<PAGE>
As filed with the Securities and Exchange Registration No. 33-88722
Commission on November 30, 1995 Registration No. 811-2512
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
- ------------------------------------------------------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
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: (860) 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)
- ------------------------------------------------------------------------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective on December 29, 1995.
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
Form N-4
Item No. Part A (Prospectus) Location
- -------- ------------------- --------
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,
and Portfolio Companies...................... The Company, The
Separate Account
and Description of
the Funds
6 Deductions and Expenses...................... Charges and Deductions;
Distribution
7 General Description of Variable Annuity
Contracts.................................... Contracts;
Miscellaneous
8 Annuity Period............................... Annuity Period
9 Death Benefit................................ Death Benefit
10 Purchases and Contract Value................. Purchase; Determining
Contract Value
11 Redemptions.................................. Contracts - Withdrawals
During the Accumulation
Period; Contracts -
Right to Cancel
12 Taxes........................................ Tax Status
13 Legal Proceedings............................ Miscellaneous - Legal
Proceedings
14 Table of Contents of the Statement of
Additional Information....................... Statement of Additional
Information - Table of
Contents
<PAGE>
Form N-4
Item No. Part B (Statement of Additional Information) Location
- -------- -------------------------------------------- --------
15 Cover Page................................... Cover page
16 Table of Contents............................ Table of Contents
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
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>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY
151 Farmington Avenue, Annuity Operations, Hartford, Connecticut 06156,
Telephone: 1-800-525-4225
VARIABLE ANNUITY ACCOUNT B
Prospectus Dated: December 20, 1995
AETNAPLUS -- GROUP VARIABLE ANNUITY CONTRACTS FOR
EMPLOYER-SPONSORED DEFERRED COMPENSATION PLANS
HEALTHCARE DEFERRED COMPENSATION PLANS
This Prospectus describes group deferred variable annuity contracts issued by
Aetna Life Insurance and Annuity Company ("Company," "us" or "we"). The Contract
allows lump-sum payments and installment payments. See "Contracts." The
Contracts are designed for use in connection with retirement programs for select
management and highly compensated healthcare employees in plans formerly carried
under certain hospital association endorsements ("Plans"). Such plans may be:
(1) employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals not subject to Section 457 of the Internal Revenue
Code of 1986, as amended ("Code") or by taxable organizations for their
employees and/or independent contractors ("Non-Section 457 Plans"); or (2)
employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals that are subject to Code Section 457 for their
employees and/or independent contractors ("Section 457 Plans").
Purchase Payments made to an Account may be directed by the Contract Holder or
you, if permitted by the Contract Holder, to (i) a fixed account (the Fixed
Account or the Fixed Plus Account, depending on which are available under the
Contract) (see Appendices II and III); (ii) the Guaranteed Accumulation Account,
if qualified for sale in your state (see Appendix I); or (iii) a separate
account (Variable Annuity Account B) for investment in one or more of the
following variable fund options ("Funds"):
- AETNA VARIABLE FUND - FIDELITY VIP GROWTH PORTFOLIO
- AETNA INCOME SHARES - FIDELITY VIP OVERSEAS PORTFOLIO
- AETNA VARIABLE ENCORE FUND - JANUS ASPEN AGGRESSIVE GROWTH
- AETNA INVESTMENT ADVISERS FUND, PORTFOLIO
INC. - JANUS ASPEN BALANCED PORTFOLIO
- AETNA ASCENT VARIABLE PORTFOLIO - JANUS ASPEN FLEXIBLE INCOME
- AETNA CROSSROADS VARIABLE PORTFOLIO PORTFOLIO
- AETNA LEGACY VARIABLE PORTFOLIO - JANUS ASPEN GROWTH PORTFOLIO
- ALGER AMERICAN GROWTH PORTFOLIO - JANUS ASPEN SHORT-TERM BOND
- ALGER AMERICAN SMALL CAP PORTFOLIO PORTFOLIO
- CALVERT RESPONSIBLY INVESTED - JANUS ASPEN WORLDWIDE GROWTH
BALANCED PORTFOLIO PORTFOLIO
- FIDELITY VIP II CONTRAFUND - LEXINGTON NATURAL RESOURCES TRUST
PORTFOLIO - NEUBERGER & BERMAN GROWTH PORTFOLIO
- FIDELITY VIP EQUITY-INCOME - SCUDDER INTERNATIONAL PORTFOLIO
PORTFOLIO - TCI PORTFOLIOS, INC. -- TCI GROWTH
Your Plan may limit your choices to fewer than all of the Funds listed above.
Consult your employer and/or your enrollment materials to determine which Funds
are available. See "Description of the Funds."
This Prospectus sets forth concisely the information about Variable Annuity
Account B ("Account B") that a prospective investor should know before
investing. Additional information about Account B is contained in a Statement of
Additional Information ("SAI") dated December 20, 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 found in this Prospectus. An SAI
may be obtained without charge by indicating your request on the enrollment form
or on the prospectus receipt contained in this Prospectus or by calling
1-800-525-4225.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS AND GUARANTEED ACCUMULATION ACCOUNT. ALL PROSPECTUSES SHOULD BE READ
AND RETAINED FOR FUTURE REFERENCE.
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 THIS PROSPECTUS. 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 THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED 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 and 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
DEFINITIONS......................................................................................... 4
PROSPECTUS SUMMARY.................................................................................. 6
FEE TABLE........................................................................................... 7
PERFORMANCE DATA.................................................................................... 12
THE COMPANY, THE SEPARATE ACCOUNT AND DESCRIPTION OF THE FUNDS...................................... 13
The Company................................................................................... 13
The Separate Account.......................................................................... 13
Description of the Funds...................................................................... 13
Fund Investment Advisers...................................................................... 15
Shared and Mixed Funding...................................................................... 16
Additional Funds, Limitations on Selection of Funds and Substitution of Funds................. 17
PURCHASE
Contract Purchase............................................................................. 17
Purchase Payments............................................................................. 18
Minimum and Maximum Purchase Payments......................................................... 18
Allocating Purchase Payments.................................................................. 18
Designations of Annuitant..................................................................... 18
Distribution.................................................................................. 18
DETERMINING CONTRACT VALUE
Accumulation Units............................................................................ 19
Net Investment Factor......................................................................... 19
CONTRACTS
General....................................................................................... 20
Right to Cancel............................................................................... 20
Rights Under the Contract..................................................................... 20
Allocation Changes and Transfers.............................................................. 20
Withdrawals During Accumulation Period........................................................ 20
CHARGES AND DEDUCTIONS
Mortality and Expense Risk Charges............................................................ 22
Administrative Expense Charge................................................................. 22
Fund Expenses................................................................................. 22
Charges for Withdrawals (Deferred Sales Charge)............................................... 22
Premium Tax................................................................................... 24
ADDITIONAL WITHDRAWAL OPTIONS
General....................................................................................... 24
Estate Conservation Option.................................................................... 25
Systematic Withdrawal Option.................................................................. 25
ANNUITY PERIOD
Annuity Period Elections...................................................................... 25
Annuity Options............................................................................... 27
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Page
DEATH BENEFIT
<S> <C>
Accumulation Period........................................................................... 28
Annuity Period................................................................................ 28
TAX STATUS
Introduction.................................................................................. 29
Taxation of the Company....................................................................... 29
Tax Status of the Contract.................................................................... 30
Section 457 Plans............................................................................. 30
Plans of Non-Section 457 Tax-Exempt Organizations and Taxable Organizations................... 31
Possible Changes in Taxation.................................................................. 31
Other Tax Consequences........................................................................ 31
MISCELLANEOUS
Voting Rights................................................................................. 32
Modification of the Contract.................................................................. 32
Contract Holder Inquiries..................................................................... 32
Telephone Transfers........................................................................... 33
Transfer of Ownership; Assignment............................................................. 33
Legal Proceedings............................................................................. 33
Legal Matters................................................................................. 33
STATEMENT OF ADDITIONAL INFORMATION--TABLE OF CONTENTS.............................................. 34
APPENDIX I--Guaranteed Accumulation Account......................................................... 35
APPENDIX II--Fixed Account.......................................................................... 36
APPENDIX III--Fixed Plus Account.................................................................... 37
</TABLE>
3
<PAGE>
DEFINITIONS
As used in this Prospectus, the following terms have the meanings shown:
ACCOUNT: A record established for each Participant, as directed by the Contract
Holder, to identify Contract values during the Accumulation Period.
ACCOUNT VALUE: The dollar value of amounts held in an Account as of any
Valuation Period, including the value of the Accumulation Units in the Funds,
the amounts held in the Guaranteed Accumulation Account ("GAA"), and any amounts
invested in the Fixed Account or Fixed Plus Account, plus interest earned on
those amounts.
ACCOUNT OR PLAN ACCOUNT YEAR: The period of 12 months measured from the
Account's Effective Date or from an anniversary of such Effective Date.
ACCUMULATION PERIOD: The period during which Purchase Payment(s) credited to an
Account are invested to fund future annuity payments.
ACCUMULATION UNIT: A measure of the value of the Separate Account assets
attributable to each Fund used as a variable funding option.
AGGREGATE PURCHASE PAYMENT(S): The sum of all Purchase Payment(s) made under a
Contract.
ANNUITANT: A natural person on whose life an Annuity payment is based.
ANNUITY: A series of payments for life, for a definite period or a combination
of the two.
ANNUITY PERIOD: The period during which Annuity payments are made.
ANNUITY UNIT: A measure of the value attributable to each Fund selected during
the Annuity Period.
BENEFICIARY: The Contract Holder is the Contract beneficiary.
CODE: The Internal Revenue Code of 1986, as amended.
COMPANY: Aetna Life Insurance and Annuity Company, referred to as "us" or "we."
CONTRACT: The group deferred, variable annuity contracts offered by this
Prospectus.
CONTRACT HOLDER: The entity to which the Contract is issued. The Contract Holder
has all right, title and interest in amounts held under the Contract. The
Contract Holder is the Contract beneficiary.
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 the Company accepts and approves the Contract
application or enrollment form, as applicable.
FUNDS: The mutual funds offered as variable funding options for the investment
of assets of the Separate Account under the Contracts.
GAA: Guaranteed Accumulation Account, a credited interest option available in
certain jurisdictions for deposits under the Contract.
HOME OFFICE: The Company's principal executive offices located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
NET PURCHASE PAYMENT(S): The Purchase Payment(s) less premium taxes, if
applicable.
NON-SECTION 457 PLAN(S): Employer-sponsored deferred compensation plans
sponsored by tax-exempt organizations for deferrals not subject to Code Section
457 and by taxable organizations for their employees and/or independent
contractors.
PARTICIPANT: An eligible person participating in a Plan, referred to as "you."
Participants have no rights to the assets accumulated under the Plan.
PLAN(S): Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations and/or taxable organizations for their employees or independent
contractors (or both).
PURCHASE PAYMENT(S): The gross payment(s) made to the Company under a Contract.
4
<PAGE>
PURCHASE PAYMENT PERIOD: For installment Purchase Payment Accounts, the period
of time for completion of the agreed upon annual number and amount of Purchase
Payments. For example, if it is determined that the Purchase Payment Period will
consist of 12 payments per year and only 11 payments are made, the Purchase
Payment Period is not completed until the twelfth Purchase Payment is made. When
a particular remittance is intended to include more than one regular Purchase
Payment, we will credit the number of Purchase Payments represented by such
remittance in determining the Purchase Payment Period. However, the number of
completed Purchase Payment Periods may never be greater than the number of full
calendar years since the date an Account is established under the Contract.
SECTION 457 PLAN(S): Employer-sponsored deferred compensation plans sponsored by
tax-exempt organizations for deferrals that are subject to Code Section 457 for
their employees and/or independent contractors.
SEPARATE ACCOUNT: Variable Annuity Account B, an account that segregates assets
from other assets of the Company. The Separate Account holds shares of the Funds
acquired for the Contracts. The Company holds title to the assets held in the
Separate Account.
UNDERWRITER: The registered broker-dealer which contracts with other registered
broker-dealers on behalf of the Separate Accounts to offer and sell the
Contracts.
VALUATION PERIOD: The period of time from when a Fund determines its net asset
value until the next time it determines its net asset value, usually from 4:15
p.m. Eastern time, each day the New York Stock Exchange is open, until 4:15 p.m.
the next such business day.
VALUATION RESERVE: A reserve established pursuant to the insurance laws of
Connecticut to measure voting rights during the Annuity Period and the value of
a commutation right available under the "Payments for a Specified Period of
Time" Annuity option when elected on a variable basis under the Contract.
VARIABLE ANNUITY CONTRACT: An Annuity Contract providing for the accumulation of
values and/or for Annuity payments which vary in dollar amount with investment
results.
5
<PAGE>
PROSPECTUS SUMMARY
CONTRACTS OFFERED
The Contracts described in this Prospectus are group deferred variable annuity
contracts. They allow lump-sum payments and installment payments. See
"Purchase," "Contracts" and "Miscellaneous."
The Contracts we describe in this Prospectus are designed to provide retirement
benefits to Participants under:
(1) Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals not subject to Code Section 457 and by taxable
organizations for their employees and/or independent contractors
("Non-Section 457 Plans"), and
(2) Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals that are subject to Code Section 457 for their
employees and/or independent contractors ("Section 457 Plans").
