<PAGE>
As filed with the Securities and Exchange Registration No. 33-62473
Commission on February 16, 1996 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 February 23, 1996.
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 expects to file a Rule 24f-2 Notice for the fiscal year ended
December 31, 1995 on or before February 29, 1996.
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-4
- -------- Part A (Prospectus) Location
Item No. ------------------- --------
- --------
<C> <S> <C>
1 Cover Page............................. Cover Page
2 Definitions............................ Glossary of Special Terms
3 Synopsis or Highlights................. Prospectus Summary; Fee Table
4 Condensed Financial
Information............................ Not Applicable
5 General Description of Registrant, The Company; Variable Annuity
Depositor, and Portfolio Companies..... Account B; The Funds
6 Deductions and Expenses................ Charges and Deductions;
Distribution; Commissions and
Distribution Expenses
7 General Description of Variable
Annuity Contracts...................... Contract Rights; Miscellaneous
8 Annuity Period......................... Annuity Period
9 Death Benefit.......................... Death Benefit
10 Purchases and Contract Value .......... Purchase; Certificate Holder's
Account Values
11 Redemptions............................ Contract Rights - Withdrawals;
Right to Cancel
12 Taxes.................................. Tax Status
13 Legal Proceedings...................... Miscellaneous - Legal
Proceedings
14 Table of Contents of the Statement Statement of Additional
of Additional Information.............. Information - Table of Contents
</TABLE>
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Marathon Service Unit, 151 Farmington Avenue, Hartford, Connecticut 06156
Telephone: 1-800-531-4547
VARIABLE ANNUITY ACCOUNT B
THE NEW RETIREMENT
NICHOLAS-APPLEGATE/AETNA ANNUITY
Prospectus Dated: , 1996
This Prospectus describes the flexible premium deferred variable annuity
contracts ("Contracts") issued by Aetna Life Insurance and Annuity Company
(the "Company"). The Contracts allow individuals to accumulate values and
elect payment of annuity benefits on a fixed or a variable basis. Group
Contracts are offered to certain broker-dealers which have agreed to act as
Distributors of the Contracts. (See "Contract Purchase -- Distribution.")
Individuals who have established accounts with those broker-dealers are
eligible to participate in the Contract. Individual Contracts are offered only
in those states where the group Contracts are not authorized for sale.
The Contracts described in this Prospectus are (a) nonqualified deferred
annuity contracts, and (b) contracts which may be available for use under
Section 408(b) of the Internal Revenue Code of 1988, as amended (the "Code")
as Individual Retirement Annuities. See "Contract Purchase -- How to Purchase"
and "Tax Status."
The securities offered in this Prospectus are distributed through the Company
as the Underwriter, and by registered broker-dealers selected by it as
Distributors. See "Contract Purchase -- Distribution."
Purchase Payments received under the Contracts on behalf of persons
participating under group Contracts or individual Contract owners
(collectively, "Certificate Holders") will be allocated at the Certificate
Holder's direction to variable funding options or to a credited interest
option for accumulation of values for the Certificate Holder's Account.
Amounts allocated to the variable funding options will be deposited in
Variable Annuity Account B (the "Separate Account"), a separate account of the
Company, for investment in the variable funding options. The value of the
Certificate Holder's Account will vary to reflect the performance of the
variable funding options selected, and may be more or less than Purchase
Payments made under the Contract.
This Prospectus is intended to describe the Contract provisions relating to
the variable funding options (the "Funds") and the fees and expenses that may
be charged in connection with investment in the Separate Account. Information
with respect to the ALIAC Guaranteed Account ("Guaranteed Account"), is
included in the Appendix to this Prospectus and in the prospectus for the
ALIAC Guaranteed Account which should accompany this Prospectus. The ALIAC
Guaranteed Account is offered only in those jurisdictions where it has been
qualified for sale.
The variable funding options currently available through the Separate Account
under the Contract described in this Prospectus are as follows:
<TABLE>
<S> <C>
. Nicholas-Applegate Core Growth . Nicholas-Applegate Diversified
Series Income Series
. Nicholas-Applegate Emerging Growth . Nicholas-Applegate International
Series Fixed Income Series
. Nicholas-Applegate International . Aetna Variable Encore Fund
Growth Series
. Nicholas-Applegate Value Series
</TABLE>
The availability of the above Funds is subject to applicable regulatory
authorization.
This Prospectus sets forth concisely the information about the Contracts and
the Separate Account that a prospective investor should know before investing.
Additional information about the Separate Account is contained in a Statement
of Additional Information ("SAI") dated , 1996, which has been filed with
the Securities and Exchange Commission and is incorporated herein by
reference. The Table of Contents for the SAI is contained in this Prospectus.
An SAI may be obtained without charge by calling 1-800-531-4547.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR THE FUNDS
AND THE MARATHON GUARANTEED ACCOUNT. ALL PROSPECTUSES SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE.
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
<PAGE>
UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUSES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THE PROSPECTUSES, IN CONNECTION
WITH THE OFFERS OF THE SECURITIES DESCRIBED IN THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GLOSSARY OF SPECIAL TERMS.................................................. 4
PROSPECTUS SUMMARY......................................................... 6
FEE TABLE.................................................................. 8
PERFORMANCE DATA........................................................... 10
THE COMPANY................................................................ 11
VARIABLE ANNUITY ACCOUNT B................................................. 11
THE FUNDS.................................................................. 11
Fund Investment Adviser................................................... 12
Mixed and Shared Funding.................................................. 12
Fund Additions and Limitations............................................ 12
CONTRACT PURCHASE
Purchase.................................................................. 13
Allocations............................................................... 13
Purchase Payments......................................................... 13
Designations of Beneficiary and Annuitant................................. 14
Distribution.............................................................. 14
CERTIFICATE HOLDER'S ACCOUNT VALUES
Accumulation Units........................................................ 14
Net Investment Factor..................................................... 14
CONTRACT RIGHTS
Right to Cancel........................................................... 15
Rights Under the Contract and Account..................................... 15
Transfers Among Investment Options........................................ 15
Dollar Cost Averaging Program............................................. 16
Account Rebalancing Program............................................... 16
Withdrawals............................................................... 16
Reinstatement Privilege Following Withdrawal.............................. 17
CHARGES AND DEDUCTIONS
General................................................................... 17
Maintenance Fee........................................................... 18
Mortality and Expense Risk Charges........................................ 18
Administrative Expense Charge............................................. 18
Transfer Fees............................................................. 18
Deferred Sales Charge..................................................... 18
Fund Expenses............................................................. 19
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Premium Tax.............................................................. 20
Commissions and Distribution Expenses.................................... 20
ADDITIONAL WITHDRAWAL OPTIONS
General.................................................................. 20
Estate Conservation Option............................................... 21
Systematic Withdrawal Option............................................. 21
ANNUITY PERIOD
Annuity Period Elections................................................. 22
Partial Annuitizations................................................... 23
Annuity Options.......................................................... 23
DEATH BENEFIT
General.................................................................. 24
Death Benefit Amount..................................................... 25
Death Benefit Options Available to Beneficiary Under a Nonqualified
Flexible Premium Contract............................................. 26
Death Benefit Options Available to Beneficiary Under an IRA Rollover
Contract.............................................................. 27
TAX STATUS
Introduction............................................................. 28
Taxation of the Company.................................................. 28
Tax Status of the Contract............................................... 29
Taxation of Annuities.................................................... 29
IRA Rollover Contracts................................................... 31
Withholding.............................................................. 31
Possible Changes in Taxation............................................. 31
Other Tax Consequences................................................... 32
MISCELLANEOUS
Voting Rights............................................................ 32
Modification of the Contract............................................. 32
Inquiries................................................................ 33
Telephone Transfers...................................................... 33
Transfer of Ownership; Assignment........................................ 33
Legal Proceedings........................................................ 33
Legal Matters............................................................ 33
STATEMENT OF ADDITIONAL INFORMATION -- TABLE OF CONTENTS.................. 34
APPENDIX: ALIAC Guaranteed
Account.................................................................. 35
</TABLE>
3
<PAGE>
GLOSSARY OF SPECIAL TERMS
As used in this Prospectus, the following terms have the meanings shown:
ACCUMULATION PERIOD: The period during which one or more Net Purchase Payments
applied to a Certificate Holder's Account are invested to fund future annuity
payments.
ACCUMULATION UNIT: A measure of the net investment results for each variable
investment option during the Accumulation Period. The Accumulation Units for
the applicable Funds are used to calculate the portion of the Certificate
Holder's Account attributable to the Separate Account during the Accumulation
Period.
ADJUSTED ACCOUNT VALUE: The Certificate Holder's Account Value plus or minus
the aggregate market value adjustment.
ANNUITANT: The natural person on whose life the Annuity benefit under a
Contract is based.
ANNUITY: A series of payments for life, for a definite period or a combination
of the two.
ANNUITY DATE: The date on which Annuity payments commence.
ANNUITY OPTIONS: Annuity payment methods available during the Annuity Period.
ANNUITY PERIOD: The period of time during which Annuity payments are made.
ANNUITY UNIT: A measure of the net investment results for each variable
investment option selected during the Annuity Period. Annuity Units are used
to calculate the amount of each variable Annuity payment.
BENEFICIARY: The person entitled to receive any death benefit under a
Contract.
CERTIFICATE: The document issued to a Certificate Holder for a Certificate
Holder's Account established under a group Contract.
CERTIFICATE HOLDER: A person or entity (i.e., a Trustee for a Trust) who
purchases or acquires an interest under a group Contract or who purchases an
individual Contract. A Certificate Holder's spouse may have an interest in the
same Certificate Holder's Account as a joint Certificate Holder. References to
"Certificate Holders" in this Prospectus mean both of the Certificate Holders
on Joint Accounts. The Company reserves the right to limit ownership to
natural persons.
CERTIFICATE HOLDER'S ACCOUNT: A record established for each Certificate Holder
to maintain values under a Contract.
CERTIFICATE HOLDER'S ACCOUNT VALUE: As of any Valuation Period, the dollar
value of all amounts accumulated in a Certificate Holder's Account, including
the value of the Accumulation Units, ALIAC Guaranteed Account and amounts
deposited pursuant to the guaranteed death benefit.
CODE: Internal Revenue Code of 1986, as amended.
COMPANY: Aetna Life Insurance and Annuity Company.
CONTRACTS: Group variable deferred annuity contracts offered as Nonqualified
Flexible Premium Contracts and Individual Retirement Annuity (IRA) Rollover
Contracts. Individual variable deferred annuity contracts are offered in
certain states.
DISTRIBUTOR(S): The registered broker-dealer(s) which have entered into
selling agreements with the Company to offer and sell the Contracts. The
Company may also serve as a Distributor.
EFFECTIVE DATE: The date on which a Contract or Certificate is issued to a
Certificate Holder.
4
<PAGE>
FUNDS: The open-end management investment companies offered as variable
funding options for the investment of assets of the Separate Account under the
Contracts.
GENERAL ACCOUNT: The account into which all Company assets not held in a
separate account are deposited. The General Account is subject to all
liabilities of the Company.
GROUP CONTRACT HOLDER: The entity to which a group Contract is issued.
GUARANTEED ACCOUNT: The ALIAC Guaranteed Account.
HOME OFFICE: The principal executive offices of the Company located at 151
Farmington Avenue, Hartford, Connecticut 06156.
INDIVIDUAL CONTRACT HOLDER: A person or entity (i.e., a Trustee for a Trust)
who has purchased an individual variable annuity Contract (also referred to as
"Certificate Holder"). A Contract Holder's spouse may have an interest in the
same Contract Holder's Account as a Joint Contract Holder. The Company
reserves the right to limit ownership to natural persons.
INDIVIDUAL RETIREMENT ANNUITY (IRA) ROLLOVER CONTRACT: An individual or group
variable deferred annuity Contract established to accept a single Purchase
Payment of rollover amounts previously accumulated under an Individual
Retirement Account or Annuity or a plan qualified under Code Section 401 or
403. These Contracts are intended to qualify under Code Section 408(b).
MARKET VALUE ADJUSTMENT (MVA): An amount deducted or added to amounts
withdrawn early from the Guaranteed Account to reflect changes in the market
value of the investment since the date of deposit. See the Appendix and the
prospectus for the Guaranteed Account for a discussion of how the market value
adjustment is actually calculated.
NET PURCHASE PAYMENT: The Purchase Payment less premium taxes, if applicable.
NONQUALIFIED FLEXIBLE PREMIUM CONTRACT: An individual or group variable
deferred annuity Contract established to accept one or more Purchase Payments
to supplement an individual's retirement income, or to provide an alternative
investment option under an Individual Retirement Account qualified under Code
Section 408(a).
PURCHASE PAYMENT: The gross payment made to a Certificate Holder's Account
pursuant to the terms of a Contract. The Company reserves the right to refuse
to accept any Purchase Payment at any time for any reason.
SEC: Securities and Exchange Commission.
SEPARATE ACCOUNT: Variable Annuity Account B, an account whose assets are
segregated from other assets of the Company. The Separate Account holds shares
of the Funds acquired as variable funding options under the Contracts. The
Company holds title to the assets held in the Separate Account.
SURRENDER VALUE: The amount payable upon the withdrawal of all or any portion
of a Certificate Holder's Account Value.
UNDERWRITER: The registered broker-dealer which contracts with other
registered broker-dealers on behalf of the Separate Account to offer and sell
the Contracts. The Company will serve as Underwriter for the Contracts.
VALUATION PERIOD: The period of time for which a Fund determines its net asset
value, usually from 4:15 p.m. Eastern time each day the New York Exchange is
open for trading until 4:15 p.m. the next such business day.
VALUATION RESERVE: A reserve established pursuant to the insurance laws of the
State of Connecticut to measure voting rights during the Annuity Period. It
also measures the value of a commutation right under the "Payments of a Stated
Period of Time" nonlifetime Annuity option when elected on a variable basis.
5
<PAGE>
PROSPECTUS SUMMARY
CONTRACTS OFFERED
The Contracts described in this Prospectus are group variable deferred annuity
Contracts and, where required by state law, individual variable deferred
annuity Contracts.
The Company currently offers the Contracts described below:
1. Nonqualified Flexible Premium Contracts and IRA Rollover Contracts to
NASD Firms.
2. IRA Rollover Contracts to employers who sponsor Individual Retirement
Annuity Plans for their employees.
3. Nonqualified Flexible Premium Contracts to custodians or trustees of
Code Section 408(a) Individual Retirement Accounts, to employers who
offer deferred annuities to their employees and to entities which make
contributions to annuities for their customers.
4. Nonqualified Flexible Premium Contracts and IRA Rollover Contracts to
individuals when required in certain states.
The Nonqualified Flexible Premium Contract is designed to accept one or more
Purchase Payments. The Individual Retirement Annuity Rollover Contract is
designed to accept rollovers from Individual Retirement Accounts or Annuities
or plans qualified under Code Sections 401 or 403.
Under the Nonqualified Flexible Premium Contract, the minimum initial Purchase
Payment amount is $5,000, and additional Purchase Payments of at least $500
may be made. The minimum Purchase Payment amount for the Individual Retirement
Annuity Rollover Contract is $10,000. (See "Contract Purchase -- Purchase.")
A group Contract is issued to the Group Contract Holder once we receive a
completed master application form. A Certificate Holder establishes an account
under a group Contract by completing an enrollment form and any other required
forms. Certificate Holder enrollment form(s), along with the Purchase Payment,
are submitted to the Company by the Distributor. Upon acceptance, a
Certificate is issued for each Certificate Holder under the group Contract and
the Company will maintain a Certificate Holder's Account for each Certificate
Holder. In those states where an individual Contract is offered, an individual
applies for a Contract by completing an individual Contract application and
submitting it with the Purchase Payment to the Distributor. In either case,
the individual is referred to as the "Certificate Holder" or "you."
Joint Certificate Holders are allowed, except for Contracts acquired by
individuals for purposes of establishing an Individual Retirement Annuity
under Sections 408(a) or 408(b) of the Code. A Joint Certificate Holder must
be the spouse of the other Joint Certificate Holder.
WITHDRAWAL
You may redeem all or a portion of your Certificate Holder's Account Value
during the Accumulation Period by completing the Company's withdrawal request
form. Amounts withdrawn may be subject to a deferred sales charge or
maintenance fee. (See "Charges and Deductions.") The maximum deferred sales
charge that could be assessed on a full or partial withdrawal is 6% of each
Net Purchase Payment withdrawn. Amounts withdrawn from the ALIAC Guaranteed
Account may be subject to a market value adjustment ("MVA"). (See the
Appendix.) A 10% federal penalty tax may also be imposed on the taxable
portion paid to you upon withdrawal and certain amounts may be withheld for
tax purposes. (See "Tax Status -- Taxation of Annuities.")
GUARANTEED DEATH BENEFIT
These Contracts contain a guaranteed death benefit feature. Upon the death of
the Annuitant and under certain circumstances, the Certificate Holder's
Account Value may be adjusted upward. (See "Death Benefit.")
6
<PAGE>
CONTRACT CHARGES
Certain charges are associated with these Contracts; for example, mortality
and expense risk charges, administrative expense charges, transfer fees, fund
expenses, maintenance fees and premium taxes. See "Charges and Deductions" for
a complete explanation of these charges.
SEPARATE ACCOUNT
Variable Annuity Account B (the "Separate Account") is a Separate Account
established by the Company and is registered as a unit investment trust under
the Investment Company Act of 1940 ("1940 Act"). Assets of the Separate
Account attributable to the Contract are invested in shares of one or more of
the Funds. (See "Variable Annuity Account B" and "The Funds" in this
Prospectus.)
FREE LOOK PROVISION
The Certificate Holder may cancel his or her interest in the Contract within
ten days after receiving the Contract or Certificate, whichever is applicable,
(or as otherwise allowed by state law) by returning it to us or to the
Distributor from whom it was purchased along with a written notice of
cancellation. Unless applicable state law requires otherwise, the amount the
Certificate Holder of a Nonqualified Flexible premium Contract will receive
upon cancellation under this provision may reflect the investment performance
of the Purchase Payments deposited in the Separate Account while invested. In
certain cases, this may be less than the amount of the Purchase Payments. For
IRA Rollover Contracts, we will refund the Purchase Payment. (See "Contract
Rights -- Right to Cancel.")
7
<PAGE>
FEE TABLE
THE PURPOSE OF THE FEE TABLE IS TO ASSIST CONTRACT AND CERTIFICATE HOLDERS IN
UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT WILL BE BORNE, DIRECTLY OR
INDIRECTLY, UNDER THE CONTRACT. THE INFORMATION LISTED REFLECTS THE CHARGES
DEDUCTED UNDER THE CONTRACT, AS WELL AS THE FEES AND EXPENSES DEDUCTED FROM
THE FUNDS. ADDITIONAL INFORMATION REGARDING THE CHARGES AND DEDUCTIONS
ASSESSED UNDER THE CONTRACT CAN BE FOUND UNDER "CHARGES AND DEDUCTIONS" IN
THIS PROSPECTUS. CHARGES AND EXPENSES SHOWN DO NOT TAKE INTO ACCOUNT PREMIUM
TAXES THAT MAY BE APPLICABLE.
TRANSACTION EXPENSES
- --------------------
DEFERRED SALES CHARGE (as a percentage of each Net Purchase Payment
deposited)/(1)/
<TABLE>
<CAPTION>
LENGTH OF TIME SINCE NET PURCHASE PAYMENT MADE DEDUCTION
---------------------------------------------- ---------
<S> <C>
Less than 2 years 6%
2 years or more but less than 4 years 5%
4 years or more but less than 5 years 4%
5 years or more but less than 6 years 3%
6 years or more but less than 7 years 2%
7 years or more 0%
Annual Maintenance Fee/(2)/ $30.00
Transfers/(3)/ $ 0.00
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
- --------------------------------
Daily deductions are made from the Certificate Holder's Account Value held in
the variable options. The deduction is the daily equivalent of the annual
effective percentage shown in the following chart:
<TABLE>
<S> <C>
During the Accumulation Period:
Mortality and Expense Risk Fees 1.25%
Administrative Expense Charge 0.10%
-----
Total Separate Account Annual Expenses 1.35%
=====
During the Annuity Period:
Mortality and Expense Risk Fees 1.25%
Administrative Expense Charge/(4)/ 0.00%
-----
Total Separate Account Annual Expenses 1.25%
=====
</TABLE>
/(1)/ Referred to in the Contracts as a "surrender fee." See "Deferred Sales
Charge" for a description of the deferred sales charge and instances in
which this charge may be waived.
