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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 28, 2001, there were 55,000 shares of common stock outstanding, par
value $50 per share, all of which shares were held by Aetna Retirement
Holdings, Inc.
Reduced Disclosure Format:
The registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K 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.)
Annual Report on Form 10-K
For the year ended December 31, 2000
TABLE OF CONTENTS
Form 10-K
Item No. Page
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PART I
Item 1. Business**.............................. 3
Item 2. Properties**............................ 12
Item 3. Legal Proceedings....................... 13
Item 4. Submission of Matters to a Vote of
Security Holders*....................... 13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters......... 13
Item 6. Selected Financial Data*................ 13
Item 7. Management's Analysis of the Results of
Operations**............................ 13
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk....................... 26
Item 8. Financial Statements and Supplementary
Data.................................... 27
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. 65
PART III
Item 10. Directors and Executive Officers of the
Registrant*............................. 65
Item 11. Executive Compensation*................. 65
Item 12. Security Ownership of Certain Beneficial
Owners and Management*.................. 65
Item 13. Certain Relationships and Related
Transactions*........................... 65
PART IV
Item 14. Exhibits, Consolidated Financial
Statement Schedules, and Reports on Form
8-K..................................... 65
Index to Consolidated Financial
Statement Schedules..................... 70
Signatures.............................. 75
* Item omitted pursuant to General Instruction I(2) of Form 10-K
** Item prepared in accordance with General Instruction I(2) of Form 10-K
2
PART I
ITEM 1. BUSINESS.
ORGANIZATION OF BUSINESS
Aetna Life Insurance and Annuity Company ("ALIAC") is a Connecticut stock life
insurance company, which was originally organized in 1976. ALIAC, together with
its wholly owned subsidiaries, Aetna Insurance Company of America ("AICA"),
Aetna Investment Adviser Holding Company, Inc. ("IA Holdco") and Aetna
Investment Services, LLC ("AIS") is herein called the "Company". ALIAC is a
wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"), which is
a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is
ultimately owned by ING Groep N.V. ("ING").
On December 13, 2000, ING America Insurance Holdings, Inc., an indirect wholly
owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial
Services business, of which the Company is a part, and Aetna International
businesses, for approximately $7.7 billion. The purchase price was comprised of
approximately $5.0 billion in cash and the assumption of $2.7 billion of
outstanding debt and other net liabilities. In connection with the acquisition,
Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). At the time of
the sale, Lion entered into certain transition services agreements with a former
related party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former
Aetna"). Refer to Note 1 of the Notes to Consolidated Financial Statements.
HOLDCO contributed AIS to the Company on June 30, 2000 and contributed IA Holdco
to the Company on July 1, 1999 (refer to Note 2 of the Notes to Consolidated
Financial Statements). As a result of the contribution of IA Holdco, the Company
has two business segments: Financial Products and Investment Management
Services. On October 1, 1998, the Company sold its domestic individual life
insurance business to Lincoln National Corporation ("Lincoln") and accordingly,
such business was classified as Discontinued Operations. Refer to Note 3 of the
Notes to Consolidated Financial Statements for further discussion on the sale.
FINANCIAL PRODUCTS
PRODUCTS AND SERVICES
The Financial Products segment includes annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored retirement
plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457,
nonqualified annuity contracts and mutual funds. Annuity contracts may be
deferred or immediate ("payout annuities"). These products also include programs
offered to qualified plans and nonqualified deferred compensation plans that
package administrative and recordkeeping services along with a menu of
investment options, including mutual funds (both Company and nonaffiliated
mutual funds), variable and fixed investment options. Financial Products
includes wrapper agreements entered into with retirement plans which contain
certain benefit responsive guarantees (i.e. liquidity guarantees of principal
and previously accrued interest for benefits paid under the terms of the plan)
with respect to portfolios of plan-owned assets not invested with the Company.
Financial Products also include investment advisory services and pension plan
administrative services.
3
ITEM 1. BUSINESS. (continued)
FINANCIAL PRODUCTS (continued)
INVESTMENT OPTIONS
The Financial Products segment offers customers products that contain variable
and/or fixed investment options. Variable options generally provide for full
assumption (and, in limited cases, provide for partial assumption) by the
customer of investment risks. Assets supporting variable annuity options are
held in separate accounts that invest in Company mutual funds and/or
unaffiliated mutual funds. Company mutual funds include funds managed by Aeltus
Investment Management, Inc. ("Aeltus"), an indirect wholly owned subsidiary of
ALIAC, and funds managed by ALIAC and subadvised by outside investment advisors.
Variable separate account investment income and realized capital gains and
losses are not reflected in the Company's consolidated statements of income.
Fixed options can be either "fully-guaranteed" or "experience-rated".
Fully-guaranteed options provide guarantees on investment return, maturity
values and, if applicable, benefit payments. Experience-rated options require
the customer to assume investment (including realized capital gains and losses)
and other risks subject to, among other things, certain minimum guarantees. As
long as minimum guarantees are not triggered, the effect of experience-rated
products' investment performance does not impact the Company's consolidated
results.
FEES AND INVESTMENT MARGINS
Insurance and expense charges, investment management fees and other fees earned
by the Company vary by product and depend on, among other factors, the funding
option selected by the customer under the product. For annuity products where
assets are allocated to variable funding options, the Company may charge the
separate account asset-based insurance and expense fees. In addition, where the
customer selects a mutual fund managed by Aeltus as a variable funding option,
Aeltus receives an advisory fee. Aeltus then pays ALIAC half of this advisory
fee, which is reflected in the Financial Products segment's results. Aeltus,
whose operating results are reported in the Investment Management Services'
segment, records the advisory fees net of the amount it pays to ALIAC. In the
case of the variable option mutual funds advised by ALIAC and subadvised by
outside managers, the Company receives an investment advisory fee from the fund
and pays a subadvisory fee to the fund manager. If the customer selects an
unaffiliated mutual fund as a variable funding option, the Company receives
distribution fees and/or expense reimbursements. For fixed funding options, the
Company earns an investment margin, which is based on the difference between
income earned on the investments supporting the liability and interest credited
to customers. The Company may also receive other fees or charges depending on
the nature of the products.
ASSETS UNDER MANAGEMENT AND ADMINISTRATION
The substantial portion of the Company's fees or other charges and investment
margins are based on assets under management. Assets under management are
principally affected by net deposits (i.e., deposits, including new contracts,
less surrenders), investment growth (i.e., interest credited to customer
accounts for fixed options or market performance for variable options) and
customer retention. Financial Products' assets under management, excluding net
unrealized capital gains and losses on debt securities that support fixed
annuities, were $53.3 billion, $54.8 billion and $44.5 billion at December 31,
2000, 1999, and 1998, respectively.
4
ITEM 1. BUSINESS. (continued)
FINANCIAL PRODUCTS (continued)
Financial Products' assets under management include assets that are also
reported in the Investment Management Services segment. Both segments report
certain assets under management because they each earn a different component of
revenue derived from these assets. Refer to "Overview-Continuing Operations" in
Management's Analysis of the Results of Operations for the elimination
adjustment required to calculate consolidated assets under management.
Approximately 94% and 95% of assets under management at December 31, 2000 and
1999, respectively, allowed for contractholder withdrawal. Approximately 86% and
85% of assets under management at December 31, 2000 and 1999, respectively, are
subject to market value adjustments and/or deferred surrender charges. To
encourage customer retention and recover acquisition expenses, contracts
typically impose a surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception. The period of time and level of
the charge vary by product. In addition, an approach incorporated into recent
variable annuity contracts with fixed funding options allows contractholders to
receive an incremental interest rate if withdrawals from the fixed account are
spread over a period of five years. Further, more favorable credited rates may
be offered after policies have been in force for a period of time. Existing tax
penalties on annuity and certain custodial account distributions prior to age
59 1/2 provide further disincentive to customers for premature surrenders of
account balances, but generally do not impede transfers of those balances to
products of competitors.
The following table summarizes assets under management for the principal
customer groups of the Financial Products segment, excluding net unrealized
capital gains and losses related to fair value adjustments required under
Financial Accounting Standard ("FAS") No. 115. Refer to "Overview" and
"Financial Products" in Management's Analysis of the Results of Operations for
further discussion of assets under management.
(Millions) 2000 1999 1998
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Corporate pensions $17,628.1 $16,974.9 $14,450.4
Not-for-profit organizations 22,872.6 24,721.1 19,611.5
Individuals 12,761.7 13,116.8 10,414.1
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Total (1) $53,262.4 $54,812.8 $44,476.0
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(1) Excludes net unrealized capital gains of $126.9 million at December 31,
2000, net unrealized capital losses of $247.9 million at December 31, 1999
and net unrealized capital gains of $496.9 million at December 31, 1998.
Deposits, which are not included in premiums or revenue, are shown in the
following table:
(Millions) 2000 1999 1998
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Corporate pensions $2,700.1 $2,444.2 $1,871.0
Not-for-profit organizations 1,930.4 2,638.7 1,591.7
Individuals 1,527.3 1,824.8 1,305.6
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Total $6,157.8 $6,907.7 $4,768.3
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A portion of the Financial Products' fee revenue is also based on assets under
administration. Assets under administration are assets for which the Company
provides administrative services only. Assets
5
ITEM 1. BUSINESS. (continued)
FINANCIAL PRODUCTS (continued)
under administration were $8.3 billion at December 31, 2000, $4.4 billion at
December 31, 1999 and $2.9 billion at December 31, 1998.
PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION
Products and services of the Financial Products segment are offered primarily to
individuals, pension plans, small businesses and employer-sponsored groups in
the health care, government, education (collectively "not-for-profit"
organizations) and corporate markets. The Company's products generally are sold
through pension professionals, independent agents and brokers, third party
administrators, banks, dedicated career agents and financial planners.
COMPETITION
Competition arises from other insurance companies and from an array of financial
services companies including banks and mutual funds, as well as other investment
managers. Principal competitive factors are reputation for investment
performance, product features, service, cost and the perceived financial
strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of the Company's products and services.
RESERVES
Reserves for limited payment contracts (i.e. annuities with life contingent
payout) are computed on the basis of assumed investment yield and mortality,
including a margin for adverse deviation which is assumed to provide for
expenses. The assumptions vary by plan, year of issue and policy duration.
Reserves for investment contracts (i.e. deferred annuities and immediate
annuities without life contingent payouts) are equal to cumulative deposits plus
credited interest for fixed options less withdrawals and charges thereon. Of
those investment contracts which are experience-rated, the reserves also reflect
net realized capital gains/losses, which the Company reflects through credited
rates on an amortized basis, and unrealized capital gains/losses related to FAS
No. 115.
Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
INVESTMENT MANAGEMENT SERVICES
The Investment Management Services segment primarily consists of the operations
of Aeltus, the primary operating subsidiary of IA Holdco, which has two
wholly-owned operating subsidiaries: Aeltus Capital, Inc. ("ACI"), a broker
dealer, and Aeltus Trust Company ("ATC"), a limited purpose banking entity. IA
Holdco was contributed to ALIAC on July 1, 1999 by HOLDCO. Refer to Note 2 of
the Notes to Consolidated Financial Statements.
6
ITEM 1. BUSINESS. (continued)
INVESTMENT MANAGEMENT SERVICES (continued)
PRODUCTS AND SERVICES
Investment Management Services provides investment advisory services to
affiliated and unaffiliated institutional and retail clients on a
fee-for-service basis; underwriting services to the Aetna Series Fund, Inc.;
distribution services for other Company products; and trustee, administrative
and other fiduciary services to retirement plans requiring or otherwise
utilizing a trustee or custodian.
FEES
Investment management fees earned by the Company depend primarily on the
investment style (e.g. equity vs. fixed income) and the service level (e.g.
asset allocation service) selected by the client, as well as the size (measured
by assets under management) of the account. Fees are generated by client money
invested in advisory accounts, individual and pooled trust accounts,
collateralized bond obligations, affiliated mutual funds and separate accounts
and the general account investments of the Company, which collectively represent
substantially all assets under management.
During the second quarter of 2001, ING Investment Management, LLC, an affiliate
of the Company, will become the advisor of the Company's general account
investments.
ASSETS UNDER MANAGEMENT
Fee income is substantially derived from a charge assessed on assets under
management. Assets under management are principally affected by net deposits
(i.e., deposits, including new contracts, less surrenders), market performance
and customer retention. Investment Management Services' assets under management,
excluding net unrealized capital gains and losses on debt securities that
support fixed annuities, were $55.6 billion, $55.0 billion and $47.8 billion at
December 31, 2000, 1999, and 1998, respectively. Investment Management Services'
assets under management include assets which are also reported in the Financial
Products segment. Both segments report certain assets under management because
they each earn a different component of revenue derived from these assets. Refer
to "Overview-Continuing Operations" in Management's Analysis of the Results of
Operations for the elimination adjustment required to calculate consolidated
assets under management.
Substantially all assets under management invested through the products of the
Investment Management Services segment at December 31, 2000 and 1999 allowed for
contractholder withdrawal subject to market value adjustments and/or deferred
contingent sales charges. Collaterized bond obligations managed by the segment
are generally not withdrawable. To encourage customer retention and recover
acquisition expenses, certain mutual fund assets under management are subject to
deferred contingent sales charges on balances withdrawn within a period of time
after contribution to the fund. For withdrawal characteristics on assets under
management invested through the Financial Products segment refer to "Financial
Products" in the Business section.
The following table summarizes assets under management for the principal
business channels of the Investment Management Services segment. Amounts
reflected exclude net unrealized capital gains and losses related to fair value
adjustments required by FAS No. 115. Refer to "Overview" and
7
ITEM 1. BUSINESS. (continued)
INVESTMENT MANAGEMENT SERVICES (continued)
"Investment Management Services" in Management's Analysis of the Results of
Operations for further discussion on assets under management.
(Millions) 2000 1999 1998
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Plan sponsored (1) $15,719.4 $14,244.5 $11,581.5
Collateralized bond obligations 2,020.7 2,051.8 1,492.8
Retail mutual funds 1,670.0 1,447.7 616.6
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Subtotal $19,410.1 $17,744.0 $13,690.9
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Invested through products of the
Financial Products segment:
Variable annuity mutual funds $16,327.1 $18,144.2 $15,423.3
Fixed annuities (2) 12,450.3 12,641.1 12,131.1
Plan sponsored and other 7,441.8 6,466.9 6,542.8
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Subtotal 36,219.2 37,252.2 34,097.2
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Total $55,629.3 $54,996.2 $47,788.1
====================================================================
(1) As of December 31, 2000, 1999 and 1998, amounts included $5,837.1 million,
$6,986.3 million and $7,809.3 million, respectively, of assets managed for
Aetna Life Insurance Company, a former affiliate of the Company (refer to
Note 1 of the Notes to Consolidated Financial Statements).
(2) Excludes net unrealized capital gains of $126.9 million at December 31,
2000, net unrealized capital losses of $247.9 million at December 31, 1999
and net unrealized capital gains of $496.9 million at December 31, 1998.
PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION
Investment Management Services' products and services are offered primarily to
pension plans (e.g. corporate, public, health care, religious), non-profit
organizations (e.g. endowments, foundations), taxable entities (e.g. corporate,
health care), corporate sponsored retirement plans and individual investors. The
Company's products are sold through an in-house sales force utilizing consultant
relationships, affiliated and unaffiliated brokers, banks, and financial
planners.
COMPETITION
Competition arises from an array of financial services companies including
banks, mutual funds and other investment managers. Principal competitive factors
are reputation for investment performance, product features, service, cost and
the perceived financial strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of the Company's products and services.
DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE
PRODUCTS AND SERVICES
Discontinued Operations include universal life and variable universal life
products, which have both life insurance and investment characteristics,
traditional whole life and term insurance.
8
ITEM 1. BUSINESS. (continued)
DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE (continued)
LIFE INSURANCE IN FORCE AND OTHER STATISTICAL DATA
The table below summarizes nonparticipating life insurance in force before
deductions for reinsurance ceded to other companies. As a result of the sale of
the Company's domestic individual life insurance business on October 1, 1998,
substantially all of the in force amounts shown in the table have been ceded to
Lincoln.
Life Insurance In Force at
December 31,
----------------------------
(Billions, except as noted below) 2000 1999 1998
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Direct:
Permanent $ 34.1 $ 36.1 $ 37.8
Term 1.6 3.6 5.1
Assumed:
Permanent 0.7 0.9 0.9
Term 1.2 1.5 1.6
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Total $ 37.6 $ 42.1 $ 45.4
=================================================================
Number of direct policies in force,
end of year (thousands) 359.7 390.2 419.8
=================================================================
Average size of direct policy in
force, end of year (thousands) $ 99.3 $101.7 $102.2
=================================================================
ASSETS UNDER MANAGEMENT
No assets under management were reported for the years presented due to the sale
of the domestic individual life business to Lincoln on October 1, 1998.
RESERVES
Because the sale of the domestic individual life business was substantially in
the form of an indemnity reinsurance agreement, the Company reported an addition
to its reinsurance recoverable approximating the total domestic individual life
insurance reserves at the sale date.
The domestic individual life business sold consisted of universal life business
and other fixed individual life business. Reserves for universal life products,
are equal to cumulative deposits less withdrawals and charges plus credited
interest for fixed options. Reserves for all other fixed individual life
contracts, which are ceded under the sale agreement, are computed on a basis of
assumed investment yield, mortality, morbidity and expenses including a margin
for adverse deviation. These assumptions vary by plan, year of issue and policy
duration.
