reinsurance recoverable 2,996.8 3,005.8
Current income taxes - 40.6
Deferred policy acquisition costs 84.3 12.3
Value of business acquired 1,774.4 1,780.9
Goodwill 2,280.2 2,297.4
Other assets 164.9 154.7
Separate Accounts assets 34,462.2 36,745.8
----------------- ------------------
Total assets $57,029.4 $57,153.0
================= ==================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $3,994.6 $ 3,977.7
Unpaid claims and claim expenses 24.1 29.6
Policyholders' funds left with the Company 11,454.9 11,125.6
----------------- ------------------
Total insurance reserve liabilities 15,473.6 15,132.9
Payables under securities loan agreement 505.3 131.8
Current income taxes 97.3 -
Deferred income taxes 203.8 248.0
Other liabilities 1,853.9 549.9
Separate Accounts liabilities 34,462.2 36,745.8
----------------- ------------------
Total liabilities 52,596.1 52,808.4
----------------- ------------------
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 22.1 25.4
Retained earnings 104.6 12.6
----------------- ------------------
Total shareholder's equity 4,433.3 4,344.6
----------------- ------------------
Total liabilities and shareholder's equity $57,029.4 $57,153.0
================= ==================
</Table>
See Condensed Notes to Consolidated Financial Statements.
4
<Page>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(Unaudited)
(millions)
<Table>
<Caption>
Six Months Ended June 30,
-------------------------------
2001 2000
---- ----
Shareholder's equity, beginning of period $4,344.6 $1,385.7
Comprehensive income:
Net income 92.0 111.5
Other comprehensive income, net of tax:
Unrealized losses on securities $(5.1), $(1.4)
pretax (1) (3.3) (0.9)
------------- -------------
Total comprehensive income 88.7 110.6
------------- -------------
Other changes - 0.9
Common stock dividends - (1.5)
------------- -------------
Shareholder's equity, end of period $4,433.3 $1,495.7
============= =============
</Table>
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
5
<Page>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
<Table>
<Caption>
Six Months Ended June 30,
--------------------------------------
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income $ 92.0 $ 111.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Net accretion of discount on investments (7.9) (19.9)
Amortization of deferred gain on sale - (3.2)
Net realized capital (gains) losses (20.3) 11.9
Changes in assets and liabilities:
(Increase) decrease in accrued investment income (7.7) 5.8
Decrease in premiums due and other receivables 91.2 8.0
Decrease (increase) in policy loans 3.5 (11.9)
Increase in deferred policy acquisition costs (72.0) (82.7)
Decrease in value of business acquired 6.5 -
Amortization of goodwill (net of adjustments) 17.2 -
Net increase in universal life account balances 17.5 13.4
(Decrease) increase in other insurance reserve liabilities (65.0) 55.6
Increase in other liabilities and other assets (223.4) 27.5
Increase in income taxes 95.5 48.5
----------------- ------------------
Net cash provided by operating activities (72.9) 164.5
----------------- ------------------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,063.7 6,177.7
Equity securities 4.9 54.7
Mortgage loans 2.6 2.1
Investment maturities and collections of:
Debt securities available for sale 525.0 339.4
Short-term investments 2,609.7 50.5
Cost of investment purchases in:
Debt securities available for sale (6,897.4) (6,255.2)
Equity securities (13.7) (14.1)
Short-term investments (1,850.1) (17.0)
Decrease in property and equipment 22.5 3.6
Other, net 0.3 (3.2)
----------------- ------------------
Net cash (used for) provided by investing activities (532.5) 338.5
----------------- ------------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 985.4 910.3
Withdrawals of investment contracts (670.9) (1,229.2)
Dividends paid to Shareholder (1.5)
Other, net (90.1) 15.1
----------------- ------------------
Net cash provided by (used for) financing activities 224.4 (305.3)
----------------- ------------------
Net (decrease) increase in cash and cash equivalents (380.9) 197.7
Cash and cash equivalents, beginning of period 796.3 694.4
----------------- ------------------
Cash and cash equivalents, end of period $ 415.4 $ 892.1
================= ==================
Supplemental cash flow information:
Income taxes (received) paid, net $ (38.1) $ 4.7
================= ==================
</Table>
See Condensed Notes to Consolidated Financial Statements.
