<PAGE>
As filed with the Securities and Exchange Registration No. 33-34370
Commission on August 25, 1995 Registration No. 811-2512
--
_________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
_________________________________________________________________________
POST-EFFECTIVE AMENDMENT NO. 20 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
and Amendment To
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
_________________________________________________________________________
Variable Annuity Account B of Aetna Life Insurance and Annuity Company
(Exact Name of Registrant)
Aetna Life Insurance and Annuity Company
(Name of Depositor)
151 Farmington Avenue, RE4C, Hartford, Connecticut 06156
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code: (203) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4C, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
_________________________________________________________________________
It is proposed that this filing will become effective (Check appropriate space):
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on _______________________ pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(i) of Rule 485
_____ on _______________________ pursuant to paragraph (a)(i) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
_____ on _______________________ pursuant to (a)(ii) of Rule 485
X on August 31, 1995 pursuant to paragraph (a)(iii) of Rule 485
-----
If appropriate check the following space:
_____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
Registrant filed a Rule 24f-2 Notice for the fiscal year ended December 31, 1994
on February 28, 1995.
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-4
--------
Item No. Part A (Prospectus) Location
-------- ------------------ --------
<S> <C> <C>
1 Cover Page................................... Cover Page
2 Definitions.................................. Definitions
3 Synopsis or Highlights....................... Prospectus Summary; Fee Table
4 Condensed Financial Information.............. Condensed Financial Information
5 General Description of Registrant, Depositor, The Company; Variable Annuity
and Portfolio Companies...................... Account B; The Funds
6 Deductions and Expenses...................... Charges and Deductions;
Distribution
7 General Description of Variable Annuity
Contracts.................................... Contract Rights; Miscellaneous
8 Annuity Period............................... Annuity Period
9 Death Benefit................................ Death Benefit
10 Purchases and Contract Value................. Purchase; Determining Contract
Value
11 Redemptions.................................. Contract Rights - Withdrawals;
Right to Cancel
12 Taxes........................................ Tax Status
13 Legal Proceedings............................ Miscellaneous - Legal
Proceedings
14 Table of Contents of the Statement of Statement of Additional
Additional Information....................... Information - Table of Contents
15 Cover Page................................... Cover page
16 Table of Contents............................ Table of Contents
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form N-4
--------
Item No. Part B (Statement of Additional Information) Location
-------- ------------------------------------------- --------
<S> <C> <C>
17 General Information and History................ General Information and History
18 Services....................................... General Information and
History; Independent Auditors
19 Purchase of Securities Being Offered........... Offering and Purchase of
Contracts
20 Underwriters................................... Offering and Purchase of
Contracts
21 Calculation of Performance Data................ Performance Data; Average
Annual Total Return Quotations
22 Annuity Payments............................... Annuity Payments
23 Financial Statements........................... Financial Statements
</TABLE>
Part C (Other Information)
--------------------------
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
<PAGE>
AETNA MARATHON PLUS
A VARIABLE ANNUITY CONTRACT FUNDED THROUGH
VARIABLE ANNUITY ACCOUNT B
AND ISSUED BY
AETNA LIFE INSURANCE AND ANNUITY COMPANY
AUGUST 31, 1995 SUPPLEMENT TO THE MAY 1, 1995 PROSPECTUS
The Company has made the following changes to this Prospectus.
NAME CHANGE FOR GUARANTEED ACCOUNT
The name for the Marathon Plus Guaranteed Account has been changed to "ALIAC
Guaranteed Account." Where the names "Marathon Plus Guaranteed Account,"
"Marathon Guaranteed Account" or "MGA" appear in this Prospectus, they will now
mean the ALIAC Guaranteed Account.
MUTUAL FUND ANNUAL EXPENSES
The following Mutual Fund Annual Expense information replaces the table
contained on page 9 of the Prospectus:
Except where otherwise noted, these figures are a percentage of each Fund's
average net assets based on figures for the year ended December 31, 1994.
<TABLE>
<CAPTION>
INVESTMENT OTHER TOTAL FUND
ADVISORY FEES/(1)/ EXPENSES/(2)/ ANNUAL EXPENSES
(AFTER EXPENSE (AFTER EXPENSE (AFTER EXPENSE
REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Aetna Variable Fund 0.25% 0.05% 0.30%
Aetna Income Shares 0.25% 0.08% 0.33%
Aetna Variable Encore Fund 0.25% 0.07% 0.32%
Aetna Investment Advisers Fund, Inc. 0.25% 0.07% 0.32%
Aetna Ascent Variable Portfolio/(3)/ 0.50% 0.20% 0.70%
Aetna Crossroads Variable Portfolio/(3)/ 0.50% 0.20% 0.70%
Aetna Legacy Variable Portfolio/(3)/ 0.50% 0.20% 0.70%
Alger American Balanced Portfolio 0.75% 0.33% 1.08%
Alger American Income and Growth 0.63% 0.12% 0.75%
Portfolio
Alger American MidCap Growth 0.80% 0.17% 0.97%
Portfolio
Alger American Leveraged AllCap 0.85% 0.94% 1.79%
Portfolio/(3)//(4)/
Alger American Small Cap Portfolio 0.85% 0.11% 0.96%
Alger American Growth Portfolio 0.75% 0.11% 0.86%
Fidelity High Income Portfolio 0.61% 0.10% 0.71%
Fidelity Equity-Income Portfolio/(5)/ 0.52% 0.06% 0.58%
Fidelity Growth Portfolio/(5)/ 0.62% 0.07% 0.69%
Fidelity Overseas Portfolio 0.77% 0.15% 0.92%
Fidelity Investment Grade Bond 0.46% 0.21% 0.67%
Portfolio
Fidelity Asset Manager Portfolio/(5)/ 0.72% 0.08% 0.80%
34370.00.1 Aetna Ed. 8/95
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT OTHER TOTAL FUND
ADVISORY FEES/(1)/ EXPENSES/(2)/ ANNUAL EXPENSES
(AFTER EXPENSE (AFTER EXPENSE (AFTER EXPENSE
REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT)
---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Fidelity Index 500 Portfolio/(6)/ 0.00% 0.28% 0.28%
Fidelity Contrafund Portfolio/(3)/ 0.62% 0.27% 0.89%
IMS Equity Growth and Income Fund/(7)/ 0.00% 0.85% 0.85%
IMS Utility Fund/(7)/ 0.00% 0.85% 0.85%
IMS U.S. Government Bond Fund/(7)/ 0.00% 0.80% 0.80%
IMS Corporate Bond Fund/(7)/ 0.00% 0.80% 0.80%
Janus Aspen Aggressive Growth
Portfolio/(8)/ 0.77% 0.28% 1.05%
Janus Aspen Balanced Portfolio/(8)/ 0.83% 0.74% 1.57%
Janus Aspen Flexible Income Portfolio
Portfolio/(8)/ 0.30% 0.70% 1.00%
Janus Aspen Growth Portfolio/(8)/ 0.66% 0.22% 0.88%
Janus Aspen Short-Term Bond
Portfolio/(8)/ 0.00% 0.65% 0.65%
Janus Aspen Worldwide Growth
Portfolio/(8)/ 0.69% 0.49% 1.18%
Lexington Emerging Markets Fund/(9)/ 0.85% 0.45% 1.30%
Lexington Natural Resources Trust 1.00% 0.55% 1.55%
TCI Growth/(10)/ 1.00% 0.00% 1.00%
TCI Balanced/(10)/ 1.00% 0.00% 1.00%
TCI International/(10)/ 1.50% 0.00% 1.50%
</TABLE>
(1) Certain of the unaffiliated Fund managers or their affiliates reimburse the
Company for administrative costs incurred in connection with administering
the Funds as variable funding options. These reimbursements are generally
based on a percentage of assets under management and may be paid out of the
managers' advisory fees. These amounts are not charged to the Funds or
Contract Holders, but are paid from other assets of the Fund managers or
their affiliates.
(2) A mutual fund's "Other Expenses" are operating costs of the Fund. The
expenses are factored into the Fund's net asset value and are not deducted
from the Contract Value.
(3) These funds have only limited operating history and therefore the expenses
are estimated for the current fiscal year.
(4) This figure does not include 0.75% that is attributable to Interest
Expense.
(5) A portion of the brokerage commission the Fund paid was used to reduce its
expenses. Without this reduction, total operating expenses would have been
0.60% for the Equity-Income Portfolio, 0.70% for the Growth Portfolio and
0.81% for the Asset Manager Portfolio.
(6) The Fund's expenses were voluntarily reduced by the Fund's investment
adviser. Absent reimbursement, investment advisory fees, other expenses and
total expenses would have been 0.28%, 0.53% and 0.81%, respectively.
(7) The Fund's Adviser has agreed to waive all or a portion of its advisory fee
and reimburse certain expenses so that the total annual expenses for the
Equity Growth and Income Fund and the Utility Fund would not exceed 0.85%
of average net assets, and the total annual expenses for the U.S.
Government Bond Fund and the Corporate Bond Fund would not exceed 0.80% of
average net assets. Without this waiver and reimbursement, the maximum
advisory fees and the maximum total annual expenses for the Funds,
respectively, would have been 0.75% and 25.96% for the Equity Growth and
Income Fund, 0.75% and 55.43% for the Utility Fund, 0.60% and 33.35% for
the U.S. Government Bond Fund, and 0.60% and 10.42% for the Coporate Bond
Fund. The Adviser can terminate this voluntary waiver or reimbursement of
expenses at any time at its sole discretion.
<PAGE>
(8) The expense figures shown are net of certain expense waivers from Janus
Capital Corporation. Without such waivers, the Investment Advisory Fees,
Other Expenses and Total Fund Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1994 would have been: 1.00%, 0.28% and
1.28%, respectively, for Janus Aspen Aggressive Growth Portfolio; 1.00%,
0.74% and 1.74%, respectively, for Janus Aspen Balanced Portfolio; 0.65%,
0.70% and 1.35%, respectively, for Janus Aspen Flexible Income Portfolio;
1.00%, 0.22% and 1.22%, respectively, for Janus Aspen Growth Portfolio;
0.65%, 0.75% and 1.40%, respectively, for Janus Aspen Short-Term Bond
Portfolio; and 1.00%, 0.49%,and 1.49%, respectively, for Janus Aspen
Worldwide Growth Portfolio.
(9) The Fund's investment adviser has agreed to reimburse the Fund so that the
total expenses of the Fund (excluding taxes, brokerage, and extraordinary
expenses) will not exceed an annual rate of 1.30% of the Fund's average net
assets. Without this agreement, it is estimated that the Fund's Investment
Advisory Fee, Total Other Expenses and Total Fund Annual Expenses would
have been 0.85%, 5.43% and 6.28%, respectively.
(10) The Portfolio's investment adviser pays all expenses of the Portfolio
except brokerage commissions, taxes, interest, fees and expenses of the
non-interested directors (including counsel fees) and extraordinary
expenses.
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
Assuming a 5% annual return on assets, you would have paid the following
expenses on a $1,000 investment(1):
<TABLE>
<CAPTION>
For a complete withdrawal at If no withdrawal is made, or if
the end of the applicable time the Certificate Holder
period: annuitizes:
1 3 5 10 1 3 5 10
year years years years year years years years
----------------------------------- --------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund $81 $109 $131 $207 $18 $55 $95 $207
Aetna Income Shares $81 $110 $132 $210 $18 $56 $97 $210
Aetna Variable Encore Fund $81 $109 $132 $209 $18 $56 $96 $209
Aetna Investment Advisers Fund, Inc. $81 $109 $132 $209 $18 $56 $96 $209
Aetna Ascent Variable Portfolio $85 $121 $151 $249 $22 $68 $116 $249
Aetna Crossroads Variable Portfolio $85 $121 $151 $249 $22 $68 $116 $249
Aetna Legacy Variable Portfolio $85 $121 $151 $249 $22 $68 $116 $249
Alger American Balanced Portfolio $89 $133 $170 $287 $26 $79 $135 $287
Alger American Income and Growth
Portfolio $85 $123 $154 $254 $22 $69 $118 $254
Alger American MidCap Growth
Portfolio $87 $129 $165 $276 $25 $76 $129 $276
Alger American Leveraged AllCap
Portfolio $96 $154 $205 $355 $33 $100 $170 $355
Alger American Small Cap Portfolio $87 $129 $164 $275 $24 $75 $129 $275
Alger American Growth Portfolio $86 $126 $159 $265 $23 $72 $124 $265
Fidelity High Income Portfolio $85 $121 $152 $250 $22 $68 $116 $250
Fidelity Equity-Income Portfolio $83 $117 $145 $237 $21 $64 $110 $237
Fidelity Growth Portfolio $85 $121 $151 $248 $22 $67 $115 $248
Fidelity Overseas Portfolio $87 $128 $162 $271 $24 $74 $127 $271
Fidelity Investment Grade Bond
Portfolio $84 $120 $150 $246 $22 $67 $114 $246
Fidelity Asset Manager Portfolio $86 $124 $156 $259 $23 $71 $121 $259
Fidelity Index 500 Portfolio $80 $108 $130 $205 $18 $55 $94 $205
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For a complete withdrawal If no withdrawal is made,
at the end of the or if the Certificate
applicable time period: Holder annuitizes:
1 3 5 10 1 3 5 10
year years years years year years years years
----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity Contrafund Portfolio $87 $127 $161 $268 $24 $73 $125 $268
IMS Equity Growth and Income Fund $86 $126 $159 $264 $23 $72 $123 $264
IMS Utility Fund $86 $126 $159 $264 $23 $72 $123 $264
IMS U.S. Government Bond Fund $86 $124 $156 $259 $23 $71 $121 $259
IMS Corporate Bond Fund $86 $124 $156 $259 $23 $71 $121 $259
Janus Aspen Aggressive Growth
Portfolio $88 $132 $169 $284 $25 $78 $133 $284
Janus Aspen Balanced Portfolio $93 $147 $195 $334 $31 $94 $159 $334
Janus Aspen Flexible Income Portfolio $88 $130 $166 $279 $25 $77 $131 $279
Janus Aspen Growth Portfolio $87 $126 $160 $267 $24 $73 $125 $267
Janus Aspen Short-Term Bond
Portfolio $84 $119 $149 $244 $21 $66 $113 $244
Janus Aspen Worldwide Growth
Portfolio $90 $136 $175 $297 $27 $82 $140 $297
Lexington Emerging Markets Fund $91 $139 $181 $309 $28 $86 $146 $309
Lexington Natural Resources Trust $93 $147 $194 $333 $30 $93 $158 $333
TCI Growth $88 $130 $166 $279 $25 $77 $131 $279
TCI Balanced $88 $130 $166 $279 $25 $77 $131 $279
TCI International $93 $145 $191 $328 $30 $91 $156 $328
</TABLE>
/(1)/ The illustrations reflects the $30.00 maintenance fee as an annual charge
of 0.058% of assets.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Marathon Service Unit, 151 Farmington Avenue, Hartford, Connecticut 06156
Telephone: 1-800-531-4547
VARIABLE ANNUITY ACCOUNT B
Prospectus Dated: May 1, 1995
AETNA MARATHON PLUS(TM)
This Prospectus describes the Marathon Plus variable deferred annuity contract
("Contracts") issued by Aetna Life Insurance and Annuity Company (the
"Company"). The Contracts allow individuals to accumulate values and elect
payment of annuity benefits on a fixed or a variable basis. Group Contracts are
offered to certain broker-dealers which have agreed to act as Distributors of
the Contracts. (See "Contract Purchase -- Distribution.") Individuals who have
established accounts with those broker-dealers are eligible to participate in
the Contract. Individual Contracts are offered only in those states where the
group Contracts are not authorized for sale.
The Contracts described in this Prospectus are (a) nonqualified deferred
annuity contracts, and (b) contracts which may be available for use under
Section 408(b) of the Internal Revenue Code of 1988, as amended (the "Code") as
Individual Retirement Annuities. See "Contract Purchase -- How to Purchase" and
"Tax Status."
The securities offered in this Prospectus are distributed through the Company
as the Underwriter, and by registered broker-dealers selected by it as
Distributors. See "Contract Purchase -- Distribution."
Purchase Payments received under the Contracts in behalf of persons
participating under group Contracts or individual Contract owners
(collectively, "Certificate Holders") will be allocated at the Certificate
Holder's direction to variable funding options or to a credited interest option
for accumulation of values for the Certificate Holder's Account. Amounts
allocated to the variable funding options will be deposited in Variable Annuity
Account B (the "Separate Account"), a separate account of the Company, for
investment in the variable funding options. The value of the Certificate
Holder's Account will vary to reflect the performance of the variable funding
options selected, and may be more or less than Purchase Payments made under the
Contract.
This Prospectus is intended to describe the Contract provisions relating to the
variable funding options (the "Funds") and the fees and expenses that may be
charged in connection with investment in the Separate Account. Information with
respect to the credited interest option, the Marathon Plus Guaranteed Account
(Marathon Guaranteed Account), is included in the Appendix to this Prospectus
and in the prospectus for the Marathon Guaranteed Account which should
accompany this Prospectus. The Marathon Guaranteed Account is offered only in
those jurisdictions where it has been qualified for sale.
The variable funding options currently available through the Separate Account
under the Contract described in this Prospectus are as follows:
. Aetna Variable Fund . Fidelity Index 500 Portfolio
. Aetna Income Shares . Fidelity Growth Portfolio
. Aetna Variable Encore Fund . Fidelity Overseas Portfolio
. Aetna Investment Advisers Fund, Inc. . IMS -- Equity Growth and Income
. Aetna Ascent Variable Portfolio Fund
. Aetna Crossroads Variable Portfolio . IMS -- Utility Fund
. Aetna Legacy Variable Portfolio . IMS -- U.S. Government Bond Fund
. Alger American Balanced Portfolio . IMS -- Corporate Bond Fund
. Janus Aspen Aggressive Growth
Portfolio
. Alger American Income and Growth . Janus Aspen Balanced Portfolio
Portfolio . Janus Aspen Flexible Income
. Alger American Growth Portfolio Portfolio
. Alger American MidCap Growth Portfolio . Janus Aspen Growth Portfolio
. Alger American Leveraged AllCap . Janus Aspen Short-Term Bond
Portfolio Portfolio
. Alger American Small Capitalization . Janus Aspen Worldwide Growth
Portfolio Portfolio
. Fidelity Asset Manager Portfolio . Lexington Emerging Markets Fund
. Fidelity Equity-Income Portfolio . Lexington Natural Resources Trust
. Fidelity Contrafund Portfolio . TCI International
. Fidelity High Income Portfolio . TCI Growth
. Fidelity Investment Grade Bond . TCI Balanced
Portfolio
The availability of the above Funds is subject to applicable regulatory
authorization. Not all Funds are available in all jurisdictions or under all
Contracts.
This Prospectus sets forth concisely the information about the Contracts and
the Separate Account that a prospective investor should know before investing.
Additional information about the Separate Account is contained in a Statement
of Additional Information ("SAI") dated May 1, 1995, which has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
The Table of Contents for the SAI is contained in this Prospectus. An SAI may
be obtained without charge by calling 1-800-531-4547.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE FUNDS
AND THE MARATHON GUARANTEED ACCOUNT. ALL PROSPECTUSES SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE.
<PAGE>
THE SECURITIES OFFERED BY THIS PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUSES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THE PROSPECTUSES, IN CONNECTION
WITH THE OFFERS OF THE SECURITIES DESCRIBED IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
The Company has filed a registration statement (the "Registration Statement")
with the SEC under the Securities Act of 1933 relating to the Contracts offered
by this prospectus. This prospectus has been filed as a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and its exhibits. Reference is hereby made to such
Registration Statement, including exhibits, for further information relating to
the Company and the Contracts. The Registration Statement and its exhibits may
be inspected and copied at the public reference facilities of the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GLOSSARY OF SPECIAL TERMS.................................................. 4
PROSPECTUS SUMMARY......................................................... 6
FEE TABLE.................................................................. 8
PERFORMANCE DATA........................................................... 14
THE COMPANY................................................................ 15
VARIABLE ANNUITY ACCOUNT B................................................. 15
THE FUNDS.................................................................. 15
Fund Investment Advisers.................................................. 19
Mixed and Shared Funding.................................................. 19
Fund Additions and Limitations............................................ 20
CONTRACT PURCHASE
Purchase.................................................................. 20
Purchase Payments......................................................... 20
Designations of Beneficiary and Annuitant................................. 21
Distribution.............................................................. 21
CERTIFICATE HOLDER'S ACCOUNT VALUES
Accumulation Units........................................................ 22
Net Investment Factor..................................................... 22
CONTRACT RIGHTS
Right to Cancel........................................................... 22
Rights Under the Contract and Account..................................... 23
Transfers Among Investment Options........................................ 23
Dollar Cost Averaging Program............................................. 23
Account Rebalancing Program............................................... 24
Withdrawals............................................................... 24
Reinstatement Privilege Following Withdrawal.............................. 25
CHARGES AND DEDUCTIONS
General................................................................... 25
Maintenance Fee........................................................... 25
Mortality and Expense Risk Charges........................................ 25
Administrative Expense Charge............................................. 26
Transfer Fees............................................................. 26
Deferred Sales Charge..................................................... 26
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses............................................................. 27
Premium Tax............................................................... 27
Commissions and Distribution Expenses..................................... 28
ADDITIONAL WITHDRAWAL OPTIONS
General................................................................... 28
Estate Conservation Option................................................ 29
Systematic Withdrawal Option.............................................. 29
ANNUITY PERIOD
Annuity Period Elections.................................................. 30
Annuity Options........................................................... 31
DEATH BENEFIT
General................................................................... 32
Death Benefit Amount...................................................... 32
Nonqualified Flexible Premium Contract.................................... 33
IRA Rollover Contract..................................................... 35
TAX STATUS
Tax Status of the Contract................................................ 37
Diversification........................................................... 37
Taxation of Annuities..................................................... 37
IRA Rollover Contracts.................................................... 39
Withholding............................................................... 39
Possible Changes in Taxation.............................................. 39
Other Tax Consequences.................................................... 40
MISCELLANEOUS
Voting Rights............................................................. 40
Modification of the Contract.............................................. 40
Inquiries................................................................. 41
Telephone Transfers....................................................... 41
Transfer of Ownership; Assignment......................................... 41
Legal Proceedings......................................................... 41
Legal Matters............................................................. 41
STATEMENT OF ADDITIONAL INFORMATION -- TABLE OF CONTENTS................... 42
APPENDIX: Marathon Guaranteed Account...................................... 43
</TABLE>
3
<PAGE>
GLOSSARY OF SPECIAL TERMS
As used in this Prospectus, the following terms have the meanings shown:
ACCUMULATION PERIOD: The period during which one or more Net Purchase Payments
applied to a Certificate Holder's Account are invested to fund future annuity
payments.
ACCUMULATION UNIT: A measure of the net investment results for each variable
investment option during the Accumulation Period. The Accumulation Units for
the applicable Funds are used to calculate the portion of the Certificate
Holder's Account attributable to the Separate Account during the Accumulation
Period.
ADJUSTED ACCOUNT VALUE: The Certificate Holder's Account Value plus or minus
the Certificate Holder's aggregate Marathon Guaranteed Account market value
adjustment.
ANNUITANT: The natural person on whose life the Annuity benefit under a
Contract is based.
ANNUITY: A series of payments for life, for a definite period or a combination
of the two.
ANNUITY DATE: The date on which Annuity payments commence.
ANNUITY OPTIONS: Annuity payment methods available during the Annuity Period.
ANNUITY PERIOD: The period of time during which Annuity payments are made.
ANNUITY UNIT: A measure of the net investment results for each variable
investment option selected during the Annuity Period. Annuity Units are used to
calculate the amount of each variable Annuity payment.
BENEFICIARY: The person entitled to receive any death benefit under a Contract.
CERTIFICATE: The document issued to a Certificate Holder for a Certificate
Holder's Account established under a group Contract.
CERTIFICATE HOLDER: A person or entity (i.e., a Trustee for a Trust) who
purchases or acquires an interest under a group Contract or who purchases an
individual Contract. A Certificate Holder's spouse may have an interest in the
same Certificate Holder's Account as a joint Certificate Holder. References to
"Certificate Holders" in this Prospectus mean both of the Certificate Holders
on Joint Accounts.
CERTIFICATE HOLDER'S ACCOUNT: A record established for each Certificate Holder
to maintain values under a Contract.
CERTIFICATE HOLDER'S ACCOUNT VALUE: As of any Valuation Period, the dollar
value of all amounts accumulated in a Certificate Holder's Account, including
the value of the Accumulation Units, Marathon Guaranteed Account and amounts
deposited pursuant to the guaranteed death benefit.
CODE: Internal Revenue Code of 1986, as amended.
COMPANY: Aetna Life Insurance and Annuity Company.
CONTRACTS: Group variable deferred annuity contracts offered as Nonqualified
Flexible Premium Contracts and Individual Retirement Annuity (IRA) Rollover
Contracts. Individual variable deferred annuity contracts are offered in
certain states.
DISTRIBUTOR(S): The registered broker-dealer(s) which have entered into selling
agreements with the Company to offer and sell the Contracts. The Company may
also serve as a Distributor.
EFFECTIVE DATE: The date on which a Contract or Certificate is issued to a
Certificate Holder.
4
<PAGE>
FUNDS: The open-end management investment companies offered as variable funding
options for the investment of assets of the Separate Account under the
Contracts.
GENERAL ACCOUNT: The account into which all Company assets not held in a
separate account are deposited. The General Account is subject to all
liabilities of the Company.
GROUP CONTRACT HOLDER: The entity to which a group Contract is issued.
HOME OFFICE: The principal executive offices of the Company located at 151
Farmington Avenue, Hartford, Connecticut 06156.
INDIVIDUAL CONTRACT HOLDER: A person or entity (i.e., a Trustee for a Trust)
who has purchased an individual variable annuity Contract (also referred to as
"Certificate Holder"). A Contract Holder's spouse may have an interest in the
same Contract Holder's Account as a Joint Contract Holder.
INDIVIDUAL RETIREMENT ANNUITY (IRA) ROLLOVER CONTRACT: An individual or group
variable deferred annuity Contract established to accept a single Purchase
Payment of rollover amounts previously accumulated under an Individual
Retirement Account or Annuity or a plan qualified under Code Section 401 or
403. These Contracts are intended to qualify under Code Section 408(b).
MARKET VALUE ADJUSTMENT (MVA): An Amount deducted or added to amounts withdrawn
early from the Guaranteed Account to reflect changes in the market value of the
investment since the date of deposit. See the Appendix and the prospectus for
the Guaranteed Account for a discussion of how the market value adjustment is
actually calculated.
NET PURCHASE PAYMENT: The Purchase Payment less premium taxes, if applicable.
NONQUALIFIED FLEXIBLE PREMIUM CONTRACT: An individual or group variable
deferred annuity Contract established to accept one or more Purchase Payments
to supplement an individual's retirement income, or to provide an alternative
investment option under an Individual Retirement Account qualified under Code
Section 408(a).
PURCHASE PAYMENT: The gross payment made to a Certificate Holder's Account
pursuant to the terms of a Contract. The Company reserves the right to refuse
to accept any Purchase Payment at any time for any reason.
SEC: Securities and Exchange Commission.
SEPARATE ACCOUNT: Variable Annuity Account B, an account whose assets are
segregated from other assets of the Company. The Separate Account holds shares
of the Funds acquired as variable funding options under the Contracts. The
Company holds title to the assets held in the Separate Account.
SURRENDER VALUE: The amount payable upon the withdrawal of all or any portion
of a Certificate Holder's Account Value.
UNDERWRITER: The registered broker-dealer which contracts with other registered
broker-dealers on behalf of the Separate Account to offer and sell the
Contracts. The Company will serve as Underwriter for the Contracts.
VALUATION PERIOD: The period of time for which a Fund determines its net asset
value, usually from 4:15 p.m. Eastern time each day the New York Exchange is
open for trading until 4:15 p.m. the next such business day.
VALUATION RESERVE: A reserve established pursuant to the insurance laws of the
State of Connecticut to measure voting rights during the Annuity Period. It
also measures the value of a commutation right under the "Payments of a Stated
Period of Time" nonlifetime Annuity option when elected on a variable basis.
VARIABLE ANNUITY CONTRACT: An annuity contract providing for the accumulation
of values, and for retirement payments, which vary in amount based on
investment results.
5
<PAGE>
PROSPECTUS SUMMARY
CONTRACTS OFFERED
The Contracts described in this Prospectus are group variable deferred annuity
Contracts and, where required by state law, individual variable deferred
annuity Contracts. The Nonqualified Flexible Premium Contract is designed to
accept one or more Purchase Payments. The Individual Retirement Annuity
Rollover Contract is designed to accept rollovers from Individual Retirement
Accounts or Annuities or plans qualified under Code Sections 401 or 403. For
the Nonqualified Flexible Premium Contract, the minimum initial Purchase
Payment amount is $5,000. Additional Purchase Payments of at least $2,500 may
be made to a Nonqualified Flexible Premium Contract. The minimum Purchase
Payment amount for the Individual Retirement Annuity Rollover Contract is
$10,000. (See "Contract Purchase -- Purchase.")
Under the group Contract, individuals may be enrolled as Certificate Holders
and the Company will maintain a Certificate Holder's Account for each
Certificate Holder. Under an individual Contract, the owner will be an
individual. (In either case, the individual is referred to as "Certificate
Holder" or "you.") Under the Contract, Certificate Holders have certain
rights. (See "Contract Rights.")
Joint Certificate Holders are allowed, except for Contracts acquired by
individuals for purposes of establishing an Individual Retirement Annuity
under Sections 408(a) or 408(b) of the Code. A Joint Certificate Holder must
be the spouse of the other Joint Certificate Holder.
