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, 2000 Commission file number 33-23376
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Aetna Life Insurance and Annuity Company
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(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code (860) 273-0123
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None
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Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at July 31, 2000
- -------------- ----------------
Common Stock, par value $50 55,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
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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........................................... 14
Item 2. Management's Analysis of the Results of Operations............................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 23
Item 5. Other Information............................................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................................. 24
Signature ............................................................................... 25
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
(millions)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenue:
Premiums $ 39.3 $ 18.8 $ 75.3 $ 42.4
Charges assessed against policyholders 115.1 95.6 231.1 184.5
Net investment income 221.3 218.4 449.6 438.2
Net realized capital (losses) gains (3.0) 0.9 (11.9) 5.7
Other income 36.6 33.2 73.5 62.4
------------ ------------ ------------ -------------
Total revenue 409.3 366.9 817.6 733.2
Benefits and expenses:
Current and future benefits 197.3 179.4 398.5 362.2
Operating expenses:
Salaries and related benefits 47.6 37.3 91.7 72.7
Other 51.0 51.2 106.3 101.1
Amortization of deferred policy acquisition costs 28.4 26.8 59.6 51.7
------------ ------------ ------------ -------------
Total benefits and expenses 324.3 294.7 656.1 587.7
------------ ------------ ------------ -------------
Income from continuing operations before income taxes 85.0 72.2 161.5 145.5
Income taxes 28.1 23.7 53.2 47.8
------------ ------------ ------------ -------------
Income from continuing operations 56.9 48.5 108.3 97.7
Discontinued operations, net of tax:
Amortization of deferred gain on sale 1.6 1.4 3.2 2.7
------------ ------------ ------------ -------------
Net income $ 58.5 $ 49.9 $111.5 $100.4
============ ============ ============ =============
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)
June 30, December 31,
2000 1999
---------------- ----------------
Assets
- ------
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,408.9 and $11,657.9) $11,167.3 $11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $110.2 and $134.7) 105.9 130.9
Investment in affiliated mutual funds (cost: $60.9 and $63.5) 63.2 64.1
Common stock (cost: $6.2 and $6.7) 13.9 11.5
Short-term investments 15.3 74.2
Mortgage loans 4.6 6.7
Policy loans 325.9 314.0
Other investments 13.4 13.2
---------------- ----------------
Total investments 11,709.5 12,024.7
Cash and cash equivalents 892.1 694.4
Short-term investments under securities loan agreement 644.8 232.5
Accrued investment income 144.9 150.7
Premiums due and other receivables 379.0 298.3
Reinsurance recoverable 3,014.1 3,001.2
Deferred income taxes 119.1 150.4
Deferred policy acquisition costs 1,129.1 1,046.4
Other assets 74.2 96.5
Separate Accounts assets 40,129.6 38,692.6
---------------- ----------------
Total assets $58,236.4 $56,387.7
================ ================
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $3,900.9 $ 3,850.4
Unpaid claims and claim expenses 41.0 27.3
Policyholders' funds left with the Company 10,814.2 11,121.7
---------------- ----------------
Total insurance reserve liabilities 14,756.1 14,999.4
Payables under securities loan agreement 644.8 232.5
Current income taxes 32.8 14.7
Other liabilities 1,177.4 1,062.8
Separate Accounts liabilities 40,129.6 38,692.6
---------------- ----------------
Total liabilities 56,740.7 55,002.0
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Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 431.9 431.9
Accumulated other comprehensive loss (45.7) (44.8)
Retained earnings 1,106.7 995.8
---------------- ----------------
Total shareholder's equity 1,495.7 1,385.7
---------------- ----------------
Total liabilities and shareholder's equity $58,236.4 $56,387.7
================ ================
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
(millions)
Six Months Ended June 30,
-------------------------
2000 1999
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Shareholder's equity, beginning of period $1,385.7 $1,394.4
Comprehensive income:
Net income 111.5 100.4
Other comprehensive income (loss), net of tax:
Unrealized losses on securities (($1.4) and ($154.4)
pretax)(1) (0.9) (100.4)
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Total comprehensive income 110.6 0.0
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Other changes 0.9 0.3
Common stock dividends (1.5) (14.5)
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Shareholder's equity, end of period $1,495.7 $1,380.2
========== ==========
(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
(millions)
Six Months Ended June 30,
-------------------------
2000 1999
---------- ----------
Cash Flows from Operating Activities:
Net income $ 111.5 $ 100.4
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Net accretion of discount on investments (19.9) (12.5)
Amortization of deferred gain on sale (3.2) (2.7)
Net realized capital losses (gains) 11.9 (5.7)
Changes in assets and liabilities:
Decrease in accrued investment income 5.8 7.5
Decrease in premiums due and other receivables 8.0 34.8
Increase in policy loans (11.9) (6.5)
Increase in deferred policy acquisition costs (82.7) (73.2)
Net increase in universal life account balances 13.4 64.9
Increase (decrease) in other insurance reserve liabilities 55.6 (72.6)
Increase (decrease) in other liabilities and other assets 27.5 (45.9)
Increase (decrease) in income taxes 48.5 (275.3)
---------- ----------
Net cash provided by (used for) operating activities 164.5 (286.8)
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 6,177.7 2,055.6
Equity securities 54.7 61.6
Mortgage loans 2.1 2.3
Investment maturities and collections of:
Debt securities available for sale 339.4 679.4
Short-term investments 50.5 54.2
Cost of investment purchases in:
Debt securities available for sale (6,255.2) (2,330.1)
Equity securities (14.1) (4.1)
Short-term investments (17.0) (35.9)
Decrease in property and equipment 3.6 7.0
Other, net (3.2) 5.1
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Net cash provided by investing activities 338.5 495.1
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Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 910.3 1,117.7
Withdrawals of investment contracts (1,229.2) (879.8)
Dividends paid to shareholder (1.5) (220.5)
Other, net 15.1 67.2
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Net cash (used for) provided by financing activities (305.3) 84.6
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Net increase in cash and cash equivalents 197.7 292.9
Cash and cash equivalents, beginning of period 694.4 629.4
---------- ----------
Cash and cash equivalents, end of period $ 892.1 $ 922.3
========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 4.7 $ 287.8
========== ==========
See Condensed Notes to Consolidated Financial Statements.