6
<Page>
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 indirectly owned by ING Groep N.V. ("ING"). On June 30,
2000, HOLDCO contributed AIS to the Company. (Refer to Note 5).
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.
Operating results for three and six months ended June 30, 2001, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2001.
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
7
<Page>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. NEW ACCOUNTING STANDARD (continued)
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.
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 6.)
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 6.) 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 June
30, 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 that is "embedded" in the instrument. In addition 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 $5.4 million of embedded
derivatives relating to investments at June 30, 2001.
8
<Page>
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 ALIAC.
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 six months ended June 30, 2000, assuming that the
acquisition of the Company occurred at the beginning of 2000, would each
have been approximately $78.9 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 individual life business to Lincoln.
4. REVISION OF PRELIMINARY ALLOCATION OF PURCHASE PRICE
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, on December 13, 2000.
The preliminary allocation of the purchase price did not reflect any market
value adjustments related to the Company's investment portfolios. The
Company, after giving consideration to certain exposures in the general
market place which, while existing prior to the acquisition, subsequently
took on more significance, determined that a reduction in carrying value was
warranted.
The preliminary allocation of the purchase price reflected the write down of
certain fixed assets resulting from conforming accounting policies.
Subsequent to the date of acquisition, the Company completed a full review
of the fixed assets that existed at or prior to the acquisition and
determined that an additional write down was necessary.
9
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
4. REVISION OF PRELIMINARY ALLOCATION OF PURCHASE PRICE (continued)
The amount of the reductions in the carrying values of the investment
portfolios and the fixed assets were accounted for as components of the
purchase price and the amounts assigned to the Company's assets and
liabilities in the allocation of the purchase price were adjusted
appropriately. The adjustment was generally reflected as an adjustment to
goodwill.
The Company generally would be required to recognize a charge to income in
its final preacquisition consolidated statement of income for the reduction
in the carrying value of the fixed assets.
5. CONTRIBUTION OF AIS FROM HOLDCO
On June 30, 2000, HOLDCO contributed AIS to the Company. AIS is registered
with the Securities and Exchange Commission as a broker/dealer and is a
member of the National Association of Securities Dealers, Inc. It is also
registered with the appropriate state securities authorities as a
broker/dealer and is a Registered Investment Advisor. The principal
operation of AIS is the sale of fixed and variable annuities and mutual
funds through its registered representatives.
6. 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 June 30, 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
10
<Page>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
6. DERIVATIVE INSTRUMENTS (continued)
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 June 30, were as follows:
<Table>
<Caption>
2001 2000
------------------------------------------ ------------------------------------------
Notional Carrying Estimated Fair Notional Carrying Estimated
(Millions) Amounts Amounts Value Amounts Amounts Fair Value
---------------------------------------------------------------------------------------------------------------------
Futures contracts to sell
securities $ - $ - $ - $113.2 $ 0.6 $ 0.6
Warrants - 0.3 0.3 - 0.3 0.3
Embedded Derivatives -
investments - 5.4 5.4 - 2.0 2.0
---------------------------------------------------------------------------------------------------------------------
</Table>
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.
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 June 30, 2001, the Company did not have any investment income or loss
for writing call options on underlying securities and, as of June 30, 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.
11
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
7. 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:
<Table>
<Caption>
Six months ended June 30,
---------------------------------------
(Millions) 2001 2000
-----------------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during the period (1) $ 15.0 $ 4.3
Less: reclassification adjustments for accretion of net investment
discounts and gains included in net income (2) 18.3 5.2
-----------------------------------------------------------------------------------------------------------------
Net unrealized losses on securities $(3.3) $ (0.9)
=================================================================================================================
</Table>
(1) Pretax unrealized holding gains arising during the period were $23.1
million and $6.6 million for the six months ended June 30, 2001 and
June 30, 2000, respectively.
(2) Pretax reclassification adjustments for accretion of net investment
discounts and gains included in net income for the period were $28.2
million and $8.0 million for the six months ended June 30, 2001 and
June 30, 2000, respectively.
