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 September 30, 1999 Commission file number 33-23376
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 October 29, 1999
- -------------- -------------------
Common Stock, 55,000
par value $50
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
PAGE
----
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 ................................. 13
Item 2. Management's Analysis of the Results of Operations ................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 25
Item 5. Other Information .................................................... 25
Item 6. Exhibits and Reports on Form 8-K ..................................... 25
Signature ............................................................ 26
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 Nine Months
Ended September 30, Ended September 30,
--------------------- ------------------------
1999 1998 1999 1998
---------- -------- ----------- ----------
Revenue:
Premiums $ 44.2 $ 20.1 $ 86.6 $ 54.5
Charges assessed against policyholders 98.6 81.3 283.1 243.3
Net investment income 223.2 218.8 668.8 649.9
Net realized capital (losses) gains (11.1) 2.7 (5.4) 9.3
Other income 27.9 23.6 82.5 66.5
------- ------ -------- -------
Total revenue 382.8 346.5 1,115.6 1,023.5
Benefits and expenses:
Current and future benefits 201.8 181.7 564.0 529.7
Operating expenses:
Salaries and related benefits 36.1 32.0 107.7 100.9
Other 53.3 51.5 156.0 147.5
Amortization of deferred policy
acquisition costs 25.9 23.2 77.6 69.5
------- ------ -------- -------
Total benefits and expenses 317.1 288.4 905.3 847.6
------- ------ -------- -------
Income from continuing operations before
income taxes 65.7 58.1 210.3 175.9
Income taxes 21.7 15.2 69.2 51.6
------- ------ -------- -------
Income from continuing operations 44.0 42.9 141.1 124.3
Discontinued operations, net of tax:
Income from operations -- 24.5 -- 61.8
Deferred gain on sale 1.4 -- 4.1 --
------- ------ -------- -------
Net income $ 45.4 $ 67.4 $ 145.2 $ 186.1
======= ====== ======== =======
See Condensed Notes to Consolidated Financial Statements.
3
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
September 30, December 31,
1999 1998
-------------- --------------
Assets
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,467.3 and $11,570.3) $11,335.2 $12,068.2
Equity securities, available for sale, at fair value:
Nonredeemable preferred stock (cost: $142.9 and $202.6) 140.5 203.3
Investment in affiliated mutual funds (cost: $72.8 and $96.8) 73.3 100.1
Common stock (cost: $6.4 and $1.0) 8.5 2.0
Short-term investments 56.5 48.9
Mortgage loans 10.4 12.7
Policy loans 308.9 292.2
--------- ---------
Total investments 11,933.3 12,727.4
Cash and cash equivalents 797.2 628.3
Short-term investments under securities loan agreement 771.5 277.3
Accrued investment income 163.0 151.6
Premiums due and other receivables 95.0 61.1
Reinsurance recoverable 2,957.5 2,959.8
Deferred income taxes 148.6 114.3
Deferred policy acquisition costs 1,007.8 893.1
Other assets 77.7 70.4
Separate Accounts assets 32,807.7 29,458.4
--------- ---------
Total assets $50,759.3 $47,341.7
========= =========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,842.6 $ 3,815.9
Unpaid claims and claim expenses 35.3 18.8
Policyholders' funds left with the Company 11,117.2 11,305.6
--------- ---------
Total insurance reserve liabilities 14,995.1 15,140.3
Payables under securities loan agreement 771.5 277.3
Current income taxes 0.5 279.6
Other liabilities 809.8 821.0
Separate Accounts liabilities 32,803.5 29,430.2
--------- ---------
Total liabilities 49,380.4 45,948.4
--------- ---------
Shareholder's Equity:
Common stock, par value $50 (100,000 shares authorized;
55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 431.8 431.8
Accumulated other comprehensive (loss) income (25.5) 104.8
Retained earnings 969.8 853.9
--------- ---------
Total shareholder's equity 1,378.9 1,393.3
--------- ---------
Total liabilities and shareholder's equity $50,759.3 $47,341.7
========= =========
See Condensed Notes to Consolidated Financial Statements.