9
ITEM 1. BUSINESS. (continued)
DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE (continued)
Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
GENERAL ACCOUNT INVESTMENTS
Consistent with the nature of the contract obligations involved in the Company's
operations, the majority of the general account assets are invested in long-term
debt securities such as: U.S. corporate debt securities, residential
mortgage-backed securities, foreign government and foreign corporate debt
securities, commercial and multifamily mortgage-backed securities, other
asset-backed securities and U.S. government securities. It is management's
objective that the portfolios be of high quality while achieving competitive
investment yields and returns. Investment portfolios generally match the
duration of the insurance liabilities they support. The general account of the
Company has been segmented to improve the asset/liability matching process. The
duration of investments is monitored and security purchases and sales are
executed with the objective of having adequate funds available to satisfy the
Company's maturing liabilities.
The Company's general account investments are currently managed by Aeltus.
During the second quarter of 2001, ING Investment Management, LLC, an affiliate
of the Company, will become the advisor of the Company's general account
investments.
See "General Account Investments" in Management's Analysis of the Results of
Operations for a further discussion of investments.
OTHER MATTERS
REGULATION
The Company's operations are subject to comprehensive regulation throughout the
United States. The laws of the various jurisdictions establish supervisory
agencies, including the state insurance departments, with broad authority to
grant licenses to transact business and regulate many aspects of the products
and services offered by the Company, as well as solvency and reserve adequacy.
Many agencies also regulate investment activities on the basis of quality,
diversification, and other quantitative criteria. The Company's operations and
accounts are subject to examination at regular intervals by certain of these
regulators.
Operations conducted by the Company are subject to regulation by various
insurance agencies where the Company conducts business, in particular the
insurance departments of Connecticut, Florida and New York. Among other matters,
these agencies may regulate premium rates, trade practices, agent licensing,
policy forms, underwriting and claims practices and the maximum interest rates
that can be charged on policy loans.
10
ITEM 1. BUSINESS. (continued)
OTHER MATTERS (continued)
The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of the Company.
Regulations of the SEC, Department of Labor ("DOL") and Internal Revenue Service
also impact certain of the Company's annuity, life insurance and other
investment and retirement products. These products involve Separate Accounts and
mutual funds registered under the Investment Company Act of 1940.
a) Federal Employee Benefit Regulation
The Company provides a variety of products and services to employee benefit
plans that are covered by the Employee Retirement Income Security Act of 1974
("ERISA").
In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit policy" were
"plan assets" for purposes of ERISA and that the insurance company had fiduciary
responsibility with respect to those assets. In reaching its decision, the Court
declined to follow a 1975 DOL interpretive bulletin that had suggested that
insurance company general account assets were not plan assets.
The Small Business Job Protection Act (the "Act"), was signed into law in 1996.
The Act created a framework for resolving potential issues raised by the Supreme
Court decision. The Act provides that, absent criminal conduct, insurers
generally will not have liability with respect to general account assets held
under contracts that are not guaranteed benefit policies based on claims that
those assets are plan assets. The relief afforded extends to conduct that
occurred before the date that is eighteen months after the DOL issues final
regulations required by the Act, except as provided in the anti-avoidance
portion of the regulations. The regulations, which were issued on January 5,
2000, address ERISA's application to the general account assets of insurers
attributable to policies issued on or before December 31, 1998 that are not
guaranteed benefit policies. The conference report relating to the Act states
that policies issued after December 31, 1998 that are not guaranteed benefit
policies will be subject to ERISA's fiduciary obligations. The Company is not
currently able to predict how these matters may ultimately affect its
businesses.
b) Insurance Holding Company Laws
A number of states, including Connecticut and Florida, regulate affiliated
groups of insurers such as the Company under holding company statutes. These
laws, among other things, place certain restrictions on transactions between
affiliates such as dividends and other distributions that may be paid to the
Company's parent corporation. For information regarding payments of dividends by
the Company, refer to "Liquidity & Capital Resources" in Management's Analysis
of the Results of Operations and Note 7 of the Notes to Consolidated Financial
Statements.
11
ITEM 1. BUSINESS. (continued)
OTHER MATTERS (continued)
c) Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants.
There were no material charges to earnings for guaranty fund obligations during
2000, 1999 and 1998. While the Company has historically recovered more than half
of its guaranty fund assessments through statutorily permitted premium tax
offsets, significant increases in assessments could jeopardize future efforts to
recover such assessments. For information regarding certain other potential
regulatory changes relating to the Company's businesses, see Management's
Analysis of the Results of Operations--Forward-Looking Information/Risk Factors.
RATINGS
The Company's financial strength ratings at March 28, 2001 and November 8, 2000
are as follows:
Rating Agencies
--------------------------------------------------
Moody's Standard &
A.M. Best Fitch Investors Service Poor's
- ----------------------------------------------------------------------------------
March 28, 2001 (1) A+ AA+ Aa2 AA+
November 8, 2000 A AA Aa3 AA-
- ----------------------------------------------------------------------------------
(1) Company ratings were upgraded by each of the rating agencies shown in the
table upon completion of ING's acquisition of Aetna Financial Services
businesses on December 13, 2000 (refer to Note 1 of the Consolidated Notes
to Financial Statements).
MISCELLANEOUS
The Company had approximately 3,100 employees at December 31, 2000.
Management believes that the Company's computer facilities, systems and related
procedures are adequate to meet its business needs. The Company's data
processing systems and backup and security policies, practices and procedures
are regularly evaluated by the Company's management and internal auditors and
are modified as considered necessary.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of consolidated revenue in 2000. In addition, the
loss of business from any one, or a few, independent brokers or agents would not
have a material adverse effect on the earnings of the Company.
ITEM 2. PROPERTIES
ALIAC's home office is located at 151 Farmington Avenue, Hartford, Connecticut
06156. All Company office space is leased or subleased by ALIAC or other
affiliates. ALIAC pays substantially all expenses associated with its leased and
subleased office properties. Expenses not paid directly by ALIAC are paid by an
affiliate and allocated back to ALIAC.
12
ITEM 3. LEGAL PROCEEDINGS
In recent years, a number of life insurance companies have been named as
defendants in class action lawsuits relating to life insurance sales practices.
The Company is currently a defendant in one such lawsuit.
A purported class action complaint was filed in the United States District Court
for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard
Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint").
The Reese Complaint seeks compensatory and punitive damages and injunctive
relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful
sales practices in marketing life insurance policies. ALIAC has moved to dismiss
the Reese Complaint for failure to state a claim upon which relief can be
granted. This litigation is in the preliminary stages. The Company intends to
defend the action vigorously.
The Company is also involved in other lawsuits arising, for the most part, in
the ordinary course of its business operations. While the outcome of these other
lawsuits cannot be determined at this time, after consideration of the defenses
available to the Company, applicable insurance coverage and any related reserves
established, these other lawsuits are not 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are directly owned by HOLDCO, which is a
wholly owned subsidiary of ARSI whose ultimate parent is ING.
For information on dividends refer to Note 7 of the Notes to Consolidated
Financial Statements. For information on capital contributions refer to Note 12
of the Notes to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
Omitted Pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
13
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
OVERVIEW
RECENT DEVELOPMENTS
On December 13, 2000, ING America Insurance Holdings, Inc., an indirect wholly
owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial
Services business, of which the Company is a part, and Aetna International
businesses, for approximately $7.7 billion. The purchase price was comprised of
approximately $5.0 billion in cash and the assumption of $2.7 billion of
outstanding debt and other net liabilities. In connection with the acquisition,
Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). Refer to Note 1
of the Notes to Consolidated Financial Statements.
HOLDCO contributed AIS to the Company on June 30, 2000 and contributed IA Holdco
to the Company on July 1, 1999. Refer to Note 2 of the Notes to Consolidated
Financial Statements.
SALE OF THE DOMESTIC INDIVIDUAL LIFE INSURANCE BUSINESS
On October 1, 1998, the Company sold its domestic 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 was recognizing it
over approximately 15 years. Approximately $6 million (after tax) and $5 million
(after tax) of the deferred gain was recognized during 2000 and 1999,
respectively. During the fourth quarter of 1999, the Company refined certain
accrual and tax estimates which had been established in connection with the
recording of the deferred gain. As a result, the deferred gain was increased by
$13 million (after tax) to $65 million at December 31, 1999.
In conjunction with the accounting for the acquisition of the Aetna Financial
Services business, of which the Company is a part, the deferred gain, which was
previously part of other liabilities, was written off. Refer to Note 3 of the
Notes to Consolidated Financial Statements.
CONSOLIDATED RESULTS
Consolidated results include results from continuing operations and discontinued
operations. Continuing operations is comprised of the Financial Products and
Investment Management Services segments plus certain items not directly
allocable to the business segments. Discontinued Operations is comprised of the
domestic individual life insurance business.
CONTINUING OPERATIONS
Income from continuing operations increased $2 million and $9 million in 2000
and 1999, respectively. Income from continuing operations includes Year 2000
costs of $18 million in 1999 and $22 million in 1998. Excluding net realized
capital losses of $23 million and $14 million in 2000 and 1999, respectively,
and net realized capital gains of $7 million in 1998, income from continuing
14
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
OVERVIEW (continued)
operations increased $11 million in 2000 and $30 million in 1999. These
increases in income excluding net realized capital losses and gains in 2000 and
1999 primarily reflect an increase in charges assessed against policyholders and
other income resulting from higher levels of assets under management and
administration partially offset by higher operating expenses.
Substantially all of the charges assessed against policyholders and other income
reported for continuing operations are derived from assets under management and
administration. Compared to prior years, assets under management and
administration at December 31, 2000 and 1999 increased 5% and 26%. The increase
in 2000 is primarily due to new investment advisory and administrative contracts
(including approximately $3 billion of plan assets from a new large case, which
closed in the second quarter of 2000) and additional net deposits. This increase
was partially offset by the stock market decline in the last half of 2000. The
increase in 1999 is primarily due to appreciation in the stock market, new
investment advisory and administrative contracts and additional net deposits
(i.e., deposits less surrenders).
Assets under management and administration for continuing operations are shown
in the table below. Certain assets under management are reported for both the
Financial Products and the Investment Management Services segments, because each
segment reports a different component of the revenue generated from this
particular group of assets. The group of assets that are reported in both
segments must be deducted from the aggregate segment assets to determine the
consolidated assets under management of the Company.
(Millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Assets under management:
Financial Products $ 53,262.4 $ 54,812.8 $ 44,476.0
Investment Management Services 55,629.3 54,996.2 47,788.1
Consolidating adjustment (1) (36,219.2) (37,252.2) (34,097.1)
- ---------------------------------------------------------------------------------------------------
Total--assets under management (2) (3) (4) $ 72,672.5 $ 72,556.8 $ 58,167.0
Assets under administration: (5)
Financial Products $ 8,293.7 $ 4,441.7 $ 2,860.1
- ---------------------------------------------------------------------------------------------------
Assets under management and administration $ 80,966.2 $ 76,998.5 $ 61,027.1
===================================================================================================
(1) Represents consolidating adjustment related to the assets under management
reported by both the Financial Products and Investment Management segments.
(2) Includes $13,492.1 million, $13,472.4 million and $7,467.5 million at
December 31, 2000, 1999 and 1998, respectively, of assets invested through
the Company's products in unaffiliated mutual funds.
(3) Excludes net unrealized capital gains of $126.9 million at December 31,
2000, net unrealized capital losses of $247.9 million at December 31, 1999
and net unrealized capital gains of $496.9 million at December 31, 1998.
(4) As of December 31, 2000, 1999 and 1998, amounts included $5,837.1 million,
$6,986.3 million and $7,809.3 million of assets managed for Aetna Life
Insurance Company, a former affiliate of the Company refer to Note 1 of the
Notes to Consolidated Financial Statements).
(5) Represents assets for which the Company provides administrative services
only.
Salaries and related benefits in the years ended December 31, 2000 and 1999
increased 42% and 9%, respectively, over the prior years. The increase in 2000
primarily reflects higher staffing levels needed to support business growth and
the implementation of strategic business initiatives and higher variable
compensation triggered in certain compensation plans when ING purchased the
Company. The increase in 1999 primarily reflects business growth. Other
operating expenses for the years ended
15
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
OVERVIEW (continued)
December 31, 2000 and 1999 increased 15% and 7%, respectively, over prior years.
The increase in 2000 is also primarily due to business growth and implementation
of strategic business initiatives and the increase in 1999 is primarily due to
business growth. Other operating expenses in 1999 and 1998 include Year 2000
costs, before tax, of approximately $27 million and $35 million, respectively.
Year 2000 costs for 1999 and 1998 are not allocated to the Company's segments.
OUTLOOK
The Company's strategy is to increase assets under management and administration
and improve profitability by focusing on strategic markets and products in its
businesses. In doing so, the Company may take a variety of actions intended to
improve its investment and product management, marketing, distribution and
customer service. The recent acquisition of the Company by ING presents
opportunities for improved execution of this strategy. Integration with ING's
current businesses, technology platforms and distribution channels will provide
the Company with increased business scale as well as expanded brokerage and
distribution capabilities and allow it to explore cross-selling opportunities
with other affiliates. Additionally, as a result of the integration with ING's
businesses, it is anticipated that the Company will not continue to actively
market certain single premium deferred annuity products.
See "Forward-Looking Information/Risk Factors" regarding other important factors
that may materially affect the Company.
16
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
FINANCIAL PRODUCTS
OPERATING SUMMARY
(Millions) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Premiums (1) $ 154.2 $ 107.5 $ 79.4
Charges assessed against policyholders 461.0 388.3 324.3
Net investment income 905.8 881.5 865.3
Net realized capital (losses) gains (35.6) (21.5) 10.4
Other income 76.9 55.3 41.9
- --------------------------------------------------------------------------------------------------------
Total revenue 1,562.3 1,411.1 1,321.3
- --------------------------------------------------------------------------------------------------------
Current and future benefits 795.6 746.2 714.4
Operating expenses:
Salaries and related benefits 172.6 127.9 123.4
Other 218.0 177.3 156.7
Amortization of deferred policy acquisition costs and value of
business acquired 115.6 93.4 80.3
- --------------------------------------------------------------------------------------------------------
Total benefits and expenses 1,301.8 1,144.8 1,074.8
- --------------------------------------------------------------------------------------------------------
Income from operations before income taxes 260.5 266.3 246.5
Income taxes 79.0 87.5 68.2
- --------------------------------------------------------------------------------------------------------
Net income (2) $ 181.5 $ 178.8 $ 178.3
========================================================================================================
Net realized capital (losses) gains, net of tax (included above) $ (23.1) $ (14.0) $ 7.3
========================================================================================================
Deposits (not included in premiums above)
Annuities--fixed options $ 1,479.1 $ 1,973.2 $ 1,125.6
Annuities--variable options 4,678.7 4,934.5 3,642.7
- --------------------------------------------------------------------------------------------------------
Total--deposits $ 6,157.8 $ 6,907.7 $ 4,768.3
========================================================================================================
Assets Under Management (3)
Annuities--fixed options (4) $12,450.3 $12,641.1 $12,131.1
Annuities--variable options (5) 33,084.0 35,352.9 25,527.0
- --------------------------------------------------------------------------------------------------------
Subtotal--annuities 45,534.3 47,994.0 37,658.1
Plan Sponsored and Other 7,728.1 6,818.8 6,817.9
- --------------------------------------------------------------------------------------------------------
Total--assets under management 53,262.4 54,812.8 44,476.0
Assets under administration (6) 8,293.7 4,441.7 2,860.1
- --------------------------------------------------------------------------------------------------------
Total assets under management and administration $61,556.1 $59,254.5 $47,336.1
========================================================================================================
(1) Includes $107.8 million in 2000, $71.5 million in 1999 and $67.4 million in
1998 for annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies.
(2) Year 2000 costs incurred in 1999 and 1998 are not allocated to segment
operating expenses; and, therefore, excluded in the determination of
segment net income.
(3) Includes $36,219.2 million, $37,252.2 million, and $34,097.1 million of
assets under management that are also reported in the Investment Management
Services segment at December 31, 2000, 1999 and 1998, respectively (refer
to "Overview").
(4) Excludes net unrealized capital gains of $126.9 million at December 31,
2000, net unrealized capital losses of $247.9 million at December 31, 1999
and net unrealized capital gains of $496.9 million at December 31, 1998.
(5) Includes $13,492.1 million at December 31, 2000, $13,472.4 million at
December 31, 1999, and $7,467.5 million at December 31, 1998 related to
assets invested through the Company's products in unaffiliated mutual
funds.
(6) Represents assets for which the Company provides administrative services
only.
Financial Products' net income increased $3 million in 2000 and $1 million in
1999. Excluding net realized capital losses and gains, net income increased $12
million, or 6%, in 2000 and $22 million, or
17
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
FINANCIAL PRODUCTS (continued)
13% in 1999. The increase in net income excluding net realized capital losses
and gains primarily reflects an increase in charges assessed against
policyholders and other income partially offset by an increase in operating
expenses.
Substantially all of the charges assessed against policyholders and other income
reported for the segment are calculated based on assets under management and
administration. Compared to prior years, assets under management and
administration at December 31, 2000 and 1999 increased 4% and 25%. The increase
in 2000 is primarily due to new investment advisory and administration contracts
(including approximately $3.0 billion of plan assets from a new large case,
which closed in the second quarter of 2000) and additional net deposits (i.e.,
deposits less surrenders). This increase was partially offset by the stock
market decline in the last half of 2000. The increase in 1999 is primarily due
to appreciation in the stock market, new investment advisory and administration
contracts and additional net deposits.
