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, 1998 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, 1998
-------------- ----------------
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 SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
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............................... 12
Item 2. Management's Analysis of the Results of Operations................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 22
Signatures .................................................................. 23
2
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
Premiums $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
------------ ------------ ----------- -----------
Total revenue 333.2 305.8 645.2 612.7
Benefits and expenses:
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 76.2 70.0 150.5 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
------------ ------------ ----------- -----------
Total benefits and expenses 277.2 266.0 549.3 523.6
------------ ------------ ----------- -----------
Income from continuing operations before income taxes 56.0 39.8 95.9 89.1
Income taxes 16.5 10.4 28.2 25.4
------------ ------------ ----------- -----------
Income from continuing operations 39.5 29.4 67.7 63.7
Income from discontinued operations, net of tax 23.5 13.7 37.3 29.8
------------ ------------ ----------- -----------
Net income $ 63.0 $ 43.1 $ 105.0 $ 93.5
============ ============ =========== ===========
See Condensed Notes to Consolidated Financial Statements.
3
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
June 30, 1998 December 31, 1997
------------- -----------------
Assets
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,536.4 and $12,912.2) $13,136.3 $13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $91.2 and $131.7) 99.9 147.6
Investment in affiliated mutual funds (cost: $135.1 and $78.1) 147.6 83.0
Common stock (cost: $0.3 and $0.2) 1.9 0.6
Short-term investments 81.4 95.6
Mortgage loans 12.7 12.8
Policy loans 498.7 469.6
--------- ---------
Total investments 13,978.5 14,273.0
Cash and cash equivalents 1,058.2 565.4
Short-term investments under securities loan agreement 706.4 -
Accrued investment income 159.3 163.0
Premiums due and other receivables 86.3 63.7
Deferred policy acquisition costs 1,711.6 1,654.6
Reinsurance loan to affiliate 317.5 397.2
Other assets 60.0 46.8
Separate accounts assets 26,968.4 22,982.7
--------- ---------
Total assets $45,046.2 $40,146.4
========= =========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,832.1 $ 3,785.7
Unpaid claims and claim expenses 28.7 38.0
Policyholders' funds left with the Company 11,083.8 11,121.5
--------- ---------
Total insurance reserve liabilities 14,944.6 14,945.2
Payables under securities loan agreement 706.4 -
Other liabilities 378.7 312.8
Income taxes:
Current 23.9 12.4
Deferred 88.9 72.0
Separate accounts liabilities 26,955.5 22,970.0
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Total liabilities 43,098.0 38,312.4
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Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 104.4 92.9
Retained earnings 1,423.0 1,320.3
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Total shareholder's equity 1,948.2 1,834.0
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Total liabilities and shareholder's equity $45,046.2 $40,146.4
========= =========
See Condensed Notes to Consolidated Financial Statements.
4
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Six Months Ended June 30,
---------------------------
1998 1997
---- ----
Shareholder's equity, beginning of period $1,834.0 $1,609.5
Comprehensive income
Net income 105.0 93.5
Other comprehensive income, net of tax
Unrealized gains on securities ($17.7,
$0.2, pretax, respectively ) 11.5 0.1
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Total comprehensive income 116.5 93.6
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Other changes 0.7 3.3
Common stock dividends (3.0) (5.3)
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Shareholder's equity, end of period $1,948.2 $1,701.1
======== =========
See Condensed Notes to Consolidated Financial Statements.