PURCHASE
The Contracts may be purchased by eligible organizations on behalf of a group
made up of their employees and/or independent contractors. The Contract Holder
establishes an Account for eligible employees by completing an enrollment form
(and any other required forms) and submitting it to the Company with an initial
Purchase Payment. Purchase Payments are made by salary reduction or by lump sum
payments from an eligible, existing plan. See "Contract Purchase."
REDEMPTION
The Contract Holder may withdraw all or a portion of the Account Value during
the Accumulation Period by properly completing the Company's disbursement form
and sending it to the Company. See "Charges and Deductions" and
"Contracts--Withdrawals During Accumulation Period." Limitations apply to
withdrawals from the Fixed Plus Account. (See Appendix III.)
DEFERRED SALES CHARGES
Amounts withdrawn may be subject to a deferred sales charge. The maximum
deferred sales charge that could be assessed on a full or partial withdrawal is
5% of the amount withdrawn. See "Charges and Deductions--Deferred Sales Charge."
Amounts withdrawn from GAA may be subject to a Market Value Adjustment. (See
Appendix I.)
TAXES AND WITHHOLDING
Purchase Payments and investment results of the Separate Account credited to the
value of the Account are generally not taxable until distributed or made
available under the employer's Plan. Withholding for income tax may be imposed
on certain withdrawals. See "Tax Status."
CONTRACT CHARGES
Certain charges are associated with these Contracts, for example, mortality and
expense risk charges and administrative expense charges. The Funds are also
subject to certain fees and expenses. Purchase Payments may also be subject to
premium taxes. See "Charges and Deductions" for a complete explanation of these
charges.
FREE LOOK PROVISION
Contract Holders have the right to cancel their Contract within 10 days after
receiving it by returning it to the Company along with a written notice of
cancellation. Unless state law requires otherwise, the amount the Contract
Holder will receive on 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. See "Contract Rights--Right to Cancel."
6
<PAGE>
FEE TABLE
(BASED ON YEAR ENDED DECEMBER 31, 1994)
This fee table is provided to assist in understanding the various fees and costs
that you or a Contract Holder will bear directly or indirectly.(1) The table
sets forth Separate Account charges due under the Contract as well as those
deducted from the Funds' assets. The table does not take into account any
premium taxes that may be applicable.
CONTRACT CHARGES AND EXPENSES
DEFERRED SALES CHARGE (as a percentage of amount withdrawn):(2)
<TABLE>
<CAPTION>
INSTALLMENT PURCHASE PAYMENT ACCOUNT
PURCHASE PAYMENT
PERIODS COMPLETED DEDUCTION
---------------------------------------- ---------
<C> <C>
Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or 10 2%
more than 10 0%
<CAPTION>
SINGLE PURCHASE PAYMENT ACCOUNT
ACCOUNT YEARS
COMPLETED DEDUCTION
---------------------------------------- ---------
<C> <C>
Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES --VARIABLE OPTIONS ONLY(3)
(Daily deductions, equal to the percentage shown on an annual basis, made from
amounts allocated to the variable options)
During the Accumulation Period:
Mortality and Expense Risk Fees 0.75%
Administrative Expense Charge(4) 0.00%
Total Separate Account Annual Expenses 0.75%
During the Annuity Period:
Mortality and Expense Risk Fees 1.25%
Administrative Expense Charge(4) 0.00%
Total Separate Account Annual Expenses 1.25%
- ------------------------
(1)See "Charges and Deductions" in this Prospectus. For more information
regarding expenses paid out of the assets of a particular Fund, see the
Fund's prospectus.
(2) The total amount deducted for the deferred sales charge will not exceed 8.5%
of the total Purchase Payments made to the Account. The deferred sales
charge may be referred to in the Contract as a "surrender fee." See "Charges
and Deductions--Charges for Withdrawals" for instances in which this charge
may be waived.
(3) See "Charges and Deductions" for a description of these expenses.
(4) The Administrative Expense Charge is currently zero; however, we reserve the
right to deduct a daily charge of not more than 0.25% (0% through April
30,1996) per year from the portion of Account Values held in the Separate
Account.
7
<PAGE>
FUNDING OPTION ANNUAL EXPENSES
(Except as noted, the following figures are a percentage of average net assets
and, except where otherwise indicated, are based on figures for the year ended
December 31, 1994)
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY OTHER
FEES(1) EXPENSES(2) TOTAL FUND
(AFTER EXPENSE (AFTER EXPENSE ANNUAL
REIMBURSEMENT) REIMBURSEMENT) 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 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 Growth Portfolio 0.75% 0.11% 0.86%
Alger American Small Cap Portfolio 0.85% 0.11% 0.96%
Calvert Responsibly Invested Balanced
Portfolio 0.70% 0.10% 0.80%
Fidelity VIP II Contrafund
Portfolio(3) 0.62% 0.27% 0.89%
Fidelity VIP Equity-Income
Portfolio(4) 0.52% 0.06% 0.58%
Fidelity VIP Growth Portfolio(4) 0.62% 0.07% 0.69%
Fidelity VIP Overseas Portfolio 0.77% 0.15% 0.92%
Janus Aspen Aggressive Growth
Portfolio(5) 0.77% 0.28% 1.05%
Janus Aspen Balanced Portfolio(5) 0.83% 0.74% 1.57%
Janus Aspen Flexible Income
Portfolio(5) 0.30% 0.70% 1.00%
Janus Aspen Growth Portfolio(5) 0.66% 0.22% 0.88%
Janus Aspen Short-Term Bond
Portfolio(5) 0.00% 0.65% 0.65%
Janus Aspen Worldwide Growth
Portfolio(5) 0.69% 0.49% 1.18%
Lexington Natural Resources Trust(6) 1.00% 0.55% 1.55%
Neuberger & Berman Growth Portfolio(7) 0.79% 0.12% 0.91%
Scudder International Portfolio 0.88% 0.20% 1.08%
TCI Growth(8) 1.00% 0.00% 1.00%
</TABLE>
- --------------------------
(1)Certain of the unaffiliated Fund advisers have contracted to reimburse the
Company for administrative costs incurred in connection with administering
the Funds as variable funding options under the Contract. These
reimbursements are paid out of the investment advisory fees and are not
charged to investors.
(2)A Fund's "Other Expenses" include operating costs of the Fund. The deduction
of the above expenses are reflected in the Fund's net asset value and are not
deducted from the Account Value under the Contract.
(3)These Funds have only limited operating history; therefore the expenses are
estimated for the current fiscal year.
(4)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 and 0.70% for the Growth Portfolio.
(5)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. The waivers are voluntary and could be terminated
upon 90 days' notice.
(6)These fees as a percentage of assets are higher than those for other similar
funds, although the amounts of the fees are not due to the limited amount of
assets in the Fund.
(7)Until May 1, 1995, the Portfolio had a Distribution Plan pursuant to Rule
12b-1 which provided for the reimbursement by Neuberger & Berman Management
of certain distribution expenses, up to a maximum of 0.25% on an annual basis
of the Portfolio's average daily net assets. The "Other Expenses" and "Total
Annual Expenses" for the Portfolio do not include 0.02% which was paid by the
Portfolio for the months of January through April 1995, since 12b-1 fees will
not be charged after May 1, 1995.
(8)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.
8
<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.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets.
<TABLE>
<CAPTION>
IF YOU WITHDRAW YOUR ENTIRE ACCOUNT IF YOU DO NOT WITHDRAW YOUR ACCOUNT
VALUE AT THE END OF THE PERIODS VALUE, OR IF YOU ANNUITIZE DURING THE
SHOWN, YOU WOULD PAY THE FOLLOWING PERIODS SHOWN, YOU WOULD PAY THE
EXPENSES, INCLUDING ANY APPLICABLE FOLLOWING EXPENSES (NO DEFERRED SALES
DEFERRED SALES CHARGE: CHARGE IS REFLECTED):
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 $63 $ 90 $119 $128 $11 $33 $ 58 $128
Aetna Income Shares $63 $ 90 $120 $132 $11 $34 $ 60 $132
Aetna Variable Encore Fund $63 $ 90 $120 $131 $11 $34 $ 59 $131
Aetna Investment Advisers Fund, Inc. $63 $ 90 $120 $131 $11 $34 $ 59 $131
Aetna Ascent Variable Portfolio $67 $101 $139 $174 $15 $46 $ 79 $174
Aetna Crossroads Variable Portfolio $67 $101 $139 $174 $15 $46 $ 79 $174
Aetna Legacy Variable Portfolio $67 $101 $139 $174 $15 $46 $ 79 $174
Alger American Growth Portfolio $68 $106 $147 $191 $16 $51 $ 88 $191
Alger American Small Cap Portfolio $69 $109 $152 $202 $17 $54 $ 93 $202
Calvert Responsibly Invested Balanced
Portfolio $67 $104 $144 $185 $16 $49 $ 84 $185
Fidelity VIP II Contrafund Portfolio $68 $107 $148 $194 $17 $52 $ 89 $194
Fidelity VIP Equity-Income Portfolio $65 $ 98 $133 $160 $14 $42 $ 73 $160
Fidelity VIP Growth Portfolio $66 $101 $138 $172 $15 $46 $ 79 $172
Fidelity VIP Overseas Portfolio $69 $108 $149 $197 $17 $52 $ 90 $197
Janus Aspen Aggressive Growth Portfolio $70 $112 $156 $212 $18 $57 $ 97 $212
Janus Aspen Balanced Portfolio $75 $127 $181 $266 $24 $72 $124 $266
Janus Aspen Flexible Income Portfolio $69 $110 $154 $206 $18 $55 $ 95 $206
Janus Aspen Growth Portfolio $68 $107 $148 $193 $17 $51 $ 89 $193
Janus Aspen Short-Term Bond Portfolio $66 $100 $136 $168 $14 $44 $ 77 $168
Janus Aspen Worldwide Growth Portfolio $71 $115 $162 $225 $20 $61 $104 $225
Lexington Natural Resources Trust $75 $126 $180 $264 $23 $72 $123 $264
Neuberger & Berman Growth Portfolio $69 $108 $149 $197 $17 $52 $ 90 $197
Scudder International Portfolio $70 $112 $157 $215 $19 $58 $ 99 $215
TCI Growth $69 $110 $154 $206 $18 $55 $ 95 $206
</TABLE>
9
<PAGE>
CONDENSED FINANCIAL INFORMATION
(SELECTED DATA FOR ACCUMULATION UNITS OUTSTANDING THROUGHOUT EACH PERIOD)
THE CONDENSED FINANCIAL INFORMATION PRESENTED BELOW FOR EACH OF THE YEARS IN THE
TEN-YEAR PERIOD ENDED DECEMBER 31, 1994 (AS APPLICABLE), 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. THE ACCUMULATION UNIT VALUES AND THE PERCENTAGE CHANGE IN THE VALUE
OF AN ACCUMULATION UNIT REFLECT A MORTALITY AND EXPENSE RISK CHARGE OF 1.25% FOR
THE PERIODS SHOWN. AS OF THE DATE OF THIS PROSPECTUS, THE MORTALITY AND EXPENSE
RISK CHARGE WAS REDUCED TO 0.75% DURING THE ACCUMULATION PERIOD. IT WILL
INCREASE TO 1.25% DURING THE ANNUITY PERIOD.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986
------------- ---------- ---------- ---------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AETNA VARIABLE FUND
VALUE AT BEGINNING OF
PERIOD $10.940 $10.378 $84.249 $67.496 $66.174 $51.900 $45.839 $43.994 $37.445
VALUE AT END OF PERIOD $10.698 $10.940 $10.378(2) $84.249 $67.496 $66.174 $51.900 $45.839 $43,994
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) (2.21)% 5.41% (2) 24.82% 2.00% 27.50% 13.22% 4.19% 17.49%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 11,117,383 879,670 3,107 908,777 810,126 831,547 887,039 1,020,744 1,273,920
AETNA INCOME SHARES
VALUE AT BEGINNING OF
PERIOD $11.006 $10.160 $37.815 $32.066 $29.752 $26.291 $24.734 $23.888 $21.203
VALUE AT END OF PERIOD $10.457 $11.006 $10.160(3) $37.815 $32.066 $29,752 $26.291 $24.734 $23.888
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) (4.99)% 8.33% (3) 17.93% 7.78% 13.16% 6.29% 3.54% 12.66%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 1,988,960 166,913 4,196 427,893 358,454 366,176 383,856 377,078 565,148
AETNA VARIABLE
ENCORE FUND
VALUE AT BEGINNING OF
PERIOD $10.223 $10.031 $34.122 $32.431 $30.285 $28.029 $26.401 $25.028 $23.660
VALUE AT END OF PERIOD $10.509 $10.223 $10.031(4) $34.122 $32.431 $30.285 $28.029 $26.401 $25.028
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) 2.79% 1.91% (4) 5.21% 7.09% 8.05% 6.17% 5.49% 5.78%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 1,822,449 90,782 2,808 548,425 722,438 653,619 720,726 898,557 881,853
AETNA INVESTMENT
ADVISERS FUND, INC.