8. 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
indirectly 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 six months ended June 30, 2001 within VOBA was as follows:
<Table>
<Caption>
(Millions)
--------------------------------------------------------------------
Balance at December 31, 2000 $ 1,780.9
Additions 49.9
Interest accrued at 7 % 60.5
Amortization (116.9)
--------------------------------------------------------------------
Balance at June 30, 2001 $1,774.4
====================================================================
</Table>
12
<Page>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
9. 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 six months ended June 30, 2001 within the severance
liability and positions eliminated related to such actions was as follows:
<Table>
<Caption>
(Millions) Severance Liability Positions
-----------------------------------------------------------------------------------
Balance at December 31, 2000 $ 10.7 175
Actions taken (3.0) (39)
-----------------------------------------------------------------------------------
Balance at June 30, 2001 $ 7.7 136
===================================================================================
</Table>
Severance actions are expected to be substantially completed by March 31,
2002.
13
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
10. SEGMENT INFORMATION
Summarized financial information for the Company's principal operations for
the three months ended June 30, was as follows:
<Table>
<Caption>
Investment
Worksite Individual Management Discontinued
(Millions) Products (1) Products (1) Services (1) Operations (1) Other (1) Total
------------------------------------------------------------------------------------------------------------------------------
2001
Revenues from external customers $ 115.5 $ 36.6 $ 29.7 $ - $ (9.7) $ 172.1
Net investment income 195.5 26.0 0.5 (6.5) 215.5
------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 311.0 $ 62.6 $ 30.2 $ - $ (16.2) $ 387.6
==============================================================================================================================
Operating earnings (2) $ 45.9 $ 11.1 $ 7.1 $ - $ (23.9) $ 40.2
Net realized capital gains, net of tax 11.8 3.9 - - - 15.7
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 57.7 $ 15.0 $ 7.1 $ $ (23.9) $ 55.9
==============================================================================================================================
2000
Revenues from external customers 141.2 $ 28.3 $ 34.6 $ - $ (13.1) $ 191.0
Net investment income 192.0 27.7 0.6 1.0 221.3
------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding net realized
capital losses $ 333.2 $ 56.0 $ 35.2 $ - $ (12.1) $ 412.3
==============================================================================================================================
Operating earnings (2) $ 41.0 $ 9.0 $ 9.1 $ $ (0.3) $ 58.8
Net realized capital losses, net of tax (1.3) (0.6) - - - (1.9)
------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 39.7 8.4 9.1 - (0.3) 56.9
Discontinued operations, net of tax:
Amortization of deferred gain on
sale - - - 1.6 1.6
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 39.7 $ 8.4 $ 9.1 $ 1.6 $ (0.3) $ 58.5
==============================================================================================================================
</Table>
(1) Worksite Products include deferred annuity contracts that fund defined
contribution and deferred compensation plans; immediate annuity
contracts; mutual funds; distribution services for annuities and
mutual funds; programs offered to defined contribution and deferred
compensation plans that package administrative and recordkeeping
services along with a menu of investment options; wrapper agreements
containing certain benefit responsive 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, ING corporate expense and taxes not
allocated back to segment. 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.
14
<Page>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
10. SEGMENT INFORMATION (continued)
Summarized financial information for the Company's principal operations for
the six months ended June 30, was as follows:
<Table>
<Caption>
Investment
Worksite Individual Management Discontinued
(Millions) Products (1) Products (1) Services (1) Operations (1) Other (1) Total
------------------------------------------------------------------------------------------------------------------------------
2001
Revenues from external customers $ 231.9 $ 73.2 $ 62.2 $ - $ (19.9) $ 347.4
Net investment income 392.1 51.9 0.9 (5.2) 439.7
------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 624.0 $ 125.1 $ 63.1 $ - $ (25.1) $ 787.1
==============================================================================================================================
Operating earnings (2) $ 86.3 $ 19.4 $ 15.1 $ - $ (42.0) $ 78.8
Net realized capital gains, net of tax 9.5 3.7 13.2
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 95.8 $ 23.1 $ 15.1 $ $ (42.0) $ 92.0
==============================================================================================================================
2000
Revenues from external customers $ 282.0 $ 55.2 $ 67.8 $ - $ (25.1) $ 379.9
Net investment income 392.1 54.3 1.2 2.0 449.6
------------------------------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains (losses) $ 674.1 $ 109.5 $ 69.0 $ - $ (23.1) $ 829.5
==============================================================================================================================
Operating earnings (2) $ 83.5 $ 15.8 $ 16.5 $ - $ 0.2 $ 116.0
Net realized capital (losses) gains,
net of tax (6.0) (1.8) 0.1 - - (7.7)
------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 77.5 14.0 16.6 - 0.2 108.3
Discontinued operations, net of tax:
Amortization of deferred gain on sale - - - 3.2 - 3.2
------------------------------------------------------------------------------------------------------------------------------
Net income $ 77.5 $ 14.0 $ 16.6 $ 3.2 $ 0.2 $ 111.5
==============================================================================================================================
</Table>
(1) Worksite Products include deferred annuity contracts that fund defined
contribution and deferred compensation plans; immediate annuity
contracts; mutual funds; distribution services for annuities and
mutual funds; programs offered to defined contribution plans and
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,
ING corporate expense and taxes not allocated back to the segment. 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.