6
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1) Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company ("ALIAC") and its wholly owned subsidiaries, Aetna
Insurance Company of America ("AICA"), Aetna Investment Adviser Holding
Company, Inc. ("IA Holdco") and Aetna Investment Services, Inc.
(collectively, the "Company"). ALIAC is a wholly owned subsidiary of Aetna
Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary
of Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc.
("Aetna"). On June 30, 2000 HOLDCO contributed Aetna Investment Services,
Inc. ("AISI") to the Company. (Refer to note 2). The Company has two
business segments: Financial Products and Investment Management Services.
On October 1, 1998, the Company sold its individual life insurance business
to Lincoln National Corporation ("Lincoln") and accordingly, it is now
classified as Discontinued Operations.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. The
contribution of IA Holdco to the Company, which occurred on July 1, 1999,
and the contribution of AISI to the Company were each accounted for in a
manner similar to that of a pooling-of-interests and, accordingly, the
Company's historical consolidated financial statements have been restated
to include the accounts and results of operations of IA Holdco and AISI.
Certain reclassifications have been made to 1999 financial information to
conform to the 2000 presentation. These interim statements necessarily rely
heavily on estimates, including assumptions as to annualized tax rates. In
the opinion of management, all adjustments necessary for a fair statement
of results for the interim periods have been made. All such adjustments are
of a normal, recurring nature. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes as presented in ALIAC's 1999 Annual
Report on Form 10-K. Certain financial information that is normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles, but that is not required for
interim reporting purposes, has been condensed or omitted.
2) Contribution of AISI from HOLDCO
--------------------------------
On June 30, 2000, HOLDCO contributed AISI to the Company. AISI is
registered with the Securities Exchange Commission as a broker/dealer and
is a member of the National Association of Securities Dealers, Inc. It is
also registered with the appropriate state securities authorities as a
broker/dealer. The principal operation of AISI is the sale of fixed and
variable annuities and mutual funds through its registered representatives.
7
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
3) Recent Developments
-------------------
Agreement to sell Aetna Financial Services and Aetna International
On July 20, 2000, Aetna announced that it reached a definitive agreement to
sell its Aetna Financial Services and Aetna International businesses to ING
Groep N.V. ("ING") in a transaction valued at approximately $7.7 billion.
The Company is part of the Aetna Financial Services business and will be
included in the sale to ING. Under the terms of the agreement and in an
integrated transaction, Aetna will spin off to its shareholders the shares
of a standalone health company that will be comprised primarily of its
Aetna U.S. Healthcare and Large Case Pensions businesses. Simultaneously,
Aetna, which then will be comprised of Aetna Financial Services and Aetna
International, will merge with a newly formed subsidiary of ING.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well
as other closing conditions, by year-end 2000. Aetna expects that it will
incur certain costs associated with the definitive agreement with ING
related to the consummation of the transaction and such costs may be
material to Aetna and the Company. The full impact of the sale to ING on
the Company's financial position and results of operations cannot be
determined at this time.
4) New Accounting Standard
-----------------------
On January 1, 2000, the Company adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified
Public Accountants. This statement provides guidance on how to account for
all insurance and reinsurance contracts that do not transfer insurance
risk, except for long-duration life and health insurance contracts. The
adoption of this standard had no impact on the Company's financial position
or results of operations.
8
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
5) Future Accounting Standard
--------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, further guidance related
to accounting for derivative instruments and hedging activities was
provided when the FASB issued FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133. This standard, as amended requires companies to
record all derivatives on the balance sheet as either assets or liabilities
and measure those instruments at fair value. The manner in which companies
are to record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, these standards are effective for the Company's
financial statements beginning January 1, 2001, with early adoption
permitted. The impact of FAS No. 133, as amended, on the Company's
financial statements will vary based on certain factors including future
interpretive guidance from the FASB, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of
such instruments. The Company is evaluating the impact of the adoption of
this standard and currently does not believe that this standard will have a
material effect on the Company's financial position or results of
operations.