5
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
Six Months Ended June 30,
------------------------------
1998 1997
---- ----
Cash Flows from Operating Activities:
Net income $ 105.0 $ 93.5
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Decrease (increase) in accrued investment income 3.7 (1.6)
Decrease (increase) in premiums due and other receivables 24.5 (16.8)
Increase in policy loans (29.1) (30.9)
Increase in deferred policy acquisition costs (57.0) (78.3)
Decrease in reinsurance loan to affiliate 79.7 102.7
Net increase in universal life account balances 177.5 156.8
Decrease in other insurance reserve liabilities (159.0) (97.7)
Net decrease in other liabilities and other assets (9.9) (76.3)
Increase in income taxes 27.1 3.0
Net accretion of discount on investments (26.5) (34.9)
Net realized capital gains (7.9) (9.1)
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Net cash provided by operating activities 128.1 10.4
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Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,859.7 2,274.8
Equity securities 59.1 30.5
Mortgage loans 0.1 0.1
Investment maturities and repayments of:
Debt securities available for sale 799.1 716.1
Short-term investments 89.8 10.4
Cost of investment purchases in:
Debt securities available for sale (4,237.4) (2,699.5)
Equity securities (71.8) (37.5)
Short-term investments (75.4) (107.6)
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Net cash provided by investing activities 423.2 187.3
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Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 776.2 819.4
Withdrawals of investment contracts (833.0) (607.2)
Capital Contribution to Separate Account - (25.0)
Return of capital from Separate Account 1.3 -
Dividends paid to shareholder (3.0) (5.3)
---------- ----------
Net cash (used for) provided by financing activities (58.5) 181.9
---------- ----------
Net increase in cash and cash equivalents 492.8 379.6
Cash and cash equivalents, beginning of period 565.4 459.1
---------- ----------
Cash and cash equivalents, end of period $ 1,058.2 $ 838.7
========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 28.2 $ 44.6
========== ==========
See Condensed Notes to Consolidated Financial Statements.
6
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(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 and its wholly owned subsidiary, Aetna Insurance Company of
America (collectively, the "Company"). The Company has agreed to sell its
individual life insurance operations to Lincoln National Corporation
("Lincoln") and accordingly, they are classified as Discontinued
Operations. (Please refer to Note 2 below). Aetna Life Insurance and
Annuity Company 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").
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1997 financial information to conform
to the 1998 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 the Company's 1997
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) Discontinued Operations - Individual Life Insurance
On May 21, 1998, the Company agreed to sell its domestic individual life
insurance business to Lincoln for approximately $1 billion in cash. The
operating results of the individual life business are presented as
Discontinued Operations. Results of the Discontinued Operations will be
included in the Company's net income until the completion of the sale. All
prior year income statement data has been restated to reflect the
presentation as Discontinued Operations. The transaction is generally in
the form of an indemnity reinsurance arrangement, under which Lincoln will
contractually assume from the Company certain policyholder liabilities and
obligations, although the Company will remain directly obligated to
policyholders. Future policy benefit insurance reserves were approximately
$3 billion as of June 30, 1998. Assets related to and supporting the life
policies will be transferred to Lincoln and the Company will record a
reinsurance receivable from Lincoln. The transaction is expected to result
in an after-tax gain of approximately $170 million, of which a significant
portion will be deferred and amortized over approximately 15 years. The
amount of the gain will depend on the actual amount of assets transferred
and liabilities contractually assumed from the Company and the remaining
related deferred acquisition cost at the closing date.
7
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
2) Discontinued Operations - Individual Life Insurance (continued)
Completion of the sale, which is anticipated to occur in the fall of 1998,
is subject to state regulatory approvals and other customary conditions. In
July 1998, the Federal Trade Commission granted early termination to the
waiting period for the transaction under the Hart-Scott-Rodino Antitrust
Improvements Act.
Revenues for the individual life segment were $135.7 million and $165.9
million for the second quarters of 1998 and 1997, respectively, and $280.7
million and $303.6 million for the six months ended June 30, 1998 and 1997,
respectively. Net income was $23.5 million and $13.7 million for the second
quarters of 1998 and 1997, respectively, and $37.3 million and $29.8
million for the six months ended June 30, 1998 and 1997, respectively.
3) New Accounting Standards
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public
Accountants ("AICPA"). This statement requires that certain costs incurred
in developing internal-use computer software be capitalized, and provides
guidance for determining whether computer software is considered to be for
internal use. The Company will amortize these costs over a period of 3 to 5
years. Previously, the Company expensed the cost of internal-use computer
software as incurred. The adoption of this statement resulted in an
increase to net income of $1.7 million and $3.4 million for the three and
six months ended June 30, 1998, respectively.
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in June 1996 and provides accounting and reporting standards for transfers
of financial assets and extinguishments of liabilities.
FAS No. 125 was effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending were not effective until January 1, 1998. The adoption of those
provisions effective in 1998 did not have a material effect on the Company's
financial position or results of operations.
8
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
4) Future Application of Accounting Standards
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
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. This standard is
effective at the beginning of 2000, with early adoption permitted. The
Company is currently evaluating the impact of the adoption of this
statement and the potential effect on its financial position or results of
operations.