We offer the Contracts described below:
1. Nonqualified Flexible Premium Contracts and IRA Rollover Contracts to
NASD Firms.
2. IRA Rollover Contracts to employers who sponsor Individual Retirement
Annuity Plans for their employees.
3. Nonqualified Flexible Premium Contracts to custodians or trustees of
Code Section 408(a) Individual Retirement Accounts, to employers who
offer deferred annuities to their employees and to entities which make
contributions to annuities for their customers.
4. Nonqualified Flexible Premium Contracts and IRA Rollover Contracts to
individuals when required in certain states.
A group Contract is issued to the Group Contract Holder once we receive a
completed master application form. A Certificate Holder establishes an account
under a group Contract by completing an enrollment form and any other required
forms. Certificate Holder enrollment form(s), along with the Purchase Payment,
are submitted to the Company by the Distributor. Upon acceptance, a
Certificate is issued for each Certificate Holder under the group Contract. In
those states where an individual Contract is offered, an individual applies
for a Contract by completing an individual Contract application and submitting
it with the Purchase Payment to the Distributor. "Contract Purchase" in this
Prospectus describes the process of establishing a Certificate Holder's
Account.
WITHDRAWAL
You may redeem all or a portion of your Certificate Holder's Account Value
during the Accumulation Period by completing the Company's withdrawal request
form. Amounts withdrawn may be subject to a deferred sales charge or
maintenance fee. (See "Charges and Deductions.") The maximum deferred sales
charge that could be assessed on a full or partial withdrawal is 7% of each
Net Purchase Payment withdrawn. Amounts withdrawn from the Marathon Guaranteed
Account may be subject to a market value adjustment ("MVA"). (See the
Appendix.) A 10% federal penalty tax may also be imposed on the taxable
portion paid to you upon withdrawal and certain amounts may be withheld for
tax purposes. (See "Tax Status -- Taxation of Annuities.")
6
<PAGE>
GUARANTEED DEATH BENEFIT
These Contracts contain a guaranteed death benefit feature. Upon the death of
the Annuitant and under certain circumstances, the Certificate Holder's
Account Value may be adjusted upward. (See "Death Benefit.")
CONTRACT CHARGES
Certain charges are associated with these Contracts; for example, mortality
and expense risk charges, administrative expense charges, transfer fees, fund
expenses, maintenance fees and premium taxes. See "Charges and Deductions" for
a complete explanation of these charges.
SEPARATE ACCOUNT
Variable Annuity Account B (the "Separate Account") is a Separate Account
established by the Company and is registered as a unit investment trust under
the Investment Company Act of 1940 ("1940 Act"). Assets of the Separate
Account attributable to the Contract are invested in shares of one or more of
the Funds. (See "Variable Annuity Account B" and "The Funds" in this
Prospectus.)
FREE LOOK PROVISION
The Certificate Holder may cancel the Certificate Holder's Account no later
than ten days after receiving the Contract or Certificate, whichever is
applicable, (or as otherwise allowed by state law) by returning it to us or to
the Distributor from whom it was purchased along with a written notice of
cancellation. Unless applicable state law requires otherwise, the amount the
Certificate Holder of a Nonqualified Flexible premium Contract will receive
upon cancellation under this provision may reflect the investment performance
of the Purchase Payments deposited in the Separate Account while invested. In
certain cases, this may be less than the amount of the Purchase Payments. For
IRA Rollover Contracts, we will refund the Purchase Payment. (See "Contract
Rights -- Right to Cancel.")
7
<PAGE>
FEE TABLE
(Based on year ended December 31, 1994)
THE PURPOSE OF THE FEE TABLE IS TO ASSIST CONTRACT HOLDERS IN UNDERSTANDING
THE VARIOUS COSTS AND EXPENSES THAT WILL BE BORNE, DIRECTLY OR INDIRECTLY,
UNDER THE CONTRACT. THE INFORMATION LISTED REFLECTS THE CHARGES DEDUCTED UNDER
THE CONTRACT, AS WELL AS THE FEES AND EXPENSES DEDUCTED FROM THE FUNDS.
ADDITIONAL INFORMATION REGARDING THE CHARGES AND DEDUCTIONS ASSESSED UNDER THE
CONTRACT CAN BE FOUND UNDER "CHARGES AND DEDUCTIONS" IN THIS PROSPECTUS.
CHARGES AND EXPENSES SHOWN DO NOT TAKE INTO ACCOUNT PREMIUM TAXES THAT MAY BE
APPLICABLE.
TRANSACTION EXPENSES
DEFERRED SALES CHARGE (as a percentage of each Net Purchase Payment
deposited)(/1/)
<TABLE>
<CAPTION>
LENGTH OF TIME SINCE NET PURCHASE PAYMENT MADE DEDUCTION
---------------------------------------------- ---------
<S> <C>
Less than 2 years 7%
2 years or more but less than 4 years 6%
4 years or more but less than 5 years 5%
5 years or more but less than 6 years 4%
6 years or more but less than 7 years 3%
7 years or more 0%
Annual Maintenance Fee(/2/) $30.00
Transfers(/3/) $ 0.00
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
Daily deductions are made from the Current Value of an Account or individual
Contract held in the variable options. The deduction is the daily equivalent
of the annual effective percentage shown in the following chart:
<TABLE>
<S> <C>
During the Accumulation Period:
Mortality and Expense Risk Fees 1.25%
Administrative Expense Charge 0.15%
-----
Total Separate Account Annual Expenses 1.40%
=====
During the Annuity Period:
Mortality and Expense Risk Fees 1.25%
Administrative Expense Charge(/4/) 0.00%
-----
Total Separate Account Annual Expenses 1.25%
=====
</TABLE>
(/1/) Referredto in the Contracts as a "surrender fee." See "Deferred Sales
Charge" for a description of the deferred sales charge and instances in
which this charge may be waived.
(/2/) The maintenance fee is waived when the Current Value of the Account or
individual Contract is $50,000 or more on the date the maintenance fee is
due. See "Maintenance Fee" in this Prospectus.
(/3/) The Company currently allows an unlimited number of transfers without
charge. However, we reserve the right to impose a fee of $10 for each
transfer in excess of 12 per year. See "Transfers Among Investment
Options" in this Prospectus.
(/4/) The Company does not currently impose an administrative charge during the
Annuity Period. We do, however, reserve the right to deduct a daily charge
of not more than 0.25% per year from amounts held under the variable
annuity options.
8
<PAGE>
MUTUAL FUND ANNUAL EXPENSES
(As a percentage of average net assets, except where otherwise noted, based on
figures for the year ended December 31, 1994.)
<TABLE>
<CAPTION>
INVESTMENT OTHER
ADVISORY FEES(/1/) EXPENSES(/2/)
(AFTER EXPENSE (AFTER EXPENSE TOTAL FUND
REIMBURSEMENT) REIMBURSEMENT) ANNUAL EXPENSES
------------------ -------------- ---------------
<S> <C> <C> <C>
Aetna Variable Fund 0.25% 0.05% 0.30%
Aetna Income Shares 0.25% 0.08% 0.33%
Aetna Variable Encore Fund 0.25% 0.07% 0.32%
Aetna Investment Advisers
Fund, Inc. 0.25% 0.07% 0.32%
Aetna Ascent Variable Port-
folio(/3/) 0.50% 0.20% 0.70%
Aetna Crossroads Variable
Portfolio(/3/) 0.50% 0.20% 0.70%
Aetna Legacy Variable Port-
folio(/3/) 0.50% 0.20% 0.70%
Alger Balanced Portfolio 0.75% 0.33% 1.08%
Alger American Income and
Growth Portfolio 0.63% 0.12% 0.75%
Alger American MidCap Growth
Portfolio 0.80% 0.17% 0.97%
Alger American Leveraged
AllCap Portfolio(/3/)(/4/) 0.85% 0.94% 1.79%
Alger American Small Cap
Portfolio 0.85% 0.11% 0.96%
Alger American Growth Port-
folio 0.75% 0.11% 0.86%
Fidelity High Income Portfo-
lio 0.61% 0.10% 0.71%
Fidelity Equity-Income Port-
folio 0.52% 0.06% 0.58%
Fidelity Growth Portfolio 0.62% 0.07% 0.69%
Fidelity Overseas Portfolio 0.77% 0.14% 0.91%
Fidelity Investment Grade
Bond Portfolio 0.46% 0.21% 0.67%
Fidelity Asset Manager Port-
folio 0.72% 0.08% 0.80%
Fidelity Index 500 Portfolio 0.28% 0.00% 0.28%
Fidelity Contrafund Portfo-
lio(/3/) 0.62% 0.27% 0.89%
IMS Equity Growth and Income
Fund(/5/) 0.00% 0.85% 0.85%
IMS Utility Fund(/5/) 0.00% 0.85% 0.85%
IMS U.S. Government Bond
Fund(/5/) 0.00% 0.80% 0.80%
IMS Corporate Bond Fund(/5/) 0.00% 0.80% 0.80%
Janus Aggressive Growth
Portfolio(/6/) 0.77% 0.28% 1.05%
Janus Balanced Portfo-
lio(/6/) 0.83% 0.74% 1.57%
Janus Flexible Income
Portfolio(/6/) 0.30% 0.70% 1.00%
Janus Growth Portfolio(/6/) 0.66% 0.22% 0.88%
Janus Short-Term Bond
Portfolio(/6/) 0.00% 0.65% 0.65%
Janus Worldwide Growth Port-
folio(/6/) 0.69% 0.49% 1.18%
Lexington Emerging Markets
Fund(/7/) 0.85% 0.45% 1.30%
Lexington Natural Resources
Trust 1.00% 0.55% 1.55%
TCI Growth(/8/) 1.00% 0.00% 1.00%
TCI Balanced(/8/) 1.00% 0.00% 1.00%
TCI International(/8/) 1.50% 0.00% 1.50%
</TABLE>
9
<PAGE>
--------
(/1/) Certain of the unaffiliated Fund managers or their affiliates reimburse
the Company for administrative costs incurred in connection with
administering the Funds as variable funding options. These reimbursements
are generally based on a percentage of assets under management and may be
paid out of the managers' advisory fees. These amounts are not charged to
the Funds or Contract Holders, but are paid from other assets of the Fund
Managers or their affiliates.
(/2/) A mutual fund's "Other Expenses" are operating costs of the Fund. The
expenses are factored into the Fund's net asset value and are not
deducted from the Contract Value.
(/3/) These funds have only limited operating history and therefore the
expenses are estimated for the current fiscal year.
(/4/) This figure does not include 0.75% that is attributable to Interest
Expense.
(/5/) The Adviser to these Funds has agreed to waive all or a portion of its
advisory fee for the Funds so that total annual expenses for the IMS
Equity Growth and Income Fund and the IMS Utility Fund would not exceed
0.85% of average net assets, and so that total annual expenses for the
IMS U.S. Government Bond Fund and the IMS Corporate Bond Fund would not
exceed 0.80% of average net assets. Without this reimbursement, the
maximum advisory fees and the maximum total annual expenses for the
Funds, would have been 0.75% and 1.23% for the IMS Equity Growth and
Income Fund; 0.75% and 1.20% for the IMS Utility Fund; 0.60% and 1.11%
for the IMS U.S. Government Fund; and 0.60% and 1.11% for the IMS
Corporate Bond Fund. The Adviser can terminate this voluntary
reimbursement of expenses at any time at its sole discretion.
(/6/) The expense figures shown are net of certain expense waivers from Janus
Capital Corporation. Without such waivers, the Investment Advisory Fees,
Other Expenses and Total Mutual Fund Annual Expenses for the Portfolios
for the fiscal year ended December 31, 1994 would have been: 1.00%, 0.28%
and 1.28%, respectively, for Janus Aspen Aggressive Growth Portfolio;
1.00%, 0.74% and 1.74%, respectively, for Janus Aspen Balanced Portfolio;
0.65%, 0.70% and 1.35%, respectively, for Janus Aspen Flexible Income
Portfolio; 1.00%, 0.22% and 1.22%, respectively, for Janus Aspen Growth
Portfolio; 0.65%, 0.75% and 1.40%, respectively, for Janus Aspen Short-
Term Bond Portfolio; and 1.00%, 0.49% and 1.49%, respectively, for Janus
Aspen Worldwide Growth Portfolio.
(/7/) The Fund's investment adviser has agreed to reimburse the Fund so that
the total expenses of the Fund (excluding taxes, brokerage, and
extraordinary expenses) will not exceed an annual rate of 1.30% of the
Fund's average net assets. Without this agreement, it is estimated that
the Fund's investment Advisory Fee, Total Other Expenses and Total Mutual
Fund Annual Expenses would have been 0.85%, 2.52% and 3.37%,
respectively.
(/8/) ThePortfolio's investment adviser pays all expenses of
the Portfolio except brokerage commissions, taxes, interest, fees and
expenses of the non-interested directors (including counsel fees) and
extraordinary expenses.
10
<PAGE>
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
Assuming a 5% annual return on assets, you would have paid the following
expenses on a $1,000 investment (/1/):
<TABLE>
<CAPTION>
For a complete withdrawal at If no withdrawal is made, or if
the end of the applicable time the Certificate Holder
period: annuitizes:
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund $81 $109 $131 $207 $18 $ 55 $ 95 $207
Aetna Income Shares $81 $110 $132 $210 $18 $ 56 $ 97 $210
Aetna Variable Encore Fund $81 $109 $132 $209 $18 $ 56 $ 96 $209
Aetna Investment
Advisers Fund, Inc. $81 $109 $132 $209 $18 $ 56 $ 96 $209
Aetna Ascent Variable
Portfolio $85 $121 $151 $249 $22 $ 68 $116 $249
Aetna Crossroads
Variable Portfolio $85 $121 $151 $249 $22 $ 68 $116 $249
Aetna Legacy Variable
Portfolio $85 $121 $151 $249 $22 $ 68 $116 $249
Alger American Balanced
Portfolio $89 $133 $170 $287 $26 $ 79 $135 $287
Alger American Income
and Growth Portfolio $85 $123 $154 $254 $22 $ 69 $118 $254
Alger American MidCap
Growth Portfolio $87 $129 $165 $276 $25 $ 76 $129 $276
Alger American Leveraged
AllCap Portfolio $96 $154 $205 $255 $53 $100 $170 $355
Alger American Small Cap
Portfolio $87 $129 $164 $275 $24 $ 75 $129 $275
Alger American Growth
Portfolio $86 $126 $159 $265 $23 $ 72 $124 $265
Fidelity Equity-Income
Portfolio $83 $117 $145 $237 $21 $ 64 $110 $237
Fidelity Growth
Portfolio $85 $121 $151 $248 $22 $ 67 $115 $248
Fidelity Overseas
Portfolio $87 $127 $162 $270 $24 $ 74 $126 $270
Fidelity VIP II Asset
Manager Portfolio $86 $124 $156 $259 $23 $ 71 $121 $259
Fidelity High Income
Portfolio $85 $121 $152 $250 $22 $ 68 $116 $250
Fidelity Investment
Grade Bond Portfolio $84 $120 $150 $246 $22 $ 67 $114 $246
Fidelity Index 500
Portfolio $18 $ 55 $ 94 $305 $80 $108 $130 $205
Fidelity Contrafund $87 $127 $161 $268 $24 $ 73 $125 $268
IMS Equity Growth and
Income Fund $86 $126 $159 $264 $23 $ 72 $123 $264
IMS Utility Fund $86 $126 $159 $264 $23 $ 72 $123 $264
IMS U.S. Government Bond
Fund $86 $124 $156 $259 $23 $ 71 $121 $259
IMS Corporate Bond Fund $86 $124 $156 $259 $23 $ 71 $121 $259
Janus Aspen Aggressive
Growth Portfolio $88 $132 $169 $284 $25 $ 78 $133 $284
Janus Aspen Balanced
Portfolio $93 $147 $195 $334 $31 $ 94 $159 $334
Janus Aspen Flexible
Income Portfolio $88 $130 $166 $279 $25 $ 77 $131 $279
Janus Aspen Growth
Portfolio $87 $126 $160 $267 $24 $ 73 $125 $267
Janus Aspen Short-Term
Bond Portfolio $84 $119 $149 $244 $21 $ 66 $113 $244
Janus Aspen Worldwide
Growth Portfolio $90 $136 $175 $297 $27 $ 82 $140 $297
Lexington Emerging
Markets Fund $91 $139 $181 $309 $28 $ 86 $146 $309
Lexington Natural
Resources Trust $93 $147 $194 $333 $30 $ 93 $158 $333
TCI Growth $88 $130 $166 $279 $25 $ 77 $131 $279
TCI Balanced $88 $130 $166 $279 $25 $ 77 $131 $279
TCI International $93 $145 $191 $328 $30 $ 91 $156 $328
</TABLE>
--------
(/1/)The illustration reflects the $30.00 maintenance fee as an annual charge
of 0.058% of assets.
11
<PAGE>
CONDENSED FINANCIAL INFORMATION
(SELECTED DATA FOR ACCUMULATION UNITS OUTSTANDING THROUGHOUT EACH PERIOD)
THE CONDENSED FINANCIAL INFORMATION PRESENTED BELOW FOR THE YEAR OR PERIOD
ENDED DECEMBER 31, 1994 IS DERIVED FROM THE FINANCIAL STATEMENTS OF THE
SEPARATE ACCOUNT, WHICH FINANCIAL STATEMENTS HAVE BEEN AUDITED BY KPMG PEAT
MARWICK LLP, INDEPENDENT AUDITORS. THE FINANCIAL STATEMENTS AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1994, AND THE INDEPENDENT AUDITORS' REPORT THEREON, ARE
INCLUDED IN THE STATEMENT OF ADDITIONAL INFORMATION.
<TABLE>
<CAPTION>
1994
---------
<S> <C>
AETNA VARIABLE FUND
Value at beginning of period $10.000
Value at end of period $10.737
Increase (decrease) in value of accumulation units(/1/) 7.37%(/5/)
Number of accumulation units outstanding at end of period 3,178,712
AETNA INCOME SHARES
Value at beginning of period $10.000
Value at end of period $10.324
Increase (decrease) in value of accumulation units(/1/) 3.24%(/3/)
Number of accumulation units outstanding at end of period 983,357
AETNA VARIABLE ENCORE FUND
Value at beginning of period $10.000
Value at end of period $10.489
Increase (decrease) in value of accumulation units(/1/) 4.89%(/5/)
Number of accumulation units outstanding at end of period 3,407,448
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $10.000
Value at end of period $10.828
Increase (decrease) in value of accumulation units(/1/) 8.28%(/2/)
Number of accumulation units outstanding at end of period 911,281
FIDELITY EQUITY-INCOME PORTFOLIO
Value at beginning of period $10.000
Value at end of period $10.002
Increase (decrease) in value of accumulation units(/1/) 0.02%(/6/)
Number of accumulation units outstanding at end of period 17,013
FIDELITY GROWTH PORTFOLIO
Value at beginning of period $10.000
Value at end of period $10.423
Increase (decrease) in value of accumulation units(/1/) 4.23%(/6/)
Number of accumulation units outstanding at end of period 17,013
IMS EQUITY GROWTH AND INCOME FUND
Value at beginning of period $10.000
Value at end of period $ 9.838
Increase (decrease) in value of accumulation units(/1/) (1.62)%(/4/)
Number of accumulation units outstanding at end of period 188,708
IMS UTILITY FUND
Value at beginning of period $10.000
Value at end of period $ 9.881
Increase (decrease) in value of accumulation units(/1/) (1.19)%(/4/)
Number of accumulation units outstanding at end of period 41,191
IMS U.S. GOVERNMENT BOND FUND
Value at beginning of period $10.000
Value at end of period $10.073
Increase (decrease) in value of accumulation units(/1/) 0.73%(/4/)
Number of accumulation units outstanding at end of period 12,714
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1994
-------
<S> <C>
IMS CORPORATE BOND FUND
Value at beginning of period $10.000
Value at end of period $ 9.814
Increase (decrease) in value of accumulation units(/1/) (1.86)%(/4/)
Number of accumulation units outstanding at end of period 31,309
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $10.000
Value at end of period $10.109
Increase (decrease) in value of accumulation units(/1/) 1.09%(/2/)
Number of accumulation units outstanding at end of period 9,588
LEXINGTON EMERGING MARKETS FUND
Value at beginning of period $10.000
Value at end of period $ 9.795
Increase (decrease) in value of accumulation units(/1/) (2.05)%(/2/)
Number of accumulation units outstanding at end of period 1,500
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $10.000
Value at end of period $ 9.056
Increase (decrease) in value of accumulation units(/1/) (9.44)%(/3/)
Number of accumulation units outstanding at end of period 537
TCI GROWTH
Value at beginning of period $10.000
Value at end of period $10.847
Increase (decrease) in value of accumulation units(/1/) 8.47%(/2/)
Number of accumulation units outstanding at end of period 893,534
TCI BALANCED
Value at beginning of period $10.000
Value at end of period $10.152
Increase (decrease) in value of accumulation units(/1/) 1.52%(/2/)
Number of accumulation units outstanding at end of period 3,477
TCI INTERNATIONAL
Value at beginning of period $10.000
Value at end of period $ 9.441
Increase (decrease) in value of accumulation units(/1/) (5.59)%(/2/)
Number of accumulation units outstanding at end of period 3,745
</TABLE>
(/1/) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value during a calendar year,
and dividing the result by the beginning Accumulation Unit value. These
figures do not reflect the deferred sales charge or the fixed dollar
annual maintenance fee, if any. Inclusion of these charges would reduce
the investment results shown.
(/2/) Reflects less than a full year of performance activity. Funds were first
received in this option during July 1994.
(/3/) Reflects less than a full year of performance activity. Funds were first
received in this option during August 1994.
(/4/) Reflects less than a full year of performance activity. Funds were first
received in this option during September 1994.
(/5/) Reflects less than a full year of performance activity. Funds were first
received in this option during October 1994.
(/6/) Reflects less than a full year of performance activity. Funds were first
received in this option during December 1994.
13
<PAGE>
PERFORMANCE DATA
From time to time, the Company may advertise different types of historical
performance for the variable funding options of the Separate Account available
under the Contracts described in this Prospectus. The Company may advertise the
"standardized average annual total returns" of the variable funding options,
calculated in a manner prescribed by the SEC, as well as the "non-standardized
return." Both methods are described below. Further information is contained in
the SAI.
"Standardized average annual total returns" are computed according to a formula
in which a hypothetical investment of $1,000 is applied to the variable funding
options under the Contract and then related to the ending redeemable values
over the most recent one, five and ten-year periods (or since inception if less
than 10 years). Standardized returns will reflect the deduction of all
recurring charges during each period (e.g., mortality and expense risk charges,
the annual maintenance fee, the administrative expense charge and any
applicable deferred sales charge).
"Non-standardized return" will be calculated in a similar manner, except that
non-standardized figures will not reflect the deduction of any applicable
deferred sales charge (which would decrease the level of performance shown if
reflected in these calculations). The non-standardized figures may also include
a three-year period.
For Funds that were in existence prior to the date that the Fund became
available under the Contract, the performance data will show the investment
performance that such Fund would have achieved (reduced by the applicable
charges) had it been available under the Contract for the period quoted.
The Company may distribute sales literature that compares the percentage change
in Accumulation Unit values for any of the Funds to established market indexes
such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial
Averages or to the change in values of other management investment companies
that have investment objectives similar to the Fund being compared.
The Company may publish in advertisements and reports to Certificate Holders
the ratings and other information assigned to us by one or more independent
rating organizations such as A.M. Best Company, Duff & Phelps, Standard &
Poor's Corporation and Moody's Investors Service, Inc. The purpose of the
ratings is to reflect the Company's financial strength and/or claims-paying
ability. We may also quote ranking services, such as Morningstar's Variable
Annuity/Life Performance Report, and Lipper's Variable Insurance Products
Performance Analysis Service (VIPPAS), which rank variable annuity or life
subaccounts or their underlying funds by performance and/or investment
objective. From time to time, we will quote articles from newspapers and
magazines or other publications or reports including, but not limited to, The
Wall Street Journal, Money magazine, USA Today and The VARDS Report.
14
<PAGE>
THE COMPANY
Aetna Life Insurance and Annuity Company (the "Company"), the depositor for
Variable Annuity Account B, is a stock life insurance company organized in 1976
under the insurance laws of the State of Connecticut. As of December 31, 1994,
we managed over $19.9 billion of assets. We are a wholly owned subsidiary of
Aetna Life and Casualty Company which, with its subsidiaries, constitutes one
of the nation's largest diversified financial services organizations. Our Home
Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B is a Separate Account established by us in 1976
under the insurance laws of the State of Connecticut. The Separate Account was
formed for the purpose of segregating assets attributable to the variable
portions of Contracts from our other assets. The Separate Account is registered
as a unit investment trust under the 1940 Act, and meets the definition of
"separate account" under the federal securities laws.
Although the Company holds title to the assets of the Separate Account, such
assets are not chargeable with liabilities arising out of any other business we
may conduct. Income, gains or losses of the Separate Account, realized or
unrealized, are credited to or charged against the assets of the Separate
Account without regard to other income, gains or losses of the Company.
However, all obligations arising under the Contracts are general corporate
obligations of the Company.
THE FUNDS
Assets of the Separate Account attributable to the Contracts may be invested in
shares of one or more of the following management investment companies you
select. The availability of the Funds is subject to applicable regulatory
authorization. Not all Funds are available in all jurisdictions or under all
Contracts.
. AETNA VARIABLE FUND seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stocks.
. AETNA INCOME SHARES seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities.
. AETNA VARIABLE ENCORE FUND seeks to provide high current return,
consistent with preservation of capital and liquidity, through
investment in high-quality money market instruments. An investment in
the Fund is neither insured nor guaranteed by the U.S. Government.
. AETNA INVESTMENT ADVISERS FUND, INC. seeks to maximize investment return
consistent with reasonable safety of principal by investing in one or
more of the following asset classes: stocks, bonds and cash equivalents
based on the Company's judgment of which of those sectors or mix thereof
offers the best investment prospects.
. AETNA GENERATION PORTFOLIOS, INC.--AETNA ASCENT VARIABLE PORTFOLIO seeks
to provide capital appreciation by allocating its investments among
equities and fixed income securities. Aetna Ascent is managed for
investors who generally have an investment horizon exceeding 15 years,
and who have a high level of risk tolerance. See the Fund's prospectus
for a discussion of the risks involved.
. AETNA GENERATION PORTFOLIOS, INC.--AETNA CROSSROADS VARIABLE PORTFOLIO
seeks to provide total return (i.e., income and capital appreciation,
both realized and unrealized) by allocating its investments among
equities and fixed income securities. Aetna Crossroads is managed for
investors who generally have an investment horizon exceeding 10 years
and who have a moderate level of risk tolerance.
. AETNA GENERATION PORTFOLIOS, INC.--AETNA LEGACY VARIABLE PORTFOLIO seeks
to provide total return consistent with preservation of capital by
allocating its investments among equities and
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fixed income securities. Aetna Legacy is managed for investors who
generally have an investment horizon exceeding five years and who have a
low level of risk tolerance.
. ALGER AMERICAN BALANCED PORTFOLIO seeks current income and long-term
capital appreciation by investing in common stocks and fixed income
securities, with emphasis on income-producing securities which appear to
have some potential for capital appreciation.
. ALGER AMERICAN INCOME AND GROWTH PORTFOLIO seeks a high level of
dividend income to the extent consistent with prudent investment
management by investing primarily in dividend paying equity securities.
Capital appreciation is a secondary objective of the Portfolio.
. ALGER AMERICAN FUND--ALGER AMERICAN GROWTH PORTFOLIO seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization -- present market value per share multiplied by the total
number of shares outstanding -- of $1 billion or greater. Income is a
consideration in the selection of investments but is not an investment
objective.
. ALGER AMERICAN FUND--ALGER AMERICAN MIDCAP GROWTH PORTFOLIO seeks long-
term capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization between $750 million and $3.5 billion. Income is a
consideration in the selection of investments but is not an investment
objective of the Portfolio.
. ALGER AMERICAN FUND--ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities. Income is a consideration in the
selection of investments but is not an investment objective of the
Portfolio. The Portfolio may engage in leveraging (up to 33 1/3% of its
assets) and options and futures transactions, which are deemed to be
speculative and which may cause the Portfolio's net asset value to
fluctuate.
. ALGER AMERICAN FUND--ALGER AMERICAN SMALL CAP PORTFOLIO seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total market
capitalization of less than $1 billion. Small capitalization stocks offer
great potential for growth but there are additional market and business
risks associated with them. (See the Portfolio's prospectus for a
discussion of these risks.)
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND--EQUITY-INCOME
PORTFOLIO seeks reasonable income by investing primarily in income-
producing equity securities. In choosing these securities, the Fund will
also consider the potential for capital appreciation.
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND--GROWTH PORTFOLIO
seeks to achieve capital appreciation by investing primarily in common
stock, although the Fund is not limited to any one type of security.
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND--HIGH INCOME
PORTFOLIO seeks to obtain a high level of current income by investing
primarily in high-yielding, lower-rated, fixed income securities, while
also considering growth of capital. Lower-rated corporate debt
obligations are commonly known as "junk bonds" or "high yield, high risk
bonds" and involve significant degree of risk (see the funds' prospectus
for a discussion of the risk factors involved in investing in lower-rate
corporate debt obligations).
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND--OVERSEAS
PORTFOLIO seeks long-term growth of capital primarily through investments
in foreign securities (at least 65% from at least three countries outside
of North America). International investments such as these involve
greater risks than U.S. investments.
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II--ASSET MANAGER
PORTFOLIO seeks high total return with reduced risk over the long-term by
allocating its assets among stocks, bonds and short-term fixed-income
instruments.