VALUE AT BEGINNING OF
PERIOD $11.164 $10.286 $12.717 $10.882 $10.423 $10.000(5)
VALUE AT END OF PERIOD $10.971 $11.164 $10.286(6) $12.717 $10.882 $10.423
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) (1.73)% 8.54% (6) 16.86% 4.40% 4.23%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 3,541,703 318,711 6,537 1,324,822 984,798 639,219
ALGER AMERICAN SMALL
CAP PORTFOLIO
VALUE AT BEGINNING OF
PERIOD $10.307 $10.000(7)
VALUE AT END OF PERIOD $ 9.622 $10.307
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) (6.64)% 3.07%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 441,809 31,855
CALVERT RESPONSIBLY
INVESTED BALANCED
PORTFOLIO*
VALUE AT BEGINNING OF
PERIOD $11.010 $10.296 $10.000(8)
VALUE AT END OF PERIOD $10.518 $11.010 $10.296
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) (4.47)% 6.93% 2.96%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 752 1,383 82
JANUS ASPEN AGGRESSIVE
GROWTH PORTFOLIO
VALUE AT BEGINNING OF
PERIOD $10.000(9)
VALUE AT END OF PERIOD $10.319
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) 3.19%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
PERIOD 131,702
<CAPTION>
1985
----------
<S> <C>
AETNA VARIABLE FUND
VALUE AT BEGINNING OF
PERIOD $27.565
VALUE AT END OF PERIOD $37.445
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) 35.84%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 1,089,637
AETNA INCOME SHARES
VALUE AT BEGINNING OF
PERIOD $17.698
VALUE AT END OF PERIOD $21.203
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) 19.80%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 533,123
AETNA VARIABLE
ENCORE FUND
VALUE AT BEGINNING OF
PERIOD $22.084
VALUE AT END OF PERIOD $23.660
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1) 7.14%
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD 1,170,600
AETNA INVESTMENT
ADVISERS FUND, INC.
VALUE AT BEGINNING OF
PERIOD
VALUE AT END OF PERIOD
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1)
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD
ALGER AMERICAN SMALL
CAP PORTFOLIO
VALUE AT BEGINNING OF
PERIOD
VALUE AT END OF PERIOD
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1)
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD
CALVERT RESPONSIBLY
INVESTED BALANCED
PORTFOLIO*
VALUE AT BEGINNING OF
PERIOD
VALUE AT END OF PERIOD
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1)
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
OF PERIOD
JANUS ASPEN AGGRESSIVE
GROWTH PORTFOLIO
VALUE AT BEGINNING OF
PERIOD
VALUE AT END OF PERIOD
INCREASE (DECREASE) IN
VALUE OF ACCUMULATION
UNIT(1)
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT END
PERIOD
</TABLE>
10
<PAGE>
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ------------
<S> <C> <C> <C>
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
VALUE AT BEGINNING OF PERIOD $10.000(9)
VALUE AT END OF PERIOD $ 9.886
INCREASE (DECREASE) IN VALUE OF
ACCUMULATION UNIT(1) (1.14)%
NUMBER OF ACCUMULATION UNITS
OUTSTANDING AT END OF PERIOD 15,893
LEXINGTON NATURAL RESOURCES TRUST
VALUE AT BEGINNING OF PERIOD $ 9.716 $10.000(10)
VALUE AT END OF PERIOD $ 9.079 $ 9.716
INCREASE (DECREASE) IN VALUE OF
ACCUMULATION UNIT(1) (6.56)% (2.84)%
NUMBER OF ACCUMULATION UNITS
OUTSTANDING AT END OF PERIOD 141,076 27,908
NEUBERGER & BERMAN GROWTH PORTFOLIO
VALUE AT BEGINNING OF PERIOD $12.990 $10.123 $10.000(8)
VALUE AT END OF PERIOD $12.199 $12.990 $10.123
INCREASE (DECREASE) IN VALUE OF
ACCUMULATION UNIT(1) (6.09)% 28.32% 1.23%
NUMBER OF ACCUMULATION UNITS
OUTSTANDING AT END OF PERIOD 228,370 71,556 2,275
SCUDDER INTERNATIONAL PORTFOLIO
VALUE AT BEGINNING OF PERIOD $13.654 $10.051 $10.000(8)
VALUE AT END OF PERIOD $13.372 $13.654 $10.051
INCREASE (DECREASE) IN VALUE OF
ACCUMULATION UNIT(1) (2.07)% 35.85% 0.51%
NUMBER OF ACCUMULATION UNITS
OUTSTANDING AT END OF PERIOD 652,630 144,303 324
TCI GROWTH
VALUE AT BEGINNING OF PERIOD $11.159 $10.232 $10.000(11)
VALUE AT END OF PERIOD $10.883 $11.159 $10.232
INCREASE (DECREASE) IN VALUE OF
ACCUMULATION UNIT(1) (2.48)% 9.06% 2.32%
NUMBER OF ACCUMULATION UNITS
OUTSTANDING AT END OF PERIOD 1,123,366 261,107 4,284
</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 CHARGES OR THE FIXED DOLLAR
ANNUAL MAINTENANCE FEE, IF ANY. INCLUSION OF THESE CHARGES WOULD REDUCE THE
INVESTMENT RESULTS SHOWN.
(2) THE ACCUMULATION UNIT VALUE WAS CONVERTED TO $10.000 ON NOVEMBER 2, 1992
UPON THE COMMENCEMENT OF A NEW ADMINISTRATIVE SYSTEM. IMMEDIATELY PRIOR TO
THAT DATE, THE ACCUMULATION UNIT VALUE OF THE FUND WAS $85.546. ON THE DATE
OF CONVERSION, ADDITIONAL UNITS WERE ISSUED SO THAT ACCOUNT VALUES WERE NOT
CHANGED AS A RESULT OF THE CONVERSION. THE PERCENTAGE CHANGE IN THE
ACCUMULATION UNIT VALUE FROM THE BEGINNING OF THE YEAR TO THE DATE OF
CONVERSION WAS 1.54%; THE PERCENTAGE CHANGE IN THE ACCUMULATION UNIT VALUE
FROM THE DATE OF CONVERSION TO THE END OF THE YEAR WAS 3.78%.
(3) THE ACCUMULATION UNIT VALUE WAS CONVERTED TO $10.000 ON NOVEMBER 2, 1992
UPON THE COMMENCEMENT OF A NEW ADMINISTRATIVE SYSTEM. IMMEDIATELY PRIOR TO
THAT DATE, THE ACCUMULATION UNIT VALUE OF THE FUND WAS $39.496. ON THE DATE
OF CONVERSION, ADDITIONAL UNITS WERE ISSUED SO THAT ACCOUNT VALUES WERE NOT
CHANGED AS A RESULT OF THE CONVERSION. THE PERCENTAGE CHANGE IN THE
ACCUMULATION UNIT VALUE FROM THE BEGINNING OF THE YEAR TO THE DATE OF
CONVERSION WAS 4.45%; THE PERCENTAGE CHANGE IN THE ACCUMULATION UNIT VALUE
FROM THE DATE OF CONVERSION TO THE END OF THE YEAR WAS 1.60%.
(4) THE ACCUMULATION UNIT VALUE WAS CONVERTED TO $10.000 ON NOVEMBER 2, 1992
UPON THE COMMENCEMENT OF A NEW ADMINISTRATIVE SYSTEM. IMMEDIATELY PRIOR TO
THAT DATE, THE ACCUMULATION UNIT VALUE OF THE FUND WAS $34.828. ON THE DATE
OF CONVERSION, ADDITIONAL UNITS WERE ISSUED SO THAT ACCOUNT VALUES WERE NOT
CHANGED AS A RESULT OF THE CONVERSION. THE PERCENTAGE CHANGE IN THE
ACCUMULATION UNIT VALUE FROM THE BEGINNING OF THE YEAR TO THE DATE OF
CONVERSION WAS 2.07%; THE PERCENTAGE CHANGE IN THE ACCUMULATION UNIT VALUE
FROM THE DATE OF CONVERSION TO THE END OF THE YEAR WAS 0.31%.
(5) THE INITIAL ACCUMULATION UNIT VALUE WAS ESTABLISHED AT $10.000 ON JUNE 23,
1989, THE DATE ON WHICH THE FUND COMMENCED OPERATIONS.
(6) THE ACCUMULATION UNIT VALUE WAS CONVERTED TO $10.000 ON NOVEMBER 2, 1992
UPON THE COMMENCEMENT OF A NEW ADMINISTRATIVE SYSTEM. IMMEDIATELY PRIOR TO
THAT DATE, THE ACCUMULATION UNIT VALUE OF THE FUND WAS $12.991. ON THE DATE
OF CONVERSION, ADDITIONAL UNITS WERE ISSUED SO THAT ACCOUNT VALUES WERE NOT
CHANGED AS A RESULT OF THE CONVERSION. THE PERCENTAGE CHANGE IN THE
ACCUMULATION UNIT VALUE FROM THE BEGINNING OF THE YEAR TO THE DATE OF
CONVERSION WAS 2.15%; THE PERCENTAGE CHANGE IN THE ACCUMULATION UNIT VALUE
FROM THE DATE OF CONVERSION TO THE END OF THE YEAR WAS 2.86%.
(7) THE INITIAL ACCUMULATION UNIT VALUE WAS ESTABLISHED AT $10.000 ON SEPTEMBER
17, 1993, THE DATE ON WHICH THE PORTFOLIO BECAME AVAILABLE UNDER THE
CONTRACT.
(8) THE INITIAL ACCUMULATION UNIT VALUE WAS ESTABLISHED AT $10.000 ON NOVEMBER
2, 1992, THE DATE ON WHICH THE FUND/PORTFOLIO BECAME AVAILABLE UNDER THE
CONTRACT.
(9) THE INITIAL ACCUMULATION UNIT VALUE WAS ESTABLISHED AT $10.000 DURING
OCTOBER 1994, WHEN THE FUNDS WERE FIRST RECEIVED IN THIS OPTION.
(10) THE INITIAL ACCUMULATION UNIT VALUE WAS ESTABLISHED AT $10.000 ON MAY 26,
1993, THE DATE ON WHICH THE FUND BECAME AVAILABLE UNDER THE CONTRACT.
(11) THE INITIAL ACCUMULATION UNIT VALUE WAS ESTABLISHED AT $10.000 ON AUGUST
21, 1992, THE DATE ON WHICH THE FUND BECAME AVAILABLE UNDER THE CONTRACT.
* FORMERLY CALVERT SOCIALLY RESPONSIBLE SERIES
11
<PAGE>
PERFORMANCE DATA
From time to time, we may advertise performance data for the various investment
options under the Contracts. Such data will show the percentage change in the
value of an Accumulation Unit based on the performance of an investment option
over a period of time, usually a calendar year. It is determined by dividing the
increase (decrease) in value for that unit by the Accumulation Unit value at the
beginning of the period. This percentage figure will reflect the deduction of
any asset based charges under the Contracts but will not reflect the deduction
of any applicable deferred sales charge. The deduction of any applicable
deferred sales charge would reduce any percentage increase or make greater any
percentage decrease.
Any advertisement will also include total return figures calculated as required
by the SEC, as described in the Statement of Additional Information. The total
return figures do reflect the deduction of any applicable deferred sales charge,
as well as any other Separate Account expenses.
12
<PAGE>
THE COMPANY, THE SEPARATE ACCOUNT AND DESCRIPTION OF THE FUNDS
THE COMPANY
Aetna Life Insurance and Annuity Company ("Company," "us" or "we"), the
depositor for the Separate Account, is a stock life insurance company organized
in 1976 under the insurance laws of the State of Connecticut. As of December 31,
1994, the Company managed over $20.4 billion of assets. As of December 31, 1993,
the Company ranked among the top 2% of all U.S. life insurance companies by
size. 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.
THE SEPARATE ACCOUNT
Variable Annuity Account B is a separate account established by the Company in
1976 under the 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 Company assets. The Separate Account is registered as a unit
investment trust under the Investment Company Act of 1940.
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 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 of the Company
arising under the Contracts are general corporate obligations of the Company.
DESCRIPTION OF THE FUNDS
The Contract Holder will designate some or all of the mutual funds described
below as variable funding options under the Contract. The Contract Holder, or
you, if allowed by the Contract Holder may select one or more of the Funds for
investment of the Purchase Payments made on your behalf. Except where noted, all
of the Funds are diversified as defined in the Investment Company Act of 1940.
- -AETNA VARIABLE FUND seeks to maximize total return through investments in a
diversified portfolio of common stocks and securities convertible into common
stock.
- -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. is a managed mutual fund which 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 Variable Portfolio 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 Variable Portfolio is managed for investors who
generally have an investment horizon exceeding 10 years and who have a moderate
level of risk tolerance.
13
<PAGE>
- -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 fixed income securities. Aetna Legacy Variable
Portfolio is managed for investors who generally have an investment horizon
exceeding five years and who have a low level of risk tolerance.
- -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 SMALL CAPITALIZATION PORTFOLIO seeks
capital return through investment in the common stock of smaller companies
offering the potential for significant price gain. It invests at least 85% of
its net assets in equity securities and at least 65% of its net assets in
equity securities of companies that, at the time of purchase, have "total
market capitalization"--present market value per share multiplied by the total
number of shares outstanding--of less than $1 billion. Investing in smaller
companies may present risks not present in investments in larger companies. See
the Fund's prospectus for a discussion of these risks.
- -CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO is a non-diversified portfolio
that seeks growth of capital through investment in stocks, bonds and money
market instruments issued by enterprises that make a significant contribution
to society through their products and services and through the way they do
business. Prior to May 1, 1995, the Fund was known as the Calvert Socially
Responsible Series.