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments, which provides
guidance for determining when an insurance or other enterprise should
recognize a liability for guaranty-fund and other insurance-related
assessments and guidance for measuring the liability. This statement is
effective for 1999 financial statements, with early adoption permitted. The
Company does not expect adoption of this statement to have a material
effect on its financial position or results of operations.
(5) Financial Instruments
The Company engages in hedging activities to manage interest rate risk.
Such hedging activities have principally consisted of using
off-balance-sheet instruments such as treasury futures. (See General
Account Investments on page 20 of the Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 3 of the Notes to
the Financial Statements in the Company's 1997 Annual Report on Form 10-K
for a description of the Company's hedging activities). The notional
amounts, carrying values and estimated fair values of the Company's open
treasury futures as of June 30, 1998 are $1,782.4 million, ($3.0) million,
and ($3.0) million, respectively. These open treasury futures are related
to hedging the interest rate risk on the assets supporting the individual
life business that is expected to be sold to Lincoln. (See Note 2 above for
further discussion on the sale of the individual life business).
9
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
(6) Additional Information - Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains on securities (excluding those related to experience rated
contractholders) were as follows:
Six Months Ended June 30,
---------------------------------------------------------------------------------------
(Millions) 1998 1997
---------------------------------------------------------------------------------------
Unrealized holding gains arising during the period (1) $33.9 $28.7
Less: reclassification adjustments for amortization of net
investment discounts and gains included in net income (2) 22.4 28.6
---------------------------------------------------------------------------------------
Net unrealized gains on securities $11.5 $ 0.1
=======================================================================================
(1) Pretax unrealized holding gains arising during the period were $52.1
million and $44.2 million for 1998 and 1997, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income were $34.4 million and $44.0
million for 1998 and 1997, respectively.
(7) Severance and Facilities Charges
During 1996, the Company was allocated severance and facilities reserves
from Aetna to reflect actions taken or to be taken to reduce the level of
corporate expenses and other costs previously absorbed by Aetna's
property-casualty operations.
Also during 1996, the Company established severance and facilities reserves
in the Financial Services and Individual Life Insurance segments to reflect
actions taken or to be taken in order to make its businesses more
competitive.
Activity for the six months ended June 30, 1998 within the severance and
facilities reserves (pretax, in millions) and positions eliminated related
to such actions were as follows:
-------------------------------------------------------------------
Reserve Positions
-------------------------------------------------------------------
Balance at December 31, 1997 $ 20.8 361
Actions taken (1) (7.2) (63)
------ -----
Balance at June 30, 1998 $ 13.6 298
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(1) Includes $5.3 million of severance-related actions and $1.4 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
10
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
(8) Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in a liability for
amounts material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
(9) Dividends
On January 30, 1998, the Company paid a $3.0 million dividend to HOLDCO.
The additional amount of dividends that may be paid by the Company to
HOLDCO in 1998 without prior approval by the Insurance Commissioner of the
State of Connecticut is $74.6 million.
11
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 Subsidiary as of June 30, 1998, and the
related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 1998 and 1997, and the related condensed
consolidated statements of changes in shareholder's equity and cash flows for
the six-month periods ended June 30, 1998 and 1997. 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 Subsidiary as of December 31, 1997, 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 3,
1998, 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, 1997, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
August 4, 1998
12
Item 2. Management's Analysis of the Results of Operations
The following discussion and analysis presents a review of Aetna Life Insurance
and Annuity Company and its subsidiary (collectively, the "Company") for the
three and six months ended June 30, 1998 and 1997. This review should be read in
conjunction with the consolidated financial statements and other data presented
herein.
Consolidated Overview
Sale of Domestic Individual Life Insurance Business
On May 21, 1998, the Company agreed to sell its domestic individual life
insurance business to Lincoln National Corporation ("Lincoln") for approximately
$1 billion in cash. The transaction is generally in the form of an indemnity
reinsurance arrangement, under which Lincoln will contractually assume from the
Company certain policyholder liabilities and obligations, although the Company
will remain directly obligated to policyholders. Future policy benefit insurance
reserves were approximately $3 billion as of June 30, 1998. Assets related to
and supporting the life policies will be transferred to Lincoln and the Company
will record a reinsurance receivable from Lincoln. The transaction is expected
to result in an after-tax gain of approximately $170 million, of which a
significant portion will be deferred and amortized over approximately 15 years.
The amount of the gain will depend on the actual amount of assets transferred
and liabilities contractually assumed from the Company and the remaining related
deferred acquisition costs at the closing date.