4
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)
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- -----------
Shareholder's equity, beginning of period $1,393.3 $1,852.7
Comprehensive income (loss):
Net income 145.2 186.1
Other comprehensive loss, net of tax:
Unrealized losses on securities
($(200.5), $(10.5), pretax) (1) (130.3) (6.8)
-------- --------
Total comprehensive income 14.9 179.3
-------- --------
Other changes 0.5 1.6
Common stock dividends (29.8) (9.0)
-------- --------
Shareholder's equity, end of period $1,378.9 $2,024.7
======== ========
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
5
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
Nine Months Ended September 30,
-------------------------------
1999 1998
------------- -------------
Cash Flows from Operating Activities:
Net income $ 145.2 $ 186.1
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Net accretion of discount on investments (20.6) (24.3)
Deferred gain on sale (4.1) --
Net realized capital losses (gains) 5.4 (10.0)
Changes in assets and liabilities:
Increase in accrued investment income (11.4) (2.3)
Decrease in premiums due and other receivables 31.6 22.8
Increase in policy loans (16.7) (51.9)
Increase in deferred policy acquisition costs (114.7) (89.5)
Decrease in reinsurance loan to affiliate -- 135.7
Net (decrease) increase in universal life account balances (220.5) 176.9
Increase (decrease) in other insurance reserve liabilities 232.1 (148.7)
Decrease in other liabilities and other assets (68.0) (191.3)
(Decrease) increase in income taxes (280.1) 18.7
---------- ----------
Net cash (used for) provided by operating activities (321.8) 22.2
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,017.1 5,680.9
Equity securities 89.9 120.7
Mortgage loans 2.3 0.2
Investment maturities and collections of:
Debt securities available for sale 995.2 1,105.3
Short-term investments 60.6 170.5
Cost of investment purchases in:
Debt securities available for sale (4,805.5) (5,421.9)
Equity securities (9.4) (93.7)
Short-term investments (68.4) (94.4)
Other, net 6.2 88.8
---------- ----------
Net cash provided by investing activities 288.0 1,556.4
---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,576.5 1,144.6
Withdrawals of investment contracts (1,308.4) (1,061.0)
Return of capital from Separate Account -- 1.3
Dividends paid to shareholder (235.8) (9.0)
Other, net 170.4 4.4
---------- ----------
Net cash provided by financing activities 202.7 80.3
---------- ----------
Net increase in cash and cash equivalents 168.9 1,658.9
Cash and cash equivalents, beginning of period 628.3 577.5
---------- ----------
Cash and cash equivalents, end of period $ 797.2 $ 2,236.4
========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 315.3 $ 69.3
========== ==========
See Condensed Notes to Consolidated Financial Statements.
6
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") and Aetna Investment Adviser Holding Company, 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 July 1, 1999, HOLDCO contributed Aetna Investment Adviser Holding Company,
Inc., and its subsidiaries (collectively, "IA Holdco") to the Company (refer to
Note 2). As a result, 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 (refer to Note
3).
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 was accounted for in a manner similar to that of a
pooling-of-interests and, accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results of
operations of IA Holdco. Certain reclassifications have been made to 1998
financial information to conform to the 1999 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 1998
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 IA Holdco from HOLDCO
-------------------------------------
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The primary
operating subsidiary of IA Holdco is Aeltus Investment Management, Inc
("Aeltus") which has two wholly-owned operating subsidiaries: Aeltus Capital,
Inc. ("ACI"), a broker dealer, and Aeltus Trust Company ("ATC"), a limited
purpose banking entity. Aeltus is a registered investment adviser under the
Investment Advisers Act of 1940 and provides investment advisory services to
institutional and retail clients on a fee-for-service basis. In addition,
Aeltus, through its ACI subsidiary, provides distribution services for certain
Aetna mutual funds and other Aetna products. Aeltus'ATC subsidiary provides
trustee, administrative, and other fiduciary services to retirement plans
requiring or otherwise utilizing a trustee or custodian.
7
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) Discontinued Operations -- Individual Life Insurance
----------------------------------------------------
On October 1, 1998, the Company sold its individual life insurance business to
Lincoln for $1 billion in cash. The transaction was generally in the form of an
indemnity reinsurance arrangement, under which Lincoln contractually assumed
from the Company certain policyholder liabilities and obligations, although the
Company remains directly obligated to policyholders. Insurance reserves ceded as
of December 31, 1998 were $2.9 billion. Deferred policy acquisition costs
related to the life policies of $907.9 million were written off against the gain
on the sale. Certain invested assets related to and supporting the life policies
were sold to consummate the life sale and the Company recorded a reinsurance
receivable from Lincoln. The transaction resulted in an after-tax gain on the
sale of approximately $117 million, of which $58 million was deferred and is
being recognized over approximately 15 years (as profits in the book of business
sold emerge). The remaining portion of the gain was recognized immediately in
net income and was largely attributed to the sale of the life insurance business
for access to the agency sales force and brokerage distribution channel. The
unamortized portion of the gain is presented in other liabilities and deferred
taxes on the consolidated balance sheets. Premiums ceded and reinsurance
recoveries made in 1999 totaled $373 million and $304 million, respectively.
4) New Accounting Standard
-----------------------
On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments,
issued by the American Institute of Certified Public Accountants ("AICPA"). This
statement 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. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this statement.
8
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 Standards
---------------------------
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
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. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The Company
does not expect the adoption of this standard to have a material effect on its
financial position and results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("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. As amended
by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133, this standard is
effective for the Company's financial statements beginning January 1, 2001, with
early adoption permitted. The Company is currently evaluating the impact of the
adoption of this standard and the potential effect on its financial position and
results of operations.
6) Additional Information -- Accumulated Other Comprehensive (Loss) Income
-----------------------------------------------------------------------
Changes in accumulated other comprehensive income (loss) related to changes in
unrealized (losses) gains on securities (excluding those related to
experience-rated contractholders) were as follows:
Nine Months Ended September 30,
(Millions) 1999 1998
- ---------------------------------------------------------------------------------------------------
Unrealized holding (losses) gains arising during the period (1) $ (120.4) $ 15.5
Less: reclassification adjustments for amortization of net
investment discounts and gains included in net income (2) 9.9 22.3
- ---------------------------------------------------------------------------------------------------
Net unrealized losses on securities $ (130.3) $ (6.8)
===================================================================================================
(1) Pretax unrealized holding (losses) gains arising during the period were
$(185.3) million and $23.8 million for 1999 and 1998, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income were $15.2 million and $34.3
million for 1999 and 1998, respectively.