Annuity deposits relate to annuity contracts not containing life contingencies.
Compared to prior years, deposits decreased 11% for the year ended December 31,
2000 and increased 45%, for the year ended December 31, 1999. The decrease for
the year ended December 31, 2000 results from the fact that net deposits in 1999
included the plan assets from two large new cases and higher individual annuity
sales due to a new mutual fund offering. These same factors contributed to the
increase in net deposits in 1999 compared to 1998.
Salaries and related benefits for the year ended December 31, 2000 and 1999
increased 35% and 3%, respectively, over prior years. The increase in 2000
primarily reflects higher staffing levels needed to support business growth and
the implementation of strategic business initiatives, particularly improving
system infrastructures and adding new distribution capabilities. The increase in
1999 reflects business growth. Other operating expenses for the year ended
December 31, 2000 and 1999 increased 23% and 13%, respectively, over prior
years. The increase in 2000 is also primarily due to business growth and
implementation of strategic business initiatives and the increase in 1999 is
primarily due to business growth.
Of the $12.5 billion at December 31, 2000, $12.6 billion at December 31, 1999
and $12.1 billion at December 31, 1998 of fixed annuity assets under management,
25% were fully guaranteed and 75% were experienced rated for each of the three
years. The average earned rate on investments supporting fully guaranteed
investment contracts was 7.5%, 7.4% and 7.6%, and the average annualized earned
rate on investments supporting experience rated investment contracts was 7.7%,
7.6% and 7.8% for the years ended December 31, 2000, 1999 and 1998,
respectively. The average credited rate on fully guaranteed investment contracts
was 6.2%, 6.3% and 6.5%, and the average credited rate on experience rated
investment contracts was 5.6%, 5.6% and 5.8% for the years ended December 31,
2000, 1999 and 1998, respectively. The resulting interest margins on fully
guaranteed investment contracts were 1.3%, 1.1% and 1.1% and on experience rated
investment contracts were 2.1%, 2.0%, and 2.0% for the years ended December 31,
2000, 1999 and 1998, respectively.
18
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
INVESTMENT MANAGEMENT SERVICES
OPERATING SUMMARY
(Millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Net investment income $ 2.8 $ 1.5 $ 1.5
Net realized capital gains 0.2 -- --
Other income (1) 138.2 118.3 96.7
- ------------------------------------------------------------------------------------------------
Total revenue 141.2 119.8 98.2
- ------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related benefits 44.9 25.1 17.7
Other 77.5 50.1 41.8
- ------------------------------------------------------------------------------------------------
Total operating expenses 122.4 75.2 59.5
- ------------------------------------------------------------------------------------------------
Income from operations before income taxes 18.8 44.6 38.7
Income taxes 9.0 16.5 14.7
- ------------------------------------------------------------------------------------------------
Net income (2) $ 9.8 $ 28.1 $ 24.0
================================================================================================
Net realized capital gains, net of tax (included above) $ 0.1 -- --
- ------------------------------------------------------------------------------------------------
Assets under management:
Retail mutual funds $ 1,670.0 $ 1,447.7 $ 616.6
Plan sponsored (3) 15,719.4 14,244.5 11,581.5
Collateralized bond obligations 2,020.7 2,051.8 1,492.8
- ------------------------------------------------------------------------------------------------
Subtotal $19,410.1 $17,744.0 $13,690.9
- ------------------------------------------------------------------------------------------------
Invested through products of the Financial Products
segment: (4)
Variable annuity mutual funds $16,327.1 $18,144.2 $15,423.3
Fixed annuities (5) 12,450.3 12,641.1 12,131.1
Plan sponsored and other 7,441.8 6,466.9 6,542.8
- ------------------------------------------------------------------------------------------------
Subtotal $36,219.2 $37,252.2 $34,097.2
- ------------------------------------------------------------------------------------------------
Total assets under management $55,629.3 $54,996.2 $47,788.1
================================================================================================
(1) Primarily includes investment advisory fees earned on assets under
management.
(2) Year 2000 costs are not allocated to segment operating expenses and,
therefore, excluded in the determination of segment net income.
(3) As of December 31, 2000, 1999 and 1998, amounts included $5,837.1 million,
$6,986.3 million and $7,809.3 million of assets managed for Aetna Life
Insurance Company, a former affiliate of the Company (refer to Note 1 of
the Notes to Consolidated Financial Statements).
(4) The Investment Management Services segment earns investment advisory fees
on these assets, which are also reported in the Financial Products segment.
(5) Excludes net unrealized capital gains of $126.9 million at December 31,
2000, net unrealized capital losses of $247.9 million at December 31, 1999
and net unrealized capital gains of $496.9 million at December 31, 1998.
For the Investment Management Services segment, net income excluding realized
capital gains in 2000 decreased $18 million, or 65%, for the year ended
December 31, 2000, and increased $4 million, or 17%, for the year ended
December 31, 1999. The decrease in net income excluding realized capital gains
for the year ended December 31, 2000 primarily reflects an increase in operating
expenses. The increase in net income for the year ended December 31, 1999
primarily reflects an increase in investment advisory fees partially offset by
higher operating expenses.
Investment advisory fees, reported in "other income" are calculated based on
assets under management. At December 31, 2000, assets under management increased
1% over the prior year due to additional net sales. This increase was partially
offset by the stock market decline in the last half of 2000. At December 31,
1999, assets under management increased 15% over the prior year
19
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
INVESTMENT MANAGEMENT SERVICES (continued)
primarily due to appreciation in the stock market and, to a lesser extent,
additional net deposits (i.e. deposits, including new contracts, less
surrenders).
For the years ended December 31, 2000 and 1999, salaries and related benefits
increased 79% and 42%, respectively, because of higher variable compensation
expense caused by change in control provisions in certain compensation plans,
which were triggered by ING's purchase of the Company, and business growth. For
the same periods, other operating expenses increased 55% and 20%, respectively,
due to business growth.
DISCONTINUED OPERATIONS--DOMESTIC INDIVIDUAL LIFE INSURANCE
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln. See "Overview" in Management's Analysis of the Results of
Operations and Note 3 of the Notes to Consolidated Financial Statements for
further discussion on the sale.
GENERAL ACCOUNT INVESTMENTS
The Company's investment strategies and portfolios are intended to match the
duration of the related liabilities and provide sufficient cash flow to meet
obligations while maintaining a competitive rate of return. The duration of the
investment portfolios supporting the Company's liabilities is regularly
monitored and adjusted in order to maintain an aggregate duration that is within
0.5 years of the estimated duration of the underlying liabilities. Customers
assume the risks associated with the investments supporting experience rated
products subject to, among other things, certain minimum guarantees.
The Company's invested assets were comprised of the following:
(Millions) December 31, 2000 December 31, 1999
- ------------------------------------------------------------------------------------
Debt securities, available for sale, at
fair value (1) $11,371.4 $11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock 100.7 130.9
Investment in affiliated mutual funds 12.7 64.1
Common stock 3.5 11.5
Short-term investments (2) 111.7 74.2
Mortgage loans 4.6 6.7
Policy loans 339.3 314.0
Other investments 13.4 13.2
- ------------------------------------------------------------------------------------
Total Investments $11,957.3 $12,024.7
====================================================================================
(1) Includes $126.7 million of debt securities pledged to creditors at
December 31, 2000. Refer to "Investments" in Note 1 of Notes to
Consolidated Financial Statements.
(2) Includes $2.3 million of short-term investments pledged to creditors at
December 31, 2000. Refer to "Investments" in Note 1 of Notes to
Consolidated Financial Statements
20
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
GENERAL ACCOUNT INVESTMENTS (continued)
DEBT SECURITIES
At December 31, 2000 and 1999, the Company's carrying value of available for
sale debt securities including debt securities pledged to creditors (herein
after referred to as "total debt securities") represented 95% of the general
account invested assets. For the same periods, $8.9 billion, or 79% of total
debt securities, and $8.9 billion, or 78% of total debt securities supported
experience rated products. Total debt securities reflected net unrealized
capital gains of $126.9 million at December 31, 2000 and net unrealized capital
losses of $247.9 million at December 31, 1999.
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 December 31, 2000 and 1999 was AA.
The percentage of total debt securities investments by quality rating category
is as follows:
December 31, 2000 December 31, 1999
- ------------------------------------------------------------------------------------
AAA 53.2% 48.4%
AA 9.1 9.5
A 23.5 24.5
BBB 9.9 11.1
BB 1.5 2.5
B and Below 2.8 4.0
- ------------------------------------------------------------------------------------
Total 100.0% 100.0%
====================================================================================
The portfolio of debt securities at December 31, 2000 and 1999 included $482
million (4.3% of the total debt securities) and $739 million (6.5% of the total
debt securities), respectively, of investments that are considered "below
investment grade". "Below investment grade" securities are defined to be
securities that carry a rating below BBB- and Baa3, by Standard & Poor's and
Moody's Investors Services, respectively.
The percentage of total debt securities investments by market sector is as
follows:
December 31, 2000 December 31, 1999
- ------------------------------------------------------------------------------------
U.S. Corporate 43.0% 40.6%
Residential Mortgage-Backed 27.1 23.9
Commercial/Multifamily Mortgage-Backed 9.8 8.6
U.S. Treasuries/Agencies 8.4 9.4
Asset-Backed 6.7 6.1
Foreign (1) 5.0 11.4
- ------------------------------------------------------------------------------------
Total 100.0% 100.0%
====================================================================================
(1) Substantially all U.S. Dollar Denominated
21
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
GENERAL ACCOUNT INVESTMENTS (continued)
RISK MANAGEMENT AND MARKET SENSITIVE INSTRUMENTS
The Company regularly evaluates the appropriateness of investments relative to
its management approved investment guidelines and the business objective of the
portfolios. The Company manages interest rate risk by seeking to maintain a
tight duration band, while credit risk is managed by maintaining high average
quality ratings and diversified sector exposure within the debt securities
portfolio. In connection with its investment and risk management objectives, the
Company also uses financial instruments whose market value is at least partially
determined by, among other things, levels of or changes in domestic and/or
foreign interest rates (short-term or long-term), duration, exchange rates,
prepayment rates, equity markets or credit ratings/spreads.
The Company's use of derivatives is generally limited to hedging purposes and
has principally consisted of using futures contracts to hedge interest rate and
equity price risk. When used for hedging, the expectation is that these
instruments would reduce overall risk. (Refer to Notes 1 and 5 of the Notes to
Consolidated Financial Statements for additional information.)
The following discussion about the Company's risk management activities includes
"forward-looking statements" that involve risk and uncertainties. Set forth
below are management's projections of hypothetical net losses in fair value of
shareholder's equity of the Company's market sensitive instruments if an
immediate increase of 100 basis points in interest rates and an immediate
decrease of 10% in prices for domestic equity securities were to occur
(sensitivity analysis). The instruments included in this analysis are not
leveraged and are held for purposes other than trading. While the Company
believes that the assumed market rate changes are reasonably possible in the
near term, actual results may differ, particularly as a result of any management
actions that would be taken to mitigate such hypothetical losses in fair value
of shareholder's equity.
INTEREST RATE RISK
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical loss in fair value of shareholder's equity related to financial and
derivative instruments is estimated to be $44 million (after tax) at
December 31, 2000 and $12 million (after tax) at December 31, 1999. The Company
believes that an interest rate shift of this magnitude represents a moderately
adverse scenario, and is approximately equal to the historical annual volatility
of interest rate movements for the Company's intermediate term
available-for-sale debt securities. The Company has included corresponding
changes in certain insurance liabilities in this sensitivity analysis.
The potential effect of interest rate risk on fair value was determined based on
commonly used models. The models project the impact of interest rate changes on
a wide range of factors, including duration, prepayment, put options and call
options. Fair value was estimated based on the net present value of cash flows
or duration estimates, using a representative set of likely future interest rate
scenarios.
The risks associated with investments supporting experience rated pension and
annuity products are assumed by those contractholders, not by the Company
(subject to, among other things, certain
22
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
GENERAL ACCOUNT INVESTMENTS (continued)
minimum guarantees). Risks associated with the investments and liabilities
related to experience-rated pension and annuity products are not included in the
sensitivity analysis presented below.
EQUITY PRICE RISK
The Company's available-for-sale equity securities are comprised primarily of
domestic stocks. Assuming an immediate decrease of 10% in equity prices for
domestic equity securities, the hypothetical loss in fair value of shareholder's
equity related to financial and derivative instruments is estimated to be $2
million (after tax) at December 31, 2000 and $5 million (after tax) at
December 31, 1999.
Based on the Company's overall exposure to interest rate risk and equity price
risk, the Company believes that these changes in market rates and prices would
not materially affect the consolidated near-term financial position, results of
operations or cash flows of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits, asset maturities and income received on
investments. Cash provided from these sources is used primarily for benefit
payments, contract withdrawals and operating expenses.
Debt securities and mortgage loans have durations that were selected to
approximate the durations of the liabilities they support. The general account
of the Company has been segmented to improve the asset/liability matching
process. The duration of these investments is monitored, and investment
purchases and sales are executed with the objective of having adequate funds
available to satisfy the Company's maturing liabilities.
As the Company's investment strategy focuses on matching asset and liability
durations, and not specific cash flows, and since these duration assessments are
dependent on numerous cash flow assumptions, asset sales may, from time to time,
be required to satisfy liability obligations and/or rebalance asset portfolios.
The investment portfolios are closely monitored to assess asset and liability
matching in order to rebalance the portfolios as conditions warrant.
Given the high quality of the debt securities portfolio (see "General Account
Investments"), management expects the vast majority of the Company's investments
in debt securities to be repaid in accordance with contractual terms. In
addition, most of the debt securities in the portfolio are highly marketable and
can be sold to enhance cash flow before maturity.
In 2000, the Company received capital contributions of $73.5 million in cash and
$56.0 million in assets from HOLDCO. The Company did not receive any capital
contributions in 1999, but it received a capital contribution of $9.3 million in
cash from HOLDCO in 1998.
23
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Company paid $10.1 million, $255.7 million and $570.0 million in cash
dividends to HOLDCO in 2000, 1999 and 1998, respectively. Of the $255.7 million
paid in 1999, $206.0 million was accrued for in 1998. Of the $776.0 million
dividends paid or accrued in 1998, $756.0 million (all of which was approved by
the Insurance Commissioner of the State of Connecticut) was attributable to
proceeds from the sale of the domestic individual life insurance business. The
Company may not pay distributions, including dividends, to HOLDCO in excess of a
statutory limit unless approved by the Insurance Commissioner of the State of
Connecticut. As of March 28, 2001, the Company had not exceeded such statutory
limit.
See "Consolidated Statements of Cash Flows" for additional information.
YEAR 2000
As of March 28, 2001, the Company has not experienced any material difficulties
with its mission-critical IT systems, embedded systems, suppliers, or customers
due to Year 2000 issues. The Company has reassigned its Year 2000 personnel and
transferred Year 2000 related responsibilities to its businesses. The Company
remains Year 2000 vigilant and any potential future Year 2000 issues will be
addressed by IT personnel within the Company's business segments.
YEAR 2000 COSTS
Year 2000 costs for the year ended December 31, 2000 were immaterial. Total Year
2000 project costs were $18 million (after tax) for the year ended December 31,
1999 and $22 million (after tax) for the year ended December 31, 1998. The
Company funded these costs through operating cash flows.
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.
We want to take advantage of these safe harbor provisions.
Certain information contained in this Management's Analysis of the Results of
Operations is forward-looking within the meaning of the 1995 Act or Securities
and Exchange Commission rules. This information includes, but is not limited to
the information that appears under the headings: (1) Overview--Outlook,
(2) General Account Investments--Risk Management and Market Sensitive
Instruments/Interest Rate Risk/Equity Price Risk and (3) "Year 2000." In writing
this Management's
24
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (continued)
Analysis of the Results of Operations, we also used the following words, or
variations of these words and similar expressions, where we intended to identify
forward-looking statements:
- - Expects - Plans
- - Projects - Believes
- - Anticipates - Seeks
- - Intends - Estimates
These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of significant uncertainties and
other factors, many of which are outside our control, that could cause actual
results to differ materially from these statements. You should not put undue
reliance on these forward-looking statements. We disclaim 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 these forward-looking statements and our businesses
generally.
CERTAIN FACTORS PARTICULAR TO THE COMPANY'S OPERATIONS
SIGNIFICANT CHANGES IN FINANCIAL MARKETS COULD AFFECT EARNINGS. Significant
changes in financial markets could impact the level of assets under management
and administration in our businesses, and, in turn, our level of asset-based
fees in those businesses. For example, significant increases in interest rates
or decreases in equity markets would directly affect the level of assets under
management and administration and, in addition, may increase the level of
withdrawals and decrease the level of deposits by customers. Customers under
those circumstances may seek to diversify among asset managers or seek
investment alternatives that we do not offer. Significant declines in the value
of investments also may affect our ability to pass through investment losses to
certain experience rated customers, whether due to triggering minimum guarantees
or other business reasons.
DECREASES IN RATINGS COULD AFFECT ASSETS UNDER MANAGEMENT. Decreases in the
claims-paying ratings of the Company could have the effect of decreasing new
sales and deposits and increasing withdrawals and surrenders in our businesses.