- -FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II--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--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--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.
- -JANUS ASPEN SERIES--AGGRESSIVE GROWTH PORTFOLIO is a non-diversified portfolio
that seeks long-term growth of capital by emphasizing investments in common
stocks of companies with market capitalizations 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.
- -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. Janus Aspen 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." High yield, high risk securities involve
certain risks. See the Fund's prospectus for a discussion of these risks.
- -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.
14
<PAGE>
- -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 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 supply goods and services to such companies. Current income will not be a
factor. Total return will consist primarily of capital appreciation. 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.
- -NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST--GROWTH PORTFOLIO seeks capital
growth through investments in common stocks of companies that the investment
adviser believes will have above-average earnings or otherwise provide
investors with above-average potential for capital appreciation.
- -SCUDDER VARIABLE LIFE INVESTMENT FUND--INTERNATIONAL PORTFOLIO seeks long-term
growth of capital primarily through diversified holdings of marketable foreign
equity investments. Investing in foreign securities may involve a greater
degree of risk than investing in domestic securities. See the Fund's prospectus
for a discussion of the risks involved.
- -TCI PORTFOLIOS, INC.--TCI GROWTH (a Twentieth Century Fund) 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 Fund may invest 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.
There is no assurance that the Funds will achieve their investment objectives.
Participants bear the full investment risk of investments in the Funds selected.
Contract Holders should read the accompanying prospectuses of the Funds
carefully before investing.
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.
FUND INVESTMENT ADVISERS
The following identifies the investment adviser and the subadvisers, if any, for
each Fund.
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER SUBADVISER
- ------------------------------ ----------------------------- ------------------------
<S> <C> <C>
Aetna Variable Fund Aetna Life Insurance and --
Annuity Company (ALIAC)
Aetna Income Shares ALIAC --
Aetna Variable Encore Fund ALIAC --
Aetna Investment Advisers ALIAC --
Fund, Inc.
Aetna Ascent Variable ALIAC --
Portfolio
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER SUBADVISER
- ------------------------------ ----------------------------- ------------------------
Aetna Crossroads Variable ALIAC --
Portfolio
<S> <C> <C>
Aetna Legacy Variable ALIAC --
Portfolio
Alger American Growth Fred Alger Management, Inc. --
Portfolio
Alger American Small Cap Fred Alger Management, Inc. --
Portfolio
Calvert Responsibly Invested Calvert Asset Management NCM Capital Management
Balanced Portfolio Company, Inc. Group, Inc.
Fidelity Contrafund Portfolio Fidelity Management & --
Research Company
Fidelity Equity-Income Fidelity Management & --
Portfolio Research Company
Fidelity Growth Portfolio Fidelity Management & --
Research Company
Fidelity Overseas Portfolio Fidelity Management & --
Research Company
Janus Aspen Aggressive Growth Janus Capital Corporation --
Portfolio
Janus Aspen Balanced Portfolio Janus Capital Corporation --
Janus Aspen Flexible Income Janus Capital Corporation --
Portfolio
Janus Aspen Growth Portfolio Janus Capital Corporation --
Janus Aspen Short-Term Bond Janus Capital Corporation --
Portfolio
Janus Aspen Worldwide Growth Janus Capital Corporation --
Portfolio
Lexington Natural Resources Lexington Management Market Systems Research
Trust Corporation Advisors, Inc.
Neuberger & Berman Growth Neuberger & Berman Management Neuberger & Berman
Portfolio Incorporated
Scudder International Scudder, Stevens & Clark, --
Portfolio Inc.
TCI Growth Investors Research --
Corporation
</TABLE>
More comprehensive information, including a discussion of potential risks, is
found in the current prospectus for each Fund which is distributed with this
Prospectus. Additional prospectuses and the Statements of Additional Information
for this Prospectus and each of the Funds can be obtained by writing to our Home
Office, Attention: Annuity Operations, or by calling 1-800-525-4225.
SHARED AND MIXED 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."
16
<PAGE>
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 of the insurance
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.
ADDITIONAL FUNDS, LIMITATIONS ON SELECTION OF FUNDS AND SUBSTITUTION OF FUNDS
We may, from time to time, add additional mutual funds as eligible variable
funding options under the Contracts. In such event, the Contract Holder or you,
if permitted by the Contract Holder, may be permitted to select from these other
funds, subject to any conditions that may be imposed in connection with those
options. No more than 18 different choices may be made over the life of the
Account.
The Company's current policy is to allow only 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--Annuity
Period Elections."
The Contract Holder may decide to offer only a select number of Funds as funding
options under its Plan, or may decide to substitute shares of one Fund for
shares of another Fund currently held by the Separate Account.
PURCHASE
CONTRACT PURCHASE
An organization eligible to establish deferred compensation plans may acquire a
group Contract for its Plan by filling out the appropriate master application
form and returning it to the Company or to a Distributor for delivery to the
Company. Once we approve the application, a group Contract is issued to the
organization as Contract Holder. The Contract Holder exercises all rights under
the Contracts. See "Contracts." A Single Purchase Payment Account will be
established for lump-sum transfers of amounts accumulated under a preexisting
Plan. An installment Purchase Payment Account will be issued for continuing,
periodic payments.
Employees of the Contract Holder may fill out an enrollment form or forms and
return them to the Company or to a Distributor for delivery to the Company for
review, acceptance or rejection. 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 Contract Holder or Participant,
pending acceptance of the application or enrollment form. If the application or
enrollment form is accepted, a Contract will be issued to the Contract 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 Contract 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.
For Contracts sold to taxable organizations, this Contract may be aggregated
with other Annuity Contracts purchased by the Contract Holder from us (and our
affiliates) on or after October 21, 1988 for purposes of determining the taxable
portion of payments from this Contract. (See "Tax Status.")
The Contract Holder may cancel the contract within 10 days after receiving it
(or as otherwise allowed by state law). See "Contracts--Right to Cancel" for
more information.
17
<PAGE>
PURCHASE PAYMENTS
Once the application or enrollment form is accepted, Purchase Payments will be
credited to an Account for allocation to the applicable funding options. If
required, premium taxes will be deducted prior to crediting the Purchase
Payments to the Account. See "Charges and Deductions--Premium Tax" and
"Determining Contract Value--Accumulation Units."
The Code may limit the total amount of Purchase Payments made on a Participant's
behalf in a year. See "Tax Status."
MINIMUM AND MAXIMUM PURCHASE PAYMENTS
There is currently no minimum amount for lump-sum purchase payments; however,
the Company reserves the right to set such a minimum in the future. Installment
Purchase Payments must be at least $100 per month ($1,200 annually) per
Participant, and may not be less than $25 per payment. In addition, a distinct
Account will be established for each lump-sum payment of $10,000 or more per
Participant.
Single Purchase Payment Accounts are established for lump-sum transfers to the
Company of amounts accumulated under a pre-existing Plan involving at least
$75,000 with an average Purchase Payment of $10,000 or more per Participant.
The Code imposes a maximum limit on annual Purchase Payments that may be
excluded from your gross income. For Section 457 Plan Participants, such limit
is generally the lesser of $7,500 or 33 1/3% of your includable compensation
(25% of gross compensation).
ALLOCATING PURCHASE PAYMENTS
Each Purchase Payment is forwarded to us through a Distributor.
The Contract Holder or you, if permitted by the Contract Holder, may elect to
have each Purchase Payment accumulate (i) on a variable basis through the
Separate Account by investment in shares of one or more of the Funds; (ii)
through the Fixed Account or the Fixed Plus Account (see Appendix II and III);
(iii) under the Guaranteed Accumulation Account; or (iv) in a combination of (i)
(ii) and (iii). Not all options are available under all Plans. Your enrollment
materials should indicate which options are available for you. The Contract
Holder, or you, if permitted by the Contract Holder, must indicate on the
enrollment forms how the Purchase Payments should be allocated among the
options. The allocations must be in terms of whole percentages. All Purchase
Payments received thereafter will be allocated in the same percentages until new
allocation instructions are received. See the applicable Appendix regarding the
allocation of amounts to the Fixed Account, Fixed Plus Account, or the
Guaranteed Accumulation Account.
DESIGNATIONS OF ANNUITANT
Under the terms of the Contract, the Participant must be the Annuitant. See
"Contracts--Rights Under the Contract."
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"), including at least one affiliate of
the Company, to offer and sell the Contracts. All persons offering and selling
the Contracts must be registered representatives of the Distributors and must
also be licensed as insurance agents to sell Variable Annuity Contracts. These
registered representatives may also provide services to Participants in
connection with establishing their Accounts under the Contract.
Persons offering and selling the Contracts may receive commissions in connection
with the sale of the Contracts. The maximum percentage amount that the Company
will ever pay as commission with respect to any given Purchase Payment is with
respect to those made during the first year of Purchase Payments under an
Account. That percentage amount will range from 1% to 6% of those Purchase
Payments. The Company may also pay renewal commissions on
18
<PAGE>
Purchase Payments made after the first year and asset-based service fees. The
average of all payments made by the Company is estimated to equal approximately
3% of the total Purchase Payments made over the life of an average Contract. The
Company may also reimburse the Distributor for certain actual expenses. The name
of the Distributor and the registered representative responsible for your
Account are set forth on your enrollment form. Commissions and sales related
expenses are paid by the Company and are not deducted from Purchase Payments.
See "Charges and Deductions--Deferred Sales Charge."
Occasionally, we may pay commissions and fees to Distributors which are
affiliated or associated with the Contract Holder or the Participants. We may
also enter into agreements with some entities associated with the Contract
Holder or Participants in which we would agree to pay the association for
certain services in connection with administering the Contracts. In both these
circumstances there may be an understanding that the Distributor or association
would endorse the Company as a provider of the Contract. You will be notified if
you are purchasing a Contract that is subject to these arrangements.
DETERMINING CONTRACT VALUE
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 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 Purchase Payments by the Separate Account. The value
of Accumulation Units attributable to the Funds will be affected by the
investment performance, expenses and charges of those Funds.
Accumulation Units are valued separately for each Fund. Therefore, if you elect
to have a Purchase Payment invested in a combination of Funds, you will have
Accumulation Units credited from more than one source. The value of your 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 Fixed Account, Fixed Plus Account and in GAA.
NET INVESTMENT FACTOR
The value of an Accumulation Unit for any Valuation Period is calculated by
multiplying the 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 the Separate Account 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 an annual rate of 0.75% for
the mortality and expense risks during the Accumulation Period (1.25% during the
Annuity Period), and a daily administrative expense charge which will not exceed
0.25% (0% through April 30, 1996) on an annual basis. The net investment rate
may be more or less than zero.
19
<PAGE>
CONTRACTS
GENERAL
The Contracts are annuities which means that they provide payments in the future
for a fixed period or for life. See "Annuity Period." The amount of the payments
made during the Annuity Period will be determined by the amount of Purchase
Payments received by the Company for your Account and on the investment results
of the funding options that the Contract Holder, or you, if applicable, has
selected. The Contracts offer the ability to have Purchase Payments allocated to
a fixed account which guarantees a minimum rate of interest, to the Guaranteed
Accumulation Account, or to the Separate Account which allows the amounts to be
invested in the shares of a variety of different funds. See "Description of the
Funds."
The Contracts described in this Prospectus are designed to provide retirement
benefits to Participants under:
(1)Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals not subject to Code Section 457 and by taxable
organizations for their employees and/or independent contractors
("Non-Section 457 Plans"); and
(2)Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals that are subject to Code Section 457 for their
employees and/or independent contractors ("Section 457 Plans").
RIGHT TO CANCEL
The Contract Holder may cancel the Contract no later than ten days after
receiving it (or as otherwise allowed by state law) by returning it, along with
a written notice of cancellation, to us. We will produce a refund not later than
seven days after receiving the Contract and the written notice at our Home
Office. Unless the applicable state law requires a refund of Purchase Payments
only, we will refund the Purchase Payment(s) plus any increase or minus any
decrease in the value attributable to any Purchase Payments allocated to the
variable option(s).
RIGHTS UNDER THE CONTRACT
All rights under the Contract rest with the Contract Holder, which is usually
the employer or other obligor under the Plan. The Contract will be part of the
employer's general assets, subject to the claims of its general creditors.
Benefits available to you are governed exclusively by the provisions of the Plan
and are backed only by the general assets of the employer. Some of the options
and elections under the Contract may not be available to you under the
provisions of the Plan. Contact your employer for information regarding the
specifics of your plan.
ALLOCATION CHANGES AND TRANSFERS
During each calendar year, the Contract Holder, or you, if permitted by the
Contract Holder, may change the allocation of future Net Purchase Payments among
the allowable investment options. Unlimited allocation changes are allowed.
You may also make any number of transfers of not less than $500 among funding
options during the calendar year, without charge.
Any transfer will be based on the Accumulation Unit value next determined after
we receive a valid request at our Home Office. See Appendix I, II, and III for
information on transfers from credited interest options.
During the Annuity Period, transfers of accumulated values are not allowed.