6) Additional Information - Accumulated Other Comprehensive (Loss) Income
----------------------------------------------------------------------
Changes in accumulated other comprehensive income (loss) related to changes
in unrealized losses on securities (excluding those related to
experience-rated contractholders) were as follows:
Six Months Ended June 30,
(Millions) 2000 1999
----------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the period(1) $ 4.3 $ (88.6)
Less: reclassification adjustments for amortization of net investment
discounts and gains included in net income(2) 5.2 11.8
----------------------------------------------------------------------------------------------------------------
Net unrealized losses on securities $(0.9) $(100.4)
================================================================================================================
(1) Pretax unrealized holding gains (losses) arising during the period were
$6.6 million and $(136.3) million for 2000 and 1999, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income for the period were $8.0 million
and $18.1 million for 2000 and 1999, respectively.
9
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
7) Segment Information
-------------------
Summarized financial information for the Company's principal operations for
the three months ended June 30, was as follows:
Investment
Financial Management Discontinued
(Millions) Products(1) Services(1) Operations(1) Other(1) Total
-----------------------------------------------------------------------------------------------------------------------
2000
Revenues from external customers $ 169.5 $ 34.6 $ - $(13.1) $ 191.0
Net investment income 219.7 0.6 - 1.0 221.3
-----------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
losses $ 389.2 $ 35.2 $ - $(12.1) $ 412.3
=======================================================================================================================
Operating earnings(2) $ 51.8 $ 9.1 $ - $ (1.9) $ 59.0
Realized capital losses, net of tax (2.1) - - - (2.1)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 49.7 9.1 - (1.9) 56.9
Discontinued operations, net of tax:
Amortization of deferred gain on sale - - 1.6 - 1.6
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 49.7 $ 9.1 $ 1.6 $ (1.9) $ 58.5
=======================================================================================================================
1999
Revenues from external customers $ 130.7 $ 28.4 $ - $(11.5) $ 147.6
Net investment income 217.3 0.3 - 0.8 218.4
-----------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
gains $ 348.0 $ 28.7 $ - $(10.7) $ 366.0
=======================================================================================================================
Operating earnings(2) $ 48.0 $ 6.9 $ - $ (7.0) $ 47.9
Realized capital gains, net of tax 0.6 - - 0.6
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 48.6 6.9 - (7.0) 48.5
Discontinued operations, net of tax:
Amortization of deferred gain on sale - - 1.4 - 1.4
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 48.6 $ 6.9 $ 1.4 $ (7.0) $ 49.9
=======================================================================================================================
(1) Financial Products include: deferred and immediate annuity contracts;
mutual funds; distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment
Management Services include the following services: investment advisory
services to affiliated and unaffiliated institutional and retail
clients; underwriting; distribution for Company mutual funds and an
affiliate's separate accounts ; and trustee, administrative and other
fiduciary services to retirement plans. Discontinued Operations include
life insurance products. Other includes consolidating adjustments and
Year 2000 costs of $4.9 million in 1999.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses. While operating earnings is the
measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
10
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
7) Segment Information (Continued)
-------------------
Summarized financial information for the Company's principal operations for
the six months ended June 30, was as follows:
Investment
Financial Management Discontinued
(Millions) Products(1) Services(1) Operations(1) Other(1) Total
-----------------------------------------------------------------------------------------------------------------------
2000
Revenues from external customers $ 337.2 $ 67.8 $ - $(25.1) $ 379.9
Net investment income 446.4 1.2 - 2.0 449.6
-----------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
(losses) gains $ 783.6 $ 69.0 $ - $(23.1) $ 829.5
=======================================================================================================================
Operating earnings (2) $ 103.2 $ 16.5 $ - $ (3.7) $ 116.0
Realized capital (losses) gains, net of tax (7.8) 0.1 - - (7.7)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 95.4 16.6 - (3.7) 108.3
Discontinued operations, net of tax:
Amortization of deferred gain on sale - - 3.2 - 3.2
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 95.4 $ 16.6 $ 3.2 $ (3.7) $ 111.5
=======================================================================================================================
1999
Revenues from external customers $ 254.9 $ 56.6 $ - $(22.2) $ 289.3
Net investment income 436.0 0.6 - 1.6 438.2
-----------------------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
gains $ 690.9 $ 57.2 $ - $(20.6) $ 727.5
=======================================================================================================================
Operating earnings (2) $ 94.6 $ 13.6 $ - $(14.2) $ 94.0
Realized capital gains, net of tax 3.7 - - - 3.7
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 98.3 13.6 - (14.2) 97.7
Discontinued operations, net of tax:
Amortization of deferred gain on sale - - 2.7 - 2.7
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 98.3 $ 13.6 $ 2.7 $(14.2) $ 100.4
=======================================================================================================================
(1) Financial Products include: deferred and immediate annuity contracts;
mutual funds; distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment
Management Services include the following services: investment advisory
services to affiliated and unaffiliated institutional and retail
clients; underwriting; distribution for Company mutual funds and an
affiliate's separate accounts ; and trustee, administrative and other
fiduciary services to retirement plans. Discontinued Operations include
life insurance products. Other includes consolidating adjustments and
Year 2000 costs of $10.4 million in 1999.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses. While operating earnings is the
measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
11
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of \Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
8) Commitments and Contingent Liabilities
--------------------------------------
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments between the time that the
Company enters into the commitments and the specified future date on which
the Company must purchase or sell the securities, as the case may be. As of
June 30, 2000, there were no such off-balance sheet commitments.