Such changes in sales and deposits, withdrawals and surrenders would adversely
affect the level of asset-based fees of our businesses. The claims-paying
ratings are periodically reviewed and subject to changes, in certain cases,
based on factors beyond our control.
EARLY WITHDRAWAL OF ASSETS COULD AFFECT EARNINGS. We incur up-front costs, such
as commissions, when we sell our annuity and other financial services products.
We generally defer these costs and recognize them over time. As a result, the
retention of assets under these products is an important component of
profitability. We generally seek to structure our products and sales to
encourage retention of assets under management and administration or recover
costs, through surrender charges, higher credited rates to customers if we
retain their assets for longer periods, paying renewal commissions, paying
service fees or other terms. However, if customers withdraw assets earlier than
25
ITEM 7. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS. (continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (continued)
we anticipated when we priced the products, it would adversely affect
profitability. We could also experience competitive pressure to lower margins.
LITIGATION CAN ADVERSELY AFFECT US. Litigation also could adversely affect us,
both through costs of defense and adverse results or settlements. Refer to Note
14 of the Notes to Consolidated Financial Statements and Legal Proceedings for
information regarding litigation.
ADVERSE CHANGES IN REGULATION COULD AFFECT THE OPERATIONS OF EACH OF OUR
BUSINESSES. Each of our businesses is subject to comprehensive regulation.
These businesses could be adversely affected by:
- - Increases in minimum capital and other financial viability requirements for
insurance operations;
- - Changes in the taxation of insurance companies; and
- - 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
our financial services products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "General Account Investments" in Management's Analysis of the Results of
Operations.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report...................... 28
Consolidated Financial Statements:
Consolidated Statements of Income for the One
Month Ended December 31, 2000, the Eleven
Months Ended November 30, 2000 and for the
Years Ended December 31, 1999 and 1998..... 29
Consolidated Balance Sheets as of
December 31, 2000 and 1999................. 30
Consolidated Statements of Changes in
Shareholder's Equity for the One Month
Ended December 31, 2000, the Eleven Months
Ended November 30, 2000 and for the Years
Ended December 31, 1999 and 1998........... 31
Consolidated Statements of Cash Flows for the
One Month Ended December 31, 2000, the
Eleven Months Ended November 30, 2000 and
for the Years Ended December 31, 1999 and
1998....................................... 32
Notes to Consolidated Financial Statements.... 33
27
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 2000
("Successor Company") and December 31, 1999 ("Preacquisition Company"), and the
related consolidated statements of income, changes in shareholder's equity and
cash flows for the period from December 1, 2000 to December 31, 2000 ("Successor
Company"), and for the period from January 1, 2000 to November 30, 2000 and the
years ended December 31, 1999 and 1998 ("Preacquisition Company"). These
consolidated financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the Successor Company's consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company and Subsidiaries at
December 31, 2000, and the results of their operations and their cash flows for
the period from December 1, 2000 to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
Further, in our opinion, the Preacquisition Company's consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Aetna Life Insurance and Annuity Company and Subsidiaries
at December 31, 1999, and the results of their operations and their cash flows
for the period from January 1, 2000 to November 30, 2000, and the years ended
December 31, 1999 and 1998, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
November 30, 2000, ING America Insurance Holdings Inc. acquired all of the
outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's
indirect parent and sole shareholder in a business combination accounted for as
a purchase. As a result of the acquisition, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
/s/ KPMG LLP
Hartford, Connecticut
March 27, 2001
28
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(millions)
Preacquisition
-------------------------------------------
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
2000 2000 1999 1998
------------- ------------- ------------- -------------
Revenue:
Premiums $ 16.5 $ 137.7 $ 107.5 $ 79.4
Charges assessed against policyholders 36.4 424.6 388.3 324.3
Net investment income 78.6 833.8 886.3 871.8
Net realized capital (losses) gains 1.8 (37.2) (21.5) 10.4
Other income 13.4 148.7 129.7 100.2
------ -------- -------- --------
Total revenue 146.7 1,507.6 1,490.3 1,386.1
------ -------- -------- --------
Benefits and expenses:
Current and future benefits 68.9 726.7 746.2 714.4
Operating expenses:
Salaries and related benefits 29.9 187.5 153.0 141.0
Other 19.2 227.1 213.7 199.6
Amortization of deferred policy acquisition costs
and value of business acquired 10.2 116.7 104.9 91.2
------ -------- -------- --------
Total benefits and expenses 128.2 1,258.0 1,217.8 1,146.2
------ -------- -------- --------
Income from continuing operations before income taxes 18.5 249.6 272.5 239.9
Income taxes 5.9 78.1 90.6 67.1
------ -------- -------- --------
Income from continuing operations 12.6 171.5 181.9 172.8
Discontinued operations, net of tax:
Income from operations -- -- -- 61.8
Amortization of deferred gain on sale -- 5.7 5.7 --
Immediate gain on sale -- -- -- 59.0
------ -------- -------- --------
Net income $ 12.6 $ 177.2 $ 187.6 $ 293.6
====== ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
(millions, except share data)
December 31, December 31,
2000 1999
--------------- ---------------
ASSETS
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,120.0 and $11,657.9) $11,244.7 $11,410.1
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $109.0 and $134.7) 100.7 130.9
Investment in affiliated mutual funds (cost: $9.6 and $63.5) 12.7 64.1
Common stock (cost: $2.2 and $6.7) 3.5 11.5
Short-term investments 109.4 74.2
Mortgage loans 4.6 6.7
Policy loans 339.3 314.0
Other investments 13.4 13.2
Securities pledged to creditors (amortized cost: $126.8) 129.0 --
--------- ---------
Total investments 11,957.3 12,024.7
Cash and cash equivalents 796.3 694.4
Short-term investments under securities loan agreement 131.8 238.8
Accrued investment income 147.2 150.7
Premiums due and other receivables 82.9 298.3
Reinsurance recoverable 3,005.8 3,001.2
Current income taxes 40.6 --
Deferred income taxes -- 150.4
Deferred policy acquisition costs 12.3 1,046.4
Value of business acquired 1,780.9 --
Goodwill 2,297.4 --
Other assets 154.7 96.5
Separate Accounts assets 36,745.8 38,692.6
--------- ---------
Total assets $57,153.0 $56,394.0
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $ 3,977.7 $ 3,850.4
Unpaid claims and claim expenses 29.6 27.3
Policyholders' funds left with the Company 11,125.6 11,121.7
--------- ---------
Total insurance reserve liabilities 15,132.9 14,999.4
Payables under securities loan agreement 131.8 238.8
Current income taxes -- 14.7
Deferred income taxes 248.0 --
Other liabilities 549.9 1,062.8
Separate Accounts liabilities 36,745.8 38,692.6
--------- ---------
Total liabilities 52,808.4 55,008.3
--------- ---------
Shareholder's equity:
Common stock, par value $50 (100,000 shares authorized; 55,000
shares issued and outstanding) 2.8 2.8
Paid-in capital 4,303.8 431.9
Accumulated other comprehensive gain (loss) 25.4 (44.8)
Retained earnings 12.6 995.8
--------- ---------
Total shareholder's equity 4,344.6 1,385.7
--------- ---------
Total liabilities and shareholder's equity $57,153.0 $56,394.0
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
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)
Preacquisition
-------------------------------------------
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
2000 2000 1999 1998
------------- ------------- ------------- -------------
Shareholder's equity, beginning of period $4,313.4 $1,385.7 $1,394.5 $1,853.3
Comprehensive income:
Net income 12.6 177.2 187.6 293.6
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
($28.7, $79.4, ($230.2), $18.2 pretax) (1) 18.6 51.6 (149.6) 11.9
-------- -------- -------- --------
Total comprehensive income 31.2 228.8 38.0 305.5
-------- -------- -------- --------
Capital contributions:
Cash -- 73.5 -- 9.3
Assets -- 56.0 -- --
-------- -------- -------- --------
Total capital contributions -- 129.5 -- 9.3
-------- -------- -------- --------
Other changes -- 0.8 2.9 2.4
-------- -------- -------- --------
Common stock dividends -- (10.1) (49.7) (776.0)
-------- -------- -------- --------
Adjustment for purchase accounting -- 2,578.7 -- --
-------- -------- -------- --------
Shareholder's equity, end of period $4,344.6 $4,313.4 $1,385.7 $1,394.5
======== ======== ======== ========
(1) Net of reclassification adjustments.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
Preacquisition
-----------------------------------------------
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
2000 2000 1999 1998
--------------- ------------- --------------- ---------------
Cash Flows from Operating Activities:
Net income $ 12.6 $ 177.2 $ 187.6 $ 293.6
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Net accretion of discount on investments (2.7) (32.6) (26.5) (29.5)
Amortization of deferred gain on sale -- (5.7) (5.7) 0.0
Immediate gain on sale -- -- -- (59.0)
Net realized capital gains (losses) (1.8) 37.2 21.5 (11.1)
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 6.6 (3.1) 0.9 11.4
Decrease (increase) in premiums due and other receivables 31.1 (23.7) 23.3 (24.0)
Decrease (increase) in policy loans 0.1 (25.4) (21.8) 177.4
Increase in deferred policy acquisition costs/value of
business acquired (12.2) (136.6) (153.3) (132.8)
Decrease in reinsurance loan to affilitate -- -- -- 397.2
Net (decrease) increase in universal life account balances (3.8) 23.8 55.7 122.9
(Decrease) increase in other insurance reserve liabilities (5.3) 85.6 (28.6) (41.8)
Increase (decrease) in other liabilities and other assets 103.9 (75.2) (42.5) (35.3)
(Decrease) increase in income taxes (14.3) 23.1 (259.8) 106.5
------- ---------- --------- ---------
Net cash provided by (used for) operating activities 114.2 44.6 (249.2) 775.5
------- ---------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of fixed maturities
Debt securities available for sale 233.0 10,083.2 5,890.1 6,790.2
Equity securities 1.5 118.4 111.2 150.1
Mortgage loans 0.1 2.1 6.1 0.3
Life Business -- -- -- 966.5
Investment maturities and collections of:
Debt securities available for sale 53.7 573.1 1,216.5 1,296.3
Short-term investments 0.4 59.9 80.6 135.3
Cost of investment purchases in:
Debt securities available for sale (230.7) (10,505.5) (7,099.7) (6,706.4)
Equity securities (27.8) (17.6) (13.0) (125.7)
Short-term investments (10.0) (113.1) (106.0) (83.9)
Decrease (increase) in property and equipment 1.9 5.4 (5.7)
Other, net 0.3 (4.0) 3.7 (2,725.9)
------- ---------- --------- ---------
Net cash provided by (used for) investing activities 22.4 201.9 83.8 (312.2)
------- ---------- --------- ---------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 164.2 1,529.7 2,040.2 1,571.1
Withdrawals of investment contracts (156.3) (1,832.6) (1,680.8) (1,393.1)
Capital contribution from HOLDCO -- 73.5 -- 9.3
Return of capital to Separate Account -- -- -- 1.7
Dividends paid to shareholder -- (10.1) (255.7) (570.0)
Other, net (73.6) 22.0 126.7 (34.3)
------- ---------- --------- ---------
Net cash (used for) provided by financing activities (65.7) (217.5) 230.4 (415.3)
------- ---------- --------- ---------
Net increase in cash and cash equivalents 70.9 29.0 65.0 48.0
Effect of exchange rate changes on cash and cash equivalents -- 2.0 -- --
Cash and cash equivalents, beginning of period 725.4 694.4 629.4 581.4
------- ---------- --------- ---------
Cash and cash equivalents, end of period $ 796.3 $ 725.4 $ 694.4 $ 629.4
======= ========== ========= =========
Supplemental cash flow information:
Income taxes paid, net $ 20.3 $ 39.9 $ 316.9 $ 60.9
======= ========== ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aetna Life Insurance and Annuity Company ("ALIAC") and its wholly owned
subsidiaries (collectively, the "Company") are providers of financial
products and services and investment management services in the United
States. 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).
On December 13, 2000, ING America Insurance Holdings, Inc., an indirect
wholly owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna
Financial Services business, of which the Company is a part, and the Aetna
International business, for approximately $7.7 billion. The purchase price
was comprised of approximately $5.0 billion in cash and the assumption of
$2.7 billion of outstanding debt and other net liabilities. In connection
with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc.
("Lion"). At the time of the sale, Lion entered into certain transition
services agreements with a former related party, Aetna U.S. Healthcare,
which was renamed Aetna Inc. ("former Aetna").
For accounting purposes, the acquisition has been accounted for as of
November 30, 2000 using the purchase method. The application of the purchase
method, including the recognition of goodwill, is being pushed down and
reflected on the financial statements of certain ARSI (a subsidiary of Lion)
subsidiaries, including the Company. The Balance Sheet changes related to
accounting for this purchase were entirely non-cash in nature and
accordingly have been excluded from the pre-acquisition Consolidated
Statement of Cash Flow for the eleven months ended November 30, 2000.
The purchase price was allocated to assets and liabilities based on their
respective fair values. This revaluation resulted in a net increase to
assets, excluding the effects of goodwill, of $592.0 million and a net
increase to liabilities of $310.6 million. The allocation of the purchase
price to assets and liabilities is subject to further refinement.
The net increase to assets reflects the write off of deferred acquisition
costs of $1,183.0 million, which was the balance as of November 30, 2000,
the establishment of value of business acquired of $1,780.9, an increase to
other assets of $6.0 million and a decrease of $12.0 million in current
income taxes. The increase to other assets reflects the write down of
certain fixed assets and capitalized software costs resulting from
conforming accounting policies, the establishment of a favorable lease asset
and the reclassification of certain pension assets (previously reflected in
other liabilities). The balances in other assets and current income taxes
prior to push down accounting were $148.7 million and $52.6 million,
respectively.
The net increase to liabilities reflects an increase to insurance reserves
of $60.0 million representing the revaluation of the reserves using current
assumptions, an increase to deferred tax liabilities of $266.4 million
primarily representing the deferred tax effect of the purchase accounting
adjustments and a decrease to other liabilities of $15.8 million. The
decrease in other liabilities includes the write-off of the deferred gain
related to the sale of the individual life insurance business (refer to Note
3) partially offset by the establishment of a severance liability
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
and the revaluation of certain benefit plan liabilities. The balances in
insurance reserves and other liabilities prior to push down accounting were
$15,072.9 million and $565.7 million. With respect to deferred taxes, prior
to push down accounting, the Company had a deferred tax asset of $18.4
million. As a result of the application of push down accounting, retained
earnings immediately prior to the sale was reclassified to paid-in capital.
Additionally, the Company established goodwill of $2.3 billion. Goodwill is
being amortized over a period of 40 years.
Unaudited proforma consolidated income from continuing operations and net
income of the Company for the period from January 1, 2000 to November 30,
2000 and for the year-ended December 31, 1999, assuming that the acquisition
of the Company occurred at the beginning of each period, would have been
approximately $118.1 million and $123.5 million, respectively. The pro forma
adjustments, which do not affect revenues, reflect primarily goodwill
amortization, amortization of the favorable lease asset and the elimination
of amortization of the deferred gain on sale associated with the life
business.
Financial Products include annuity contracts that offer a variety of funding
and payout options for individual and employer-sponsored retirement plans
qualified under Internal Revenue Code Sections 401, 403, 408 and 457,
nonqualified annuity contracts and mutual funds. Annuity contracts may be
deferred or immediate ("payout annuities"). These products also include
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a
menu of investment options, including mutual funds (both ALIAC and
nonaffiliated mutual funds), variable and fixed investment options.
Financial Products also include investment advisory services and pension
plan administrative services.
Investment Management Services provides: investment advisory services to
affiliated and unaffiliated institutional and retail clients on a
fee-for-service basis; underwriting services to the Aetna Series Fund Inc.;
distribution services for other company products; and trustee,
administrative, and other fiduciary services to retirement plans requiring
or otherwise utilizing a trustee or custodian.
Discontinued Operations include universal life, variable universal life,
traditional whole life and term insurance.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include ALIAC and its wholly owned
subsidiaries, Aetna Insurance Company of America ("AICA"), Aetna Investment
Adviser Holding Company, Inc. ("IA Holdco") and Aetna Investment Services,
LLC ("AIS"). ALIAC is a wholly owned subsidiary of Aetna Retirement
Holdings, Inc. ("HOLDCO"), which is a wholly owned subsidiary of Aetna
Retirement Services, Inc. ("ARSI"). ARSI is ultimately owned by ING Groep
N.V.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(ING). HOLDCO contributed AIS to the Company on June 30, 2000 and
contributed IA Holdco to the Company on July 1, 1999 (refer to Note 2).
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The contributions of AIS and IA Holdco to the Company were 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 both companies.
Certain reclassifications have been made to 1999 and 1998 financial
information to conform to the 2000 presentation.
NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
In September 2000, the Financial Accounting Standard Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces FAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This standard revises the
accounting for securitizations, other financial asset transfers and
collateral associated with securities lending transactions and requires
certain additional disclosures. FAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. However, for recognition and disclosure of collateral
and for additional disclosures related to securitization transactions, FAS
No. 140 was effective for the Company's December 31, 2000 financial
statements. With respect to the provisions effective December 31, 2000, the
Company reclassified debt securities on loan to other institutions from
"Debt Securities" to "Securities Pledged to Creditors" on the Company's
Consolidated Balance Sheet. The Company does not expect the adoption of
those provisions effective after March 31, 2001 to have a material effect on
its financial position or results of operations (Refer to Note 4).