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. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II--BOND PORTFOLIO
seeks as high a level of current income as is consistent with the
preservation of capital by investing in a broad range of investment-grade
fixed-income securities.
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II--CONTRAFUND
PORTFOLIO ("Fidelity Contrafund Portfolio") seeks maximum total return
over the long term by investing its assets mainly in equity securities of
companies that are undervalued or out-of-favor.
. FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II--INDEX 500
PORTFOLIO seeks to provide investment results that correspond to the
total return of common stocks publicly traded in the United States by
duplicating the composition and total return of the Standard & Poor's 500
Composite Stock Price Index.
. INSURANCE MANAGEMENT SERIES--EQUITY GROWTH AND INCOME FUND seeks to
achieve long-term growth of capital and to provide income. The IMS Equity
Growth and Income Fund pursues its investment objectives by investing,
under normal circumstances, at least 65% of its total assets in common
stock of "blue-chip" companies. "Blue-chip" companies generally are top-
quality, established growth companies which, in the opinion of the
Adviser, Federated Advisers, meet certain criteria.
. INSURANCE MANAGEMENT SERIES--UTILITY FUND seeks to achieve high current
income and moderate capital appreciation by investing primarily in a
professionally managed and diversified portfolio of equity and debt
securities of utility companies. Under normal market conditions, the IMS
Utility Fund will invest at least 65% of its total assets in securities
of utility companies.
. INSURANCE MANAGEMENT SERIES--U.S. GOVERNMENT BOND FUND seeks to provide
current income. The IMS U.S. Government Bond Fund pursues its investment
objective by investing at least 65% of the value of its total assets in
securities issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies or instrumentalities.
. INSURANCE MANAGEMENT SERIES--CORPORATE BOND FUND seeks high current
income by investing primarily in a diversified portfolio of
professionally managed fixed income securities. The fixed-income
securities in which the Fund intends to invest are lower-rated corporate
debt obligations. Lower-rated corporate debt obligations are commonly
known as "junk bonds" or "High Yield, High Risk Bonds" and involve
significant degree of risk (see the funds' prospectus for a discussion of
the risk factors involved in investing in lower-rated corporate debt
obligations). Some of the fixed income securities may involve equity
features. Capital growth will be considered, but only when consistent
with the investment objective of high current income.
. JANUS ASPEN SERIES--AGGRESSIVE GROWTH PORTFOLIO is a non-diversified
portfolio that seeks long-term growth of capital by emphasizing
investments in common stock of companies with a market capitalization
between $1 billion and $5 billion.
. JANUS ASPEN SERIES--BALANCED PORTFOLIO seeks both long-term growth of
capital and current income. The Portfolio is designed for investors who
want to participate in the equity markets through a more moderate
investment than a pure growth fund. Investments in income-producing
securities are intended to result in a portfolio that provides a more
consistent total return than may be attainable through investing solely
in growth stocks. The Portfolio is not designed for investors who desire
a consistent level of income. There can be no assurance that the
Portfolio will achieve its objective.
. JANUS ASPEN SERIES--FLEXIBLE INCOME PORTFOLIO seeks to maximize total
return, consistent with preservation of capital, from a combination of
current income and capital appreciation. Flexible Income Portfolio
invests in all types of income-producing securities and may have
substantial holdings of debt securities rated below investment grade
("high yield/high risk securities"), also commonly known as junk bonds.
These securities involve certain risks, and investors should read
carefully the risk disclosure in the portfolio's prospectus.
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<PAGE>
. JANUS ASPEN SERIES--GROWTH PORTFOLIO seeks long-term growth of capital
by investing primarily in a diversified portfolio of common stocks of a
large number of issuers of any size. The Portfolio generally emphasizes
issuers with large market capitalizations.
. JANUS ASPEN SERIES--SHORT-TERM BOND PORTFOLIO seeks as high a level of
current income as is consistent with preservation of capital by investing
primarily in short- and intermediate-term fixed income securities. The
Portfolio will normally maintain a dollar-weighted average portfolio
maturity of less than three years, but not to exceed five years depending
upon its portfolio manager's opinion of prevailing market, financial and
economic conditions.
. JANUS ASPEN SERIES--WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of
capital by investing primarily in common stocks of companies of foreign
and domestic issuers of any size. The portfolio normally invests in
issuers from at least five different countries including the United
States. International investments involve risks not present in U.S.
Securities.
. LEXINGTON EMERGING MARKETS FUND seeks long-term growth of capital
primarily through investment in equity securities of companies domiciled
in, or doing business in emerging countries and emerging markets.
. LEXINGTON NATURAL RESOURCES TRUST is a non-diversified portfolio that
seeks long-term growth of capital through investment primarily in common
stocks of companies which own or develop natural resources and other
basic commodities or that supply goods and services to such companies.
The Fund may invest up to 25% of its total assets in foreign securities.
Foreign investing involves risks that differ from those involved in
domestic investing. See the Fund's prospectus for a discussion of these
risks.
. TCI PORTFOLIOS, INC.--TCI GROWTH seeks capital growth by investing in
common stocks (including securities convertible into common stocks) and
other securities that meet certain fundamental and technical standards of
selection and, in the opinion of TCI Growth's management, have better
than average potential for appreciation. TCI Growth tries to stay fully
invested in such securities, regardless of the movement of prices
generally. The Portfolio may invest in foreign securities. Foreign
investing involves risks that differ from those involved in domestic
investing. See the Portfolio's prospectus for a discussion of these
risks.
. TCI PORTFOLIOS, INC.--TCI BALANCED seeks capital growth and current
income. It seeks capital growth by investing in 60% common stocks
(including securities convertible into common stocks) and other
securities that meet certain fundamental and technical standards of
selection and, in the opinion of TCI Balanced's management, have better-
than-average potential for appreciation. Management intends to maintain
approximately 40% of the Portfolio's assets in fixed income securities.
. TCI PORTFOLIOS, INC.--TCI INTERNATIONAL seeks capital growth by investing
primarily in an internationally diversified portfolio of common stocks
that are considered by management to have prospects for appreciation. The
Fund will invest primarily in securities of issuers located in countries
with developed economies.
There is no assurance that the Funds will achieve their investment objectives.
Certificate Holders and Contract Holders bear the full investment risk of
investments in the Funds selected.
Some of the above funds may use instruments known as derivatives as part of
their investment strategies as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectus for the Funds for a discussion of the risks associated with an
investment in those Funds.
More comprehensive information, including a discussion of potential risks, is
found in the current prospectus for each Fund which is distributed with and
must accompany this Prospectus. Contract Holders and Certificate Holders should
read the accompanying prospectuses carefully before investing. Additional
prospectuses and the Statements of Additional Information for this Prospectus
and each of the Funds can be obtained from the Company's Home Office at the
address and telephone number listed on the cover of this Prospectus.
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FUND INVESTMENT ADVISERS
The following identifies the investment adviser and the subadviser, if any, for
each Fund.
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
---- ------------------
<S> <C>
Aetna Variable Fund Aetna Life Insurance and
Annuity Company (ALIAC)
Aetna Income Shares ALIAC
Aetna Variable Encore Fund ALIAC
Aetna Investment Advisers Fund, Inc. ALIAC
Aetna Ascent Variable Portfolio ALIAC
Aetna Crossroads Variable Portfolio ALIAC
Aetna Legacy Variable Portfolio ALIAC
Alger Balanced Portfolio Fred Alger Management, Inc.
Alger Income and Growth Portfolio Fred Alger Management, Inc.
Alger MidCap Growth Portfolio Fred Alger Management, Inc.
Alger Leveraged AllCap Portfolio Fred Alger Management, Inc.
Alger Small Cap Portfolio Fred Alger Management, Inc.
Alger Growth Portfolio Fred Alger Management, Inc.
Fidelity High Income Portfolio Fidelity Management & Research Company
Fidelity Equity-Income Portfolio Fidelity Management & Research Company
Fidelity Growth Portfolio Fidelity Management & Research Company
Fidelity Overseas Portfolio Fidelity Management & Research Company
Fidelity Investment Grade Bond Portfolio Fidelity Management & Research Company
Fidelity Asset Manager Portfolio Fidelity Management & Research Company
Fidelity Index 500 Portfolio Fidelity Management & Research Company
Fidelity Contrafund Portfolio Fidelity Management & Research Company
IMS Equity Growth and Income Fund Federated Advisers
IMS Utility Fund Federated Advisers
IMS U.S. Government Bond Fund Federated Advisers
IMS Corporate Bond Fund Federated Advisers
Janus Aggressive Growth Portfolio Janus Capital Corporation
Janus Balanced Portfolio Janus Capital Corporation
Janus Flexible Income Portfolio Janus Capital Corporation
Janus Growth Portfolio Janus Capital Corporation
Janus Short-Term Bond Portfolio Janus Capital Corporation
Janus Worldwide Growth Portfolio Janus Capital Corporation
Lexington Emerging Markets Fund Lexington Management Corporation
Lexington Natural Resources Trust Lexington Management Corporation*
TCI Growth Investors Research Corporation
TCI Balanced Investors Research Corporation
TCI International Investors Research Corporation
</TABLE>
* Market Systems Research Advisors, Inc. serves as the sub-adviser for the
Lexington Natural Resources Trust.
MIXED AND SHARED FUNDING
Shares of the Funds are sold to us for funding variable annuities. The Funds
may be sold to other companies for the same purpose. This is referred to as
"shared funding." Shares of the Funds may also be used for funding variable
life insurance policies through variable life separate accounts sponsored by us
or by third parties. This is referred to as "mixed funding."
It is conceivable that, in the future, it may be disadvantageous for variable
annuity separate accounts and variable life separate accounts of the same or of
an unaffiliated insurance company to invest in these Funds simultaneously,
since the interests of the contract holders or policy owners or insurance
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companies may differ. Each Fund's Board of Trustees or Directors has agreed to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the separate
accounts might withdraw its investment in a Fund. This might force that Fund to
sell portfolio securities at disadvantageous prices.
FUND ADDITIONS AND LIMITATIONS
We may, from time to time, add additional mutual funds as eligible variable
funding options under the Contracts. No more than 18 different choices of
investment options may be made over the life of the Certificate. See "Transfers
Among Investment Options."
The Company's current policy is to allow only the Aetna Variable Fund, Aetna
Income Shares and Aetna Investment Advisers Fund, Inc. to be used as variable
investment options during the Annuity Period. See "Annuity Period Elections."
CONTRACT PURCHASE
PURCHASE
The Contract application must be completed by the prospective Group Contract
Holder and sent, together with the Purchase Payment, if any, to the Distributor
or directly to the Company at its Home Office. A Certificate Holder establishes
an Account under a group contract by completing an enrollment form and any
other required forms. The Distributor will deliver any application or
enrollment form to the Company for review, acceptance or rejection.
Contracts may be purchased by spouses as Joint Certificate Holders. Tax law
prohibits the purchase of Individual Retirement Annuities by Joint Certificate
Holders. (See "Contract Rights.")
The Company must accept or reject an application or enrollment form within two
business days of its receipt. If the application or enrollment form is
incomplete, the Company may hold it and any accompanying Purchase Payment for
five days. Purchase Payments may be held for longer periods only with the
consent of the Certificate Holder, pending acceptance of the application or
enrollment form. If the application is accepted, a Contract will be issued to
the Certificate Holder or the Purchase Payment will be accepted. Any Purchase
Payment accompanying the application or enrollment form, or received prior to
acceptance of the application or enrollment form, will be invested as of the
date of acceptance. If the application or enrollment form is rejected, the
application or enrollment form and any Purchase Payments will be returned to
the Certificate Holder. Initial payments held for longer than the five business
days will be deposited in the Aetna Variable Encore Fund until the forms are
completed.
You may cancel the Contract within 10 days of receiving it. See "Contract
Rights--Right to Cancel" for more information.
PURCHASE PAYMENTS
Each Purchase Payment accepted by us that is to be invested in the variable
funding options will be deposited in the Separate Account as set forth under
"Certificate Holder's Account Values."
You may elect to have each Net Purchase Payment accumulate (a) on a variable
basis invested in shares of one or more of the Funds; (b) under the credited
interest option; or (c) in a combination of any of the available investment
options. Net Purchase Payments must be allocated in terms of whole
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<PAGE>
percentages, and may not be invested in more than 18 investment options over
the life of the Certificate. See "Transfers Among Investment Options." Purchase
Payments received after the initial payment will be allocated in the same
proportion as the last allocation, unless new allocation instructions are
received with the Purchase Payment.
For the Nonqualified Flexible Premium Contract the minimum initial Purchase
Payment is $5,000. Additional Purchase Payments to a Nonqualified Flexible
Premium Contract must be at least $2,500. Subsequent payments may be sent
through the Group Contract Holder, the Distributor or may be sent to the
Marathon Service Unit at the Company's Home Office. The minimum Purchase
Payment for the Individual Retirement Annuity Rollover Contract (IRA) is
$10,000. A Purchase Payment of more than $500,000 is allowed only with our
consent. The maximum issue age for the Annuitant is 90.
Additional Purchase Payments made to an existing Nonqualified Flexible Premium
Contract are subject to the terms and conditions published by us at the time of
the subsequent payment. We reserve the right to limit the total dollar amount
accepted from a Certificate Holder. We also reserve the right to reject any
Purchase Payment to a prospective or existing Certificate Holder's Account
without advance notice.
Each Nonqualified Flexible Premium Contract must be aggregated with other
annuity contracts and/or accounts under a Contract purchased by you from us
(and our affiliates) in any calendar year on or after October 21, 1988 for
purposes of determining the taxable portion of payments. (See "Tax Status--Tax
Status of Distributions.")
DESIGNATIONS OF BENEFICIARY AND ANNUITANT
For both Nonqualified Flexible Premium Contracts and IRA Rollover Contracts,
you designate the Beneficiary on the enrollment form or application for an
individual Contract. For an IRA Rollover Contract, you must be the Annuitant.
For Flexible Premium Contracts, you may (but need not) select a different
person as the Annuitant. See "Contract Rights--Rights Under the Contract and
Account," if you are not the Annuitant.
DISTRIBUTION
The Company will serve as Underwriter for the securities sold by this
Prospectus. The Company is registered as a broker-dealer with the Securities
and Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. (NASD). As Underwriter, the Company will contract with
one or more registered broker-dealers ("Distributors") to offer and sell the
Contracts. The Company and one or more affiliates may also sell the Contracts
directly. All registered representatives of the Distributors must also be
licensed as insurance agents to sell Variable Annuity Contracts.
The Company may also contract with independent third party broker-dealers who
will act as wholesalers by assisting the Company in finding broker-dealers
interested in acting as Distributors for the Company. These wholesalers may
also provide training, marketing and other sales related functions for the
Company and the Distributors and may provide certain administrative services to
the Company in connection with the Contracts. The Company may pay such
wholesalers compensation based on Purchase Payments for the Contracts purchased
through Distributors selected by the wholesaler.
The Company may also designate third parties to provide services in connection
with the Contracts such as reviewing applications for completeness and
compliance with insurance requirements and providing the Distributors with
approved marketing material, prospectuses or other supplies. These parties will
also receive payments based on Purchase Payments for their services, to the
extent such payments are allowed by applicable securities laws. All costs and
expenses related to these services will be paid by the Company.
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CERTIFICATE HOLDER'S ACCOUNT VALUES
ACCUMULATION UNITS
A Purchase Payment that is directed to one or more of the Funds is deposited in
the Separate Account and credited to the Certificate Holder's Account in the
form of Accumulation Units for each Fund selected. The number of Accumulation
Units credited is determined by dividing the applicable portion of the Purchase
Payment by that Contract's Accumulation Unit value of the appropriate Fund. The
Accumulation Unit value used is that next-computed following the date on which
a Purchase Payment is received, unless the application has not been accepted.
In that event, Purchase Payments will be credited at the Accumulation Unit
Value next determined after acceptance of the application. Shares of the Funds
are purchased by the Separate Account at the net asset value next determined by
the Fund following receipt of Net Purchase Payments by the Separate Account,
which will be no later than the next business day following the crediting of
the Accumulation Units attributable to the Funds. The value of Accumulation
Units attributable to the Funds will be affected by the investment performance,
expenses and charges of those Funds. Generally, if the net asset value of the
fund increases, so does the Accumulation Unit value; however, performance of
the Separate Account is reduced by charges and deductions under the contract.
Accumulation Units are valued separately for each Fund. Therefore, if you elect
to have a Net Purchase Payment invested in a combination of Funds, you will
have Accumulation Units credited from more than one Fund. The value of the
Certificate Holder's Account as of the most recent Valuation Period, is
determined by adding the value of any Accumulation Units attributed to the
Fund(s) you have selected to the value of any amounts invested in the Marathon
Guaranteed Account.
NET INVESTMENT FACTOR
The value of a Fund's Accumulation Unit for any Valuation Period is calculated
by multiplying the Fund's Accumulation Unit value for the immediately preceding
Valuation Period by the net investment factor of the appropriate investment
option for the current period.
The net investment factor is calculated separately for each Fund in which
assets of the Separate Account are invested. It is determined by adding
1.0000000 to the net investment rate.
The net investment rate equals (a) the net assets of the Fund held by the
Separate Account at the end of a Valuation Period, minus (b) the net assets of
the Fund held by Account B at the beginning of a Valuation Period, plus or
minus (c) taxes or provision for taxes, if any, attributable to the operation
of the Separate Account, divided by (d) the value of the Fund's Accumulation
and Annuity Units held by the Separate Account at the beginning of the
Valuation Period, minus (e) a daily charge at the annual effective rate of
1.25% for mortality and expense risks, and a daily administrative expense
charge at the annual effective rate of 0.15% during the Accumulation Period and
up to 0.25% during the Annuity Period. The net investment rate may be more or
less than zero.
CONTRACT RIGHTS
RIGHT TO CANCEL
The Group or Individual Contract Holder may cancel the Contract no later than
ten days after receiving it (or as otherwise allowed by state law) by returning
it to us or to the Distributor from whom it was purchased along with a written
notice of cancellation. A Certificate Holder may cancel his or her Certificate
Holder's Account under a group Contract no later than ten days after receiving
the Certificate (or as otherwise allowed by state law) by returning it to us or
to the Distributor from whom it was purchased along with a written notice of
cancellation. We will send a refund not later than seven calendar days after we
receive the Contract or Certificate and the written notice at our Home Office.
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Unless the applicable state law requires a refund of the Purchase Payments, for
Nonqualified Flexible Premium Contracts, we will refund the Purchase Payments
plus any increase or minus any decrease in the value attributable to the
Purchase Payments allocated to the variable option(s). For IRA Rollover
Contracts, we will refund the Purchase Payment.
RIGHTS UNDER THE CONTRACT AND ACCOUNT
The Group Contract Holder has title to the Contract and only the right to
accept or reject any modifications to the Contract. You have all other rights
to your Certificate Holder's Account under the Contract. However, under a
Nonqualified Flexible Premium Contract, if you and the Annuitant are not the
same, and the Annuitant dies first, a different provision applies. In this
case, your rights are automatically transferred to the Beneficiary. (See "Death
Benefit.")
Two individuals may have an interest in the same Certificate Holder's Account
as Joint Certificate Holders. See "Contract Purchase." Joint Certificate
Holders have equal rights under the Contract and with respect to their
Certificate Holder's Account. On the death of a Joint Certificate Holder prior
to the Annuity Date, the surviving Certificate Holder may retain all ownership
rights under the Contract or elect to have the proceeds distributed. See "Death
Benefits." All rights under the Contract must be exercised by both Joint
Certificate Holders with the exception of transfers among investment options;
at the Company's discretion, one Joint Certificate Holder can select additional
investment options after the Account has been established.
Loans are not allowed under this Contract.
TRANSFERS AMONG INVESTMENT OPTIONS
The Company currently allows unlimited transfers of accumulated amounts to
available investment options during the Accumulation Period without charge;
however, it reserves the right to charge up to $10 if more than 12 transfers
are made in a calendar year. See "Charges and Deductions -- Transfer Charges."
The Company reserves the right to establish a minimum transfer amount. Unless
the transfer is made from the one-year term in connection with the Dollar Cost
Averaging Program (where state regulatory approval has been received),
transfers from the Marathon Guaranteed Account will be subject to a market
value adjustment, if applicable. (See "Dollar Cost Averaging Program" below, as
well as the Appendix and the prospectus for the Marathon Guaranteed Account.)
Any transfer will be based on the Accumulation Unit value next determined after
the Company receives a valid request at its Home Office. During the Annuity
Period, transfers are not available.
DOLLAR COST AVERAGING PROGRAM
Dollar Cost Averaging is a system for investing a fixed amount of money at
regular intervals over a period of time. It is based on the economic fact that
buying a variably priced item with a constant sum of money at fixed intervals
affords the buyer the opportunity to automatically buy more of that item when
prices are low and less of it when prices are high, thus reducing the average
cost per item. Dollar Cost Averaging does not ensure a profit nor guarantee
against loss in a declining market. Certificate Holders should consider their
financial ability to continue purchases through periods of low price levels.
The Dollar Cost Averaging Program permits Certificate Holders to systematically
transfer amounts from any of the variable funding options and the one-year
Guaranteed Account Term to any of the variable investment options. Where state
regulatory approval has been received, a market value adjustment will not be
applied to dollar cost averaging transfers from the one-year Guaranteed Term.
Consult your representative to determine whether the waiver is approved in your
state. (See Appendix I for a discussion of the restrictions and features
attributable to the Marathon Guaranteed Account.)
You must have an Account Value of at least $5,000 to participate in the Dollar
Cost Averaging Program. The minimum amount that may be transferred into a
particular variable funding option is $50. DCA can be elected at any time
during the Accumulation Period by completing the DCA section of the application
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or by completing a DCA Election Form available from the Company at its Home
Office. All DCA transfers will be made on the 15th of each month (or the next
Valuation Period, if applicable). Any transfer made under the DCA program will
not be counted for purposes of any transfer limitations imposed under the
Contract. A Certificate Holder may terminate the DCA program at any time. The
Company reserves the right to modify or terminate the DCA program at any time.
Dollar Cost Averaging is not available to individuals who have elected the
Systematic Withdrawal Option or the Account Rebalancing Program (described
below).
ACCOUNT REBALANCING PROGRAM
The Account Rebalancing Program allows Certificate Holders to have portions of
their Account Value automatically reallocated annually to a specified
percentage. Only Account Values accumulating in the variable funding options
can be rebalanced. Certificate Holders may participate in this program by
completing the Account Rebalancing Section of the Contract Application, or by
requesting the service in writing from the Company's Home Office. Reallocations
under the Account Rebalancing Program will not be counted for purposes of any
transfer limitations imposed under the Contract.
Account Rebalancing is not available to Certificate Holders who have elected
the Dollar Cost Averaging Program.
Account Rebalancing does not ensure a profit nor guarantee against loss in a
declining market.
WITHDRAWALS
You may withdraw all or a portion of the Certificate Holder's Account Value
during the Accumulation Period by properly completing a disbursement form
provided by us and sending it to our Home Office. Withdrawal request forms are
available from us and from the Distributors. The following types of withdrawal
may be requested:
. Full Withdrawal: The Adjusted Account Value minus any applicable deferred
sales charge and maintenance fee due.
. Partial Withdrawal (Percentage): The percentage of the Adjusted Account
Value requested minus any applicable deferred sales charge.
. Partial Withdrawal (Specific Dollar Amount): The dollar amount requested.
The amount actually withdrawn from the Certificate Holder's Account may
be greater or less than the dollar amount requested to allow for payment
of any applicable deferred sales charge and any applicable MVA.
We will pay all amounts based on the Certificate Holder's Account Value next
computed after the request is received in the Home Office or a later date, if
specified. For any partial withdrawal, amounts are withdrawn on a pro rata
basis from all variable funding options. (For treatment of amounts withdrawn
from the Marathon Guaranteed Account, see the Appendix.)
Taxes or tax penalties may be due on the amount withdrawn. (See "Tax Status--
Taxation of Annuities.")
We reserve the right to close out, upon 90 days written notice, any Certificate
Holder's Account with a value of $2,500 or less immediately following a partial
withdrawal. A deferred sales charge will not be deducted in this event. The
Company does not intend to exercise this right in cases where the Certificate
Holder's Account Value is reduced to $2,500 or less solely due to investment
performance.
Our policy is to make payments for withdrawal requests in accordance with SEC
requirements, but normally not later than seven calendar days after we receive
a properly completed withdrawal form in our Home Office or within seven
calendar days of the date the withdrawal form may specify. Payments may be
delayed for: (a) any period in which the New York Stock Exchange ("Exchange")
is closed
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(other than customary weekend and holiday closings) or in which trading on the
Exchange is restricted; (b) any period in which an emergency exists where
disposal of securities held by the Funds is not reasonably practicable or it is
not reasonably practicable for the value of the assets of the Funds to be
fairly determined; or (c) such other periods as the SEC may by order permit for
the protection of Certificate Holders. The conditions under which restricted
trading or an emergency exists will be determined by the rules and regulations
of the SEC.
The tax treatment of withdrawals from each Nonqualified Flexible Premium
Contract may be affected if you own other annuity contracts or accounts issued
by us (or our affiliates) that were purchased on or after October 21, 1988.
(See "Tax Status--Tax Status of Distributions.")
REINSTATEMENT PRIVILEGE FOLLOWING WITHDRAWAL
You may elect to reinstate all or a portion of the proceeds received from the
full withdrawal of the Certificate Holder's Account within 30 days after the
withdrawal. Accumulation Units will be credited to the Certificate Holder's
Account for the amount reinstated, as well as for any maintenance fee charged
and any portion of any deferred sales charge imposed at the time of withdrawal.
However, any aggregate negative market value adjustment made to the MGA will
not be credited. Reinstated amounts will be reallocated to the applicable
investment options in the same proportion as they were allocated at the time of
withdrawal.
The number of Accumulation Units credited will be based upon the Accumulation
Unit value(s) next computed following receipt at our Home Office of the
reinstatement request along with the amount to be reinstated. Any maintenance
fee which falls due after the withdrawal and before the reinstatement will be
deducted from the amount reinstated. The reinstatement privilege may be used
only once and does not apply to Certificate Holder's Accounts that we close
out. If you are contemplating reinstatement, you should seek competent advice
regarding the tax consequences associated with this type of a transaction.
CHARGES AND DEDUCTIONS
GENERAL
This section describes the maximum charges that we may deduct for maintenance
fees, administrative expenses, sales-related expenses and transfer fees. A
description of mortality and expense risk charges and Fund expenses is also
included.
MAINTENANCE FEE
We will deduct an annual maintenance fee of $30 from the Certificate Holder's
Account Value during the Accumulation Period. This fee is to reimburse us for
some administrative expenses relating to the establishment and maintenance of
the Certificate Holder's Account. We will deduct the fee on the anniversary of
the Certificate Holder's Account's Effective Date (or, if this is not a
business day that the New York Stock Exchange is open, on the next business
day). The fee is also deducted upon withdrawal of the entire Certificate
Holder's Account. The fee is deducted proportionately from each investment
option selected under the Contract by liquidating a portion of amounts held in
those options.
We will not deduct a maintenance fee (either annually or upon withdrawal) if
the Certificate Holder's Account Value is $50,000 or more on the day the
maintenance fee is due.
MORTALITY AND EXPENSE RISK CHARGES
We make a daily deduction from the Separate Account variable portion of the
Certificate Holder's Account Value for mortality and expense risks (insurance
charges). The deduction, equal to the annual effective rate of 1.25% per year,
is made as part of the calculation of Accumulation Unit and Annuity Unit
value(s).
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The mortality risk charge is to compensate us for the risks we assume (a) for
the guaranteed death benefit and (b) for our promise to make lifetime payments
according to Annuity rates specified in the Contract. The expense risk charge
is to compensate us for the risk that actual expenses for costs incurred under
the Contract will exceed the maximum costs that can be charged under the
Contract. We hope to profit from the daily deduction for mortality and expense
risks. Any such profit, as well as any other profit realized by us, would be
available for any proper corporate purpose, including, but not limited to,
payment of sales and distribution expenses. During 1994, we received $8,918,042
for mortality and expense risks from contracts funded through the Separate
Account.
ADMINISTRATIVE EXPENSE CHARGE
During the Accumulation Period, we deduct a daily charge of 0.15% per year from
the Separate Account portion of the Certificate Holder's Account Value. This
charge is to reimburse us for expenses we incur for administering the Contract.
We do not intend to profit from this charge. The administrative expense charge
is a percentage of the variable portion of the Certificate Holder's Account
Value; therefore, there may be no relationship between the amount so deducted
and the amount of expenses attributable to the Certificate Holder's Account.
An administrative expense charge may be established upon the start of a
variable Annuity Option. This charge will not exceed 0.25% per year, deducted
on a daily basis from any variable portion of the Annuity Option. Through
April 30, 1996, this charge is guaranteed to be 0%. Once an Annuity Option is
elected, and an administrative expense charge has been established, we will not
change the charge.
TRANSFER FEES
For each Certificate Holder's Account unlimited transfers are currently allowed
without charge during the Accumulation Period. We reserve the right to charge
$10 for each transfer in excess of 12 during a calendar year. If we do assess
the fee, it will be deducted from the Certificate Holder's Account Value.
During the Annuity Period, Transfers are not allowed during the Annuity Period.
DEFERRED SALES CHARGE
You may withdraw the Adjusted Account Value of your Certificate Holder's
Account at any time during the Accumulation Period; however, a deferred sales
charge (referred to in the Contract as a surrender fee) may be deducted so that
we may recover some of our sales expenses.