WITHDRAWALS DURING ACCUMULATION PERIOD
The Contract Holder may withdraw all or a portion of the Account Value during
the Accumulation Period by properly completing a disbursement form and sending
it to the Home Office. Disbursement forms are available from the Company and our
representatives. Withdrawals may be requested in one of the following ways:
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<PAGE>
- - FULL WITHDRAWAL OF THE CONTRACT: The amount paid will be the full value of the
Funds, GAA and the Fixed Account held in all Accounts minus any applicable
deferred sales charge plus one-fifth of the amount held in the Fixed Plus
Account*, minus any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months. Amount withdrawn from GAA may be
subject to a market value adjustment. See Appendix I.
- - FULL WITHDRAWAL OF AN ACCOUNT: The amount paid will be the full value of the
Funds, GAA and the Fixed Account held in the Account minus any applicable
deferred sales charge plus one-fifth of the amount held in the Fixed Plus
Account*, minus any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months. Amounts withdrawn from GAA may be
subject to a market value adjustment. See Appendix I.
- - PARTIAL WITHDRAWAL (PERCENTAGE): The amount paid will be the percentage of the
Account value requested minus any applicable deferred sales charge. However,
amounts withdrawn from the Fixed Plus Account may not exceed 20% minus any
Fixed Plus Account withdrawals, transfers or annuitizations in the prior 12
months.** Amounts withdrawn from GAA may be subject to a market value
adjustment. See Appendix I.
- - PARTIAL WITHDRAWAL (SPECIFIC DOLLAR AMOUNT): The amount paid will be the
dollar amount requested. However, the amount withdrawn from the Account will
equal the dollar amount requested, plus any applicable deferred sales charge.
The amount withdrawn from the Fixed Plus Account may not exceed 20% minus any
Fixed Plus Account withdrawals, transfers or annuitizations in the prior 12
months.** Amounts withdrawn from GAA may be subject to a market value
adjustment. See Appendix I.
* Note: The balance of the amount held in the Fixed Plus Account will be paid in
four annual installments. If a full withdrawal is due to death or
annuitization, or if the Account Value is $3,500 or less (and no withdrawals,
transfers or annuitizations have been made from the Account within the prior
twelve months), the entire amount held in the Fixed Plus Account will be paid
in one lump sum (or used to provide Annuity payments) rather than in annual
installments. See Appendix III for more information.
**The 20% limit is waived if the partial withdrawal is due to annuitization or
death. See Appendix III for more information.
All amounts paid will be based on Account Values as of the end of the Valuation
Period in which the request is received in the Home Office. If a later payment
date is specified, the amount paid will be based on the Account Value as of that
date. For any partial withdrawal, unless requested otherwise by the Contract
Holder, the value of the Accumulation Units cancelled will be withdrawn
proportionately from each investment option used under the Account.
Payments for withdrawal requests (subject to the above limitations on
withdrawals from the Fixed Plus Account) will be made in accordance with SEC
requirements, but normally not later than seven calendar days after a properly
completed disbursement form is received at our Home Office or within seven
calendar days of the date the disbursement form may specify. Payments may be
delayed for: (a) any period in which the New York Stock Exchange ("Exchange") is
closed (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 where
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 Contract Holders and Participants. The conditions under which
restricted trading or an emergency exists shall be determined by the rules and
regulations of the SEC.
For Contracts sold to taxable organizations, tax treatment of withdrawals from
this Contract may be modified if the Contract Holder owns other Annuity
Contracts issued by the Company (and its affiliates) that were purchased on or
after October 21, 1988. (See "Tax Status.")
CHARGES AND DEDUCTIONS
This section describes the maximum Contract charges which we may deduct for
administrative expenses and sales-related expenses. A description of mortality
and expense risk charges and Fund expenses is also included.
21
<PAGE>
Certain Contract Holders may qualify for a reduction of the charges described in
this section. We will not reduce or eliminate any charges that would be unfairly
discriminatory to any other Contract Holders.
MORTALITY AND EXPENSE RISK CHARGES
We make a daily deduction from the Separate Account for mortality and expense
risks. The deduction, made as part of the calculation of Accumulation Unit
value(s), is equivalent to 0.75% per year. During the Annuity Period, the
deduction for mortality and expense risks is equivalent to 1.25%. The mortality
risk charge is to compensate us for the risk we assume when we promise to
continue making payments for the lives of individual Annuitants according to
Annuity rates specified in the Contract at issue. 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.
For 1994, we received $8,918,042 for mortality and expense risks from Contracts
under Account B.
ADMINISTRATIVE EXPENSE CHARGE
We reserve the right to deduct a daily charge of not more than 0.25% per year
from the variable portion of Contract values to reimburse us for some of the
expenses incurred by us for administering the Contract. We will establish this
charge on an annual basis effective each May 1 through April 30 of the following
year. During the Accumulation Period, the charge may fluctuate annually. Once an
Annuity option is elected, no further change will be made to the then-effective
administrative fee deducted from the variable portion of Annuity Payments.
For the period through April 30, 1996, we have established the charge to be
zero. Since the administrative expense charge is a percentage of the variable
portion of Account Values, there may be no relationship between the amount so
deducted and the amount of expenses attributable to the Contract.
FUND EXPENSES
Each Fund has an investment adviser. An investment advisory fee, based on the
Fund's average net assets, is deducted from the assets of each Fund and paid to
the investment adviser.
Most expenses incurred in the operations of each Fund are borne by that Fund.
Fund advisers may reimburse the Funds they advise for some or all of these
expenses. For further details on each Fund's expenses, you and the Contract
Holder should read the accompanying prospectus for each Fund, and refer to the
Fee Table in this Prospectus.
CHARGES FOR WITHDRAWALS (DEFERRED SALES CHARGE)
There are no deductions from Purchase Payments for sales or administrative
expenses. However, if all or any portion of an Account value is withdrawn during
the Accumulation Period, a percentage of the amount withdrawn may be deducted
from that amount as a deferred sales charge, so that we may recover sales and
administration-related expenses. In addition, if the nonlifetime Annuity option
is elected on a variable basis and the remaining value is withdrawn before three
years of Annuity payments have been completed, the applicable deferred sales
charge will be assessed. (See "Annuity Options.") (For a further explanation of
a deferred sales charge calculation, see "Withdrawals During Accumulation
Period.")
The following tables reflect the deferred sales charge deduction as a percentage
of the amount withdrawn from the Funds, GAA and the Fixed Account.
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<TABLE>
<CAPTION>
INSTALLMENT PURCHASE PAYMENT ACCOUNTS:
PURCHASE PAYMENT DEFERRED SALES
PERIODS COMPLETED CHARGE DEDUCTION
---------------------------------------- ----------------
<C> <C>
Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or 10 2%
More than 10 0%
<CAPTION>
SINGLE PURCHASE PAYMENT ACCOUNTS:
ACCOUNT YEARS DEFERRED SALES
COMPLETED CHARGE DEDUCTION
---------------------------------------- ----------------
<C> <C>
Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
</TABLE>
The deduction for the deferred sales charge will not exceed 8.5% of the total
Purchase Payments made to the Account.
For all Non-Section 457 Plans, a deferred sales charge is not deducted from any
portion of the Account Value which is:
(a) applied to provide Annuity benefits;
(b) withdrawn on or after the tenth anniversary of the effective date of the
Account or Plan Account;
(c) paid due to the death of the Participant;
(d) withdrawn due to the election of the Systematic Withdrawal Option;
(e) paid where the Account Value is $3,500 or less and no amount has been
withdrawn from that Account within the prior 12 months. If more than one
Account is being fully withdrawn on behalf of a Participant, all Account
Values will be added together to determine eligibility for the $3,500
exemption. This provision is not available under Plan Accounts (where
Accounts are not maintained by the Company) nor is it applicable to the
withdrawal of all Accounts under one Contract established with the Company;
(f) paid due to the Participant's separation from service with the employer; or
(g) withdrawn from an installment Purchase Payment Account provided the
Participant is at least age 59 1/2 and nine Purchase Payment periods have
been completed.
For Section 457 Plans, a deferred sales charge is not deducted from any portion
of the Account Value which is:
(a) applied to provide Annuity benefits;
(b) withdrawn on or after the tenth anniversary of the effective date of the
Account or Plan Account;
(c) paid due to the death of the Participant;
(d) withdrawn due to the election of the Estate Conservation Option or
Systematic Withdrawal Option;
(e) withdrawn from an installment Purchase Payment Account providing the
Participant is at least age 59 1/2 and nine Purchase Payment Periods have
been completed for the benefit of the Participant;
(f) withdrawn due to a hardship resulting from an unforeseeable emergency, as
specified in the Code;
(g) paid due to the Participant's separation from service with the employer; or
(h) paid where the Account Value is $3,500 or less and no amount has been
withdrawn or used to purchase Annuity benefits from that Account during the
prior 12 months. If more than one Account is being fully withdrawn on behalf
of a Participant, all Account Values will be added together to determine
eligibility for the $3,500 exemption. This provision is not available under
Plan Accounts (where Accounts are not maintained by the Company) nor is it
applicable to the withdrawal of all Accounts under one Contract established
with the Company.
Based on our actuarial determination, we do not anticipate that the deferred
sales charge will cover all sales and administrative expenses which we will
incur in connection with the Contract. Also, we do not intend to profit from the
administrative expense charge, if imposed. We do hope to profit from the daily
deduction for mortality and expense risks. Any such profit, as well as any other
profit realized by us and held in the general account (which supports insurance
and annuity obligations), would be available for any proper corporate purpose,
including, but not limited to, payment of sales and distribution expenses.
23
<PAGE>
Reduction or elimination of the deferred sales charge can be made if we
anticipate we will incur decreased sales-related expenses due to the nature of
the Plan to which the Contract is issued. When considering a change to the
deferred sales charge, we will take into account:
(a) The size, characteristics and nature of the group to which a Contract is
issued;
(b) The expected level of initial agent or our involvement during the
establishment and maintenance of the Contract including the amount of
enrollment activity required, and the amount of service required by the
Contract Holder in support of the Plan;
(c) Contract Holder involvement in conducting ongoing enrollment of subsequently
eligible Participants; and
(d) Any other factors which we anticipate will affect the sales-related expenses
associated with the sale of the Contract in connection with the Plan.
PREMIUM TAX
Several states and municipalities impose a premium tax on Annuities. Currently
such taxes range up to 4%. Ordinarily, in states that do impose a premium tax,
it would be deducted from the amount applied to an Annuity option. However, we
reserve the right to deduct a state premium tax at any time from the Purchase
Payment(s) or from the Account Value based upon our determination of when such
tax is due.
Any municipal premium tax assessed at a rate in excess of 1% will be deducted
from the Purchase Payments or from the amount applied to an Annuity option based
upon 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 its Annuity purchase rates for residents of such
municipalities.
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").
ECO is available only to Section 457 Plan Participants.
No deferred sales charge is assessed on the amounts distributed under these
options. Since ECO and SWO are not Annuity options, the Accounts remains in the
Accumulation Period, retains all the rights and flexibility described in this
prospectus, and is subject to all other contract charges. The value of the
Accumulation Units cancelled will be withdrawn proportionately from the
investment options used under the Account. We reserve the right to discountinue
the availability of these options and to change the terms for future elections.
Once elected, the applicable option(s) may be revoked by the Contract Holder or
Participant 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. However, if you die after revoking SWO but
before a minimum distribution is required, the Contract Holder can elect SWO on
behalf of your spouse if your spouse is the Plan beneficiary.
You should determine the availability of ECO and SWO under the Plan (by checking
with your employer), and the terms and conditions that may apply (the Code
requires that any pay-out election under a deferred compensation plan must be
irrevocable). You must have an Account Value of at least $25,000 at the time of
election.
SWO is different from ECO in the following ways: (1) SWO payments are made for a
fixed dollar amount or fixed time period whereas ECO payments vary in dollar
amount and are made during your lifetime, and (2) generally, SWO payments will
be higher than expected ECO payments. You should carefully assess your future
income needs when considering the election of these options.
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<PAGE>
ESTATE CONSERVATION OPTION
At the time of ECO election, the value of your Account applied to ECO must be at
least $25,000. The first distribution may not be made until the first day of the
calendar year in which you attain age 70 1/2.
We will calculate and distribute an annual amount using the method contained in
the Code's minimum distribution regulations. The annual distribution is
determined by dividing the prior December 31 value of the Account by a life
expectancy factor. The factor will be based on either your life expectancy or
the joint life expectancies of you and your designated Plan beneficiary, as
directed by the Contract Holder, and based on tables in IRS regulations. If ECO
is elected based only on your life expectancy, the full Account Value must be
distributed in the year following your death as required by current IRS
regulations. If ECO is based on joint life expectancy and the survivor dies, the
full Account must be distributed in the year following his or her death. Factors
will be recalculated for each year's distribution. The value of the Account to
be used in this calculation is the value on the December 31st prior to the year
for which 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 may be monthly, quarterly, semiannually or annually. However,
distributions may not be elected until you are eligible to begin receiving
distributions under the Plan. No election may be made that would result in a
payment of less than $250.
At the time of SWO election, the value of your Account(s) applied to SWO must be
at least $25,000.
One of two methods of distribution may be elected:
(a) Specified Payment -- payments of a designated amount. The annual dollar
amount chosen cannot be greater than 20% of the initial cash value applied
to SWO. The Specified Payment amount will remain constant unless a higher
amount is required under Code minimum distribution requirements. The minimum
required distribution is determined by dividing the value of the Account or
Participant's portion of the Plan Account on the December 31st prior to the
year for which payment is being made by the life expectancy factor. If the
dollar amount chosen is less than the Code's minimum required distribution,
we will pay the minimum distribution amount.