Litigation
In recent years, several life insurance and annuity companies have been
named as defendants in class action lawsuits relating to life insurance and
annuity pricing and sales practices. The Company is a defendant in two such
lawsuits.
A purported class action complaint was filed in the Circuit Court of
Lauderdale County, Alabama on March 28, 2000 by Loretta Shaner against
ALIAC (the "Shaner Complaint"). This case has been removed to the United
States District Court for the Northern District of Alabama. The Shaner
Complaint seeks unspecified compensatory damages from ALIAC and unnamed
affiliates of ALIAC. The Shaner Complaint claims that ALIAC's sale of
deferred annuity products for use as investments in tax-deferred
contributory retirement plans (e.g., IRAs) is improper. This litigation is
in the preliminary stages. The Company intends to defend the action
vigorously.
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.
This litigation is in the preliminary stages. The Company intends to defend
the action vigorously.
12
Item 1. Financial Statements (continued)
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (continued)
8) Commitments and Contingent Liabilities (continued)
--------------------------------------------------
The Company is also involved in numerous other lawsuits arising, for the
most part, in the ordinary course of its business operations. While the
outcome of the litigation against the Company referred to in this paragraph
cannot be determined at this time, after consideration of the defenses
available to the Company and any related reserves established, and after
consultation with counsel, the litigation referred to in this paragraph is
not expected to result in liability for amounts material to the financial
condition of the Company, although it may adversely affect results of
operations in future periods.
9) Dividends
---------
During 2000, the Company paid $1.5 million in dividends to HOLDCO, which
did not require approval from the Insurance Commissioner of the State of
Connecticut.
On July 26, 2000, a distribution was declared in an amount up to $8.5
million, payable no later than October 3, 2000 to HOLDCO.
13
Independent Auditors' Review Report
The Board of Directors
Aetna Life Insurance and Annuity Company:
We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Life Insurance and Annuity Company and Subsidiaries as of June 30, 2000, and the
related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 2000 and 1999 and the related condensed
consolidated statements of changes in shareholder's equity and cash flows for
the six-month periods ended June 30, 2000 and 1999. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Life Insurance and Annuity
Company and Subsidiaries as of December 31, 1999, and the related consolidated
statements of income, changes in shareholder's equity and cash flows for the
year then ended (not presented herein); and in our report dated February 7,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
Hartford, Connecticut
August 3, 2000
14
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, 2000 and 1999. This review should be read in
conjunction with the consolidated financial statements and other data presented
herein as well as the "Management's Analysis of the Results of Operations"
section contained in ALIAC's 1999 Annual Report on Form 10-K.
Overview
Recent Developments
On July 20, 2000, Aetna Inc. ("Aetna"), the ultimate parent of the Company,
announced that it reached a definitive agreement to sell its Aetna Financial
Services and Aetna International businesses to ING Groep N.V. ("ING") in a
transaction valued at approximately $7.7 billion. The Company is part of the
Aetna Financial Services business and will be included in the sale to ING. Under
the terms of the agreement and in an integrated transaction, Aetna will spin off
to its shareholders the shares of a standalone health company that will be
comprised primarily of its Aetna U.S. Healthcare and Large Case Pensions
businesses. Simultaneously, Aetna, which then will be comprised of Aetna
Financial Services and Aetna International, will merge with a newly formed
subsidiary of ING.
Aetna's goal is to close the transaction, which is subject to receipt of
required shareholder, regulatory and other consents and approvals, as well as
other closing conditions, by year-end 2000. Aetna expects that it will incur
certain costs associated with the definitive agreement with ING upon
consummation of the transaction and such costs may be material to Aetna and the
Company. The full impact of the sale to ING on the Company's financial position
and results of operations cannot be predicted at this time.
Consolidated Results
Consolidated results include results from continuing operations and discontinued
operations. Results of continuing operations are comprised of the results of the
Financial Products and Investment Management Services segments plus certain
items not directly allocable to the business segments. Refer to Note 7 of
Condensed Notes to Consolidated Financial Statements.
Results of discontinued operations for the three and six months ended June 30,
2000 and 1999 consist of the recognized portion of the deferred gain relating to
the sale of the domestic individual life insurance business that occurred on
October 1, 1998. Refer to "Discontinued Operations" in this report and to Note 3
of Notes to the Consolidated Financial Statements and "Overview" in ALIAC's 1999
Annual Report on Form 10-K.
15
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
On June 30, 2000, HOLDCO contributed AISI to the Company. AISI is registered
with the Securities Exchange Commission as a broker/dealer and is a member of
the National Association of Securities Dealers, Inc. It is also registered with
the appropriate state securities authorities as a broker/dealer. The principal
operation of AISI is the sale of fixed and variable annuities and mutual funds
through its registered representatives. The contribution of AISI to the Company
was accounted for in a manner similar to that of a pooling-of-interests and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of HOLDCO. AISI's financial
results are included in the Financial Products segment.
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The contribution
of IA Holdco to the Company was accounted for in a manner similar to that of a
pooling-of-interests and, accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results of
IA Holdco.