/(2)/ The maintenance fee is waived when the Current Value of the Account or
individual Contract is $50,000 or more on the date the maintenance fee is
due. See "Maintenance Fee" in this Prospectus.
/(3)/ The Company currently allows an unlimited number of transfers without
charge. However, we reserve the right to impose a fee of $10 for each
transfer in excess of 12 per year. See "Transfers Among Investment
Options" in this Prospectus.
/(4)/ The Company does not currently impose an administrative charge during the
Annuity Period. We do, however, reserve the right to deduct a daily charge
of not more than 0.25% per year from amounts held under the variable
annuity options.
8
<PAGE>
MUTUAL FUND ANNUAL EXPENSES
- ---------------------------
<TABLE>
<CAPTION>
INVESTMENT OTHER
ADVISORY FEES EXPENSES(/1/)
(AFTER EXPENSE (AFTER EXPENSE TOTAL FUND
REIMBURSEMENT) REIMBURSEMENT) ANNUAL EXPENSES
-------------- -------------- ---------------
<S> <C> <C> <C>
Nicholas-Applegate Core Growth
Series(/2/) 0.75% 0.25% 1.00%
Nicholas-Applegate Emerging
Growth Series(/2/) 1.00% 0.25% 1.25%
Nicholas-Applegate International
Growth Series(/2/) 1.00% 0.40% 1.40%
Nicholas-Applegate Value
Series(/2/) 0.75% 0.25% 1.00%
Nicholas-Applegate Diversified
Income Series(/2/) 0.45% 0.00% 0.45%
Nicholas-Applegate International
Fixed Income Series(/2/) 0.60% 0.35% 0.95%
Aetna Variable Encore Fund 0.25% 0.07% 0.32%
</TABLE>
(/1/Other)expenses include operating costs of the Fund. The deduction of these
expenses are reflected in the Fund's net asset value and are not deducted
from the Certificate Holder's Account Value.
(/2/The)Fund's Adviser has agreed to reduce its fees, and to absorb the other
operating expenses of each Series to ensure that the expenses of each
Series (excluding interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital expenditures and extraordinary
expenses) do not exceed the following percentages of such Series' average
net assets on an annual basis through December 31, 1996: Core Growth --
1.00%; Emerging Growth -- 1.25%; International Growth -- 1.40%; Value --
1.00%; Diversified Income -- .45%; International Fixed Income -- .95%.
Without such an arrangement, the "Other Expenses" and "Total Fund Annual
Expenses" are estimated to be as follows: Core Growth -- 0.56% and 1.31%;
Emerging Growth -- 0.61% and 1.61%; International Growth -- 0.61% and
1.61%; Value -- 0.56% and 1.31%; Diversified Income -- 0.27% and 0.72%;
and International Fixed Income -- 1.15% and 1.75%. During the course of
this period, expenses may be more or less than the amount shown.
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
- -----------------------------------
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
Assuming a 5% annual return on assets, you would have paid the following
expenses on a $1,000 investment (/1/):
<TABLE>
<CAPTION>
If no
withdrawal is
For a complete made, or if
withdrawal at the
the end of the Certificate
applicable Holder
time period: annuitizes*:
1 year 3 years 1 year 3 years
------ ------- ------ -------
<S> <C> <C> <C> <C>
Nicholas-Applegate Core Growth Series $79 $122 $25 $77
Nicholas-Applegate Emerging Growth Series 81 129 28 84
Nicholas-Applegate International Growth Series 83 134 29 89
Nicholas-Applegate Value Series 79 122 25 77
Nicholas-Applegate Diversified Income Series 73 105 20 60
Nicholas-Applegate International Fixed Income
Series 78 120 25 75
Aetna Variable Encore Fund 72 101 18 56
</TABLE>
(/1/The)illustration reflects the $30.00 maintenance fee as an annual charge
of 0.12% of assets.
* If a nonlifetime variable annuity option is selected, and a lump sum
settlement is requested within three years after annuity payments start, the
lump sum payment will be treated as a withdrawal during the Accumulation
Period and will be subject to any deferred sales charge that would then
apply. At the time of such a lump sum settlement, the total expenses that
you would have paid would be the same as those shown under the column for
"For a complete withdrawal at the end of the applicable time period."
9
<PAGE>
PERFORMANCE DATA
From time to time, the Company may advertise different types of historical
performance for the variable funding options of the Separate Account available
under the Contracts described in this Prospectus. The Company may advertise
the "standardized average annual total returns" of the variable funding
options, calculated in a manner prescribed by the SEC, as well as the "non-
standardized return." Both methods are described below. Further information is
contained in the SAI.
"Standardized average annual total returns" are computed according to a
formula in which a hypothetical investment of $1,000 is applied to the
variable funding options under the Contract and then related to the ending
redeemable values over the most recent one, five and ten-year periods (or
since inception if less than 10 years). Standardized returns will reflect the
deduction of all recurring charges during each period (e.g., mortality and
expense risk charges, the annual maintenance fee, the administrative expense
charge and any applicable deferred sales charge). "Non-standardized return"
will be calculated in a similar manner, except that non-standardized figures
will not reflect the deduction of any applicable deferred sales charge (which
would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include a three-year
period.
The Company may distribute sales literature that compares the percentage
change in Accumulation Unit values for any of the Funds to established market
indexes such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Averages or to the change in values of other management investment
companies that have investment objectives similar to the Fund being compared.
The Company may publish in advertisements and reports to Certificate Holders
the ratings and other information assigned to us by one or more independent
rating organizations such as A.M. Best Company, Duff & Phelps, Standard &
Poor's Corporation and Moody's Investors Service, Inc. The purpose of the
ratings is to reflect the Company's financial strength and/or claims-paying
ability. We may also quote ranking services, such as Morningstar's Variable
Annuity/Life Performance Report, and Lipper's Variable Insurance Products
Performance Analysis Service (VIPPAS), which rank variable annuity or life
subaccounts or their underlying funds by performance and/or investment
objective. From time to time, we will quote articles from newspapers and
magazines or other publications or reports including, but not limited to, The
Wall Street Journal, Money magazine, USA Today and The VARDS Report.
10
<PAGE>
THE COMPANY
Aetna Life Insurance and Annuity Company (the "Company") is the issuer of the
Contract and the depositor of the Separate Account. The Company is engaged in
the business of issuing variable annuity and variable life insurance policies.
The Company is registered as an investment adviser under the Investment
Advisers Act of 1940, and is also registered as a broker-dealer under the
Securities Exchange Act of 1934.
The Company was organized in 1976 as a stock life insurance company under the
insurance laws of the State of Connecticut and is a wholly owned subsidiary of
Aetna Retirement Services, Inc., which is in turn a wholly owned subsidiary of
Aetna Life and Casualty Company. Through a merger, the Company succeeded to the
business of Aetna Variable Annuity Life Insurance Company. The former company
had been doing business since 1954 as an Arkansas insurance company under the
name Participating Annuity Life Insurance Company. The Company managed assets of
over $20.4 billion as of December 31, 1994, and as of December 31, 1993, it
ranked among the top 2% of all U.S. life insurance companies by size.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B is a Separate Account established by the Company in
1976 under the insurance laws of the State of Connecticut. The Separate
Account was formed for the purpose of segregating assets attributable to the
variable portions of Contracts from our other assets. The Separate Account is
registered as a unit investment trust under the 1940 Act, and meets the
definition of "separate account" under the federal securities laws.
Although the Company holds title to the assets of the Separate Account, such
assets are not chargeable with liabilities arising out of any other business
we may conduct. Income, gains or losses of the Separate Account, realized or
unrealized, are credited to or charged against the assets of the Separate
Account without regard to other income, gains or losses of the Company.
However, all obligations arising under the Contracts are general corporate
obligations of the Company.
THE FUNDS
The Separate Account currently invests in shares of the underlying funds (the
"Funds") listed below. Certificate Holders may allocate their Purchase
Payments to the portion of the Separate Account which holds shares of the
Funds. The investment results of the Funds, whose investment objectives are
described below, are likely to differ significantly. There is no assurance
that any of the Funds will achieve their respective investment objectives.
Certificate Holders bear the full investment risk of investment in the Funds
selected. Investment in some of the Funds involves special risks, which are
described in the prospectuses for the Funds. You should read the prospectuses
for the Funds and consider carefully, and on a continuing basis, which Fund or
combination of Funds is best suited to your long-term investment needs. Except
where otherwise noted, all of the Funds are diversified, as defined in the
1940 Act.
. NICHOLAS-APPLEGATE CORE GROWTH SERIES seeks to maximize long-term capital
appreciation. It invests primarily in a diversified portfolio of common
stocks of U.S. companies with middle market capitalizations and above
(generally above $500 million).
. NICHOLAS-APPLEGATE EMERGING GROWTH SERIES seeks to maximize long-term
capital appreciation. It invests primarily in a diversified portfolio of
common stocks of U.S. companies with smaller market capitalizations.
. NICHOLAS-APPLEGATE INTERNATIONAL GROWTH SERIES seeks to maximize long-
term capital appreciation. It invests in an international portfolio of
equity securities of foreign companies.
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. NICHOLAS-APPLEGATE VALUE SERIES seeks to provide a total return
consisting of capital appreciation plus dividend income that exceeds the
total return realized on the Standard and Poor's 500 Stock Price Index.
It invests primarily in a diversified portfolio of equity securities with
larger market capitalizations.
. NICHOLAS-APPLEGATE DIVERSIFIED INCOME SERIES seeks to maximize total
return. It invests primarily in an actively-managed diversified portfolio
of fixed-income securities, up to 35% of which may be 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 description of such risks.
. NICHOLAS-APPLEGATE INTERNATIONAL FIXED INCOME SERIES seeks high total
return through both income and capital appreciation. It invests in a non-
diversified international portfolio of high-grade bonds and money market
instruments of foreign issuers.
. 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.
Some of the above funds may use instruments known as derivatives as part of
their investment strategies as described in the each Fund's prospectus. 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 Fund's prospectuses for a discussion of the risks associated with an
investment in the Funds.
FUND INVESTMENT ADVISER
The Funds of the Nicholas-Applegate Series Trust are managed by Nicholas-
Applegate Capital Management, a California limited partnership organized in
1984, with its principal place of business in California. Nicholas-Applegate
Capital Management is a registered investment adviser under the Investment
Advisers Act of 1940, as amended. Nicholas-Applegate Capital Management has
retained the services of Rogge Global Partners, plc as a subadviser for the
investments of the International Fixed Income Series under the supervision of
the Investment Adviser. Rogge Global Partners, plc is a registered investment
adviser organized in 1984. Its principal place of business in the U.S. is
located in Connecticut.
The Aetna Variable Encore Fund is managed by Aetna Life Insurance and Annuity
Company.
MIXED AND SHARED FUNDING
Shares of the Funds are sold to the Separate Account for the purpose of
funding variable annuity contracts issued by the Company or its affiliates.
The Funds may be sold to other companies for the same purpose. This is
referred to as "shared funding." Shares of the Funds may also be used for
funding variable life insurance policies through variable life separate
accounts sponsored by us or by third parties. This is referred to as "mixed
funding."
It is conceivable that, in the future, it may be disadvantageous for variable
annuity separate accounts and variable life separate accounts of the same or
of an unaffiliated insurance company to invest in these Funds simultaneously,
since the interests of the contract holders or policy owners or insurance
companies may differ. Each of the Funds' Boards of Trustees have agreed to
monitor events in order to identify any material irreconcilable conflicts
which may possibly arise and to determine what action, if any, should be taken
in response thereto. If such a conflict were to occur, one of the separate
accounts might withdraw its investment in a Fund. This might force that Fund
to sell portfolio securities at disadvantageous prices.
FUND ADDITIONS AND LIMITATIONS
We may, from time to time, add additional mutual funds as eligible variable
funding options under the Contracts. In such event, the Certificate Holder may
be permitted to select from these other funds, subject to any conditions that
may be imposed in connection with these options.
The Company's current policy is to allow all of the Funds noted above to be
used as investment options during the Annuity Period. However, the Company has
reserved the right to limit which Funds can be used as investment
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options during the Annuity Period. Currently, a Certificate Holder may elect
no more than four funding options during the Annuity Period. See "Annuity
Period Elections."
CONTRACT PURCHASE
PURCHASE
The Contract application must be completed by the prospective Group Contract
Holder and sent, together with the Purchase Payment, if any, to the
Distributor or directly to the Company at its Home Office. A Certificate
Holder establishes an Account under a group contract by completing an
enrollment form and any other required forms. The Distributor will deliver any
application or enrollment form to the Company for review, acceptance or
rejection.
Contracts may be purchased by spouses as Joint Certificate Holders. However,
tax law prohibits the purchase of Individual Retirement Annuities by Joint
Certificate Holders. (See "Contract Rights.")
The Company must accept or reject an application or enrollment form (the
"enrollment materials") within two business days of its receipt. If the
enrollment materials are incomplete, the Company may hold them and any
accompanying Purchase Payment for five days. Purchase Payments may be held for
longer periods only with the consent of the Certificate Holder, pending
acceptance of the enrollment materials. If the enrollment materials are
accepted, a Contract will be issued to the Certificate Holder and the Purchase
Payment will be accepted. Any Purchase Payment accompanying or received prior
to the acceptance of the enrollment materials, will be invested as of the date
of acceptance. If the enrollment materials are rejected, both the enrollment
materials and any Purchase Payments will be returned to the Certificate
Holder. Initial payments held for longer than the five business days will be
deposited in the Aetna Variable Encore Fund until the forms are completed.
As described under "Contract Rights--Right to Cancel" you may cancel the
Contract within 10 days of receiving it.
ALLOCATIONS
Each Purchase Payment accepted by us that is to be invested in the Funds will
be deposited in the Separate Account as set forth under "Certificate Holder's
Account Values."
You may elect to have each Net Purchase Payment accumulate (a) on a variable
basis through investment in shares of one or more of the Funds; (b) under the
credited interest option; or (c) in a combination of any of the available
investment options. Net Purchase Payments must be allocated in terms of whole
percentages, and may not be invested in more than 18 investment options over
the life of the Certificate. See "Transfers Among Investment Options."
Purchase Payments received after the initial payment will be allocated in the
same proportion as the last allocation, unless new allocation instructions are
received with the Purchase Payment.
PURCHASE PAYMENTS
For the Nonqualified Flexible Premium Contract, the minimum initial Purchase
Payment is $5,000 and additional Purchase Payments must be at least $500
(monthly automatic check payments must be at least $50). Subsequent payments
may be sent through the Group Contract Holder or the Distributor or they may
be sent directly to the Company's Home Office. The minimum Purchase Payment
for the Individual Retirement Annuity Rollover Contract (IRA) is $10,000.
Additional Purchase Payments made to an existing Nonqualified Flexible Premium
Contract are subject to the terms and conditions published by us at the time
of the subsequent payment. A Purchase Payment of more than $1 million is
allowed only with our consent. We reserve the right to limit the total dollar
amount accepted from a Certificate Holder. We also reserve the right to reject
any Purchase Payment to a prospective or existing Certificate Holder's Account
without advance notice.
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DESIGNATIONS OF BENEFICIARY AND ANNUITANT
For both Nonqualified Flexible Premium Contracts and IRA Rollover Contracts,
you designate the Beneficiary on the enrollment materials. For an IRA Rollover
Contract, you must be the Annuitant. For Flexible Premium Contracts, you may
(but need not) select a different person as the Annuitant. See "Contract
Rights--Rights Under the Contract and Account," if you are not the Annuitant.
The maximum issue age for the Annuitant is 90.
DISTRIBUTION
The Company will serve as the Underwriter for the securities sold by this
Prospectus. The Company is registered as a broker-dealer with the Securities
and Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. (NASD). As Underwriter, the Company will contract
with one or more registered broker-dealers ("Distributors") to offer and sell
the Contracts. The Company and one or more affiliates may also sell the
Contracts directly. All registered representatives of the Distributors must
also be licensed as insurance agents to sell variable annuity contracts.
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities
(together referred to as "Nicholas-Applegate") will be compensated for
providing certain services to the registered representatives, wholesalers
and/or Distributors and their registered representatives, which may include
obtaining information to appoint individuals as agents, training, design and
preparation of marketing materials, and servicing an "800 number" customer
service desk. Nicholas-Applegate will also facilitate the Company's
recruitment of Distributors and will assist in the development of new Contract
features. Nicholas--Applegate will not be compensated in any manner for
solicitations made or other activities relating to the sale of Contracts
directly to investors, including customers of Distributors or the Company or
its affiliates. The Company will pay Nicholas-Applegate a fee for these
services, some of which may be based on a percentage of gross premiums, and
some of which may be based on total Contract assets.
CERTIFICATE HOLDER'S ACCOUNT VALUES
ACCUMULATION UNITS
A Net Purchase Payment that is directed to one or more of the Funds is
deposited in the Separate Account and credited to the Certificate Holder's
Account in the form of Accumulation Units for each Fund selected. The number
of Accumulation Units credited is determined by dividing the applicable
portion of the Net 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, Net Purchase Payments
will be credited at the Accumulation Unit Value next determined after
acceptance of the application. Shares of the Funds are purchased by the
Separate Account at the net asset value next determined by the Fund following
receipt of Net Purchase Payments by the Separate Account, which will be no
later than the next business day following the crediting of the Accumulation
Units attributable to the Funds. The value of Accumulation Units attributable
to the Funds will be affected by the investment performance, expenses and
charges of those Funds. Generally, if the net asset value of the fund
increases, so does the Accumulation Unit value; however, performance of the
Separate Account is reduced by charges and deductions under the Contract.
Accumulation Units are valued separately for each Fund. Therefore, if you
elect to have a Net Purchase Payment invested in a combination of Funds, you
will have Accumulation Units credited from more than one Fund. The value of
the Certificate Holder's Account as of the most recent Valuation Period is
determined by adding the value of any Accumulation Units attributed to the
Fund(s) you have selected to the value of any amounts invested in the Marathon
Guaranteed Account.
NET INVESTMENT FACTOR
The value of a Fund's Accumulation Unit for any Valuation Period is calculated
by multiplying the Fund's Accumulation Unit value for the immediately
preceding Valuation Period by the net investment factor of the appropriate
investment option for the current period.
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The net investment factor is calculated separately for each Fund in which
assets of the Separate Account are invested. It is determined by adding
1.0000000 to the net investment rate.
The net investment rate equals (a) the net assets of the Fund held by the
Separate Account at the end of a Valuation Period, minus (b) the net assets of
the Fund held by Account B at the beginning of a Valuation Period, plus or
minus (c) taxes or provision for taxes, if any, attributable to the operation
of the Separate Account, divided by (d) the value of the Fund's Accumulation
and Annuity Units held by the Separate Account at the beginning of the
Valuation Period, minus (e) a daily charge at the annual effective rate of
1.25% for mortality and expense risks, and a daily administrative expense
charge at the annual effective rate of 0.10% during the Accumulation Period
and up to 0.25% during the Annuity Period. The net investment rate may be more
or less than zero.
CONTRACT RIGHTS
RIGHT TO CANCEL
The Group or Individual Contract Holder may cancel the Contract no later than
ten days after receiving it (or as otherwise allowed by state law) by
returning it to us or to the Distributor from whom it was purchased along with
a written notice of cancellation. A Certificate Holder may cancel his or her
Certificate Holder's Account under a group Contract no later than ten days
after receiving the Certificate (or as otherwise allowed by state law) by
returning it to us or to the Distributor from whom it was purchased along with
a written notice of cancellation. We will send a refund not later than seven
calendar days after we receive the Contract or Certificate and the written
notice at our Home Office. Unless the applicable state law requires a refund
of the Purchase Payments, for Nonqualified Flexible Premium Contracts, we will
refund the Purchase Payments plus any increase or minus any decrease in the
value attributable to the Purchase Payments allocated to the variable
option(s). For IRA Rollover Contracts, we will refund the Purchase Payment.