(b) Specified Period -- payments for a designated time period. The specified
period must be at least 5 years but not greater than the Participant's life
expectancy factor. Each annual distribution is determined by dividing the
value of the Account or Participant's portion of the Plan Account on the
December 31st prior to the year for which the payment is being made by the
number of years remaining in the elected period. For payments made more
often than annually, the annual payment result (calculated above) is divided
by the number of payments due each year.
A life expectancy factor from tables designated by the IRS will be used to
determine the minimum distribution amounts required. The factor will be based on
either your life expectancy or the joint life expectancies of you and your
designated beneficiary, as directed by the Contract Holder. Factors will be
reduced by one for each distribution year.
ANNUITY PERIOD
ANNUITY PERIOD ELECTIONS
The Contract Holder must notify us in writing of the Annuity start date and
Annuity option elected. Until a date and option are elected, the Account or Plan
Account will continue in the Accumulation Period.
The Contract Holder must give written notice to us at least 30 days before
Annuity payments begin, electing or changing (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) used to provide Annuity payments (i.e., a fixed annuity using the
general account, Aetna Variable Fund, Aetna Income Shares, Aetna Investment
Advisers
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Fund, Inc., or any combination thereof). No other variable Funds may currently
be used as investment options during the Annuity Period. Once Annuity Payments
begin, the Annuity Option may not be changed, nor may transfers be made among
funding options.
During the Annuity Period, we will deduct a daily mortality and expense risk
charge equivalent to 1.25% annually from amounts held under the variable
options.
We may also deduct a daily administrative expense 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.
If Annuity payments are to be made on a variable basis, the first and subsequent
payments will vary depending on the assumed net investment rate (3 1/2% per
annum, unless a 5% annual rate is elected). 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 exceeds 5% on an annualized basis. Annuity
payments would decline if the rate were below 5%. 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.
No election may be made that would result in a first Annuity payment of less
than $20 or total yearly Annuity payments of less than $100. If the value of the
Account or Plan Account is insufficient to elect an option for the minimum
amount specified, a lump-sum payment must be elected.
When payments start, the age of the Annuitant plus the number of years for which
payments are guaranteed must not exceed 95.
NON-SECTION 457 PLANS. For all Non-Section 457 Plans, the retirement date and
the Annuity Options available to Participants are normally established by the
terms of the Plan.
SECTION 457 PLANS. Section 401(a)(9) of the Code has required minimum
distribution rules for Section 457 Plans. For all Section 457 Plans, the
retirement date and the Annuity Options available to you are normally
established by the terms of the Plan, subject to applicable provisions of the
Code. Under such rules, generally, for all nongovernmental Section 457 Plans,
distributions must begin no later than April 1st of the calendar year following
the calendar year in which the Participant attains age 70 1/2. In addition,
distributions must be in a form and amount sufficient to satisfy the Code
requirements.
In determining the amount of benefit payments, the minimum distribution
incidental death benefit rule described in IRS regulations* must be satisfied.
Annuity payments may not extend beyond (a) your life, (b) the joint lives of you
and your Plan beneficiary, (c) a period certain greater than your life
expectancy, or (d) a period certain greater than the joint life expectancies of
you and your Plan beneficiary.
You will be subject to a 50% federal penalty tax on the amount of distribution
required each year which is not distributed under the Code's minimum
distribution rules.
* This rule assures that any death benefits payable under the Plan are
incidental to the primary purpose of the Plan which is to provide retirement
benefits or deferred compensation to you. The amount to be distributed under
this rule is determined from tables contained in the IRS regulations and is
based on your age or the ages of you and your Plan beneficiary.
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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
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 payments.
(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
than options not providing a guaranteed payment period.
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, neither the Contract Holder nor the
Annuitant can elect to receive a lump-sum settlement or change the Annuity
option elected.
NONLIFETIME:
Under the nonlifetime option, the type of annuity (fixed or variable) and the
number of years that may be selected are determined by the investment options
used prior to annuitization.
Payments for a Specified Period of Time--For amounts held in the Fixed Plus
Account, an Annuity with payments to be made for at least five but not more
than thirty years on a fixed basis. For amounts held in the Funds, GAA or
the Fixed Account, an Annuity with payments to be made for three to thirty
years, as selected, on a fixed or variable basis. If this option is elected
on a variable basis, the Contract Holder 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. 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--Charges for Withdrawals.") This
option is not available on a variable basis under a Contract which provides
for immediate Annuity benefits.
We make a daily deduction for mortality and expense risks from any Contract
values 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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In addition to the Annuity options described above, we may, with the Contract
Holder's consent, make optional methods of payment available to you and other
payees.
DEATH BENEFIT
ACCUMULATION PERIOD
All or a portion of any death proceeds may be (a) paid to the beneficiary in a
lump sum; (b) applied under any of the Annuity Options; (c) subject to
applicable provisions of the Code, left in the variable investment options; or
(d) if the beneficiary is your spouse, paid under ECO or SWO. Any lump-sum
payment paid during the Accumulation Period will normally be made within seven
calendar days after proof of death acceptable to us and a request for payment
are received at our Home Office.
Until the election of a method of payment, amounts will remain invested as they
were before death. For Section 457 Plans, the Code requires that distributions
begin within a certain time period, as described below. If no elections are made
concerning distribution, no distributions will be made. Failure to commence
distribution within the following time periods can result in tax penalties.
NON-SECTION 457 PLANS. For Non-Section 457 Plans, if required by the Code,
the entire value must be distributed within five years after the date of
death unless an Annuity Option is elected within one year.
SECTION 457 PLANS. For all Section 457 Plans, if your designated beneficiary
under the Section 457 Plan is your surviving spouse, distribution to the
Plan beneficiary is not required to begin earlier than when you would have
attained age 70 1/2 to begin Annuity payments, to receive a lump-sum
distribution, or to elect and begin receiving distributions under ECO or
SWO. If your designated beneficiary under the Section 457 Plan is not your
surviving spouse, the Section 457 Plan must provide that either Annuity
Payments begin within one year of the Participant's death, or the entire
value must be distributed within five years of the Participant's death. For
any non-spouse beneficiary, Annuity payments may not extend beyond fifteen
years. In either case, payments to any Participant's beneficiary may not
extend beyond the life of the Participant's beneficiary or any period
certain greater than the Participant beneficiary's life expectancy and must
be in substantially nonincreasing amounts.
If you die before Annuity Payments have begun and if a lump-sum distribution is
elected, the Plan beneficiary will receive the value of the Account or
appropriate portion of the Plan Account's value determined as of the Valuation
Period in which proof of death acceptable to us and a request for payment from
the Contract Holder are received at our Home Office.
If an Annuity Option is elected, the value applied to the Annuity Option is
determined in the same manner as a lump-sum distribution, the amount of payout
will depend on the annuity option elected and the investment option(s) used to
provide such payments. See "Annuity Period." If amounts are left in the variable
investment options, the account value will continue to be affected by the
investment performance of the investment option(s) selected. 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.")
ANNUITY PERIOD
If an Annuitant dies after Annuity payments have begun, any death benefit
payable will depend upon the terms of the Contract and the Annuity option
selected.
If lifetime option (a) or (b) was elected without a guaranteed minimum payment
period under the Contract, Annuity payments will cease upon the death of the
Annuitant under a Life Annuity or the death of the surviving Annuitant under
options (b)(i), (ii), (iii) or (v).
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Under the Contract, if lifetime options (a) or (b) were elected with a
guaranteed minimum payment period and the death of the second Annuitant under
option (a) or the surviving Annuitant under option (b)(iv) occurs prior to the
end of that period, we will pay to the designated Plan beneficiary in a lump
sum, unless otherwise requested, the present value of the guaranteed Annuity
payments remaining. Such value will be determined as of the Valuation Period in
which proof of death acceptable to us and a request for payment are received at
our Home Office. The value will be reduced by any payments made after the date
of death.
If the nonlifetime option was elected under the Contract and the Annuitant dies
before all payments are made, the value of any remaining payments may be paid in
a lump sum to the Plan beneficiary and no deferred sales charge will be imposed.
Such value will be determined as of the Valuation Period in which proof of death
acceptable to us and a request for payment are received at our Home Office.
Any lump sum payment paid under the applicable lifetime or nonlifetime Annuity
Options will normally be made within seven calendar days after proof of death,
acceptable to us, and a request for payment are received at our Home Office.
For Non-Section 457 Plans, if required by the Code, and there is a death benefit
payable under the Annuity Option elected, the remaining values must be
distributed at least as rapidly as under the original method of distribution.
For Section 457 Plans, if there is a death benefit payable under the Annuity
Option elected, Annuity Payments must be distributed to your beneficiary at
least as rapidly as under the original method of distribution and in
substantially nonincreasing amounts.
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 Contract may be purchased and used in connection with:
(1) Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals not subject to Code Section 457 and by taxable
organizations for their employees and/or independent contractors; and
(2) Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals that are subject to Code Section 457 for their
employees and/or independent contractors.
The ultimate effect of federal income taxes on the amounts held under a
Contract, or Annuity Payments, and on the economic benefit to the Contract
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 Part I of Subchapter L of
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. Investment
income and realized
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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 realized 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.
TAX STATUS OF THE CONTRACT
With respect to contracts sold to taxable organizations, Section 817(h) of the
Code requires that, the investments of the Funds be "adequately diversified" in
accordance with Treasury Regulations in order for the Contracts to qualify as
annuity contracts with 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 affect how the Fund's assets may be
invested.
In certain circumstances, owners of variable annuity contracts that are taxable
organizations 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. One of the
circumstances that has raised this issue is the number of funding options
available under the Contract. The Company reserves the right to modify the
Contract as necessary to attempt to prevent a Contract Holder from being
considered the owner of a pro rata share of the assets of the Separate Account.
SECTION 457 PLANS
The Contract is designed for use with Section 457 plans. The tax rules
applicable to participants and beneficiaries in retirement plans vary according
to the terms and conditions of the Plan. Special favorable tax treatment may be
available for certain types of contributions. Adverse tax consequences may
result from contributions in excess of specified limits; distributions prior to
separation from service (subject to certain exceptions); distributions that do
not conform to specified commencement and minimum distribution rules; and in
other specified circumstances.
The Company makes no attempt to provide more than general information about use
of the Contracts with Section 457 plans. Contract Holders and participants under
Section 457 plans as well as annuitants and beneficiaries are cautioned that the
rights of any person to any benefits under the Contracts may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract issued in connection with such a plan. Section 457
plans are subject to distribution and other requirements that are not
incorporated in the provisions of the Contracts. Contract Holders are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts satisfy applicable law. Purchasers of
Contracts for use with any Section 457 plan should consult their legal counsel
and tax adviser regarding the suitability of the Contract.
Section 457 provides for certain deferred compensation plans. These plans may be
offered with respect to service for state governments, local governments,
political subdivisions, agencies, instrumentalities and certain affiliates of
such entities, and tax exempt organizations. These plans are subject to various
restrictions on contributions and distributions. The plans may permit
participants to specify the form of investment for their deferred compensation
account. In general, all investments are owned by the sponsoring employer and
are subject to the claims of the general creditors of the employer. Depending on
the terms of the particular plan, the employer may be entitled to draw on
deferred amounts for purposes unrelated to its Section 457 plan obligations. In
general, all amounts received under a Section 457 Plan are taxable and
reportable to the IRS as taxable income. This includes payments for death
benefits, periodic and nonperiodic distributions. Also, all amounts except death
benefit proceeds are subject to federal income tax withholding as wages. If we
make payments directly to a participant on behalf of the employer as Contract
Holder, we will withhold federal taxes (and state taxes, if applicable).
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PLANS OF NON-SECTION 457 TAX-EXEMPT ORGANIZATIONS AND TAXABLE ORGANIZATIONS
Effective January 1, 1987, rules applicable to deferred compensation plans of
state and local governments (Section 457 of the Code) were extended to deferred
compensation plans sponsored by tax-exempt employers. While no limitation is
imposed on deferrals under deferred compensation plans of taxable employers,
each Participant in a plan subject to Section 457 has a maximum allowable annual
deferral of $7,500 or 33 1/3% of the Participant's includible compensation.
However, the Code does allow the following "grandfathering" provisions for those
who were Participants in tax-exempt employer deferred compensation plans, as of
August 16, 1986.
(1) Section 457 shall not apply to amounts deferred from taxable years beginning
before January 1, 1987.
(2) Section 457 shall not apply to amounts deferred from taxable years beginning
after December 31, 1986 provided (a) a deferral agreement was in writing on
August 16, 1986, and (b) as of August 16, 1986, the agreement provided for a
deferral of a fixed amount or of an amount determined pursuant to a fixed
formula, and (c) the agreement has not been modified as to amount or formula
after August 16, 1986.
Only individuals may participate under a Section 457 Plan subject to the Section
457 rules. Therefore, corporations may not participate in tax-exempt employer
deferred compensation plans unless they qualify under the "grandfathering"
provisions.
Any reference in this prospectus to Section 457 Plans relates only to
contributions subject to Section 457 of the Code and these references do not
apply to "grandfathered" contributions.
In general, all amounts received under these Plans are taxable and, except for
death benefit payments, are subject to federal income tax withholding as wages.