Completion of the sale, which is anticipated to occur in the fall of 1998, is
subject to state regulatory approvals and other customary conditions. In July
1998, the Federal Trade Commission granted early termination to the waiting
period for the transaction under the Hart-Scott-Rodino Antitrust Improvements
Act.
Aetna expects to use the proceeds from the sale to finance a portion of the
purchase price of the NYLCare health business. The remaining proceeds are
expected to be used for general corporate purposes, including internal growth,
acquisitions and share repurchases.
13
Item 2. Management's Analysis of the Results of Operations (continued)
Consolidated Overview (continued)
Operating Summary:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------
1998 1997 1998 1997
(Millions)
- ---------------------------------------------------------------------------------------------------------
Premiums (1) $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
- ---------------------------------------------------------------------------------------------------------
Total revenue 333.2 305.8 645.2 612.7
- ---------------------------------------------------------------------------------------------------------
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 76.2 70.0 150.5 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
- ---------------------------------------------------------------------------------------------------------
Total benefits and expenses 277.2 266.0 549.3 523.6
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes 56.0 39.8 95.9 89.1
Income taxes 16.5 10.4 28.2 25.4
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations 39.5 29.4 67.7 63.7
Income from discontinued operations, net of tax 23.5 13.7 37.3 29.8
- ---------------------------------------------------------------------------------------------------------
Net income (2) $ 63.0 $ 43.1 $ 105.0 $ 93.5
=========================================================================================================
Net realized capital gains, net of tax
(included above) $ 6.6 $ 2.3 $ 4.3 $ 5.3
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 275.6 $ 298.4 $ 608.7 $ 578.6
Annuities--variable options 947.5 796.2 1,854.6 1,614.3
Discontinued Operations 129.6 117.3 260.7 237.8
--------------------------------------------------------
Total $1,352.7 $1,211.9 $2,724.0 $2,430.7
=========================================================================================================
Assets under management: (3)
Annuities--fixed options $ 11,947.1 $11,898.1
Annuities--variable options (4) 23,932.5 17,527.1
---------------------------
Subtotal Annuities 35,879.6 29,425.2
Other Investment Advisory (5) (6) 4,442.3 2,211.0
---------------------------
Financial Services 40,321.9 31,636.2
Discontinued Operations 3,267.0 2,987.0
---------------------------
Total $ 43,588.9 $34,623.2
========================================================================================================
Discontinued Operations - coverage issued $ 2,091.3 $ 2,523.0
========================================================================================================
Discontinued Operations - coverage in force $ 45,530.7 $43,278.0
========================================================================================================
(1) Includes $13.7 million and $28.0 million for the three and six months ended
June 30, 1998, respectively, and $13.7 million and $30.1 million,
respectively, for the same periods a year ago, for annuity premiums on
contracts converting from the accumulation phase to payout options with
life contingencies.
(2) Net income for the three and six months ended June 30, 1998 includes a net
benefit from capitalizing internal-use software of $1.7 million and $3.4
million, respectively.
(3) Excludes net unrealized capital gains of $599.9 million and $318.0 million
at June 30, 1998 and 1997, respectively.
(4) Includes $6,603.3 million and $6,017.6 million at June 30, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) The June 30, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously held by an affiliate, reflecting the migration
of certain other pension products which complement the Company's business
strategy.
(6) The June 30, 1997 balance included $1,189.0 million of mutual fund assets
for which the Company is no longer the investment advisor. The advisory
agreement was transferred to an affiliate effective February 2, 1998.
14
Item 2. Management's Analysis of the Results of Operations (continued)
Consolidated Overview (continued)
Operating Summary: (continued)
The Company's net income for the second quarter of 1998 increased $20 million
compared to the same period a year ago. Net income for the six months ended June
30, 1998 increased $12 million compared to the same period in 1997. Net income
includes income from individual life insurance operations ("Discontinued
Operations") of $24 million and $14 million for the second quarters of 1998 and
1997, respectively, and of $37 million and $30 million for the six months ended
June 30, 1998 and 1997, respectively.
The Company reported income from continuing operations for the second quarters
of 1998 and 1997 of $40 million and $29 million, respectively, and, for the six
months ended June 30, 1998 and 1997, $68 million and $64 million, respectively.