RIGHTS UNDER THE CONTRACT AND ACCOUNT
The Group Contract Holder has title to the Contract and only the right to
accept or reject any modifications to the Contract. You have all other rights
to your Certificate Holder's Account under the Contract. However, under a
Nonqualified Flexible Premium Contract, if you and the Annuitant are not the
same, and the Annuitant dies first, a different provision applies. In this
case, your rights are automatically transferred to the Beneficiary. (See
"Death Benefit.")
As discussed under "Contract Purchase," two individuals may have an interest
in the same Certificate Holder's Account as Joint Certificate Holders. Joint
Certificate Holders have equal rights under the Contract and with respect to
their Certificate Holder's Account. If a Joint Certificate Holder dies prior
to the Annuity Date, the surviving Certificate Holder may retain all ownership
rights under the Contract or elect to have the proceeds distributed under one
of the payout options available under the Contract. See "Death Benefits." All
rights under the Contract must be exercised by both Joint Certificate Holders
with the exception of transfers among investment options; at the Company's
discretion, one Joint Certificate Holder can select additional investment
options after the Account has been established.
Loans are not allowed under this Contract.
TRANSFERS AMONG INVESTMENT OPTIONS
The Company currently allows unlimited transfers of accumulated amounts to
available investment options during the Accumulation Period without charge;
however, it reserves the right to charge up to $10 if more than 12 transfers
are made in a calendar year. See "Charges and Deductions -- Transfer Charges."
During each calendar year, you may change the allocation of future Net
Purchase Payments and/or transfer account values among the funding options
available under the Contract. However, you may not make allocations or
transfers to new funding options if the total number of funding options you
have selected would exceed 18 since the time that you acquired an interest in
the Contract. Each variable funding option and each guaranteed term of the
Guaranteed Account selected counts as one option, even if you no longer have
amounts allocated to that option.
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The Company reserves the right to establish a minimum transfer amount. Unless
the transfer is made from the one-year term in connection with the Dollar Cost
Averaging Program (where state regulatory approval has been received),
transfers from the Guaranteed Account will be subject to a market value
adjustment, if applicable. (See "Dollar Cost Averaging Program" below, as well
as the Appendix and the prospectus for the Guaranteed Account.) Any transfer
will be based on the Accumulation Unit value next determined after the Company
receives a valid request at its Home Office. During the Annuity Period,
transfers are not available.
DOLLAR COST AVERAGING PROGRAM
Dollar Cost Averaging is a system for investing a fixed amount of money at
regular intervals over a period of time. It is based on the economic fact that
buying a variably priced item with a constant sum of money at fixed intervals
affords the buyer the opportunity to automatically buy more of that item when
prices are low and less of it when prices are high, thus reducing the average
cost per item. Dollar Cost Averaging does not ensure a profit nor guarantee
against loss in a declining market. Certificate Holders should consider their
financial ability to continue purchases through periods of low price levels.
The Dollar Cost Averaging Program permits Certificate Holders to
systematically transfer amounts from any of the variable funding options and
the one-year Guaranteed Account Term to any of the variable investment
options. Where state regulatory approval has been received, a market value
adjustment will not be applied to dollar cost averaging transfers from the
one-year Guaranteed Term. Consult your representative to determine whether the
waiver is approved in your state. (See Appendix I for a discussion of the
restrictions and features attributable to the Guaranteed Account.)
You must have an Account Value of at least $5,000 to participate in the Dollar
Cost Averaging Program. The minimum amount that may be transferred into a
particular variable funding option is $50. DCA can be elected at any time
during the Accumulation Period by completing the DCA section of the
application or by completing a DCA Election Form available from the Company at
its Home Office. All DCA transfers will be made on the 15th of each month (or
the next Valuation Period, if applicable). Any transfer made under the DCA
program will not be counted for purposes of any transfer limitations imposed
under the Contract. A Certificate Holder may terminate the DCA program at any
time. The Company reserves the right to modify or terminate the DCA program at
any time.
Dollar Cost Averaging is not available to individuals who have elected the
Systematic Withdrawal Option or the Account Rebalancing Program (described
below).
ACCOUNT REBALANCING PROGRAM
The Account Rebalancing Program allows Certificate Holders to have portions of
their Account Value automatically reallocated annually to a specified
percentage. Only Account Values accumulating under the Fund can be rebalanced.
Certificate Holders may participate in this program by completing the Account
Rebalancing Section of the enrollment materials, or by requesting the service
in writing from the Company's Home Office. Reallocations under the Account
Rebalancing Program will not be counted for purposes of any transfer
limitations imposed under the Contract.
Account Rebalancing is not available to Certificate Holders who have elected
the Dollar Cost Averaging Program.
Account Rebalancing does not ensure a profit nor guarantee against loss in a
declining market.
WITHDRAWALS
You may withdraw all or a portion of the Certificate Holder's Account Value
during the Accumulation Period by properly completing a disbursement form
available from the Company or one of the Distributions and sending it to our
Home Office. The following types of withdrawals may be requested:
. Full Withdrawal: The Adjusted Account Value minus any applicable deferred
sales charge and maintenance fee due.
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. Partial Withdrawal (Percentage): The percentage of the Adjusted Account
Value requested minus any applicable deferred sales charge.
. Partial Withdrawal (Specific Dollar Amount): The dollar amount requested.
The amount actually withdrawn from the Certificate Holder's Account may
be greater or less than the dollar amount requested to allow for payment
of any applicable deferred sales charge and any applicable MVA.
We will pay all amounts based on the Certificate Holder's Account Value next
computed after the request is received in the Home Office or a later date, if
specified. For any partial withdrawal, amounts are withdrawn on a pro rata
basis from all variable funding options. (For treatment of amounts withdrawn
from the Guaranteed Account, see the Appendix.)
Taxes or tax penalties may be due on the amount withdrawn. (See "Tax Status--
Taxation of Annuities.")
We reserve the right to close out, upon 90 days written notice, any
Certificate Holder's Account with a value of $2,500 or less immediately
following a partial withdrawal. A deferred sales charge will not be deducted
in this event. The Company does not intend to exercise this right in cases
where the Certificate Holder's Account Value is reduced to $2,500 or less
solely due to investment performance.
Our policy is to make payments for withdrawal requests in accordance with SEC
requirements, but normally not later than seven calendar days after we receive
a properly completed withdrawal form in our Home Office or within seven
calendar days of the date the withdrawal form may specify. Payments may be
delayed for: (a) any period in which the New York Stock Exchange ("Exchange")
is closed (other than customary weekend and holiday closings) or in which
trading on the Exchange is restricted; (b) any period in which an emergency
exists where disposal of securities held by the Funds is not reasonably
practicable or it is not reasonably practicable for the value of the assets of
the Funds to be fairly determined; or (c) such other periods as the SEC may by
order permit for the protection of Certificate Holders. The conditions under
which restricted trading or an emergency exists will be determined by the
rules and regulations of the SEC.
REINSTATEMENT PRIVILEGE FOLLOWING WITHDRAWAL
You may elect to reinstate all or a portion of the proceeds received from the
full withdrawal of the Certificate Holder's Account within 30 days after the
withdrawal. Accumulation Units will be credited to the Certificate Holder's
Account for the amount reinstated, as well as for any maintenance fee charged
and any portion of any deferred sales charge imposed at the time of
withdrawal. However, any aggregate negative market value adjustment made to
the Guaranteed Account will not be credited. Reinstated amounts will be
reallocated to the applicable investment options in the same proportion as
they were allocated at the time of withdrawal.
The number of Accumulation Units credited will be based upon the Accumulation
Unit value(s) next computed following receipt at our Home Office of the
reinstatement request along with the amount to be reinstated. Any maintenance
fee which falls due after the withdrawal and before the reinstatement will be
deducted from the amount reinstated. The reinstatement privilege may be used
only once and does not apply to Certificate Holder's Accounts that we close
out. If you are contemplating reinstatement, you should seek competent advice
regarding the tax consequences associated with this type of a transaction.
CHARGES AND DEDUCTIONS
GENERAL
This section describes the maximum charges that we may deduct for maintenance
fees, administrative expenses, sales-related expenses and transfer fees. A
description of mortality and expense risk charges and Fund expenses is also
included.
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MAINTENANCE FEE
We will deduct an annual maintenance fee of $30 from the Certificate Holder's
Account Value during the Accumulation Period. This fee is to reimburse us for
some administrative expenses relating to the establishment and maintenance of
the Certificate Holder's Account. We will deduct the fee on the anniversary of
the Certificate Holder's Account's Effective Date (or, if this is not a
business day that the New York Stock Exchange is open, on the next business
day). The fee is also deducted upon withdrawal of the entire Certificate
Holder's Account. The fee is deducted proportionately from each investment
option selected under the Contract by liquidating a portion of amounts held in
those options.
We will not deduct a maintenance fee (either annually or upon withdrawal) if
the Certificate Holder's Account Value is $50,000 or more on the day the
maintenance fee is due.
MORTALITY AND EXPENSE RISK CHARGES
We make a daily deduction from the Separate Account for mortality and expense
risks (insurance charges). The deduction, equal to the annual effective rate
of 1.25% per year, is made as part of the calculation of Accumulation Unit and
Annuity Unit value(s).
The mortality risk charge is to compensate us for the risks we assume (a) for
the guaranteed death benefit and (b) for our promise to make lifetime payments
according to Annuity rates specified in the Contract. The expense risk charge
is to compensate us for the risk that actual expenses for costs incurred under
the Contract will exceed the maximum costs that can be charged under the
Contract. We hope to profit from the daily deduction for mortality and expense
risks. Any such profit, as well as any other profit realized by us, would be
available for any proper corporate purpose, including, but not limited to,
payment of sales and distribution expenses.
ADMINISTRATIVE EXPENSE CHARGE
During the Accumulation Period, we deduct a daily charge of 0.10% per year
from the Separate Account portion of the Certificate Holder's Account Value.
This charge is to reimburse us for expenses we incur for administering the
Contract. We do not intend to profit from this charge. The administrative
expense charge is a percentage of the variable portion of the Certificate
Holder's Account Value; therefore, there may be no relationship between the
amount so deducted and the amount of expenses attributable to the Certificate
Holder's Account.
The Company reserves the right to establish an administrative expense charge
of 0.25% upon the start of a variable Annuity Option. Currently, the charge is
0%. Once an Annuity Option is elected, and an administrative expense charge
has been established, we will not change the charge.
TRANSFER FEES
For each Certificate Holder's Account unlimited transfers are currently
allowed without charge during the Accumulation Period. We reserve the right to
charge $10 for each transfer in excess of 12 during a calendar year. If we do
assess the fee, it will be deducted from the Certificate Holder's Account
Value. Transfers are not allowed during the Annuity Period.
DEFERRED SALES CHARGE
You may withdraw the Adjusted Account Value of your Certificate Holder's
Account at any time during the Accumulation Period; however, a deferred sales
charge (referred to in the Contract as a surrender fee) may be deducted so
that we may recover some of our sales expenses.
The charge only applies to the Net Purchase Payment (not to any associated
changes in value), and gradually decreases so that seven years after the date
of the Net Purchase Payment, the charge associated with that payment is 0%.
Withdrawals are charged first against Purchase Payments, then against any
increases in value. To satisfy a partial withdrawal, the deferred sales charge
is calculated as if Net Purchase Payments are
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<PAGE>
withdrawn in the same order they were applied to the Certificate Holder's
Account (i.e., the oldest Net Purchase Payment will be exhausted, then the
next oldest and so on). Partial withdrawals from the Guaranteed Account will
be treated as described in the Appendix and in its prospectus. The deferred
sales charge for each Net Purchase Payment is determined by multiplying the
Net Purchase Payment withdrawn by the appropriate percentage, depending on the
number of years completed since the Net Purchase Payment was made, as shown in
the table below. The total charge will be the sum of the charges applicable
for all of the Net Purchase Payments withdrawn.
<TABLE>
<CAPTION>
LENGTH OF TIME SINCE
NET PURCHASE PAYMENT MADE DEDUCTION
------------------------- ---------
<S> <C>
Less than 2 years 6%
2 years or more but less than 4 years 5%
4 years or more but less than 5 years 4%
5 years or more but less than 6 years 3%
6 years or more but less than 7 years 2%
7 years or more 0%
</TABLE>
We will not deduct a deferred sales charge from any Net Purchase Payment
withdrawn that is:
(a) Applied to provide Annuity benefits;
(b) Paid to a Beneficiary due to the Annuitant's death before Annuity
payments start, up to a maximum of the Net Purchase Payment(s) in the
Certificate Holder's Account on the Annuitant's date of death;
(c) Withdrawn due to the election of the Systematic Withdrawal Option (SWO)
or the Estate Conservation Option (ECO);
(d) Withdrawn after the Annuitant has spent at least 45 consecutive days in
a licensed nursing care facility, but within three years of admission
to a licensed nursing care facility (in New Hampshire only, the
facility does not have to be licensed). This waiver does not apply if
you or the Annuitant are in a nursing care facility at the time the
Certificate Holder's Account is established or is admitted to a
licensed nursing care facility within one year of that time. It will
also not apply if prohibited by state law;
(e) Paid due to the full withdrawal of the Certificate Holder's Account for
which the value is $2,500 or less and no withdrawals have been made in
the prior 12 months;
(f) Paid, at least 12 months after the date of the first Purchase Payment
to the Certificate Holder's Account in an amount of 10% or less of the
Certificate Holder's Account Value. This applies to the first partial
or full withdrawal made each calendar year. The 10% amount will be
calculated using the Certificate Holder's Account Value on the date the
request is received in good order at the Home Office. If a withdrawal
is made that exceeds 10%, the applicable deferred sales charge on the
amount over 10% and any applicable MVA will be deducted from the
Certificate Holder's Account Value. This provision may not be exercised
if SWO is elected; or
(g) Paid if we close out the Certificate Holder's Account. (See "Contract
Rights -- Withdrawals.")
In the instances cited in the above paragraphs, no deferred sales charge is
deducted. However, the amount withdrawn may be subject to the 10% federal
penalty tax. (See "Tax Status -- Taxation of Annuities.") An MVA may also
apply to amounts withdrawn from the Guaranteed Account.
Based on our actuarial determination, we do not anticipate that the deferred
sales charge will cover all sales and administrative expenses that we will
incur in connection with the Contract.
FUND EXPENSES
Pursuant to investment advisory agreements between each of the Funds and their
investment advisers, the investment advisers receive an annual advisory fee
from each of the Funds they advise for managing the
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investments of the Funds. These fees are based on each Fund's average net
assets, and are deducted from the assets of each Fund and paid to the adviser
monthly.
Most expenses incurred in the operations of each Fund are borne by that Fund.
The investment advisers may reimburse the Funds they advise for some or all of
these expenses. For further details on the expenses of the Funds, you should
read the accompanying prospectus for the Funds and refer to the Fee Table in
this Prospectus.
PREMIUM TAX
Several states and municipalities impose a premium tax on Purchase Payments
either when made or when an Annuity option is elected. Currently such taxes
range up to 4%. Ordinarily, any state premium tax will be deducted from the
Certificate Holder's Account Value when it is applied to an Annuity option.
However, we reserve the right to deduct state premium tax at any time from the
Purchase Payment(s) or from the Certificate Holder's Account Value based upon
our determination of when such tax is due.
Any municipal premium tax assessed at a rate in excess of 1% will be deducted
from the Purchase Payment(s) or from the amount applied to an Annuity option
based on our determination of when such tax is due. We will absorb any
municipal premium tax which is assessed at 1% or less. We reserve the right,
however, to reflect this added expense in our Annuity purchase rates for
residents of such municipalities.
COMMISSIONS AND DISTRIBUTION EXPENSES
Commissions will be paid to broker-dealers who sell the Contracts. Broker-
dealers will be paid commissions up to an amount currently equal to 7.5% of
Purchase Payments.
Other than the mortality and expense risk charge and the administrative
charge, all expenses incurred in the operations of the Separate Account are
borne by the Company.
ADDITIONAL WITHDRAWAL OPTIONS
GENERAL
We offer two withdrawal options that are not considered Annuity options: the
Estate Conservation Option ("ECO") and the Systematic Withdrawal Option
("SWO"). These options are available if your Certificate Holder's Account
Value is at least $25,000 at the time of election and you are at least age 70
1/2 for ECO or 59 1/2 for SWO. ECO is available only for amounts in an IRA
Rollover Contract, and not for amounts under a Nonqualified Flexible Premium
Contract. Under SWO, Certificate Holders receive a series of partial
withdrawals from the account based on the payment method selected. It is
designed for those who want a periodic income while retaining investment
flexibility for amounts accumulating under the Contract. ECO offers the same
investment flexibility as SWO, but is designed for those who want to receive
only the minimum distribution that the Code requires each year. Under ECO, the
Company calculates the minimum distribution amount required by law and pays
that amount once a year.
Amounts withdrawn for ECO and SWO will be deducted from the Contract in the
same manner as for any other withdrawals during the Accumulation Period except
that no deferred sales charge will be applied. Additionally, where state
regulatory approval has been received, no market value adjustment will be
applied to amounts distributed under an ECO or SWO election. (See your
representative to determine whether the waiver is approved in your state.)
(See "Contract Rights--Withdrawals" and "Charges and Deductions--Deferred
Sales Charge.")
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Since ECO and SWO are not Annuity options, the Certificate Holder's Account
retains all the rights and obligations available during the Accumulation
Period, as described in this Prospectus, and is subject to all Accumulation
Period Contract charges. We reserve the right to discontinue the availability
of these withdrawal options and to change the terms for future elections.
Once elected, you or your spousal beneficiary may revoke the applicable
option(s) at any time, by submitting a written request to our Home Office. Any
revocation will apply only to the amounts not yet paid. Once ECO or SWO is
revoked, it may not be elected again.
SWO is different from ECO in the following ways: (1) SWO payments are made for
a fixed dollar amount, fixed time period or fixed percentage whereas ECO
payments vary in dollar amount and can continue indefinitely during your
lifetime; (2) generally, SWO payments will be higher than expected ECO
payments; and (3) ECO is available only for amounts in an Individual
Retirement Annuity Contract, whereas SWO is available under both Individual
Retirement Annuity Contracts and nonqualified deferred annuity contracts. You
should carefully assess your future income needs when considering the election
of these withdrawal options.
You should consult your tax adviser prior to electing one of these options due
to the potential for adverse tax consequences.
For a discussion of the consequences if you or your Beneficiary dies after SWO
or ECO has been elected, see "Death Benefit."
ESTATE CONSERVATION OPTION
The first distribution may not be made before the calendar year in which the
Certificate Holder attains age 70 1/2. ECO is available only for amounts in an
Individual Retirement Annuity Contract.
We will calculate and distribute an annual amount using the recalculation
method contained in the Code's minimum distribution regulations. You specify
the month you want to receive the distributions and they will be mailed for
receipt by the 15th of that month each year. The annual distribution is
determined each year by dividing the Certificate Holder's Account Value by a
life expectancy factor from tables designated by the Internal Revenue Service
("IRS"). The factor will be based on either your life expectancy or the joint
life expectancy of you and your Beneficiary and will be redetermined for each
calendar year's distribution. The Certificate Holder's Account Value to be
used in this calculation is the Certificate Holder's Value on the December
31st of the year prior to the year in which the ECO payment is being made.
This calculation will be changed, if necessary, to conform to changes in the
Code or applicable regulations.
SYSTEMATIC WITHDRAWAL OPTION
SWO payments are available on a monthly, quarterly, semiannual or annual basis
and are mailed for receipt by the 15th of the month. Under the Specified
Percentage method, payments will be made until you reach age 70 1/2, or if
elected by your spouse as a Beneficiary, until you would have reached age 70
1/2. You may not make any election that would result in a payment of less than
$500.
You may elect one of the following methods of distribution:
(a) Specified Payment -- payments of a designated dollar amount. The dollar
amount chosen cannot be greater than 10% of the Certificate Holder's
Account Value. The Company may require a minimum payment amount.
(b) Specified Period -- payments for a designated time period. Each annual
distribution is determined by dividing the Certificate Holder's Account
Value by the number of years remaining in the elected period.
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The Certificate Holder's Account Value used in this calculation is the
Certificate Holder's Account Value on the December 31st of the year
prior to the year for which the payment is being made. For payments made
more often than annually, the annual payment result (calculated above)
is divided by the number of payments due each year. The specified period
must be at least 10 years but, for IRA Rollover Contracts, not greater
than your life expectancy factor.