This includes payments for periodic and nonperiodic distributions. Under Plans
sponsored by taxable organizations, such payments made to a Participant are
generally deductible by the Contract Holder as compensation paid to the
Participant. If we make payments directly to a Participant or beneficiary on
behalf of the employer as Owner, we will report to the IRS the taxable income
and we will withhold federal taxes (and state taxes, if applicable) for payments
to Participants.
The owner of a Contract who is not a natural person must generally include in
income any increase in the excess of the Account Value over the "investment in
the contract" during the taxable year. There are some exceptions to this rule
and prospective owners that are not natural persons may wish to discuss this
with a competent tax advisor.
For contracts sold to taxable organizations, Section 72(e)(11) of the Code
provides that Annuity Contracts issued by the same insurer (and its affiliates)
to the same Contract Holder during a calendar year shall be treated as a single
Annuity Contract. This means, that any amount received under this Contract, or
any other Contract subject to this provision, prior to the Contracts Annuity
starting date will be taxable (and possibly subject to the 10% penalty tax) to
the extent of the combined income in all such Contracts. For purposes of this
section, immediate Annuity Contracts, and Contracts used to fund qualified
pension and profit-sharing plans under Section 401(a) of the Code, Annuity plans
under Sections 403(a) or 403(b) of the Code, and individual retirement annuities
and accounts under Section 408 of the Code are not aggregated.
POSSIBLE CHANGES IN TAXATION
In past years, legislation has been proposed that would have adversely modified
the federal taxation of certain annuities. 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).
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
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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 Contract 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 meetings of
shareholders 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 is equal to the portion of the
current value 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 applicable to 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.
Each Contract Holder will receive a notice of each meeting of shareholders of
that Fund, together with any proxy solicitation materials, and a statement of
the number of votes attributable to the Contract. Votes attributable to Contract
Holders who do not direct us will be cast by us in the same proportion as the
votes for which we have received directions.
MODIFICATION OF THE CONTRACT
Changes to the following Contract provisions may be considered material by us
and cannot be changed without the approval of appropriate state of federal
regulatory authorities; transfers among investment options; notification to the
Contract Holder; conditions governing payments of surrender values; terms of
Annuity options; and death benefit payments.
The following provisions may be changed with 30 days' advance written notice to
the Contract Holder, with the Contract Holder's consent. Such changes would only
apply to future Accounts:
(a) the Annuity options;
(b)the contractual promise that no deduction will be made from Purchase
Payment(s) for sales or administrative expenses;
(c) the deferred sales charge, if applicable;
(d) the mortality and expense risk charges; and
(e) the administrative expense charge provision.
If a Contract Holder has not accepted a proposed change at the time of its
effective date, we will discontinue establishing new Accounts and we reserve the
right to discontinue accepting Purchase Payments to existing Accounts.
We may also change any provision that must be altered to comply with state or
federal law.
Once an Annuity has begun, we will not change the terms or the amount of the
Annuity payments, unless a change is deemed necessary to comply with Code
requirements or other laws and regulations affecting the Plan or Contract.
CONTRACT HOLDER INQUIRIES
A Contract Holder or Participant may direct inquiries to a local representative
of the Distributor or may write directly to us at the address shown on the cover
page of this Prospectus.
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TELEPHONE TRANSFERS
Subject to the Contract Holder's approval, you automatically have the right to
make transfers among Funds by telephone. We have enacted procedures to prevent
abuses of Account transactions by telephone. The procedures include requiring
the use of a personal identification number (PIN) to execute transactions. You
are responsible for safeguarding your PIN, and for keeping Account information
confidential. If the Company fail to follow its procedures, it would be liable
for any losses to your Account resulting from the failure. To ensure
authenticity, we record all calls on the 800 line. Note: all Account information
and transactions permitted are subject to the terms of the Plan(s).
TRANSFER OF OWNERSHIP; ASSIGNMENT
No assignment of a Contract will be binding on us unless made in writing and
sent to us at our Home Office. The Company will use reasonable procedures to
confirm that the assignment is authentic, including verification of signature.
If the Company fails to follow its procedures, it would be liable for any losses
to you directly resulting from the failure. Otherwise, we are not responsible
for the validity of any assignment. The rights of the Contract Holder and the
interest of the Annuitant and any Beneficiary will be subject to the rights of
any assignee of record.
LEGAL PROCEEDINGS
We know of no material legal proceedings pending to which the Separate Account
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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<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION--TABLE OF CONTENTS
The following items are the contents of the Statement of Additional Information:
<S> <C>
General Information and History.................................................................... 2
Offering and Purchase of Contracts................................................................. 2
Performance Data................................................................................... 2
General...................................................................................... 2
Average Annual Total Return Quotations....................................................... 3
Annuity Payments................................................................................... 4
Dollar-Cost Averaging.............................................................................. 5
Sales Material..................................................................................... 5
Independent Auditors............................................................................... 6
Financial Statements of the Separate Account....................................................... S-1
Financial Statements of Aetna Life Insurance and Annuity Company................................... F-1
</TABLE>
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APPENDIX I
GUARANTEED ACCUMULATION ACCOUNT
THE GUARANTEED ACCUMULATION ACCOUNT ("GAA") IS A CREDITED INTEREST OPTION
AVAILABLE DURING THE ACCUMULATION PERIOD UNDER THE CONTRACTS DESCRIBED IN THIS
PROSPECTUS. YOU AND THE CONTRACT HOLDER SHOULD READ THE ACCOMPANYING GAA
PROSPECTUS CAREFULLY BEFORE INVESTING. THIS APPENDIX IS A SUMMARY OF GAA AND IS
NOT INTENDED TO REPLACE THE GAA PROSPECTUS. AMOUNTS ALLOCATED TO GAA ARE HELD IN
A NONINSULATED, NONUNITIZED SEPARATE ACCOUNT.
GAA is a credited interest option in which we guarantee stipulated rates of
interest for stated periods of time on amounts directed to GAA. 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. This option guarantees the
minimum interest rate specified in the Contract.
During a specified period of time, amounts may be applied to any or all of
available Guaranteed Terms within the Short-Term and Long-Term Classifications.
The Short-Term Classification consists of all Guaranteed Terms of 3 years or
less and the Long-Term Classification consists of all Guaranteed Terms of 10
years or less, but greater than 3 years.
Withdrawals or transfers from a Guaranteed Term before the end of that
Guaranteed Term 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 paid into GAA.
As a Guaranteed Term matures, assets accumulating under GAA may be (a)
transferred to a new Guaranteed Term, (b) transferred to the other available
investment options, or (c) withdrawn. Amounts withdrawn may be subject to a
deferred sales charge and/or tax liabilities.
By notifying us at our Home Office at least 30 days before the Annuity payments
begin, amounts that have been accumulating under GAA may be transferred to one
or more of the funds available during the Annuity Period, to provide variable
Annuity payments. GAA cannot be used as an investment option during the Annuity
Period.
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.
Transfers are permitted from Guaranteed Terms of one Classification to available
Guaranteed Terms of another Classification. We will apply an MVA to GAA
transfers made before the end of a Guaranteed Term. Transfers of GAA values due
to a maturity are not subject to an MVA.
REINVESTMENT PRIVILEGE
Any amounts reinvested in GAA will be applied to the current deposit period.
Amounts are proportionately reinvested to the Classifications in the same manner
as they were allocated before the withdrawal. Any negative MVA amount applied to
a withdrawal is not included in the reinvestment.
35
<PAGE>
APPENDIX II
FIXED ACCOUNT
THE FOLLOWING SUMMARIZES MATERIAL INFORMATION CONCERNING THE FIXED ACCOUNT.
AMOUNTS ALLOCATED TO THE FIXED ACCOUNT ARE HELD IN THE COMPANY'S GENERAL ACCOUNT
THAT SUPPORTS GENERAL INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED
ACCOUNT HAVE NOT BEEN REGISTERED WITH THE SEC IN RELIANCE ON EXEMPTIONS UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. DISCLOSURE IN THE PROSPECTUS REGARDING
THE FIXED ACCOUNT, MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE
PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND
COMPLETENESS OF SUCH STATEMENTS. DISCLOSURE IN THIS APPENDIX REGARDING THE FIXED
ACCOUNT HAS NOT BEEN REVIEWED BY THE SEC.
The Fixed Account guarantees the minimum interest rate specified in the
Contract. The Company may credit a higher interest rate from time to time. The
current rate is subject to change at any time, but will never fall below the
guaranteed minimum. The Company's determination of interest rates reflects the
investment income earned on invested assets and the amortization of any capital
gains and/or losses realized on the sale of invested assets. Under the Fixed
Account, the Company assumes the risk of investment gain or loss by guaranteeing
Account Values and promising a minimum interest rate and Annuity Payment. The
Fixed Account is available under Installment Purchase Payment contracts only.
Under certain emergency conditions, we may defer payment of a Fixed Account
withdrawal value (a) for a period of up to six months, or (b) as provided by
federal law.
Amounts applied to the Fixed Account will earn the interest rate in effect when
actually applied to the Fixed Account.
The Fixed Account will reflect a compound interest rate credited by us. The
interest rate quoted is an annual effective yield. We make no deductions from
the credited interest rate for mortality and expense risks, these risks are
considered in determining the credited rate.
If a withdrawal is made from the Fixed Account, a deferred sales charge may
apply. (See "Charges and Deductions-- Charges for Withdrawals.")
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers from the Fixed Account to any other available investment option(s) are
allowed in each calendar year during the Accumulation Period. The amount which
may be transferred may vary at our discretion; however, it will never be less
than 10% of the amount held under the Fixed Account. Transfers to the Fixed Plus
Account (if available under the Contract) will be permitted without regard to
this limitation.
ANNUITIZATIONS
By notifying us at our Home Office at least 30 days before Annuity Payments
begin, you may elect to have amounts which have been accumulating under the
Fixed Account transferred to one or more of the Funds available during the
Annuity Period to provide variable Annuity Payments.
36
<PAGE>
APPENDIX III
FIXED PLUS ACCOUNT
THE FIXED PLUS ACCOUNT IS AN INVESTMENT OPTION AVAILABLE DURING THE ACCUMULATION
PERIOD UNDER THE CONTRACTS. THE FOLLOWING SUMMARIZES MATERIAL INFORMATION
CONCERNING THE FIXED ACCOUNT THAT IS OFFERED AS AN OPTION UNDER THE CONTRACT.
ADDITIONAL INFORMATION MAY BE FOUND IN THE CONTRACT. AMOUNTS ALLOCATED TO THE
FIXED PLUS ACCOUNT ARE HELD IN THE COMPANY'S GENERAL ACCOUNT THAT SUPPORTS
INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED PLUS ACCOUNT HAVE NOT
BEEN REGISTERED WITH THE SEC IN RELIANCE ON EXEMPTIONS UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. DISCLOSURE IN THIS PROSPECTUS REGARDING THE FIXED PLUS
ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF
THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF THE
STATEMENTS. DISCLOSURE IN THIS APPENDIX REGARDING THE FIXED PLUS ACCOUNT HAS NOT
BEEN REVIEWED BY THE SEC.
FIXED PLUS ACCOUNT
The Fixed Plus Account option guarantees that amounts allocated to this option
will earn the minimum Fixed Plus interest rate specified in the Contract. We may
credit a higher interest rate from time to time. Our determination of interest
rates reflects the investment income earned on invested assets and the
amortization of any capital gains and/or losses realized on the sale of invested
assets. Under this option, we assume the risk of investment gain or loss by
guaranteeing Net Purchase Payment values and promising a minimum interest rate
and Annuity payment.
The Fixed Plus Account will reflect a compound interest rate credited by us. The
interest rate quoted is an annual effective yield. Amounts applied to the Fixed
Plus Account will earn the Fixed Plus interest rate in effect when actually
applied to the Fixed Plus Account. We make no deductions from the credited
interest rate for mortality and expense risks; these risks are considered in
determining the credited rate.
Beginning on the tenth Account Year, we will credit amounts held in the Fixed
Plus Account with an interest rate that is at least 0.25% higher than the
then-declared interest rate for the Fixed Plus Accounts for Accounts that have
not reached their tenth anniversary.
We reserve the right to limit Net Purchase Payment(s) and/or transfers to the
Fixed Plus Account.
FIXED PLUS ACCOUNT WITHDRAWALS
The amount eligible for partial withdrawal is 20% of the amount held in the
Fixed Plus Account on the day we receive a written request in our Home Office,
reduced by any Fixed Plus Account withdrawals, transfers or annuitizations made
in the prior 12 months. In calculating the 20% limit, we reserve the right to
include payments made due to the election of SWO or ECO.
The 20% limit is waived if the partial withdrawal is due to annuitization or
death. For this waiver to apply, any such partial withdrawal must also be made
pro rata from all funding options used under the Account.
If a full withdrawal is requested, we will pay any amounts held in the Fixed
Plus Account in five payments, as follows:
- One-fifth of the Fixed Plus Account value on the day the request is
received, reduced by any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months;
- One-fourth of the remaining Fixed Plus Account value twelve months later;
- One-third of the remaining Fixed Plus Account value twelve months later;
- One-half of the remaining Fixed Plus Account value twelve months later;
and
- The balance of the Fixed Plus Account value twelve months later.