The charge only applies to the Net Purchase Payment (not to any associated
changes in value), and gradually decreases by 1% per year so that seven years
after the date of the Net Purchase Payment, the charge associated with that
payment is 0%. To satisfy a partial withdrawal, the deferred sales charge is
calculated as if Net Purchase Payments are withdrawn in the same order they
were applied to the Certificate Holder's Account (i.e., the oldest Net Purchase
Payment will be exhausted, then the next oldest and so on if a partial
withdrawal is requested). Partial withdrawals from the Marathon Guaranteed
Account will be treated as described in the Appendix and the prospectus for
MGA. Withdrawals are charged first against Purchase Payments, then against any
increases in value. The deferred sales charge for each Net Purchase Payment is
determined by multiplying the Net Purchase Payment withdrawn by the appropriate
percentage, depending on the number of years completed since the Net Purchase
Payment was made, as shown in the table below. The total charge will be the sum
of the charges applicable for all of the Net Purchase Payments withdrawn.
<TABLE>
<CAPTION>
LENGTH OF TIME SINCE
NET PURCHASE PAYMENT MADE DEDUCTION
------------------------- ---------
<S> <C>
Less than 2 years 7%
2 years or more but less than 4 years 6%
4 years or more but less than 5 years 5%
5 years or more but less than 6 years 4%
6 years or more but less than 7 years 3%
7 years or more 0%
</TABLE>
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We will not deduct a deferred sales charge from any Net Purchase Payment
withdrawn that is:
(a) Applied to provide Annuity benefits;
(b) Paid to a Beneficiary due to the Annuitant's death before Annuity
payments start, up to a maximum of the Net Purchase Payment(s) in the
Certificate Holder's Account on the Annuitant's date of death;
(c) Withdrawn due to the election of the Systematic Withdrawal Option (SWO)
or the Estate Conservation Option (ECO);
(d) Withdrawn after the Annuitant has spent at least 45 consecutive days in
a licensed nursing care facility, but within three years of admission
to a licensed nursing care facility (in New Hampshire only, the
facility does not have to be licensed). This waiver does not apply if
you or the Annuitant are in a nursing care facility at the time the
Certificate Holder's Account is established or is admitted to a
licensed nursing care facility within one year of that time. It will
also not apply if prohibited by state law
(e) Paid due to the full withdrawal of the Certificate Holder's Account for
which the value is $2,500 or less and no withdrawals have been made in
the prior 12 months; or
(f) Paid, at least 12 months after the date of the first Purchase Payment
to the Certificate Holder's Account in an amount of 10% or less of the
Certificate Holder's Account Value. This applies to the first partial
or full withdrawal made each calendar year. The 10% amount will be
calculated using the Certificate Holder's Account Value on the date the
request is received in good order at the Home Office. If a withdrawal
is made that exceeds 10%, the applicable deferred sales charge on the
amount over 10% and any applicable MVA will be deducted from the
Certificate Holder's Account Value. This provision may not be exercised
if SWO is elected.
(g) Paid if we close out the Certificate Holder's Account. (See "Contract
Rights--Withdrawals.")
In the instances cited in the above paragraphs, no deferred sales charge is
deducted. However, the amount withdrawn may be subject to the 10% federal
penalty tax. (See "Tax Status--Tax Status of Distributions.") An MVA may also
apply to amounts withdrawn from MGA.
Based on our actuarial determination, we do not anticipate that the deferred
sales charge will cover all sales and administrative expenses that we will
incur in connection with the Contract.
FUND EXPENSES
Each Fund has an investment adviser which charges a management or investment
advisory fee for its services. These fees are based on each Fund's average net
assets, is and are deducted from the assets of each Fund and paid to the
investment adviser. The Fee Table sets forth the management fee and other
expenses of each Fund for 1994. (See "The Fund--Fund Investment Advisers" for a
list of the Funds' investment advisers.)
Most expenses incurred in the operations of each Fund (except TCI Growth, TCI
Balanced and TCI International) are borne by that Fund. Fund advisers may
reimburse the Funds that they advise for some or all of these expenses. For
further details on each Fund's expenses, you should read the accompanying
prospectus for each Fund and the Fee Table in this Prospectus.
PREMIUM TAX
Several states and municipalities impose a premium tax on Purchase Payments
either when made or when an Annuity option is elected. Currently such taxes
range up to 4%. Ordinarily, any state premium tax will be deducted from the
Certificate Holder's Account Value when it is applied to an Annuity option.
However, we reserve the right to deduct state premium tax at any time from the
Purchase Payment(s) or from the Certificate Holder's Account Value based upon
our determination of when such tax is due.
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Any municipal premium tax assessed at a rate in excess of 1% will be deducted
from the Purchase Payment(s) or from the amount applied to an Annuity option
based on our determination of when such tax is due. We will absorb any
municipal premium tax which is assessed at 1% or less. We reserve the right,
however, to reflect this added expense in our Annuity purchase rates for
residents of such municipalities.
COMMISSIONS AND DISTRIBUTION EXPENSES
We pay Distributors and their registered representatives who sell the Contracts
commissions and service fees. In limited circumstances, we also pay certain of
these professionals compensation, overrides or reimbursement for expenses
associated with the distribution of the Contract. In total, the compensation
amounts are considered equivalent to approximately 7.5% of the Purchase
Payments credited to the Contract over the Contract's estimated life. (See
"Distribution" in this Prospectus.)
We pay these commissions, fees and related distribution expenses out of any
deferred sales charges assessed or out of our general assets, including
investment income and any profit from investment advisory fees and mortality
and expense risk charges. No additional deductions or charges are imposed for
commissions and related expenses.
ADDITIONAL WITHDRAWAL OPTIONS
GENERAL
We offer two withdrawal options that are not considered Annuity options: the
Estate Conservation Option ("ECO") and the Systematic Withdrawal Option
("SWO"). These options are available if your Certificate Holder's Account Value
is at least $25,000 at the time of election and you are at least age 70 1/2 for
ECO or 59 1/2 for SWO. ECO is available only for amounts in an IRA Rollover
Contract, and not for amounts under a Nonqualified Flexible Premium Contract.
Under SWO, Certificate Holders receive a series of partial withdrawals from the
account based on the payment method selected. It is designed for those who want
a periodic income while retaining investment flexibility for amounts
accumulating under the Contract. ECO offers the same investment flexibility as
SWO, but is designed for those who want to receive only the minimum
distribution that the Code requires each year. Under ECO, the Company
calculates the minimum distribution amount required by law and pays that amount
once a year.
Amounts withdrawn for ECO and SWO will be deducted from the Contract in the
same manner as for any other withdrawals during the Accumulation Period except
that no deferred sales charge will be applied. Additionally, where state
regulatory approval has been received, no market value adjustment will be
applied to amounts distributed under an ECO or SWO election. (See your
representative to determine whether the waiver is approved in your state.) (See
"Contract Rights--Withdrawals" and "Charges and Deductions--Deferred Sales
Charge.")
Since ECO and SWO are not Annuity options, the Certificate Holder's Account
retains all the rights and obligations available during the Accumulation
Period, as described in this Prospectus, and is subject to all Accumulation
Period Contract charges. We reserve the right to discontinue the availability
of these withdrawal options and to change the terms for future elections.
Once elected, you or your spousal beneficiary may revoke the applicable
option(s) at any time, by submitting a written request to our Home Office. Any
revocation will apply only to the amounts not yet paid. Once ECO or SWO is
revoked, it may not be elected again.
SWO is different from ECO in the following ways: (1) SWO payments are made for
a fixed dollar amount, fixed time period or fixed percentage whereas ECO
payments vary in dollar amount and can continue indefinitely during your
lifetime; (2) generally, SWO payments will be higher than expected ECO
payments; and (3) ECO is available only for amounts in an Individual Retirement
Annuity Contract, whereas SWO is available under both Individual Retirement
Annuity Contracts and nonqualified deferred annuity contracts. You should
carefully assess your future income needs when considering the election of
these withdrawal options.
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You should consult your tax adviser prior to electing one of these options due
to the potential for adverse tax consequences.
For a discussion of the consequences if you or your Beneficiary dies after SWO
or ECO has been elected, see "Death Benefit."
ESTATE CONSERVATION OPTION
The first distribution may not be made before the calendar year in which the
Certificate Holder attains age 70 1/2. ECO is available only for amounts in an
Individual Retirement Annuity Contract.
We will calculate and distribute an annual amount using the recalculation
method contained in the Code's minimum distribution regulations. You specify
the month you want to receive the distributions and they will be mailed for
receipt by the 15th of that month each year. The annual distribution is
determined each year by dividing the Certificate Holder's Account Value by a
life expectancy factor from tables designated by the Internal Revenue Service
("IRS"). The factor will be based on either your life expectancy or the joint
life expectancy of you and your Beneficiary and will be redetermined for each
calendar year's distribution. The Certificate Holder's Account Value to be used
in this calculation is the Certificate Holder's Value on the December 31st of
the year prior to the year in which the ECO payment is being made. This
calculation will be changed, if necessary, to conform to changes in the Code or
applicable regulations.
SYSTEMATIC WITHDRAWAL OPTION
SWO payments are available on a monthly, quarterly, semiannual or annual basis
and are mailed for receipt by the 15th of the month. Under the Specified
Percentage method, payments will be made until you reach age 70 1/2, or if
elected by your spouse as a Beneficiary, until you would have reached age 70
1/2. You may not make any election that would result in a payment of less than
$500.
You may elect one of the following methods of distribution:
(a) Specified Payment -- payments of a designated dollar amount. The dollar
amount chosen cannot be greater than 10% of the Certificate Holder's
Account Value. The Company may require a minimum payment amount.
(b) Specified Period -- payments for a designated time period. Each annual
distribution is determined by dividing the Certificate Holder's Account
Value by the number of years remaining in the elected period. The
Certificate Holder's Account Value used in this calculation is the
Certificate Holder's Account Value on the December 31st of the year
prior to the year for which the payment is being made. For payments
made more often than annually, the annual payment result (calculated
above) is divided by the number of payments due each year. The
specified period must be at least 10 years but, for IRA Rollover
Contracts, not greater than your life expectancy factor.
(c) Specified Percentage -- payments of a designated percentage. The
specified percentage chosen cannot be greater than 10% of the
Certificate Holder's Account Value. The percentage elected may be
changed every six months. Each annual distribution is determined by
multiplying the Certificate Holder's Account Value by the percentage
chosen. The value used in this calculation is the value on the December
31st of the year prior to the year for which the payment is being made.
For payments made more often than annually, the annual payment result
(calculated above) is divided by the number of the payments due each
year.
Note: For an IRA Rollover Contract, the annual minimum SWO distribution, or
maximum SWO time period, as you direct, will be determined by a life expectancy
factor from tables designated by the IRS. Under both the Specified Payment and
Specified Period payment methods, a higher amount will be paid in any year, if
required under the Code minimum distribution rules. For the initial
distribution year, we will calculate the amount paid based on your single life
expectancy determined from Table V of Section 1.72-9 of the Income Tax
Regulations. For each year thereafter, we will use the life expectancy for the
previous year reduced by one.
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ANNUITY PERIOD
ANNUITY PERIOD ELECTIONS
You must notify us in writing of the Annuity Date and Annuity option elected.
The Certificate Holder's Account will continue in the Accumulation Period until
the Annuity Date. Once Annuity Payments start, the Annuity Date and Annuity
Option cannot be changed. You elect the Annuity Date. Payments may not begin
earlier than one year after purchase, or later than the later of: (a) the first
day of the month following the Annuitant's 85th birthday, or (b) the tenth
anniversary of the last Purchase Payment. As required by the Code,
distributions from an IRA Rollover Contract must begin no later than April 1 of
the calendar year after the calendar year in which you attain age 70 1/2.
At least 30 days before the Annuity Date, you must notify us in writing to
elect or change (a) the date on which Annuity payments are to begin, (b) the
Annuity option, (c) whether the payments are to be made monthly, quarterly,
semiannually or annually, and (d) the investment option(s) to be used to
provide Annuity payments (i.e., a fixed annuity using the general account,
Aetna Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc.,
or any combination thereof). No other Funds may currently be used as investment
options during the Annuity Period. Once Annuity Payments start, no further
changes of Annuity Options may be made. In addition, no further changes may be
made to the selection of variable funding options offered during the Annuity
Period.
The Annuitant's adjusted age is his or her age as of the birthday closest to
the date of the first Annuity payment, reduced by one year for Annuity start
dates occurring during the period from July 1, 1993 through December 31, 1999.
The Annuitant's age (and joint Annuitant's, if applicable) will be reduced by
two years for Annuity start dates occurring during the period from January 1,
2000 through December 31, 2009. The Annuitant's adjusted age (and joint
Annuitant's, if applicable) will be reduced by one additional year for Annuity
start dates in each succeeding decade.
If Annuity payments are elected on a variable basis, the first and subsequent
Annuity payments will also depend on the assumed net investment rate (3 1/2%
annually, unless a 5% annual rate is elected). Use of the 3 1/2% assumed rate
causes a lower first payment, but subsequent payments would increase more
rapidly or decline more slowly as changes occur in the net investment rate. A
5% rate causes a higher first payment, but Annuity payments will increase
thereafter only to the extent that the net investment rate exceeds 5% annually.
Annuity payments would decline if the rate were below 5%.
No election may be made that would result in a first Annuity payment of less
than $50 or total yearly Annuity payments of less than $250 (less if required
by state law). If the Certificate Holder's Account Value on the Annuity start
date is insufficient to elect an option for the minimum amount specified, a
lump-sum payment must be elected. We reserve the right to increase the minimum
first Annuity payment amount and the minimum annual Annuity payment amount
based on increases reflected in the Consumer Price Index-Urban (CPI-U), since
July 1, 1993.
For IRA Rollover Contracts, in determining the amount of Annuity payments, we
must satisfy the minimum distribution incidental death benefit rule described
in IRS regulations. This rule assures that any death benefits payable are
incidental to the primary purpose of the Contract, which is to provide you with
retirement benefits. The amount to be distributed under this rule is determined
based on your age and tables contained in the IRS regulations.
When payments start, the age of the Annuitant plus the number of years for
which payments are guaranteed must not exceed 95.
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ANNUITY OPTIONS
LIFETIME:
(a) Life Annuity -- an Annuity with payments guaranteed to the date of the
Annuitant's death. This option may be elected with payments guaranteed
for a minimum of 5, 10, 15 or 20 years. Because it provides a specified
minimum number of Annuity payments, the election of a guaranteed
payment period results in somewhat lower payment than if a Life Annuity
with no specified number of guaranteed payments had been elected.
(b) Life Income Based Upon the Lives of Two Payees -- An Annuity will be
paid during the lives of the Annuitant and a second Annuitant. Payments
will continue until both Annuitants have died. When this option is
chosen, a choice must be made of:
(i) 100% of the payment to continue after the first death;
(ii) 66 2/3% of the payment to continue after the first death;
(iii) 50% of the payment to continue after the first death;
(iv) Payments for a minimum of 120 months, with 100% of the payment to
continue after the first death; or
(v) 100% of the payment to continue at the death of the second
Annuitant and 50% of the payment to continue at the death of the
Annuitant.
Because (iv) provides a specified minimum number of Annuity payments, the
election of the guaranteed payment period results in somewhat lower
payments.
Payments under any lifetime Annuity option will be determined without regard
to the sex of the Annuitant(s). Such Annuity payments will be based solely on
the age of the Annuitant(s).
If a lifetime option is elected without a guaranteed minimum payment period,
it is possible that only one Annuity payment will be made if the Annuitant
under (a), or the surviving Annuitant under (b), should die prior to the due
date of the second Annuity payment.
Once lifetime Annuity payments begin, you cannot elect to receive a lump-sum
settlement or change elections.
NONLIFETIME:
(a) Payments for a Stated Period of Time -- an Annuity with payments to be
made for five to 30 years, as selected. If this option is elected on a
variable basis, you may request at any time during the payment period
that the present value of all or any portion of the remaining variable
payments be paid in one sum. If elected on a fixed basis, you cannot
elect to receive a lump-sum settlement. However, any lump sum elected
before three years of payments have been completed will be treated as a
withdrawal during the Accumulation Period and any applicable deferred
sales charge will be assessed. (See "Charges and Deductions--Deferred
Sales Charge.") Once an Annuity option is elected on either a variable
or fixed basis, you cannot change elections.
(b) Payment of Interest -- interest payments will be made to your
Beneficiary on all or a portion of the amount payable upon your death
prior to your electing an Annuity Option and allocated to this option.
Amounts under this option are held in our general account. Your
Beneficiary may withdraw any amount held under this option or direct
that any or all of the amount be applied to an Annuity Option.
We make a daily deduction for mortality and expense risks from any amounts
held on a variable basis. (See "Charges and Deductions--Mortality and Expense
Risk Charges.") Therefore, electing the nonlifetime option on a variable basis
will result in a deduction being made even though we assume no mortality risk.
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We may also deduct a daily administrative charge from amounts held under the
variable options. The charge, established when a variable Annuity Option is
elected, will not exceed 0.25% per year of amounts held on a variable basis.
Once established the charge will be effective during the entire Annuity
Period.
In addition to the Annuity Options described, we may offer you and other
payees optional methods of payment.
DEATH BENEFIT
GENERAL
The following section provides information about determining the death benefit
amount, should you or the Annuitant die during the Accumulation Period.
Additional information is given for IRA Rollover Contracts and Nonqualified
Flexible Premium Contracts regarding the rights available and who receives
them in case of the death of you or the Annuitant. In many cases, the rights
available will depend on whether the Beneficiary is your spouse.
In many of the scenarios described below, a deadline is given for receiving
distributions equal to the Certificate Holder's Account Value. According to
the Code, the required amount must be distributed by the deadline given. If
not, the IRS will deem the Beneficiary to be in "constructive receipt" of the
amount, and the Beneficiary may be subject to a penalty tax in addition to any
other income tax due on the amount.
Upon the death of a Joint Certificate Holder prior to the Annuity Date, the
surviving Certificate Holder, if any, will be the designated beneficiary. Any
other beneficiary designation on record with the Company at the time of death
will be treated as a contingent beneficiary, and payments will be made to such
beneficiary only upon the death of the surviving Certificate Holder. Upon the
death of an Annuitant who is not a Certificate Holder, the Death Benefit
Amount will be paid to the beneficiary designated.
Note: We will not allow Annuity payments to a Beneficiary to extend beyond the
Beneficiary's life or any period certain greater than the Beneficiary's life
expectancy.
DEATH BENEFIT AMOUNT
If the Annuitant (or for the Nonqualified Flexible Premium Contract, the
Certificate Holder or the Annuitant) dies before Annuity payments start, the
Beneficiary is entitled to a death benefit. The excess, if any, of the amount
of the guaranteed death benefit over the Certificate Holder's Account Value is
determined as of the date of death. Any excess amount will be deposited to the
Certificate Holder's Account and allocated to Aetna Variable Encore Fund as of
the claim date. The Certificate Holder's Account Value on the claim date plus
any excess amount deposited, becomes the Certificate Holder's Account Value.
The claim date is the date when we receive valid proof of death and the
Beneficiary's claim at our Home Office.
For Nonqualified Flexible Premium Contracts, the death benefit value is
determined as described in items (a), (b), (c) and (d) below. For IRA Rollover
Contracts, the death benefit value is determined as described in items (a),
(b) and (d) below.
(a) Death of Certificate Holder/Annuitant (for IRA Rollover Contracts) or
death of Annuitant (for Nonqualified Flexible Premium Contracts) less
than 75 years of age: The guaranteed death benefit value is the
greatest of:
(1) The Net Purchase Payment(s) made to the Certificate Holder's
Account minus the sum of all amounts withdrawn, applied to an
Annuity, or deducted from the Certificate Holder's Account;
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(2)(i) In jurisdictions where regulatory approval has been received, the
highest step-up value as of the date of death. A step-up value
is determined on each anniversary of the Effective Date. Each
step-up value is calculated as the Certificate Holder's Account
Value on the Effective Date anniversary, increased by the amount
of any Purchase Payment(s) made, and decreased by the amount of
any partial withdrawals and/or amounts applied to an Annuity
Option since the Effective Date anniversary;
(ii) In jurisdictions where regulatory approval for (a)(2)(i) above
has NOT been received, the value will be the step-up value as
of the date of death, minus the total of all partial
withdrawals, amounts applied to an Annuity and deductions made
from the Certificate Holder's Account since determination of
the step-up value. The step-up value is the Certificate
Holder's Account Value on the most recent seventh year
anniversary of the date the Net Purchase Payment was applied.
(3) The Certificate Holder's Account Value as of the date of death.
The excess, if any, of the guaranteed death benefit value over the
Certificate Holder's Account Value is determined as of the date of
death. Any excess amount will be deposited and allocated to Aetna
Variable Encore Fund as of the claim date. The Certificate Holder's
Account Value on the claim date plus any excess amount deposited
becomes the Certificate Holder's Account Value.
(b)Death of Certificate Holder/Annuitant (for IRA Rollover Contracts) or
death of Annuitant (for Nonqualified Flexible Premium Contracts) age 75 or
greater: The death benefit is the greatest of:
(1) The Net Purchase Payments made to the Certificate Holder's Account
minus the sum of all amounts withdrawn, applied to an Annuity, or
deducted from the Certificate Holder's Account;
(2) The highest step-up value as of the Participant's 75th birthday.
The step-up value is calculated as described in (a)(2)(i) above. In
jurisdictions where regulatory approval for (a)(2)(i) has not been
received, the value will be the step-up value as of the
Participant's 75th birthday, determined as described in (a)(2)(ii)
above;
(3) The Certificate Holder's Account Value as of the date of death.
(c) Death of the Certificate Holder if the Certificate Holder is not the
Annuitant (Nonqualified Flexible Premium Contracts only): The death
benefit amount is the Adjusted Account Value on the Claim Date. A
deferred sales charge may apply to any full or partial withdrawal. (See
"Charges and Deductions--Deferred Sales Charge.")
(d) Death of a Spousal Beneficiary: In the case of a spousal beneficiary
who continued the Account in his or her own name, the death benefit
shall be equal to the Certificate Holder's Account Value, less any
applicable deferred sales charge on any Purchase Payment(s) made after
we receive proof of death.
For amounts held in the Marathon Guaranteed Account: The death benefit, if paid
within six months of the date of the Annuitant's death, is the greater of the
Certificate Holder's Account Value or the aggregate market value adjusted (MVA)
amount. If paid after the six-month period, the death benefit will be the
aggregate Market Value Adjustment amount. The aggregate Market Value Adjustment
amount may be more or less than the Certificate Holder's Account Value.
DEATH BENEFIT OPTIONS AVAILABLE TO BENEFICIARY UNDER A NONQUALIFIED FLEXIBLE
PREMIUM CONTRACT
Under a Nonqualified Flexible Premium Contract, prior to any election, the
Certificate Holder's Account Value will remain in the Certificate Holder's
Account and the Account Value will continue to be affected by the investment
performance of the investment option(s) selected. The Beneficiary has the right
to allocate or transfer any amount to any available investment options (subject
to an MVA, as applicable).
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The Code requires that distributions begin within a certain time period as
described below; failure to commence distribution within those time periods can
result in tax penalties. The following options are available to the
Beneficiary:
(a) When you are the Annuitant and you die:
(1) If the Beneficiary is your surviving spouse, the Beneficiary will
become the successor Certificate Holder. The successor Certificate
Holder may exercise all Certificate Holder rights under the
Contract and continue in the Accumulation Period, or may elect (i),
(ii), or (iii) below. Under the Code, distributions are not
required until the successor Certificate Holder's death. The
Beneficiary may:
(i) Apply some or all of the Adjusted Account Value to any of the
Annuity options. The Amount of payout will depend on the annuity
option elected and the investment option(s) used to provide such
payments. The proceeds are taxed in the same manner as annuity
payments. See "Tax Status."
(ii) Elect to have some or all of the Adjusted Account Value
deposited in the Company's general account, earning the then-
current interest rate which may be changed from time to time.
The Beneficiary may elect to receive monthly, quarterly,
semiannual or annual interest payments. The balance on deposit
can be withdrawn at any time or applied to any Annuity option.
The principal amount is guaranteed, but interest payments may
vary; or
(iii) Request, at any time, a lump-sum payment equal to all or a
portion of the Adjusted Account Value.
Under (ii) and (iii) above, payments are taxed as surrenders as they are
received.
(2) If the Beneficiary is not your surviving spouse, he or she may
exercise all Contract or Certificate Holder rights and continue in
the Accumulation Period or may elect option (i), (ii), or (iii)
under (1) above. According to the Code, any portion of the Adjusted
Account Value not applied to an Annuity option (other than the
Nonlifetime Payment of Interest) within one year of your death,
must be paid within five years after your death.
(3) If no Beneficiary exists, a lump-sum payment equal to the Adjusted
Account Value will be made to your estate.
Note: If SWO has been elected, SWO payments to the Beneficiary may be
continued, unless the Beneficiary elects otherwise. Any payments elected must
be made at least as frequently as those made prior to your death.
(b) When you are not the Annuitant and you die:
(1) If the Beneficiary is your surviving spouse, he or she will become
the successor Certificate Holder. The successor Certificate Holder
may exercise all your rights under the Contract and continue in the
Accumulation Period, or may elect (i), (ii), or (iii) below. Under
the Code, distributions are not required until the successor
Certificate Holder's death. The Beneficiary may elect to:
(i) Apply some or all of the Adjusted Account Value to any of the
Annuity options. The amount of payout will depend on the annuity
option elected and the investment option(s) used to provide such
payments. The proceeds are taxed in the same manner as annuity
payments;
(ii) Elect to have some or all of the Surrender Value deposited in
the Company's general account, earning the then-current
interest rate which may be changed from time to time. The
Beneficiary may elect to receive monthly, quarterly, semiannual
or annual interest payments. The balance on deposit can be
withdrawn at any time or applied to any Annuity option. The
principal amount is guaranteed, but interest payments may vary;
or
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(iii) Request, at any time, a lump-sum payment equal to all or a
portion of the Surrender Value.
Under (ii) and (iii) above, payments are taxed as surrenders as they are
received.
(2) If the Beneficiary is not your surviving spouse, he or she may
elect option (i), (ii), or (iii) under (1) above. According to the
Code, any portion of the Adjusted Account Value not applied to one
of the Annuity options (other than the Nonlifetime Payment of
Interest) within one year of your death and must be paid within
five years after your death. This amount will be subject to a
deferred sales charge, if applicable.
(3) If no Beneficiary exists, a lump-sum payment equal to the Surrender
Value will be made to your estate.
Note: If SWO has been elected, the payments to the Beneficiary may be
continued, unless the Beneficiary elects otherwise. Any payments elected must
be made at least as frequently as those made prior to your death.
(c) When you are not the Annuitant and the Annuitant dies: the Beneficiary
must elect an Annuity option (see "Annuity Options") other than the
Nonlifetime Payment of Interest within 60 days of the date of death.
DEATH BENEFIT OPTIONS AVAILABLE TO BENEFICIARY UNDER AN IRA ROLLOVER CONTRACT
Under an IRA Rollover Contract, prior to any election, the Certificate Holder's
Account Value will be retained in the Certificate Holder's Account and the
Account Value will continue to be affected by the investment performance of the
investment option(s) selected. Under the Code, distributions must begin within
a certain time period. If no elections are made, no distributions will be made.
Failure to commence distributions within those time periods can result in tax
penalties. The following options are available to the Beneficiary:
(a) If the Beneficiary is your surviving spouse, he or she may exercise all
rights under the Contract and continue in the Accumulation Period, or
may elect (1), (2), or (3) below. Under the Code, distributions are not
required until December 31st of the year in which you would have
attained age 70 1/2. The Beneficiary may elect to:
(1) Apply some or all of the Adjusted Account Value to the Annuity
options. The amount of payout will depend on the annuity option
elected and the investment option(s) used to provide such payments;
(2) Elect to have some or all of the Adjusted Account Value deposited
in the Company's general account, earning the then-current interest
rate which may be changed from time to time. The Beneficiary may
elect to receive monthly, quarterly, semiannual or annual interest
payments. The balance on deposit can be withdrawn at any time, or
applied to any Annuity option. The principal amount is guaranteed,
but interest amounts may vary; or
(3) Receive, at any time, a lump-sum payment equal to all or any
portion of the Adjusted Account Value.
In general, regardless of the method of payment, payments received by your
Beneficiaries after your death are taxed in the same manner as if you had
received those payments. See "Tax Status."
Note: If ECO is in effect when you die, your surviving spouse can elect to
continue receiving ECO payments if a joint life expectancy was chosen.
Otherwise, your surviving spouse must receive a lump-sum payment of the
Adjusted Account Value. If SWO is in effect and you die before your required
beginning date for minimum distributions the SWO payments will stop and your
surviving spouse may
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elect (1), (2) or (3) above. If SWO is in effect and you die after your
required beginning date for minimum distributions, your surviving spouse can
elect to continue SWO payments. Otherwise, your spouse must elect to receive a
lump sum payment equal to the Adjusted Account Value.
(b) If the Beneficiary is other than your surviving spouse, and ECO is not
in effect when you die, he or she may exercise all rights under the
Certificate Holder's Account and continue in the Accumulation Period or
may elect option (1), (2), or (3) under (a) above. Any portion of the
Adjusted Account Value that is not applied to an Annuity Option (other
than the Nonlifetime Payment of Interest) by December 31st of the year
following the year of your death must be distributed by December 31st
of the year containing the fifth anniversary of your date of death.
Note: If ECO or SWO is in effect when you die, the Beneficiary must receive an
automatic and immediate lump-sum payment of the Adjusted Account Value.
(c) If no Beneficiary exists, a lump-sum payment equal to the Adjusted
Account Value will be made to your estate.