(c) Specified Percentage -- payments of a designated percentage. The
specified percentage chosen cannot be greater than 10% of the
Certificate Holder's Account Value. The percentage elected may be
changed every six months. Each annual distribution is determined by
multiplying the Certificate Holder's Account Value by the percentage
chosen. The value used in this calculation is the value on the December
31st of the year prior to the year for which the payment is being made.
For payments made more often than annually, the annual payment result
(calculated above) is divided by the number of the payments due each
year.
Note: For an IRA Rollover Contract, the annual minimum SWO distribution, or
maximum SWO time period, as you direct, will be determined by a life
expectancy factor from tables designated by the IRS. Under both the Specified
Payment and Specified Period payment methods, a higher amount will be paid in
any year, if required under the Code minimum distribution rules. For the
initial distribution year, we will calculate the amount paid based on your
single life expectancy determined from Table V of Section 1.72-9 of the Income
Tax Regulations. For each year thereafter, we will use the life expectancy for
the previous year reduced by one.
ANNUITY PERIOD
ANNUITY PERIOD ELECTIONS
You must notify us in writing of the date you want your Annuity Payments to
start (the "Annuity Date") and the Annuity Option elected. Once Annuity
Payments start, the Annuity Date and Annuity Option cannot be changed.
Payments may not begin earlier than one year after purchase, or, without our
consent, later than the later of: (a) the first day of the month following the
Annuitant's 85th birthday, or (b) the tenth anniversary of the last Purchase
Payment.
Your Annuity Payments will not begin until you have selected an Annuity Date
and an Annuity Option. The Certificate Holder's Account will continue in the
Accumulation Period until the Annuity Date. For IRA Rollover Contracts, the
Code requires that distributions from the Contract must begin no later than
April 1 of the calendar year after the calendar year in which you attain age
70 1/2. For Nonqualified Flexible Premium Contracts, failure to select an
Annuity Option and an Annuity Date, or postponement of the Annuity Date past
the Annuitant's 85th birthday or the tenth anniversary of your last Purchase
Payment, may have adverse tax consequences. You should consult with a
qualified tax adviser if you are considering such a course of action.
At least 30 days before the Annuity Date, you must notify us in writing to
elect or change (a) the date on which Annuity payments are to begin, (b) the
Annuity option, (c) whether the payments are to be made monthly, quarterly,
semiannually or annually, and (d) the investment option(s) to be used to
provide Annuity payments (i.e., a fixed annuity using the general account, one
or more of the Funds available during the Annuity Period, or any combination
thereof). The Company has reserved the right to limit which and how many
funding options will be available as investment options during the Annuity
Period. Currently, no more than four Funds may be elected. Once Annuity
Payments start, no further changes of Annuity Options may be made. In
addition, no further changes may be made to the selection of variable funding
options offered during the Annuity Period.
The Annuitant's adjusted age is his or her age as of the birthday closest to
the date of the first Annuity payment, reduced by one year for Annuity start
dates occurring during the period from July 1, 1993 through December 31, 1999.
The Annuitant's age (and joint Annuitant's, if applicable) will be reduced by
two years for Annuity start dates occurring during the period from January 1,
2000 through December 31, 2009. The Annuitant's adjusted age (and joint
Annuitant's, if applicable) will be reduced by one additional year for Annuity
start dates in each succeeding decade.
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If Annuity payments are elected on a variable basis, the first and subsequent
Annuity payments will also depend on the assumed net investment rate (3 1/2%
annually, unless a 5% annual rate is elected). Use of the 3 1/2% assumed rate
causes a lower first payment, but subsequent payments would increase more
rapidly or decline more slowly as changes occur in the net investment rate. A
5% rate causes a higher first payment, but Annuity payments will increase
thereafter only to the extent that the net investment rate exceeds 5%
annually. Annuity payments would decline if the rate were below 5%.
No election may be made that would result in a first Annuity payment of less
than $50 or total yearly Annuity payments of less than $250 (less if required
by state law). If the Certificate Holder's Account Value on the Annuity start
date is insufficient to elect an option for the minimum amount specified, a
lump-sum payment must be elected. We reserve the right to increase the minimum
first Annuity payment amount and the minimum annual Annuity payment amount
based on increases reflected in the Consumer Price Index-Urban (CPI-U), since
July 1, 1993.
For IRA Rollover Contracts, in determining the amount of Annuity payments, we
must satisfy the minimum distribution incidental death benefit rule described
in IRS regulations. This rule assures that any death benefits payable are
incidental to the primary purpose of the Contract, which is to provide you
with retirement benefits. The amount to be distributed under this rule is
determined based on your age and tables contained in the IRS regulations.
When payments start, the age of the Annuitant plus the number of years for
which payments are guaranteed must not exceed 95.
PARTIAL ANNUITIZATION
You may elect an Annuity Option with respect to a portion of your Account
Value, while leaving the remaining portion of your Account Value invested in
the Accumulation Period. The Tax Code and the regulations thereunder do not
specifically address the tax treatment applicable to payments provided
pursuant to the exercise of this option. The Company takes the position that
payments provided pursuant to this option are taxable as annuity payments, and
not as a withdrawal. However, because the tax treatment of such payments is
currently unclear, you should consult with a qualified tax adviser if you are
considering a partial annuitization of your Account.
ANNUITY OPTIONS
LIFETIME:
(a) Life Annuity -- an Annuity with payments guaranteed to the date of the
Annuitant's death. This option may be elected with payments guaranteed
for a minimum of 5, 10, 15 or 20 years. Because it provides a specified
minimum number of Annuity payments, the election of a guaranteed
payment period results in somewhat lower payment than if a Life Annuity
with no specified number of guaranteed payments had been elected.
(b) Life Income Based Upon the Lives of Two Payees -- An Annuity will be
paid during the lives of the Annuitant and a second Annuitant. Payments
will continue until both Annuitants have died. When this option is
chosen, a choice must be made of:
(i) 100% of the payment to continue after the first death;
(ii) 66 2/3% of the payment to continue after the first death;
(iii) 50% of the payment to continue after the first death;
(iv) Payments for a minimum of 120 months, with 100% of the payment to
continue after the first death; or
(v) 100% of the payment to continue at the death of the second Annuitant
and 50% of the payment to continue at the death of the Annuitant.
Because (iv) provides a specified minimum number of Annuity payments, the
election of the guaranteed payment period results in somewhat lower
payments.
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Payments under any lifetime Annuity option will be determined without regard
to the sex of the Annuitant(s). Such Annuity payments will be based solely on
the age of the Annuitant(s).
If a lifetime option is elected without a guaranteed minimum payment period,
it is possible that only one Annuity payment will be made if the Annuitant
under (a), or the surviving Annuitant under (b), should die prior to the due
date of the second Annuity payment.
Once lifetime Annuity payments begin, you cannot elect to receive a lump-sum
settlement or change elections.
NONLIFETIME:
(a) Payments for a Stated Period of Time -- an Annuity with payments to be
made for five to 30 years, as selected. If this option is elected on a
variable basis, you may request at any time during the payment period
that the present value of all or any portion of the remaining variable
payments be paid in one sum. If elected on a fixed basis, you cannot
elect to receive a lump-sum settlement. However, any lump sum elected
before three years of payments have been completed will be treated as a
withdrawal during the Accumulation Period and any applicable deferred
sales charge will be assessed. (See "Charges and Deductions -- Deferred
Sales Charge.") Once an Annuity option is elected on either a variable
or fixed basis, you cannot change elections.
(b) Payment of Interest -- interest payments will be made to your
Beneficiary on all or a portion of the amount payable upon your death
prior to your electing an Annuity Option and allocated to this option.
Amounts under this option are held in our general account. Your
Beneficiary may withdraw any amount held under this option or direct
that any or all of the amount be applied to an Annuity Option.
We make a daily deduction for mortality and expense risks from any amounts
held on a variable basis. (See "Charges and Deductions -- Mortality and
Expense Risk Charges.") Therefore, electing the nonlifetime option on a
variable basis will result in a deduction being made even though we assume no
mortality risk.
We may also deduct a daily administrative charge from amounts held under the
variable options. The charge, established when a variable Annuity Option is
elected, will not exceed 0.25% per year of amounts held on a variable basis.
Once established the charge will be effective during the entire Annuity
Period.
In addition to the Annuity Options described, we may offer you and other
payees optional methods of payment.
DEATH BENEFIT
GENERAL
The following section provides information about determining the death benefit
amount, should you or the Annuitant die during the Accumulation Period.
Additional information is given for IRA Rollover Contracts and Nonqualified
Flexible Premium Contracts regarding the rights available and who receives
them in case of the death of you or the Annuitant. In many cases, the rights
available will depend on whether the Beneficiary is your spouse.
In many of the scenarios described below, a deadline is given for receiving
distributions equal to the Certificate Holder's Account Value. According to
the Code, the required amount must be distributed by the deadline given. If
not, the IRS will deem the Beneficiary to be in "constructive receipt" of the
amount, and the Beneficiary may be subject to a penalty tax in addition to any
other income tax due on the amount.
Upon the death of a Joint Certificate Holder prior to the Annuity Date, the
surviving Certificate Holder, if any, will be the designated beneficiary. Any
other beneficiary designation on record with the Company at the time of death
will be treated as a contingent beneficiary, and payments will be made to such
beneficiary only upon the death of the surviving Certificate Holder. Upon the
death of an Annuitant who is not a Certificate Holder, the Death Benefit
Amount will be paid to the beneficiary designated.
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Note: We will not allow Annuity payments to a Beneficiary to extend beyond the
Beneficiary's life or any period certain greater than the Beneficiary's life
expectancy.
DEATH BENEFIT AMOUNT
If the Annuitant (or for the Nonqualified Flexible Premium Contract, the
Certificate Holder or the Annuitant) dies before Annuity payments start, the
Beneficiary is entitled to a death benefit. The excess, if any, of the amount
of the guaranteed death benefit over the Certificate Holder's Account Value is
determined as of the date of death. Any excess amount will be deposited to the
Certificate Holder's Account and allocated to Aetna Variable Encore Fund as of
the claim date. The Certificate Holder's Account Value on the claim date plus
any excess amount deposited, becomes the Certificate Holder's Account Value.
The claim date is the date when we receive valid proof of death and the
Beneficiary's claim at our Home Office.
For Nonqualified Flexible Premium Contracts, the death benefit value is
determined as described in items (a), (b), (c) and (d) below. For IRA Rollover
Contracts, the death benefit value is determined as described in items (a),
(b) and (d) below.
(a) Death of Certificate Holder/Annuitant (for IRA Rollover Contracts) or
death of Annuitant (for Nonqualified Flexible Premium Contracts) less
than 75 years of age: The guaranteed death benefit value is the
greatest of:
(1) The Net Purchase Payment(s) made to the Certificate Holder's Account
minus the sum of all amounts withdrawn, applied to an Annuity, or
deducted from the Certificate Holder's Account;
(2)(i)In jurisdictions where regulatory approval has been received, the
highest step-up value as of the date of death. A step-up value is
determined on each anniversary of the Effective Date. Each step-up
value is calculated as the Certificate Holder's Account Value on
the Effective Date anniversary, increased by the amount of any
Purchase Payment(s) made, and decreased by the amount of any
partial withdrawals and/or amounts applied to an Annuity Option
since the Effective Date anniversary;
(ii) In jurisdictions where regulatory approval for (a)(2)(i) above
has NOT been received, the value will be the step-up value as of
the date of death, minus the total of all partial withdrawals,
amounts applied to an Annuity and deductions made from the
Certificate Holder's Account since determination of the step-up
value. The step-up value is the Certificate Holder's Account
Value on the most recent seventh year anniversary of the date
the Net Purchase Payment was applied.
(3) The Certificate Holder's Account Value as of the date of death.
The excess, if any, of the guaranteed death benefit value over the
Certificate Holder's Account Value is determined as of the date of
death. Any excess amount will be deposited and allocated to Aetna
Variable Encore Fund as of the claim date. The Certificate Holder's
Account Value on the claim date plus any excess amount deposited becomes
the Certificate Holder's Account Value.
(b) Death of Certificate Holder/Annuitant (for IRA Rollover Contracts) or
death of Annuitant (for Nonqualified Flexible Premium Contracts) age 75
or greater: The death benefit is the greatest of:
(1) The Net Purchase Payments made to the Certificate Holder's Account
minus the sum of all amounts withdrawn, applied to an Annuity, or
deducted from the Certificate Holder's Account;
(2) The highest step-up value as of the Participant's 75th birthday. The
step-up value is calculated as described in (a)(2)(i) above. In
jurisdictions where regulatory approval for (a)(2)(i) has not been
received, the value will be the step-up value as of the
Participant's 75th birthday, determined as described in (a)(2)(ii)
above;
(3) The Certificate Holder's Account Value as of the date of death.
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(c) Death of the Certificate Holder if the Certificate Holder is not the
Annuitant (Nonqualified Flexible Premium Contracts only): The death
benefit amount is the Adjusted Account Value on the Claim Date. A
deferred sales charge may apply to any full or partial withdrawal. (See
"Charges and Deductions --Deferred Sales Charge.")
(d) Death of a Spousal Beneficiary: In the case of a spousal beneficiary
who continued the Account in his or her own name, the death benefit
shall be equal to the Certificate Holder's Account Value, less any
applicable deferred sales charge on any Purchase Payment(s) made after
we receive proof of death.
For amounts held in the Guaranteed Account: The death benefit, if paid within
six months of the date of the Annuitant's death, is the greater of the
Certificate Holder's Account Value or the aggregate market value adjusted
(MVA) amount. If paid after the six-month period, the death benefit will be
the aggregate Market Value Adjustment amount. The aggregate Market Value
Adjustment amount may be more or less than the Certificate Holder's Account
Value.
DEATH BENEFIT OPTIONS AVAILABLE TO BENEFICIARY UNDER A NONQUALIFIED FLEXIBLE
PREMIUM CONTRACT
Under a Nonqualified Flexible Premium Contract, prior to any election, the
Certificate Holder's Account Value will remain in the Certificate Holder's
Account and the Account Value will continue to be affected by the investment
performance of the investment option(s) selected. The Beneficiary has the
right to allocate or transfer any amount to any available investment options
(subject to an MVA, as applicable). 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 those time periods can result in tax penalties. The
following options are available to the Beneficiary:
(a) When you are the Annuitant and you die:
(1) If the Beneficiary is your surviving spouse, the Beneficiary will
become the successor Certificate Holder. The successor Certificate
Holder may exercise all Certificate Holder rights under the Contract
and continue in the Accumulation Period, or may elect (i), (ii), or
(iii) below. Under the Code, distributions are not required until
the successor Certificate Holder's death. The Beneficiary may:
(i) Apply some or all of the Adjusted Account Value to any of the
Annuity options. The Amount of payout will depend on the annuity
option elected and the investment option(s) used to provide such
payments. The proceeds are taxed in the same manner as annuity
payments. See "Tax Status."
(ii) Elect to have some or all of the Adjusted Account Value
deposited in the Company's general account, earning the then-
current interest rate which may be changed from time to time.
The Beneficiary may elect to receive monthly, quarterly,
semiannual or annual interest payments. The balance on deposit
can be withdrawn at any time or applied to any Annuity option.
The principal amount is guaranteed, but interest payments may
vary; or
(iii) Request, at any time, a lump-sum payment equal to all or a
portion of the Adjusted Account Value.
Under (ii) and (iii) above, payments are taxed as surrenders as they are
received.
(2) If the Beneficiary is not your surviving spouse, he or she may
exercise all Contract or Certificate Holder rights and continue in
the Accumulation Period or may elect option (i), (ii), or (iii)
under (1) above. According to the Code, any portion of the Adjusted
Account Value not applied to an Annuity option (other than the
Nonlifetime Payment of Interest) within one year of your death, must
be paid within five years after your death.
(3) If no Beneficiary exists, a lump-sum payment equal to the Adjusted
Account Value will be made to your estate.
Note: If SWO has been elected, SWO payments to the Beneficiary may be
continued, unless the Beneficiary elects otherwise. Any payments elected must
be made at least as frequently as those made prior to your death.
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(b) When you are not the Annuitant and you die:
(1) If the Beneficiary is your surviving spouse, he or she will become
the successor Certificate Holder. The successor Certificate Holder
may exercise all your rights under the Contract and continue in the
Accumulation Period, or may elect (i), (ii), or (iii) below. Under
the Code, distributions are not required until the successor
Certificate Holder's death. The Beneficiary may elect to:
(i) Apply some or all of the Adjusted Account Value to any of the
Annuity options. The amount of payout will depend on the annuity
option elected and the investment option(s) used to provide such
payments. The proceeds are taxed in the same manner as annuity
payments;
(ii) Elect to have some or all of the Surrender Value deposited in
the Company's general account, earning the then-current interest
rate which may be changed from time to time. The Beneficiary may
elect to receive monthly, quarterly, semiannual or annual
interest payments. The balance on deposit can be withdrawn at
any time or applied to any Annuity option. The principal amount
is guaranteed, but interest payments may vary; or
(iii) Request, at any time, a lump-sum payment equal to all or a
portion of the Surrender Value.
Under (ii) and (iii) above, payments are taxed as surrenders as they are
received.
(2) If the Beneficiary is not your surviving spouse, he or she may elect
option (i), (ii), or (iii) under (1) above. According to the Code,
any portion of the Adjusted Account Value not applied to one of the
Annuity options (other than the Nonlifetime Payment of Interest)
within one year of your death and must be paid within five years
after your death. This amount will be subject to a deferred sales
charge, if applicable.
(3) If no Beneficiary exists, a lump-sum payment equal to the Surrender
Value will be made to your estate.
Note: If SWO has been elected, the payments to the Beneficiary may be
continued, unless the Beneficiary elects otherwise. Any payments elected must
be made at least as frequently as those made prior to your death.
(c) When you are not the Annuitant and the Annuitant dies: the Beneficiary
must elect an Annuity option (see "Annuity Options") other than the
Nonlifetime Payment of Interest within 60 days of the date of death.
DEATH BENEFIT OPTIONS AVAILABLE TO BENEFICIARY UNDER AN IRA ROLLOVER CONTRACT
Under an IRA Rollover Contract, prior to any election, the Certificate
Holder's Account Value will be retained in the Certificate Holder's Account
and the Account Value will continue to be affected by the investment
performance of the investment option(s) selected. Under the Code,
distributions must begin within a certain time period. If no elections are
made, no distributions will be made. Failure to commence distributions within
those time periods can result in tax penalties. The following options are
available to the Beneficiary:
(a) If the Beneficiary is your surviving spouse, he or she may exercise all
rights under the Contract and continue in the Accumulation Period, or
may elect (1), (2), or (3) below. Under the Code, distributions are not
required until December 31st of the year in which you would have
attained age 70 1/2. The Beneficiary may elect to:
(1) Apply some or all of the Adjusted Account Value to the Annuity
options. The amount of payout will depend on the annuity option
elected and the investment option(s) used to provide such payments;
(2) Elect to have some or all of the Adjusted Account Value deposited in
the Company's general account, earning the then-current interest
rate which may be changed from time to time. The Beneficiary may
elect to receive monthly, quarterly, semiannual or annual interest
payments. The balance on deposit can be withdrawn at any time, or
applied to any Annuity option. The principal amount is guaranteed,
but interest amounts may vary; or
(3) Receive, at any time, a lump-sum payment equal to all or any portion
of the Adjusted Account Value.
In general, regardless of the method of payment, payments received by your
Beneficiaries after your death are taxed in the same manner as if you had
received those payments. See "Tax Status."
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Note: If ECO is in effect when you die, your surviving spouse can elect to
continue receiving ECO payments if a joint life expectancy was chosen.
Otherwise, your surviving spouse must receive a lump-sum payment of the
Adjusted Account Value. If SWO is in effect and you die before your required
beginning date for minimum distributions the SWO payments will stop and your
surviving spouse may elect (1), (2) or (3) above. If SWO is in effect and you
die after your required beginning date for minimum distributions, your
surviving spouse can elect to continue SWO payments. Otherwise, your spouse
must elect to receive a lump sum payment equal to the Adjusted Account Value.