9
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 and nine months ended September 30, was as follows:
Investment
Three months ended September 30, Financial Management Discontinued
(Millions) Products (1) Services (1) Operations (1) Other (1) Total
- -----------------------------------------------------------------------------------------------------------
1999
Revenues from external customers $151.9 $29.8 $ -- $ (11.0) $170.7
Net investment income 221.9 .4 -- .9 223.2
- -----------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital losses $373.8 $30.2 $ -- $ (10.1) $393.9
===========================================================================================================
Operating earnings (2) $ 48.0 $ 7.5 $ -- $ (1.7) $ 53.8
Other item (3) -- -- -- (2.6) (2.6)
Realized capital losses, net of tax (7.2) -- -- -- (7.2)
- -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 40.8 7.5 -- (4.3) 44.0
Discontinued operations, net of tax:
Deferred gain on sale -- -- 1.4 -- 1.4
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 40.8 $ 7.5 $ 1.4 $ (4.3) $ 45.4
===========================================================================================================
1998
Revenues from external customers $109.6 $24.5 $ -- $ (9.1) $125.0
Net investment income 217.2 .4 -- 1.2 218.8
- -----------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains $326.8 $24.9 $ -- $ (7.9) $343.8
===========================================================================================================
Operating earnings (2) $ 42.3 $ 6.8 $ -- $ (1.9) $ 47.2
Other item (3) -- -- -- (6.0) (6.0)
Realized capital gains, net of tax 1.7 -- -- -- 1.7
- -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 44.0 6.8 -- (7.9) 42.9
Discontinued operations, net of tax:
Income from operations -- -- 24.5 -- 24.5
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 44.0 $ 6.8 $24.5 $ (7.9) $ 67.4
===========================================================================================================
(1) Financial Products include deferred and immediate annuity contracts.
Investment Management Services include the following services: investment
advisory, underwriting, distribution for Company products and trustee,
administrative and other fiduciary services to retirement plans. (Refer to
Notes 1 and 2.) Discontinued operations include life insurance products.
(Refer to Note 3.) Other includes consolidating adjustments and Year 2000
costs.
(2) Operating earnings are comprised of net income excluding net realized
capital (losses) gains and any other items.
(3) Other item excluded from operating earnings includes after-tax Year 2000
costs of $2.6 million and $6.0 million in 1999 and 1998, respectively.
10
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)
------------------
Investment
Nine months ended September 30, Financial Management Discontinued
(Millions) Products (1) Services (1) Operations (1) Other (1) Total
- ------------------------------------------------------------------------------------------------------------
1999
Revenues from external customers $ 399.1 $86.4 $ -- $ (33.3) $ 452.2
Net investment income 665.2 1.1 -- 2.5 668.8
- ------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital losses $1,064.3 $87.5 $ -- $ (30.8) $1,121.0
============================================================================================================
Operating earnings (2) $ 142.1 $21.1 $ -- $ (5.6) $ 157.6
Other item (3) -- -- -- (13.0) (13.0)
Realized capital losses, net of tax (3.5) -- -- -- (3.5)
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 138.6 21.1 -- (18.6) 141.1
Discontinued operations, net of tax:
Deferred gain on sale -- -- 4.1 -- 4.1
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 138.6 $21.1 $ 4.1 $ (18.6) $ 145.2
============================================================================================================
1998
Revenues from external customers $ 320.0 $71.1 $ -- $ (26.8) $ 364.3
Net investment income 645.4 1.1 -- 3.4 649.9
- ------------------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains $ 965.4 $72.2 $ -- $ (23.4) $1,014.2
============================================================================================================
Operating earnings (2) $ 120.9 $18.1 $ -- $ (5.2) $ 133.8
Other item (3) -- -- -- (15.6) (15.6)
Realized capital gains, net of tax 6.1 -- -- -- 6.1
- ------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 127.0 18.1 -- (20.8) 124.3
Discontinued operations, net of tax:
Income from operations -- -- 61.8 -- 61.8
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 127.0 $18.1 $61.8 $ (20.8) $ 186.1
============================================================================================================
(1) Financial Products include deferred and immediate annuity contracts.
Investment Management Services include the following services: investment
advisory, underwriting, distribution for Company products and trustee,
administrative and other fiduciary services to retirement plans. (Refer to
Notes 1 and 2.) Discontinued operations include life insurance products.
(Refer to Note 3.) Other includes consolidating adjustments and Year 2000
costs.
(2) Operating earnings are comprised of net income excluding net realized
capital (losses) gains and any other items.
(3) Other item excluded from operating earnings includes after-tax Year 2000
costs of $13.0 million and $15.6 million in 1999 and 1998, respectively.
11
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. As of September 30, 1999, the Company had
commitments to purchase investments of $307.8 million. The fair value at
September 30, 1999 of the investments to be purchased approximated $308.3
million.
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, and after consultation with counsel, 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.
9) Dividends
---------
During 1999, the Company paid $235.8 million in dividends to HOLDCO, of which
$206.0 million was accrued for in 1998.