Continuing Operations
Income from continuing operations increased $8 million for the three months
ended June 30, 2000 compared to the corresponding period in 1999. Income from
continuing operations includes Year 2000 costs of $5 million in 1999. Excluding
net realized capital losses of $2 million in 2000 and net realized capital gains
of $1 million in 1999, earnings from continuing operations for the three months
ended June 30, 2000 increased $11 million, or 23%, compared to the same period
in 1999.
Income from continuing operations increased $11 million for the six months ended
June 30, 2000 compared to the corresponding period in 1999. Income from
continuing operations includes Year 2000 costs of $10 million in 1999. Excluding
net realized capital losses of $8 million in 2000 and net realized capital gains
of $4 million in 1999, earnings from continuing operations for the six months
ended June 30, 2000 increased $22 million, or 23%, compared to the same period
in 1999.
The increase in earnings for the three and six month periods ended June 30, 2000
primarily reflects an increase in charges assessed against policyholders from
higher levels of assets under management and administration partially offset by
higher salaries and related benefits.
Substantially all of the charges assessed against policyholders and other income
reported for continuing operations are derived from assets under management and
administration. Compared to June 30, 1999, assets under management and
administration at June 30, 2000 increased 24% primarily due to appreciation in
the stock market, new investment advisory and administrative contracts
(including approximately $3 billion of plan assets from a new large case, which
closed in the second quarter of 2000) and additional net deposits (i.e.,
deposits less surrenders). Assets under management and administration for
continuing operations are shown in the table below. Certain assets under
management are reported for both the Financial Products and the Investment
Management Services segments, because each segment reports a different component
of the revenue generated from this particular group of assets. This group of
assets must be deducted from the aggregate segment assets to determine the
consolidated assets under management of the Company.
16
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
(Millions) June 30, 2000 June 30, 1999
- ------------------------------------------------------------------------------------------------------------------
Assets under management:
Financial Products $ 56,220.4 $48,568.9
Investment Management Services(1) 56,470.3 51,329.7
Consolidating adjustment(2) (36,605.3) (35,538.7)
- ------------------------------------------------------------------------------------------------------------------
Total - assets under management(3)(4) $ 76,085.4 $64,359.9
- ------------------------------------------------------------------------------------------------------------------
Assets under administration:(5)
Financial Products 8,512.1 3,729.4
- ------------------------------------------------------------------------------------------------------------------
Assets under management and administration $ 84,597.5 $68,089.3
==================================================================================================================
(1) Includes $6,893.0 million and $7,484.0 million of assets managed for Aetna
Life Insurance Company, an affiliate of the Company, as of June 30, 2000
and 1999, respectively. (Aetna Inc. reports these assets in its Large Case
Pensions segment.)
(2) Assets under management reported in both the Financial Products and
Investment Management Services segments must be deducted from the aggregate
segment assets to determine the consolidated assets under management of the
Company.
(3) Includes $15,324.1 million and $9,699.8 million at June 30, 2000 and 1999,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(4) Excludes net unrealized capital losses of $241.6 million at June 30, 2000
and net unrealized capital gains of $2.6 million at June 30, 1999 on assets
invested through annuities with fixed options.
(5) Represents assets for which the Company provides administrative services
only.
For continuing operations, salaries and related benefits in the three and six
month periods ended June 30, 2000 increased 28% and 26%, respectively, over the
corresponding periods in 1999. These increases primarily reflect higher staffing
levels, which are attributable to business growth and the implementation of
strategic business initiatives, particularly improving system infrastructures
and adding new distribution capabilities. Compared to the same periods in 1999,
other operating expenses for the three months ended June 30, 2000 remained
approximately the same and those for the six months ended June 30, 2000
increased 5%. For the three and six month periods ended June 30, 1999, other
operating expenses include Year 2000 costs, before tax, of approximately $8
million and $16 million, respectively. Year 2000 costs for 1999 are not
allocated to the Company's segments.