(b) If the Beneficiary is other than your surviving spouse, and ECO is not
in effect when you die, he or she may exercise all rights under the
Certificate Holder's Account and continue in the Accumulation Period or
may elect option (1), (2), or (3) under (a) above. Any portion of the
Adjusted Account Value that is not applied to an Annuity Option (other
than the Nonlifetime Payment of Interest) by December 31st of the year
following the year of your death must be distributed by December 31st
of the year containing the fifth anniversary of your date of death.
Note: If ECO or SWO is in effect when you die, the Beneficiary must receive an
automatic and immediate lump-sum payment of the Adjusted Account Value.
(c) If no Beneficiary exists, a lump-sum payment equal to the Adjusted
Account Value will be made to your estate.
TAX STATUS
INTRODUCTION
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon the Company's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("IRS"). No representation is made as to the
likelihood of the continuation of the present federal income tax laws or of
the current interpretation by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
The Nonqualified Flexible Premium Contract is purchased on a non-tax qualified
basis. The IRA Rollover Contract is purchased and used in connection with
certain arrangements entitled to special income tax treatment under section
408 of the Code. The ultimate effect of federal income taxes on the amounts
held under a Contract, on Annuity Payments, and on the economic benefit to the
Certificate Holder, the Annuitant, or the Beneficiary may depend on the tax
status of the individual concerned.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the Code. Since the
Separate Account is not an entity separate from the Company, and its operation
forms a part of the Company, it will not be taxed separately as a "regulated
investment company" under Subchapter M of the Code or as any other separate
entity. Investment income and capital gains are automatically applied to
increase reserves under the Contracts. Under existing federal income tax law,
the Company believes that the Separate Account investment income and net
capital gains will not be taxed to the extent that such income and gains are
applied to increase the reserves under the Contracts.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Separate Account and, therefore, the
Company does not intend to make provisions for any such taxes. However, if
changes in the federal tax laws or interpretations thereof result in the
Company being taxed on income or gains
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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
DIVERSIFICATION: Section 817(h) of the Code requires that with respect to
Nonqualified Flexible Premium Contracts, the investments of the Funds be
"adequately diversified" in accordance with Treasury Regulations in order for
the Contracts to qualify as annuity contracts under federal tax law. The
Separate Account, through the Funds, intends to comply with the
diversification requirements prescribed by the Treasury in Reg. Sec. 1.817-5,
which affects how the Funds' assets may be invested.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In these circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The IRS has stated in published
rulings that a variable contract owner will be considered the owner of
separate account assets if the contract owner possesses incidents of
investment control over the assets. The ownership rights under the contract
are similar to, but different in certain respects from those described by the
IRS in rulings in which it was determined that contract owners were not owners
of separate account assets. For example, a Certificate Holder has additional
flexibility in allocating premium payments and account values. In addition,
the number of funds provided under the Contract is greater than the number of
funds offered in contracts on which rulings have been issued. These
differences could result in a Certificate Holder being treated as the owner of
a pro rata portion of the assets of the Separate Account. The Company reserves
the right to modify the Contract as necessary to attempt to prevent a
Certificate Holder from being considered the owner of a pro rata share of the
assets of the Separate Account.
REQUIRED DISTRIBUTION: In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires nonqualified
contracts to provide that (a) if any Certificate Holder dies on or after the
annuity date but prior to the time the entire interest in the Contract has
been distributed, the remaining portion of such interest will be distributed
at least as rapidly as under the method of distribution being used as of the
date of such owner's death; and (b) if any Certificate Holder dies prior to
the annuity date, the entire interest in the Contract will be distributed
within five years after the date of such Certificate Holder's death. These
requirements will be considered satisfied as to any portion of a Certificate
Holder's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Certificate Holder's death. The "designated beneficiary" refers to a natural
person designated by the Certificate Holder as a Beneficiary and to whom
ownership of the contract passes by reason of death. However, if the
"designated beneficiary" is the surviving spouse of the deceased Certificate
Holder, the contract may be continued with the surviving spouse as the new
Certificate Holder.
The Nonqualified Flexible Premium Contracts contain provisions which are
intended to comply with the requirements of section 72(s) of the Code,
although no regulations interpreting these requirements have yet been issued.
The Company intends to review such provisions and modify them if necessary to
assure that they comply with the requirements of Code section 72(s) when
clarified by regulation or otherwise. Other rules may apply to IRA Rollover
Contracts.
The following discussion is based on the assumption that the Contract
qualifies as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
IN GENERAL: Section 72 of the Code governs taxation of annuities in general.
The Company believes that a Certificate Holder who is a natural person
generally is not taxed on increases in the Contract Value until distribution
occurs by withdrawing all or part of such Contract Value (e.g., withdrawals or
Annuity payments under
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the Annuity Option elected). The assignment, pledge, or agreement to assign or
pledge any portion of the Value generally will be treated as a distribution.
The taxable portion of a distribution (in the form of a single sum payment or
an annuity) is taxable as ordinary income.
The following discussion generally applies to a Contract or Certificate owned
by a natural person.
WITHDRAWALS: In the case of a withdrawal under an IRA Rollover Contract,
including withdrawals under SWO or ECO, the amount taxable is generally based
on the ratio of the "investment in the contract" to Account Value. The
"investment in the contract" generally equals the amount of any nondeductible
Purchase Payments paid by or on behalf of any individual less any amount
received previously which was excludable from gross income. For an IRA
Rollover Contract, the "investment in the contract" can be zero. Special tax
rules may be available for certain distributions from an IRA Rollover
Contract.
With respect to Nonqualified Flexible Premium Contracts, partial withdrawals,
including withdrawals under SWO, are generally treated as taxable income to
the extent that the Account Value immediately before the withdrawal exceeds
the "investment in the contract" at that time. The Account Value immediately
before a withdrawal may have to be increased by any positive market value
adjustment (MVA) that results from such a withdrawal. There is, however, no
definitive guidance on the proper tax treatment of MVAs in these
circumstances, and a Certificate Holder should contact a competent tax advisor
with respect to the potential tax consequences of any MVA that arises as a
result of a partial withdrawal.
Full withdrawals of a Nonqualified Flexible Premium Contract are treated as
taxable income to the extent that the amount received exceeds the "investment
in the contract."
ANNUITY PAYMENTS: Although the tax consequences may vary depending on the
Annuity payment elected under the Contract, in general, only the portion of
the Annuity payment that represents the amount by which the Account Value
exceeds the "investment in the contract" will be taxed; after the "investment
in the contract" is recovered, the full amount of any additional Annuity
payments is taxable. For variable annuity payments, the taxable portion is
generally determined by an equation that establishes a specific dollar amount
of each payment that is not taxed. The dollar amount is determined by dividing
the "investment in the contract" by the total number of expected periodic
payments. However, the entire distribution will be taxable once the recipient
has recovered the dollar amount of his or her "investment in the contract."
For fixed annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the Annuity payments for the term of the
payments; however, the remainder of each Annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional Annuity payments is taxable. If Annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
PENALTY TAX: In the case of a distribution pursuant to a Nonqualified Flexible
Premium Contract, there may be imposed a federal income tax penalty equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty tax on distributions: (1) made on or after the date on which the
taxpayer attains age 59 1/2; (2) made as a result of death or disability of a
Certificate Holder; (3) received in substantially equal periodic payments as a
life annuity or a joint and survivor annuity for the lives or life
expectancies of the Certificate Holder and a "designated beneficiary." Other
tax penalties may apply to certain distributions pursuant to an IRA Rollover
Contract.
TAXATION OF DEATH BENEFIT PROCEEDS: Amounts may be distributed from the
Contract because of the death of a Certificate Holder or the Annuitant.
Generally, such amounts are includible in the income of the recipient as
follows: (1) if distributed in a lump sum, they are taxed in the same manner
as a full surrender as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as Annuity payments, as described
above.
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TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF THE CONTRACT: A transfer of ownership
of a Contract, the designation of an Annuitant, Payee or other Beneficiary who
is not also a Certificate Holder, the selection of certain Annuity Dates, or
the exchange of a Contract or Certificate may result in certain tax
consequences that are not discussed herein. Assignments or transfers of
ownership of an IRA Rollover Contract are not allowed except as permitted
under Code Section 408(d)(6), coincident to a divorce. Anyone contemplating
any such designation, transfer, assignment, selection, or exchange should
contact a competent tax adviser with respect to the potential tax effects of
such a transaction.
MULTIPLE CONTRACTS: All deferred nonqualified annuity contracts that are
issued by the Company (or its affiliates) to the same owner during any
calendar year are treated as one annuity contract for purposes of determining
the amount includible in gross income under section 72(e) of the Code. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of section 72(e) through the serial purchase of
annuity contracts or otherwise. Congress has also indicated that the Treasury
Department may have authority to treat the combination purchase of an
immediate annuity contract and separate deferred annuity contracts as a single
annuity contract under its general authority to prescribe rules as may be
necessary to enforce the income tax laws.
IRA ROLLOVER CONTRACTS
IN GENERAL: The qualified contract is designed for use as an Individual
Retirement Annuity. The tax rules applicable to participants and beneficiaries
in Individual Retirement Annuities are complex. Special favorable tax
treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in
excess of specified limits; distributions prior to age 59 1/2 (subject to
certain exceptions); distributions that do not conform to specified
commencement and minimum distribution rules; aggregate distributions in excess
of a specified annual amount; and in other specified circumstances.
INDIVIDUAL RETIREMENT ANNUITIES: Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity or Individual Retirement Account, each
hereinafter referred to as an "IRA." Also, distributions from certain other
types of qualified plans may be "rolled over" on a tax-deferred basis into an
IRA. The sale of a contract for use with an IRA may be subject to special
disclosure requirements of the Internal Revenue Service. Purchasers of a
Contract for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other appropriate agency. Such
purchasers will have the right to revoke their purchase within 7 days of the
earlier of the establishment of the IRA or their purchase. A Contract issued
in connection with an IRA will be amended as necessary to conform to the
requirements of the Code. Purchasers should seek competent advice as to the
suitability of the Contract for use with IRAs.
The Internal Revenue Service has not reviewed the Contract for qualification
as an IRA, and has not addressed in a ruling of general applicability whether
a death benefit provision such as the provision in the Contract comports with
IRA qualification requirements.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions.
POSSIBLE CHANGES IN TAXATION
In past years, legislation has been proposed that would have adversely
modified the federal taxation of certain annuities. For example, one such
proposal would have changed the tax treatment of nonqualified annuities that
did not have "substantial life contingencies" by taxing income as it is
credited to the annuity. Although as of the date of this prospectus Congress
is not actively considering any legislation regarding the taxation of
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other means (such as IRS regulations, revenue
rulings, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change).
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OTHER TAX CONSEQUENCES
As noted, above, the foregoing discussion of the federal income tax
consequences is not exhaustive and special rules are provided with respect to
other tax situations not discussed in this Prospectus. Further, the federal
income tax consequences discussed herein reflect the Company's understanding
of the current law and the law may change. Federal estate and gift tax
consequences of ownership or receipt of distributions under the Contract
depend on the individual circumstances of each Certificate Holder or recipient
of a distribution. A competent tax adviser should be consulted for further
information.
MISCELLANEOUS
VOTING RIGHTS
Each Contract Holder may direct us in the voting of shares at shareholders'
meetings of the appropriate Fund(s). The number of votes to which each
Contract Holder may give direction will be determined as of the record date.
The number of votes each Contract Holder is entitled to direct with respect to
a particular Fund during the Accumulation Period equals the portion of the
Certificate Holder's Account Value(s) of the Contract attributable to that
Fund, divided by the net asset value of one share of that Fund. During the
Annuity Period, the number of votes is equal to the Valuation Reserve for the
portion of the Contract attributable to that Fund, divided by the net asset
value of one share of that Fund. In determining the number of votes,
fractional votes will be recognized. Where the value of the Contract or
Valuation Reserve relates to more than one Fund, the calculation of votes will
be performed separately for each Fund.
If you are a Participant under a group Contract, you have a fully vested
(100%) interest in the benefits provided to you under your Certificate
Holder's Account. Therefore, you may instruct the group Contract Holder how to
direct the Company to cast the votes for the portion of the value or Valuation
Reserve attributable to your Certificate Holder's Account. Votes attributable
to those Certificate Holders who do not instruct the group Contract Holder
will be cast by the Company in the same proportion as votes for which
instructions have been received by the group Contract Holder. Votes
attributable to individual or group Contract Holders who do not direct us will
be cast by us in the same proportion as votes for which directions we have
received.
You will receive a notice of each meeting of shareholders, together with any
proxy solicitation materials, and a statement of the number of votes
attributable to your Certificate Holder's Account.
MODIFICATION OF THE CONTRACT
The Company may change any provision of the Contract that must be altered to
comply with state or federal law. The Company may also modify the Contract for
other reasons, when it deems an amendment appropriate, subject to the
limitations described below, by notifying the Contract Holder in writing 30
days before the effective date of the change. The following Contract
provisions are considered material by the Company and cannot be changed
without the approval of appropriate state or federal regulatory authorities:
(a) transfers among investment options;
(b) notification to the Contract Holder;
(c) conditions governing payments of surrender values;
(d) terms of Annuity Options;
(e) death benefit payments; and
(f) contract charges.
In addition, changes to the items listed below will apply only to new
Certificate Holders' Accounts establishing under a group Contract, or
individual Contracts issued after the effective date of the change:
(a) the Annuity Options;
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(b) the contractual promise that no deduction will be made from the
Purchase Payment for sales or administrative expenses;
(c) increasing the deferred sales charges;
(d) increasing the mortality and expense risk charges;
(e) increasing the administrative charge;
(f) the right to make transfers; and
(g) the Guaranteed Account Guaranteed Rate.
Modification of items (b) through (e) above specifically require authorization
by the SEC to the extent that the proposed changes are not currently
authorized by existing orders issued to us by the SEC.
If the group Contract Holder has not accepted the proposed change at the time
of its effective date, no new Certificate Holder's Accounts may be opened
under the group Contract.
No modification may affect any Annuity beginning before the effective date of
the change unless deemed necessary for the Contract to comply with the
requirements of the Code or other laws and regulations affecting the Contract.
INQUIRIES
You may direct inquiries by writing directly to us at the address shown on the
cover page of this Prospectus or by calling 1-800-531-4547.
TELEPHONE TRANSFERS
You automatically have the right to make transfers among Funds by telephone.
The Company has enacted procedures to prevent abuses of Certificate Holder's
Account transactions by telephone. The procedures include requiring the use of
a personal identification number (PIN) in order to execute transactions. You
are responsible for safeguarding your PIN, and for keeping your Account
information confidential. If the Company fails to follow these procedures it
would be liable for any losses to your Certificate Holder's Account resulting
from the failure. To ensure authenticity, the Company records all calls on the
800 line.
TRANSFER OF OWNERSHIP; ASSIGNMENT
Assignments or transfers of ownership of an IRA Rollover Contract are not
allowed except as permitted under Code Section 408(d)(6), coincident to a
divorce. We will accept assignments or transfers of ownership of a
Nonqualified Flexible Premium Contract, with proper notification. The date of
any such transfer will be the date we receive the notification at our Home
Office. Refer to "Tax Status" for general tax information. If you are
contemplating a transfer of ownership or assignment you should consult a tax
adviser due to the potential for tax liability.
LEGAL PROCEEDINGS
The Company knows of no material legal proceedings pending to which Account B
is a party or which would materially affect the Separate Account.
LEGAL MATTERS
The validity of the securities offered by this Prospectus has been passed upon
by Susan E. Bryant, Esq., Counsel to the Company.
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STATEMENT OF ADDITIONAL INFORMATION -- TABLE OF CONTENTS
The following items are the contents of the Statement of Additional Information:
<TABLE>
<S> <C>
General Information and History............................................. 2
Variable Annuity Account B.................................................. 2
Offering and Purchase of Contracts.......................................... 3
Performance Data............................................................ 3
Average Annual Total Return Quotations.................................... 4
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
ALIAC GUARANTEED ACCOUNT
THE ALIAC GUARANTEED ACCOUNT IS A GUARANTEED INTEREST OPTION AVAILABLE DURING
THE ACCUMULATION PERIOD UNDER THE CONTRACTS DESCRIBED IN THIS PROSPECTUS.
SINCE THE GUARANTEED ACCOUNT IS A FUNDING OPTION UNDER THE CONTRACT, YOU
SHOULD READ THE ACCOMPANYING GUARANTEED ACCOUNT PROSPECTUS CAREFULLY BEFORE
INVESTING. THIS APPENDIX IS INTENDED AS A SUMMARY DESCRIPTION OF THE
GUARANTEED ACCOUNT AND IS NOT INTENDED AS A REPLACEMENT FOR THE GUARANTEED
ACCOUNT PROSPECTUS.
GENERAL
The Guaranteed Account is a guaranteed interest option for which we guarantee
stipulated rates of interest for stated periods of time on amounts applied to
the Guaranteed Account. For guaranteed terms of one year or less, a guaranteed
rate is credited for the full term. For guaranteed rates of greater than one
year, the initial guaranteed rate is credited from the date of deposit to the
end of a specified period within the guaranteed term. The interest rate
stipulated is an annual effective yield; that is, it reflects a full year's
interest. Interest is credited daily at a rate that will provide the
guaranteed annual effective yield over the period of one year. Guaranteed
interest rates will never be less than an annual effective rate of 3%.
During the deposit period, amounts may be applied to any of the available
guaranteed terms. Purchase Payments received after the initial payment will be
allocated in the same proportions as the last allocation, if no new allocation
instructions are received with the Purchase Payment. For amounts allocated to
the Guaranteed Account, if the same guaranteed term(s) are not available, the
next shortest term will be used. If no shorter guaranteed term is available,
the next longer guaranteed term will be used.
WITHDRAWALS
Except for transfers from the one-year Guaranteed Term in connection with the
Dollar Cost Averaging Program and withdrawals taken in connection with an
Estate Conservation or Systematic Withdrawal distribution option (where state
regulatory approval has been received), withdrawals or transfers from a
guaranteed term before the guaranteed term matures may be subject to a market
value adjustment ("MVA"). An MVA reflects the change in the value of the
investment due to changes in interest rates since the date of deposit. When
interest rates increase after the date of deposit, the value of the investment
decreases, and the MVA is negative. Conversely, when interest rates decrease
after the date of deposit, the value of the investment increases, and the MVA
is positive. It is possible that a negative MVA could result in you receiving
an amount that is less than the amount you allocated to MGA.
For partial withdrawals during the Accumulation Period, amounts to be
withdrawn from the Guaranteed Account will be withdrawn on a pro rata basis
from each group of deposits having the same length of time until the Maturity
Date ("Guaranteed Term Group"). Within a Guaranteed Term Group, the amount
will be withdrawn first from the oldest Deposit Period, then from the next
oldest, and so on until the amount requested is satisfied.
MATURITY OF A GUARANTEED TERM
As a guaranteed term matures, assets accumulating under the Guaranteed Account
may be (a) transferred to a new guaranteed term, (b) transferred to any other
available investment options, or (c) withdrawn. Amounts withdrawn may be
subject to a deferred sales charge. If no direction is received by the Company
at its Home Office by the maturity date of a guaranteed term, the amount from
the maturing guaranteed term will be transferred to the current deposit period
for a similar length guaranteed term. If the same guaranteed term is no longer
available the next shortest guaranteed term available in the current deposit
period will be used. If no shorter guaranteed term is available, the next
longer guaranteed term will be used.
If you do not provide instructions concerning the maturity value of a maturing
guaranteed term, the maturity value transfer provision applies. This provision
allows you to transfer without an MVA to available guaranteed terms of
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the current deposit period or to other available investment options, or
surrender without an MVA (if applicable, a deferred sales charge is assessed
on the surrendered amount). The provision is available only during the
calendar month immediately following a guaranteed term maturity date and only
applies to the first transaction regardless of the amount involved in the
transaction.
MORTALITY AND EXPENSE RISK CHARGES
We make no deductions from the credited interest rate for mortality and
expense risks; these risks are considered in determining the credited rate.
TRANSFERS
Amounts applied to a guaranteed term during a deposit period may not be
transferred to any other funding option or to another guaranteed term during
that deposit period or for 90 days after the close of that deposit period.