On October 12, 1999, a distribution was declared in an amount up to $20.2
million, payable by no later than December 31, 1999 to HOLDCO.
12
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 September 30, 1999,
and the related condensed consolidated statements of income for the three-month
and nine-month periods ended September 30, 1999 and 1998, and the related
condensed consolidated statements of changes in shareholder's equity and cash
flows for the nine-month periods ended September 30, 1999 and 1998. 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, 1998, 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,
1999, 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, 1998, 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
October 27, 1999
13
Item 2. Management's Analysis of the Results of Operations
The following discussion and analysis presents a review of the Company for the
three and nine months ended September 30, 1999 and 1998. 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" contained in ALIAC's 1998 Annual Report on Form 10-K.
Overview
Contribution from HOLDCO
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. See Notes 1 and 2
of Condensed Notes to Consolidated Financial Statements.
Sale of Individual Life Insurance Business
On October 1, 1998, the Company sold its individual life insurance business to
Lincoln for $1 billion in cash. The sale resulted in an after-tax gain of
approximately $117 million. Since the principal agreement to sell this business
was generally in the form of an indemnity reinsurance arrangement, the Company
deferred approximately $58 million of the gain and is recognizing it over
approximately 15 years. The amounts of the deferred gain recognized during the
three months and nine months ended September 30, 1999 were $1 million and $4
million, respectively. Individual life insurance coverage in force was
approximately $44 billion at September 30, 1999 and 1998. Substantially all of
this coverage in force has been ceded to Lincoln under the indemnity reinsurance
arrangement entered into as part of the sale. Revenues from the business sold
were $161 million for the three months ended September 30, 1998 and $441 million
for the first nine months of 1998. For more details about the sale, refer to
Note 3 of Condensed Notes to Consolidated Financial Statements.
Consolidated Results
Consolidated results include results from continuing operations and discontinued
operations. Continuing operations is comprised of the Company's Financial
Products and Investment Management Services business segments plus certain items
not directly allocable to the business segments. Discontinued operations is
comprised of the individual life business. 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. In
addition, all prior period income statement data has been restated to reflect
the presentation of the individual life insurance business as discontinued
operations.
14
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
Operating Summary
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
(Millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Premiums (1) $ 44.2 $ 20.1 $ 86.6 $ 54.5
Charges assessed against policyholders 98.6 81.3 283.1 243.3
Net investment income 223.2 218.8 668.8 649.9
Net realized capital (losses) gains (11.1) 2.7 (5.4) 9.3
Other income 27.9 23.6 82.5 66.5
- --------------------------------------------------------------------------------------------------------------------
Total revenue 382.8 346.5 1,115.6 1,023.5
- --------------------------------------------------------------------------------------------------------------------
Current and future benefits 201.8 181.7 564.0 529.7
Operating expenses 89.4 83.5 263.7 248.4
Amortization of deferred policy acquisition costs 25.9 23.2 77.6 69.5
- --------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 317.1 288.4 905.3 847.6
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 65.7 58.1 210.3 175.9
Income taxes 21.7 15.2 69.2 51.6
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations 44.0 42.9 141.1 124.3
Discontinued operations, net of tax:
Income from operations -- 24.5 -- 61.8
Deferred gain on sale 1.4 -- 4.1 --
- --------------------------------------------------------------------------------------------------------------------
Net income $ 45.4 $ 67.4 $ 145.2 $ 186.1
====================================================================================================================
Net realized capital (losses) gains, net of tax
(included above) $ (7.2) $ 1.7 $ (3.5) $ 6.1
====================================================================================================================
Deposits (not included in premiums above)
Financial Products $1,854.5 $1,089.1 $ 5,393.9 $ 3,552.4
Discontinued operations -- 113.5 -- 374.2
- --------------------------------------------------------------------------------------------------------------------
Total--Deposits $1,854.5 $1,202.6 $ 5,393.9 $ 3,926.6
====================================================================================================================
Assets under management
Financial Products (2) (3) $47,547.6 $38,991.9
Investment Management Services (4) 17,268.5 12,723.8
Discontinued operations (5) -- 2,826.0
- --------------------------------------------------------------------------------------------------------------------
Total--assets under management $64,816.1 $54,541.7
- --------------------------------------------------------------------------------------------------------------------
Assets under administration (6)
Financial Products $ 3,581.8 $ 2,618.5
- --------------------------------------------------------------------------------------------------------------------
Assets under management and administration $68,397.9 $57,160.3
====================================================================================================================
(1) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $15.9 million and $17.7
million for the three months ended September 30, 1999 and 1998,
respectively, and $53.9 million and $51.3 million for the nine months ended
September 30, 1999 and 1998, respectively.
(2) Includes $10,138.7 million and $6,099.4 million at September 30, 1999 and
1998, respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(3) Excludes net unrealized capital (losses) gains of ($132.1) million and
$500.6 million at September 30, 1999 and 1998, respectively.
(4) Excludes $34.2 billion and $30.5 billion of assets managed by Aeltus which
are reported in the Financial Products segment as of September 30, 1999 and
1998, respectively; and, excludes $2.3 billion of assets managed by Aeltus
which are reported in discontinued operations as of September 30, 1998.
(5) Excludes net unrealized capital gains of $51.7 million at September 30,
1998.