15
<Page>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
11. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, money market instruments or commercial
mortgages 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 June 30, 2001, there were off-balance sheet commitments of $263.7
million.
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. Certain discovery is underway. 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.
16
<Page>
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 June
30, 2001, and the related condensed consolidated statements of income, changes
in stockholder's equity and cash flows for the three and six-month periods then
ended. These financial statements are the responsibility of the Company's
management. The condensed consolidated balance sheet of the Company as of
December 31, 2000 was audited by other accountants whose report (dated March 27,
2001) expressed an unqualified opinion as to the application of accounting
principles generally accepted in the United States. The condensed consolidated
statements of income, changes in stockholder's equity and cash flows of the
Company for the three and six-month periods ended June 30, 2000 were reviewed by
other accountants whose report (dated August 3, 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 to be in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Hartford, Connecticut
August 13, 2001
17
<Page>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
The following analysis presents a review of the Company for the three-month and
six-month periods ended June 30, 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 Company funds; distribution
services for other Company products; and trustee, administrative and other
fiduciary services to retirement plans requiring or otherwise utilizing a
trustee or custodian.
18
<Page>
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 5 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 10 of Condensed Notes to Financial Statements.
19
<Page>
CONSOLIDATED RESULTS (continued)
Operating Summary
<Table>
<Caption>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------
(Millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Premiums (1) $ 29.1 $ 39.3 $ 60.9 $ 75.3
Charges assessed against policyholders 97.8 115.1 197.5 231.1
Net investment income 215.5 221.3 439.7 449.6
Net realized capital gains (losses) 24.3 (3.0) 20.3 (11.9)
Other income 45.2 36.6 89.0 73.5
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 411.9 409.3 807.4 817.6
- -------------------------------------------------------------------------------------------------------------------------
Current and future benefits 182.0 197.3 365.4 398.5
Operating expenses:
Salaries and related benefits 42.9 47.6 86.9 91.7
Other 49.5 51.0 108.2 106.3
Amortization of deferred policy acquisition costs and
value of business acquired 27.9 28.4 58.7 59.6
Amortization of goodwill 14.6 - 28.9 -
- -------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 316.9 324.3 648.1 656.1
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 95.0 85.0 159.3 161.5
Income taxes 39.1 28.1 67.3 53.2
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 55.9 56.9 92.0 108.3
Discontinued operations, net of tax:
Amortization of deferred gain on sale - 1.6 - 3.2
- -------------------------------------------------------------------------------------------------------------------------
Net Income $ 55.9 $ 58.5 $ 92.0 $ 111.5
=========================================================================================================================
Net realized capital gains (losses), net of tax
(included above) $ 15.7 $ (1.9) $ 13.2 $ (7.7)
=========================================================================================================================
Deposits (not included in premiums above)
Annuities -fixed options $ 387.4 $ 362.3 $ 797.7 $ 814.6
Annuities -variable options 1,035.1 1,158.0 2,265.9 2,482.2
- -------------------------------------------------------------------------------------------------------------------------
Total - deposits $ 1,422.5 $ 1,520.3 $ 3,063.6 $ 3,296.8
=========================================================================================================================
Assets under management:
Worksite Products $ 43,709.7 $ 47,422.9
Individual Products 8,079.5 8,797.5
Investment Management Services (2) 41,024.6 56,459.3
Consolidating adjustment (3) (23,617.7) (36,594.3)
- -------------------------------------------------------------------------------------------------------------------------
Total assets under management (4) (5) 69,196.1 76,085.4
- -------------------------------------------------------------------------------------------------------------------------
Assets under administration: (6)
Worksite Products 9,985.1 8,512.1
- -------------------------------------------------------------------------------------------------------------------------
Assets under management and administration $ 79,181.2 $ 84,597.5
=========================================================================================================================
</Table>
(1) Includes $21.9 million and $26.9 million for the three months ended June
30, 2001 and 2000, respectively, and $46.0 million and $55.2 million for
the six months ended June 30, 2001 and 2000, respectively, for annuity
premiums on contracts converting from the accumulation phase to payout
options with life contingencies.