This does not apply to (1) amounts transferred on the Maturity Date or under
the maturity value transfer provision; (2) amounts transferred from the
Guaranteed Account before the Maturity Date due to the election of an Annuity
option; (3) amounts transferred from the one-year Guaranteed Term in
connection with the Dollar Cost Averaging Program; and (4) amounts distributed
under the Estate Conservation or Systematic Withdrawal distribution. Transfers
after the 90-day period are permitted from guaranteed term(s) to other
guaranteed term(s) available during a deposit period or to other available
investment options. Except for transactions described in items (1), (3) and
(4) above, amounts withdrawn or transferred from the Guaranteed Account prior
to the maturity date will be subject to a Market Value Adjustment. However,
only a positive aggregate Market Value Adjustment will be applied to transfers
made due to annuitization under one of the lifetime Annuity options described
in item (2) above. These waivers are subject to regulatory approval and may
not be available in all states. See your representative to determine whether
the waiver is approved in your state.
Transfers of Guaranteed Account values on or within one calendar month of a
term's maturity date are not counted as one of the 12 free transfers of
accumulated values in the Certificate Holder's Account.
The Certificate Holder may select a maximum of 18 different funding options
over the lifetime of the Contract. Under the Guaranteed Account, each
guaranteed term is counted as one funding option. If a guaranteed term
matures, and is renewed for the same term, it will not count as an additional
funding option.
DEATH BENEFIT
Full and partial withdrawals and transfers made from the Guaranteed Account
within six months after the date of the Annuitant's death will be the greater
of:
(a) The aggregate MVA amount (i.e., the sum of all market value adjusted
amounts calculated due to a withdrawal of amounts). This total may be
greater or less than the Certificate Holder's Account Value of those
amounts; or
(b) The applicable portion of the Certificate Holder's Account Value
attributable to the Guaranteed Account.
After the six-month period, the surrender or transfer amount will be adjusted
for the aggregate MVA amount, which may be greater or less than the
Certificate Holder's Account Value of those amounts. Only a positive aggregate
Market Value Adjustment will be applied to transfers made due to annuitization
under one of the lifetime Annuity options.
ANNUITY PERIOD
By notifying us at our Home Office at least 30 days before the Annuity Date,
you may elect to have amounts which have been accumulating under the
Guaranteed Account transferred to one of the funding options available during
the Annuity Period to provide variable Annuity payments. (The Guaranteed
Account cannot be used as an investment option during the Annuity Period.)
Transfers made due to the election of a lifetime Annuity Option will be
subject to only a positive aggregate MVA.
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REINSTATEMENT PRIVILEGE
Any amounts reinstated to the Guaranteed Account will be applied to the
available guaranteed terms of the current deposit period in the same
proportion as they were at the time of surrender. If a guaranteed term of the
same time to maturity is not available in the current deposit period, the
funds will be reinvested in a guaranteed term having the next shortest time to
maturity. Any negative MVA amount applied to a surrender is not included in
the reinstatement.
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- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated ___________, 1996
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for The New Retirement: Nicholas-
Applegate/Aetna Annuity dated __________, 1996.
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
Service Unit
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-531-4547
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History....................................... 2
Variable Annuity Account B............................................ 2
Offering and Purchase of Contracts.................................... 3
Performance Data...................................................... 3
Average Annual Total Return Quotations.............................. 4
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
<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
Retirement Services, Inc. which is in turn a wholly owned subsidiary of Aetna
Life and Casualty Company. The Company's Home Office is located at 151
Farmington Avenue, Hartford, Connecticut 06156.
The Company, a registered broker-dealer under the Securities Exchange Act of
1934, serves as the principal underwriter for the Separate Account. The Company
is also a registered investment adviser under the Investment Advisers Act of
1940.
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 assets of the Separate Account are held by the Company. The Separate
Account has no custodian. However, the Funds in whose shares the assets of the
Separate Account are invested each have custodians, as discussed in their
respective prospectuses.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity contracts
issued by the Company. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended. The assets of the Separate Account will be invested
exclusively in shares of the mutual funds described in the Prospectus. Purchase
Payments made under the Contract may be allocated to one or more of the variable
investment options. The Company may make additions to or deletions from
available investment options as permitted by law. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts. The Funds currently available
under the Contract are as follows:
Nicholas-Applegate Core Growth Series
Nicholas-Applegate Emerging Growth Series
Nicholas-Applegate International Growth Series
Nicholas-Applegate Value Series
Nicholas-Applegate Diversified Income Series
Nicholas-Applegate International Fixed Income Series
Aetna Variable Encore Fund
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
2
<PAGE>
OFFERING AND PURCHASE OF CONTRACTS
As principal underwriter, ALIAC offers the Contracts through life insurance
agents licensed to sell variable annuities who are registered representatives of
ALIAC or of other registered broker-dealers who have sales agreements with
ALIAC. The offering of the Contracts is continuous. A description of the
manner in which Contracts are purchased may be found in the prospectus under the
sections titled "Contract Purchase" and "Certificate Holder's Account Value."
PERFORMANCE DATA
From time to time, the Company may advertise different types of historical
performance for the variable options of the Separate Account available under the
Contracts issued by the Company which are described in the Prospectus. The
Company may advertise the "standardized average annual total returns,"
calculated in a manner prescribed by the Securities and Exchange Commission (the
"standardized return"), as well as the "non-standardized total return," both of
which are described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the variable options under the Contract, and then related
to the ending redeemable values over one, three, five and ten year periods (or
fractional periods thereof). The standardized figures reflect the deduction of
all recurring charges during each period (e.g., mortality and expense risk
charges, maintenance fees, administrative charges, and deferred sales charges).
These charges will be deducted on a pro rata basis in the case of fractional
periods. The maintenance fee is converted to a percentage of assets based on
the estimated average account size under these Contracts.
The non-standardized figures will be calculated in a similar manner, except that
non-standardized figures will not reflect the deduction of any applicable
deferred sales charge (which would decrease the level of performance shown if
reflected in these calculations). The non-standardized figures may also include
a three year period.
For variable options underlying the Separate Account that were in existence
prior to the date the Fund became available under the Contract or the date on
which the Separate Account commenced operations, the standardized and non-
standardized total returns may include periods prior to the date on which such
Fund became available under the Contract. These figures are calculated by
adjusting the actual returns of the Fund to reflect the charges that would have
been assessed under the Contract had that Fund been available under the Contract
during that period.
The total return quotations are based upon historical earnings and are not
necessarily representative of future performance. Investment results of the
Funds will fluctuate over time, and any presentation of the Funds' total return
quotations for any prior period should not be considered as a representation of
how the variable options will perform in any future period. Additionally, your
Account Value upon redemption may be more or less than your original cost.
3
<PAGE>
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 period ended September 30,
1995 for the variable options available under the Contract. As the Nicholas-
Applegate Series currently has no performance history, the table below shows
Average Annual Total Return Quotations for the Aetna Variable Encore Fund
investment option only.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Fund
STANDARDIZED NON-STANDARDIZED Inception Date
- -----------------------------------------------------------------------------------------------------------------------
Investment Option 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 Encore Fund (1.05)% 2.84% 4.78% 4.33% 2.68% 3.30% 4.78% 09/01/75
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Contract or Account is
determined using Accumulation Unit values as of the tenth Valuation Period
before the first Annuity payment is due. Such value (less any applicable premium
tax) is applied to provide an Annuity in accordance with the Annuity and
investment options elected.
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.
4
<PAGE>
EXAMPLE:
Assume that, at the date Annuity payments are to begin, there are 3,000
Accumulation Units credited under a particular Contract or Account and that the
value of an Accumulation Unit for the tenth Valuation Period prior to retirement
was $13.650000. This produces a total value of $40,950.
Assume also that no premium tax is payable and that the Annuity table in the
Contract provides, for the option elected, a first monthly variable Annuity
payment of $6.68 per $1000 of value applied; the Annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an Annuity Unit for the Valuation Period in which
the first payment was due was $13.400000. When this value is divided into the
first monthly payment, the number of Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate Fund is 1.0015000
as of the tenth Valuation Period preceding the due date of the second monthly
payment, multiplying this factor by .9999058* (to neutralize the assumed net
investment rate of 3.5% per annum built into the number of Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Annuity Unit value for the prior Valuation Period (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation
Period in which the second payment is due.
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
DOLLAR-COST AVERAGING
The term "dollar-cost averaging" describes a system of investing a uniform sum
of money at regular intervals over an extended period of time. It is based on
the economic fact that buying a variably priced item with a constant sum of
money at fixed intervals results in acquiring more of the item when prices are
low and less of it when prices are high. In order to maximize the effectiveness
of dollar-cost averaging, it is important that investors consider their
financial ability to continue purchasing the securities through periods of high
and low price levels. Investors should also note that no system can protect
against reduced values in a declining market.
SALES MATERIAL
The Company may include hypothetical illustrations in its sales literature that
explain the mathematical principles of dollar cost averaging, compounded
interest, tax deferred accumulation, and the mechanics of variable annuity
contracts. The Company may also discuss the difference between variable annuity
contracts and other types of savings or investment products, including, but not
limited to, personal savings accounts and Certificates of Deposit.
5
<PAGE>
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.
6
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Independent Auditors' Report
Statement of Assets and liabilities as of December 31, 1994
Statement of Operations for the year ended December 31, 1994
Statements of Changes in Net Assets for the years ended December 31, 1994 and
1993
Notes to Financial Statements as of December 31, 1994
Statement of Assets and Liabilities as of September 30, 1995 (Unaudited)
Statement of Operations for the nine-month period ended September 30, 1995
(Unaudited)
Statements of Changes in Net Assets for the nine-month period ended September
30, 1995 and the year ended December 31, 1994 (Unaudited)
Notes to Financial Statements (Unaudited)
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>
<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
-------------- --------------
<S> <C> <C> <C>
Reserves for annuity contracts in accumulation period:
AETNA VARIABLE FUND:
Non-Qualified 1964................................................. 5,159.1 $114.828 $ 592,407
Non-Qualified I.................................................... 232,142.6 129.838 30,140,993
Non-Qualified II................................................... 478,180.1 91.515 43,760,850
Non-Qualified III.................................................. 2,229,372.7 87.638 195,378,787
Non-Qualified V.................................................... 11,117,382.8 10.698 118,932,105
Non-Qualified VI................................................... 52,441.8 9.993 524,057
Non-Qualified VII.................................................. 3,178,711.5 10.737 34,130,411
AETNA INCOME SHARES:
Non-Qualified I.................................................... 16,981.4 39.514 671,004
Non-Qualified II................................................... 151,836.3 41.302 6,271,196
Non-Qualified III.................................................. 699,850.8 39.919 27,937,427
Non-Qualified V.................................................... 1,988,960.0 10.457 20,799,277
Non-Qualified VI................................................... 8,201.1 9.534 78,189
Non-Qualified VII.................................................. 983,356.7 10.324 10,152,119
AETNA VARIABLE ENCORE FUND:
Non-Qualified I.................................................... 30,683.2 35.958 1,103,292
Non-Qualified II................................................... 194,997.6 36.602 7,137,317
Non-Qualified III.................................................. 744,594.5 34.450 25,651,159
Non-Qualified V.................................................... 1,822,449.0 10.509 19,152,951
Non-Qualified VI................................................... 3,730.2 10.237 38,185
Non-Qualified VII.................................................. 3,407,448.2 10.489 35,740,583
AETNA INVESTMENT ADVISERS FUND, INC.:
Non-Qualified I.................................................... 70,446.9 14.299 1,007,320
Non-Qualified II................................................... 679,528.1 14.252 9,684,634
Non-Qualified III.................................................. 2,044,887.2 14.218 29,074,206
Non-Qualified V.................................................... 3,541,702.6 10.971 38,856,019
Non-Qualified VII.................................................. 911,280.6 10.828 9,867,346
AETNA GET FUND, SERIES B:
Non-Qualified V.................................................... 1,197,924.6 10.159 12,170,153
ALGER AMERICAN FUND - ALGER AMERICAN SMALL
CAPITALIZATION PORTFOLIO:
Non-Qualified V.................................................... 441,808.5 9.622 4,251,298
CALVERT SOCIALLY RESPONSIBLE SERIES:
Non-Qualified V.................................................... 752.3 10.518 7,912
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS
FUND - EQUITY-INCOME PORTFOLIO:
Non-Qualified VII.................................................. 17,012.8 10.002 170,167
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS
FUND - GROWTH PORTFOLIO:
Non-Qualified VII.................................................. 17,012.8 10.423 177,333
</TABLE>
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>
<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>
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>
<S> <C>
Aetna Variable Fund Insurance Management Series-Prime Money
Aetna Income Shares Fund
Aetna Variable Encore Fund Insurance Management Series-Utility Fund
Aetna Investment Advisers Fund, Inc. Janus Aspen Series-Aggressive Growth
Aetna GET Fund, Series B Portfolio
Alger American Fund-Alger American Small Janus Aspen Series-Flexible Income Portfolio
Capitalization Portfolio Janus Aspen Series-Growth Portfolio
Calvert Socially Responsible Series Lexington Emerging Markets Fund, Inc.
Fidelity Investments Variable Insurance Lexington Natural Resources Trust
Products Fund-Equity-Income Portfolio Neuberger & Berman Advisers Management
Fidelity Investments Variable Insurance Trust-Growth Portfolio
Products Fund-Growth Portfolio Scudder Variable Life Investment Fund-
Insurance Management Series-Corporate International Portfolio
Bond Fund TCI Portfolios, Inc.-TCI Balanced
Insurance Management Series-Equity Growth TCI Portfolios, Inc.-TCI Growth
and Income Fund TCI Portfolios, Inc.-TCI International
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 October 21, 1994 Net investment income
Bond Fund 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
- -------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers Management February 11, 1994 Net investment income and net
Trust-Growth Portfolio realized gains
</TABLE>
S-9
<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-10
<PAGE>
Statement of Assets and Liabilities September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
VAAB.XLS
ASSETS: ------------
Investments, at net asset value: (Note 1)
<S> <C>
Aetna Variable Fund; 17,850,935 shares at $31.80 per share (cost $526,679,779)................................... $567,638,301
Aetna Income Shares; 5,765,326 shares at $12.99 per share (cost $71,714,080)..................................... 74,873,687
Aetna Variable Encore Fund; 6,111,490 shares at $13.12 per share (cost $78,214,785).............................. 80,161,851
Aetna Investment Advisers Fund, Inc; 7,576,230 shares at $14.19 per share (cost $96,029,199)..................... 107,481,312
Aetna GET Fund, Series B; 1,136,743 shares at $12.02 per share (cost $11,475,713)................................ 13,666,041
Aetna Ascent Variable Portfolio; 9,799 shares at $10.60 per share (cost $103,295)................................ 103,886
Aetna Crossroads Variable Portfolio; 14,890 shares at $10.53 per share (cost $155,204)........................... 156,815
Aetna Legacy Variable Portfolio; 7,329 shares at $10.45 per share (cost $76,880)................................. 76,597
Alger American Fund - Alger American Balanced Portfolio; 10,620 shares at $13.86 per share
(cost $139,359)................................................................................................ 147,195
Alger American Fund - Alger American Growth Portfolio; 100,926 shares at $32.73 per share
(cost $3,150,036).............................................................................................. 3,303,319
Alger American Fund - Alger American Income and Growth Portfolio; 12,181 shares at $18.91 per share
(cost $219,298)................................................................................................ 230,347
Alger American Fund - Alger American Leveraged AllCap Portfolio; 20,586 shares
at $17.76 per share (cost $350,518)............................................................................ 365,614
Alger American Fund - Alger American MidCap Portfolio; 34,377 shares
at $20.53 per share (cost $664,053)............................................................................ 705,754
Alger American Fund - Alger American Small Capitalization Portfolio; 416,027 shares
at $42.83 per share (cost $15,782,145)......................................................................... 17,818,451
Calvert Socially Responsible Series; 137,772 shares at $1.80 per share (cost $235,902)........................... 248,540
Fidelity Investments Variable Insurance Products Fund - Equity-Income Portfolio; 340,400 shares
at $18.25 per share (cost $5,899,277).......................................................................... 6,212,299
Fidelity Investments Variable Insurance Products Fund - Growth Portfolio; 200,633 shares
at $30.47 per share (cost $5,741,341).......................................................................... 6,113,275
Fidelity Investments Variable Insurance Products Fund - High Income Portfolio; 17,690 shares
at $11.74 per share (cost $205,949)............................................................................ 207,683
Fidelity Investments Variable Insurance Products Fund - Index 500 Portfolio; 4,783 shares
at $71.49 per share (cost $332,140)............................................................................ 341,922
Fidelity Investments Variable Insurance Products Fund - Overseas Portfolio; 42,251 shares
at $16.70 per share (cost $696,486)............................................................................ 705,588
Fidelity Investments Variable Insurance Products Fund II - Asset Manager Portfolio; 66,694 shares
at $15.21 per share (cost $961,194)............................................................................ 1,014,409
Fidelity Investments Variable Insurance Products Fund II - Contrafund Portfolio; 432,058 shares
at $13.94 per share (cost $5,844,455).......................................................................... 6,022,886
Fidelity Investments Variable Insurance Products Fund II - Investment Grade Bond Portfolio; 15,560 shares
at $11.97 per share (cost $183,879)............................................................................ 186,253
Insurance Management Series - Corporate Bond Fund; 790,596 shares at $9.63 per share
(cost $7,456,784)............................................................................................. 7,613,442
Insurance Management Series - International Stock Fund; 98,365 shares at $10.15 per share
(cost $989,329)............................................................................................... 998,405
Insurance Management Series - Equity Growth and Income Fund; 1,581,961 shares
at $12.24 per share (cost $17,498,642)......................................................................... 19,363,206
Insurance Management Series - Prime Money Fund; 6,866,306 shares at $1.00 per share
(cost $6,862,451).............................................................................................. 6,866,306
Insurance Management Series - U.S. Government Bond Fund; 231,366 shares
at $10.11 per share (cost $2,316,563).......................................................................... 2,339,108
Insurance Management Series - Utility Fund; 577,259 shares at $10.49 per share (cost $5,637,164)................. 6,055,448
Janus Aspen Series - Aggressive Growth Portfolio; 465,079 shares at $16.29 per share (cost $6,678,293)........... 7,576,133
Janus Aspen Series - Balanced Portfolio; 15,249 shares at $12.33 per share (cost $184,003)....................... 188,024
Janus Aspen Series - Flexible Income Portfolio; 63,791 shares at $10.83 per share (cost $670,397)................ 690,855
Janus Aspen Series - Growth Portfolio; 68,019 shares at $13.06 per share (cost $832,373)......................... 888,322
Janus Aspen Series - Short-Term Bond Portfolio; 33,687 shares at $9.98 per share (cost $332,977)................. 336,201
Janus Aspen Series - Worldwide Growth Portfolio; 139,009 shares at $14.58 per share (cost $1,963,554)............ 2,026,756
Lexington Emerging Markets Fund, Inc.; 11,277 shares at $9.77 per share (cost $110,437).......................... 110,175
Lexington Natural Resources Trust; 157,573 shares at $10.96 per share (cost $1,588,115).......................... 1,727,002
Neuberger & Berman Advisers Management Trust - Growth Portfolio; 303,796 shares at $26.85
per share (cost $7,299,114).................................................................................... 8,156,927
Scudder Variable Life Investment Fund - International Portfolio; 881,869 shares
at $11.82 per share (cost $9,739,048).......................................................................... 10,423,693
TCI Portfolios, Inc - TCI Balanced; 34,771 shares at $6.93 per share (cost $226,684)............................. 240,964
TCI Portfolios, Inc - TCI Growth; 4,410,098 shares at $12.53 per share (cost $43,120,759)........................ 55,258,534
TCI Portfolios, Inc - TCI International; 22,442 shares at $5.18 per share (cost $112,348)........................ 116,250
---------------
NET ASSETS......................................................................................................... $1,018,757,776
===============
</TABLE>
See Notes to Financial Statements
S-11
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities (continued)
Net assets represented by:
<TABLE>
<CAPTION>
Accumulation
Unit
Units Value
------------ ------------
Reserves for annuity contracts in accumulation period:
<S> <C> <C> <C>
Aetna Variable Fund:
Non-Qualified 1964........................................ 5,159.1 $143.454 $740,093
Non-Qualified I........................................... 197,246.6 162.280 32,009,126
Non-Qualified II.......................................... 167,436.9 114.330 19,143,062
Non-Qualified III......................................... 319,347.2 109.487 34,964,222
Non-Qualified V........................................... 28,483,909.5 13.365 380,681,897
Non-Qualified VI.......................................... 247,417.6 12.490 3,090,252
Non-Qualified VII......................................... 2,938,322.1 13.398 39,367,460
Aetna Income Shares:
Non-Qualified I........................................... 14,426.2 44.411 640,677
Non-Qualified II.......................................... 75,758.1 46.400 3,515,143
Non-Qualified III......................................... 59,408.4 44.846 2,664,204
Non-Qualified V........................................... 4,575,913.4 11.748 53,757,505
Non-Qualified VI.......................................... 9,820.5 10.715 105,230
Non-Qualified VII......................................... 944,815.2 11.584 10,944,920
Aetna Variable Encore Fund:
Non-Qualified I........................................... 25,873.7 37.252 963,855
Non-Qualified II.......................................... 82,655.1 37.903 3,132,878
Non-Qualified III......................................... 56,925.1 26.674 2,030,761
Non-Qualified V........................................... 4,084,404.3 10.883 44,450,543
Non-Qualified VI.......................................... 3,834.3 10.883 40,664
Non-Qualified VII......................................... 2,723,178.2 10.849 29,543,150
Aetna Investment Advisers Fund, Inc.