Outlook
Refer to "Forward-Looking Information/Risk Factors" in this Report and
"Overview-Outlook" and "Forward-Looking Information/Risk Factors" in ALIAC's
1999 Annual Report on Form 10-K.
17
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Products
Operating Summary
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------
(Millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Premiums (1) $ 39.3 $ 18.8 $ 75.3 $ 42.4
Charges assessed against policyholders 115.1 95.6 231.1 184.5
Net investment income 219.7 217.3 446.4 436.0
Net realized capital (losses) gains (3.1) 0.9 (12.1) 5.7
Other income 15.1 16.3 30.8 28.0
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 386.1 348.9 771.5 696.6
- --------------------------------------------------------------------------------------------------------------------------
Current and future benefits 197.3 179.4 398.5 362.2
Operating expenses:
Salaries and related benefits 40.7 31.6 77.3 61.2
Other 49.4 42.3 101.2 81.7
Amortization of deferred policy acquisition costs 25.4 23.4 53.8 45.8
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 312.8 276.7 630.8 550.9
- --------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 73.3 72.2 140.7 145.7
Income taxes 23.6 23.6 45.3 47.4
- --------------------------------------------------------------------------------------------------------------------------
Net income (2) $ 49.7 $ 48.6 $ 95.4 $ 98.3
==========================================================================================================================
Net realized capital (losses) gains, net of tax
(included above) $ (2.1) $ 0.6 $ (7.8) $ 3.7
==========================================================================================================================
Deposits (not included in premiums above)
Annuities - fixed options $ 362.2 $ 449.1 $ 814.6 $ 994.3
Annuities - variable options 1,158.1 1,061.0 2,482.2 2,545.1
- --------------------------------------------------------------------------------------------------------------------------
Total - deposits $ 1,520.3 $ 1,510.1 $ 3,296.8 $ 3,539.4
==========================================================================================================================
Assets under management
Annuities - fixed options (3) $ 12,355.4 $ 12,550.8
Annuities - variable options (4) 36,786.5 29,499.5
- --------------------------------------------------------------------------------------------------------------------------
Subtotal - annuities 49,141.9 42,050.3
Plan sponsored and other 7,078.5 6,518.6
- --------------------------------------------------------------------------------------------------------------------------
Total assets under management (5) 56,220.4 48,568.9
Assets under administration (6) 8,512.1 3,729.4
- --------------------------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 64,732.5 $ 52,298.3
==========================================================================================================================
(1) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $26.9 million for the
three months ended June 30, 2000, $16.3 million for the three months ended
June 30, 1999, $55.2 million for the six months ended June 30, 2000 and
$38.0 million for the six months ended June 30, 1999.
(2) Year 2000 costs for 1999 are not allocated to segment operating expenses
and, therefore, are excluded in the determination of segment net income.
(3) Excludes net unrealized capital losses of $241.6 million at June 30, 2000
and net unrealized capital gains of $2.6 million at June 30, 1999.
(4) Includes $15,324.1 million and $9,699.8 million at June 30, 2000 and 1999,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) Includes $36,605.3 million and $35,538.7 million at June 30, 2000 and 1999,
respectively, of assets under management that are also reported in the
Investment Management Services segment (Refer to "Overview-Continuing
Operations").
(6) Represents assets for which the Company provides administrative services
only.
Financial Products' net income for the three months ended June 30, 2000
increased $1 million compared to the corresponding period in 1999. Excluding net
realized capital gains or losses, results for the three months ended June 30,
2000 increased $4 million, or 8%, compared to the corresponding period in 1999.
18
Item 2. Management's Analysis of the Results of Operations. (continued)
Financial Products (continued)
Net income for the six months ended June 30, 2000 decreased $3 million compared
to the same period in 1999. Excluding net realized capital gains and losses,
results for the six months ended June 30, 2000 increased $9 million, or 9%,
compared to the first six months of 1999.
This increase in earnings for both the three and six month periods ended June
30, 2000 primarily reflects an increase in charges assessed against
policyholders and other income offset by an increase in salaries and related
benefits.
Substantially all of the charges assessed against policyholders and other income
reported for the segment are calculated based on assets under management and
administration. Compared to June 30, 1999, assets under management and
administration at June 30, 2000 increased 24% primarily due to appreciation in
the stock market, new investment advisory and administration contracts
(including approximately $3.0 billion of plan assets from a new large case,
which closed in the second quarter of 2000) and additional net deposits (i.e.,
deposits less surrenders). Deposits for the six months ended June 30, 2000
decreased 7% compared to the corresponding period in 1999 primarily because
deposits for the first three months of 1999 reflected plan assets of a large new
case. Excluding this large case, deposits for the six months ended June 30, 2000
would have increased 15% compared to the corresponding period in 1999.
Salaries and related benefits in the three and six month periods ended June 30,
2000 increased 29% and 26%, respectively, over the corresponding periods in
1999. These increases, primarily reflect higher staffing levels, which are
attributable to business growth and the implementation of strategic business
initiatives, particularly improving system infrastructures and adding new
distribution capabilities. Compared to the same periods in 1999, other operating
expenses for the three and six months ended June 30, 2000 increased 17% and 24%,
respectively, primarily because of business growth. These increases for other
operating expenses are higher than the corresponding changes for other operating
expenses discussed in "Overview/Continuing Operations" because Year 2000 costs
for 1999 are not allocated to the Financial Products segment. Despite these
increases, annuity operating expenses as a percentage of assets under management
decreased as of June 30, 2000 compared June 30, 1999.
Of the $12.4 billion and $12.6 billion of fixed annuity assets under management
at June 30, 2000 and 1999, respectively, 25% were fully guaranteed and 75% were
experience-rated in each period. The average annualized earned rate on
investments supporting fully guaranteed investment contracts was 7.5% and 7.4%
for the six months ended June 30, 2000 and 1999, respectively, and the average
annualized earned rate on investments supporting experience-rated investment
contracts was 7.7% and 7.6% for six months ended June 30, 2000 and 1999,
respectively. The average annualized credited rate on fully guaranteed
investment contracts was 6.2% and 6.4% for the six months ended June 30, 2000
and 1999, respectively, and the average annualized credited rate on
experience-rated investment contracts was 5.6% for both periods. The resulting
annualized interest margins on fully guaranteed investment contracts were 1.3%
and 1.0%, and on experience-rated investment contracts were 2.1% and 2.0 % for
the six months ended June 30, 2000 and 1999, respectively.