Results include Year 2000 remediation costs of $5 million (after tax) for the
second quarter of 1998 and $9 million (after tax) for the six months ended June
30, 1998, which are not allocable to the business segments. Excluding Year 2000
costs and net realized capital gains, results for the second quarter of 1998
increased $11 million, or 42%, compared to the second quarter of 1997. Results
for the six months ended June 30, 1998 increased $15 million, or 25%, from the
same period a year ago.
Assets under management increased by 21%, net of transfers (see Notes 5 and 6 to
the Consolidated Operating Summary table), primarily due to appreciation in the
stock market and additional net deposits (deposits less surrenders).
Of the $11.9 billion of fixed annuity assets under management at June 30, 1998
and 1997, 26% and 24%, respectively, were fully guaranteed and 74% and 76%,
respectively, were experience rated. The average annualized earned rate on
investments supporting fully guaranteed contracts was 7.5% and 7.8%; and, the
average annualized earned rate on investments supporting experience rated
contracts was 7.9% and 8.0% for the six months ended June 30, 1998 and 1997,
respectively. The average annualized credited rate on fully guaranteed contracts
was 6.5% and 6.7%; and, the average annualized credited rate on experience rated
contracts was 5.8% and 5.9% for each of the six months ended June 30, 1998 and
1997, respectively. The resulting annualized interest margins on fully
guaranteed contracts were 1.0% and 1.1% and, on experienced rated contracts, was
2.1% for each of the six months ended June 30, 1998 and 1997, respectively.
15
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Services
Operating Summary:
Three Months Ended June 30, Six Months Ended June 30,
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1998 1997 1998 1997
(Millions)
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Premiums (1) $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
- ----------------------------------------------------------------------------------------------------------------
Total revenue 333.2 305.8 645.2 612.7
- ----------------------------------------------------------------------------------------------------------------
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 68.7 70.0 136.7 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
- ----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 269.7 266.0 535.5 523.6
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 63.5 39.8 109.7 89.1
Income taxes 19.1 10.4 33.0 25.4
- ----------------------------------------------------------------------------------------------------------------
Net income (2) $ 44.4 $ 29.4 $ 76.7 $ 63.7
================================================================================================================
Net realized capital gains, net of tax (included above) $ 6.6 $ 2.3 $ 4.3 $ 5.3
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
Deposits not included in premiums above:
Annuities--fixed options $ 275.6 $ 298.4 $ 608.7 $ 578.6
Annuities--variable options 947.5 796.2 1,854.6 1,614.3
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Total $1,223.1 $1,094.6 $ 2,463.3 $ 2,192.9
================================================================================================================
Assets under management: (3)
Annuities--fixed options $11,947.1 $11,898.1
Annuities--variable options (4) 23,932.5 17,527.1
----------------------------
Subtotal Annuities 35,879.6 29,425.2
Other Investment Advisory (5) (6) 4,442.3 2,211.0
----------------------------
Total $40,321.9 $31,636.2
================================================================================================================
(1) Includes $13.7 million and $28.0 million for the three and six months ended
June 30, 1998, respectively, and $13.7 million and $30.1 million,
respectively, for the same periods a year ago, for annuity premiums on
contracts converting from the accumulation phase to payout options with
life contingencies.
(2) Net income for the three and six months ended June 30, 1998 includes a net
benefit from capitalizing internal-use software of $1.3 million and $2.7
million, respectively, and excludes any effect of Year 2000 costs recorded
in 1998 which are not allocable to the segment.
(3) Excludes net unrealized capital gains of $507.0 million and $277.7 million
at June 30, 1998 and 1997, respectively.
(4) Includes $6,603.3 million and $6,017.6 million at June 30, 1998 and 1997,
respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) The June 30, 1998 balance includes the transfer of $3,163.5 million of
assets that were previously held by an affiliate, reflecting the migration
of certain other pension products which complement the Company's business
strategy.
(6) The June 30, 1997 balance included $ 1,189.0 million of mutual fund assets
for which the Company is no longer the investment advisor. The advisory
agreement was transferred to an affiliate effective February 2, 1998.
Net income in the financial services segment for the second quarter of 1998
increased $15 million compared to the second quarter of 1997; and, net income
for the six months ended June 30, 1998 increased $13 million compared to the
same period a year ago. Excluding net realized capital gains, results for the
second quarter of 1998 increased $11 million, or 42%, from the second quarter a
year ago; and, results for the six months ended June 30, 1998 increased $15
million, or 25%, over the same period in 1997. The 1998 results reflect
increased fee income primarily from increased assets under management.