(2) Includes $4,588.9 million and $6,893.0 million of assets managed for Aetna
Life Insurance Company, a former affiliate of the Company, as of June 30,
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
segment must be deducted from the aggregate segment assets to determine the
Company's consolidated assets under management.
(4) Includes $12,201.4 million and $15,234.1 million at June 30, 2001 and 2000,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) Excludes net unrealized capital gains of $146.9 million at June 30, 2001
and net unrealized capital losses of $241.6 million at June 30, 2000 on
assets invested through annuities with fixed options.
(6) Represents assets for which the Company provides administrative services
only.
20
<Page>
CONSOLIDATED RESULTS (continued)
Continuing Operations
Income from continuing operations decreased $1 million for the three months
ended June 30, 2001 compared to the same period in 2000. Excluding goodwill
amortization of $15 million and net realized capital gains in 2001 and net
realized capital losses in 2000, income from continuing operations for the three
months ended June 30, 2001 decreased $4 million, or 7%, compared to the same
period in 2000.
Income from continuing operations decreased $16 million for the six months ended
June 30, 2001 compared to the same period in 2000. Excluding goodwill
amortization of $29 million and net realized capital gains in 2001 and net
realized capital losses in 2000, income from continuing operations for the six
months ended June 30, 2001 decreased $8 million, or 7%, compared to the same
period in 2000.
The decrease in earnings for the three-month and six-month periods ended June
30, 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 partially offset by higher other income and
lower operating expenses.
Substantially all of the charges assessed against policyholders and other income
reported for continuing operations are derived from assets under management and
administration. Compared to June 30, 2000, assets under management and
administration at June 30, 2001 decreased 6% primarily due to a decline in the
stock market partially offset by 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 three months and six months ended June 30, 2000, deposits for
the three months and six months ended June 30, 2001 decreased 6% and 7%,
respectively. The decreases for the three and six month periods are primarily
due to a decrease in individual annuity sales.
The increases in the effective tax rate for the three-month and six-month
periods ended June 30, 2001 are 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 and six months ended June 30,
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.
21
<Page>
WORKSITE PRODUCTS
Operating Summary
<Table>
<Caption>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------
(Millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Premiums (1) $ 21.9 $ 39.3 $ 46.0 $ 75.3
Charges assessed against policyholders 72.6 88.3 146.6 178.4
Net investment income 195.5 192.0 392.1 392.1
Net realized capital gains (losses) 18.2 (2.0) 14.6 (9.2)
Other income 21.0 13.6 39.3 28.3
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 329.2 331.2 638.6 664.9
- -------------------------------------------------------------------------------------------------------------------------
Current and future benefits 156.1 178.3 312.3 360.1
Operating expenses:
Salaries and related benefits 32.6 31.3 64.6 62.4
Other 35.6 46.1 82.5 91.3
Amortization of deferred policy acquisition costs and
value of business acquired 16.2 14.5 31.9 31.9
- -------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 240.5 270.2 491.3 545.7
- -------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 88.7 61.0 147.3 119.2
Income taxes 31.0 21.3 51.5 41.7
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 57.7 $ 39.7 $ 95.8 $ 77.5
=========================================================================================================================
Net realized capital gains (losses), net of tax
(included above) $ 11.8 $ (1.3) $ 9.5 $ (6.0)
=========================================================================================================================
Deposits (not included in premiums above)
Annuities -fixed options $ 166.3 $ 155.9 $ 376.3 $ 336.1
Annuities -variable options 971.5 1,005.0 2,102.9 2,134.4
- -------------------------------------------------------------------------------------------------------------------------
Total - deposits $ 1,137.8 $ 1,160.9 $ 2,479.2 $ 2,470.5
=========================================================================================================================
Assets Under Management (2)
Annuities - fixed options (3) $ 10,643.7 $ 10,136.1
Annuities - variable options (4) 24,642.5 30,208.3
- -------------------------------------------------------------------------------------------------------------------------
Subtotal - annuities 35,286.2 40,344.4
Plan Sponsored and Other 8,423.5 7,078.5
- -------------------------------------------------------------------------------------------------------------------------
Total - assets under management 43,709.7 47,422.9
Assets under administration (5) 9,985.1 8,512.1
- -------------------------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 53,694.8 $ 55,935.0
=========================================================================================================================
</Table>
(1) Includes $21.9 million and $26.9 million for the three months ended June
30, 2001 and 2000, respectively, and $46.0 million and $55.2 million for
the six months ended June 30, 2001 and 2000, respectively, for annuity
premiums on contracts converting from the accumulation phase to payout
options with life contingencies.