19
Item 2. Management's Analysis of the Results of Operations (continued)
Investment Management Services
Operating Summary
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------
(Millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.6 $ 0.3 $ 1.2 $ 0.6
Net realized capital gains 0.1 - 0.2 -
Other income(1) 34.6 28.4 67.8 56.6
- --------------------------------------------------------------------------------------------------------------------------
Total revenue 35.3 28.7 69.2 57.2
Operating expenses:
Salaries and related benefits 7.0 5.7 14.5 11.5
Other 13.7 12.1 28.2 24.1
- --------------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 14.6 10.9 26.5 21.6
Income taxes 5.5 4.0 9.9 8.0
- --------------------------------------------------------------------------------------------------------------------------
Net income(2) $ 9.1 $ 6.9 $ 16.6 $ 13.6
==========================================================================================================================
Net realized capital gains, net of tax (included above) $ - $ - $ 0.1 $ -
==========================================================================================================================
Assets under management:
Retail mutual funds $ 1,565.0 $ 649.0
Plan sponsored(3) 16,260.5 13,076.3
Collateralized bond obligations and other 2,039.5 2,065.7
- --------------------------------------------------------------------------------------------------------------------------
Subtotal $ 19,865.0 $ 15,791.0
- --------------------------------------------------------------------------------------------------------------------------
Invested through products of the Financial Products
segment(4)
Variable annuity mutual funds $ 17,530.7 $ 16,803.2
Fixed annuities(5) 12,355.4 12,550.8
Plan sponsored and other 6,719.2 6,184.7
- --------------------------------------------------------------------------------------------------------------------------
Subtotal $ 36,605.3 $ 35,538.7
- --------------------------------------------------------------------------------------------------------------------------
Total assets under management $ 56,470.3 $ 51,329.7
==========================================================================================================================
(1) Primarily includes investment advisory fees earned on assets under
management.
(2) Year 2000 costs for 1999 are not allocated to segment operating expenses
and, therefore, are excluded in the determination of segment net income.
(3) Includes $6,893.0 million and $7,484.0 million of assets managed for Aetna
Life Insurance Company, an affiliate of the Company, as of June 30, 2000
and 1999, respectively. (Aetna Inc. reports these assets in its Large Case
Pensions segment.)
(4) The Investment Management Services segment earns investment advisory fees
on these assets, which are also reported in the Financial Products segment.
(5) Excludes net unrealized capital losses of $241.6 million at June 30, 2000
and net unrealized capital gains of $2.6 million at June 30, 1999.
For the Investment Management Services segment, net income excluding realized
capital gains in 2000, increased $2 million, or 32%, for the three months ended
June 30, 2000 and $3 million, or 21%, for the six months ended June 30, 2000
compared to the same periods in 1999. The increases in earnings for the three
and six month periods ended June 30, 2000 primarily reflects an increase in
investment advisory fees offset by higher operating expenses.
Investment advisory fees are calculated based on assets under management. The
increase in advisory fee income is due to higher levels of assets under
management. At June 30, 2000, assets under management increased 10% over those
reported as of June 30, 1999. This increase was primarily due to appreciation in
the stock market and to a lessor extent additional net sales.
The increase in operating expenses for the three and six months ended June 30,
2000, compared to the same periods in 1999, reflects business growth.
20
Item 2. Management's Analysis of the Results of Operations. (continued)
Discontinued Operations - Domestic Individual Life Insurance
Results of discontinued operations consist solely of the deferred gain
recognized from the sale of the domestic individual life insurance business on
October 1, 1998. The after-tax gain recognized during the three months ended
June 30, 2000 and 1999 was $1.6 million and $1.4 million, respectively. The
after-tax gain recognized during the six months ended June 30, 2000 and 1999 was
$3.2 million and $2.7 million, respectively.
Individual life insurance coverage in force was approximately $40 billion at
June 30, 2000. The entire amount of this coverage in force has been ceded to
Lincoln under the indemnity reinsurance arrangement entered into as part of the
sale.
For more details about the transaction and the indemnity reinsurance
arrangement, refer to Note 3 of Notes to the Consolidated Financial Statement in
the Company's 1999 Annual Report on Form 10-K.
General Account Investments
The Company's invested assets were comprised of the following:
(Millions) June 30, 2000 December 31, 1999
-------------------------------------------------------------------------------------------------------------------
Debt securities, available for sale, at fair value $ 11,167.3 $ 11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock 105.9 130.9
Investment in affiliated mutual funds 63.2 64.1
Common stock 13.9 11.5
Short-term investments 15.3 74.2
Mortgage loans 4.6 6.7
Policy loans 325.9 314.0
Other investments 13.4 13.2
-------------------------------------------------------------------------------------------------------------------
Total Investments $ 11,709.5 $ 12,024.7
===================================================================================================================
Debt Securities
At June 30, 2000 and December 31, 1999, the Company's carrying value of
investments in debt securities represented 95% of the total general account
invested assets. For the same periods, $8.7 billion, or 78% of total debt
securities, and $8.9 billion, or 78% of total debt securities, respectively,
supported experience-rated contracts.