16
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Services (continued)
Assets under management increased by 22%, net of transfers (see Notes 5 and 6 to
the Consolidated Operating Summary table), primarily due to appreciation in the
stock market and additional net deposits (deposits less surrenders).
Discontinued Operations - Individual Life Insurance
Amounts reflected in the table below are summarized on the line, "Income from
discontinued operations, net of tax", in the Operating Summary table of the
Consolidated Overview section.
Operating Summary:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------
(Millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
Premiums $ 33.6 $ 63.2 $ 77.8 $ 97.7
Charges assessed against policyholders 53.7 52.4 103.4 104.6
Net investment income 49.2 49.6 97.5 99.8
Net realized capital gains 1.4 0.6 1.4 1.0
Other income (2.2) 0.1 .6 0.5
- -------------------------------------------------------------------------------------------------------
Total revenue 135.7 165.9 280.7 303.6
- -------------------------------------------------------------------------------------------------------
Current and future benefits 72.1 116.1 170.5 208.8
Operating expenses 13.4 14.6 29.4 28.3
Amortization of deferred policy acquisition costs 12.5 13.4 21.1 19.5
- -------------------------------------------------------------------------------------------------------
Total benefits and expenses 98.0 144.1 221.0 256.6
- -------------------------------------------------------------------------------------------------------
Income before income taxes 37.7 21.8 59.7 47.0
Income taxes 14.2 8.1 22.4 17.2
- -------------------------------------------------------------------------------------------------------
Net income (1) $ 23.5 $ 13.7 $ 37.3 $ 29.8
=======================================================================================================
Net realized capital gains net of tax (included above) $ 0.9 $ 0.4 $ 0.9 $ 0.6
=======================================================================================================
- -------------------------------------------------------------------------------------------------------
Deposits not included in premiums above $129.6 $117.3 $ 260.7 $ 237.8
=======================================================================================================
Assets under management (2) $ 3,267.0 $ 2,987.0
=======================================================================================================
Individual life insurance coverage issued $ 2,091.3 $ 2,523.0
=======================================================================================================
Individual life insurance coverage in force $45,530.7 $43,278.0
=======================================================================================================
(1) Net income for the three and six months ended June 30, 1998 includes a net
benefit from capitalizing internal-use software of $.4 million and $.7
million, respectively, and excludes any effect of Year 2000 costs recorded
in 1998 which are not allocable to the segment.
(2) Excludes net unrealized capital gains of $92.9 million and $40.3 million at
June 30, 1998 and 1997, respectively.
Excluding realized capital gains, Discontinued Operations' net income increased
$9 million, or 70%, for the second quarter of 1998 compared to the second
quarter a year ago; and, net income for the six months ended June 30, 1998
increased $7 million, or 25%, compared to the same period a year ago. Earnings
for the three and six months ended June 30, 1998 increased primarily due to
favorable mortality experience.
17
Item 2. Management's Analysis of the Results of Operations (continued)
Discontinued Operations - Individual Life Insurance (continued)
Premiums and current and future benefits reflect offsetting amounts of $56
million and $75 million for the six months ended June 30, 1998 and 1997,
respectively, related to the transition of the reinsurance agreement with Aetna
Life Insurance Company from a modified coinsurance to a coinsurance arrangement.
The Company's agreement to sell its domestic individual life insurance business
to Lincoln includes the business in force as well as access to a managing
general agent and brokerage distribution channel. The transaction is generally
in the form of an indemnity reinsurance arrangement and covers the following
lines of insurance: traditional life, universal life, sponsored life,
corporate-owned life insurance and pension life. Pension life results which are
not material to the individual life insurance business are reported in Financial
Services and not included in the following sentence. Net income from
Discontinued Operations, excluding net realized capital gains in all periods,
was $23 million for the second quarter of 1998 compared to $13 million for the
second quarter of 1997 and $36 million for the first six months of 1998 compared
to $29 million for the same period in 1997, as well as, $64 million for the year
ended December 31, 1997.