DEPOSIT ACCOUNTING: ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS THAT
DO NOT TRANSFER INSURANCE RISK
On January 1, 2000, the Company adopted Statement of Position 98-7, Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk, issued by the American Institute of Certified
Public Accountants. This statement provides guidance on how to account for
all insurance and reinsurance contracts that do not transfer insurance risk,
except for long-duration life and health insurance contracts. The adoption
of this standard had no impact on the Company's financial position or
results of operations.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FUTURE APPLICATION OF ACCOUNTING STANDARDS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This June 2000, further guidance related
to accounting for derivative instruments and hedging activities was provided
when the FASB issued FAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement
No. 133. This standard, as amended, requires companies to record all
derivatives on the balance sheet as either assets or liabilities and measure
those instruments at fair value. The manner in which companies are to record
gains or losses resulting from changes in the values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting. As amended by FAS No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133, this standard is effective for the Company's financial statements
beginning January 1, 2001, with early adoption permitted. The impact to the
Company, of the adoption of this standard, as amended, will not have a
material effect on the Company's financial position or results of
operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from reported results using those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
Debt and equity securities are classified as available for sale and carried
at fair value. Securities are written down (as realized capital losses) for
other than temporary declines in value. Included in available-for-sale
securities are investments that support experience-rated products.
Experience-rated products are products where the customer, not the Company,
assumes investment (including realized capital gains and losses) and other
risks, subject to, among other things, minimum guarantees. As long as
minimum guarantees are not triggered, the effect of experience-rated
products' investment performance does not impact the Company's results of
operations. Realized and unrealized capital gains and losses on investments
supporting these products are reflected in policyholders' funds left with
the Company. Realized capital gains and losses on all other investments are
reflected in the Company's results of operations. Unrealized capital gains
and losses on all other investments are reflected in shareholder's equity,
net of related income taxes.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Purchases and sales of debt and equity securities are recorded on the trade
date. Sales of mortgage loans are recorded on the closing date.
Fair values for debt and equity securities are based on quoted market prices
or dealer quotations. Where quoted market prices or dealer quotations are
not available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and
discounts, which are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments. The
Company does not accrue interest on problem debt securities when management
believes the collection of interest is unlikely.
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of a loaned domestic security and 105% of the market value of a
loaned foreign security. The collateral is deposited by the borrower with a
lending agent, and retained and invested by the lending agent according to
the Company's guidelines to generate additional income. The market value of
the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned securities
fluctuates.
In September 2000, the FASB issued FAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. In
accordance with this new standard, general account securities on loan are
reflected on the balance sheet as "Securities pledged to creditors", which
includes the following:
Gross Gross
December 31, 2000 Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
---------------------------------------------------------------------------
Debt securities $124.5 $5.3 $3.1 $126.7
Short-term investments 2.3 -- -- 2.3
---------------------------------------------------------------------------
Total securities pledged to
creditors $126.8 $5.3 $3.1 $129.0
---------------------------------------------------------------------------
At December 31, 1999, the Company had securities pledged to creditors with a
fair value of approximately $232.5 million reflected as debt securities.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds by the Company, and is carried at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances,
net of impairment reserves.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of 91 days to one
year, are considered available for sale and are carried at fair value, which
approximates amortized cost.
The Company utilizes futures contracts for other than trading purposes in
order to hedge interest rate risk (i.e. market risk, refer to Note 5).
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts allocable to
experience rated contracts are deducted from capital gains and losses with
an offsetting amount reported in future policy benefits. Changes in the fair
value of futures contracts allocable to non-experienced-rated contracts that
qualify as hedges are deferred and recognized as an adjustment to the hedged
asset or liability. Deferred gains or losses on such futures contracts are
amortized over the life of the acquired asset or liability as a yield
adjustment or through net realized capital gains or losses upon disposal of
an asset. Changes in the fair value of futures contracts that do not qualify
as hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains or losses on the hedging instrument are reflected in net
realized capital gains or losses.
Included in common stock are warrants which represent the right to purchase
specific securities. Upon exercise, the cost of the warrants is added to the
basis of the securities purchased.
On occasion, the Company sells call options written on underlying securities
which are carried at fair value. Changes in fair value of these options are
recorded in net realized capital gains or losses.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of net
assets acquired, is amortized on a straight-line basis over 40 years.
The Company regularly evaluates the recoverability of goodwill. The carrying
value of goodwill would be reduced through a direct write-off, if, in
management's judgement, it was probable that projected future operating
income (before amortization of goodwill) would not be sufficient on an
undiscounted basis to recover the carrying value. Operating earnings
considered in such an analysis are those of the entity acquired, if
separately identifiable, or the business segment that acquired the entity if
the entity's earnings are not separately identifiable.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring certain insurance business are deferred. These
costs, all of which vary with and are primarily related to the production of
new and renewal business, consist principally of commissions, certain
expenses of underwriting and issuing contracts, and certain agency
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
expenses. For certain annuity and pension contracts, such costs are
amortized in proportion to estimated gross profits and adjusted to reflect
actual gross profits over the life of the contracts (up to 20 years for
annuity and pension contracts.)
Periodically, modifications may be made to deferred annuity contract
features, such as shortening the surrender charge period or waiving the
surrender charge, changing the mortality and expense fees, etc. Unamortized
deferred policy acquisition costs associated with these modified contracts
are not written off, but rather, continue to be associated with the original
block of business to which these costs were previously recorded. Such costs
are amortized based on revised estimates of expected gross profits based
upon the contract after the modification.
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits are not adequate to cover related expenses.
Refer to "Principles of Consolidation" within Note 1 for related discussions
regarding the application of the purchase method to deferred policy
acquisition costs.
VALUE OF BUSINESS ACQUIRED
Value of business acquired ("VOBA") is an asset and represents the present
value ofestimated net cash flows embedded in the Company's contracts
acquired by ING. VOBA is amortized in proportion to estimated gross profits
and adjusted to reflect actual gross profits over the contracts (up to 30
years for annuity contracts and pension contracts).
VOBA is written off to the extent that it is determined that gross profits
are not adequate to recover the asset. The estimated amount of VOBA to be
amortized, net of interest, over the next five years is $104.3 million,
$112.6 million, $114.3 million, $110.8 million and $106.3 million for the
years 2001, 2002, 2003, 2004 and 2005, respectively. Actual amortization
incurred during these years may vary as assumptions are modified to
incorporate actual results.
INSURANCE RESERVE LIABILITIES
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life products are equal to cumulative
deposits less withdrawals and charges plus credited interest thereon.
Reserves for traditional life insurance contracts represent the present
value of future benefits to be paid to or on behalf of policyholders and
related expenses less the present value of future net premiums.
Reserves for immediate annuities with life contingent payouts contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 2.0% to 9.5% for all years presented. Investment yield is based on the
Company's experience. Mortality and withdrawal rate assumptions are based on
relevant
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Company experience and are periodically reviewed against both industry
standards and experience.
Because the sale of the domestic individual life insurance business was
substantially in the form of an indemnity reinsurance agreement, the Company
reported an addition to its reinsurance recoverable approximating the
Company's total individual life reserves at the sale date.
Policyholders' funds left with the Company include reserves for deferred
annuity investment contracts and immediate annuities without life contingent
payouts. Reserves on such contracts are equal to cumulative deposits less
charges and withdrawals plus credited interest thereon (rates range from
2.0% to 14.0% for all years presented) net of adjustments for investment
experience that the Company is entitled to reflect in future credited
interest. These reserves also include unrealized gains/losses related to FAS
No. 115. Reserves on contracts subject to experience rating reflect the
rights of contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
REVENUE RECOGNITION
For certain annuity contracts, charges assessed against policyholders' funds
for the cost of insurance, surrender charges, actuarial margin and other
fees are recorded as revenue in charges assessed against policyholders.
Other amounts received for these contracts are reflected as deposits and are
not recorded as revenue. Related policy benefits are recorded in relation to
the associated premiums or gross profit so that profits are recognized over
the expected lives of the contracts. When annuity payments with life
contingencies begin under contracts that were initially investment
contracts, the accumulated balance in the account is treated as a single
premium for the purchase of an annuity and reflected as an offsetting amount
in both premiums and current and future benefits in the Consolidated
Statements of Income.
SEPARATE ACCOUNTS
Separate Accounts assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractholders who
bear the investment risk, subject, in some cases, to minimum guaranteed
rates. Investment income and investment gains and losses generally accrue
directly to such contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
Separate Account assets supporting variable options under universal life and
annuity contracts are invested, as designated by the contractholder or
participant under a contract (who bears the investment risk subject, in
limited cases, to minimum guaranteed rates) in shares of mutual funds which
are managed by the Company, or other selected mutual funds not managed by
the Company.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Separate Accounts assets are carried at fair value. At December 31, 2000 and
1999, unrealized gains of $9.5 million and unrealized losses of $8.0
million, respectively, after taxes, on assets supporting a guaranteed
interest option are reflected in shareholder's equity. Separate Accounts
liabilities are carried at fair value, except for those relating to the
guaranteed interest option. Reserves relating to the guaranteed interest
option are maintained at fund value and reflect interest credited at rates
ranging from 3.8% to 14.0% in 2000 and 3.7% to 12.0% in 1999.
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Financial Statements (with the
exception of realized and unrealized capital gains and losses on the assets
supporting the guaranteed interest option). The Consolidated Statements of
Cash Flows do not reflect investment activity of the Separate Accounts.
REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure
to large losses in all aspects of its insurance business. Such reinsurance
permits recovery of a portion of losses from reinsurers, although it does
not discharge the primary liability of the Company as direct insurer of the
risks reinsured. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of reinsurers.
Only those reinsurance recoverable balances deemed probable of recovery are
reflected as assets on the Company's Consolidated Balance Sheets. Of the
reinsurance recoverable on the Consolidated Balance Sheets at December 31,
2000 and 1999, $2,991 million and $2,989 million, respectively, is related
to the reinsurance recoverable from Lincoln arising from the sale of the
Company's domestic life insurance business. (Refer to Note 3).
INCOME TAXES
The Company is included in the consolidated federal income tax return of
Lion through December 13, 2000. Subsequent to December 13, 2000 the Company
will file a consolidated return with AICA. The Company is taxed at regular
corporate rates after adjusting income reported for financial statement
purposes for certain items. Deferred income tax expenses/ benefits result
from changes during the year in cumulative temporary differences between the
tax basis and book basis of assets and liabilities.
2. RECENT DEVELOPMENTS
CONTRIBUTIONS OF AIS AND IA HOLDCO FROM HOLDCO
On June 30, 2000, HOLDCO contributed AIS to the Company. AIS is registered
with the Securities and Exchange Commission as a broker/dealer and is a
member of the National Association of Securities Dealers, Inc. It is also
registered with the appropriate state securities authorities as a
broker/dealer and is a Registered Investment Advisor. The principal
operation of
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. RECENT DEVELOPMENTS (continued)
AIS is acting as underwriter for ALIAC's manufactured products, as well as
the sale of fixed and variable annuities and mutual funds through its
registered representatives.
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 advisor
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, serves as underwriter to the
Aetna Series Fund, Inc. and provides distribution services for other Company
products. Aeltus' ATC subsidiary provides trustee, administrative, and other
fiduciary services to retirement plans requiring or otherwise utilizing a
trustee or custodian.
3. DISCONTINUED OPERATIONS-INDIVIDUAL LIFE INSURANCE
On October 1, 1998, the Company sold its domestic 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. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance recoverable
from Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $117 million, of which $57.7 million was deferred and was
being recognized over approximately 15 years. The remaining portion of the
gain was recognized immediately in net income and was largely attributed to
access to the agency sales force and brokerage distribution channel.
Approximately $5.7 million and $5.2 million (after tax) of the deferred gain
was recognized during 2000 and 1999, respectively. During the fourth quarter
of 1999, the Company refined certain accrual and tax estimates which had
been established in connection with the recording of the deferred gain. As a
result, the deferred gain was increased by $12.9 million (after tax) to
$65.4 million at December 31, 1999.
In conjunction with the accounting for the acquisition of the Aetna
Financial Services business, of which the Company is a part, the deferred
gain, which was previously part of other liabilities, was written off.
(Refer to Note 1).
The operating results of the domestic individual life insurance business are
presented as Discontinued Operations. Revenues for the individual life
segment were $652.2 million for 1998. Premiums ceded and reinsurance
recoveries made in 2000 totaled $419.1 million and $416.1 million,
respectively, and in 1999 totaled $476.5 million and $513.4 million,
respectively.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INVESTMENTS
Debt securities available for sale as of December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2000 (Millions) Cost Gains Losses Value
-----------------------------------------------------------------------------
U.S. government and government
agencies and authorities $ 920.8 $ 34.3 $ 2.1 $ 953.0
States, municipalities and
political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 282.2 13.8 6.2 289.8
Financial 1,753.1 33.8 21.2 1,765.7
Transportation/capital
goods 660.2 21.4 11.3 670.3
Health care/consumer
products 758.9 16.2 27.9 747.2
Natural resources 499.3 7.6 15.6 491.3
Other corporate securities 972.0 7.1 52.3 926.8
-----------------------------------------------------------------------------
Total U.S. corporate
securities 4,925.7 99.9 134.5 4,891.1
-----------------------------------------------------------------------------
Foreign securities:
Government, including
political subdivisions 384.7 23.9 4.3 404.3
Utilities 122.9 18.6 -- 141.5
Other 31.2 -- 9.3 21.9
-----------------------------------------------------------------------------
Total foreign securities 538.8 42.5 13.6 567.7
-----------------------------------------------------------------------------
Residential mortgage-backed
securities:
Pass-throughs 1,390.3 37.1 4.1 1,423.3
Collateralized mortgage
obligations 1,606.6 61.2 7.1 1,660.7
-----------------------------------------------------------------------------
Total residential
mortgage-backed securities 2,996.9 98.3 11.2 3,084.0
-----------------------------------------------------------------------------
Commercial/Multifamily
mortgage-backed securities 1,108.3 27.5 24.2 1,111.6
Other asset-backed securities 753.7 13.4 3.4 763.7
-----------------------------------------------------------------------------
Total debt securities,
including debt securities
pledged to creditors 11,244.5 315.9 189.0 11,371.4
Less: Debt securities pledged
to creditors 124.5 5.3 3.1 126.7
-----------------------------------------------------------------------------
Debt securities $11,120.0 $310.6 $185.9 $11,244.7
=============================================================================
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INVESTMENTS (continued)
Debt securities available for sale as of December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1999 (Millions) Cost Gains Losses Value
-----------------------------------------------------------------------------
U.S. government and government
agencies and authorities $1,087.2 $ 4.6 $ 22.1 $ 1,069.7
States, municipalities and
political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 514.5 5.6 12.7 507.4
Financial 1,869.8 8.2 44.7 1,833.3
Transportation/capital
goods 623.4 .9 39.0 585.3
Health care/consumer
products 1,138.7 9.3 51.3 1,096.7
Natural resources 424.6 1.3 15.4 410.5
Other corporate securities 214.0 1.0 14.9 200.1
-----------------------------------------------------------------------------
Total U.S. corporate
securities 4,785.0 26.3 178.0 4,633.3
-----------------------------------------------------------------------------
Foreign securities:
Government, including
political subdivisions 364.6 17.1 11.9 369.8
Utilities 196.4 7.3 .4 203.3
Other 748.2 8.9 34.3 722.8
-----------------------------------------------------------------------------
Total foreign securities 1,309.2 33.3 46.6 1,295.9
-----------------------------------------------------------------------------
Residential mortgage-backed
securities:
Pass-throughs 1,055.9 19.8 17.6 1,058.1
Collateralized mortgage
obligations 1,683.1 25.1 37.7 1,670.5
-----------------------------------------------------------------------------
Total residential
mortgage-backed securities 2,739.0 44.9 55.3 2,728.6
-----------------------------------------------------------------------------
Commercial/Multifamily
mortgage-backed securities 1,031.5 3.4 48.7 986.2
Other asset-backed securities 705.7 0.3 9.9 696.1
-----------------------------------------------------------------------------
Debt securities $11,657.9 $112.8 $360.6 $11,410.1
=============================================================================
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INVESTMENTS (continued)
At December 31, 2000 and 1999, net unrealized appreciation (depreciation) of
$126.9 million and $(247.8) million, respectively, on available-for-sale
debt securities including debt securities pledged to creditors, herein after
referred to as "total debt securities", included $92.9 million and $(189.7)
million, respectively, related to experience-rated contracts, which were not
reflected in shareholder's equity but in insurance reserves.
The amortized cost and fair value of total debt securities for the year
ended December 31, 2000 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may be
restructured, called, or prepaid.
Amortized Fair
(Millions) Cost Value
--------------------------------------------------------------
Due to mature:
One year or less $ 405.4 $ 405.9
After one year through five years 2,272.8 2,299.2
After five years through ten years 1,754.3 1,731.5
After ten years 1,953.1 1,975.6
Mortgage-backed securities 4,105.2 4,195.5
Other asset-backed securities 753.7 763.7
--------------------------------------------------------------
Less: Debt securities pledged to
creditors 124.5 126.7
==============================================================
Debt securities $11,120.0 $11,244.7
==============================================================
At December 31, 2000 and 1999, debt securities carried at fair value of $8.6
million and $8.7 million, respectively, were on deposit as required by
regulatory authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 2000.