(2) Includes $21,259.9 million at June 30, 2001 and $32,196.3 million at June
30, 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 $128.3 million at June 30, 2001
and net unrealized capital losses of $211.7 million at June 30, 2000.
(4) Includes $9,138.3 million at June 30, 2001 and $11,525.5 million at June
30, 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 increased $18 million for the three months ended
June 30, 2001 compared to the same period in 2000. Excluding net realized
capital gains and losses, net income for the three months ended June 30, 2001
increased $5 million, or 12%, compared to the same period in 2000.
22
<Page>
WORKSITE PRODUCTS (continued)
Worksite Products' net income increased $18 million for the six months ended
June 30, 2001 compared to the same period in 2000. Excluding net realized
capital gains and losses, net income increased $3 million, or 3%, compared to
the same period in 2000.
The increases for both the three-month and six-month periods ended June 30, 2001
are primarily the result of an increase in other income and a decrease in
operating expenses partially offset by a decrease in charges assessed against
policyholders.
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 June 30, 2001 decreased 4% compared to June 30, 2000. The
decrease in 2001 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 three months ended June 30, 2000, deposits for the three months
ended June 30, 2001 decreased 2%. Compared to the first six months of 2000,
deposits increased slightly for the six months ended June 30, 2001.
23
<Page>
INDIVIDUAL PRODUCTS
Operating Summary
<Table>
<Caption>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------
2001 2000 2001 2000
(Millions)
- -------------------------------------------------------------------------------------------------------------------------
Premiums $ 7.2 $ - $ 14.9 $ -
Charges assessed against policyholders 25.2 26.8 50.9 52.7
Net investment income 26.0 27.7 51.9 54.3
Net realized capital gains (losses) 6.1 (1.0) 5.7 (2.8)
Other income 4.2 1.5 7.4 2.5
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 68.7 55.0 130.8 106.7
- -------------------------------------------------------------------------------------------------------------------------
Current and future benefits 25.9 19.1 53.1 38.5
Operating expenses:
Salaries and related benefits 3.2 5.6 7.2 11.1
Other 7.4 6.5 14.2 13.7
Amortization of deferred policy acquisition costs and
value of business acquired 9.1 10.9 20.8 21.9
- -------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 45.6 42.1 95.3 85.2
- -------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 23.1 12.9 35.5 21.5
Income taxes 8.1 4.5 12.4 7.5
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 15.0 $ 8.4 $ 23.1 $ 14.0
=========================================================================================================================
Net realized capital gains (losses), net of tax
(included above) $ 3.9 $ (0.6) $ 3.7 $ (1.8)
=========================================================================================================================
Deposits (not included in premiums above)
Annuities -fixed options $ 221.1 $ 206.4 $ 421.4 $ 478.5
Annuities -variable options 63.6 153.0 163.0 347.8
- -------------------------------------------------------------------------------------------------------------------------
Total - deposits $ 284.7 $ 359.4 $ 584.4 $ 826.3
=========================================================================================================================
Assets Under Management (1)
Annuities - fixed options (2) $ 2,226.6 $ 2,219.3
Annuities - variable options (3) 5,852.9 6,578.2
- -------------------------------------------------------------------------------------------------------------------------
Total - assets under management $ 8,079.5 $ 8,797.5
=========================================================================================================================
</Table>
(1) Includes $2,357.8 million at June 30, 2001 and $4,398.0 million at June 30,
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 $18.6 million at June 30, 2001 and
net unrealized capital losses of $29.9 at June 30, 2000.