Non-Qualified I........................................... 54,344.3 14.299 935,966
Non-Qualified II.......................................... 164,719.9 14.252 2,826,322
Non-Qualified III......................................... 233,813.1 17.117 4,002,249
Non-Qualified V........................................... 6,148,668.2 13.208 81,209,131
Non-Qualified VI.......................................... 7,976.0 11.087 88,432
Non-Qualified VII......................................... 848,584.3 13.021 11,049,187
Aetna GET Fund, Series B:
Non-Qualified V........................................... 1,108,026.6 12.334 13,666,041
Aetna Ascent Variable Portfolio:
Non-Qualified V........................................... 8,325.2 10.256 85,380
Non-Qualified VII......................................... 1,804.9 10.253 18,506
Aetna Crossroads Variable Portfolio:
Non-Qualified V........................................... 13,019.8 10.240 133,319
Non-Qualified VII......................................... 2,295.2 10.237 23,496
Aetna Legacy Variable Portfolio:
Non-Qualified V........................................... 166.8 10.112 1,686
Non-Qualified VII......................................... 7,409.3 10.110 74,911
Alger American Fund - Alger American Balanced
Portfolio:
Non-Qualified VII......................................... 11,466.9 12.836 147,195
Alger American Fund - Alger American Growth
Portfolio:
Non-Qualified V........................................... 76,679.3 10.703 820,662
Non-Qualified VII......................................... 181,451.5 13.682 2,482,657
Alger American Fund - Alger American Income and
Growth Portfolio:
Non-Qualified VII......................................... 20,257.5 11.371 230,347
</TABLE>
S-12
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities (continued)
<TABLE>
<CAPTION>
Accumulation
Unit
Units Value
------------- ------------
<S> <C> <C> <C>
Alger American Fund - Alger American Leveraged
AllCap Portfolio:
Non-Qualified VII .............................................. 29,152.6 $12.541 ........ $ 365,614
Alger American Fund - Alger American
MidCap Portfolio:
Non-Qualified VII .............................................. 47,653.8 14.810 ........ 705,754
Alger American Fund - Alger American Small
Capitalization Portfolio:
Non-Qualified V ................................................ 1,075,754.3 14.951 ........ 16,083,247
Non-Qualified VII .............................................. 119,671.3 14.500 ........ 1,735,204
Calvert Socially Responsible Series:
Non-Qualified V ................................................ 19,053.1 13.045 ........ 248,540
Fidelity Investments Variable Insurance Products Fund
- Equity - Income Portfolio:
Non-Qualified V ................................................ 111,657.1 10.447 ........ 1,166,461
Non-Qualified VII .............................................. 400,566.5 12.597 ........ 5,045,838
Fidelity Investments Variable Insurance Products Fund
- - Growth Portfolio:
Non-Qualified V ................................................ 121,390.8 10.537 ........ 1,279,045
Non-Qualified VII .............................................. 331,811.0 14.569 ........ 4,834,230
Fidelity Investments Variable Insurance Products Fund
- - High Income Portfolio:
Non-Qualified VII .............................................. 19,849.5 10.463 ........ 207,683
Fidelity Investments Variable Insurance Products Fund
- - Index 500 Portfolio:
Non-Qualified VII .............................................. 31,830.5 10.742 ........ 341,922
Fidelity Investments Variable Insurance Products Fund
- - Overseas Portfolio:
Non-Qualified V ................................................ 24,460.8 9.876 ........ 241,577
Non-Qualified VII .............................................. 42,363.4 10.953 ........ 464,011
Fidelity Investments Variable Insurance Products Fund II
- - Asset Manager Portfolio:
Non-Qualified VII .............................................. 89,967.7 11.275 ........ 1,014,409
Fidelity Investments Variable Insurance Products Fund II
- Contrafund Portfolio:
Non-Qualified V ................................................ 283,146.7 10.484 ........ 2,968,533
Non-Qualified VII .............................................. 261,495.7 11.680 ........ 3,054,353
Fidelity Investments Variable Insurance Products Fund II
- - Investment Grade Bond Portfolio:
Non-Qualified VII .............................................. 18,255.1 10.203 ........ 186,253
Insurance Management Series - Corporate Bond Fund:
Non-Qualified VII .............................................. 677,062.6 11.245 ........ 7,613,442
Insurance Management Series - International Stock Fund:
Non-Qualified VII .............................................. 98,929.2 10.092 ........ 998,405
Insurance Management Series - Equity Growth and Income Fund:
Non-Qualified VII .............................................. 1,561,801.8 12.398 ........ 19,363,206
Insurance Management Series - Prime Money Fund:
Non-Qualified VII .............................................. 665,777.2 10.313 ........ 6,866,306
Insurance Management Series - U.S. Government Bond Fund:
Non-Qualified VII .............................................. 223,020.1 10.488 ........ 2,339,108
Insurance Management Series - Utility Fund:
Non-Qualified VII .............................................. 530,366.1 11.417 ........ 6,055,448
</TABLE>
S-13
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities (continued)
<TABLE>
<CAPTION>
Accumulation
Unit
Units Value
------------ ------------
<S> <C> <C> <C>
Janus Aspen Series - Aggressive Growth Portfolio:
Non-Qualified V .................................................. 554,993.0 $12.356 ........ $ 6,857,728
Non-Qualified VII ................................................ 57,903.1 12.407 ........ 718,405
Janus Aspen Series - Balanced Portfolio:
Non-Qualified V .................................................. 2.1 10.206 ........ 21
Non-Qualified VII ................................................ 16,483.6 11.405 ........ 188,003
Janus Aspen Series - Flexible Income Portfolio:
Non-Qualified V .................................................. 40,723.4 11.514 ........ 468,882
Non-Qualified VII ................................................ 19,307.4 11.497 ........ 221,973
Janus Aspen Series - Growth Portfolio:
Non-Qualified V .................................................. 17,327.1 10.394 ........ 180,093
Non-Qualified VII ................................................ 57,064.4 12.411 ........ 708,229
Janus Aspen Series - Short-Term Portfolio:
Non-Qualified V .................................................. 131.5 10.104 ........ 1,329
Non-Qualified VII ................................................ 31,775.0 10.539 ........ 334,872
Janus Aspen Series - Worldwide Growth Portfolio:
Non-Qualified V .................................................. 126,596.3 10.372 ........ 1,313,027
Non-Qualified VII ................................................ 60,715.2 11.755 ........ 713,729
Lexington Emerging Markets Fund, Inc.:
Non-Qualified VII ................................................ 11,473.2 9.603 ........ 110,175
Lexington Natural Resources Trust:
Non-Qualified V .................................................. 162,457.7 10.153 ........ 1,649,409
Non-Qualified VII ................................................ 7,671.2 10.115 ........ 77,593
Neuberger & Berman Advisers
Management Trust- Growth Portfolio:
Non-Qualified V .................................................. 493,469.0 16.530 ........ 8,156,927
Scudder Variable Life Investment Fund - International Portfolio:
Non-Qualified V .................................................. 708,131.2 14.720 ........ 10,423,693
TCI Portfolios, Inc. - TCI Balanced:
Non-Qualified VII ................................................ 20,261.6 11.893 ........ 240,964
TCI Portfolios, Inc. - TCI Growth:
Non-Qualified II ................................................. 127,113.9 13.782 ........ 1,751,899
Non-Qualified III ................................................ 202,793.1 13.661 ........ 2,770,276
Non-Qualified V .................................................. 2,549,764.1 14.686 ........ 37,445,358
Non-Qualified VI ................................................. 5,989.1 12.384 ........ 74,167
Non-Qualified VII ................................................ 904,064.0 14.619 ........ 13,216,834
TCI Portfolios, Inc. - TCI International:
Non-Qualified VII ................................................ 11,411.2 10.187 ........ 116,250
Reserves for annuity contracts in payment period (Note 1) .................................................... 68,258,222
--------------
$1,018,757,776
==============
</TABLE>
See Notes to Financial Statements.
S-14
<PAGE>
Variable Annuity Account B
Statement of Operations Nine-Month Period-Ended September 30, 1995 (Unaudited)
<TABLE>
INVESTMENT INCOME:
Dividends: (Notes 1 and 3)
<S> <C>
Aetna Variable Fund....................................................................... $21,079,814
Aetna Income Shares....................................................................... 1,687,363
Aetna Investment Advisers Fund, Inc....................................................... 4,595,718
Aetna GET Fund, Series B.................................................................. 169,679
Alger American Fund - Alger American Balanced Portfolio................................... 267
Alger American Fund - Alger American Growth Portfolio..................................... 1,379
Alger American Fund - Alger American MidCap Portfolio..................................... 2
Fidelity Investments Variable Insurance Products Fund - Equity-Income Portfolio........... 52,123
Fidelity Investments Variable Insurance Products Fund - Growth Portfolio.................. 1,403
Fidelity Investments Variable Insurance Products Fund - Overseas Portfolio................ 106
Fidelity Investments Variable Insurance Products Fund II - Asset Manager Portfolio........ 3,070
Insurance Management Series - Corporate Bond Fund......................................... 213,272
Insurance Management Series - Equity Growth and Income Fund............................... 146,596
Insurance Management Series - Government Bond Fund........................................ 46,740
Insurance Management Series - Prime Money Fund............................................ 141,347
Insurance Management Series - Utility Fund................................................ 103,912
Janus Aspen Series - Aggressive Growth Portfolio.......................................... 46,173
Janus Aspen Series - Balanced Portfolio................................................... 443
Janus Aspen Series - Flexible Income Portfolio............................................ 13,214
Janus Aspen Series - Growth Portfolio..................................................... 1,112
Janus Aspen Series - Short-Term Bond Portfolio............................................ 1,139
Janus Aspen Series - Worldwide Growth Portfolio........................................... 107
Neuberger & Berman Advisers Management Trust - Growth Portfolio........................... 111,452
Scudder Variable Life Investment Fund - International Portfolio........................... 40,450
TCI Portfolios, Inc - TCI Balanced........................................................ 2,443
TCI Portfolios, Inc - TCI Growth.......................................................... 47,666
------------
Total investment income................................................................ 28,506,990
Valuation period deductions (Note 2)...................................................... (8,347,571)
------------
Net investment income..................................................................... 20,159,419
------------
</TABLE>
<TABLE>
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
<S> <C> <C>
Realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales..................................................................... $397,443,454
Cost of investments sold................................................................ 370,943,405
------------
Net realized gain..................................................................... 26,500,049
Unrealized gain (loss) on investments:
Beginning of period..................................................................... (44,356,052)
End of period........................................................................... 80,283,774
------------
Net unrealized gain................................................................... 124,639,826
------------
Net realized and unrealized gain on investments........................................... 151,139,875
------------
Increase in net assets resulting from operations.......................................... $171,299,294
============
</TABLE>
See Notes to Financial Statements
S-15
<PAGE>
Variable Annuity Account B
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Nine-Month
Period Ended
September 30, 1995 Year Ended
(Unaudited) December 31, 1994
------------------ -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.................................................. $20,159,419 $74,514,904
Net realized and unrealized gain (loss) on investments................. 151,139,875 (89,424,840)
-------------- ------------
Increase (decrease) in net assets resulting from operations.......... 171,299,294 (14,909,936)
-------------- ------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments............................ 96,395,915 170,170,873
Sales and administrative charges deducted by the Company............... (28,628) (8,045)
-------------- ------------
Net variable annuity contract purchase payments...................... 96,367,287 170,162,828
Transfers from the Company for mortality guarantee adjustments......... 312,725 537,027
Transfers to the Company's fixed account options....................... (5,525,569) (6,000,310)
Redemptions by contract holders........................................ (34,728,560) (32,737,461)
Annuity payments....................................................... (5,768,864) (7,564,589)
Other.................................................................. 996,827 (127,555)
-------------- ------------
Increase in net assets from unit transactions........................ 51,653,846 124,269,940
-------------- ------------
Change in net assets................................................... 222,953,140 109,360,004
NET ASSETS:
Beginning of period.................................................... 795,804,636 686,444,632
-------------- ------------
End of period.......................................................... $1,018,757,776 $795,804,636
============== ============
</TABLE>
See Notes to Financial Statements.
S-16
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 September 30, 1995:
Aetna Variable Fund Insurance Management Series:
Aetna Income Shares . Corporate Bond Fund
Aetna Variable Encore Fund . International Stock Fund
Aetna Investment Advisers Fund, Inc. . Equity Growth and Income Fund
Aetna GET Fund, Series B . Prime Money
Aetna Ascent Variable Fund . Government Bond Fund
Aetna Crossroads Variable Fund . Utility Fund
Aetna Legacy Variable Fund
Alger American Funds: Janus Aspen Series:
. Alger American Balanced Portfolio . Aggressive Growth Portfolio
. Alger American Growth Portfolio . Balance Portfolio
. Alger American Income and Growth Portfolio . Flexible Income Portfolio
. Alger American Leveraged Capitalization . Growth Portfolio
Portfolio . Short-Term Portfolio
. Alger American Mid-Capitalization Portfolio . World Growth Portfolio
. Alger American Small Capitalization Portfolio
Calvert Socially Responsible Series Lexington:
. Emerging Markets Fund, Inc.
. Natural Resources Trust
Fidelity Investments Variable Insurance Neuberger & Berman Advisers
Products Fund: Management Trust
. Contrafund Portfolio - Growth Portfolio
. Equity-Income Portfolio
. Growth Portfolio Scudder Variable Life
. High Income Portfolio Investment Fund
. Index 500 Portfolio -International Portfolio
. Overseas Portfolio
Fidelity Investments Variable Insurance TCI Portfolios, Inc.:
Products Fund II: . TCI Balanced
. Asset Manager . TCI Growth
. Investment Bond Portfolio . TCI International
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.
S-17
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
4. PURCHASES AND SALES OF INVESTMENTS
The cost of purchases and proceeds from sales of investments other than
short-term investments for the nine month period ended September 30, 1995
aggregated $469,256,720 and $397,443,454, respectively.
S-18
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report..................................................................... F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1994, 1993, and 1992....... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1993.................................. F-4
Consolidated Statements of Changes in 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
Consolidated Financial Statements:
Unaudited Consolidated Statements of Income for the Nine-Month Period Ended
September 30, 1995 and 1994................................................................... F-26
Unaudited Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994.......... F-27
Unaudited Consolidated Statements of Changes in Shareholder's Equity for the Nine-Month Period
Ended September 30, 1995 and 1994............................................................. F-28
Unaudited Consolidated Statements of Cash Flows for the Nine-Month Period Ended
September 30, 1995 and 1994................................................................... F-29
Condensed Notes to Consolidated Financial Statements............................................. F-30
</TABLE>
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
--------- ---------
<S> <C> <C>
(millions)
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 CO NET
AMOUNT COMPANIES -- AMOUNT
------ --------- ------
1994 (millions)
<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
--------- --------- --------- ---------
Assets: (millions)
<S> <C> <C> <C> <C>
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
--------- ----------- ----------
<S> <C> <C> <C>
(millions)
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>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
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>
9 Months Ended September 30,
----------------------------
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
Revenue:
Premiums $94.8 $79.2
Charges assessed against policyholders 231.1 207.0
Net investment income 732.0 684.9
Net realized capital gains 19.3 5.3
Other income 30.0 3.9
--------- ---------
Total revenue 1,107.2 980.3
Benefits and expenses:
Current and future benefits 677.1 621.1
Operating expenses 222.9 166.7
Amortization of deferred policy acquisition costs 27.3 31.7
--------- ---------
Total benefits and expenses 927.3 819.5
Income before federal income taxes 179.9 160.8
Federal income taxes 58.8 51.4
--------- ---------
Net income $121.1 $109.4
========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-26
<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>
September 30, December 31,
Assets 1995 1994
- ------ ---- ----
<S> <C> <C>
Investments: (Unaudited)
Debt securities, available for sale:
(amortized cost: $11,540.8 and $10,577.8) $11,999.5 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $54.8 and $43.3) 61.5 47.2
Investment in affiliated mutual funds (cost: $213.9 and $187.1) 241.7 181.9
Common stock (cost: $5.7 at September 30, 1995) 7.6 --
Short-term investments 16.6 98.0
Mortgage loans 5.6 9.9
Policy loans 305.7 248.7
Limited partnership 24.6 24.4
------------ ------------
Total investments 12,662.8 10,801.5
Cash and cash equivalents 506.4 623.3
Accrued investment income 171.8 142.2
Premiums due and other receivables 54.5 75.8
Deferred policy acquisition costs 1,283.1 1,172.0
Reinsurance loan to affiliate 659.4 690.3
Other assets 21.2 15.9
Separate Accounts assets 9,931.9 7,420.8
------------ -----------
Total assets $25,291.1 $20,941.8
============ ===========
<CAPTION>
Liabilities and Shareholder's Equity
- ------------------------------------
<S> <C> <C>
Liabilities:
Future policy benefits $3,247.2 $2,920.4
Unpaid claims and claim expenses 22.9 23.8
Policyholders' funds left with the Company 10,132.7 8,949.3
------------ -----------
Total insurance reserve liabilities 13,402.8 11,893.5
Other liabilities 261.4 302.1
Federal income taxes:
Current 17.6 3.4
Deferred 167.6 233.5
Separate Accounts liabilities 9,931.9 7,420.8
------------ -----------
Total liabilities 23,781.3 19,853.3
------------ -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 407.6 407.6
Net unrealized capital gains (losses) 111.2 (189.0)
Retained earnings 988.2 867.1
------------ -----------
Total shareholder's equity 1,509.8 1,088.5
------------ -----------
Total liabilities and shareholder's equity $25,291.1 $20,941.8
============ ===========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-27
<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>
9 Months Ended September 30,
----------------------------
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
Shareholder's equity, beginning of period $1,088.5 $1,246.7
Net change in unrealized capital gains (losses) 300.2 (224.1)
Net income 121.1 109.4
--------- ---------
Shareholder's equity, end of period $1,509.8 $1,132.0
========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-28
<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>
9 Months Ended September 30,
----------------------------
1995 1994
---- ----
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $121.1 $109.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (29.6) (9.8)
Decrease in premiums due and other receivables 28.1 12.4
Increase in policy loans (57.0) (31.3)
Increase in deferred policy acquisition costs (111.1) (52.7)
Decrease in reinsurance loan to affiliate 30.9 21.0
Net increase in universal life account balances 164.0 110.2
Increase in other insurance reserve liabilities 10.6 14.1
Net (increase) decrease in other liabilities and other assets (17.2) 23.3
Increase in federal income taxes (3.6) (17.7)
Net accretion of discount on debt securities (48.9) (62.0)
Net realized capital gains (19.3) (5.3)
---------- ----------
Net cash provided by operating activities 68.0 111.6
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,276.2 2,976.0
Equity securities 130.5 87.4
Investment maturities and collections of:
Debt securities available for sale 420.7 1,134.0
Short-term investments 95.6 16.2
Cost of investment purchases in:
Debt securities available for sale (4,581.6) (4,460.5)
Equity securities (170.2) (159.2)
Short-term investments (14.2) (87.5)
Limited partnership -- (25.0)
---------- ----------
Net cash used for investing activities (843.0) (518.6)
---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,461.9 1,328.6
Withdrawals of investment contracts (803.8) (705.3)
---------- ----------
Net cash provided by financing activities 658.1 623.3
---------- ----------
Net (decrease) increase in cash and cash equivalents (116.9) 216.3
Cash and cash equivalents, beginning of period 623.3 536.1
---------- ----------
Cash and cash equivalents, end of period $506.4 $752.4
========== ==========
Supplemental cash flow information:
Income taxes paid, net $62.4 $69.1
========== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Life and Casualty Company)
Condensed Notes to Consolidated Financial Statements (Unaudited)
1. 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 accordance with
generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1994 financial information to conform to
1995 presentation. These interim statements necessarily rely heavily on
estimates including assumptions as to annualized tax rates. In the opinion of
management, all adjustments necessary for a fair statement of results for the
interim periods have been made. All such adjustments are of a normal
recurring nature.