Included in the Company's total debt securities were residential
collateralized mortgage obligations ("CMOs") supporting the following:
2000 1999
------------------- -------------------
Amortized Fair Amortized Fair
(Millions) Cost Value Cost Value
------------------------------------------------------------------------
Total residential CMOs (1) $1,606.6 $1,660.7 $1,683.1 $1,670.5
========================================================================
Percentage of total:
Supporting experience rated
products 80.6% 80.7%
Supporting remaining
products 19.4% 19.3%
------------------------------------------------------------------------
100.0% 100.0%
========================================================================
(1) At December 31, 2000 and 1999, approximately 84% and 81%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, and FHLMC.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INVESTMENTS (continued)
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for CMO's that are not
agency-backed, defaults. The principal risks inherent in holding CMOs are
prepayment and extension risks related to dramatic decreases and increases
in interest rates resulting in the repayment of principal from the
underlying mortgages either earlier or later than originally anticipated. At
December 31, 2000 and 1999, approximately 2% and 1%, respectively, of the
Company's CMO holdings were invested in types of CMOs which are subject to
more prepayment and extension risk than traditional CMOs (such as interest-
or principal-only strips).
Investments in equity securities as of December 31 were as follows:
(Millions) 2000 1999
--------------------------------------------------------
Amortized Cost $120.8 $204.9
Gross unrealized gains 6.0 12.5
Gross unrealized losses 9.9 10.9
--------------------------------------------------------
Fair Value $116.9 $206.5
========================================================
5. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2000 and 1999 were as follows:
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
------------------------------------------------------------------------
Assets:
Mortgage loans $ 4.6 $ 4.5 $ 6.7 $ 6.8
Liabilities:
Investment contract
liabilities:
With a fixed maturity 1,041.0 982.3 1,055.3 991.0
Without a fixed maturity 10,084.6 9,549.9 10,066.4 9,452.8
------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument,
such as estimates of timing and amount of future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the disclosed
value be realized in immediate settlement of the instrument. In evaluating
the Company's management of interest rate, price and liquidity risks, the
fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. FINANCIAL INSTRUMENTS (continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
MORTGAGE LOANS: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
INVESTMENT CONTRACT LIABILITIES (INCLUDED IN POLICYHOLDERS' FUNDS LEFT WITH
THE COMPANY):
WITH A FIXED MATURITY: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
OFF-BALANCE-SHEET AND OTHER FINANCIAL INSTRUMENTS
FUTURES CONTRACTS:
Futures contracts are used to manage interest rate risk in the Company's
bond portfolio. Futures contracts represent commitments to either purchase
or sell securities at a specified future date and at a specified price or
yield. Futures contracts trade on organized exchanges and, therefore, have
minimal credit risk. Cash settlements are made daily based on changes in the
prices of the underlying assets. The notional amounts, carrying values and
estimated fair values of the Company's open treasury futures as of
December 31, 1998 were $250.9 million, $.1 million, and $.1 million,
respectively. There were no open treasury futures at December 31, 2000 and
1999.
WARRANTS:
Included in common stocks are warrants which are instruments giving the
Company the right, but not the obligation to buy a security at a given price
during a specified period. The carrying values and estimated fair values of
the Company's warrants to purchase equity securities at December 31, 2000
were both $0.3 million. The carrying values and estimated fair values at
December 31, 1999 were both $6.5 million.
OPTIONS:
As of December 31, 2000 and 1999, the Company earned $1.1 million and $0.4
million respectively, of investment income for writing call options on
underlying securities. At December 31, 2000 and 1999, there were no option
contracts outstanding.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. FINANCIAL INSTRUMENTS (continued)
DEBT INSTRUMENTS WITH DERIVATIVE CHARACTERISTICS:
The Company also had investments in certain debt instruments with derivative
characteristics, including those whose market value is at least partially
determined by, among other things, levels of or changes in domestic and/or
foreign interest rates (short- or long-term), exchange rates, prepayment
rates, equity markets or credit ratings/spreads. The amortized cost and fair
value of these securities, included in the debt securities portfolio, as of
December 31, 2000 was as follows:
Amortized Fair
(Millions) Cost Value
-------------------------------------------------------------
Residential collateralized mortgage
obligations $1,606.6 $1,660.7
Principal-only strips (included above) 28.1 32.1
Interest-only strips (included above) 8.2 9.7
Other structured securities with
derivative characteristics (1) 51.5 51.5
-------------------------------------------------------------
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
6. NET INVESTMENT INCOME
Sources of net investment income were as follows:
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
(Millions) 2000 2000 1999 1998
------------------------------------------------------------------------------------------------
Debt securities $70.3 $768.9 $823.3 $798.8
Nonredeemable preferred stock 1.8 9.5 17.1 18.4
Investment in affiliated
mutual funds 0.5 2.1 2.4 6.6
Mortgage loans 0.1 0.5 1.1 0.6
Policy loans 0.7 7.9 7.7 7.2
Cash equivalents 4.4 50.3 39.0 46.1
Other 2.6 13.1 15.3 15.5
------------------------------------------------------------------------------------------------
Gross investment income 80.4 852.3 905.9 893.2
Less: investment expenses (1.8) (18.5) (19.6) (21.4)
------------------------------------------------------------------------------------------------
Net investment income $78.6 $833.8 $886.3 $871.8
================================================================================================
Net investment income includes amounts allocable to experience rated
contractholders of $55.9 million and $622.2 million for the one month and
eleven month periods ended December 31, 2000 and November 30, 2000,
respectively, and $659.6 million and $655.6 million for the years ended
December 31, 1999 and 1998, respectively. Interest credited to
contractholders is included in current and future benefits.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The Company paid $10.1 million, $255.7 million and $570.0 million in cash
dividends to HOLDCO in 2000, 1999 and 1998, respectively. Of the $255.7
million paid in 1999, $206.0 million was accrued for in 1998. Of the $776.0
million dividends paid or accrued in 1998, $756.0 million (all of which was
approved by the Insurance Commissioner of the State of Connecticut) was
attributable to proceeds from the sale of the domestic individual life
insurance business.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and capital and surplus those amounts determined in
conformity with statutory accounting practices prescribed or permitted by
the Department, which differ in certain respects from generally accepted
accounting principles. Statutory net income was $100.6 million, $133.9
million and $148.1 million for the years ended December 31, 2000, 1999 and
1998, respectively. Statutory capital and surplus was $931.1 million and
$844.9 million as of December 31, 2000 and 1999, respectively.
As of December 31, 2000, the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
For 2001, the Company is required to implement statutory accounting changes
ratified by the NAIC and state insurance departments ("Codification"). The
cumulative effect of Codification to the Company's statutory surplus as of
January 1, 2001 is estimated to be an increase of $27.4 million.
8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains (losses) on investments were as follows:
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
(Millions) 2000 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Debt securities $1.2 $(36.3) $(23.6) $ 7.4
Equity securities 0.6 (0.9) 2.1 3.0
- ------------------------------------------------------------------------------------------------
Pretax realized capital gains
(losses) $1.8 $(37.2) $(21.5) $10.4
================================================================================================
After-tax realized capital
gains (losses) $1.3 $(24.3) $(14.0) $ 7.3
================================================================================================
Net realized capital (losses) gains of $(16.8) million, $(36.7) million and
$15.0 million for 2000, 1999 and 1998, respectively, allocable to experience
rated contracts, were deducted from net realized capital gains and an
offsetting amount was reflected in Policyholders' funds left with the
Company. Net unamortized gains allocable to experienced-rated
contractholders were $45.1 million and $68.5 million at December 31, 2000
and 1999, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued)
Proceeds from the sale of total debt securities and the related gross gains
and losses were as follows:
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
(Millions) 2000 2000 1999 1998
------------------------------------------------------------------------------------------------
Proceeds on sales $233.0 $10,083.2 $5,890.1 $6,790.2
Gross gains 1.4 2.5 10.5 98.8
Gross losses -- 39.0 34.1 91.4
------------------------------------------------------------------------------------------------
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities
including securities pledged to creditors, excluding those related to
experience-rated contractholders) were as follows:
(Millions) 2000 1999 1998
------------------------------------------------------------
Debt securities $ 92.1 $(199.2) $ 18.9
Equity securities (5.5) (3.4) (16.1)
Other 21.5 (27.6) 15.4
------------------------------------------------------------
Subtotal 108.1 (230.2) 18.2
Increase (decrease) in deferred
income taxes
(Refer to Note 10) 37.9 (80.6) 6.3
------------------------------------------------------------
Net changes in accumulated other
comprehensive income (loss) $ 70.2 $(149.6) $ 11.9
============================================================
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued)
Net unrealized capital gains (losses) allocable to experience-rated
contracts of $92.9 million and $(189.7) million at December 31, 2000 and
1999, respectively, are reflected on the Consolidated Balance Sheets in
Policyholders' funds left with the Company and are not included in
shareholder's equity. Shareholder's equity included the following
accumulated other comprehensive (loss) income, which is net of amounts
allocable to experience-rated contractholders, at December 31:
(Millions) 2000 1999 1998
-----------------------------------------------------------
Total debt securities:
Gross unrealized capital gains $ 78.5 $ 18.6 $157.3
Gross unrealized capital losses (44.5) (76.7) (16.2)
-----------------------------------------------------------
34.0 (58.1) 141.1
-----------------------------------------------------------
Equity securities:
Gross unrealized capital gains 6.0 12.5 13.1
Gross unrealized capital losses (9.9) (10.9) (8.1)
-----------------------------------------------------------
(3.9) 1.6 5.0
-----------------------------------------------------------
Other:
Gross unrealized capital gains 15.0 1.3 17.1
Gross unrealized capital losses (5.9) (13.7) (1.8)
-----------------------------------------------------------
9.1 (12.4) 15.3
-----------------------------------------------------------
Deferred income taxes (Refer to
Note 10) 13.8 (24.1) 56.6
-----------------------------------------------------------
Net accumulated other comprehensive
income (loss) $ 25.4 $(44.8) $104.8
===========================================================
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, including securities pledged to
creditors (excluding those related to experience-rated contractholders) were
as follows:
(Millions) 2000 1999 1998
----------------------------------------------------------
Unrealized holding gains (losses)
arising during the year (1) $70.1 $(146.3) $38.3
Less: reclassification adjustment
for (losses) gains and other
items included in net income (2) (0.1) 3.3 26.4
==========================================================
Net unrealized gains (losses) on
securities $70.2 $(149.6) $11.9
==========================================================
(1) Pretax unrealized holding gains (losses) arising during the year were
$108.0 million, $(225.2) million and $58.8 million for 2000, 1999 and 1998,
respectively.
(2) Pretax reclassification adjustments for (losses) gains and other items
included in net income were $(0.1) million, $5.0 million and $40.6 million
for 2000, 1999 and 1998, respectively.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. SEVERANCE
In December 2000, the Company, in accounting for its acquisition by ING,
established a severance liability of $10.7 million related to actions taken
or expected to be taken with respect to the integration of the Company's and
ING's businesses. The severance liability is based on a plan to eliminate
approximately 175 positions (primarily in the retail annuity operations).
The severance liability is reflected in other liabilities in the
Consolidated Balance Sheets. Severance actions are expected to be
substantially completed by December 31, 2001. No significant severance
actions took place in 2000.
10. INCOME TAXES
The Company is included in the consolidated federal income tax return of
Lion through December 13, 2000. For tax settlements related to tax periods
ending on or prior to December 13, 2000, the purchase agreement between ING
America Insurance Holdings, Inc. and the former Aetna provides for the
settlement of balances owed by the Company based on an amount approximating
the tax the Company would have incurred were it not a member of the
consolidated group, and owed to the Company for the use of its tax saving
attributes in the consolidated federal income tax return.
Subsequent to December 13, 2000, as a result of the sale, the Company will
be filing a consolidated return with AICA. The Company allocates to each
member, an amount approximating the tax the member would have incurred were
it not a member of the consolidated group, and credits the member for use of
its tax saving attributes in the consolidated federal income tax return.
Income taxes from continuing operations consist of the following:
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
(Millions) 2000 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Current taxes (benefits):
Federal $ 9.4 $ 5.3 $ 64.3 $ 257.9
State 0.2 2.6 2.5 3.0
Net realized capital
(losses) gains 0.3 (11.5) (20.1) 16.8
- ------------------------------------------------------------------------------------------------
9.9 (3.6) 46.7 277.7
- ------------------------------------------------------------------------------------------------
Deferred taxes (benefits):
Federal (4.3) 83.2 31.3 (196.7)
Net realized capital gains
(losses) 0.3 (1.5) 12.6 (13.9)
- ------------------------------------------------------------------------------------------------
(4.0) 81.7 43.9 (210.6)
- ------------------------------------------------------------------------------------------------
Total $ 5.9 $ 78.1 $ 90.6 $ 67.1
================================================================================================
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. INCOME TAXES (continued)
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes for
the following reasons:
One month Eleven months
ended ended Year ended Year ended
December 31, November 30, December 31, December 31,
(Millions) 2000 2000 1999 1998
--------------------------------------------------------------------------------------------------
Income from continuing
operations before
income taxes $ 18.5 $ 249.6 $ 272.5 $ 239.9
Tax rate 35% 35% 35% 35%
--------------------------------------------------------------------------------------------------
Application of the tax rate 6.4 87.4 95.4 84.0
Tax effect of:
State income tax, net of
federal benefit 0.1 1.7 1.6 2.0
Excludable dividends (0.9) (12.6) (6.1) (17.1)
Other, net 0.3 1.6 (0.3) (1.8)
--------------------------------------------------------------------------------------------------
Income taxes $ 5.9 $ 78.1 $ 90.6 $ 67.1
==================================================================================================
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
(Millions) 2000 1999
---------------------------------------------------------
Deferred tax assets:
Deferred policy acquisition costs $ 44.8 $ --
Insurance reserves 306.3 323.1
Unrealized gains allocable to
experience rated contracts 32.5 --
Net unrealized capital losses -- 90.5
Investment losses 9.0 1.3
Postretirement benefits other than
pensions 5.8 24.8
Deferred compensation 65.6 42.5
Sale of individual life insurance
business -- 44.9
Other 21.1 23.7
---------------------------------------------------------
Total gross assets 485.1 550.8
---------------------------------------------------------
Deferred tax liabilities:
Value of business acquired 623.3 --
Deferred policy acquisition costs -- 324.0
Market discount 4.9 6.5
Net unrealized capital gains 46.3 --
Unrealized losses allocable to
experience rated contracts -- 66.4
Depreciation 4.4 3.5
Sale of Individual life insurance
business 15.1 --
Excludable dividends 5.0 --
Other 34.1 --
---------------------------------------------------------
Total gross liabilities 733.1 400.4
---------------------------------------------------------
Net deferred tax (liability) asset $(248.0) $150.4
=========================================================
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. As of December 31, 2000 and 1999, no valuation
allowance was required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax return
purposes under the Deficit Reduction Act of 1984. The balance in such
account was approximately $17.2 million at December 31, 2000. This amount
would be taxed only under certain conditions. No income taxes have been
provided on this amount since management believes under current tax law the
conditions under which such taxes would become payable are remote.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. INCOME TAXES (continued)
The Internal Revenue Service (the "Service") has completed examinations of
the consolidated federal income tax returns of Lion through 1994.
Discussions are being held with the Service with respect to proposed
adjustments. Management believes there are adequate defenses against, or
sufficient reserves to provide for, any such adjustments. The Service has
commenced its examinations for the years 1995 through 1997.
11. BENEFIT PLANS
ALIAC, in conjunction with ING, has noncontributory defined benefit pension
plans covering substantially all employees. The plans provide pension
benefits based on years of service and average annual compensation (measured
over 60 consecutive months of highest earnings in a 120 - month period).
Contributions are determined using the Projected Unit Credit Method and, for
qualified plans subject to ERISA requirements, are limited to the amount
that are tax-deductible. The accumulated benefit obligation and plan assets
are recorded by ALIAC. As of the measurement date (i.e. December 13, 2000),
fair value of plan assets exceed projected benefit obligations. Allocated
pretax charges to operations for the former Aetna pension plan (based on the
Company's total salary cost as a percentage of former Aetna's total salary
cost) were $3.7 million and $6.6 million for the years ended December 31,
2000 and 1999, respectively. There were no charges in 1998 due to favorable
plan asset performance.
Effective January 1, 1999 ALIAC, in conjunction with former Aetna, changed
the formula for providing pension benefits from the existing final average
pay formula to a cash balance formula, which credits employees annually with
an amount equal to a percentage of eligible pay based on age and years of
service as well as an interest credit based on individual account balances.
The formula also provides for a transition period until December 1, 2006,
which allows certain employees to receive vested benefits at the higher of
the final average pay or cash balance formula. The changing of this formula
will not have a material effect on ALIAC's results of operations, liquidity
or financial condition.
In addition to providing pension benefits, ALIAC, in conjunction with ING,
provides certain health care and life insurance benefits for retired
employees. A comprehensive medical and dental plan is offered to all
full-time employees retiring at age 45 with 10 years of service. There is a
cap on the portion of the cost paid by the Company relating to medical and
dental benefits. Retirees are generally required to contribute to the plans
based on their years of service with the Company. The costs to the Company
associated with the former Aetna postretirement plans for 2000, 1999 and
1998 were $1.2 million, $2.1 million and $1.0 million, respectively.