37
<PAGE>
Once we receive a request for a full withdrawal from an Account, no further
withdrawals or transfers will be permitted from the Fixed Plus Account.
A full withdrawal from the Fixed Plus Account may be cancelled at any time
before the end of the five-payment period.
We will waive the Fixed Plus Account full withdrawal provision, if the
withdrawal is made:
(a) due to your death, before Annuity payments begin;
(b) due to the election of an Annuity option;
(c) when the Fixed Plus Account value is $3,500 or less (and no withdrawals,
transfers or annuitizations have been made from the Account within the prior
12 months)
TRANSFERS AMONG INVESTMENT OPTIONS
The amount eligible for transfer from the Fixed Plus Account is 20% of the
amount held in the Fixed Plus Account on the day we receive a written request in
our Home Office, reduced by any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of SWO or ECO. We
will waive the 20% transfer limit when the value in the Fixed Plus Account is
$1,000 or less.
SWO
The Systematic Withdrawal Option may not be elected if you have requested a
Fixed Plus Account transfer or withdrawal within the prior 12-month period.
ANNUITIZATIONS
By notifying us at our Home Office at least 30 days before Annuity payments
begin, the Contract Holder may elect to have amounts which have been
accumulating under the Fixed Plus Account transferred to one or more of the
funds available during the Annuity Period, to provide lifetime variable Annuity
payments.
38
<PAGE>
FOR MASTER APPLICATIONS ONLY
I hereby acknowledge receipt of:
(1) an Account B group prospectus dated , 1995 for employer-sponsored
deferred compensation contracts issued by Aetna Life Insurance and Annuity
Company; and
(2) all current prospectuses pertaining to the investment options under the
contracts.
- -- Please send an Account B Statement of Additional Information.
-------------------------------------------
CONTRACT HOLDER'S SIGNATURE
-------------------------------------------
DATE
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 20, 1995
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Variable Annuity Account B (the
"Separate Account") dated December 20, 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
Annuity Operations
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-525-4225
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
Offering and Purchase of Contracts . . . . . . . . . . . . . 2
Performance Data . . . . . . . . . . . . . . . . . . . . . . 2
General. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Average Annual Total Return Quotations . . . . . . . . . . 3
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . 4
Dollar-Cost Averaging. . . . . . . . . . . . . . . . . . . . 5
Sales Material . . . . . . . . . . . . . . . . . . . . . . . 5
Independent Auditors . . . . . . . . . . . . . . . . . . . . 6
Financial Statements of the Separate Account . . . . . . . . S-1
Financial Statements of Aetna Life Insurance and
Annuity Company. . . . . . . . . . . . . . . . . . . . . . . F-1
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 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.
In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account.
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 some unaffiliated sponsors of the Funds used as funding options under
the Contract. These fees generally range from 0.15% 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.
OFFERING AND PURCHASE OF CONTRACTS
The Company offers the Contracts through life insurance agents licensed to
sell variable annuities who are registered representatives of the Company or
of other registered broker-dealers who have sales agreements with the
Company. 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 "Determining
Contract 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 in connection with Plans 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 Accumulation Period charges during each period
(e.g., mortality and expense risk charges, as if the charge had been 0.75%
during all periods shown, administrative charges, and deferred sales charges);
these charges will be deducted on a pro rata basis in the case of fractional
periods. (The mortality and expense risk charge will increase to 1.25% during
the Annuity Period.) If you had invested in the contract prior to the effective
date of the prospectus, your actual performance would have been lower than the
figures shown since the mortality and expense risk charge prior to the
effective date of the prospectus was 1.25%. See the Condensed Financial
Information table in the Prospectus for the actual increase or decrease in the
value of an Accumulation Unit for those periods.
2
<PAGE>
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 of the Separate Account that were in existence prior to the
date the Fund became available under the Contract, 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 (under the current charge structure) 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 under the Contract issued by the Company.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
STANDARDIZED NON-STANDARDIZED FUND
INCEPTION
DATE
- -----------------------------------------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund -6.64% 6.14% 13.31% -1.72% 3.31% 7.23% 13.31% 04/30/75
- -----------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares -9.28% 6.22% 9.39% -4.51% 3.50% 7.32% 9.39% 06/01/78
- -----------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund -1.85% 3.32% 5.71% 3.31% 2.88% 4.38% 5.71% 09/01/75
- -----------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc. -6.06% 5.93% 6.19%* -1.11% 4.44% 7.02% 7.19% 06/23/89
- -----------------------------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio -4.35% 13.31% 14.96%* 0.69% 10.93% 14.48% 15.95%* 01/08/89
- -----------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap Portfolio -10.86% 11.62% 17.34%* -6.17% 2.63% 12.77% 18.30%* 09/21/88
- -----------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested
Balanced Portfolio** -8.79% 5.49% 8.53%* -3.99% 3.68% 6.58% 9.21%* 09/30/86
- -----------------------------------------------------------------------------------------------------------------------------
Fidelity Equity-Income Portfolio 0.95% 8.57% 9.48%* 6.26% 13.12% 9.69% 10.17% 10/22/86
- -----------------------------------------------------------------------------------------------------------------------------
Fidelity Growth Portfolio -5.73% 8.93% 11.15%* -0.77% 8.45% 10.05% 11.86% 11/07/86
- -----------------------------------------------------------------------------------------------------------------------------
Fidelity Overseas Portfolio -4.08% 3.92% 5.57%* 0.96% 6.84% 5.00% 6.26% 02/13/87
- -----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 9.71% 21.82%* N/A 15.48% 26.73% N/A N/A 09/13/93
- ----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio -4.91% 1.31%* N/A 0.10% 5.40% N/A N/A 09/13/93
- -----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio -6.55% -4.73%* N/A -1.63% -0.89% N/A N/A 09/13/93
- -----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio -3.11% 0.05%* N/A 2.00% 4.08% N/A N/A 09/13/93
- -----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Short-Term Bond Portfolio -4.84% -3.69%* N/A 0.17% 0.19% N/A N/A 09/13/93
- -----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio -4.26% 10.44%* N/A 0.78% 14.89% N/A N/A 09/13/93
- -----------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust -10.78% -4.45%* -1.60%* -6.08% 1.74% -3.47% -0.69% 05/31/89
- -----------------------------------------------------------------------------------------------------------------------------
3
<PAGE>
STANDARDIZED NON-STANDARDIZED FUND
INCEPTION
DATE
- -----------------------------------------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Growth Portfolio -10.34% 7.93% 11.69%* -5.62% 9.54% 9.04% 11.69% 12/31/85
- -----------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio -6.50% 4.48% 7.60%* -1.58% 8.93% 5.56% 8.32% 04/30/87
- -----------------------------------------------------------------------------------------------------------------------------
TCI Growth -6.89% 6.68% 8.90%* -1.99% 1.77% 7.78% 9.69% 11/20/87
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Although results are not available for the full calendar indicated,
the percentage shown is an average annual return since inception.
**Formerly known as Calvert Socially Responsible Series.
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Contract or Individual
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.
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 Individual 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.
4
<PAGE>
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.
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 Deposits.
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.
5
<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
S-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
financial 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
financial 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
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 and condensed
financial 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 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 financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Annuity Account B
as of December 31, 1994, the results of its operations and condensed financial
information 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
accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
January 31, 1995
S-2
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES - December 31, 1994
<TABLE>
<CAPTION>
<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>
See Notes to Financial Statements
S-3
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES - December 31, 1994 (continued)
<TABLE>
<CAPTION>
Net assets represented by: ACCUMULATION
UNIT
UNITS VALUE
--------- ------------
Reserves for annuity contracts in accumulation period:
<S> <C> <C> <C>
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>
See Notes to Financial Statements
S-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 - PRIME 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. - INTERNATIONAL:
Non-Qualified VII. . . . . . . . . . . . . . . . . . . . 3,745.4 9.441 35,359
Reserves for annuity contracts in payment period (Note 1) 53,335,014
------------
$795,804,636
------------
------------
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS - Year Ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <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 period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,069,324
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (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
S-6
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- ------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,514,904 $ 34,484,591
Net realized and unrealized gain (loss) on investments . . . . . . . . . . . . . . (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 options. . . . . . . . . . . . . . (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
S-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
Company 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
accordance 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:
<TABLE>
<CAPTION>
<S> <C>
Aetna Variable Fund Insurance Management Series-Prime Money Fund
Aetna Income Shares Insurance Management Series-Utility Fund
Aetna Variable Encore Fund Janus Aspen Series-Aggressive Growth Portfolio
Aetna Investment Advisers Fund, Inc. Janus Aspen Series-Flexible Income Portfolio
Aetna GET Fund, Series B Janus Aspen Series-Growth Portfolio
Alger American Fund-Alger American Small Lexington Emerging Markets Fund, Inc.
Capitalization Portfolio Lexington Natural Resources Trust
Calvert Socially Responsible Series Neuberger & Berman Advisers Management
Fidelity Investments Variable Insurance Trust-Growth Portfolio
Products Fund-Equity-Income Portfolio Scudder Variable Life Investment Fund-
Fidelity Investments Variable Insurance International Portfolio
Products Fund-Growth Portfolio TCI Portfolios, Inc.-TCI Balanced
Insurance Management Series-Corporate TCI Portfolios, Inc.-TCI Growth
Bond Fund TCI Portfolios, Inc.-TCI International
Insurance Management Series-Equity Growth
and Income Fund
Insurance Management Series-U.S.
Government Bond Fund
</TABLE>
b. OTHER
Investment transactions are accounted for on a trade-date basis and dividend
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 Individual
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 reserves are required, the
Company reimburses the Account.
S-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 OF
FUND REINVESTMENT 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 Net investment income
December 30, 1994
- --------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund July 20, 1994 Net investment income
December 30, 1994
- --------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc. July 20, 1994 Net investment income and
December 30, 1994 realized gains
- --------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B December 30, 1994 Net investment income and
net realized gains
- --------------------------------------------------------------------------------------------------------------------
Alger American Fund-Alger American Small May 5, 1994 Net realized gains
Capitalization Portfolio
- --------------------------------------------------------------------------------------------------------------------
Calvert Socially Responsible Series December 30, 1994 Net investment income
- --------------------------------------------------------------------------------------------------------------------
Insurance Management Series-Corporate Bond October 21, 1994 Net investment income
Fund November 21, 1994
December 21, 1994
- --------------------------------------------------------------------------------------------------------------------
Insurance Management Series-Equity Growth and December 21, 1994 Net investment income
Income Fund
- --------------------------------------------------------------------------------------------------------------------
Insurance Management Series-U.S. Government Bond Fund October 21, 1994 Net investment income
November 21, 1994
December 21, 1994
- --------------------------------------------------------------------------------------------------------------------
Insurance Management Series-Prime Money Fund November 30, 1994 Net investment Income
December 30, 1994
- --------------------------------------------------------------------------------------------------------------------
Insurance Management Series-Utility Fund October 21, 1994 Net investment income
November 21, 1994
December 21, 1994
- --------------------------------------------------------------------------------------------------------------------
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 Fund, Inc. December 29, 1994 Net investment income and net
realized gains
- --------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust December 29, 1994 Net investment income
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers Management February 11, 1994 Net investment income and net
Trust-Growth Portfolio realized gains
</TABLE>
S-10
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (continued)
3. DIVIDEND INCOME (continued)
<TABLE>
<CAPTION>
DATE OF DIVIDEND SOURCE OF
FUND REINVESTMENT DIVIDENDS
---- ---------------- ---------
<S> <C> <C>
Scudder Variable Life Investment Fund- February 28, 1994 Net investment income
International Portfolio
- --------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc.-TCI Balanced September 24, 1994 Net investment income
December 16, 1994
- --------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc.-TCI Growth April 8, 1994 Net investment income
</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.
S-11
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
INDEX
PAGE
----
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
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 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
F-2
<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.
F-3
<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
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
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
authorized; 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.
F-4
<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.
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<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 obligations 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 securities:
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
securities . . . . . . . . . . . . . . . . . . . . . . . . 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>
F-11
<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 obligations of
U.S government agencies and corporations . . . . . . . . . $ 827.2 $ 19.4 $ 6.6 $ 840.4
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 securities. . . . . . . . . . . . . 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 securities:
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
securities . . . . . . . . . . . . . . . . . . . . . . . . 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 securities . . . . . . . . . . . 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.
F-12
<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
F-13
<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)
CMOs from December 31, 1993 to December 31, 1994 was related primarily to sales
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).
F-14
<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.
F-15
<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 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.
F-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 (CONTINUED)
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 change in 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>
F-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)
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>
F-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)
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 reserve . . . . . . . . . . . . . . . . . $ 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
F-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)
full utilization of capital gains in the carryback period and the uncertainty of
future capital gains, a valuation allowance of $28.3 million related to 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.
F-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)
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.
F-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)
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.
F-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)
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
------ --------- --------- ------
1994 (milllions)
<S> <C> <C> <C> <C>
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
----- ----- ----- -----
<S> <C> <C> <C> <C>
Assets: (millions)
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>
F-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)
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.
F-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)
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 before
income taxes and cumulative effect adjustments
$ 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
-------- -------- --------
-------- -------- --------
1994 1993 1992
(millions)
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>
F-25
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Contracts
issued by
Aetna Life Insurance and Annuity Company
Form No. 88722 ALIAC Ed. 12/95