TAX STATUS
INTRODUCTION
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice. This
discussion is not intended to address the tax consequences resulting from all
of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("IRS"). No representation is made as to the
likelihood of the continuation of the present federal income tax laws or of the
current interpretation by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
The Nonqualified Flexible Premium Contract is purchased on a non-tax qualified
basis. The IRA Rollover Contract is purchased and used in connection with
certain arrangements entitled to special income tax treatment under section 408
of the Code. The ultimate effect of federal income taxes on the amounts held
under a Contract, on Annuity Payments, and on the economic benefit to the
Certificate Holder, the Annuitant, or the Beneficiary may depend on the tax
status of the individual concerned.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the Code. Since the
Separate Account is not an entity separate from the Company, and its operation
forms a part of the Company, it will not be taxed separately as a "regulated
investment company" under Subchapter M of the Code or as any other Separate
entity. Investment income and capital gains are automatically applied to
increase reserves under the Contracts. Under existing federal income tax law,
the Company believes that the Separate Account investment income and net
capital gains will not be taxed to the extent that such income and gains are
applied to increase the reserves under the Contracts.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Separate Account and, therefore, the
Company does not intend to make provisions for any such taxes. However, if
changes in the federal tax laws or interpretations thereof result in the
Company being taxed on income or gains attributable to the Separate Account,
then the Company may impose a charge against the Separate Account (with respect
to some or all Contracts) in order to set aside provisions to pay such taxes.
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TAX STATUS OF THE CONTRACT
DIVERSIFICATION: Section 817(h) of the Code requires that with respect to
Nonqualified Flexible Premium Contracts, the investments of the Funds be
"adequately diversified" in accordance with Treasury Regulations in order for
the Contracts to qualify as annuity contracts under federal tax law. The
Separate Account, through the Funds, intends to comply with the diversification
requirements prescribed by the Treasury in Reg. Sec. 1.817-5, which affects how
the Funds' assets may be invested.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In these circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of investment control over the
assets. The ownership rights under the contract are similar to, but different
in certain respects from those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, a Certificate Holder has additional flexibility in allocating premium
payments and account values. In addition, the number of funds provided under
the Contract is significantly greater than the number of funds offered in
contracts on which rulings have been issued. These differences could result in
a Certificate Holder being treated as the owner of a pro rata portion of the
assets of the Separate Account. The Company reserves the right to modify the
Contract as necessary to attempt to prevent a Certificate Holder from being
considered the owner of a pro rata share of the assets of the Separate Account.
REQUIRED DISTRIBUTION: In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires nonqualified
contracts to provide that (a) if any Certificate Holder dies on or after the
annuity date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at
least as rapidly as under the method of distribution being used as of the date
of such owner's death; and (b) if any Certificate Holder dies prior to the
annuity date, the entire interest in the Contract will be distributed within
five years after the date of such Certificate Holder's death. These
requirements will be considered satisfied as to any portion of a Certificate
Holder's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Certificate Holder's death. The "designated beneficiary" refers to a natural
person designated by the Certificate Holder as a Beneficiary and to whom
ownership of the contract passes by reason of death. However, if the
"designated beneficiary" is the surviving spouse of the deceased Certificate
Holder, the contract may be continued with the surviving spouse as the new
Certificate Holder.
The Nonqualified Flexible Premium Contracts contain provisions which are
intended to comply with the requirements of section 72(s) of the Code, although
no regulations interpreting these requirements have yet been issued. The
Company intends to review such provisions and modify them if necessary to
assure that they comply with the requirements of Code section 72(s) when
clarified by regulation or otherwise. Other rules may apply to IRA Rollover
Contracts.
The following discussion is based on the assumption that the Contract qualifies
as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
IN GENERAL: Section 72 of the Code governs taxation of annuities in general.
The Company believes that a Certificate Holder who is a natural person
generally is not taxed on increases in the Contract Value until distribution
occurs by withdrawing all or part of such Contract Value (e.g., withdrawals or
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Annuity payments under the Annuity Option elected). The assignment, pledge, or
agreement to assign or pledge any portion of the Value generally will be
treated as a distribution. The taxable portion of a distribution (in the form
of a single sum payment or an annuity) is taxable as ordinary income.
The following discussion generally applies to a Contract owned by a natural
person.
WITHDRAWALS: In the case of a withdrawal under an IRA Rollover Contract,
including withdrawals under SWO or ECO, the amount taxable is generally based
on the ratio of the "investment in the contract" to Contract Value. The
"investment in the contract" generally equals the amount of any nondeductible
Purchase Payments paid by or on behalf of any individual less any amount
received previously which was excludable from gross income. For an IRA Rollover
Contract, the "investment in the contract" can be zero. Special tax rules may
be available for certain distributions from an IRA Rollover Contract.
With respect to Nonqualified Flexible Premium Contracts, partial withdrawals,
including withdrawals under SWO, are generally treated as taxable income to the
extent that the Contract Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. The Contract Value immediately
before a withdrawal may have to be increased by any positive market value
adjustment (MVA) that results from such a withdrawal. There is, however, no
definitive guidance on the proper tax treatment of MVAs in these circumstances,
and a Certificate Holder should contact a competent tax advisor with respect to
the potential tax consequences of any MVA that arises as a result of a partial
withdrawal.
Full withdrawals of a Nonqualified Flexible Premium Contract are treated as
taxable income to the extent that the amount received exceeds the "investment
in the contract."
ANNUITY PAYMENTS: Although the tax consequences may vary depending on the
Annuity payment elected under the Contract, in general, only the portion of the
Annuity payment that represents the amount by which the Contract Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is recovered, the full amount of any additional Annuity payments is
taxable. For Variable Annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract." For
Fixed Annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the Annuity payments for the term of the
payments; however, the remainder of each Annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional Annuity payments is taxable. If Annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
PENALTY TAX: In the case of a distribution pursuant to a Nonqualified Flexible
Premium Contract, there may be imposed a federal income tax penalty equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty tax on distributions: (1) made on or after the date on which the
taxpayer attains age 59 1/2; (2) made as a result of death or disability of a
Certificate Holder; (3) received in substantially equal periodic payments as a
life annuity or a joint and survivor annuity for the lives or life expectancies
of the Certificate Holder and a "designated beneficiary." Other tax penalties
may apply to certain distributions pursuant to an IRA Rollover Contract.
TAXATION OF DEATH BENEFIT PROCEEDS: Amounts may be distributed from the
Contract because of the death of a Certificate Holder or the Annuitant.
Generally, such amounts are includible in the income of the recipient as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as Annuity payments, as described
above.
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TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF THE CONTRACT: A transfer of ownership
of a Contract, the designation of an Annuitant, Payee or other Beneficiary who
is not also a Certificate Holder, the selection of certain Annuity Dates, or
the exchange of a Contract may result in certain tax consequences that are not
discussed herein. Assignments or transfers of ownership of an IRA Rollover
Contract are not allowed except as permitted under Code Section 408(d)(6),
coincident to a divorce. Anyone contemplating any such designation, transfer,
assignment, selection, or exchange should contact a competent tax adviser with
respect to the potential tax effects of such a transaction.
MULTIPLE CONTRACTS: All deferred nonqualified annuity contracts that are issued
by the Company (or its affiliates) to the same owner during any calendar year
are treated as one annuity contract for purposes of determining the amount
includible in gross income under section 72(e) of the Code. In addition, the
Treasury Department has specific authority to issue regulations that prevent
the avoidance of section 72(e) through the serial purchase of annuity contracts
or otherwise. Congress has also indicated that the Treasury Department may have
authority to treat the combination purchase of an immediate annuity contract
and separate deferred annuity contracts as a single annuity contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws.
IRA ROLLOVER CONTRACTS
IN GENERAL: The qualified contract is designed for use as an Individual
Retirement Annuity. The tax rules applicable to participants and beneficiaries
in Individual Retirement Annuities are complex. Special favorable tax treatment
may be available for certain types of contributions and distributions. Adverse
tax consequences may result from contributions in excess of specified limits;
distributions prior to age 59 1/2 (subject to certain exceptions);
distributions that do not conform to specified commencement and minimum
distribution rules; aggregate distributions in excess of a specified annual
amount; and in other specified circumstances.
INDIVIDUAL RETIREMENT ANNUITIES: Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity or Individual Retirement Account, each
hereinafter referred to as an "IRA." Also, distributions from certain other
types of qualified plans may be "rolled over" on a tax-deferred basis into an
IRA. The sale of a contract for use with an IRA may be subject to special
disclosure requirements of the Internal Revenue Service. Purchasers of a
Contract for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other appropriate agency. Such
purchasers will have the right to revoke their purchase within 7 days of the
earlier of the establishment of the IRA or their purchase. A Contract issued in
connection with an IRA will be amended as necessary to conform to the
requirements of the Code. Purchasers should seek competent advice as to the
suitability of the Contract for use with IRAs.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions.
POSSIBLE CHANGES IN TAXATION
In past years, legislation has been proposed that would have adversely modified
the federal taxation of certain annuities. For example, one such proposal would
have changed the tax treatment of nonqualified annuities that did not have
"substantial life contingencies" by taxing income as it is credited to the
annuity. Although as of the date of this prospectus Congress is not actively
considering any legislation regarding the taxation of annuities, there is
always the possibility that the tax treatment of annuities could change by
legislation or other means (such as IRS regulations, revenue rulings, judicial
decisions, etc.). Moreover, it is also possible that any change could be
retroactive (that is, effective prior to the date of the change).
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OTHER TAX CONSEQUENCES
As noted, above, the foregoing discussion of the federal income tax
consequences is not exhaustive and special rules are provided with respect to
other tax situations not discussed in this Prospectus. Further, the federal
income tax consequences discussed herein reflect the Company's understanding of
the current law and the law may change. Federal estate and gift tax
consequences of ownership or receipt of distributions under the Contract depend
on the individual circumstances of each Certificate Holder or recipient of a
distribution. A competent tax adviser should be consulted for further
information.
MISCELLANEOUS
VOTING RIGHTS
Each Contract Holder may direct us in the voting of shares at shareholders'
meetings of the appropriate Fund(s). The number of votes to which each Contract
Holder may give direction will be determined as of the record date. The number
of votes each Contract Holder is entitled to direct with respect to a
particular Fund during the Accumulation Period equals the portion of the
Certificate Holder's Account Value(s) of the Contract attributable to that
Fund, divided by the net asset value of one share of that Fund. During the
Annuity Period, the number of votes is equal to the Valuation Reserve for the
portion of the Contract attributable to that Fund, divided by the net asset
value of one share of that Fund. In determining the number of votes, fractional
votes will be recognized. Where the value of the Contract or Valuation Reserve
relates to more than one Fund, the calculation of votes will be performed
separately for each Fund.
If you are a Participant under a group Contract, you have a fully vested (100%)
interest in the benefits provided to you under your Certificate Holder's
Account. Therefore, you may instruct the group Contract Holder how to direct
the Company to cast the votes for the portion of the value or Valuation Reserve
attributable to your Certificate Holder's Account. Votes attributable to those
Certificate Holders who do not instruct the group Contract Holder will be cast
by the Company in the same proportion as votes for which instructions have been
received by the group Contract Holder. Votes attributable to individual or
group Contract Holders who do not direct us will be cast by us in the same
proportion as votes for which directions we have received.
You will receive a notice of each meeting of shareholders, together with any
proxy solicitation materials, and a statement of the number of votes
attributable to your Certificate Holder's Account.
MODIFICATION OF THE CONTRACT
The Company may modify the Contract when it deems an amendment appropriate,
subject to the limitations described below, by notifying the Contract Holder in
writing 30 days before the effective date of the change. The following Contract
provisions are considered material by the Company and cannot be changed without
the approval of appropriate state or federal regulatory authorities:
(a) transfers among investment options;
(b) notification to the Contract Holder;
(c) conditions governing payments of surrender values;
(d) terms of Annuity Options;
(e) death benefit payments; and
(f) contract charges.
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In addition, changes to the items listed below will apply only to new
Certificate Holders' Accounts establishing under a group Contract, or
individual Contracts issued after the effective date of the change:
(a) the Annuity Options;
(b) the contractual promise that no deduction will be made from the
Purchase Payment for sales or administrative expenses;
(c) increasing the deferred sales charges;
(d) increasing the mortality and expense risk charges;
(e) increasing the administrative charge;
(f) the right to make transfers; and
(g) the Marathon Guaranteed Account Guaranteed Rate.
Modification of items (b) through (e) above specifically require authorization
by the SEC to the extent that the proposed changes are not currently authorized
by existing orders issued to us by the SEC.
If the group Contract Holder has not accepted the proposed change at the time
of its effective date, no new Certificate Holder's Accounts may be opened under
the group Contract.
No modification may affect any Annuity beginning before the effective date of
the change unless deemed necessary for the Contract to comply with the
requirements of the Code or other laws and regulations affecting the Contract.
INQUIRIES
You may direct inquiries by writing directly to us at the address shown on the
cover page of this Prospectus or by calling 1-800-531-4547.
TELEPHONE TRANSFERS
You automatically have the right to make transfers among Funds by telephone.
The Company has enacted procedures to prevent abuses of Certificate Holder's
Account transactions by telephone. The procedures include requiring the use of
a personal identification number (PIN) in order to execute transactions. You
are responsible for safeguarding your PIN, and for keeping your Account
information confidential. If the Company fails to follow these procedures it
would be liable for any losses to your Certificate Holder's Account resulting
from the failure. To ensure authenticity, the Company records all calls on the
800 line.
TRANSFER OF OWNERSHIP; ASSIGNMENT
Assignments or transfers of ownership of an IRA Rollover Contract are not
allowed except as permitted under Code Section 408(d)(6), coincident to a
divorce. We will accept assignments or transfers of ownership of a Nonqualified
Flexible Premium Contract, with proper notification. The date of any such
transfer will be the date we receive the notification at our Home Office. Refer
to "Tax Status of Distributions" for general tax information. If you are
contemplating a transfer of ownership or assignment you should consult a tax
adviser due to the potential for tax liability.
LEGAL PROCEEDINGS
The Company knows of no material legal proceedings pending to which Account B
is a party or which would materially affect the Separate Account.
LEGAL MATTERS
The validity of the securities offered by this Prospectus has been passed upon
by Susan E. Bryant, Esq., Counsel to the Company.
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STATEMENT OF ADDITIONAL INFORMATION -- TABLE OF CONTENTS
The following items are the contents of the Statement of Additional
Information:
<TABLE>
<S> <C>
General Information and History............................................. 2
Variable Annuity Account B.................................................. 2
Offering and Purchase of Contracts.......................................... 3
Performance Data............................................................ 3
General................................................................... 3
Average Annual Total Return Quotations.................................... 4
Dollar-Cost Averaging....................................................... 6
Sales Material.............................................................. 7
Annuity Payments............................................................ 7
Independent Auditors........................................................ 7
Financial Statements of the Separate Account................................ S-1
Financial Statements of the Company......................................... F-1
</TABLE>
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APPENDIX
MARATHON GUARANTEED ACCOUNT
THE MARATHON GUARANTEED ACCOUNT ("MGA") IS A GUARANTEED INTEREST OPTION
AVAILABLE DURING THE ACCUMULATION PERIOD UNDER THE CONTRACTS DESCRIBED IN THIS
PROSPECTUS. SINCE MGA IS A FUNDING OPTION UNDER THE CONTRACT, YOU SHOULD READ
THE ACCOMPANYING MGA PROSPECTUS CAREFULLY BEFORE INVESTING. THIS APPENDIX IS
INTENDED AS A SUMMARY DESCRIPTION OF MGA AND IS NOT INTENDED AS A REPLACEMENT
FOR THE MARATHON GUARANTEED ACCOUNT PROSPECTUS.
GENERAL
MGA is a guaranteed interest option for which we guarantee stipulated rates of
interest for stated periods of time on amounts applied to MGA. For guaranteed
terms of one year or less, a guaranteed rate is credited for the full term. For
guaranteed rates of greater than one year, the initial guaranteed rate is
credited from the date of deposit to the end of a specified period within the
guaranteed term. The interest rate stipulated is an annual effective yield;
that is, it reflects a full year's interest. Interest is credited daily at a
rate that will provide the guaranteed annual effective yield over the period of
one year. Guaranteed interest rates will never be less than an annual effective
rate of 3%.
During the deposit period, amounts may be applied to any of the available
guaranteed terms. Purchase Payments received after the initial payment will be
allocated in the same proportions as the last allocation, if no new allocation
instructions are received with the Purchase Payment. For amounts allocated to
the Marathon Guaranteed Account, if the same guaranteed term(s) are not
available, the next shortest term will be used. If no shorter guaranteed term
is available, the next longer guaranteed term will be used.
WITHDRAWALS
Except for transfers from the one-year Guaranteed Term in connection with the
Dollar Cost Averaging Program and withdrawals taken in connection with an
Estate Conservation or Systematic Withdrawal distribution option (where state
regulatory approval has been received), withdrawals or transfers from a
guaranteed term before the guaranteed term matures may be subject to a market
value adjustment ("MVA"). An MVA reflects the change in the value of the
investment due to changes in interest rates since the date of deposit. When
interest rates increase after the date of deposit, the value of the investment
decreases, and the MVA is negative. Conversely, when interest rates decrease
after the date of deposit, the value of the investment increases, and the MVA
is positive. It is possible that a negative MVA could result in you receiving
an amount that is less than the amount you allocated to MGA.
For partial withdrawals during the Accumulation Period, amounts to be withdrawn
from the MGA will be withdrawn on a pro rata basis from each group of deposits
having the same length of time until the Maturity Date ("Guaranteed Term
Group"). Within a Guaranteed Term Group, the amount will be withdrawn first
from the oldest Deposit Period, then from the next oldest, and so on until the
amount requested is satisfied.
MATURITY OF A GUARANTEED TERM
As a guaranteed term matures, assets accumulating under MGA may be (a)
transferred to a new guaranteed term, (b) transferred to any other available
investment options, or (c) withdrawn. Amounts withdrawn may be subject to a
deferred sales charge. If no direction is received by the Company at its Home
Office by the maturity date of a guaranteed term, the amount from the maturing
guaranteed term will be transferred to the current deposit period for a similar
length guaranteed term. If the same guaranteed term is no longer available the
next shortest guaranteed term available in the current deposit period will be
used. If no shorter guaranteed term is available, the next longer guaranteed
term will be used.
43
<PAGE>
If you do not provide instructions concerning the maturity value of a maturing
guaranteed term, the maturity value transfer provision applies. This provision
allows you to transfer without an MVA to available guaranteed terms of the
current deposit period or to other available investment options, or surrender
without an MVA (if applicable, a deferred sales charge is assessed on the
surrendered amount). The provision is available only during the calendar month
immediately following a guaranteed term maturity date and only applies to the
first transaction regardless of the amount involved in the transaction.
MORTALITY AND EXPENSE RISK CHARGES
We make no deductions from the credited interest rate for mortality and expense
risks; these risks are considered in determining the credited rate.
TRANSFERS
Amounts applied to a guaranteed term during a deposit period may not be
transferred to any other funding option or to another guaranteed term during
that deposit period or for 90 days after the close of that deposit period. This
does not apply to (1) amounts transferred on the Maturity Date or under the
maturity value transfer provision; (2) amounts transferred from the Guaranteed
Account before the Maturity Date due to the election of an Annuity option; (3)
amounts transferred from the one-year Guaranteed Term in connection with the
Dollar Cost Averaging Program; and (4) amounts distributed under the Estate
Conservation or Systematic Withdrawal distribution. Transfers after the 90-day
period are permitted from guaranteed term(s) to other guaranteed term(s)
available during a deposit period or to other available investment options.
Except for transactions described in items (1), (3) and (4) above, amounts
withdrawn or transferred from the Guaranteed Account prior to the maturity date
will be subject to a Market Value Adjustment. These waivers are subject to
regulatory approval and may not be available in all states. See your
representative to determine whether the waiver is approved in your state.
Transfers of MGA values on or within one calendar month of a term's maturity
date are not counted as one of the 12 free transfers of accumulated values in
the Certificate Holder's Account.
The Certificate Holder may select a maximum of 18 different funding options
over the lifetime of the Contract. Under the MGA, each guaranteed term is
counted as one funding option. If a guaranteed term matures, and is renewed for
the same term, it will not count as an additional funding option.
DEATH BENEFIT
Full and partial withdrawals and transfers made from the MGA within six months
after the date of the Annuitant's death will be the greater of:
(a) The aggregate MVA amount (i.e., the sum of all market value adjusted
amounts calculated due to a withdrawal of amounts). This total may be
greater or less than the Certificate Holder's Account Value of those
amounts; or
(b) The applicable portion of the Certificate Holder's Account Value
attributable to MGA.
After the six-month period, the surrender or transfer amount will be
adjusted for the aggregate MVA amount, which may be greater or less than
the Certificate Holder's Account Value of those amounts.
By notifying us at our Home Office at least 30 days before the Annuity Date,
you may elect to have amounts which have been accumulating under MGA
transferred to Aetna Variable Fund, Aetna Income Shares, Aetna Investment
Advisers Fund, Inc., or any combination thereof, to provide variable Annuity
payments. (MGA cannot be used as an investment option during the Annuity
Period.) Transfers made due to the election of a lifetime Annuity Option will
be subject to only a positive aggregate MVA.
44
<PAGE>
REINSTATEMENT PRIVILEGE
Any amounts reinstated to MGA will be applied to the available guaranteed terms
of the current deposit period in the same proportion as they were at the time
of surrender. If a guaranteed term of the same time to maturity is not
available in the current deposit period, the funds will be reinvested in a
guaranteed term having the next shortest time to maturity. Any negative MVA
amount applied to a surrender is not included in the reinstatement.
45
<PAGE>
MARATHON PLUS
VARIABLE ANNUITY ACCOUNT B
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
AETNA LIFE INSURANCE AND ANNUITY COMPANY
HARTFORD, CONNECTICUT
[LOGO OF RECYCLED PAPER APPEARS HERE]
34370SPE-2 (5/95)
<PAGE>
--------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
--------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1995
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Marathon Plus dated May 1, 1995.
A free prospectus is available upon request from the local Aetna Life Insurance
and Annuity Company office or by writing to or calling:
Aetna Life Insurance and Annuity Company
Marathon Service Unit
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-531-4547
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History........................................... 2
Variable Annuity Account B................................................ 2
Offering and Purchase of Contracts........................................ 3
Performance Data.......................................................... 3
General................................................................. 3
Average Annual Total Return Quotations.................................. 4
Annuity Payments.......................................................... 6
Dollar-Cost Averaging..................................................... 7
Sales Material............................................................ 7
Independent Auditors...................................................... 7
Financial Statements of the Separate Account.............................. S-1
Financial Statements of Aetna Life Insurance and Annuity Company.......... F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized in 1976 under the insurance laws of the
State of Connecticut. The Company is a wholly owned subsidiary of Aetna Life
Insurance and Casualty Company which, with its subsidiaries, constitutes one of
the nation's largest diversified financial services organizations. The
Company's Home Office is located at 151 Farmington Avenue, Hartford, Connecticut
06156.
ALIAC, a registered broker-dealer under the Securities Exchange Act of 1934,
serves as the principal underwriter for the Separate Account. ALIAC is also a
registered investment adviser under the Investment Advisers Act of 1940, and
provides investment advice to several of the registered management investment
companies offered as variable investment options under the Contracts funded by
the Separate Account (see "Variable Annuity Account B" below).
Other than the mortality and expense risk charges and administrative expense
charge described in the prospectus, all expenses incurred in the operations of
the Separate Account are borne by the Company. See "Charges and Deductions" in
the prospectus. The Company receives reimbursement for certain administrative
costs from the Funds' investment adviser used as funding options under the
Contract. These fees generally range from 0.10% to 0.25%.
The assets of the Separate Account are held by the Company. The Separate Account
has no custodian. However, the Funds in whose shares the assets of the Separate
Account are invested each have custodians, as discussed in their respective
prospectuses.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity contracts
issued by the Company. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended. The assets of the Separate Account will be invested
exclusively in shares of the mutual funds described in the Prospectus. Purchase
Payments made under the Contract may be allocated to one or more of the variable
investment options. The Company may make additions to or deletions from
available investment options as permitted by law. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts. The Funds currently available
under the Contract are as follows:
2
<PAGE>
<TABLE>
<S> <C>
Aetna Variable Fund Fidelity High Income Portfolio
Aetna Income Shares Fidelity Investment Grade Bond Portfolio
Aetna Variable Encore Fund Fidelity Index 500 Portfolio
Aetna Investment Advisers Fund, Inc. IMS-Equity Growth and Income Fund
Aetna Ascent Variable Portfolio IMS-Utility Fund
Aetna Crossroads Variable Portfolio IMS- U.S. Government Bond Fund
Aetna Legacy Variable Portfolio IMS-Corporate Bond Fund
Alger American Balanced Portfolio Janus Aspen Aggressive Growth Portfolio
Alger American Income and Growth Portfolio Janus Aspen Balanced Portfolio
Alger American Growth Portfolio Janus Aspen Flexible Income Portfolio
Alger American MidCap Growth Portfolio Janus Aspen Growth Portfolio
Alger American Leveraged AllCap Portfolio Janus Aspen Short-Term Bond Portfolio
Alger American Small Cap Portfolio Janus Aspen Worldwide Growth Portfolio
Fidelity Contrafund Portfolio Lexington Emerging Markets Fund
Fidelity Equity-Income Portfolio Lexington Natural Resources Trust
Fidelity Growth Portfolio TCI International
Fidelity Overseas Portfolio TCI Growth
Fidelity Asset Manager Portfolio TCI Balanced
</TABLE>
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
As principal underwriter, ALIAC offers the Contracts through life insurance
agents licensed to sell variable annuities who are registered representatives of
ALIAC or of other registered broker-dealers who have sales agreements with
ALIAC. The offering of the Contracts is continuous. A description of the
manner in which Contracts are purchased may be found in the prospectus under the
sections titled "Contract Purchase" and "Certificate Holder's Account Value."
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the variable options of the Separate Account available under the
Contracts issued by the Company which are described in the Prospectus. The
Company may advertise the "standardized average annual total returns,"
calculated in a manner prescribed by the Securities and Exchange Commission (the
"standardized return"), as well as the "non-standardized total return," both of
which are described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the variable options under the Contract, and then related
to the ending redeemable values over one, three, five and ten year periods (or
fractional periods thereof). The standardized figures reflect the deduction of
all recurring charges during
<PAGE>
each period (e.g., mortality and expense risk charges, maintenance fees,
administrative charges, and deferred sales charges). These charges will be
deducted on a pro rata basis in the case of fractional periods. The maintenance
fee is converted to a percentage of assets based on the average account size
under these contracts and similar contracts funded by the Separate Account.
The non-standardized figures will be calculated in a similar manner, except that
non-standardized figures will not reflect the deduction of any applicable
deferred sales charge (which would decrease the level of performance shown if
reflected in these calculations). The non-standardized figures may also include
a three year period.
For variable options underlying the Separate Account that were in existence
prior to the date the Fund became available under the Contract or the date on
which the Separate Account commenced operations, the standardized and non-
standardized total returns may include periods prior to the date on which such
Fund became available under the Contract. These figures are calculated by
adjusting the actual returns of the Fund to reflect the charges that would have
been assessed under the Contract had that Fund been available under the Contract
during that period.