Debt securities reflected net unrealized capital losses of $242 million and $248
million at June 30, 2000 and December 31, 1999, respectively. Of the total net
unrealized capital losses at June 30, 2000, a net unrealized capital loss of
$178 million relates to assets supporting experience-rated contracts.
21
Item 2. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
It is management's objective that the portfolio of debt securities be of high
quality and be well diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio at June 30, 2000 and December 31, 1999 was AA-.
The percentage of total debt securities by quality rating category is as
follows:
June 30, 2000 December 31, 1999
- ------------------------------------------------------------------------------------------------
AAA 50.0% 48.4%
AA 9.1 9.5
A 24.7 24.5
BBB 10.0 11.1
BB 2.4 2.5
B and Below 3.8 4.0
- ------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
================================================================================================
The percentage of total debt securities by market sector is as follows:
June 30, 2000 December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
U.S. Corporate Securities 40.2% 40.6%
Residential Mortgage-Backed Securities 27.4 23.9
Foreign Securities (1) 10.4 11.4
Commercial/Multi-family Mortgage-Backed Securities 9.5 8.6
Asset-Backed Securities 6.4 6.1
U.S. Treasuries/Agencies 6.1 9.4
- -------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
=========================================================================================================================
(1) Primarily U.S. dollar denominated
Forward-Looking Information/Risk Factors
The "Forward-Looking Information/Risk Factors" portion of ALIAC's 1999 Annual
Report on Form 10-K and report on Form 10-Q for the quarterly period ended March
31, 2000 and the discussion below contain a discussion of important risk factors
related to the Company's businesses.
We also face certain risks related to Aetna's pending transaction with ING.
Aetna's ability to complete the pending transaction with ING is subject to,
among other things, receipt of required shareholder, regulatory and other
consents and approvals, receipt of an investment grade debt rating of either at
least BBB from Standard & Poor's or Baa2 from Moody's Investors Service for the
standalone health company (which will be influenced by the results of Aetna's
health business prior to the closing of the ING transaction) and the
satisfaction of the other closing conditions specified in the transaction
22
Item 2. Management's Analysis of the Results of Operations (continued)
Forward-Looking Information/Risk Factors (continued)
documents. Aetna cannot control the timing or outcome of these consents and
approvals or certain of these other matters, which could be delayed for a
variety of reasons related and unrelated to the transaction itself. For a
description of risk factors that may materially affect the results of Aetna's
health business prior to the closing of the ING transaction, please see the risk
factors contained in Aetna's 1999 report on Form 10-K and Aetna's reports on
Form 10-Q for the quarterly periods ended March 31, 2000 and June 30, 2000 filed
with the SEC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In recent years, several life insurance and annuity companies have been named as
defendants in class action lawsuits relating to life insurance and annuity
pricing and sales practices. The Company is a defendant in two such lawsuits.
A purported class action complaint was filed in the Circuit Court of Lauderdale
County, Alabama on March 28, 2000 by Loretta Shaner against ALIAC (the "Shaner
Complaint"). This case has been removed to the United States District Court for
the Northern District of Alabama. The Shaner Complaint seeks unspecified
compensatory damages from ALIAC and unnamed affiliates of ALIAC. The Shaner
Complaint claims that ALIAC's sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (e.g., IRAs) is
improper. This litigation is in the preliminary stages. The Company intends to
defend the action vigorously.
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. This litigation is in the
preliminary stages. The Company intends to defend the action vigorously.
The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations. While the outcome of
the litigation against the Company referred to in this paragraph cannot be
determined at this time, after consideration of the defenses available to the
Company and any related reserves established, and after consultation with
counsel, the litigation referred to in this paragraph is not expected to result
in liability for amounts material to the financial condition of the Company,
although it may adversely affect results of operations in future periods.
23
Item 5. Other Information.
Ratings
The Company's financial strength ratings at May 10, 2000 and August 9, 2000 are
as follows:
Rating Agencies
-----------------------------------------------------------------------------------
Moody's Investors Standard &
A.M. Best Fitch Service Poor's
- ------------------------------------------------------------------------------------------------------------------
May 10, 2000 A AA Aa3 AA-
August 9, 2000 (1) A AA Aa3 AA-
- ------------------------------------------------------------------------------------------------------------------
(1) As a result of Aetna's announcement that it had reached a definitive
agreement to sell its Aetna Financial Services and Aetna International
businesses to ING, A. M. Best has placed the Company's rating under review
with positive implications; Fitch has placed the Company's rating on watch,
positive; Moody's Investors Service has placed the Company's rating on
review, upgrade; and Standard & Poor's has placed the Company's rating on
CreditWatch positive.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
Agreement and Plan of Restructuring and Merger,
dated as of July 19, 2000, among Aetna, ING America
Insurance Group Holdings, Inc., ANB Acquisition
Corp. and, for limited purposes only, ING Groep
N.V., incorporated herein by reference to Exhibit
2.1 to Aetna Inc.'s Form 10-Q filed on August 4,
2000.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None
24
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 10, 2000 By /s/ Deborah Koltenuk
- ---------------------- ----------------------------------------
(Date) Deborah Koltenuk
Vice President, Corporate Controller and
Assistant Treasurer
(Chief Accounting Officer)
25