ALIAC, in conjunction with ING, has a non-qualified pension plan covering
certain agents. The plan provides pension benefits based on annual
commission earnings. As of the measurement date (i.e. December 13, 2000),
the projected benefit obligation exceeded the fair value of plan assets. The
Company, in conjunction with ING, also provides certain postretirement
health care and life insurance benefits for certain agents. The costs to the
Company associated with the agents' postretirement plans for 2000, 1999 and
1998 were $1.4 million, $2.1 million and $1.4 million, respectively.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. BENEFIT PLANS (continued)
Incentive Savings Plan--Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in certain investments are matched, up to 5% of
compensation, by ING. Pretax charges to operations for former Aetna the
incentive savings plan were $9.0 million, $7.7 million and $5.3 million in
2000, 1999 and 1998, respectively.
Stock Plans--ALIAC, in conjunction with former Aetna, had a stock incentive
plan that provided for stock options, deferred contingent common stock or
equivalent cash awards or restricted stock to employees. Certain executive,
middle management and non-management employees were granted options to
purchase common stock of former Aetna at or above the market price on the
date of grant. Options generally became 100% vested three years after the
grant was made, with one-third of the options vesting each year. The former
Aetna did not recognize compensation expense for stock options granted at or
above the market price on the date of grant under its stock incentive plans.
In addition, executives were, from time to time, granted incentive units
which were rights to receive common stock or an equivalent value in cash.
The sale of ALIAC to ING America Insurance Holdings, Inc by former Aetna
caused all outstanding stock options to vest immediately. The costs to the
Company associated with the former Aetna stock plans for 2000, 1999 and
1998, were $2.7 million, $0.4 million and $4.2 million, respectively.
During 2001, the benefits plans offered by ALIAC to its employees and agents
will be transitioned to plans directly offered by ING. These plans are
substantially similar to those offered by ALIAC, in conjunction with ING,
and any differences are not expected to be material in nature.
Effective January 1, 1998, Aeltus established an additional deferred
incentive compensation plan, designed to attract, retain and incent key
members of Aeltus. The plan had a five year vesting period. Payments under
the plan were conditioned upon continued employment and were based upon an
imputed share price of Aeltus at the end of the vesting period. The plan
value was determined annually and the cost of the plan was expensed ratably
over the vesting period. A change in control at Aeltus, as defined in the
plan, would cause immediate full vesting of all outstanding shares. The
purchase of Aetna Inc. by ING meets this definition. As a result, all
outstanding shares became fully vested based on Aeltus's imputed value at
the date of the sale and were subsequently paid out in early 2001. The
appropriate annual share of the cost of the plan, including the additional
cost in 2000 associated with this full vesting, has been reflected in
salaries and related benefits in the Consolidated Statements of Income for
each of the three years ended December 31, 2000. The costs to Aeltus
associated with the deferred incentive compensation plan for 2000, 1999 and
1998, were $42.2 million, $4.7 million and $3.1 million, respectively.
12. RELATED PARTY TRANSACTIONS
INVESTMENT ADVISORY AND OTHER FEES
ALIAC and Aeltus serve as investment advisors and administrators to the
Company's mutual funds and variable funds (collectively, the Funds). Company
Funds pay Aeltus or ALIAC, as
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. RELATED PARTY TRANSACTIONS (continued)
investment advisor or administrator, a daily fee which, on an annual basis,
ranged, depending on the fund, from 0.33% to 1.15% of their average daily
net assets. All of the funds managed by ALIAC and certain of the Funds
managed by Aeltus are subadvised by investment advisors, in which case,
Aeltus or ALIAC pays a subadvisory fee to the investment advisors. The
Company is also compensated by the Separate Accounts (variable funds) for
bearing mortality and expense risks pertaining to variable life and annuity
contracts. Under the insurance and annuity contracts, the Separate Accounts
pay the Company a daily fee, which, on an annual basis is, depending on the
product, up to 3.40% of their average daily net assets. The amount of
compensation and fees received from the Funds and Separate Accounts,
included in charges assessed against policyholders and other income,
amounted to $506.3 million, $424.2 million and $349.0 million in 2000, 1999
and 1998, respectively.
CAPITAL TRANSACTIONS
The Company received capital contributions in the form of cash and assets of
$73.5 million, and $56.0 million, respectively from HOLDCO in 2000. In 1998,
the Company received capital contributions in the form of cash of $9.3
million from HOLDCO. The Company received no capital contribution in 1999.
Refer to Note 7 for dividends paid to HOLDCO.
OTHER
Premiums due and other receivables include $4.7 million and $10.5 million
due from affiliates in 2000 and 1999, respectively. Other liabilities
include $4.1 million and $1.9 million due to affiliates for 2000 and 1999,
respectively.
Former Aetna transferred to the Company $.4 million, $.8 million and $1.7
million based on its decision not to settle state tax liabilities for the
years 2000, 1999 and 1998, respectively, as permitted under the tax sharing
arrangement, which is reported in other changes in retained earnings.
Certain administrative and support functions of the Company are provided by
former Aetna and its affiliates for a specified transition period. At the
end of the transition period, these functions will be provided by ING
affiliates. The financial statements reflect allocated charges for these
services based upon measures appropriate for the type and nature of the
service provided.
13. REINSURANCE
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction is 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. (Refer to Note 3).
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. REINSURANCE (continued)
Effective January 1, 1998, 90% of the mortality risk on substantially all
individual universal life product business written from June 1, 1991 through
October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90%
of new business written on these products was reinsured externally.
Effective October 1, 1998 this agreement was assigned from the third party
reinsurer to Lincoln.
Effective December 31, 1988, the Company entered into a modified coinsurance
reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna
Life"), (formerly an affiliate of the Company), in which substantially all
of the non-participating individual life and annuity business written by
Aetna Life prior to 1981 was assumed by the Company. Effective January 1,
1997, this agreement was amended to transition (based on underlying
investment rollover in Aetna Life) from a modified coinsurance arrangement
to a coinsurance agreement. As a result of this change, reserves were ceded
to the Company from Aetna Life as investment rollover occurred. Effective
October 1, 1998, this agreement was fully transitioned to a coinsurance
arrangement and this business along with the Company's direct individual
non-participation life insurance business, with the exception of certain
supplementary contracts with reserves of $74.9 million and $81.9 million as
of December 31, 2000 and 1999, respectively, was sold to Lincoln (refer to
Note 3).
The operating results of the domestic individual life business are presented
as Discontinued Operations. Premiums of $15.8 million, $17.9 million and
$336.3 million and current and future benefits of $34.6 million, $8.6
million and $341.1 million, were assumed in 2000, 1999 and 1998,
respectively. Investment income of $17.0 million was generated from a
reinsurance loan to affiliate for the year ended December 31, 1998.
Prior to the sale of the domestic individual life insurance business to
Lincoln on October 1, 1998, the Company's retention limit per individual
life was $2.0 million and amounts in excess of this limit, up to a maximum
of $8.0 million on any new individual life business was reinsured with Aetna
Life on a yearly renewable term basis. The premium amount related to this
agreement was $2.0 million for 1998. This agreement was terminated effective
October 1, 1998.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life, (formerly an affiliate of the Company) to assume amounts in
excess of $0.2 million for certain of its participating life insurance, on a
yearly renewable term basis. Premium amounts related to this agreement were
$4.4 million in 1998. The business assumed under this agreement was
retroceded to Lincoln effective October 1, 1998.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life, (formerly an affiliate of the Company) for the purchase and
administration of a life contingent single premium variable payout annuity
contract. In addition, the Company is also responsible for administering
fixed annuity payments that are made to annuitants receiving variable
payments. Reserves of $29.2 million and $33.4 million were maintained for
this contract as of December 31, 2000 and 1999, respectively.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. REINSURANCE (continued)
The following table includes premium amounts ceded/assumed.
Ceded to Assumed
Direct Other from Other Net
(Millions) Amount Companies Companies Amount
----------------------------------------------------------------------
2000
------------------------------
Premiums:
Discontinued Operations $366.6 $382.4 $ 15.8 $ --
Accident and Health
Insurance 15.2 15.2 -- --
Annuities 160.4 7.1 0.9 154.2
----------------------------------------------------------------------
Total earned premiums $542.2 $404.7 $ 16.7 $154.2
======================================================================
1999
------------------------------
Premiums:
Discontinued Operations $460.1 $478.0 $ 17.9 $ --
Accident and Health
Insurance 33.4 33.4 -- --
Annuities 111.5 4.9 0.9 107.5
----------------------------------------------------------------------
Total earned premiums $605.0 $516.3 $ 18.8 $107.5
======================================================================
1998
------------------------------
Premiums:
Discontinued Operations $166.8 $165.4 $340.6 $342.0
Accident and Health
Insurance 16.3 16.3 -- --
Annuities 80.8 2.9 1.5 79.4
----------------------------------------------------------------------
Total earned premiums $263.9 $184.6 $342.1 $421.4
======================================================================
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. SEGMENT INFORMATION
Summarized financial information for the Company's principal operations was
as follows:
Investment
Year ended December 31, 2000 Financial Management Discontinued
(Millions) (1) Products (2) Services (2) Operations (2) Other (2) Total
-------------------------------------------------------------------------------------------------
Revenue from external
customers $ 692.1 $138.2 -- $(53.0) $ 777.3
Net investment income 905.8 2.8 -- 3.8 912.4
-------------------------------------------------------------------------------------------------
Total revenue excluding net
realized
capital (losses) gains $ 1,597.9 $141.0 -- $(49.2) $ 1,689.7
=================================================================================================
Amortization of deferred
policy acquisition costs $ 115.6 $ 11.3 $ 126.9
-------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 79.0 $ 9.0 -- $ (4.0) $ 84.0
-------------------------------------------------------------------------------------------------
Operating earnings (losses)
(3) $ 204.7 $ 9.7 -- $ (7.3) $ 207.1
Net realized capital (losses)
gains, net
of tax (23.1) 0.1 -- -- (23.0)
-------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 181.6 9.8 -- (7.3) 184.1
Discontinued operations, net
of tax:
Amortization of deferred
gain on sale (4) -- -- $ 5.7 -- 5.7
-------------------------------------------------------------------------------------------------
Net income (loss) $ 181.6 $ 9.8 $ 5.7 $ (7.3) $ 189.8
=================================================================================================
Segment assets $54,117.7 $ 44.1 $2,991.2 -- $57,153.0
-------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (5) -- -- -- $ 3.4 $ 3.4
-------------------------------------------------------------------------------------------------
Balance of long-lived assets -- -- -- $ 54.3 $ 54.3
-------------------------------------------------------------------------------------------------
(1) Year ended 2000 data reflects an aggregation of the pre-acquisition period
of the eleven months ended November 30, 2000 and the post-acquisition
period of one month ended December 31, 2000.
(2) Financial Products include: deferred and immediate annuity contracts,
mutual funds, distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a
menu of investment options, investment advisory services and pension plan
administrative services. Investment Management Services include the
following services: investment advisory to affiliated and unaffiliated
institutional and retail clients, underwriting, distribution for Company's
mutual funds and affiliate's separate accounts; and trustee, administrative
and other 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.
(3) Operating earnings is comprised of net income (loss) excluding net realized
capital gains and losses and any other items. While operating earnings is
the measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not replace
operating income or net income as a measure of profitability.
(4) Taxes on the amortization of deferred gain on sale amounted to $3.3
million.
(5) Expenditures of long-lived assets represent additions to property and
equipment not allocable to business segments.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. SEGMENT INFORMATION (continued)
Investment
Year ended December 31, 1999 Financial Management Discontinued
(Millions) Products (1) Services (1) Operations (1) Other (1) Total
- -------------------------------------------------------------------------------------------------
Revenue from external
customers $ 551.1 $118.3 -- $(43.9) $ 625.5
Net investment income 881.5 1.5 -- 3.3 886.3
- -------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital losses $ 1,432.6 $119.8 -- $(40.6) $ 1,511.8
=================================================================================================
Amortization of deferred
policy acquisition costs $ 93.4 -- -- $ 11.5 $ 104.9
- -------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 87.5 $ 16.5 -- $(13.4) $ 90.1
- -------------------------------------------------------------------------------------------------
Operating earnings
(losses) (2) $ 192.8 $ 28.1 -- $ (7.5) $ 213.4
Other item (3) -- -- -- (17.5) (17.5)
Net realized capital losses,
net of tax (14.0) -- -- -- (14.0)
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 178.8 28.1 -- (25.0) 181.9
Discontinued operations, net
of tax:
Amortization of deferred
gain on sale (4) -- -- $ 5.7 -- 5.7
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 178.8 $ 28.1 $ 5.7 $(25.0) $ 187.6
=================================================================================================
Segment assets $53,362.1 $ 36.6 $2,989.0 -- $56,387.7
- -------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (5) -- -- -- $ 3.9 $ 3.9
- -------------------------------------------------------------------------------------------------
Balance of long-lived assets -- -- -- $ 12.2 $ 12.2
- -------------------------------------------------------------------------------------------------
(1) Financial Products include: deferred and immediate annuity contracts,
mutual funds, distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a
menu of investment options, investment advisory services and pension plan
administrative services. Investment Management Services include the
following services: investment advisory to affiliated and unaffiliated
institutional and retail clients, underwriting, distribution for Company's
mutual funds and affiliate's separate accounts; and trustee, administrative
and other 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 is comprised of net income (loss) excluding net realized
capital gains and losses and any other items. While operating earnings is
the measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not replace
operating income or net income as a measure of profitability.
(3) Other item excluded from operating earnings represents after-tax Year 2000
costs.
(4) Taxes on the amortization of deferred gain on sale amounted to $3.2
million.
(5) Expenditures of long-lived assets represent additions to property and
equipment not allocable to business segments.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. SEGMENT INFORMATION (continued)
Investment
Year ended December 31, 1998 Financial Management Discontinued
(Millions) Products (1) Services (1) Operations (1) Other (1) Total
-------------------------------------------------------------------------------------------------
Revenue from external
customers $ 445.6 $96.7 -- $(38.4) $ 503.9
Net investment income 865.3 1.5 -- 5.0 871.8
-------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 1,310.9 $98.2 -- $(33.4) $ 1,375.7
=================================================================================================
Amortization of deferred
policy acquisition costs $ 80.3 -- -- $ 10.9 $ 91.2
-------------------------------------------------------------------------------------------------
Income Taxes (benefits) $ 68.2 $14.7 -- $(15.8) $ 67.1
-------------------------------------------------------------------------------------------------
Operating earnings (2) $ 171.0 $24.0 -- $ (7.1) $ 187.9
Other item (3) -- -- -- (22.4) (22.4)
Net realized capital gains,
net of tax 7.3 -- -- -- 7.3
-------------------------------------------------------------------------------------------------
Income from continuing
operations 178.3 24.0 -- (29.5) 172.8
Discontinued operations, net
of tax:
Income from operations (4) -- -- $ 61.8 -- 61.8
Immediate gain on sale (4) -- -- 59.0 -- 59.0
-------------------------------------------------------------------------------------------------
Net income (loss) $ 178.3 $24.0 $ 120.8 $(29.5) $ 293.6
=================================================================================================
Segment assets $44,367.4 $13.4 $2,946.4 -- $47,327.2
-------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (5) -- -- -- $ 6.4 $ 6.4
-------------------------------------------------------------------------------------------------
Balance of long-lived assets -- -- -- $ 12.2 $ 12.2
-------------------------------------------------------------------------------------------------
(1) Financial Products include: deferred and immediate annuity contracts,
mutual funds, distribution services for annuities and mutual funds and
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a
menu of investment options, investment advisory services and pension plan
administrative services. Investment Management Services include the
following services: investment advisory to affiliated and unaffiliated
institutional and retail clients, underwriting, distribution for Company's
mutual funds and affiliate's separate accounts; and trustee, administrative
and other 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 is comprised of net income (loss) excluding net realized
capital gains and losses and any other items. While operating earnings is
the measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not replace
operating income or net income as a measure of profitability.
(3) Other item excluded from operating earnings represents after-tax Year 2000
costs.
(4) Taxes on the income from operations and the immediate gain on sale amounted
to $32.1million and $29.3 million, respectively.
(5) Expenditures of long-lived assets represent additions to property and
equipment not allocable to business segments.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
In conjunction with the acquisition by ING, the Company entered into with or
assumed from a former affiliate operating leases for office space. Since
December 13, 2000, rent expense for these leases was immaterial. The future
net minimum payments under noncancelable leases for 2001 through 2005 are
estimated to be $25.5 million, $24.5 million, $21.5 million, $19.1 million
and $16.3 million, respectively, and 29.9 million, thereafter.
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. At December 31,1998, the Company
had off-balance sheet commitments to purchase investments of $68.7 million
with an estimated fair value of $68.9 million. At December 31, 2000 and
1999, there were no off-balance sheet commitments.
LITIGATION
In recent years, life insurance companies have been named as defendants in
class action lawsuits relating to life insurance sales practices. The
Company is currently a defendant in one such lawsuit.
A purported class action complaint was filed in the United States District
Court for the Middle District of Florida on June 30, 2000, by Helen Reese,
Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese
Complaint"). The Reese Complaint seeks compensatory and punitive damages and
injunctive relief from ALIAC. The Reese Complaint claims that ALIAC engaged
in unlawful sales practices in marketing life insurance policies. ALIAC has
moved to dismiss the Reese Complaint for failure to state a claim upon which
relief can be granted. This litigation is in the preliminary stages. The
Company intends to defend the action vigorously.