The total return quotations are based upon historical earnings and are not
necessarily representative of future performance. Investment results of the
Funds will fluctuate over time, and any presentation of the Funds' total return
quotations for any prior period should not be considered as a representation of
how the variable options will perform in any future period. Additionally, your
Contract Value upon redemption may be more or less than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The table shown below reflects the average annual standardized and non-
standardized total return quotation figures for the periods ended December 31,
1994 for the variable options available under the Contract.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Fund
STANDARDIZED NON-STANDARDIZED Inception
Date
-----------------------------------------------------------------------------------------------------------------------------
Installment Payment Contract 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
($30 annual maintenance fee)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund (8.74)% 5.93% 12.51% (2.43)% 2.57% 6.47% 12.51% 04/30/75
-----------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares (11.53)% 6.01% 8.61% (5.19)% 2.76% 6.55% 8.61% 06/01/78
-----------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund (3.71)% 3.02% 4.96% 2.58% 2.14% 3.64% 4.96% 09/01/75
-----------------------------------------------------------------------------------------------------------------------------
* *
Aetna Investment Advisers Fund, Inc. (8.13)% 5.71% 5.95% (1.82)% 3.69% 6.26% 6.42% 06/23/89
-----------------------------------------------------------------------------------------------------------------------------
* *
Alger American Balanced Portfolio (12.00)% 2.59% 2.86% (5.66)% 2.63% 3.21% 3.43% 09/05/89
-----------------------------------------------------------------------------------------------------------------------------
* *
Alger American Income and Growth (15.99)% 5.33% 5.57% (9.62)% 3.43% 5.89% 5.88% 11/14/88
Portfolio
-----------------------------------------------------------------------------------------------------------------------------
* *
Alger American Growth Portfolio (6.33)% 13.28% 14.87% (0.03)% 10.14% 13.67% 15.13% 01/08/89
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
* *
Alger American MidCap Growth Portfolio (9.30)% 15.48% N/A (2.98)% 18.74% N/A N/A 04/30/93
-----------------------------------------------------------------------------------------------------------------------------
* *
Alger American Small Cap Portfolio (12.12)% 11.87% 17.58% (5.78)% 2.39% 12.29% 17.73% 09/20/88
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Fund
STANDARDIZED NON-STANDARDIZED Inception
Date
-----------------------------------------------------------------------------------------------------------------------------
Installment Payment Contract 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
($30 annual maintenance fee)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
* *
Fidelity Asset Manager Portfolio (13.79)% 8.64% 8.17% (7.43)% 6.79% 9.12% 8.62% 09/06/89
-------------------------------------------------------------------------------------------------------------------------------
* *
Fidelity Equity-Income Portfolio (0.76)% 8.42% 9.39% 5.51% 12.32% 8.91% 9.39% 10/22/86
-------------------------------------------------------------------------------------------------------------------------------
* *
Fidelity Growth Portfolio (7.77)% 8.79% 11.06% (1.46)% 7.68% 9.27% 11.06% 11/07/86
-------------------------------------------------------------------------------------------------------------------------------
* *
Fidelity Overseas Portfolio (6.05)% 3.66% 5.51% 0.25% 6.09% 4.25% 5.51% 02/13/87
-------------------------------------------------------------------------------------------------------------------------------
* *
Fidelity High Income Portfolio (9.36)% 11.95% 9.34% (3.03)% 11.78% 12.37% 9.34% 10/11/85
-------------------------------------------------------------------------------------------------------------------------------
* *
Fidelity Investment Grade Bond Portfolio (11.50)% 4.96% 5.82% (5.17)% 2.92% 5.53% 6.14% 12/05/88
-------------------------------------------------------------------------------------------------------------------------------
* *
Fidelity Index 500 Portfolio (6.74)% 3.57% N/A (0.43)% 5.71% N/A N/A 08/27/92
-------------------------------------------------------------------------------------------------------------------------------
* *
IMS-Equity Growth and Income Fund (7.93)% N/A N/A (1.62)% N/A N/A N/A 02/10/94
-------------------------------------------------------------------------------------------------------------------------------
* *
IMS-Utility Fund (13.15)% N/A N/A (6.80)% N/A N/A N/A 02/10/94
-------------------------------------------------------------------------------------------------------------------------------
* *
IMS-U.S. Government Bond Fund (6.45)% N/A N/A (0.14)% N/A N/A N/A 03/28/94
-------------------------------------------------------------------------------------------------------------------------------
* *
IMS-Corporate Bond Fund (16.13)% N/A N/A (9.76)% N/A N/A N/A 03/01/94
-------------------------------------------------------------------------------------------------------------------------------
* *
Janus Aspen Aggressive Growth Portfolio 8.74% 21.77% N/A 14.93% 26.14% N/A N/A 09/13/93
-------------------------------------------------------------------------------------------------------------------------------
* *
Janus Aspen Balanced Portfolio (6.94)% (0.16)% N/A (0.64)% 4.63% N/A N/A 09/13/93
-------------------------------------------------------------------------------------------------------------------------------
* *
Janus Aspen Flexible Income Portfolio (8.47)% (6.38)% N/A (2.16)% (1.46)% N/A N/A 09/13/93
-------------------------------------------------------------------------------------------------------------------------------
* *
Janus Aspen Growth Portfolio (4.89)% (1.37)% N/A 1.40% 3.44% N/A N/A 09/13/93
-------------------------------------------------------------------------------------------------------------------------------
* *
Janus Aspen Short-Term Bond Portfolio (6.85)% (5.42)% N/A (0.55)% (0.53)% N/A N/A 09/13/93
-------------------------------------------------------------------------------------------------------------------------------
* *
Janus Aspen Worldwide Growth Portfolio (6.25)% 9.47% N/A 0.05% 14.07% N/A N/A 09/13/93
-------------------------------------------------------------------------------------------------------------------------------
* *
Lexington Emerging Markets Fund (7.73)% N/A N/A (1.42)% N/A N/A N/A 03/31/94
-------------------------------------------------------------------------------------------------------------------------------
* *
Lexington Natural Resources Trust (13.11)% (5.00)% (2.06)% (6.76)% 1.09% (4.11)% (1.36)% 05/31/89
-------------------------------------------------------------------------------------------------------------------------------
* *
TCI International (11.50)% N/A N/A (5.16)% N/A N/A N/A 05/31/94
-------------------------------------------------------------------------------------------------------------------------------
* *
TCI Growth (9.01)% 6.65% 9.10% (2.69)% 1.12% 7.17% 9.10% 11/20/87
-------------------------------------------------------------------------------------------------------------------------------
* *
TCI Balanced (7.05)% 4.13% N/A (0.74)% (0.85)% 5.40% N/A 05/31/94
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Although results are not available for the full calendar indicated, the
percentage shown is an average annual return since inception.
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Contract or Account is
determined using Accumulation Unit values as of the tenth Valuation Period
before the first Annuity payment is due. Such value (less any applicable premium
tax) is applied to provide an Annuity in accordance with the Annuity and
investment options elected.
6
<PAGE>
The Annuity option tables found in the Contract show, for each form of Annuity,
the amount of the first Annuity payment for each $1,000 of value applied.
Thereafter, variable Annuity payments fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected investment option(s).
The first payment and subsequent payments also vary depending on the assumed net
investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity payments will increase thereafter only to the
extent that the net investment rate increases by more than 5% on an annual
basis. Annuity payments would decline if the rate failed to increase by 5%. Use
of the 3.5% assumed rate causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the net
investment rate.
When the Annuity Period begins, the Annuitant is credited with a fixed number of
Annuity Units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b) where (a)
is the amount of the first Annuity payment based on a particular investment
option and (b) is the then current Annuity Unit value for that investment
option. As noted, Annuity Unit values fluctuate from one Valuation Period to the
next; such fluctuations reflect changes in the net investment factor for the
appropriate Fund(s) (with a ten Valuation Period lag which gives the Company
time to process Annuity payments) and a mathematical adjustment which offsets
the assumed net investment rate of 3.5% or 5% per annum.
The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for the
investment options selected during the Annuity Period.
EXAMPLE:
Assume that, at the date Annuity payments are to begin, there are 3,000
Accumulation Units credited under a particular Contract or Account and that the
value of an Accumulation Unit for the tenth Valuation Period prior to retirement
was $13.650000. This produces a total value of $40,950.
Assume also that no premium tax is payable and that the Annuity table in the
Contract provides, for the option elected, a first monthly variable Annuity
payment of $6.68 per $1000 of value applied; the Annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an Annuity Unit for the Valuation Period in which
the first payment was due was $13.400000. When this value is divided into the
first monthly payment, the number of Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate Fund is 1.0015000
as of the tenth Valuation Period preceding the due date of the second monthly
payment, multiplying this factor by .9999058* (to neutralize the assumed net
investment rate of 3.5% per annum built into the number of Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Annuity Unit value for the prior Valuation Period (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation
Period in which the second payment is due.
7
<PAGE>
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
DOLLAR-COST AVERAGING
The term "dollar-cost averaging" describes a system of investing a uniform sum
of money at regular intervals over an extended period of time. It is based on
the economic fact that buying a variably priced item with a constant sum of
money at fixed intervals results in acquiring more of the item when prices are
low and less of it when prices are high. In order to maximize the effectiveness
of dollar-cost averaging, it is important that investors consider their
financial ability to continue purchasing the securities through periods of high
and low price levels. Investors should also note that no system can protect
against reduced values in a declining market.
SALES MATERIAL
The Company may include hypothetical illustrations in its sales literature that
explain the mathematical principles of dollar cost averaging, compounded
interest, tax deferred accumulation, and the mechanics of variable annuity
contracts. The Company may also discuss the difference between variable annuity
contracts and other types of savings or investment products, including, but not
limited to, personal savings accounts and Certificates of Deposit.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the
independent auditors for the Separate Account and for the Company. The services
provided to the Separate Account include primarily the examination of the
Separate Account's financial statements and the review of filings made with the
SEC.
8
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Independent Auditors' Report
Statement of Assets and Liabilities
Statement of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Condensed Financial Information
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Aetna Life Insurance and Annuity Company and
Contract Owners of Variable Annuity Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account B (the "Account")
as of December 31, 1994, the related statement of operations and condensed fi-
nancial information for the year then ended and the statements of changes in
net assets for each of the years in the two-year period then ended. These fi-
nancial statements and condensed financial information are the responsibility
of the Account's management. Our responsibility is to express an opinion on
these financial statements and condensed financial information based on our au-
dits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed fi-
nancial information are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1994, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant esti-
mates 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 financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial posi-
tion of Aetna Life Insurance and Annuity Company Variable Annuity Account B as
of December 31, 1994, the results of its operations and condensed financial in-
formation for the year then ended and the changes in its net assets for each of
the years in the two-year period then ended in conformity with generally ac-
cepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
January 31, 1995
2
<PAGE>
Variable Annuity Account B
STATEMENT OF ASSETS AND LIABILITIES -- December 31, 1994
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 17,826,130 shares at $26.23 per share (cost
$507,156,445)................................................... $467,568,315
Aetna Income Shares; 5,871,114 shares at $11.72 per share (cost
$74,117,645).................................................... 68,832,108
Aetna Variable Encore Fund; 7,078,396 shares at $12.55 per share
(cost $89,821,997).............................................. 88,823,487
Aetna Investment Advisers Fund, Inc.; 7,752,415 shares at $12.23
per share
(cost $93,379,859).............................................. 94,792,938
Aetna GET Fund, Series B; 1,226,848 shares at $9.92 per share
(cost $12,353,186).............................................. 12,170,153
Alger American Fund--Alger American Small Capitalization
Portfolio; 155,668 shares at $27.31 per share (cost $4,071,354). 4,251,298
Calvert Socially Responsible Series; 5,491 shares at $1.44 per
share (cost $8,462)............................................. 7,912
Fidelity Investments Variable Insurance Products Fund--Equity-
Income Portfolio; 11,086 shares at $15.35 per share (cost
$170,056)....................................................... 170,167
Fidelity Investments Variable Insurance Products Fund--Growth
Portfolio; 8,176 shares at $21.69 per share (cost $170,056)..... 177,333
Insurance Management Series--Corporate Bond Fund; 34,641 shares
at $8.87 per share
(cost $311,414)................................................. 307,263
Insurance Management Series--Equity Growth and Income Fund;
190,609 shares at $9.74 per share (cost $1,862,442)............. 1,856,527
Insurance Management Series--U.S. Government Bond Fund; 12,833
shares at $9.98 per share (cost $128,226)....................... 128,071
Insurance Management Series--Prime Money Fund; 521,201 shares at
$1.00 per share
(cost $521,214)................................................. 521,201
Insurance Management Series--Utility Fund; 43,813 shares at $9.29
per share
(cost $408,580)................................................. 407,020
Janus Aspen Series--Aggressive Growth Portfolio; 99,782 shares at
$13.62 per share (cost $1,346,463).............................. 1,359,035
Janus Aspen Series--Flexible Income Portfolio; 16,574 shares at
$9.48 per share (cost $162,859)................................. 157,121
Janus Aspen Series--Growth Portfolio; 9,169 shares at $10.57 per
share (cost $96,205)............................................ 96,920
Lexington Emerging Markets Fund, Inc.; 1,490 shares at $9.86 per
share (cost $14,968)............................................ 14,692
Lexington Natural Resources Trust; 132,414 shares at $9.71 per
share (cost $1,326,234)......................................... 1,285,738
Neuberger & Berman Advisers Management Trust--Growth Portfolio;
137,169 shares at $20.31 per share (cost $2,851,294)............ 2,785,910
Scudder Variable Life Investment Fund--International Portfolio;
816,372 shares at $10.69 per share (cost $8,944,895)............ 8,727,018
TCI Portfolios, Inc.--TCI Balanced; 5,922 shares at $5.96 per
share (cost $35,156)............................................ 35,294
TCI Portfolios, Inc.--TCI Growth; 4,483,578 shares at $9.21 per
share (cost $40,864,347)........................................ 41,293,756
TCI Portfolios, Inc.--TCI International; 7,444 shares at $4.75
per share (cost $37,331)........................................ 35,359
------------
NET ASSETS........................................................ $795,804,636
============
</TABLE>
3
<PAGE>
Variable Annuity Account B
STATEMENT OF ASSETS AND LIABILITIES -- December 31, 1994 (continued)
Net assets represented by:
<TABLE>
<CAPTION>
ACCUMULATION
UNIT
UNITS VALUE
------------ ------------
<S> <C> <C> <C>
Reserves for annuity contracts in
accumulation period:
AETNA VARIABLE FUND:
Non-Qualified 1964................... 5,159.1 $114.828 $ 592,407
Non-Qualified I...................... 232,142.6 129.838 30,140,993
Non-Qualified II..................... 478,180.1 91.515 43,760,850
Non-Qualified III.................... 2,229,372.7 87.638 195,378,787
Non-Qualified V...................... 11,117,382.8 10.698 118,932,105
Non-Qualified VI..................... 52,441.8 9.993 524,057
Non-Qualified VII.................... 3,178,711.5 10.737 34,130,411
AETNA INCOME SHARES:
Non-Qualified I...................... 16,981.4 39.514 671,004
Non-Qualified II..................... 151,836.3 41.302 6,271,196
Non-Qualified III.................... 699,850.8 39.919 27,937,427
Non-Qualified V...................... 1,988,960.0 10.457 20,799,277
Non-Qualified VI..................... 8,201.1 9.534 78,189
Non-Qualified VII.................... 983,356.7 10.324 10,152,119
AETNA VARIABLE ENCORE FUND:
Non-Qualified I...................... 30,683.2 35.958 1,103,292
Non-Qualified II..................... 194,997.6 36.602 7,137,317
Non-Qualified III.................... 744,594.5 34.450 25,651,159
Non-Qualified V...................... 1,822,449.0 10.509 19,152,951
Non-Qualified VI..................... 3,730.2 10.237 38,185
Non-Qualified VII.................... 3,407,448.2 10.489 35,740,583
AETNA INVESTMENT ADVISERS FUND, INC.:
Non-Qualified I...................... 70,446.9 14.299 1,007,320
Non-Qualified II..................... 679,528.1 14.252 9,684,634
Non-Qualified III.................... 2,044,887.2 14.218 29,074,206
Non-Qualified V...................... 3,541,702.6 10.971 38,856,019
Non-Qualified VII.................... 911,280.6 10.828 9,867,346
AETNA GET FUND, SERIES B:
Non-Qualified V...................... 1,197,924.6 10.159 12,170,153
ALGER AMERICAN FUND--ALGER AMERICAN
SMALL CAPITALIZATION PORTFOLIO:
Non-Qualified V...................... 441,808.5 9.622 4,251,298
CALVERT SOCIALLY RESPONSIBLE SERIES:
Non-Qualified V...................... 752.3 10.518 7,912
FIDELITY INVESTMENTS VARIABLE
INSURANCE PRODUCTS
FUND--EQUITY-INCOME PORTFOLIO:
Non-Qualified VII.................... 17,012.8 10.002 170,167
FIDELITY INVESTMENTS VARIABLE
INSURANCE PRODUCTS
FUND--GROWTH PORTFOLIO:
Non-Qualified VII.................... 17,012.8 10.423 177,333
</TABLE>
4
<PAGE>
Variable Annuity Account B
STATEMENT OF ASSETS AND LIABILITIES -- December 31, 1994 (continued)
<TABLE>
<CAPTION>
ACCUMULATION
UNIT
UNITS VALUE
------------ ------------
<S> <C> <C> <C>
INSURANCE MANAGEMENT SERIES--CORPORATE
BOND FUND:
Non-Qualified VII...................... 31,308.6 $ 9.814 $ 307,263
INSURANCE MANAGEMENT SERIES--EQUITY
GROWTH AND INCOME FUND:
Non-Qualified VII...................... 188,707.5 9.838 1,856,527
INSURANCE MANAGEMENT SERIES--U.S.
GOVERNMENT BOND FUND:
Non-Qualified VII...................... 12,713.7 10.073 128,071
INSURANCE MANAGEMENT SERIES--PRIME
MONEY FUND:
Non-Qualified VII...................... 51,948.7 10.033 521,201
INSURANCE MANAGEMENT SERIES--UTILITY
FUND:
Non-Qualified VII...................... 41,190.7 9.881 407,020
JANUS ASPEN SERIES--AGGRESSIVE GROWTH
PORTFOLIO:
Non-Qualified V........................ 131,702.1 10.319 1,359,035
JANUS ASPEN SERIES--FLEXIBLE INCOME
PORTFOLIO:
Non-Qualified V........................ 15,892.7 9.886 157,121
JANUS ASPEN SERIES--GROWTH PORTFOLIO:
Non-Qualified VII...................... 9,587.6 10.109 96,920
LEXINGTON EMERGING MARKETS FUND, INC.:
Non-Qualified VII...................... 1,500.0 9.795 14,692
LEXINGTON NATURAL RESOURCES TRUST:
Non-Qualified V........................ 141,075.6 9.079 1,280,873
Non-Qualified VII...................... 537.2 9.056 4,865
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST--GROWTH PORTFOLIO:
Non-Qualified V........................ 228,369.5 12.199 2,785,910
SCUDDER VARIABLE LIFE INVESTMENT FUND--
INTERNATIONAL PORTFOLIO:
Non-Qualified V........................ 652,629.7 13.372 8,727,018
TCI PORTFOLIOS, INC.--TCI BALANCED:
Non-Qualified VII...................... 3,476.6 10.152 35,294
TCI PORTFOLIOS, INC.--TCI GROWTH:
Non-Qualified II....................... 568,153.8 10.213 5,802,835
Non-Qualified III...................... 1,340,758.1 10.123 13,573,082
Non-Qualified V........................ 1,123,365.7 10.883 12,225,789
Non-Qualified VII...................... 893,534.0 10.847 9,692,050
TCI PORTFOLIOS, INC.--TCI
INTERNATIONAL:
Non-Qualified VII...................... 3,745.4 9.441 35,359
Reserved for annuity contracts in
payment period (Note 1)............... 53,335,014
------------
$795,804,636
============
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Variable Annuity Account B
STATEMENT OF OPERATIONS -- Year Ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends: (Notes 1 and 3)
Aetna Variable Fund............................................. $ 71,958,106
Aetna Income Shares............................................. 4,312,751
Aetna Variable Encore Fund...................................... 2,814,325
Aetna Investment Advisers Fund, Inc............................. 3,701,779
Aetna GET Fund, Series B........................................ 423,359
Alger American Fund--Alger American Small Capitalization
Portfolio...................................................... 51,845
Calvert Socially Responsible Series............................. 246
Insurance Management Series--Corporate Bond Fund................ 3,827
Insurance Management Series--Equity Growth and Income Fund...... 4,162
Insurance Management Series--U.S. Government Bond Fund.......... 936
Insurance Management Series--Prime Money Fund................... 2,397
Insurance Management Series--Utility Fund....................... 1,778
Janus Aspen Series--Aggressive Growth Portfolio................. 9,728
Janus Aspen Series--Flexible Income Portfolio................... 4,789
Janus Aspen Series--Growth Portfolio............................ 274
Lexington Emerging Markets Fund, Inc. .......................... 315
Lexington Natural Resources Trust............................... 4,758
Neuberger & Berman Advisers Management Trust--Growth Portfolio.. 113,211
Scudder Variable Life Investment Fund--International Portfolio.. 20,721
TCI Portfolios, Inc.--TCI Balanced.............................. 405
TCI Portfolios, Inc.--TCI Growth................................ 3,234
------------
Total investment income...................................... 83,432,946
Valuation period deductions (Note 2)............................. (8,918,042)
------------
Net investment income............................................ 74,514,904
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales............................................. 213,403,512
Cost of investments sold........................................ 156,402,976
------------
Net realized gain............................................ 57,000,536
Net unrealized gain (loss) on investments:
Beginning of year............................................... 102,069,324
End of year..................................................... (44,356,052)
------------
Net unrealized loss.......................................... (146,425,376)
------------
Net realized and unrealized loss on investments.................. (89,424,840)
------------
Net decrease in net assets resulting from operations............. $(14,909,936)
============
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Variable Annuity Account B
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.............................. $ 74,514,904 $ 34,484,591
Net realized and unrealized gain (loss) on invest-
ments............................................. (89,424,840) 995,346
------------ ------------
Net increase (decrease) in net assets resulting
from operations.................................. (14,909,936) 35,479,937
------------ ------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments........ 170,170,873 115,263,261
Sales and administrative charges deducted by the
Company........................................... (8,045) (68,920)
------------ ------------
Net variable annuity contract purchase payments... 170,162,828 115,194,341
Transfers from the Company for mortality guarantee
adjustments....................................... 537,027 522,820
Transfers from (to) the Company's fixed account op-
tions............................................. (6,000,310) 12,354,531
Redemptions by contract holders.................... (32,737,461) (20,997,172)
Annuity payments................................... (7,564,589) (5,704,047)
Other.............................................. (127,555) 166,934
------------ ------------
Net increase in net assets from unit transactions. 124,269,940 101,537,407
------------ ------------
Change in net assets............................... 109,360,004 137,017,344
NET ASSETS:
Beginning of year.................................. 686,444,632 549,427,288
------------ ------------
End of year........................................ $795,804,636 $686,444,632
============ ============
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Variable Annuity Account B
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Annuity Account B ("Account") is registered under the Investment Com-
pany Act of 1940 as a unit investment trust. The Account is sold exclusively
for use with annuity contracts that may be entitled to tax-deferred treatment
under specific sections of the Internal Revenue Code of 1986, as amended.
The accompanying financial statements of the Account have been prepared in ac-
cordance with generally accepted accounting principles.
A. VALUATION OF INVESTMENTS
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on December 31, 1994:
Aetna Variable Fund Insurance Management Series--
Aetna Income Shares Prime Money Fund
Aetna Variable Encore Fund Insurance Management Series--
Aetna Investment Advisers Fund, Utility Fund
Inc. Janus Aspen Series--Aggressive
Aetna GET Fund, Series B Growth Portfolio
Alger American Fund--Alger Janus Aspen Series--Flexible
American Small Capitalization Income Portfolio
Portfolio Janus Aspen Series--Growth
Calvert Socially Responsible Portfolio
Series Lexington Emerging Markets Fund,
Fidelity Investments Variable Inc.
Insurance Products Fund-- Lexington Natural Resources Trust
Equity-Income Portfolio Neuberger & Berman Advisers
Fidelity Investments Variable Management Trust--Growth
Insurance Products Fund-- Portfolio
Growth Portfolio Scudder Variable Life Investment
Insurance Management Series-- Fund--International Portfolio
Corporate Bond Fund TCI Portfolios, Inc.--TCI
Insurance Management Series-- Balanced
Equity Growth and Income Fund TCI Portfolios, Inc.--TCI Growth
Insurance Management Series--U.S. TCI Portfolios, Inc.--TCI
Government Bond Fund International
B. OTHER
Investment transactions are accounted for on a trade-date basis and divi-
dend income is recorded on the ex-dividend date. The cost of investments
sold is determined by specific identification.
C. FEDERAL INCOME TAXES
The operations of the Account form a part of, and are taxed with, the total
operations of Aetna Life Insurance and Annuity Company ("Company") which is
taxed as a life insurance company under the Internal Revenue Code of 1986,
as amended.
D. ANNUITY RESERVES
Annuity reserves held in the Separate Accounts are computed for currently
payable contracts according to the Progressive Annuity, a49, 1971 Individ-
ual Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983 Group
Annuity Mortality tables using various assumed interest rates not to exceed
seven percent. Mortality experience is monitored by the Company. Charges to
annuity reserves for mortality experience are reimbursed to the Company if
the reserves required are less than originally estimated. If additional re-
serves are required, the Company reimburses the Account.
8
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (continued)
2. VALUATION PERIOD DEDUCTIONS
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the contracts and are paid to the Company.
3. DIVIDEND INCOME
On an annual basis, the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to the
Account are automatically reinvested in shares of the Funds. The Account's
proportionate share of the Funds' undistributed net investment income and
accumulated net realized gain (loss) on investments is included in net
unrealized loss in the Statement of Operations.
Dividends were received from the following Funds:
<TABLE>
<CAPTION>
DATE OF DIVIDEND SOURCE
FUND REINVESTMENT OF DIVIDENDS
---- ---------------- ------------
<S> <C> <C>
Aetna Variable Fund July 20, 1994 Net investment income and net
December 30, 1994 realized gains
-------------------------------------------------------------------------------
Aetna Income Shares July 20, 1994
December 30, 1994 Net investment income
-------------------------------------------------------------------------------
Aetna Variable Encore Fund July 20, 1994
December 30, 1994 Net investment income
-------------------------------------------------------------------------------
Aetna Investment Advisers July 20, 1994 Net investment income and net
Fund, Inc. December 30, 1994 realized gains
-------------------------------------------------------------------------------
Aetna Get Fund, Series B Net investment income and net
December 30, 1994 realized gains
-------------------------------------------------------------------------------
Alger American Fund--Alger
American Small
Capitalization Portfolio May 5, 1994 Net realized gains
-------------------------------------------------------------------------------
Calvert Socially Responsible
Series December 30, 1994 Net investment income
-------------------------------------------------------------------------------
Insurance Management October 21, 1994
Series--Corporate Bond November 21, 1994
Fund December 21, 1994 Net investment income
-------------------------------------------------------------------------------
Insurance Management
Series--Equity Growth and
Income Fund December 21, 1994 Net investment income
-------------------------------------------------------------------------------
Insurance Management October 21, 1994
Series--U.S. Government November 21, 1994
Bond Fund December 21, 1994 Net investment income
-------------------------------------------------------------------------------
Insurance Management November 30, 1994
Series--Prime Money Fund December 30, 1994 Net investment income
-------------------------------------------------------------------------------
Insurance Management October 21, 1994
Series--Utility Fund November 21, 1994
December 21, 1994 Net investment income
</TABLE>
9
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (continued)
3. DIVIDEND INCOME (continued)
<TABLE>
<CAPTION>
DATE OF DIVIDEND SOURCE
FUND REINVESTMENT OF DIVIDENDS
---- ---------------- ------------
<S> <C> <C>
Janus Aspen Series--
Aggressive Growth
Portfolio December 29, 1994 Net investment income
-------------------------------------------------------------------------------
Janus Aspen Series--Flexible
Income Portfolio December 29, 1994 Net investment income
-------------------------------------------------------------------------------
Janus Aspen Series--Growth
Portfolio December 29, 1994 Net investment income
-------------------------------------------------------------------------------
Lexington Emerging Markets Net investment income and net
Fund, Inc. December 29, 1994 realized gains
-------------------------------------------------------------------------------
Lexington Natural Resources
Trust December 29, 1994 Net investment income
-------------------------------------------------------------------------------
Neuberger & Berman Advisers
Management Trust--Growth Net investment income and net
Portfolio February 11, 1994 realized gains
-------------------------------------------------------------------------------
Scudder Variable Life
Investment Fund--
International Portfolio February 28, 1994 Net investment income
-------------------------------------------------------------------------------
TCI Portfolios, Inc.--TCI September 24, 1994
Balanced December 16, 1994 Net investment income
-------------------------------------------------------------------------------
TCI Portfolios, Inc.--TCI April 8, 1994 Net investment income
Growth
</TABLE>
4. PURCHASES AND SALES OF INVESTMENTS
The cost of purchases and proceeds from sales of investments other than
short-term investments for the year ended December 31, 1994 aggregated
$342,561,371 and $213,403,512, respectively.