(6) Represents assets for which the Company provides administrative services
only.
15
Item 2. Management's Analysis of the Results of Operations (continued)
Overview (continued)
Consolidated net income for the three months ended September 30, 1999 decreased
$22 million compared to the three months ended September 30, 1998 due to the
sale of the individual life business. Net income includes Year 2000 costs of $3
million and $6 million for the three months ended September 30, 1999 and 1998,
respectively. Net income also includes $25 million relating to the life business
for the three months ended September 30, 1998. Excluding Year 2000 costs, net
realized capital gains or losses and the 1998 individual life earnings, results
for the three months ended September 30, 1999 increased $8 million, or 17%,
compared to the same period in 1998.
Consolidated net income for the nine months ended September 30, 1999 decreased
$41 million compared to the nine months ended September 30, 1998 due to the sale
of the individual life business. Net income includes Year 2000 costs of $13
million and $16 million for the nine months ended September 30, 1999 and 1998,
respectively. Net income also includes $62 million relating to the life business
for the nine months ended September 30, 1998. Excluding Year 2000 costs, net
realized capital gains or losses and the 1998 individual life earnings, results
for the nine months ended September 30, 1999 increased $28 million, or 21%,
compared to the same period in 1998.
16
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Products
Operating Summary
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
(Millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Premiums (1) $ 44.2 $ 20.1 $ 86.6 $ 54.5
Charges assessed against policyholders 98.6 81.3 283.1 243.3
Net investment income 221.9 217.2 665.2 645.4
Net realized capital (losses) gains (11.1) 2.7 (5.4) 9.3
Other income 9.1 8.2 29.4 22.2
- ----------------------------------------------------------------------------------------------------------------
Total revenue 362.7 329.5 1,058.9 974.7
- ----------------------------------------------------------------------------------------------------------------
Current and future benefits 201.8 181.7 564.0 529.7
Operating expenses (2) 77.3 68.3 220.7 204.8
Amortization of deferred policy acquisition costs 23.4 20.3 69.1 61.5
- ----------------------------------------------------------------------------------------------------------------
Total benefits and expenses 302.5 270.3 853.8 796.0
- ----------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 60.2 59.2 205.1 178.7
Income taxes 19.4 15.2 66.5 51.7
- ----------------------------------------------------------------------------------------------------------------
Net income (2) $ 40.8 $ 44.0 $ 138.6 $ 127.0
================================================================================================================
Net realized capital (losses) gains, net of tax
(included above) $ (7.2) $ 1.7 $ (3.5) $ 6.1
================================================================================================================
Deposits (not included in premiums above)
Annuities--fixed options $ 524.2 $ 238.8 $ 1,518.5 $ 847.5
Annuities--variable options 1,330.3 850.3 3,875.4 2,704.9
- ----------------------------------------------------------------------------------------------------------------
Total--deposits $1,854.5 $1,089.1 $ 5,393.9 $ 3,552.4
================================================================================================================
Assets Under Management
Annuities--fixed options (3) $12,557.2 $12,043.8
Annuities--variable options (4) 29,583.0 21,367.0
- ----------------------------------------------------------------------------------------------------------------
Subtotal--annuities 42,140.2 33,410.8
Other 5,407.4 5,581.1
- ----------------------------------------------------------------------------------------------------------------
Total--assets under management (5) $47,547.6 $38,991.9
- ----------------------------------------------------------------------------------------------------------------
Assets under administration (6) $ 3,581.8 $ 2,618.5
- ----------------------------------------------------------------------------------------------------------------
Total assets under management and administration $51,129.4 $41,610.4
================================================================================================================
(1) Includes annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies of $15.9 million and $17.7
million for the three months ended September 30, 1999 and 1998,
respectively, and $53.9 million and $51.3 million for the nine months ended
September 30, 1999 and 1998, respectively.
(2) Year 2000 costs are not allocated to segment operating expenses; and,
therefore, excluded in the determination of segment net income.
(3) Excludes net unrealized capital (losses) gains of ($132.1) million and
$500.6 million at September 30, 1999 and 1998, respectively.
(4) Includes $10,138.7 million and $6,099.4 million at September 30, 1999 and
1998, respectively, of assets invested through the Company's products in
unaffiliated mutual funds.
(5) Aeltus was the investment adviser for $34.2 billion and $30.5 billion of
the total assets under management reported for this segment at September
30, 1999 and 1998, respectively; therefore, advisory fees received on these
assets are reported in the Investment Management Services segment.
(6) Represents assets for which the Company provides administrative services
only.
17
Item 2. Management's Analysis of the Results of Operations (continued)
Financial Products (continued)
Income from the Financial Products segment for the three months ended September
30, 1999 decreased $3 million compared to the three months ended Septembr 30,
1998. Excluding net realized capital gains or losses, earnings for the three
months ended September 30, 1999 increased $6 million, or 13%, compared to the
same period in 1998.
Income from the Financial Products segment for the nine months ended September
30, 1999 increased $12 million compared to the nine months ended September 30,
1998. Excluding net realized capital gains or losses, earnings for the nine
months ended September 30, 1999 increased $21 million, or 18%, compared to the
same period in 1998.