(3) Includes $3,063.1 million at June 30, 2001 and $3,798.6 million at June 30,
2000 related to assets invested through the Company's products in
unaffiliated mutual funds.
Individual Products' net income increased $7 million for the three months ended
June 30, 2001 compared to the same period in 2000. Excluding net realized
capital gains and losses, net income increased $2 million, or 23%, for the three
months ended June 30, 2001 compared to the same period in 2000. Net income
increased $9 million for the six months ended June 30, 2001 compared to the same
period in 2000. Excluding net realized capital gains and losses, net income
increased $4 million, or 23%, for the six months ended June 30, 2001 compared to
the same period in 2000.
The increases in earnings for the three-month and six-month periods ended June
30, 2001 are primarily the result of an increase in other income and a decrease
in operating expenses partially offset by a decrease in charges assessed against
policyholders.
24
<Page>
INDIVIDUAL PRODUCTS (continued)
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 June 30, 2001 decreased 8% compared to June 30, 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 same periods in 2000, deposits for the three and six months
ended June 30, 2001 decreased 21% and 29%, respectively, due to a decrease in
individual annuity sales.
INVESTMENT MANAGEMENT SERVICES
Operating Summary
<Table>
<Caption>
Three months ended June 30, Six months ended June 30,
--------------------------------------------------------------
(Millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.5 $ 0.6 $ 0.9 $ 1.2
Net realized capital gains - 0.1 - 0.2
Other income (1) 29.7 34.6 62.2 67.8
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 30.2 35.3 63.1 69.2
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related benefits 7.1 7.0 15.1 14.5
Other 12.0 13.7 24.3 28.2
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 19.1 20.7 39.4 42.7
- -------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 11.1 14.6 23.7 26.5
Income taxes 4.0 5.5 8.6 9.9
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 7.1 $ 9.1 $ 15.1 $ 16.6
=========================================================================================================================
Net realized capital gains, net of tax (included above) $ - $ - $ - $ 0.1
=========================================================================================================================
Assets under management:
Plan sponsored (2) $ 14,178.8 $ 16,260.5
Collateralized bond obligations 1,620.1 2,039.5
Retail mutual funds 1,608.0 1,565.0
- -------------------------------------------------------------------------------------------------------------------------
Subtotal 17,406.9 19,865.0
- -------------------------------------------------------------------------------------------------------------------------
Invested through products offered by the Worksite
Products and Individual Products segments: (3)
Variable annuity mutual funds 15,486.9 17,530.7
Fixed annuities (4) (5) - 12,355.4
Plan sponsored and other 8,130.8 6,708.2
- -------------------------------------------------------------------------------------------------------------------------
Subtotal 23,617.7 36,594.3
- -------------------------------------------------------------------------------------------------------------------------
Total assets under management $ 41,024.6 $ 56,459.3
=========================================================================================================================
</Table>
(1) Primarily includes investment advisory fees earned on assets under
management.
(2) Includes $4,588.9 million and $6,893.0 million of assets managed for Aetna
Life Insurance Company, a former affiliate of the Company, as of June 30,
2001 and 2000, respectively.
(3) The Investment Management Services segment earns investment advisory fees
on these assets, which are also reported in either the Worksite Products
or the Individual Products segments.
(4) In accordance with a new advisory agreement effective April 1, 2001, ING
Investment Management, LLC, an affiliate of the Company, became the
investment manager for the assets invested through the Company 's fixed
annuity products.
(5) Excludes net unrealized capital losses of $241.6 million at June 30, 2000.
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<Page>
INVESTMENT MANAGEMENT SERVICES (continued)
For the three months ended June 30, 2001, the Investment Management Services
segment's net income excluding net realized capital gains in 2000, decreased $2
million, or 22%, compared to the same period in 2000. For the six months ended
June 30, 2001, the Investment Management Services segment's net income excluding
net realized capital gains in 2000, decreased $1 million, or 8%, compared to the
same period in 2000.