10
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992.......................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1993............ F-4
Consolidated Statements of Shareholder's Equity for the Years Ended
December 31, 1994, 1993 and 1992....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
11
<PAGE>
INDEPENDENT AUDITOR'S 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, 1994 and
1993, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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, 1994 and 1993,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities and reinsurance contracts. In 1992, the Company changed its
method of accounting for income taxes and postretirement benefits other than
pensions.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 7, 1995
12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premiums......................................... $ 124.2 $ 82.1 $ 72.5
Charges assessed against policyholders........... 279.0 251.5 235.4
Net investment income............................ 917.2 911.9 848.1
Net realized capital gains....................... 1.5 9.5 13.4
Other income..................................... 10.3 9.5 6.7
-------- -------- --------
Total revenue.................................. 1,332.2 1,264.5 1,176.1
-------- -------- --------
Benefits and expenses:
Current and future benefits...................... 852.4 806.4 761.6
Operating expenses............................... 227.2 201.3 213.5
Amortization of deferred policy acquisition
costs........................................... 36.1 37.7 32.9
-------- -------- --------
Total benefits and expenses.................... 1,115.7 1,045.4 1,008.0
-------- -------- --------
Income before federal income taxes and cumulative
effect adjustments................................ 216.5 219.1 168.1
Federal income taxes............................. 71.2 76.2 54.9
-------- -------- --------
Income before cumulative effect adjustments........ 145.3 142.9 113.2
Cumulative effect adjustments, net of tax:
Change in accounting for income taxes............ -- -- 22.8
Change in accounting for postretirement benefits
other than pensions............................. -- -- (13.2)
-------- -------- --------
Net income......................................... $ 145.3 $ 142.9 $ 122.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED BALANCE SHEETS
(MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
ASSETS 1994 1993
------ --------- ---------
<S> <C> <C>
Investments:
Debt securities, available for sale:
(amortized cost: $10,577.8 and $9,783.9).................... $10,191.4 $10,531.0
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $43.3 and $38.3)...... 47.2 45.9
Investment in affiliated mutual funds (cost: $187.2 and
$122.4).................................................... 181.9 126.7
Short-term investments....................................... 98.0 22.6
Mortgage loans............................................... 9.9 10.1
Policy loans................................................. 248.7 202.7
Limited partnership.......................................... 24.4 --
--------- ---------
Total investments........................................ 10,801.5 10,939.0
Cash and cash equivalents...................................... 623.3 536.1
Accrued investment income...................................... 142.2 124.7
Premiums due and other receivables............................. 75.8 67.0
Deferred policy acquisition costs.............................. 1,172.0 1,061.0
Reinsurance loan to affiliate.................................. 690.3 711.0
Other assets................................................... 15.9 12.6
Separate Accounts assets....................................... 7,420.8 6,684.3
--------- ---------
Total assets............................................. $20,941.8 $20,135.7
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Future policy benefits....................................... $ 2,968.1 $ 2,741.8
Unpaid claims and claim expenses............................. 23.8 27.2
Policyholders' funds left with the Company................... 8,901.6 9,003.9
--------- ---------
Total insurance liabilities.............................. 11,893.5 11,698.7
Other liabilities............................................ 302.1 229.7
Federal income taxes:
Current.................................................... 3.4 40.6
Deferred................................................... 233.5 161.5
Separate Accounts liabilities................................ 7,420.8 6,684.3
--------- ---------
Total liabilities........................................ 19,853.3 18,889.0
--------- ---------
Shareholder's equity:
Common capital stock, par value $50 (100,000 shares autho-
rized; 55,000 shares issued and outstanding)................ 2.8 2.8
Paid-in capital.............................................. 407.6 407.6
Net unrealized capital gains (losses)........................ (189.0) 114.5
Retained earnings............................................ 867.1 721.8
--------- ---------
Total shareholder's equity............................... 1,088.5 1,246.7
--------- ---------
Total liabilities and shareholder's equity............... $20,941.8 $20,135.7
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1993 1992
-------- -------- ------
<S> <C> <C> <C>
Shareholder's equity, beginning of year.............. $1,246.7 $ 990.1 $867.4
Net change in unrealized capital gains (losses)...... (303.5) 113.7 (0.1)
Net income........................................... 145.3 142.9 122.8
-------- -------- ------
Shareholder's equity, end of year.................... $1,088.5 $1,246.7 $990.1
======== ======== ======
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................. $ 145.3 $ 142.9 $ 122.8
Cumulative effect adjustments............... -- -- (9.6)
Increase in accrued investment income....... (17.5) (11.1) (8.7)
(Increase) decrease in premiums due and
other receivables.......................... 1.3 (5.6) (19.9)
Increase in policy loans.................... (46.0) (36.4) (32.4)
Increase in deferred policy acquisition
costs...................................... (96.5) (60.5) (60.8)
Decrease in reinsurance loan to affiliate... 27.8 31.8 37.8
Net increase in universal life account
balances................................... 164.7 126.4 130.8
Increase in other insurance reserve
liabilities................................ 65.7 86.1 20.5
Net increase in other liabilities and other
assets..................................... 53.9 7.0 20.2
Decrease in federal income taxes............ (11.7) (3.7) (11.8)
Net accretion of discount on bonds.......... (77.9) (88.1) (75.2)
Net realized capital gains.................. (1.5) (9.5) (13.4)
Other, net.................................. (1.0) 0.2 (0.2)
--------- --------- ---------
Net cash provided by operating activities. 206.6 179.5 100.1
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale........ 3,593.8 473.9 543.3
Equity securities......................... 93.1 89.6 50.6
Investment maturities and collections of:
Debt securities available for sale........ 1,289.2 2,133.3 1,179.2
Short-term investments.................... 30.4 19.7 5.0
Cost of investment purchases in:
Debt securities........................... (5,621.4) (3,669.2) (2,612.2)
Equity securities......................... (162.5) (157.5) (63.0)
Short-term investments.................... (106.1) (41.3) (5.0)
Limited partnership....................... (25.0) -- --
--------- --------- ---------
Net cash used for investing activities.. (908.5) (1,151.5) (902.1)
--------- --------- ---------
Cash Flows from Financing Activities:
Deposits and interest credited for
investment contracts....................... 1,737.8 2,117.8 1,619.6
Withdrawals of investment contracts......... (948.7) (1,000.3) (767.7)
--------- --------- ---------
Net cash provided by financing
activities............................. 789.1 1,117.5 851.9
--------- --------- ---------
Net increase in cash and cash equivalents..... 87.2 145.5 49.9
Cash and cash equivalents, beginning of year.. 536.1 390.6 340.7
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 623.3 $ 536.1 $ 390.6
========= ========= =========
Supplemental cash flow information:
Income taxes paid, net...................... $ 82.6 $ 79.9 $ 54.0
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993, AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiaries, Aetna Insurance Company of America,
Systematized Benefits Administrators, Inc., Aetna Private Capital, Inc. and
Aetna Investment Services, Inc. (collectively, the "Company"). Aetna Life
Insurance and Annuity Company is a wholly owned subsidiary of Aetna Life and
Casualty Company ("Aetna").
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Intercompany transactions have been
eliminated. Certain reclassifications have been made to 1993 and 1992 financial
information to conform to the 1994 presentation.
The Company offers a wide range of life insurance products and annuity
contracts with variable and fixed accumulation and payout options. The Company
also provides investment advisory and other services to affiliated mutual
funds.
Accounting Changes
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the Company adopted Financial Accounting Standard ("FAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
which requires the classification of debt securities into three categories:
"held to maturity", which are carried at amortized cost; "available for sale",
which are carried at fair value with changes in fair value recognized as a
component of shareholder's equity; and "trading", which are carried at fair
value with immediate recognition in income of changes in fair value.
Initial adoption of this standard resulted in a net increase of $106.8 million,
net of taxes of $57.5 million, to net unrealized gains in shareholder's equity.
These amounts exclude gains and losses allocable to experience-rated (including
universal life) contractholders. Adoption of FAS No. 115 did not have a
material effect on deferred policy acquisition costs.
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts
During 1993, the Company adopted FAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts, retroactive to
January 1, 1993. Reinsurance recoverables (previously reported as a reduction
in insurance reserve liabilities) and reinsurance receivables and ceded
unearned premiums are included in premiums due and other receivables. The
adoption of FAS No. 113 did not have a material impact on the Company's 1993
Consolidated Financial Statements.
Accounting for Income Taxes
The Company adopted FAS No. 109, Accounting for Income Taxes, in 1992,
retroactive to January 1, 1992. A cumulative effect benefit of $22.8 million
related to the adoption of this standard is reflected in the 1992 Consolidated
Statement of Income.
17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postretirement Benefits Other Than Pensions
FAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, required that employers accrue the cost and recognize the liability
for providing non-pension benefits to retired employees and agents. Aetna and
the Company implemented FAS No. 106 in 1992, retroactive to January 1, 1992 on
the immediate recognition basis. The cumulative effect charge for all Aetna
employees was reflected in Aetna's 1992 Statement of Income. A cumulative
effect charge of $13.2 million, net of taxes of $7.1 million, related to the
adoption of this standard for Company agents is reflected in the Company's 1992
Consolidated Statement of Income.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of ninety days or less when purchased.
Investments
Debt Securities
At December 31, 1994 and 1993, all of the Company's debt securities are
classified as available for sale and carried at fair value. These securities
are written down (as realized losses) for other than temporary decline in
value. Unrealized gains and losses related to these securities, after deducting
amounts allocable to experience-rated contractholders and related taxes, are
reflected in shareholder's equity.
Fair values for debt 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.
Purchases and sales of debt securities are recorded on the trade date.
Equity Securities
Equity securities are classified as available for sale and carried at fair
value based on quoted market prices or dealer quotations. Equity securities are
written down (as realized losses) for other than temporary declines in value.
Unrealized gains and losses related to such securities are reflected in
shareholder's equity. Purchases and sales are recorded on the trade date.
The investment in affiliated mutual funds represents an investment in the Aetna
Series Fund, Inc., a retail mutual fund which has been seeded by the Company,
and is carried at fair value.
Mortgage Loans and Policy Loans
Mortgage loans and policy loans are carried at unpaid principal balances net of
valuation reserves, which approximates fair value, and are generally secured.
Purchases and sales of mortgage loans are recorded on the closing date.
18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Limited Partnership
The Company's limited partnership investment is carried at the amount invested
plus the Company's share of undistributed operating results and unrealized
gains (losses), which approximates fair value.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of over ninety days and
less than one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business have been deferred. These costs,
all of which vary with and are primarily related to the production of new
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods. For
universal life and certain annuity contracts, such costs are amortized in
proportion to estimated gross profits and adjusted to reflect actual gross
profits. These costs are amortized over twenty years for annuity pension
contracts, and over the contract period for universal life contracts. Deferred
policy acquisition costs are written off to the extent that it is determined
that future policy premiums and investment income or gross profits would not be
adequate to cover related losses and expenses.
Insurance Reserve Liabilities
The Company's liabilities include reserves related to fixed ordinary life,
fixed universal life and fixed annuity contracts. Reserves for future policy
benefits for fixed ordinary life contracts are computed on the basis of assumed
investment yield, assumed mortality, withdrawals and expenses, including a
margin for adverse deviation, which generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 10.50%. Assumed
investment yield is based on the Company's experience. Mortality and withdrawal
rate assumptions are based on relevant Aetna experience and are periodically
reviewed against both industry standards and experience.
Reserves for fixed universal life (included in Future Policy Benefits) and
fixed deferred annuity contracts (included in Policyholders' Funds Left With
the Company) are equal to the fund value. The fund value is equal to cumulative
deposits less charges plus credited interest thereon, without reduction for
possible future penalties assessed on premature withdrawal. For guaranteed
interest options, the interest credited ranged from 4.00% to 5.85% in 1994 and
4.00% to 7.68% in 1993. For all other fixed options, the interest credited
ranged from 5.00% to 7.50% in 1994 and 5.00% to 9.25% in 1993.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the
Progressive Annuity Table (modified), the Annuity Table for 1949, the 1971
Individual Annuity Mortality Table, the 1971 Group Annuity Mortality Table, the
1983 Individual Annuity Mortality Table and the 1983 Group Annuity Mortality
Table, at assumed interest rates ranging from 3.5% to 9.5%. Reserves relating
to contracts with life contingencies are included in Future Policy Benefits.
For other contracts, the reserves are reflected in Policyholders' Funds Left
With the Company.
19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
Premiums are recorded as revenue when due for fixed ordinary life contracts.
Charges assessed against policyholders' funds for cost of insurance, surrender
charges, actuarial margin and other fees are recorded as revenue for universal
life and certain annuity contracts. Policy benefits and expenses are recorded
in relation to the associated premiums or gross profit so as to result in
recognition of profits over the expected lives of the contracts.
Separate Accounts
Assets held under variable universal life, variable life and variable annuity
contracts are segregated in Separate Accounts and are invested, as designated
by the contractholder or participant under a contract, in shares of Aetna
Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna Series Fund Inc.,
which are managed by the Company or other selected mutual funds not managed by
the Company.
Separate Accounts assets and liabilities are carried at fair value except for
those relating to a guaranteed interest option which is offered through a
Separate Account. The assets of the Separate Account supporting the guaranteed
interest option are carried at an amortized cost of $149.7 million for 1994
(fair value $146.3 million) and $31.2 million for 1993 (fair value $33.3
million), since the Company bears the investment risk where the contract is
held to maturity. Reserves relating to the guaranteed interest option are
maintained at fund value and reflect interest credited at rates ranging from
4.5% to 8.38% in 1994 and from 4% to 9.45% in 1993. 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 (losses) of the Separate Accounts are not reflected in the Consolidated
Statements of Income (with the exception of realized capital gains (losses) on
the sale of assets supporting the guaranteed interest option). The Consolidated
Statements of Cash Flows do not reflect investment activity of the Separate
Accounts.
Federal Income Taxes
The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax
benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS
Investments in debt securities available for sale as of December 31, 1994 were
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obliga-
tions of U.S government agencies and
corporations........................ $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states and political
subdivisions........................ 37.9 1.2 -- 39.1
U.S. Corporate securities:
Financial.......................... 2,216.9 3.8 109.4 2,111.3
Utilities.......................... 100.1 -- 7.9 92.2
Other.............................. 1,344.3 6.0 67.9 1,282.4
--------- ------ ------ ---------
Total U.S. Corporate securities.. 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government......................... 434.4 1.2 33.9 401.7
Financial.......................... 368.2 1.1 23.0 346.3
Utilities.......................... 204.4 2.5 9.5 197.4
Other.............................. 46.3 0.8 1.5 45.6
--------- ------ ------ ---------
Total Foreign securities......... 1,053.3 5.6 67.9 991.0
Residential mortgage-backed securi-
ties:
Residential pass-throughs.......... 627.1 81.5 5.0 703.6
Residential CMOs................... 2,671.0 32.9 139.4 2,564.5
--------- ------ ------ ---------
Total Residential mortgage-backed se-
curities............................ 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily mortgage-
backed securities................... 435.0 0.2 21.3 413.9
--------- ------ ------ ---------
Total Mortgage-backed securities. 3,733.1 114.6 165.7 3,682.0
Other loan-backed securities......... 696.1 0.2 16.8 679.5
--------- ------ ------ ---------
Total debt securities available for
sale................................ $10,577.8 $133.4 $519.8 $10,191.4
========= ====== ====== =========
</TABLE>
21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments in debt securities available for sale as of December 31, 1993
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obliga-
tions of U.S. government agencies
and corporations.................... $ 827.2 $ 19.4 $ 6.6 $ 840.0
Obligations of states and political
subdivisions........................ 0.5 -- -- 0.5
U.S. Corporate securities:
Financial.......................... 983.3 49.2 0.7 1,031.8
Utilities.......................... 141.2 12.4 -- 153.6
Other.............................. 704.3 51.6 2.3 753.6
-------- ------ ----- ---------
Total U.S. Corporate securi-
ties.......................... 1,828.8 113.2 3.0 1,939.0
Foreign securities:
Government......................... 289.1 31.7 0.5 320.3
Financial.......................... 365.8 18.5 0.9 383.4
Utilities.......................... 206.2 28.9 0.1 235.0
Other.............................. 30.4 1.3 0.8 30.9
-------- ------ ----- ---------
Total Foreign securities....... 891.5 80.4 2.3 969.6
Residential mortgage-backed securi-
ties:
Residential pass-throughs.......... 1,125.0 218.1 1.7 1,341.4
Residential CMOs................... 4,868.7 318.1 1.1 5,185.7
-------- ------ ----- ---------
Total Residential mortgage-backed se-
curities............................ 5,993.7 536.2 2.8 6,527.1
Commercial/Multifamily mortgage-
backed securities................... 193.0 13.4 0.8 205.6
-------- ------ ----- ---------
Total Mortgage-backed securi-
ties.......................... 6,186.7 549.6 3.6 6,732.7
Other loan-backed securities......... 49.2 0.2 0.2 49.2
-------- ------ ----- ---------
Total debt securities available for
sale................................ $9,783.9 $762.8 $15.7 $10,531.0
======== ====== ===== =========
</TABLE>
At December 31, 1994 and 1993, net unrealized appreciation (depreciation) of
$(386.4) million and $747.1 million, respectively, on available for sale debt
securities included $(308.6) million and $582.8 million, respectively, related
to experience-rated contractholders, which were not included in shareholder's
equity.
22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and fair value of debt securities for the year ended
December 31, 1994 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be restructured,
called, or prepaid.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ---------
(millions)
<S> <C> <C>
Due to mature:
One year or less................................... $ 103.9 $ 103.5
After one year through five years.................. 1,965.6 1,920.0
After five years through ten years................. 2,371.3 2,207.0
After ten years.................................... 1,707.8 1,599.4
Mortgage-backed securities......................... 3,733.1 3,682.0
Other loan-backed securities....................... 696.1 679.5
--------- ---------
Total............................................ $10,577.8 $10,191.4
========= =========
</TABLE>
At December 31, 1994 and 1993, debt securities carried at $7.0 million and $7.3
million, respectively, were on deposit as required by regulatory authorities.
The valuation reserve for mortgage loans was $3.1 million and $4.2 million at
December 31, 1994 and 1993, respectively. The carrying value of non-income
producing investments was $0.2 million and $34.3 million at December 31, 1994
and 1993, respectively.
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, 1994 are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
DEBT SECURITIES COST VALUE
--------------- --------- ------
(millions)
<S> <C> <C>
General Electric Capital Corporation.................... $264.9 $252.1
General Motors Corporation.............................. 167.8 161.7
Society National Bank................................... 152.8 143.7
Ford Motor Company...................................... 144.7 142.3
Associates Corporation of North America................. 132.9 131.1
First Deposit Master Trust 1994-1A...................... 114.9 112.1
</TABLE>
The portfolio of debt securities at December 31, 1994 and 1993 included $318
million and $329 million, respectively, (3% of the debt securities for both
years) of investments that are considered "below investment grade". "Below
investment grade" securities are defined to be securities that carry a rating
below BBB-/Baa3, by Standard & Poors/Moody's Investor Services, respectively.
Of these below investment grade assets, $32 million and $39 million, at
December 31, 1994 and 1993, respectively, were investments that were purchased
at investment grade, but whose ratings have since been downgraded.
Included in residential mortgage-back securities are collateralized mortgage
obligations ("CMOs") with carrying values of $2.6 billion and $5.2 billion at
December 31, 1994 and 1993, respectively. The $2.6 billion decline in CMOs from
December 31, 1993 to December 31, 1994 was related primarily to sales
23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and principal repayments. CMO sales of $1.6 billion resulted in net realized
capital gains of $35 million of which $23 million was allocated to experience-
rated contracts. The Company's CMO exposure was reduced as a result of changes
in their risk and return characteristics and to better diversify the risk
profile of the Company's assets. The principal risks inherent in holding CMOs
are prepayment and extension risks related to dramatic decreases and increases
in interest rates whereby the CMOs would be subject to repayments of principal
earlier or later than originally anticipated. At December 31, 1994 and 1993,
approximately 85% and 93%, respectively, of the Company's CMO holdings
consisted of sequential and planned amortization class ("PAC") debt securities
which are subject to less prepayment and extension risk than other CMO
instruments. At December 31, 1994 and 1993, approximately 82% of the Company's
CMO holdings were collateralized by residential mortgage loans, on which the
timely payment of principal and interest was backed by specified government
agencies (e.g., GNMA, FNMA, FHLMC).
If due to declining interest rates, principal was to be repaid earlier than
originally anticipated, the Company could be affected by a decrease in
investment income due to the reinvestment of these funds at a lower interest
rate. Such prepayments may result in a duration mismatch between assets and
liabilities which could be corrected as cash from prepayments could be
reinvested at an appropriate duration to adjust the mismatch.
Conversely, if due to increasing interest rates, principal was to be repaid
slower than originally anticipated, the Company could be affected by a decrease
in cash flow which reduces the ability to reinvest expected principal
repayments at higher interest rates. Such slower payments may result in a
duration mismatch between assets and liabilities which could be corrected as
available cash flow could be reinvested at an appropriate duration to adjust
the mismatch.
At December 31, 1994 and 1993, 4% and 3%, respectively, of the Company's CMO
holdings consisted of interest-only strips (IOs) or principal-only strips
(POs). IOs receive payments of interest and POs receive payments of principal
on the underlying pool of mortgages. The risk inherent in holding POs is
extension risk related to dramatic increases in interest rates whereby the
future payments due on POs could be repaid much slower than originally
anticipated. The extension risks inherent in holding POs, PACs and sequentials
was mitigated by purchasing offsetting positions in IOs. During dramatic
increases in interest rates, IOs would generate more future payments than
originally anticipated.
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much less
than originally anticipated and in some cases could be less than the original
cost of the IO. The risks inherent in IOs are mitigated by holding offsetting
positions in PO's, PACs, and sequentials. During dramatic decreases in interest
rates POs, PACs and sequentials would generate future cash flows much quicker
than originally anticipated.
In 1993, due to declining interest rates and prepayments on the underlying pool
of mortgages, the amortized cost on IO's was written down by $85.4 million. IO
writedowns of $4.7 million, net of $80.7 million allocated to experience-rated
contracts, were reflected in 1993 net realized capital gains (losses). In 1994,
due to increasing interest rates, unrealized gains on IO's increased from $0.5
million at December 31, 1993 to $17.8 million at December 31, 1994. Conversely,
unrealized gains on POs decreased from $36.7 million at December 31, 1993 to
$5.3 million at December 31, 1994. 1994 net realized gains (losses) included
net gains of $10.0 million as a result of sales of IOs and POs (including
amounts allocated to experience-rated contractholders).
24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company did not use derivative instruments (ie., futures, forward
contracts, interest swaps, etc.) for hedging or any other purposes in 1994 or
1993.
The Company does hold investments in certain debt and equity securities with
derivative characteristics (ie., including the fact that their market value is
at least partially determined by, among other things, levels of or changes in
interest rates, prepayment rates, equity markets or credit ratings/spreads).
The amortized cost and fair value of these securities, included in the $10.8
billion investment portfolio, as of December 31, 1994 was as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(millions)
<S> <C> <C>
Collateralized mortgage obligations (including
interest-only and principal-only strips)............ $2,671.0 $2,564.5
Treasury and agency strips:
Principal.......................................... 20.7 21.6
Interest........................................... 104.2 90.2
Mandatorily convertible preferred stock.............. 12.1 11.6
</TABLE>
Investments in available for sale equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
(millions)
<S> <C> <C> <C> <C>
1994
Equity Securities...................... $ 230.5 $ 6.5 $7.9 $ 229.1
------- ----- ---- -------
1993
Equity Securities...................... $ 160.7 $12.0 $0.1 $ 172.6
------- ----- ---- -------
</TABLE>
At December 31, 1994 and 1993, 91% of outstanding policy loans had fixed
interest rates. The fixed interest rates for annuity policy loans ranged from
1% to 3% for individual annuity policies in both 1994 and 1993. The fixed
interest rates for individual life policy loans ranged from 5% to 8% in 1994
and 6% to 8% in 1993. The remaining outstanding policy loans had variable
interest rates averaging 8% in 1994 and 1993. Investment income from policy
loans was $11.5 million, $10.8 million and $9.5 million in 1994, 1993 and 1992,
respectively.
Off-Balance Sheet Financial Instruments
At December 31, 1993, the Company had $149.0 million in outstanding forward
commitments to purchase mortgage-backed securities at a specified future date
and at a specified price or yield. These instruments involve elements of market
risk whereby future changes in market prices may make a financial instrument
less valuable. However, the difference between the fair value at which the
commitments can be settled, and the contractual value of these securities, was
immaterial at December 31, 1993. There were no outstanding forward commitments
at December 31, 1994.
There were no material concentrations of off-balance sheet financial
instruments at December 31, 1994 and 1993.
25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between proceeds received
from investments sold or prepaid, and amortized cost. Net realized capital
gains as reflected in the Consolidated Statements of Income are after
deductions for net realized capital gains (losses) allocated to experience-
rated contracts of $(29.1) million, $(54.8) million and $36.1 million for the
years ended December 31, 1994, 1993, and 1992, respectively. Net realized
capital gains (losses) allocated to experience-rated contracts are deferred and
subsequently reflected in credited rates on an amortized basis. Net unamortized
gains (losses), reflected as a component of Policyholders' Funds Left With the
Company, were $(50.7) million and $(16.5) million at the end of December 31,
1994 and 1993, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and amounted to
$1.1 million and $(98.5) million, of which $0.8 million and $(91.5) million
were allocable to experience-rated contractholders, for the years ended
December 31, 1994 and 1993, respectively. There were no changes to the
valuation reserve or writedowns in 1992. The 1993 losses were primarily related
to writedowns of interest-only mortgage-backed securities to their fair value.
Net realized capital gains (losses) on investments, net of amounts allocated to
experience-rated contracts, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
(millions)
<S> <C> <C> <C>
Debt securities............................................ $1.0 $9.6 $12.9
Equity securities.......................................... 0.2 .1 0.5
Mortgage loans............................................. 0.3 (0.2) --
---- ---- -----
Pretax realized capital gains.............................. $1.5 $9.5 $13.4
==== ==== =====
After-tax realized capital gains........................... $1.0 $6.2 $ 8.8
==== ==== =====
</TABLE>
Gross gains of $26.6 million, $33.3 million and $13.9 million and gross losses
of $25.6 million, $23.7 million and $1.0 million were realized from the sales
of investments in debt securities in 1994, 1993 and 1992, respectively.
Changes in unrealized capital gains (losses), excluding changes in unrealized
capital gains (losses) related to experience-rated contracts, for the years
ended December 31, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -----
(millions)
<S> <C> <C> <C>
Debt securities...................................... $(242.1) $164.3 $ --
Equity securities.................................... (13.3) 10.6 (0.1)
Limited partnership.................................. (1.8) -- --
------- ------ -----
(257.2) 174.9 (0.1)
Deferred federal income taxes (See Note 6)........... 46.3 61.2 --
------- ------ -----
Net change in unrealized capital gains (losses)...... $(303.5) $113.7 $(0.1)
======= ====== =====
</TABLE>
The net change in unrealized capital gains (losses) on debt securities in 1994
and 1993 resulted from the adoption of FAS No. 115. For the year ended December
31, 1992, debt securities were carried at
26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized cost. The unrecorded net appreciation for debt securities carried at
amortized cost (including amounts allocable to experience-rated contracts)
amounted to $612.4 million at December 31, 1992.
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $(308.6) million and $582.8 million at December 31, 1994 and 1993,
respectively, are not included in shareholder's equity. These amounts are
reflected on the Consolidated Balance Sheet in policyholders' funds left with
the Company.
Shareholder's equity included the following unrealized capital gains (losses),
which are net of amounts allocable to experience-rated contractholders, at
December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
(millions)
<S> <C> <C> <C>
Debt securities
Gross unrealized capital gains.................... $ 27.4 $164.3 $ --
Gross unrealized capital losses................... (105.2) -- --
------- ------ ------
(77.8) 164.3 --
Equity securities
Gross unrealized capital gains.................... 6.5 12.0 2.0
Gross unrealized capital losses................... (7.9) (0.1) (0.7)
------- ------ ------
(1.4) 11.9 1.3
Limited Partnership
Gross unrealized capital gains.................... -- -- --
Gross unrealized capital losses................... (1.8) -- --
------- ------ ------
(1.8) -- --
Deferred federal income taxes (See Note 6).......... 108.0 61.7 0.5
------- ------ ------
Net unrealized capital gains (losses)............... $(189.0) $114.5 $ 0.8
======= ====== ======
</TABLE>
4. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(millions)
<S> <C> <C> <C>
Debt securities.................................. $823.9 $828.0 $763.7
Preferred stock.................................. 3.9 2.3 2.8
Investment in affiliated mutual funds............ 5.2 2.9 3.2
Mortgage loans................................... 1.4 1.5 1.8
Policy loans..................................... 11.5 10.8 9.5
Reinsurance loan to affiliate.................... 51.5 53.3 56.7
Cash equivalents................................. 29.5 16.8 16.6
Other............................................ 6.7 7.7 6.4
------ ------ ------
Gross investment income.......................... 933.6 923.3 860.7
Less investment expenses......................... (16.4) (11.4) (12.6)
------ ------ ------
Net investment income............................ $917.2 $911.9 $848.1
====== ====== ======
</TABLE>
27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net investment income includes amounts allocable to experience-rated
contractholders of $677.1 million, $661.3 million and $604.0 million for the
years ended December 31, 1994, 1993 and 1992, respectively. Interest credited
to contractholders is included in Current and Future Benefits.
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The amount of dividends that may be paid to the shareholder in 1995 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.9 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity 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 $70.9 million, $77.6 million and $62.5
million for the years ended December 31, 1994, 1993 and 1992, respectively.
Statutory shareholder's equity was $615.0 million and $574.4 million as of
December 31, 1994 and 1993, respectively.
As of December 31, 1994, the Company does not utilize any statutory accounting
practices which are not prescribed by insurance regulators that, individually
or in the aggregate, materially affect statutory shareholder's equity.
6. FEDERAL INCOME TAXES
The Company is included in the consolidated federal income tax return of Aetna.
Aetna allocates to each member an amount approximating the tax it would have
incurred were it not a member of the consolidated group, and credits the member
for the use of its tax saving attributes in the consolidated return.
As discussed in Note 1, the Company adopted FAS No. 109 as of January 1, 1992
resulting in a cumulative effect benefit of $22.8 million.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted which resulted in an increase in the federal corporate tax rate from
34% to 35% retroactive to January 1, 1993. The enactment of OBRA resulted in an
increase in the deferred tax liability of $3.4 million at date of enactment,
which is included in the 1993 deferred tax expense.
Components of income tax expense (benefits) were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(millions)
<S> <C> <C> <C>
Current taxes (benefits):
Income from operations............................. $ 78.7 $ 87.1 $ 68.0
Net realized capital gains......................... (33.2) 18.1 18.1
------ ------ ------
45.5 105.2 86.1
------ ------ ------
Deferred taxes (benefits):
Income from operations............................. (8.0) (14.2) (17.7)
Net realized capital gains......................... 33.7 (14.8) (13.5)
------ ------ ------
25.7 (29.0) (31.2)
------ ------ ------
Total............................................ $ 71.2 $ 76.2 $ 54.9
====== ====== ======
</TABLE>
28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the following
reasons:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(millions)
<S> <C> <C> <C>
Income before federal income taxes................... $216.5 $219.1 $168.1
Tax rate............................................. 35% 35% 34%
------ ------ ------
Application of the tax rate.......................... 75.8 76.7 57.2
------ ------ ------
Tax effect of:
Excludable dividends............................... (8.6) (8.7) (6.4)
Tax reserve adjustments............................ 2.9 4.7 5.1
Reinsurance transaction............................ 1.9 (0.2) (0.5)
Tax rate change on deferred liabilities............ -- 3.7 --
Other, net......................................... (0.8) -- (0.5)
------ ------ ------
Income tax expense............................... $ 71.2 $ 76.2 $ 54.9
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities under FAS No. 109 at December 31, 1994 and 1993
are presented below:
<TABLE>
<CAPTION>
1994 1993
------ ------
(millions)
<S> <C> <C>
Deferred tax assets:
Insurance reserves........................................... $211.5 $195.4
Net unrealized capital losses................................ 136.3 --
Investment losses not currently deductible................... 15.5 31.2
Postretirement benefits other than pensions.................. 8.4 8.6
Impairment reserves.......................................... -- 7.9
Other........................................................ 28.3 19.3
------ ------
Total gross assets......................................... 400.0 262.4
Less valuation allowance....................................... 136.3 --
------ ------
Deferred tax assets net of valuation......................... 263.7 262.4
Deferred tax liabilities:
Deferred policy acquisition costs............................ 385.2 355.2
Unrealized losses allocable to experience-rated contracts.... 108.0 --
Market discount.............................................. 3.6 5.4
Net unrealized capital gains................................. -- 61.7
Other........................................................ 0.4 1.6
------ ------
Total gross liabilities.................................... 497.2 423.9
------ ------
Net deferred tax liability................................. $233.5 $161.5
====== ======
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized
capital losses were reflected in shareholder's equity without deferred tax
benefits. For federal income tax purposes, capital losses are deductible only
against capital gains in the year of sale or during the carryback and
carryforward periods (three and five years, respectively). Due to the expected
full utilization of capital gains in the carryback period and
29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the uncertainty of future capital gains, a valuation allowance of $28.3 million
related to the net unrealized capital losses has been reflected in
shareholder's equity. In addition, $308.6 million of net unrealized capital
losses related to experience-rated contracts are not reflected in shareholder's
equity since such losses, if realized, are allocable to contractholders.