The increase in earnings primarily reflects increased fee income from increased
assets under management. Assets under management at the end of the third quarter
of 1999 increased over the same period in 1998 primarily due to appreciation in
the stock market as well as additional net deposits (i.e. deposits less
surrenders). Compared to June 30, 1999, assets under management and
administration increased due to additional net deposits substantially offset by
market declines. Partially offsetting the increase in fee income were increased
operating expenses resulting from business growth. However, for annuity
products, operating expenses as a percentage of assets under management declined
compared to the three and nine months ended September 30, 1998.
Of the $12.6 billion and $12.0 billion of fixed annuity assets under management
at September 30, 1999 and 1998, respectively, 25% were fully guaranteed and 75%
were experienced-rated in each period. The average annualized earned rates on
investments supporting fully guaranteed investment contracts were 7.3% and 7.6%
and the average annualized earned rates on investments supporting
experience-rated investment contracts were 7.6% and 7.9% for the nine months
ended September 30, 1999 and 1998, respectively. The average annualized credited
rates on fully guaranteed investment contracts were 6.3% and 6.5% and the
average annualized credited rates on experience-rated investment contracts were
5.6% and 5.8% for the nine months ended September 30, 1999 and 1998,
respectively. The resulting annualized interest margins on fully guaranteed
investment contracts were 1.0% and 1.1% and on experience-rated investment
contracts were 2.0% and 2.1% for the nine months ended September 30, 1999 and
1998, respectively.
Investment Management Services
Operations for the Investment Management Services segment primarily consist of
the operations of Aeltus, the primary operating subsidiary of IA Holdco, which
was contributed to ALIAC on July 1, 1999 by HOLDCO. (See Notes 1 and 2 of
Condensed Notes to Consolidated Financial Statements.) Aeltus was the investment
advisor for $34.2 billion and $30.5 billion of the total assets reported in the
Financial Products segment as of September 30, 1999 and 1998, respectively.
Aeltus was also the investment advisor to $2.3 billion of the assets under
management reported for discontinued operations in the "Overview" section.
Assets managed by Aeltus which are reported in the "Financial Products" section
and as discontinued operations in the "Overview" section are not included in the
assets under management reported for this segment in the table below. Advisory
fees earned on the assets managed by Aeltus but not reported in this segment are
included in the operating results of this segment.
18
Item 2. Management's Analysis of the Results of Operations (continued)
Investment Management Services (continued)
Operating Summary
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
(Millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net investment income $ 0.4 $ 0.4 $ 1.1 $ 1.1
Net realized capital gains -- -- -- --
Other income (1) 29.8 24.5 86.4 71.1
- ------------------------------------------------------------------------------------------------------------
Total revenue 30.2 24.9 87.5 72.2
- ------------------------------------------------------------------------------------------------------------
Operating expenses (2) 18.7 14.0 53.9 43.1
- ------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 11.5 10.9 33.6 29.1
Income taxes 4.0 4.1 12.5 11.0
- ------------------------------------------------------------------------------------------------------------
Net income (2) $ 7.5 $ 6.8 $ 21.1 $ 18.1
============================================================================================================
Net realized capital gains, net of tax (included above) $ -- $ -- $ -- $ --
============================================================================================================
Assets under management: (3) (4) $17,268.5 $12,723.8
============================================================================================================
(1) Includes advisory fees for assets managed by Aeltus, which are not reported
in this segment because they are reported in the Overview section (as
discontinued operations) or the Financial Products section.
(2) Year 2000 costs are not allocated to segment operating expenses; and,
therefore, excluded in the determination of segment net income.
(3) Excludes $34.2 billion and $30.5 billion of assets managed by Aeltus which
are reported in the Financial Products segment as of September 30, 1999 and
1998, respectively; and, excludes $2.3 billion of assets managed by Aeltus
which are reported in discontinued operations as of September 30, 1998.
(4) Includes $7,360.0 million and 7,499.0 million of assets managed for Aetna
Life Insurance Company, an affiliate of the Company, as of September 30,
1999 and 1998, respectively.
Income from the Investment Management Services segment for the three months
ended September 30, 1999 increased $1 million, or 10%, compared to the same
period in 1998. Income from the Investment Management Services segment for the
nine months ended September 30, 1999 increased $3 million, or 17% compared to
the nine months ended September 30, 1998.
The increase in earnings primarily reflects increased fee income from increased
assets under management. Assets under management at the end of the third quarter
of 1999 increased over the same period in 1998 primarily due to appreciation in
the stock market as well as additional net sales. Compared to June 30, 1999,
assets under management increased due to additional net sales substantially
offset by market declines. Partially offsetting the increase in fee income were
increased operating expenses resulting from business growth.
19
Item 2. Management's Analysis of the Results of Operations (continued)
Discontinued Operations--Individual Life Insurance
On October 1, 1998, the Company sold its individual life insurance business to
Lincoln. Refer to "Overview" and Note 3 of Condensed Notes to Consolidated
Financial Statements for more details on the sale.