2. Federal Income Taxes
--------------------
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. During the nine months ended September 30, 1995, the
Company moved from a net unrealized capital loss position of $189.0 million
at December 31, 1994, to a net unrealized capital gain position of $111.2
million at September 30, 1995, primarily due to decreases in interest rates.
As a result, all valuation allowances previously established related to
deferred tax assets on these capital losses were reversed, which had no
impact on net income for the three and nine months ended September 30, 1995.
F-30
<PAGE>
VARIABLE ANNUITY ACCOUNT B
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
- ---------------------------------------------
(a) Financial Statements:
(1) Inapplicable
(2) Included in Part B:
Financial Statements of Variable Annuity Account B:
- Independent Auditors' Report
- Statement of Assets and Liabilities as of December 31, 1994
- Statement of Operations for the year ended December 31, 1994
- Statements of Changes in Net Assets for the years ended
December 31, 1994 and 1993
- Notes to Financial Statements
- Unaudited Statement of Assets and Liabilities as of September
30, 1995
- Unaudited Statement of Operations for the nine-month period
ended September 30, 1995
- Unaudited Statements of Changes in Net Assets for nine-month
period ended September 30, 1995 and year ended December 31,
1994
- Notes to Financial Statements
Financial Statements of the Depositor:
- Independent Auditors' Report
- Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992
- Consolidated Balance Sheets as of December 31, 1994 and 1993
- Consolidated Statements of Changes in Shareholder's Equity
for the three years ended December 31, 1994, 1993 and 1992
- Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
- Notes to Financial Statements
- Unaudited Consolidated Statements of Income for the
nine-month periods ended September 30, 1995 and 1994
- Unaudited Consolidated Balance Sheets as of September 30,
1995 and December 31, 1994
- Unaudited Consolidated Statements of Changes in Shareholder's
Equity for the nine-month periods ended September 30, 1995
and 1994
- Unaudited Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1995 and 1994
- Condensed Notes to Consolidated Financial Statements
<PAGE>
(b) Exhibits
(1) Resolution of the Board of Directors of Aetna Life Insurance and
Annuity Company establishing Variable Annuity Account B/1/
(2) Not applicable
(3.1) Form of Selling Agreement/2/
(4) Form of Variable Annuity Contracts (G-CDA-IC(NQ)), (GMCC-IC(NQ)),
(G-CDA-IC(IR)), (GMCC -IC(IR)), (I-CDA-IC(NQ/MP)), (I-CDA-IC
(IR/MP))/2/
(5) Form of Variable Annuity Contract Application (300-MAR-IB)/2/
(6) Certificate of Incorporation and By-Laws of Depositor/3/
(7) Form of Reinsurance Agreement*
(8.1) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Nicholas-Applegate Series Trust, and Nicholas-
Applegate Capital Management/4/
(8.2) Marketing and Services Agreement among Aetna Life Insurance and
Annuity Company, Nicholas-Applegate Capital Management and
Nicholas-Applegate Securities*
(9) Opinion of Counsel
(10.1) Consent of Independent Auditors
(10.2) Consent of Counsel (included in exhibit 24(b)(9))
(11) Not applicable
(12) Not applicable
(13) Computation of Performance Data
(14) Financial Data Schedule (see exhibit 27)
(15.1) Powers of Attorney/5/
(15.2) Authorization for Signatures/6/
* To be filed by amendment.
1. Incorporated by reference to Registration Statement on Form N-4
(File No. 2-52448) filed February 28, 1986.
2. Incorporated by reference to Post-Effective Amendment No. 15 to Registration
Statement on Form N-4 (File No. 33-34370) filed on April 19, 1994.
3. Incorporated by reference to Post-Effective Amendment No. 58 to Registration
Statement on Form N-4 (File No. 2-52449) filed on February 28, 1994.
4. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N1-A (File No. 33-94896) as filed electronically on January
24, 1996.
5. The Power of Attorney for David E. Bushong is incorporated by reference to
Post-Effective Amendment No. 1 to Registration Statement on Form N-4
(File No. 33-87932) as filed electronically on September 18, 1995. The Powers
of Attorney for all other signatories are incorporated by reference to Post-
Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-
75982), as filed electronically, on February 16, 1996.
6. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-79122) filed electronically on August 16,
1995.
<PAGE>
Item 25. Directors and Officers of the Depositor
- -------------------------------------------------
<TABLE>
<CAPTION>
Name and Principal
Business Address* Positions and Offices with Depositor
- ------------------ ------------------------------------
<S> <C>
Daniel P. Kearney Director and President
Christopher J. Burns Director and Senior Vice President, Life
Laura R. Estes Director and Senior Vice President,
ALIAC Pensions
Shaun P. Mathews Director and Senior Vice President,
Strategic Markets and Products
Timothy A. Holt Director
John Y. Kim Director and Senior Vice President, ALIAC
Investments
Gail P. Johnson Director, Vice President, Annuity
Glen Salow Director, Vice President, ALIAC IT
Creed R. Terry Director, Vice President, Select &
Manage Markets
James C. Hamilton Vice President and Treasurer
David E. Bushong Acting Chief Financial Officer
Eugene M. Trovato Vice President, Chief Accounting Officer
and Corporate Controller
Zoe Baird Senior Vice President and General Counsel
Fred J. Franklin Vice President and Chief Compliance
Officer
Susan E. Schechter Corporate Secretary and Counsel
</TABLE>
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
<PAGE>
Item 26. Persons Controlled by or Under Common Control with the Depositor or
- -----------------------------------------------------------------------------
Registrant
- ----------
Incorporated herein by reference to Item 26 of Post Effective Amendment No. 5
to Registration Statement on Form N-4 (File No. 33-75982), as filed
electronically, on February 16, 1996.
Item 27. Number of Contract Owners
- -----------------------------------
As of December 31, 1995, there were 33,702 individuals holding interests in
variable annuity contracts funded through Account B.
Item 28. Indemnification
- -------------------------
Reference is hereby made to Section 33-320a of the Connecticut General
Statutes ("C.G.S.") regarding indemnification of directors and officers of
Connecticut corporations. The statute provides in general that Connecticut
corporations shall indemnify their officers, directors, employees, agents, and
certain other defined individuals against judgments, fines, penalties, amounts
paid in settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification does not apply unless (1) the individual is successful on
the merits in the defense of any such proceeding; or (2) a determination is made
(by a majority of the board of directors not a party to the proceeding by
written consent; by independent legal counsel selected by a majority of the
directors not involved in the proceeding; or by a majority of the shareholders
not involved in the proceeding) that the individual acted in good faith and in
the best interests of the corporation; or (3) the court, upon application by the
individual, determines in view of all the circumstances that such person is
reasonably entitled to be indemnified.
C.G.S. Section 33-320a provides an exclusive remedy: a Connecticut
corporation cannot indemnify a director or officer to an extent either greater
or less than that authorized by the statute, e.g., pursuant to its certificate
of incorporation, bylaws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
Consistent with the statute, Aetna Life and Casualty Company has procured
insurance from Lloyd's of London and several major United States excess insurers
for its directors and officers and the directors and officers of its
subsidiaries, including the Depositor, which supplements the indemnification
rights provided by C.G.S. Section 33-320a to the extent such coverage does not
violate public policy.
<PAGE>
Item 29. Principal Underwriter
- -------------------------------
(a) In addition to serving as the principal underwriter for the Registrant,
Aetna Life Insurance and Annuity Company (ALIAC) also acts as the
principal underwriter for Variable Life Account B and Variable Annuity
Accounts C and G (separate accounts of ALIAC registered as unit
investment trusts), and Variable Annuity Account I (a separate account of
Aetna Insurance Company of America registered as a unit investment
trust). Additionally, ALIAC is the investment adviser for Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund, Aetna Series Fund, Inc. and Aetna
Generation Portfolios, Inc. ALIAC is also the depositor of Variable Life
Account B and Variable Annuity Accounts C and G.
(b) See Item 25 regarding the Depositor.
(c) Compensation as of December 31, 1994:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation
Principal Discounts on Redemption Brokerage
Underwriter and Commissions or Annuitization Commissions Compensation*
- ----------- ---------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Aetna Life $269,230 $9,036,662
Insurance and
Annuity
Company
</TABLE>
* Compensation shown in column 5 includes deductions for mortality and expense
risk guarantees and contract charges assessed to cover costs incurred in the
sales and administration of the contracts issued under Account B.
Item 30. Location of Accounts and Records
- ------------------------------------------
All records concerning contract owners of Variable Annuity Account B are
located at the home office of the Depositor as follows:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Item 31. Management Services
- -----------------------------
Not applicable
<PAGE>
Item 32. Undertakings
- ----------------------
Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement on Form
N-4 as frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than sixteen
months old for as long as payments under the variable annuity contracts
may be accepted;
(b) to include as part of any application to purchase a contract offered by a
prospectus which is part of this registration statement on Form N-4, a
space that an applicant can check to request a Statement of Additional
Information; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form N-4 promptly
upon written or oral request.
(d) Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant, Variable Annuity Account B of Aetna Life Insurance and
Annuity Company, has duly caused this Pre-Effective Amendment No. 1 to its
Registration Statement on Form N-4 (File No. 33-62473) to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Hartford,
State of Connecticut, on the 16th day of February, 1996.
VARIABLE ANNUITY ACCOUNT B OF AETNA
LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
By: AETNA LIFE INSURANCE AND ANNUITY
COMPANY
(Depositor)
By: Daniel P. Kearney*
------------------------------------
Daniel P. Kearney
President
As required by the Securities Act of 1933, as amended, this Pre-Effective
Amendment No. 1 to Registration Statement on Form N-4 (File No. 33-62473) has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
Daniel P. Kearney* Director and President )
- ----------------------- (principal executive officer) )
Daniel P. Kearney )
)
)
David E. Bushong* Acting Chief Financial Officer ) February
- ----------------------- ) 16, 1996
David E. Bushong )
)
Eugene M. Trovato* Vice President, Chief Accounting Officer )
- ----------------------- and Corporate Controller )
Eugene M. Trovato )
)
Timothy A. Holt* Director )
- ----------------------- )
Timothy A. Holt )
)
Christopher J. Burns* Director )
- ----------------------- )
Christopher J. Burns )
<PAGE>
John Y. Kim* Director )
- ----------------------- )
John Y. Kim )
)
Laura R. Estes* Director )
- ----------------------- )
Laura R. Estes )
)
Shaun P. Mathews* Director )
- ----------------------- )
Shaun P. Mathews )
)
Gail P. Johnson* Director )
- ----------------------- )
Gail P. Johnson )
)
Glen Salow* Director )
- ----------------------- )
Glen Salow )
)
Creed R. Terry* Director
- -----------------------
Creed R. Terry
/s/ Julie E. Rockmore
- ----------------------------------
Julie E. Rockmore
*Attorney-in-Fact
<PAGE>
VARIABLE ANNUITY ACCOUNT B
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C> <C>
99-B.1 Resolution of the Board of Directors of Aetna Life *
Insurance and Annuity Company establishing Variable
Annuity Account B
99-B.3.1 Form of Selling Agreement *
99-B.4 Form of Variable Annuity Contracts *
99-B.5 Form of Variable Annuity Contract Application *
99-B.6 Certificate of Incorporation and By-Laws of Depositor *
99-B-7. Form of Reinsurance Agreement **
99-B.8.1 Fund Participation Agreement between Aetna Life
Insurance and Annuity Company and Nicholas-Applegate
Series Trust, and Nicholas-Applegate Capital Management *
99-B.8.2 Marketing and Services Agreement among Aetna Life
Insurance and Annuity Company, Nicholas-Applegate
Capital Management and Nicholas-Applegate Securities **
99-B.9 Opinion of Counsel -------
99-B.10.1 Consent of Independent Auditors -------
99-B.10.2 Consent of Counsel (included in exhibit 99-B.9) *
99-B.13 Computation of Performance Data -------
99-B15.1 Powers of Attorney *
99-B.15.2 Authorization for Signatures *
(27) Financial Data Schedule -------
</TABLE>
*Incorporated by reference
**To be filed by amendment
<PAGE>
151 Farmington Avenue Susan E. Bryant
Hartford, CT 06156 Counsel
Law & Regulatory Affairs, RE4C
(860) 273-7834
Fax: (860) 273-8340
February 16, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Variable Annuity Account B of Aetna Life Insurance
and Annuity Company
Registration Statement on Form N-4
File Nos. 33-62473 and 811-2512
Gentlemen:
The undersigned has acted as counsel to Aetna Life Insurance and Annuity Company
a Connecticut life insurance company (the "Company") in connection with the
registration on Form N-4 of interests in Variable Annuity Account B of the
Company. It is my understanding that the Company, as depositor, has registered
an indefinite amount of securities (the Securities) under the Securities Act of
1933, as amended ("Securities Act") as provided in Rule 24f-2 under the
Investment Company Act of 1940 (the "Investment Company Act").
In connection with such representation, I have reviewed the N-4 Registration
Statement filed on September 8, 1995 and this Pre-Effective Amendment No. 1. I
have also examined originals or copies, certified or otherwise identified to my
satisfaction, of such documents, trust records and other instruments I have
deemed necessary or appropriate for the purpose of rendering this opinion. For
purposes of such examination, I have assumed the genuineness of all signatures
on original documents and the conformity to the original of all copies.
I am admitted to practice law in Connecticut, New York and Oklahoma, and do not
purport to be an expert on the laws of any other state. My opinion herein as to
any other law is based upon a limited inquiry thereof which I have deemed
appropriate under the circumstances.
<PAGE>
Page 2
Securities and Exchange Commission
February 16, 1996
Based upon the foregoing, I am of the opinion that the Securities have been duly
and validly authorized and, assuming the securities will be issued and sold in
accordance with the provisions of the prospectus, will constitute legal and
binding obligations of the Company.
I consent to the filing of this opinion as an exhibit to the Registration
Statement and to my being named under the caption "Legal Matters" in the
prospectus contained therein.
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
<PAGE>
Exhibit 99-B.10.1
Consent of Independent Auditors
The Board of Directors of Aetna Life Insurance and Annuity Company
and Contract Owners of Aetna Variable Annuity Account B:
We consent to the use of our reports dated January 31, 1995 and February 7, 1995
included herein and to the reference to our Firm under the caption "INDEPENDENT
AUDITORS" in the Statement of Additional Information.
Our report dated February 7, 1995 refers to a change in 1993 in the Company's
methods of accounting for certain investments in debt and equity securities and
reinsurance contracts, and a change in 1992 in the Company's methods of
accounting for income taxes and post retirement benefits other than pensions.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
February 16, 1996
<PAGE>
VARIABLE ANNUITY ACCOUNT B
SCHEDULE FOR COMPUTATION OF TOTAL RETURN CALCULATIONS
-----------------------------------------------------
Total Return Calculation (Standardized)
- ---------------------------------------
The standardized rate represents fund performance for the most recent 1-year, 5-
year and 10-year periods. The "1-year rate" represents fund performance for the
period October 1, 1994 through September 30, 1995; the "5-year rate" is for the
period October 1, 1990 through September 30, 1995; the "10-year rate" is for
the period October 1, 1985 through September 30, 1995.
The formula used in the computation of the total return calculation is as
follows:
T = (ERV/P)/1/n/ where:
T = average annual total return
P = a hypothetical initial payment of $1,000
n = 1 for the "1-year rate," 5 for the "5-year rate," and 10 for
the "10-year rate"
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of each of the periods
The unit values used in the calculation reflect the deduction of all recurring
charges during each period (e.g., mortality and expense risk charges,
maintenance fees, administrative charges (if applicable) and deferred sales
charges). For calculating the redeemable value, the maintenance fee was
expressed as a percentage of assets based on the average account size under the
contracts funded by the Separate Account.
Total return Calculation (Non-Standardized)
- -------------------------------------------
The non-standardized rate represents fund performance for the most recent 1-
year, 3-year, 5-year and 10-year periods. The "1-year rate" represents fund
performance for the period October 1, 1994 through September 30,1995; the "3-
year rate" is for the period October 1, 1992 through September 30, 1995; the
"5-year rate" is for the period October 1, 1990 through September 30, 1995; and
the "10-year rate" is for the period October 1, 1985 through September 30, 1995.
The non-standardized figures will be calculated in a manner similar to the one
discussed above for the standardized figures, 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).
For an illustration of the Computation of the Total Return Quotations, both
Standardized and Non-Standardized, see attached.
<PAGE>
<TABLE>
<CAPTION>
12/29/95 13:01:10
Aetna Variable Encore Fund (Nicholas Applegate) nicapple.wwo
- ------------------------------------------------------------------------------
<S> <C>
Gross Deposit: 1000.00
Net Deposit: 1000.00
<CAPTION>
Redeemable Value
-------------------------------------------------------------------------------------
ENCNICAP
Nom. 30.00 M.F. (0.120%)
# of Years ---------------------------
Ending 9-95 DSC Value IRR MF IRR
- ------------ ---- ------- ----- ------
<S> <C> <C> <C> <C>
1 0.0% 1044.46 4.45% 4.33%
3 0.0% 1086.25 2.80% 2.68%
5 0.0% 1183.20 3.42% 3.30%
10 0.0% 1613.61 4.90% 4.78%
<CAPTION>
Accumulation Unit Values
------------------------------------------------------------
ENCNICAP
ENCNICAP.UV
<S> <C>
09-99-85 6.804586
09-99-90 9.279912
09-99-92 10.108155
09-99-94 10.512613
09-99-95 10.979966
</TABLE>
(Day = 99 means end-of-month.)
<PAGE>
<TABLE>
<CAPTION>
12/29/95 13:01:11
Aetna Variable Encore Fund (Nicholas Applegate) nicapple.wwo
- ------------------------------------------------------------------------------
<S> <C>
Gross Deposit: 1000.00
Net Deposit: 1000.00
<CAPTION>
Redeemable Value
-------------------------------------------------------------------------------------
ENCNICAP
Nom. 30.00 M.F. (0.120%)
# of Years ---------------------------
Ending 9-95 DSC Value IRR MF IRR
- ------------ ---- ------- ------ ------
<S> <C> <C> <C> <C>
1 6.0% 990.73 -0.93% -1.05%
3 5.0% 1041.68 1.37% 1.25%
5 3.0% 1156.75 2.96% 2.84%
10 0.0% 1613.61 4.90% 4.78%
<CAPTION>
Accumulation Unit Values
------------------------------------------------------------
ENCNICAP
ENCNICAP.UV
<S> <C>
09-99-85 6.804586
09-99-90 9.279912
09-99-92 10.108155
09-99-94 10.512613
09-99-95 10.979966
</TABLE>
(Day = 99 means end-of-month.)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 938,474,002
<INVESTMENTS-AT-VALUE> 1,018,757,776
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,018,757,776
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 1,018,757,776
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,018,757,776
<DIVIDEND-INCOME> 28,506,990
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 8,347,571
<NET-INVESTMENT-INCOME> 20,159,419
<REALIZED-GAINS-CURRENT> 26,500,049
<APPREC-INCREASE-CURRENT> 124,639,826
<NET-CHANGE-FROM-OPS> 171,299,294
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