However, the potential loss of tax benefits on such losses is the risk of the
Company and therefore would adversely affect the Company rather than the
contractholder. Accordingly, an additional valuation allowance of $108.0
million has been reflected in shareholder's equity as of December 31, 1994. Any
reversals of the valuation allowance are contingent upon the recognition of
future capital gains in the Company's federal income tax return or a change in
circumstances which causes the recognition of the benefits to become more
likely than not. Non-recognition of the deferred tax benefits on net unrealized
losses described above had no impact on net income for 1994, but has the
potential to adversely affect future results if such losses are realized.
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, 1994. This amount would be taxed
only under certain conditions. No income taxes have been provided on this
amount since management believes the conditions under which such taxes would
become payable are remote.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions are
being held with the Service with respect to proposed adjustments. However,
management believes there are adequate defenses against, or sufficient reserves
to provide for, such adjustments. The Service has commenced its examinations
for the years 1987 through 1990.
7. BENEFIT PLANS
Employee Pension Plans -- The Company, in conjunction with Aetna, has non-
contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over sixty consecutive months of highest
earnings in a 120 month period). Contributions are determined using the Entry
Age Normal Cost Method and, for qualified plans subject to ERISA requirements,
are limited to the amounts that are currently deductible for tax reporting
purposes. The accumulated benefit obligation and plan assets are recorded by
Aetna. The accumulated plan assets exceed accumulated plan benefits. There has
been no funding to the plan for the years 1992 through 1994, and therefore, no
expense has been recorded by the Company.
Agent Pension Plans -- The Company, in conjunction with Aetna, has a non-
qualified pension plan covering certain agents. The plan provides pension
benefits based on annual commission earnings. The accumulated plan assets
exceed accumulated plan benefits. There has been no funding to the plan for the
years 1992 through 1994, and therefore, no expense has been recorded by the
Company.
Employee Postretirement Benefits -- In addition to providing pension benefits,
Aetna also provides certain postretirement health care and life insurance
benefits, subject to certain caps, for retired employees. Medical and dental
benefits are offered to all full-time employees retiring at age 50 with at
least 15 years of service or at age 65 with at least 10 years of service.
Retirees are required to contribute to the plans based on their years of
service with Aetna.
30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aetna implemented FAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions in 1992 on the immediate recognition basis. The
cumulative effect charge for all Aetna employees was reflected in Aetna's 1992
Statement of Income. Prior to the adoption of FAS No. 106, the cost of
postretirement benefits was charged to operations as payments were made. The
accumulated benefit obligation and plan assets are recorded by Aetna.
Accumulated postretirement benefits exceed plan assets.
The cost to the Company associated with the Aetna postretirement plans for
1994, 1993 and 1992 were $1.0 million, $0.8 million and $0.8 million,
respectively.
Agent Postretirement Benefits -- The Company, in conjunction with Aetna, also
provides certain postemployment health care and life insurance benefits for
certain agents. The impact of recognizing the liability for agent costs was a
cumulative effect adjustment of $13.2 million (net of deferred taxes of $6.8
million) and is reported in the 1992 Consolidated Statement of Income.
The cost to the Company associated to the agents' postretirement plans for
1994, 1993 and 1992 were $0.7 million, $0.6 million and $0.7 million,
respectively.
Incentive Savings Plan -- Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which may
be invested in common stock of Aetna or certain other investments, are matched,
up to 5% of compensation, by Aetna. Pretax charges to operations for the
incentive savings plan were $3.3 million, $3.1 million and $2.8 million in
1994, 1993 and 1992, respectively.
Stock Plans -- Aetna has a stock incentive plan that provides for stock options
and deferred contingent common stock or cash awards to certain key employees.
Aetna also has a stock option plan under which executive and middle management
employees of Aetna may be granted options to purchase common stock of Aetna at
the market price on the date of grant or, in connection with certain business
combinations, may be granted options to purchase common stock on different
terms. The cost to the Company associated to the Aetna stock plans for 1994 and
1993 was $2.3 million, $0.4 million, respectively. The cost for 1992 was
immaterial.
8. RELATED PARTY TRANSACTIONS
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which,
on an annual basis, ranges, depending on the product, from .70% to 1.80% of
their average daily net assets. The Company also receives fees from the
variable life and annuity mutual funds and The Aetna Series Fund for serving as
investment adviser. Under the advisory agreements, the Funds pay the Company a
daily fee which, on an annual basis, ranges, depending on the fund, from .25%
to 1.00% of their average daily net assets. The advisory agreements also call
for the variable funds to pay their own administrative expenses and for The
Aetna Series Fund to pay certain administrative expenses. The Company also
receives fees (expressed as a percentage of the average daily net assets) from
The Aetna Series Fund for providing administration shareholder services and
promoting sales. The amount of compensation and fees received from the Separate
Accounts and Funds, included in Charges Assessed Against Policyholders,
amounted to $104.6 million, $93.6 million and $80.5 million in 1994, 1993 and
1992, respectively. The Company may waive advisory fees at its discretion.
31
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company may, from time to time, make reimbursements to a Fund for some or
all of its operating expenses. Reimbursement arrangements may be terminated at
any time without notice.
Since 1981, all domestic individual non-participating life insurance of Aetna
and its subsidiaries has been issued by the Company. Effective December 31,
1988, the Company entered into a reinsurance agreement with Aetna Life
Insurance Company ("Aetna Life") 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. A $108.0 million commission, paid by the
Company to Aetna Life in 1988, was capitalized as deferred policy acquisition
costs. The Company maintained insurance reserves of $690.3 million and $711.0
million as of December 31, 1994 and 1993, respectively, relating to the
business assumed. In consideration for the assumption of this business, a loan
was established relating to the assets held by Aetna Life which support the
insurance reserves. The loan is being reduced in accordance with the decrease
in the reserves. The fair value of this loan was $630.3 million and $685.8
million as of December 31, 1994 and 1993, respectively, and is based upon the
fair value of the underlying assets. Premiums of $32.8 million, $33.3 million
and $36.8 million and current and future benefits of $43.8 million, $55.4
million and $47.2 million were assumed in 1994, 1993 and 1992, respectively.
Investment income of $51.5 million, $53.3 million and $56.7 million was
generated from the reinsurance loan to affiliate in 1994, 1993 and 1992,
respectively. Net income of approximately $25.1 million, $13.6 million and
$21.7 million resulted from this agreement in 1994, 1993 and 1992,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue from
Aetna Life for the purchase and administration of a life contingent single
premium variable payout annuity contract. In addition, the Company also is
responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $24.2 million and $27.8
million were maintained for this contract as of December 31, 1994 and 1993,
respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement with
Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0
million on any new individual life business, on a yearly renewable term basis.
Premium amounts related to this agreement for 1994, 1993 and 1992 were
immaterial.
Effective December 31, 1992, the Company entered into an assumption reinsurance
agreement with Aetna Life to reinsure a block of approximately 3,500 life
contingent, period certain and deferred lump sum annuities (totaling $175.5
million in premium) issued by the Company to Aetna Casualty to fund its
obligations under structured settlement agreements. The negotiated price
recognized the sale of future profits and included consideration to ALIAC for
the continued administration of the reinsured contracts on behalf of, and in
the name of, Aetna Life.
The Company received no capital contributions in 1994, 1993 or 1992.
Premiums due and other receivables include $27.6 million and $9.8 million due
from affiliates in 1994 and 1993, respectively. Other liabilities include $27.9
million and $26.1 million due to affiliates for 1994 and 1993, respectively.
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges for these services based upon measures appropriate for the
type and nature of service provided.
32
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. 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 recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets.
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.
<TABLE>
<CAPTION>
CEDED TO ASSUMED
DIRECT OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
------ --------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
1994
Premiums:
Life Insurance............................ $ 25.8 $ 6.0 $32.8 $ 52.6
Accident and Health Insurance............. 10.8 9.3 -- 1.5
Annuities................................. 69.9 -- 0.2 70.1
------ ----- ----- ------
Total earned premiums................... $106.5 $15.3 $33.0 $124.2
====== ===== ===== ======
1993
Premiums:
Life Insurance............................ $ 20.9 $ 5.6 $33.3 $ 48.6
Accident and Health Insurance............. 14.4 12.9 -- 1.5
Annuities................................. 31.3 -- 0.7 32.0
------ ----- ----- ------
Total earned premiums................... $ 66.6 $18.5 $34.0 $ 82.1
====== ===== ===== ======
1992
Premiums:
Life Insurance............................ $ 20.8 $ 5.2 $36.8 $ 52.4
Accident and Health Insurance............. 15.1 13.7 -- 1.4
Annuities................................. 18.4 -- 0.3 18.7
------ ----- ----- ------
Total earned premiums................... $ 54.3 $18.9 $37.1 $ 72.5
====== ===== ===== ======
</TABLE>
10. FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(millions)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............. $ 623.3 $ 623.3 $ 536.1 $ 536.1
Short-term investments................ 98.0 98.0 22.6 22.6
Debt securities....................... 10,191.4 10,191.4 10,531.0 10,531.0
Equity securities..................... 229.1 229.1 172.6 172.6
Limited partnership................... 24.4 24.4 -- --
Mortgage loans........................ 9.9 9.9 10.1 10.1
Liabilities:
Investment contract liabilities:
With a fixed maturity............... 826.7 833.5 733.3 795.6
Without a fixed maturity............ 8,074.9 7,870.4 8,196.4 8,099.3
</TABLE>
33
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 expected 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 and liquidity risk, the fair values of all assets and
liabilities should be taken into consideration, not only those above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or dealer
quotations. Where quoted market prices are not available, the carrying amounts
reported in the Consolidated Balance Sheets approximates fair value. Short-term
instruments have a maturity date of one year or less and include cash and cash
equivalents, and short-term investments.
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair value is estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair value is 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. The fair value estimate
of mortgage loans of lower quality, including problem and restructured loans,
is based on the estimated fair value of the underlying collateral.
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.
11. SEGMENT INFORMATION
Effective December 31, 1994, the Company's operations, which previously were
reported in total, will now be reported through two major business segments:
Life Insurance and Financial Services. The Life Insurance segment markets most
types of life insurance including universal life, interest-sensitive whole
life, and term insurance. These products are offered primarily to individuals,
small businesses, employer-sponsored groups and executives of Fortune 2000
companies. The Financial Services segment markets and services individual and
group annuity contracts which offer a variety of funding and distribution
options for personal and employer-sponsored retirement plans that qualify for
tax deferral under sections 401(k) for corporations, 403(b) for hospitals and
educational institutions, 408 for individual retirement accounts, and 457 for
state and local governments and tax exempt healthcare organizations (the
"deferred compensation market"), of the Internal Revenue Code. These contracts
may be immediate or deferred. These products are offered primarily to
individuals, pension plans, small businesses and employer-sponsored groups.
34
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AETNA LIFE AND CASUALTY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(millions)
<S> <C> <C> <C>
Revenue:
Life insurance................................. $ 386.1 $ 371.7 $ 363.6
Financial services............................. 946.1 892.8 812.5
--------- --------- ---------
Total revenue................................ $ 1,332.2 $ 1,264.5 $ 1,176.1
========= ========= =========
Income from continuing operations before income
taxes and cumulative effect adjustments:
Life insurance................................. $ 96.8 $ 98.0 $ 74.6
Financial services............................. 119.7 121.1 93.5
--------- --------- ---------
Total income from continuing operations be-
fore income taxes and cumulative effect ad-
justments................................... $ 216.5 $ 219.1 $ 168.1
Net income:
Life insurance................................. $ 59.8 $ 56.1 $ 45.6
Financial services............................. 85.5 86.8 67.6
--------- --------- ---------
Income before cumulative effect adjustments.. $ 145.3 $ 142.9 $ 113.2
--------- --------- ---------
Cumulative effect adjustments................ -- -- 9.6
--------- --------- ---------
Net income....................................... $ 145.3 $ 142.9 $ 122.8
========= ========= =========
<CAPTION>
1994 1993 1992
--------- --------- ---------
(millions)
<S> <C> <C> <C>
Assets under management, at fair value:
Life insurance................................. $ 2,175.2 $ 2,180.1 $ 1,973.1
Financial services............................. 17,791.9 16,600.5 13,644.3
--------- --------- ---------
Total assets under management................ $19,967.1 $18,780.6 $15,617.4
========= ========= =========
</TABLE>
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY ACCOUNT B
VARIABLE ANNUITY CONTRACTS
issued by
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Form No. 34370(S) ALIAC Ed. May 1995
<PAGE>
VARIABLE ANNUITY ACCOUNT B
PART C - OTHER INFORMATION
<TABLE>
<CAPTION>
Item 24. Financial Statements and Exhibits
-------------------------------------------
<S> <C>
(a) Financial Statements:
(1) Included in Part A:
Condensed Financial Information
(2) Included in Part B:
Financial Statements of Variable Annuity Account B:
- Independent Auditors' Report
- Statement of Assets and Liabilities as of December 31, 1994
- Statement of Operations for the year ended December 31, 1994
- Statements of Changes in Net Assets for the years ended December 31, 1994
and 1993
- Notes to Financial Statements
Financial Statements of the Depositor:
- Independent Auditors' Report
- Consolidated Balance Sheets as of December 31, 1994 and 1993
- Consolidated Statements of Income for the years ended December 31, 1994,
1993 and 1992
- Consolidated Statements of Changes in Shareholder's Equity for the years
ended December 31, 1994, 1993 and 1992
- Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992
- Notes to Consolidated Financial Statements
(b) Exhibits
(1) Resolution of the Board of Directors of Aetna Life Insurance and Annuity
Company establishing Variable Annuity Account B/1/
(2) Not applicable
(3.1) Form of Selling Agreement/2/
(3.2) Alternative Form of Wholesaling Agreement and Related Selling Agreement/3/
(4.1) Form of Variable Annuity Contract (G-CDA-IC(NQ))/2/
(4.2) Form of Variable Annuity Contract (GMCC-IC(NQ))/2/
(4.3) Form of Variable Annuity Contract (G-CDA-IC(IR))/2/
(4.4) Form of Variable Annuity Contract (GMCC -IC(IR))/2/
(4.5) Form of Variable Annuity Contract (I-CDA-IC(NQ/MP))/2/
(4.6) Form of Variable Annuity Contract (I-CDA-IC(IR/MP))/2/
(5.1) Form of Variable Annuity Contract Application (300-MAR-IB)/2/
(5.2) Form of Variable Annuity Contract Application (710.6.13)/2/
(6) Certificate of Incorporation and By-Laws of Depositor/4/
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(7) Not applicable
(8.1) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company, Alger American Fund and Fred Alger Management, Inc. dated
September 1, 1993/3/
(8.2) Fund Participation Agreement by and among Aetna Life Insurance and Annuity
Company, Insurance Management Series and Federated Advisors/5/
(8.3) Fund Participation Agreements between Aetna Life Insurance and Annuity
Company and Fidelity Distributors Corporation dated February 1, 1994 (Variable
Insurance Products Fund)/6/
(8.4) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Fidelity Distributors Corporation dated February 1, 1994 (Variable
Insurance Products Fund II) /6/
(8.5) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Janus Aspen Series dated April 19, 1994, and amended
June 15, 1994/7/
(8.6) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Lexington Management Corporation regarding Natural Resources
Trust dated December 1, 1988 and amended February 11, 1991/8/
(8.7) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company, Lexington Emerging Markets Fund, Inc. and Lexington Management
Corporation (its investment advisor) dated April 28, 1994/9/
(8.8) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Advisers Management Trust (now Neuberger & Berman Advisers
Management Trust) dated April 14, 1989/3/
(8.9) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Scudder Variable Life Investment Fund dated April 27, 1992 and
amended February 19, 1993 and August 13, 1993/10/
(8.10) Fund Participation Agreement between Aetna Life Insurance and Annuity
Company, Investors Research Corporation and TCI Portfolios, Inc. dated
July 29, 1992 and amended December 22, 1992 and June 1, 1994/10/
(8.11) Form of Administrative Service Agreement between Aetna Life Insurance and
Annuity Company and Agency, Inc./2/
(9) Opinion of Counsel/11/
(10.1) Consent of Independent Auditors
(10.2) Consent of Counsel
(11) Not applicable
(12) Not applicable
(13) Computation of Performance Data/12/
(14) Financial Data Schedule (See Exhibit 27)
(15.1) Powers of Attorney/13/
(15.2) Authorization for Signatures/14/
</TABLE>
<PAGE>
1. Incorporated by reference to Registration Statement on Form N-4
(File No. 2-52448) filed February 28, 1986.
2. Incorporated by reference to Post-Effective Amendment No. 15 to
Registration Statement on Form N-4 (File No. 33-34370) filed on April 19,
1994.
3. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 33-75996) filed on April 21, 1994.
4. Incorporated by reference to Post-Effective Amendment No. 58 to
Registration Statement on Form N-4 (File No. 2-52449) filed on February 28,
1994.
5. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 33-79122) filed on September 15, 1994.
6. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 33-75978) filed on April 25, 1994.
7. Incorporated by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-4 (File No. 33-75960) filed on August 9,
1994.
8. Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 33-75978) filed on March 24,
1995.
9. Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 33-75978) filed on August 24,
1994.
10. Incorporated by reference to Registration Statement on Form N-4 (File No.
33-88720) filed on January 20, 1995.
11. Incorporated by reference to Registrant's 24f-2 Notice for the fiscal year
ended December 31, 1994 filed on February 28, 1995.
12. Incorporated by reference to Post-Effective Amendment No. 19 to
Registration Statement on Form N-4 (File No. 33-34370) filed on April 28,
1995.
13. Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-75996) filed on February
23, 1995.
14. Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-79122) filed on August 16,
1995.
<PAGE>
Item 25. Directors and Officers of the Depositor
-------------------------------------------------
Name and Principal
Business Address* Positions and Offices with Depositor
----------------- ------------------------------------
Daniel P. Kearney Director and President
Gary G. Benanav Director
Christopher J. Burns Director and Senior Vice President, Life
Laura R. Estes Director and Senior Vice President, ALIAC
Pensions
Shaun P. Mathews Director and Senior Vice President, Strategic
Markets and Products
Scott A. Striegel Director and Senior Vice President, Annuity
James C. Hamilton Director, Vice President and Treasurer
Dominick J. Agostino Director, Senior Vice President and Chief
Financial Officer
John Y. Kim Director and Senior Vice President, ALIAC
Investments
Robert E. Broatch Senior Vice President and Corporate Controller
Zoe Baird Senior Vice President and General Counsel
Fred J. Franklin Vice President and Chief Compliance Officer
Susan E. Schechter Corporate Secretary and Counsel
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
Item 26. Persons Controlled by or Under Common Control with the Depositor or
-----------------------------------------------------------------------------
Registrant
----------
Incorporated herein by references to Exhibit 24(c) to Registration Statement
on Form N-4 (File No. 33-88720) filed on January 20, 1995.
<PAGE>
Item 27. Number of Contract Owners
-----------------------------------
As of June 30, 1995, there were 73,790 contract owners of variable annuity
contracts funded through Account B.
Item 28. Indemnification
-------------------------
Reference is hereby made to Section 33-320a of the Connecticut General
Statutes ("C.G.S.") regarding indemnification of directors and officers of
Connecticut corporations. The statute provides in general that Connecticut
corporations shall indemnify their officers, directors, employees, agents, and
certain other defined individuals against judgments, fines, penalties, amounts
paid in settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification does not apply unless (1) the individual is successful on
the merits in the defense of any such proceeding; or (2) a determination is made
(by a majority of the board of directors not a party to the proceeding by
written consent; by independent legal counsel selected by a majority of the
directors not involved in the proceeding; or by a majority of the shareholders
not involved in the proceeding) that the individual acted in good faith and in
the best interests of the corporation; or (3) the court, upon application by the
individual, determines in view of all the circumstances that such person is
reasonably entitled to be indemnified.
C.G.S. Section 33-320a provides an exclusive remedy: a Connecticut
corporation cannot indemnify a director or officer to an extent either greater
or less than that authorized by the statute, e.g., pursuant to its certificate
of incorporation, bylaws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
Consistent with the statute, Aetna Life and Casualty Company has procured
insurance from Lloyd's of London and several major United States excess insurers
for its directors and officers and the directors and officers of its
subsidiaries, including the Depositor, which supplements the indemnification
rights provided by C.G.S. Section 33-320a to the extent such coverage does not
violate public policy.
Item 29. Principal Underwriter
-------------------------------
(a) In addition to serving as the principal underwriter for the Registrant,
Aetna Life Insurance and Annuity Company (ALIAC) also acts as the
principal underwriter for Variable Life Account B and Variable Annuity
Account C (separate accounts of ALIAC registered as unit investment
trusts), and Separate Account I (a separate account of Aetna Insurance
Company of America registered as a unit investment trust). Additionally,
ALIAC is the
<PAGE>
investment adviser for Aetna Variable Fund, Aetna Income Shares, Aetna
Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET
Fund, Aetna Series Fund, Inc. and Aetna Generation Portfolios, Inc. ALIAC
is also the depositor of Variable Life Account B and Variable Annuity
Account C.
(b) See Item 25 regarding the Depositor.
(c) Compensation as of December 31, 1994:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation
Principal Discounts and on Redemption Brokerage
Underwriter Commissions or Annuitization Commission Compensation*
----------- ----------- ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Aetna Life $269,230 $9,036,662
Insurance and
Annuity
Company
</TABLE>
* Compensation shown in column 5 includes deductions for mortality and expense
risk guarantees and contract charges assessed to cover costs incurred in the
sales and administration of the contracts issued under Account B.
Item 30. Location of Accounts and Records
------------------------------------------
All records concerning contract owners of Variable Annuity Account B are
located at the home office of the Depositor as follows:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Item 31. Management Services
-----------------------------
Not applicable
<PAGE>
Item 32. Undertakings
----------------------
Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement on Form
N-4 as frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than sixteen
months old for as long as payments under the variable annuity contracts
may be accepted;
(b) to include as part of any application to purchase a contract offered by a
prospectus which is part of this registration statement on Form N-4, a
space that an applicant can check to request a Statement of Additional
Information; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form N-4 promptly
upon written or oral request.
(d) Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, the Registrant, Variable Annuity Account B of Aetna Life
Insurance and Annuity Company, has caused this Post-Effective Amendment No. 20
to its Registration Statement on Form N-4 (File No. 33-34370) to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Hartford, State of Connecticut, on the 25th day of August, 1995.
----
VARIABLE ANNUITY ACCOUNT B OF AETNA
LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
By: AETNA LIFE INSURANCE AND ANNUITY
COMPANY
(Depositor)
By: Daniel P. Kearney*
-----------------------------------------
Daniel P. Kearney
President
As required by the Securities Act of 1933, as amended, this Post-Effective
Amendment No. 20 to the Registration Statement on Form N-4 (File No. 33-34370)
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Daniel P. Kearney* Director and President )
-------------------------- )
Daniel P. Kearney (principal executive officer) )
)
Dominick J. Agostino* Director, Senior Vice President and Chief Financial )
-------------------------- )
Dominick J. Agostino Officer (principal accounting and financial officer) ) August
) 25, 1995
James C. Hamilton* Director ) ---
-------------------------- )
James C. Hamilton )
)
Gary G. Benanav* Director )
-------------------------- )
Gary G. Benanav )
)
Christopher J. Burns* Director )
-------------------------- )
Christopher J. Burns )
)
Laura R. Estes* Director )
-------------------------- )
Laura R. Estes )
</TABLE>
<PAGE>
John Y. Kim* Director )
--------------------- )
John Y. Kim )
)
Shaun P. Mathews* Director )
--------------------- )
Shaun P. Mathews )
)
Scott A. Striegel* Director )
--------------------- )
Scott A. Striegel )
By: /s/ Julie E. Rockmore
---------------------------------
*Julie E. Rockmore
Attorney-in-Fact
<PAGE>
VARIABLE ANNUITY ACCOUNT B
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
----------- ------- ----
<S> <C> <C>
99-B.1 Resolution of the Board of Directors of Aetna Life Insurance and Annuity
Company establishing Variable Annuity Account B *
99-B.3.1 Form of Selling Agreement *
99-B.3.2 Alternative Form of Wholesaling Agreement and Related Selling Agreement *
99-B.4 Form of Variable Annuity Contract *
99-B.5 Form of Variable Annuity Contract Application *
99-B.6 Certificate of Incorporation and By-Laws of Depositor *
99-B.8.1 Fund Participation Agreement between Aetna Life Insurance and Annuity
Company, Alger American Fund and Fred Alger Management, Inc. dated
September 1, 1993 *
99-B.8.2 Fund Participation Agreement by and among Aetna Life Insurance and Annuity
Company, Insurance Management Series and Federated Advisors *
99-B.8.3 Fund Participation Agreements between Aetna Life Insurance and Annuity
Company and Fidelity Distributors Corporation dated February 1, 1994
(Variable Insurance Products Fund) *
99-B.8.4 Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Fidelity Distributors Corporation dated February 1, 1994
(Variable Insurance Products Fund II) *
99-B.8.5 Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Janus Aspen Series dated April 19, 1994, and amended
June 15, 1994 *
99-B.8.6 Fund Participation Agreement between Aetna Life Insurance and Annuity
Company and Lexington Management Corporation regarding Natural Resources
Trust dated December 1, 1988 and amended February 11, 1991 *
</TABLE>
*Incorporated by reference
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
----------- ------- ----
<S> <C> <C>
99-B.8.7 Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Lexington *
Emerging Markets Fund, Inc. and Lexington Management Corporation (its investment advisor)
dated April 28, 1994
99-B.8.8 Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Advisers *
Management Trust (now Neuberger & Berman Advisers Management Trust) dated April 14, 1989
99-B.8.9 Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Scudder
Variable Life Investment Fund dated April 27, 1992 and amended February 19, 1993 and *
August 13, 1993
99-B.8.10 Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Investors
Research Corporation and TCI Portfolios, Inc. dated July 29, 1992 and amended December *
22, 1992 and June 1, 1994
99-B.8.11 Form of Administrative Service Agreement between Aetna Life Insurance and Annuity Company
and Agency, Inc. *
99-B.9 Opinion of Counsel *
99-B.10.1 Consent of Independent Auditors ______________
99-B.10.2 Consent of Counsel ______________
99-B.13 Computation of Performance Data *
99-B.15.1 Powers of Attorney *
99-B.15.2 Authorization for Signatures *
27 Financial Data Schedule ______________
</TABLE>
*Incorporated by reference
<PAGE>
Exhibit 99-B.10.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of Aetna Life Insurance and Annuity Company
and Contract Owners of Aetna Variable Annuity Account B:
We consent to the use of our reports dated January 31, 1995 and February 7, 1995
included herein and to the references to our Firm under the captions "CONDENSED
FINANCIAL INFORMATION" in the Prospectus and "INDEPENDENT AUDITORS" in the
Statement of Additional Information.
Our report dated February 7, 1995 refers to a change in 1993 in the Company's
methods of accounting for certain investments in debt and equity securities and
reinsurance contracts, and a change in 1992 in the Company's methods of
accounting for income taxes and post retirement benefits other than pensions.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
August 25, 1995
----
<PAGE>
[LOGO OF AETNA APPEARS HERE]
151 Farmington Avenue SUSAN E. BRYANT
Hartford, CT 06156 Counsel
Law & Regulatory Affairs, RE4C
(203(273-7834
Fax: (203) 273-8340
August 23, 1995 Exhibit 99-B.10.2
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Dear Sir or Madam:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 27, 1995 (incorporated herein by
reference to the 24f-2 Notice for the fiscal year ended December 31, 1994 filed
on behalf of Variable Annuity Account B of Aetna Life Insurance and Annuity
Company on February 28, 1995) as an exhibit to this Post-Effective Amendment No.
20 to Registration Statement on Form N-4 (File No. 33-34370) and to my being
named under the caption "Legal Matters" therein.
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Aetna Life Insurance and Annuity Company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VARIABLE ANNUITY ACCOUNT B AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 840,160,688
<INVESTMENTS-AT-VALUE> 795,804,636
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 795,804,636
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 795,804,636
<DIVIDEND-INCOME> 83,432,946
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (8,918,042)
<NET-INVESTMENT-INCOME> 74,514,904
<REALIZED-GAINS-CURRENT> 57,000,536
<APPREC-INCREASE-CURRENT> (146,425,376)
<NET-CHANGE-FROM-OPS> (14,909,936)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 109,360,004
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