General Account Investments
The Company's invested assets were comprised of the following:
(Millions) September 30, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------------
Debt securities, available for sale, at fair value $11,335.2 $12,068.2
Equity securities, available for sale:
Nonredeemable preferred stock 140.5 203.3
Investment in affiliated mutual funds 73.3 100.1
Common stock 8.5 2.0
Short-term investments 56.5 48.9
Mortgage loans 10.4 12.7
Policy loans 308.9 292.2
- --------------------------------------------------------------------------------------------------
Total investments $11,933.3 $12,727.4
==================================================================================================
Debt Securities
At September 30, 1999 and December 31, 1998, 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 77% of total debt
securities, and $9.1 billion, or 76% of total debt securities, supported
experience-rated contracts.
Debt securities reflected net unrealized capital losses of $132 million at
September 30, 1999 compared to net unrealized capital gains of $497 million at
December 31, 1998. Of the total net unrealized capital losses at September 30,
1999, a net unrealized loss of $102 million relates to assets supporting
experience-rated contracts.
It is management's objective that the portfolio of debt securities be of high
quality and be well diversified by market sector. The debt securities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
debt security portfolio at September 30, 1999 and December 31, 1998 was AA-.
20
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:
September 30, 1999 December 31, 1998
-------------------- ------------------
AAA 44.7% 43.3%
AA 10.0 11.0
A 25.1 24.4
BBB 14.0 14.4
BB 2.8 3.7
B and Below 3.4 3.2
- ----------------------------------------------------------
100.0% 100.0%
==========================================================
The percentage of total debt securities by market sector is as follows:
September 30, 1999 December 31, 1998
-------------------- ------------------
U.S. Corporate Securities 44.6% 45.7%
Residential Mortgage-Backed Securities 22.6 22.4
Foreign Securities--U.S. Dollar Denominated 10.4 10.0
Commercial/Multifamily Mortgage-Backed
Securities 8.7 9.4
U.S. Treasuries/Agencies 7.7 6.4
Asset-Backed Securities 6.0 6.1
- ------------------------------------------------------------------------------------------
100.0% 100.0%
==========================================================================================
Year 2000
The Company relies heavily on information technology ("IT") systems and other
systems and facilities, such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems"), to conduct its business.
The Company also has business relationships with financial institutions,
financial intermediaries, public utilities and other critical vendors, as well
as regulators and customers, who are themselves reliant on IT and embedded
systems to conduct their businesses.
State of Readiness
In 1997, the Company's ultimate parent, Aetna, organized a multi-disciplinary
Year 2000 Project Team, including outside consultants. The Year 2000 Project
Team and Aetna's businesses and subsidiaries, including the Company, have
developed and are currently executing a comprehensive plan designed to make
their mission-critical IT systems and embedded systems Year 2000 ready. Outside
consultants have reviewed Aetna's overall process, plan and progress to date.
Aetna's plan for IT systems consists of several phases: (i)
inventory--identifying all IT systems and risk rating each according to its
potential business impact; (ii) assessment--identifying IT systems that use date
functions and assessing them for Year 2000 functionality; (iii)
remediation--reprogramming, or replacing where necessary, inventoried items to
make them Year 2000 ready; and (iv) testing and certification--testing the code
modifications and new inventory with other associated systems,
21
Item 2. Management's Analysis of the Results of Operations (continued)
Year 2000 (continued)
including extensive date testing, and performing quality assurance testing to
determine if they will operate successfully in the post-1999 environment. The
Company is addressing its IT systems in a manner consistent with Aetna's plan.
Aetna has completed the inventory, assessment, remediation, testing and
certification of its IT systems and those of its subsidiaries, including those
of the Company.
Aetna is handling substantially all aspects of the Year 2000 issue as it relates
to the Company's embedded systems. Aetna has inventoried and risk rated
substantially all of its embedded systems and those of its subsidiaries,
including those of the facilities the Company occupies. The results of these
processes indicate that embedded systems should not present a material Year 2000
risk to the Company. Aetna's remaining steps include testing selected embedded
systems and remediating and certifying systems that exhibit Year 2000 issues.
Aetna is focusing its testing and remediation efforts on select embedded systems
of its mission-critical facilities, such as data centers, service centers,
communications centers and select office locations. Aetna has completed the
testing, remediation and certification of a significant portion of these
systems, and the remaining work will be completed by year-end 1999.
The Company believes that its Year 2000 project is on schedule.
External Relationships
The Company also faces the risk that one or more of its critical suppliers
("external relationships") will not be able to interact with the Company due to
the third party's inability to resolve its own Year 2000 issues, including those
associated with its own external relationships. The Company has completed its
inventory of external relationships and risk rated each external relationship
based upon the potential business impact, available alternatives and cost of
substitution. In the case of mission-critical suppliers, such as certain banks,
telecommunications providers and other utilities, mutual fund companies, IT
vendors and financial market data providers, either Aetna or the Company is
engaged in discussions with the third parties and has obtained detailed
information as to those parties' Year 2000 plans and state of readiness. A
significant portion of the Company's critical external relationships have
informed the Company that they are not aware of any Year 2000 related reason
that they will not be able to perform their obligations to the Company in all
material respects.