General Account Investments
The Company's invested assets were comprised of the following:
June 30, December 31,
(Millions) 1998 1997
- -------------------------------------------------------------------------------------------
Debt securities, available for sale, at fair value $13,136.3 $13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock 99.9 147.6
Investment in affiliated mutual funds 147.6 83.0
Common stock 1.9 0.6
Short-term investments 81.4 95.6
Mortgage loans 12.7 12.8
Policy loans 498.7 469.6
------------------------------
Total Investments $13,978.5 $ 14,273.0
===========================================================================================
At June 30, 1998 and December 31, 1997, the Company's carrying value of
investments in debt securities represented 94% of total general account invested
assets. For the same periods, $10.3 billion, or 79% of total debt securities,
supported experience rated products.
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, 1998 and December 31, 1997 was AA-.
18
Item 2. Management's Analysis of the Results of Operations (continued)
General Account Investments (continued)
The percentage of total debt securities by quality rating category is as
follows:
June 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------
AAA 44.0% 48.3%
AA 11.1 10.4
A 23.4 21.7
BBB 13.9 12.9
BB 4.2 3.8
B and Below 3.4 2.9
----------------------------------------------
100.0% 100.0%
==============================================
The percentage of total debt securities investments by market sector is as
follows:
June 30, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------
U.S. Corporate Securities 41.8% 37.4%
Residential Mortgage-Backed Securities 23.5 24.3
Foreign Securities - U.S. Dollar Denominated 11.8 12.4
Commercial/Multifamily Mortgage-Backed Securities 9.8 8.6
Asset-Backed Securities 7.4 7.7
U.S. Treasuries/Agencies 5.7 9.6
------------------------------------
100.0% 100.0%
====================================
Year 2000
Year 2000 remediation costs incurred for company-owned systems and applications
were $5 million (after tax) for the second quarter of 1998 and $9 million (after
tax) for the six months ending June 30, 1998. A large majority of these costs
are currently believed to be incremental expenses that will not recur in the
Year 2000 or thereafter. Year 2000 remediation costs were not material in 1997.
See "Year 2000" in the Company's 1997 Report on Form 10-K for more detail.
19
Item 2. Management's Analysis of the Results of Operations (continued)
Forward-Looking Information/Risk Factors
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a
"safe harbor" for forward-looking statements, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important risk factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of these safe harbor provisions.
See "Other Matters/Regulation" and "Other Matters/Forward Looking" in the
Company's 1997 Annual Report on Form 10-K for information regarding important
factors that may materially affect the Company.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it 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.
Item 5. Other Information.
Ratings
Following the announcement of Aetna's agreement to acquire New York Life
Insurance Company's NYLCare health plans business (which closed in July 1998),
as is typical standard operating procedures, all of Aetna's ratings were placed
on credit watch, until the rating agencies could do further analysis of the
transaction. In July of 1998, all of the agencies completed their annual review
of the Company with the exception of A.M. Best. Moody's and Standard & Poors
reaffirmed their ratings and removed their credit watch status. Duff & Phelps
has maintained their rating watch pending the completion of the sale of the
domestic individual life business to Lincoln. A.M. Best's rating is pending
until completion of their review.
The Company's ratings are as follows:
Rating Agencies
------------------------------------------------------------
A.M. Best Duff & Phelps Moody's Standard &
Investor Service Poors
------------------------------------------------------------
Claims paying rating on
May 6, 1998 (1) A+ AA+ Aa3 AA-
Claims paying rating on
August 4, 1998 (2) A+ AA+ Aa3 AA-
(1) As of May 6, 1998, A.M. Best ratings were on review and Standard &
Poors, Moody's Investor Service and Duff & Phelps ratings were on
credit watch or review for possible downgrade.
(2) As of August 4, 1998, A.M. Best ratings are on review and Duff &
Phelps ratings are on credit watch for possible downgrade.
21
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Material Contracts.
Amended and Restated Asset Purchase Agreement by and
among Aetna Life Insurance Company, Aetna Life
Insurance and Annuity Company, The Lincoln National
Life Insurance Company and Lincoln Life & Annuity
Company of New York, dated May 21, 1998. (The Company
will provide to the Securities and Exchange Commission a
copy of omitted schedules or similar attachments upon
request.)
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 21, 1998 related
to the sale of its domestic individual live insurance business.
22
SIGNATURES
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 12, 1998 /s/ Deborah Koltenuk
- ------------------------- ---------------------------------
(Date) Deborah Koltenuk
Vice President, Treasurer,
and Corporate Controller
(Chief Accounting Officer)
23