The Company is also involved in other lawsuits arising, for the most part,
in the ordinary course of its business operations. While the outcome of
these other lawsuits cannot be determined at this time, after consideration
of the defenses available to the Company, applicable insurance coverage and
any related reserves established, these other lawsuits are not 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.
63
QUARTERLY DATA (UNAUDITED)
2000 (Millions) First Second Third Fourth
----------------------------------------------------------------
Total Revenue $408.3 $409.3 $426.4 $410.3
----------------------------------------------------------------
Income from continuing
operations
before income taxes $ 76.5 $ 85.0 $ 77.4 $ 29.2
Income Taxes 25.1 28.1 22.7 8.1
----------------------------------------------------------------
Income from continuing
operations $ 51.4 $ 56.9 $ 54.7 $ 21.1
Income from discontinued
operations 1.6 1.6 1.5 1.0
----------------------------------------------------------------
Net income $ 53.0 $ 58.5 $ 56.2 $ 22.1
================================================================
(1) Fourth quarter data reflects an aggregation of the pre-acquisition period
of the eleven months ended November 30, 2000 and the post acquisition
period of one month ended December 31, 2000.
1999 (Millions) First Second Third Fourth
----------------------------------------------------------------
Total Revenue $366.3 $366.9 $382.4 $374.7
----------------------------------------------------------------
Income from continuing
operations before income
taxes $ 73.3 $ 72.2 $ 65.7 $ 61.3
Income Taxes 24.1 23.7 21.8 21.0
----------------------------------------------------------------
Income from continuing
operations $ 49.2 $ 48.5 $ 43.9 $ 40.3
Income from discontinued
operations 1.3 1.4 1.4 1.6
----------------------------------------------------------------
Net income $ 50.5 $ 49.9 $ 45.3 $ 41.9
================================================================
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I(2) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 27.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 70.
3. Exhibits:
3(i)(a) Certificate of Incorporation
Incorporated herein by reference to post-effective amendment
No. 1 to Registration Statement on Form S-1 (File No.
33-60477) as filed on April 15, 1996.
3(i)(b) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company incorporated herein by reference
to Post-Effective Amendment No. 12 to Registration Statement
on Form N-4 (File No. 33-75964) as filed on February 11, 1997.
3(ii) By-Laws, as amended September 17, 1997.
Incorporated herein by reference to Post-Effective Amendment
No. 12 to Registration Statement on Form N-4 (File No.
33-91846) as filed on October 30, 1997.
65
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K. (continued)
4. Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts)
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on
July 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on
February 12, 1997.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on
February 11, 1997.
Incorporated by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-4 (File No. 33-75986), as filed on
April 12, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on
February 4, 1999.
Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 33-75988), as filed on
April 15, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-81216), as filed on
April 7, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on
April 15, 1996.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on
August 6, 1996.
Incorporated by reference to Registration Statement on Form N-4 (File
No. 333-01107), as filed on February 21, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75982), as filed on
February 20, 1997.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-75992), as filed on
February 13, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75974), as filed on
February 28, 1997.
66
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K. (continued)
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on
April 17, 1996.
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on
April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75982), as filed on
April 22, 1996.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on
August 19, 1997.
Incorporated by reference to Registration Statement on Form N-4 (File
No. 333-56297), as filed on June 8, 1998.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on
August 16, 1995.
Incorporated by reference to Post-Effective Amendment No. 32 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
December 16, 1997.
Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
September 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 21, 1997.
Incorporated by reference to Post-Effective Amendment No. 35 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 33-87932), as filed on
September 19, 1995.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on
April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on
April 22, 1997.
Incorporated by reference to Post-Effective Amendment No. 21 to
Registration Statement on Form N-4 (File No. 33-75996), as filed on
February 16, 2000.
67
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K. (continued)
Incorporated by reference to Post-Effective Amendment No. 13 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on
April 7, 1999.
Incorporated by reference to Post-Effective Amendment No. 37 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
April 9, 1999.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 333-87305), as filed on
December 13, 1999.
Incorporated by reference to Post-Effective Amendment No. 18 to
Registration Statement on Form N-4 (File No. 33-56297), as filed on
August 30, 2000.
Incorporated by reference to Post-Effective Amendment No. 17 to
Registration Statement on Form N-4 (File No. 33-75996), as filed on
April 7, 1999.
Incorporated by reference to Post-Effective Amendment No. 19 to
Registration Statement on From N-4 (File No. 333-01107), as filed on
February 16, 2000.
10. Material Contracts
10.1 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, incorporated
herein by reference to the Company's Form 10-Q filed on August 8,
1998. (The Company will provide to the Securities and Exchange
Commission a copy of omitted schedules or similar attachments upon
request.)
10.2 Distribution Agreement, dated as of December 13, 2000, between
Lion Connecticut Holdings Inc. and Aetna Inc.
10.3 Employee Benefits Agreement, dated as of December 13, 2000,
between Lion Connecticut Holdings Inc. and Aetna Inc.
10.4 Tax Sharing Agreement, dated as of December 13, 2000, among Lion
Connecticut Holdings Inc., Aetna Inc. and ING America Insurance
Holdings, Inc.
10.5 Transition Services Agreement, dated as of December 13, 2000,
between Lion Connecticut Holdings Inc. and Aetna Inc.
10.6 Lease Agreement, dated as of December 13, 2000, by and between
Aetna Life Insurance Company and Aetna Life Insurance and Annuity
Company
68
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K. (continued)
10.7 Real Estate Services Agreement, dated as of December 13, 2000,
between Aetna Inc. and Aetna Life Insurance and Annuity Company
10.8 10 State House Square Services Agreement, dated as of
December 13, 2000, between Aetna Inc. and Lion Connecticut
Holdings Inc.
21 Subsidiaries of the Registrant
Incorporated by reference to Exhibit Item 24 of Post-Effective Amendment
No.38 to Registration Statement on Form N-1A (File Number 33-81216), as
filed on January 19, 2001.
24 Power of Attorney
(Filed herein immediately after Signature page.)
Exhibits, other than these listed, are omitted because they are not required
or not applicable.
(b) Reports on Form 8-K.
None.
69
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Auditors' Report...................... 71
I. Summary of Investments--Other than
Investments in Affiliates as of
December 31, 2000..................... 72
III. Supplementary Insurance Information as
of and for the years ended
December 31, 2000, 1999 and 1998...... 73
Schedules other than those listed above are omitted because they are not
required or are not applicable.
70
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
Under date of March 27, 2001, we reported on the consolidated balance sheets of
Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31,
2000 ("Successor Company") and December 31, 1999 ("Preacquisition Company"), and
the related consolidated statements of income, changes in shareholder's equity
and cash flows for the period from December 1, 2000 to December 31, 2000
("Successor Company"), and for the period from January 1, 2000 to November 30,
2000 and the years ended December 31, 1999 and 1998 ("Preacquisition Company"),
as included herein. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement schedules
as listed in the accompanying index. These financial statement schedules are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
November 30, 2000, ING America Insurance Holdings Inc. acquired all of the
outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's
indirect parent and sole shareholder in a business combination accounted for as
a purchase. As a result of the acquisition, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
/s/ KPMG LLP
Hartford, Connecticut
March 27, 2001
71
SCHEDULE I
Summary of Investments--Other than Investments in Affiliates
As of December 31, 2000
(in millions)
Amount at
Which Shown
in the
Type of Investment Cost Value* Balance Sheet
------------------ --------- --------- -------------
Debt Securities:
U.S. government and government
agencies and authorities $ 920.8 $ 953.0 $ 953.0
States, municipalities and
political subdivisions 0.3 0.3 0.3
U.S. corporate securities 4,925.7 4,891.1 4,891.1
Foreign securities (1) 538.8 567.7 567.7
Residential mortgage-backed
securities 2,996.9 3,084.0 3,084.0
Commercial/Multifamily
mortgage-backed securities 1,108.3 1,111.6 1,111.6
Other asset-backed securities 753.7 763.7 763.7
Less: debt securities pledged to
creditors 124.5 126.7 126.7
--------- --------- ---------
Total debt securities 11,120.0 11,244.7 11,244.7
--------- --------- ---------
Equity securities:
Non-redeemable preferred stock 109.0 100.7 100.7
Investment in affiliated mutual
funds 9.6 12.7 12.7
Common stock 2.2 3.5 3.5
--------- --------- ---------
Total equity securities 120.8 116.9 116.9
--------- --------- ---------
Short-term investments 109.4 109.4 109.4
Mortgage loans 4.6 4.5 4.6
Policy loans 339.3 339.3 339.3
Other 13.4 13.4 13.4
Securities pledges to creditors 126.8 129.0 129.0
--------- --------- ---------
Total investments $11,834.3 $11,957.2 $11,957.3
========= ========= =========
* See Notes 1 and 4 of Notes to Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. Substantially all of the Company's foreign securities are
denominated in U.S. dollars.
72
SCHEDULE III
Supplementary Insurance Information
As of and for the years ended December 31, 2000, 1999 and 1998
(in millions)
Policy-
Deferred Unpaid holders'
policy Future claims funds left
acquisition policy and claim Unearned with the
Segment costs benefits expenses premiums (1) Company
- --------------------------------------------------------------------------------------
2000
Financial Products $ 13.0 $1,017.4 $ 7.2 $1.0 $11,116.2
Investment Management
Services -- -- -- -- --
Other (0.7) -- -- -- 9.4
Discontinued Operations
(2) -- 2,959.3 22.4 -- --
- --------------------------------------------------------------------------------------
Total $ 12.3 $3,976.7 $29.6 $1.0 $11,125.6
======================================================================================
1999
Financial Products $1,080.8 $ 889.8 $ 7.4 $1.0 $11,112.2
Investment Management
Services -- -- -- -- --
Other (34.4) -- -- -- --
Discontinued Operations
(2) -- 2,959.6 19.9 -- 9.5
- --------------------------------------------------------------------------------------
Total $1,046.4 $3,849.4 $27.3 $1.0 $11,121.7
======================================================================================
1998
Financial Products $ 916.0 $ 878.0 $ 0.3 $1.1 $11,295.1
Investment Management
Services -- -- -- -- --
Other (22.9) -- -- -- --
Discontinued Operations
(2) -- 2,936.8 18.5 -- 10.5
- --------------------------------------------------------------------------------------
Total $ 893.1 $3,814.8 $18.8 $1.1 $11,305.6
======================================================================================
NOTES TO SCHEDULE III:
(1) Included in future policy benefits on the Company's Consolidated Balance
Sheets.
(2) Domestic individual life insurance business.
73
SCHEDULE III (continued)
Supplementary Insurance Information
As of and for the years ended December 31, 2000, 1999 and 1998
(in millions)
Amortization
of deferred
Net Current policy Other
Premium investment Other and future acquisition Operating
Segment Revenue income (3) Income (4) benefits costs Expenses (5)
- --------------------------------------------------------------------------------------------------
2000 (6)
Financial Products $154.2 $905.8 $502.3 $795.6 $115.6 $390.6
Investment Management
Services -- 2.8 138.4 -- -- 122.3
Other (7) -- 3.8 (53.0) -- 11.3 (49.2)
- --------------------------------------------------------------------------------------------------
Continuing Operations $154.2 $912.4 $587.7 $795.6 $126.9 $463.7
==================================================================================================
Discontinued Operations
(8) -- -- $ 9.0 -- -- --
==================================================================================================
1999
Financial Products $107.5 $881.5 $422.1 $746.2 $ 93.4 $305.2
Investment Management
Services -- 1.5 118.3 -- -- 75.2
Other (7) -- 3.3 (43.9) -- 11.5 (13.7)
- --------------------------------------------------------------------------------------------------
Continuing Operations $107.5 $886.3 $496.5 $746.2 $104.9 $366.7
==================================================================================================
Discontinued Operations
(8) -- -- $ 8.7 -- -- --
==================================================================================================
1998
Financial Products $ 79.4 $865.3 $376.6 $714.4 $ 80.3 $280.3
Investment Management
Services -- 1.5 96.7 -- -- 59.5
Other (7) -- 5.0 (38.4) -- 10.9 1.0
- --------------------------------------------------------------------------------------------------
Continuing Operations $ 79.4 $871.8 $434.9 $714.4 $ 91.2 $340.6
==================================================================================================
Discontinued Operations
(8) $342.0 $146.1 $164.1 $482.4 $ 34.7 $ 41.3
==================================================================================================
NOTES TO SCHEDULE III (continued):
(3) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(4) Includes net realized capital losses and gains and charges assessed against
policyholders.
(5) Year 2000 costs are not included in the amounts reported for the Financial
Products and Investment Management Services segments.
(6) Year ended 2000 data reflects an aggregation of the pre-acquisition period
of the eleven months ended November 30, 2000 and the post acquisition
period of one month ended December 31, 2000.
(7) Includes consolidating adjustments and Year 2000 costs.
(8) Domestic individual life insurance business
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 30, 2001 By /s/ Deborah Koltenuk
---------------------------- -----------------------------------------------
Deborah Koltenuk
Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 30th, 2001.
SIGNATURES TITLE
- ----------------------------------------------
Wayne R. Huneke Director and Chief Financial Officer
(Principal Financial Officer)
- ----------------------------------------------
P. Randall Lowery Director
- ----------------------------------------------
Thomas J. McInerney Director and President (Principal Executive
Officer)
- ----------------------------------------------
Robert C. Salipante Director
- ----------------------------------------------
Mark A. Tullis Director
/s/ Deborah Koltenuk Vice President and Corporate Controller
- ----------------------------------------------
Deborah Koltenuk
* By: /s/ Paula Cludray-Engelke
------------------------------------------------
Paula Cludray-Engelke
Attorney-in-fact
75
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Life Insurance and Annuity
Company, hereby severally constitute and appoint Paula Cludray-Engelke and
Deborah Koltenuk and each of them individually, our true and lawful attorneys,
with full power to them and each of them to sign for us, and in our names and in
the capacities indicated below, the 2000 Form 10-K and any and all amendments
thereto to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, hereby ratifying and confirming our signatures
as they may be signed by our said attorney to the Form 10-K and any and all
amendments thereto.
WITNESS our hands and common seal on this 30th day of March, 2001.
SIGNATURES TITLE
/s/ Wayne R. Huneke
- -------------------------------------------
Wayne R. Huneke Director and Chief Financial Officer
/s/ P. Randall Lowery
- -------------------------------------------
P. Randall Lowery Director
/s/ Thomas J. McInerney
- -------------------------------------------
Thomas J. McInerney Director and President
/s/ Robert C. Salipante
- -------------------------------------------
Robert C. Salipante Director
/s/ Mark A. Tullis
- -------------------------------------------
Mark A. Tullis Director
/s/ Deborah Koltenuk
- -------------------------------------------
Deborah Koltenuk Vice President and Corporate Controller
76
ASSISTANT CORPORATE SECRETARY'S CERTIFICATE
AETNA LIFE INSURANCE AND ANNUITY COMPANY
I, Lena A.Rabbitt, the duly elected Assistant Corporate Secretary of Aetna Life
Insurance and Annuity Company (the "Company"), do hereby certify that the
attached resolutions entitled "Company Name, Authority to Sign (Duplicate
Corporate Seals)" adopted by the Board of Directors on June 22, 1995, are
currently in full force and effect, and have not been amended, restated, or
superceded.
IN WITNESS WHEREOF, I have affixed my name as Assistant Corporate Secretary and
have caused the corporate seal of said Company to be hereunto affixed this 30th
day of March, 2001.
By: /s/ Lena A. Rabbitt
-------------------------------------------------
(Corporate Seal) Lena A. Rabbitt
Assistant Corporate Secretary
Aetna Life Insurance and Annuity Company
77
AETNA LIFE INSURANCE AND ANNUITY COMPANY
COMPANY NAME, AUTHORITY TO
SIGN (DUPLICATE CORPORATE SEALS)
June 22, 1995
RESOLVED: That the following officers:
President
Senior Vice President
Vice President
General Counsel
Corporate Secretary
Treasurer
Assistant Corporate Secretary
(1) are hereby severally authorized to sign in the Company's name:
(a) insurance contracts of every type and description which the Company
is authorized to write;
(b) agreements relating to the purchase, sale, or exchange of securities
including any consents and modifications given or made under such
agreements;
(c) conveyances and leases of real estate or any interest therein
including any modifications thereof;
(d) assignments and releases of mortgages and other liens, claims or
demands;
(e) any other written instrument which they are authorized to approve in
the normal course of Company business; and
(f) any other written instrument when specifically authorized by the
Board of Directors or the President;
and are further severally authorized (i) to delegate all or any part of
the foregoing authority to one or more officers, employees or agents of
this Company, provided that each such delegation is in writing and a copy
thereof is filed in the Office of the Corporate Secretary, or (ii) to
designate any attorney at law representing this Company on a matter under
their direction, to so sign this Company's name;
(2) are hereby severally authorized to possess the Company's duplicate seals
and to affix the same to items (a) through (f) above;
and are further severally authorized to designate any Company officer
under their direction to possess and to so affix the Company's duplicate
seals; and
that the Senior Vice President, Investments is hereby authorized to
designate any officer, employee or agent of this Company under his
direction to sign the Company's name and to affix the Company's seal to
any and all documents required in connection with any investment
transaction in which the Company has an interest.
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