Year 2000 Costs
Total Year 2000 project costs for the Company are currently estimated to be at
least $18 million (after tax) in 1999. A majority of these costs are expected to
be incremental expenses that will not recur in 2000 or thereafter. Year 2000
costs were $3 million (after tax) and $13 million (after tax) for the three and
nine months ended September 30, 1999, respectively, and $6 million (after tax)
and $16 million (after tax) for the corresponding periods in 1998. The Company
expects that Year 2000 costs in 2000 will be immaterial. The Company expenses
these costs as incurred and funds these costs through operating cash flows. Year
2000 readiness is critical to the Company. The Company has redeployed some
resources from non-critical system enhancements to address
22
Item 2. Management's Analysis of the Results of Operations (continued)
Year 2000 (continued)
Year 2000 issues. Due to the importance of IT systems to the Company's business,
management has not deferred mission-critical systems enhancements to become Year
2000 ready. The Company does not expect these redeployments to have a material
impact on the Company's financial condition or results of operations.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
update customers' accounts; process financial transactions; price securities;
bill customers; assess exposure to investment risks; determine liquidity
requirements or report accurate data to management, shareholders, customers,
regulators and others; as well as business interruptions or shutdowns; financial
losses; reputational harm; increased scrutiny by regulators; and litigation
related to Year 2000 issues. The Company is attempting to limit the potential
impact of the Year 2000 by monitoring the progress of its own Year 2000 project
and those of its critical external relationships and by developing contingency/
recovery plans. The Company cannot guarantee that it will be able to resolve all
of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company
or its external relationships, however, could have a material adverse effect on
the Company's results of operations, liquidity or financial condition.
The Company has developed contingency/recovery plans aimed at sustaining the
continuity of critical business functions before and after December 31, 1999. As
part of its contingency planning process, the Company has identified reasonably
possible Year 2000 failure scenarios and has developed contingency plans for
those failure scenarios it believes could have a significant impact on the
Company's operations. The Company is continuing to validate, refine and test
these plans. The scenarios the Company is planning for include, but are not
limited to, limitations on suppliers' and customers' ability to interact
electronically with the Company, Year 2000 related failures at key external
relationships, limitations on the Company's suppliers' or customers' ability to
move funds electronically, failures in pricing securities and increased call
volumes. The Company's planned responses to these scenarios include, but are not
limited to, reallocation of existing resources, use of alternative processes and
procedures, use of outside providers to supplement internal capabilities and use
of alternative suppliers.
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 (1) those statements
are identified as forward-looking and (2) the statements are accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from those discussed in the statement.
The Company wants to take advantage of these safe harbor provisions.
23
Item 2. Management's Analysis of the Results of Operations. (continued)
Forward-Looking Information/Risk Factors (continued)
Certain information contained in this Management's Analysis of the Results of
Operations is forward-looking within the meaning of the 1995 Act or SEC rules.
This information includes, but is not limited to the information that appears
under the heading "Year 2000." In writing this Management's Analysis, the
following words, or variations of such words and similar expressions, were used
and were intended to identify forward-looking statements:
o Expects o Plans
o Projects o Believes
o Anticipates o Seeks
o Intends o Estimates
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to significant uncertainties and contingencies,
many of which are outside the control of the Company, that could cause actual
results to differ materially from these statements. Undue reliance should not be
placed on these forward-looking statements. The Company disclaims any intention
or obligation to update or revise forward-looking statements, whether as a
result of new information, future events or otherwise.
Set forth below are certain important risk factors that, in addition to general
economic conditions and other factors (some of which are discussed elsewhere in
this report), may affect forward-looking statements and the Company's business
generally.
Adverse changes in regulation could affect the operations of the Company's
businesses. The Company's businesses are subject to comprehensive regulation.
These businesses could be adversely affected by:
o increases in minimum capital and other financial viability requirements for
insurance operations.
o removal of barriers between the banking, insurance and mutual fund businesses,
such as the so-called "Gramm/Leach Act of 1999" which was recently passed by
Congress.
o changes in the taxation of insurance companies. For example, the President of
the United States' revenue proposal would require life insurance companies to
pay tax on certain income earned prior to 1984. Under current law, that income
is deferred for tax purposes. If this tax change, which is currently just a
proposal, were enacted, then the Company would recognize a one-time charge to
income in the amount of the tax.
o changes in the tax treatment of annuity, pension and other insurance products
as well as changes in capital gains tax rates. Certain of these changes,
should they occur, could affect the attractiveness to customers of the
Company's retirement services products.
Refer to "Forward-Looking Information/Risk Factors" in ALIAC's 1998 Annual
Report on Form 10-K for factors that could cause actual Year 2000 results to
differ from the Company's expectations. The "Forward- Looking Information/Risk
Factors" portion of that Annual Report also contains a general discussion of
other important risks related to the Company's businesses.
24
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, and after consultation with counsel, 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
The Company's claims paying/financial strength ratings are as follows:
Rating Agencies
--------------------------------------------------
A.M. Best Duff & Moody's Standard &
Phelps Investors Poor's
Service
- ---------------------------------------------------------------------------
July 28, 1999 A AA Aa3 AA-
October 27, 1999 (1) A AA Aa3 AA-
- ---------------------------------------------------------------------------
(1) Moody's Investors Service and Standard & Poor's have the Company's financial
strength rating on outlook negative.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None
25
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)
Date November 12, 1999 By /s/ Deborah Koltenuk
---------------- --------------------
Deborah Koltenuk
Vice President, Corporate Controller and
Assistant Treasurer
(Chief Accounting Officer)
26