The decrease in earnings for the three and six month periods ended June 30, 2001
primarily reflects a decrease in advisory fee income partially offset by a
decrease in other operating expenses.
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 June 30, 2001, assets under management decreased 27% compared to
those reported at June 30, 2000. This decrease was primarily due to a change in
the advisory agreements relating to the Company's fixed annuity and
collateralized bond obligation assets under management and a decline in the
stock market.
Effective April 1, 2001, ING Investment Management, LLC, an affiliate of the
Company, replaced Aeltus Investment Management, Inc. ("Aeltus"), an indirect
wholly owned subsidiary of the Company, as the advisor for all of the Company's
fixed annuity assets under management. Aeltus, along with its subsidiaries,
comprises the Investment Management Services segment. Subsequent to the
effective date of the new advisory agreement, the Company no longer received
advisory fees relating to these assets under management.
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
to Lincoln. The after tax amortization recognized during the three and six
months ended June 30, 2000 was $1.6 million and $3.2 million, respectively. 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 $37 billion at
June 30, 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.
26
<Page>
GENERAL ACCOUNT INVESTMENTS
The Company's invested assets were comprised of the following:
<Table>
<Caption>
(Millions) June 30, 2001 December 31, 2000
-------------------------------------------------------------------------------------------------------------------
Debt securities, available for sale, at fair value (1) $ 13,337.2 $ 11,371.4
Equity securities, at fair value:
Nonredeemable preferred stock 25.0 100.7
Investment in affiliated mutual funds 11.6 12.7
Common stock 5.1 3.5
Short-term investments (2) 135.6 111.7
Mortgage loans 6.7 4.6
Policy loans 335.8 339.3
Other investments 13.2 13.4
-------------------------------------------------------------------------------------------------------------------
Total Investments $ 13,870.2 $ 11,957.3
===================================================================================================================
</Table>
(1) At June 30, 2001 and December 31, 2000, $491.5 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 June 30, 2001, there were no short-term
investments pledged to creditors.
Debt Securities
At June 30, 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 June 30,
2001 and December 31, 2000, $10.9 billion, or 81% 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 $146.9 million and $126.9
million at June 30, 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 June 30, 2001 and AA at December 31, 2000.
27
<Page>
GENERAL ACCOUNT INVESTMENTS (continued)
The percentage of total debt securities by quality rating category is as
follows:
<Table>
<Caption>
June 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------------
AAA 53.3% 53.2%
AA 7.2 9.1
A 20.7 23.5
BBB 13.5 9.9
BB 2.8 1.5
B and Below 2.5 2.8
- ------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
================================================================================================
</Table>
The percentage of total debt securities by market sector is as follows:
<Table>
<Caption>
June 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------------------------------
U.S. Corporate 47.0% 43.0%
Mortgage-backed 32.2 36.9
Asset-backed 15.4 6.7
U.S. Treasuries/Agencies 4.8 8.4
Foreign (1) 0.6 5.0
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
==================================================================================================================
</Table>
(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.
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. Certain discovery is underway. The Company intends to defend the action
vigorously.
28
<Page>
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 August 9, 2001 and May 11, 2001 are
as follows:
<Table>
<Caption>
Rating Agencies
--------------------------------------------------------------------------------
Moody's Investors Standard &
A.M. Best Fitch Service Poor's
- ----------------------------------------------------------------------------------------------------------------
August 9, 2001 A+ AA+ Aa2 AA+
May 11, 2001 A+ AA+ Aa2 AA+
- ----------------------------------------------------------------------------------------------------------------
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
21 Subsidiaries of the Registrant
Incorporated by reference to Item 26 of Post-Effective
Amendment No. 18 to Registration Statement on Form N-4
(File Number 33-81216), as filed on April 9, 2001.
(b) Reports on Form 8-K.
Incorporated by reference to Form 8-K as filed on May 8, 2001 to
disclose a change in certifying accountant.
29
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
----------------------------------------
(Registrant)
AUGUST 13, 2001 By /s/ Deborah Koltenuk
- ------------------------- --------------------------------------------
(Date) Deborah Koltenuk
Vice President and Corporate Controller
(Chief Accounting Officer)
30